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Is China About To Drop A Devaluation Bomb?

Jan 272016
 
 January 27, 2016  Posted by at 4:40 pm Finance Tagged with: , , , , ,  8 Responses »


Berenice Abbott Broome Street, Nos. 504-506, Manhattan 1935

Though she had no intention of being funny, we laughed out loud, as undoubtedly many did with us, when incumbent and wannabe IMF head Christine Lagarde said last week in Davos that China has a communication issue. Of course, Lagarde knows full well that Beijing has much bigger problems than communication ‘with the market’. Or, to put it differently, if Xi and Li et al would ‘improve’ their communication by telling the truth about their economy, nobody would be talking about communication anymore.

Mixed signals from China, which is attempting to shift its economy away from exports and investment to a consumer-driven model, have deepened concerns about the outlook for world growth, she said. Uncertainty is “something that markets do not like”, Ms Lagarde told a panel of business leaders and economic regulators in the snow-blanketed Swiss ski resort. Investors have struggled with “not knowing exactly what the policy is, not knowing exactly against what the renminbi is going to be valued”, she said, referring to China’s currency. “I think better and more communication will certainly serve that transition better.”

The world’s second-largest economy this week announced its 2015 GDP growth as 6.9%, its slowest in a quarter of a century. The figure cast a shadow over the summit, where IHS chief economist Nariman Behravesh told AFP that Chinese policymakers had “fumbled” and had “added to the uncertainty and the volatility by their behaviour”. Mr Fang Xinghai, the vice-chairman of China’s securities regulator, said at the same panel that “in terms of communication, we should do a better job”. “We have to be patient because our system is not structured in a way that is able to communicate seamlessly with the market,” he added.

The real issue is what people would think if Beijing announced a more realistic 2% or less GDP growth number. The thought alone scares Lagarde as much as anyone, including the Politburo. The sole option seems to be to keep lying as long as you can get away with it. But how and where the yuan will be valued by China itself has become entirely inconsequential compared to how markets value the currency.

The PBoC spent a fortune trying to straighten the offshore and onshore yuan(s), only to see the two diverge sharply again, as Shanghai stocks posted the biggest loss on Tuesday, at 6.4%, since the ‘unfortunate’ circuit breaker incident. That puts additional pressure on the Hong Kong dollar peg, and ultimately on the mainland China peg to whatever it is they’re trying to peg to.

Beijing might solve some of these problems by devaluing the yuan by 30%, or even 50%, but it would invite a large amount of other problems in the door if it did. Like a full-blown currency war. Still, it’s just a matter of time till Xi and Li either do it voluntarily or are forced to by ‘the market’.

What they are trying very hard NOT to communicate is how much pain their Ponzi debt burden has put them in. It’s not even fully clear to what extent Xi himself is aware of this, but he knows at least enough to keep his mouth shut on the topic. It’s quite possible that some of his top aides dare not reveal the real tally to their boss for fear of their jobs and heads.

In concert with denial and obfuscation, pride and hubris may be clouding the image the Chinese have of themselves and their economy. The rest of the world has followed them in that to a large degree, but it’s got to wake up at some point. If what the WSJ quotes a Beijing-based investor as saying is halfway true, and Xi realizes the opportunity it provides him, a huge devaluation may be imminent after all, if Shanghai shares keep falling the way they are.

Yuan’s Fall Is Just ‘Noise’ Amid Deeper China Woes

The country is already littered with “zombie” factories, empty apartment blocks that form ghostly suburbs, mothballed power stations and other infrastructure that nobody needs. But yet more wasteful projects are in the pipeline, even as the government talks about cutting industrial overcapacity. “That’s the misalignment—everything else is noise,” says Rodney Jones, the Beijing-based principal of Wigram Capital Advisors, who was a partner at Soros Fund Management during the 1990s. If debt keeps piling up at the current rate, China faces an eventual financial crisis, perhaps leading to years of subpar growth, mirroring the fate of Japan after its bubble burst in the early 1990s.

Mr. Jones argues that global equity markets haven’t property adjusted to this risk, even after a 16% decline in U.S. dollar terms from their May peak. “The world will have to learn to live without demand from China,” he says. “It’ll come as a shock.” A sharp devaluation won’t fix these distortions, and might even make matters worse if, as likely, it were to trigger financial mayhem in China’s trading partners. An alternative—further clamping cross-border currency controls—would be a humiliating retreat from Beijing’s policy of making the yuan more international.

If China imports continue to fall the way they have recently, a development that has already relentlessly hammered global commodities markets and exporting emerging nations, the advantages of a large devaluation could become irresistible even for a proud president. With capital flight in 2015 estimated at $1 trillion, and a roughly equal chunk of foreign reserves thrown at attempts to ‘stabilize’ the yuan, that pride is getting costly.

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But it occureed to me today that perhaps I simply haven’t been cynical enough yet when pondering the matter. The support for a strong yuan, the one thing that is constantly ‘communicated’ to the world, may be just another facade. Beijing may have long decided to go for the jugular. China will have to adjust to the popping of its growth fairy tale and Ponzi economy no matter what it tries to do to prevent it.

Might as well swallow the bitter pill in one go then and get it over with?! It would make exports much more attractive at a time when more expensive imports are much less of an issue. As nice example is the very disappointing sales of iPhones in the country, prompting this comment from Apple CEO Tim Cook today: “We’re seeing extreme conditions unlike anything we’ve experienced before just about everywhere we look.” I think he might want to consider that what happened before was extreme, not what is now.

Beijing did a few things recently that triggered my cynicism radar. First, they targeted George Soros.

China Accuses George Soros Of ‘Declaring War’ On Yuan

Chinese state media has stepped up a salvo of biting commentaries against George Soros and other currency traders as the yuan comes under pressure, with the billionaire investor accused of “declaring war” on the unit. At the annual World Economic Forum in Davos last week, Soros told Bloomberg TV that the world’s second-largest economy was heading for more troubles. “A hard landing is practically unavoidable,” he said. Soros [..] pointed to deflation and excessive debt as reasons for China’s slowdown.

[..] Soros “publicly ‘declared war’ on China”, the paper said, citing the 85-year-old as saying that he had taken positions against Asian currencies. But some readers questioned whether the official rhetoric could fuel Chinese investors’ fears. “They say a lot of loud slogans, but do official media even know that Chinese investors are in hell?” said one poster on social media network Weibo. “I’m afraid that Chinese investors will die in a stampede before Soros even shows his hand.”

And I’m thinking: why should you go after Soros in a very public way when you know the whole world will take note and there’s nothing you can do other than stomp your feet and thump your chest? “Look, everyone, the world’s most notorious and successful short seller is after us, but we’re so much smarter!” Maybe they think Chinese mom and pop investor juggernauts will fall for their ‘whatever it takes’ tale, but they have to deal with the entire planet here.

Could this be simple stupidity? At a certain point that gets hard to believe. An even better example, and one that is really brow-raising, was the announcement of an inquiry into China’s statistics chief:

Head Of China’s Statistics Bureau Investigated For Corruption

The head of China’s statistics bureau is being investigated for corruption, the country’s watchdog said on Tuesday. “Wang Baoan is suspected of severe disciplinary violations, he is currently under investigation,” the Central Commission for Discipline Inspection said in a one-line statement on its website, using a phrase that is usually used to refer to corruption. The announcement came just hours after Wang appeared at a media briefing in Beijing on China’s economy in 2015. Last week the National Bureau of Statistics released data that showed China’s economy grew at the slowest pace in 25 years. Wang reiterated on Tuesday that the country’s GDP calculations were reliable, Chinese media reported, despite widespread criticism of the data.

Here’s a guy seeking to soothe his audience, which in present circumstances includes the whole globe, and you cut him off at the knees just hours after? He says all’s fine, and then you sent a message to the world that he can’t be trusted?

The timing seems crucial here. They could have waited a week, or two, so the connection between the two events (Wang’s statement and the inquiry announcement) would have been much less obvious. They could also, of course, have had the inquiry but kept it hush-hush. Instead, as in the Soros case, there’s a big public declaration.

Wang is head of a statistics bureau that, says the NYT, is tasked with:

Inquiry in China Adds to Doubt Over Reliability of Economic Data

The statistics bureau has a variety of responsibilities that are hard to balance even in the best of times. The bureau is supposed to provide China’s leaders with an unvarnished assessment of the country’s economic strengths and weaknesses, even while reassuring the public about growth and maintaining consumer confidence. It is also supposed to release enough detailed and accurate information for investors and corporate leaders to make sound decisions about economic and financial prospects.

That leads us right back to the start of this article. Wang must provide “enough detailed and accurate information” for investors”, but how can he do that if the real numbers are as bad as I strongly think they are? In that case, accurate information would drive most investors away and drive others towards shorting the yuan.

He must also “provide China’s leaders with an unvarnished assessment of the country’s economic strengths and weaknesses”, and perhaps he screwed up there (too much varnish). Xi may have found out something real bad that Wang didn’t tell him about. But even then, the fact stands that Xi risks triggering exactly what he pretends to want to prevent, by taking this to the press.

To summarize: yes, it’s possible that Beijing has a communication problem. I’ve never had the idea that Xi understands that now his power dream has come true, he finds that power is not absolute, if and when he wishes to have a financial market that allows for China to get richer through trade. That he realizes the price to pay for that is having much less than total control.

Still, after glancing through this stuff, I wouldn’t be at all surprised if the decision for a very substantial devaluation of the yuan has already been taken. It would be a panic move, with largely unpredictable consequences, but then Beijing has plenty to panic about.

And I can’t wait to see what Lagarde has to say when she figures out her new currency basket baby turns around to bite her in the ass.

PS: Something I scribbled last week: Time and again, I see ‘experts’ claim that the fact that the Chinese services sector now makes up half of GDP, is a positive. But, even if we forget for now that much of its growth is due to financial services, the real meaning is the opposite. The services sector has been able to become so important simply because the manufacturing sector is plunging as badly as it is.

Debt Rattle January 20 2016

Jan 202016
 
 January 20, 2016  Posted by at 9:22 am Finance Tagged with: , , , , , , , , , ,  5 Responses »


DPC Pere Marquette transfer boat 18 passing State Street bridge Chicago River 1901

• Oil Falls 3% On Surplus Worries, As US Drops Toward $27 (Reuters)
• Shell Q4 Profit Plunges as Oil’s Slump Deepens (BBG)
• Chinese Stocks in Hong Kong Fall to Global Financial Crisis Lows (BBG)
• Nikkei, Hang Seng Lead Slump In Asian Markets (CNBC)
• Recent S&P 500 Correction Appears Small in Context of History (BBG)
• World Faces Wave Of Epic Debt Defaults: Central Bank Veteran (AEP)
• Hedge Fund That Called Subprime Crisis Urges China To Devalue Yuan by 50% (BBG)
• China Is Getting Less and Less Bang for Its Credit Buck (BBG)
• China Needs a Great Economic Shift Away From Debt Fueled ‘Growth’ (Wolf)
• China Data Indicate Heavy Deflationary Pressure (Nikkei)
• What Is China’s Actual GDP? (CNBC)
• Mining Giant BHP Billiton Lowers Forecast, Investors Fear Dividend Cut (WSJ)
• Fed’s $216 Billion Treasuries Rollover Recalls Crisis Era Buying (BBG)
• ECB Plans To Order Banks To Tackle Bad Loans (Reuters)
• Varoufakis Speaks About 2015 Greece Parallel Currency Plan (Kath.)
• Greek Immigration Minister Slams Turkish Failure To Curb Refugee Flow (Kath.)
• EU To Scrap ‘First Country’ Asylum Claim Rule (FT)
• Children On Syrian Refugee Route Could Freeze To Death: UN (Reuters)
• Doctors Without Borders Says EU Worsens Refugee Crisis, Aids Smugglers (AP)
• Rate Of Refugee Arrivals In Greece Dwarfs 2015 Pace (AFP)
• More Plastic Than Fish In The Sea By 2050 (Guardian)

On our way to $20 and beyond.

• Oil Falls 3% On Surplus Worries, As US Drops Toward $27 (Reuters)

Crude futures slumped again in Asian trade on Wednesday, with U.S. oil droppping more than 3% toward $27 a barrel and its lowest since 2003, on worries about global oversupply. That came after the International Energy Agency, which advises industrialized countries on energy policy, warned that oil markets could “drown in oversupply” in 2016. The crash hammered Asian stock markets with MSCI’s broadest index of Asia-Pacific equities outside Japan falling 2.8% to a four-year low. “Oil prices are at a level where OPEC countries are all struggling. They are selling oil for cashflow not for profit,” said Jonathan Barratt at Sydney’s Ayers Alliance. “U.S. producers are holding out, but I think they’re bleeding as well,” he said.

U.S. crude futures were trading down 97 cents at $27.49 a barrel, or 3.4%, at 0625 GMT, the lowest since September 2003. The contract settled down 96 cents, or 3.26%, the session before. The expiry of the February contract on Wednesday was “probably” adding further downward pressure on U.S. West Texas Intermediate oil as traders closed positions, said Michael McCarthy at Sydney’s CMC Markets. Brent futures dropped 61 cents to $28.15 a barrel, or 2.1%, not far from the 12-year low hit on Monday. It settled up 21 cents, or 0.7 per cent, in the previous session. McCarthy said the market had already taken into account the 500,000 barrels per day Iran has forecast it will add to global production. “(Iran) is really another strike in the same beating the market has taken,” McCarthy said.

Read more …

Profit? You mean creative accounting.

• Shell Q4 Profit Plunges 50% as Oil’s Slump Deepens (BBG)

Royal Dutch Shell said fourth-quarter profit plunged as the rout in crude prices deepened. The company sees profit adjusted for one-time items and inventory changes of $1.6 billion to $1.9 billion, Shell said Wednesday in a preliminary earnings statement. That compares with the $1.8 billion average estimate of nine analysts surveyed by Bloomberg, and profit of $3.3 billion a year earlier. Shell, which is buying BG Group in the industry’s largest deal in a decade, has cut jobs and reduced spending as CEO Ben Van Beurden prepares for a prolonged downturn. Crude’s slump below $30 a barrel has driven down Shell’s market value to the lowest in almost seven years and prompted concern it may be overpaying for BG’s production and cash flow.

The average price of Brent crude, the international benchmark, fell 42% in the quarter from a year earlier to $44.69 a barrel, the lowest since 2009. Aberdeen Asset Management and Invesco Asset Management, two of Shell’s major shareholders, have said they will support the company’s plan to buy BG even with crude’s collapse. The acquisition allows Shell to accelerate the reshaping of its portfolio toward deepwater assets and natural gas and BG’s production is likely to grow strongly in the next three to five years, Invesco fund manager Martin Walker said. Standard Life Investments is the only Shell holder that has so far publicly said it will vote against the combination because the acquisition is “value destructive.”

Shell has justified the deal by saying it boosts its ability to maintain dividends, makes it the world’s biggest liquefied natural gas company and gives it oil and gas assets from Australia to Brazil. The company’s B shares, the class of stock used in the deal, have dropped 11% this year, extending last year’s 31% decline. Shell’s shareholders are scheduled to vote on the acquisition on Jan. 27 and BG’s the next day. Shell requires the backing of 50% of its holders. In BG’s case, votes in favor must represent at least 75% of the total value of the company’s shares. The merger will probably become effective Feb. 15, Shell said.

Read more …

Hong Kong is fast becoming the eye of the storm.

• Chinese Stocks in Hong Kong Fall to Global Financial Crisis Lows (BBG)

Chinese stocks in Hong Kong tumbled to the lowest level since the depths of the global financial crisis as a slide in the city’s dollar spurred concerns over capital outflows. Oil producers and property developers led declines. The Hang Seng China Enterprises Index plunged as much as 5.5% before paring losses to trade 4% lower at 1:57 p.m. in Hong Kong. PetroChina fell to a 11-year low as oil extended its decline and Cnooc, China’s largest offshore oil company, said it will cut output for the first time in more than a decade. Hong Kong’s dollar traded near its weakest level since 2007 as concern about China’s slowing economy curbs demand for the city’s assets. The Shanghai Composite Index lost 0.8%.

“The local dollar’s slide is igniting concerns that capital outflows are accelerating as funds are selling equities en masse,” said Castor Pang at Core-Pacific Yamaichi Hong Kong. “Overall sentiment is very bad in Hong Kong.” The so-called H-shares gauge slid to 8,043.47, heading for the lowest level since March 2009. The index has slumped 17% this year, joining China’s Shanghai Composite as the world’s worst-performing major global benchmark measure out of the 93 tracked by Bloomberg. Similar to their mainland counterparts, Hong Kong policy makers are fighting to prevent a vicious cycle of capital outflows and a weakening currency with the resulting financial-market volatility heightening concern that China’s deepest economic slowdown since 1990 will worsen. PetroChina and China Petroleum & Chemical tumbled at least 6.2% in Hong Kong.

Oil extended its decline from the lowest close in more than 12 years, while Cnooc’s output cut increased speculation the nation’s producers are succumbing to the global price war. Cnooc’s acknowledgment that spending cuts are hurting production may be a prelude to further reductions by Chinese explorers, according to Nomura. The stock dropped 6%. Hong Kong’s Hang Seng Index tumbled 3.7% to a three-year low as trading volumes surged 77% above the 30-day average for this time of day. Property developers led declines, with Cheung Kong Property Holdings Ltd. sliding 6.1% to a record low. “To protect the Hong Kong dollar peg the government has to raise the interest rate,” said Louis Tse, a Hong Kong-based director at VC Brokerage Ltd. “The property companies are high-beta stocks because you have to borrow during the development phase,” with higher borrowing costs potentially weighing on home owners as well.

Read more …

And Europe follows as we speak.

• Nikkei, Hang Seng Lead Slump In Asian Markets (CNBC)

Asian stocks tumbled Wednesday, with major indexes declining by more than 1% each, as global sentiment remained low on concerns over economic growth, China and low oil prices. “The frailty in the Chinese growth remain the core problem for investors and the spotlights are not moving away from it anytime soon,” Naeem Aslam, chief market analyst at AvaTrade, said in a note Wednesday. Overnight, the IMF cut its global growth forecast for 2016 to 3.4%, from 3.6%. The organization cited slower growth in emerging markets, especially in China, falling commodity prices, and rising interest rates in the U.S. as potential risks to global growth. Markets in China opened in negative territory, following a 3.5% gain in the previous session after Beijing released a slew of data including the full-year growth number for 2015.

The Shanghai composite was down 1.15% and the Shenzhen composite declined by 1.10%. The CSI300 was down 1.64%. Hong Kong’s Hang Seng index was down 3.77%. The Chinese economy grew by 6.9% in 2015, according to official data, down from 2014’s 7.3%, and the slowest pace of economic expansion since 1990. Some analysts believe further intervention and economic stimulus from Beijing are forthcoming as the country juggles a structural re-balancing act. Cynthia Kalasopatan from Mizuho Bank said in a morning note, “Soft growth momentum led to expectations that Chinese authorities will need to implement further policy easing to support the economy. “More policy and RRR cuts may be in the pipeline,” she added, “What’s more, targeted fiscal tools may be used as well to spur growth.”

The People’s Bank of China (PBOC) said late on Tuesday it would inject more than 600 billion yuan ($91.22 billion) into the financial system to help ease a liquidity squeeze expected before the Lunar New Year holiday in early February. [..] bank and property shares were sharply lower. Bank of China’s Hong Kong-listed shares dropped 1.97% and its Shanghai-listed ones fell 1.70%. Hong Kong-listed Shimao Property dropped 6.02%.

Read more …

The shape of things to come.

• Recent S&P 500 Correction Appears Small in Context of History (BBG)

The recent 10% drop in U.S. stocks looks very small when considered in the context of the 220% rally from the 2009 nadir to the 2015 peak. The Standard & Poor’s 500 Index remains more than 5% above its 200-week moving average, and has not spent this long continuously above it since the 1990s dot-com era. When that bull run finished, the market fell to 38% below the 200-week moving average, while the 2009 crash bottomed out 48% below it.

Read more …

“The European banking system may have to be recapitalized on a scale yet unimagined, and new “bail-in” rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.”

• World Faces Wave Of Epic Debt Defaults: Central Bank Veteran (AEP)

The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability, a leading monetary theorist has warned. “The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up,” said William White, the Swiss-based chairman of the OECD’s review committee and former chief economist of the Bank for International Settlements (BIS). “Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” he said. “It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something,” he said in Davos.

“The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.” The next task awaiting the global authorities is how to manage debt write-offs – and therefore a massive reordering of winners and losers in society – without setting off a political storm. Mr White said Europe’s creditors are likely to face some of the biggest haircuts. European banks have already admitted to $1 trillion of non-performing loans: they are heavily exposed to emerging markets and are almost certainly rolling over further bad debts that have never been disclosed. The European banking system may have to be recapitalized on a scale yet unimagined, and new “bail-in” rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.

The warnings have special resonance since Mr White was one of the very few voices in the central banking fraternity who stated loudly and clearly between 2005 and 2008 that Western finance was riding for a fall, and that the global economy was susceptible to a violent crisis. Mr White said stimulus from quantitative easing and zero rates by the big central banks after the Lehman crisis leaked out across east Asia and emerging markets, stoking credit bubbles and a surge in dollar borrowing that was hard to control in a world of free capital flows. The result is that these countries have now been drawn into the morass as well. Combined public and private debt has surged to all-time highs to 185pc of GDP in emerging markets and to 265pc of GDP in the OECD club, both up by 35 %age points since the top of the last credit cycle in 2007. “Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem too,” Mr White said.

[..] In retrospect, central banks should have let the benign deflation of this (temporary) phase of globalisation run its course. By stoking debt bubbles, they have instead incubated what may prove to be a more malign variant, a classic 1930s-style “Fisherite” debt-deflation. Mr White said the Fed is now in a horrible quandary as it tries to extract itself from QE and right the ship again. “It is a debt trap. Things are so bad that there is no right answer. If they raise rates it’ll be nasty. If they don’t raise rates, it just makes matters worse,” he said. There is no easy way out of this tangle. But Mr White said it would be a good start for governments to stop depending on central banks to do their dirty work. They should return to fiscal primacy – call it Keynesian, if you wish – and launch an investment blitz on infrastructure that pays for itself through higher growth.

Read more …

Don’t think they’d do it in one go. But who knows, it might be the way to go.

• Hedge Fund That Called Subprime Crisis Urges China To Devalue Yuan By 50% (BBG)

Mark Hart, the hedge fund manager whose bets against U.S. subprime mortgages and European sovereign debt proved prescient, said China should weaken its currency by more than 50% this year. A one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength. “There wouldn’t be anything underhanded about a sharp devaluation,” Hart said. “Why should China be forced to suffer deflationary effects of defending its currency when everyone else isn’t?”

Hart, whose prescription clashes with consensus forecasts for the yuan and recent comments from senior government officials, said China would be justified in weakening the currency after central banks in Europe and Japan fueled declines in their exchange rates to stoke economic growth in recent years. Such a move would likely come as a surprise to global investors, who were rattled by a drop of less than 3% in the yuan last August. China’s current approach to managing the currency’s decline has been costly. Foreign-exchange reserves dropped by a record $513 billion last year as the central bank intervened to ease the currency’s slide, while an estimated $843 billion of capital flowed out of China in the 11 months through November as some investors sought to get in front of further yuan weakness.

Aside from intervention, policy makers have moved to curb bearish bets against the yuan and tighten restrictions on the flow of money across the country’s borders. Those measures have fueled doubts among global investors about the ruling Communist Party’s commitment to give markets a central role in the world’s second-largest economy and make the yuan an international currency. “They’re trying to drive a car with one foot on the brake,” said Hart, who estimates the People’s Bank of China spent more than $100 billion supporting the yuan in onshore and offshore markets during the first 12 days of January. “If China were to devalue to a level that wasn’t actually a true equilibrium they will get run over pretty quickly, they will blow through FX reserves, and then they will lose face because they’ll be forced to devalue.”

Read more …

Omen.

• China Is Getting Less and Less Bang for Its Credit Buck (BBG)

Behind the numbers showing China’s continued slowdown at the end of last year lies a warning for Communist Party leaders who have been equally determined to embrace economic change and to ensure a rapid pace of growth. The flashing yellow light: there’s less and less power behind policy makers’ stimulus. For each $1 in credit expansion, China added the equivalent of 27 cents of GDP last year, the least since 2009, according to data compiled by Bloomberg from government figures released Tuesday. As recently as 2011, each $1 generated 59 cents.

The diminishing mileage for credit raises a conundrum for President Xi Jinping and his premier, Li Keqiang, of whether to let China slow further as they shut down surplus smokestack industrial capacity, or keep pumping liquidity. It also highlights the importance of financial-industry reforms – another ball the leadership is juggling. “This will require rolling back preferences that tilt, and trap, the flow of investment in inefficient state enterprises,” said David Loevinger, a former China specialist at the U.S. Treasury and now an analyst at fund manager TCW in Los Angeles. “This is always challenging because the companies that stand to lose are big and powerful and the companies that stand to win are small and may not even yet exist.”

Read more …

Martin Wolf noticed the omen too: “..the “incremental capital output ratio” — the amount of capital needed to generate additional income — has roughly doubled since the early 2000s.”

• China Needs a Great Economic Shift Away From Debt Fueled ‘Growth’ (Wolf)

Chinese policymakers have a stellar reputation for the quality of economic management but the same was true of the Japanese three decades ago. For the Japanese, the difficulty of shifting from their high-savings, high-investment, catch-up economic model proved very large. Indeed, this has still not been completed. While the Chinese economy has far more room to grow than Japan a quarter of a century ago, its disequilibria are even bigger. Moreover, contrary to conventional wisdom, the transition to a new pattern of growth has not really begun. Already, the difficulty of handling this transition is damaging Chinese policymakers reputation. Mistakes in handling the implosion of the bubble economy of the 1980s did the damage in Japan. Now it is the Chinese authorities mishandling of the currency and the stock market.

Similarly, the financial crisis of 2007 and 2008 devastated the reputation of western financiers and policymakers. Everybody seems to be a genius when credit is surging. Understandably and rightly, observers are calling upon the Chinese authorities to be more transparent. Given their political system -‘the bureaucrat knows best’- that is going to be hard to do, but this is a second-order matter. The first-order one is that it is unclear how and whether the transition to a more balanced economy is to be made. Again, some people focus on the transition from manufacturing to services. This does seem to be going quite well: according to Chinese data, industry grew at an annual rate of just 6% in the first three quarters of 2015, while services grew 8.4%. However, a large part of this apparent success is due to growth of income from financial services.

Just as was the case in the west, before the crisis, this is as much a symptom of credit growth as of a transition to a more balanced ‘new normal’. The fundamental indicators of a change in the shape of the economy would be a fall in savings and investment and a rise in consumption. Such a shift is necessary not only because much of the investment is wasted, but because it is associated with an explosive rise in debt. China has today a far higher share of investment in GDP than other high-growth east Asian economies ever had. Furthermore, according to the McKinsey Global Institute, overall indebtedness is extremely high with a concentration in non-financial corporations. It is higher than in the US, for example.

In response to the 2008 financial crisis, China promoted a huge rise in debt-fuelled investment to offset the weakening in external demand. But underlying growth in the economy was slowing. As a result, the “incremental capital output ratio” — the amount of capital needed to generate additional income — has roughly doubled since the early 2000s. China’s overall capital-output ratio is also very high and rising. At the margin, much of this investment is likely to be lossmaking. If so, the debt associated with it will also be unsound. But, if wasteful investment were slashed, the economy would go into recession.

Read more …

From debt to deflation, a natural course.

• China Data Indicate Heavy Deflationary Pressure (Nikkei)

Excess manufacturing capacity, rising real estate inventories and volatile financial markets weigh on China’s economy as the government tries to engineer a soft landing, with data for 2015 suggesting that deflation may loom. China’s real GDP growth slipped to 6.9% last year, the lowest in a quarter century. Real growth had not dropped below 7% since 1990, when international sanctions were imposed in response to the 1989 Tiananmen Square crackdown. Nominal growth, based on official GDP figures, totaled 6.4%, falling below real growth for the first time since 2009. Nominal growth that is slower than real growth indicates heavy deflationary pressure. Severe overcapacity in major manufacturing industries is one cause. China’s steel industry has 400 million tons of excess capacity.

Exports came to 100 million tons in 2015, on par with Japan’s annual output. With supply outstripping demand, wholesale prices sank 5.2% in 2015, 3.3%age points faster than in 2014. Companies are shouldering heavier real debt-repayment burdens despite repeated interest rate cuts by the People’s Bank of China. Production is depressed, with crude steel, cement and sheet glass output dropping in 2015. Electricity use, a more accurate gauge of economic conditions, slid 0.2%. Mounting real estate inventories are another drag on the economy. Inventories soared nearly 50% in two years to 718.53 million sq. meters at the end of 2015. Housing activity has been sluggish for some time in many outlying cities.

Office building vacancy rates have reached about 40% in the inland cities of Chongqing and Chengdu, a developer said. With little new investment coming in, spending on property development edged up 1% in 2015 – just one-tenth the growth seen in 2014. Turmoil in financial markets compounds the country’s problem. The slide in Chinese stocks since the start of the year could dampen brisk consumer spending. Services accounted for half of GDP in 2015, with the finance industry contributing significantly amid a rise in stock trading. If retail investors flee the market, growth could drop accordingly.

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“It doesn’t take a rocket scientist to figure out the growth in old China for the past year or so has been somewhere around zero — it’s nothing like 6.8%..”

• What Is China’s Actual GDP? (CNBC)

China announced Tuesday that its economy notched 6.9% growth in 2015 — down from the prior year, but perfectly matching expectations. And yet commentary from around the world suggests almost no outside investor or economist believes Beijing’s figures. Although there has never been definitive evidence that Chinese economic data is exaggerated, the widely-held theory says that China’s National Bureau of Statistics will overstate growth in a stability-minded effort to hide the truth about a slowing economy. So instead of relying on government reports, China-watchers analyze other metrics for a more complete picture of the country’s GDP. “Nobody knows for sure, but when we look at things that are harder numbers to fudge…our estimate is growth probably about 3.5% versus roughly 7,” said A. Gary Shilling.

“We watch (the official GDP announcement) as closely as we do in some sense out of a sense of obligation,” said Donald Straszheim, head of China Research at Evercore ISI. “I wasn’t expecting to learn a great deal last night when these numbers came out.” Not only does China’s NBS refuse to respond to inquiries, Straszheim said, but the statistics unit will announce only its total GDP growth figure — not the components of that number. “If you don’t have the components, how can you have a total? And if you have the components, which would add to the total, why are they not publicly available?” Straszheim asked. [..] For his part, Shilling said his firm models China’s possible GDP growth on measures of rail traffic, electricity consumption, coal consumption and debt.

Billionaire distressed asset investor Wilbur Ross, meanwhile, sees China’s actual growth at about 4% on a similar basket of metrics. The “reason is that if you look at physical indicators — rail car loadings, truck loadings, cement consumption, steel consumption, exports, natural gas consumption, electricity consumption — none of those are consistent with 6.8 or 6.9,” he explained. Straszheim said his group uses data from sources it regards as largely independent from government pressure, pointing to commodity consumption among other measures. But most of these indicators seek to measure the share of China’s economy based on exporting, manufacturing, and capital investment — and Beijing has made no secret that it sees the country shifting toward an increasingly service-oriented economy.

That could, in turn, potentially make it even harder for investors to know the truth about China’s GDP. “It doesn’t take a rocket scientist to figure out the growth in old China for the past year or so has been somewhere around zero — it’s nothing like 6.8%,” Straszheim said, explaining that the “new” China of services and consumer spending is tough to measure in the absence of robust data from the private sector. [..] Derek Scissors, a scholar for the American Enterprise Institute, pointed out that China’s own official numbers seem to contradict one another. For example, China’s Xinhua reported that November railways cargo fell 15.6% year on year, but the state statistics office said industrial production through the year was up 6.1%. “What? Did they just produce the goods and leave them on the factory floor and they never went anywhere?” Scissors asked.

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Putting on the brave face mask.

• Mining Giant BHP Billiton Lowers Forecast, Investors Fear Dividend Cut (WSJ)

BHP Billiton said it is committed to protecting its balance sheet amid a sharp downturn in world commodity markets, as expectations build about the miner preparing to cut its dividend. The Anglo-Australian mining giant has faced growing speculation it may have to cut its payout by as much as half this year as it grapples with plunging resources prices and the fallout from one of its worst mining disasters, a deadly dam burst at a mine operated by Samarco Mineração SA, a 50-50 joint venture with Brazil’s Vale SA. Last week, BHP also announced its largest write-down ever, a roughly US$7.2 billion pretax charge against its U.S. onshore energy assets as oil prices slumped below US$30 a barrel for the first time in more than 10 years.

Only 18 months ago, the market was speculating about the possibility of a major share repurchase by the company to reward investors. Now, even maintaining its dividend, a US$6.6 billion annual burden on its balance sheet, appears a stretch. Cutting investor payouts is a measure big companies are loath to take, for fear of alienating important shareholders. It is particularly difficult when options for growth are limited. “We continue to cut costs and remain focused on safely improving our operational performance to enhance the resilience of our business,” Chief Executive Andrew Mackenzie said Wednesday. “In this environment, we are also committed to protecting our strong balance sheet so we have the financial flexibility to manage further volatility and take advantage of the expected recovery in copper and oil over the medium term,” he added.

In August, BHP recorded its worst annual earnings result since 2003. Slackening demand from China, as miners ramp up production from mines planned when prices were booming, has hit prices of nearly every commodity, including coal, iron ore, oil and copper, which are BHP’s core products. BHP’s share price has since slumped to its lowest level in more than a decade. That’s been exacerbated by uncertainty over the Samarco disaster. [..] the Nov. 5 incident killed at least 17 people and triggered a criminal investigation and roughly US$5 billion civil lawsuit by authorities. On Wednesday, it also led BHP to pare its projection for global iron-ore production in the year through June, to 237 million metric tons from an earlier forecast of 247 million. Investors have urged BHP to clear the air on its plans for future dividends. They say uncertainty over the outlook has been a key driver in sending the miner’s share price sharply lower.

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Well, to be fair, this IS the crisis era.

• Fed’s $216 Billion Treasuries Rollover Recalls Crisis Era Buying (BBG)

If you were under the impression that the Federal Reserve was done buying Treasuries, think again. While the central bank won’t be expanding its balance sheet, about $216 billion of Treasuries in its portfolio mature in 2016, up from negligible amounts the past few years. Last week, New York Fed President William C. Dudley reiterated policy makers’ plan to keep reinvesting the proceeds for the time being, giving bondholders and Wall Street dealers reason to cheer. The Fed is the biggest holder of the government’s debt. Its $2.5 trillion hoard, amassed in a bid to support the economy after the financial crisis, is more of a focus for some investors than the trajectory of interest rates. From this month through 2019, about $1.1 trillion of Treasuries in the portfolio are set to mature.

For bond bulls, the Fed’s signals that it will roll over the obligations have been another reason to doubt the consensus forecast that yields will rise in 2016. If officials had chosen to stop funneling that money into new debt, the government would likely have to boost borrowing by roughly an equivalent amount this year, potentially pushing up Treasury yields. “The Fed tightening gave us little worry, but the unwind of the balance sheet gives us major worries,” said Mark MacQueen, co-founder of Sage Advisory Services. “The Fed is keenly aware that the balance sheet has a much greater impact on the overall yield levels in the markets going forward than raising rates.”

Officials anticipate keeping the holdings stable until the normalization of interest rates is “well under way,” though there’s no specific level for the Fed’s target at which reinvestment would end, Dudley said in prepared remarks of a speech Jan. 15. That ensures the legacy of the Fed’s quantitative-easing programs, which boosted its Treasuries holdings from less than $500 billion in 2009, will extend even further into the future. As officials roll maturing issues into new debt, that swells the amount coming due later in the decade.

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As in: bring them out into the open. Problem is, that’s the death knell for many banks.

• ECB Plans To Order Banks To Tackle Bad Loans (Reuters)

The ECB plans to tell euro zone banks how to better manage bad loans, banking officials said on Tuesday, in an effort to resolve an issue that is curbing the region’s economic recovery. Bad loans have more than doubled across the euro zone since 2009 and stood at nearly a €1 trillion at the end of 2014, the IMF said last year. Those loans burden banks and make it harder for them to lend. The ECB has asked a number of banks across the euro zone, including Italy’s Monte dei Paschi di Siena and UniCredit, about their non-performing loans. They were selected to establish a representative sample, not necessarily because they are particularly affected, the sources said. Italian bank shares have tumbled in recent days on fears the ECB had singled out some banks because of their vulnerabilities.

But the banking sources said all types of banks across the continent were included in the sample. The request for information is the first step in a process that will see the ECB define best practices on how to deal with bad loans, encompassing banks with different business models in different jurisdictions. Those guidelines will eventually be used by the ECB’s supervisory teams when formulating recommendations for the banks on their watch. The recommendations might range from hiring more staff to deal with non-performing loans or changing internal practices, to making more provisions, reviewing the value of soured loans or even creating a bad bank. An ECB spokesman said the request for information was “standard supervisory practice”. A bad loan is typically one that is more than 90-days overdue.

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“I carry a great responsibility,” he said. “I would do a lot of things differently.”

What really happened was Varoukais couldn’t guarantee Plan X would work, and Tsipras then said it would be too great a responsibility to implement it.

• Varoufakis Speaks About 2015 Greece Parallel Currency Plan (Kath.)

Yanis Varoufakis was instructed last year by Prime Minister Alexis Tsipras to put together a small team of people to draw up a plan for introducing a parallel currency if Greece was unable to reach an agreement with its lenders on a new bailout, the ex-finance minister said in a TV interview late Tuesday. Speaking on Skai TV’s “Istories” (Stories) program, Varoufakis outlined what was known as Plan X. He said that a small team of about six people examined the various parameters surrounding a potential standoff that would lead to Greece being unable to meet its obligations. Among the issues examined by Varoufakis and his advisers were how the country would continue to have access to medicines, fuel and food under such circumstances.

Varoufakis said that he advised Tsipras to put the plan, which would see Greece defaulting on 27 billion euros in Greek government bonds held by the European Central Bank, into action as soon as he called a referendum at the end of June. “I thought that if we did what we had decided as a negotiating team… and announced that we would restructure these bonds and implement the parallel payment system, then by the Monday, Tuesday or Wednesday before the referendum the discussion we expected between [ECB president Mario] Draghi and [German Chancellor Angela] Merkel would take place,” he said. Varoufakis said that Tsipras considered adopting Plan X but that he was advised against it by Deputy Prime Minister Yiannis Dragasakis.

“The prime minister thought about it very carefully,” said the ex-minister. “I saw him puzzle over what he should do and in the end he decided to follow Dragasakis’s recommendation and not mine.” Varoufakis added that he was against efforts to secure funding from Russia but that there had been an agreement with China regarding investment in Greece, including in Greek bonds. “This agreement was overturned, though, with a phone call from Berlin,” he claimed. The outspoken economist said that he became frustrated with Tsipras when the prime minister agreed to a primary surplus target of 3.5% of GDP for the coming years, saying that he thought this goal was “macroeconomically impossible.” Tsipras told him that he agreed in return for receiving debt relief. “It’s true I don’t have a lot of hair but when I heard this I started pulling out what little I have left,” he said. Varoufakis admitted that he “failed” during his time in office. “I carry a great responsibility,” he said. “I would do a lot of things differently.”

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He should chide Brussels, not Ankara.

• Greek Immigration Minister Slams Turkish Failure To Curb Refugee Flow (Kath.)

Immigration Policy Minister Yiannis Mouzalas on Tuesday criticized Turkey for failing to take any serious measures to cut the flow of migrants into Europe as Brussels called on Greece to complete construction of five “hot spots” on its territory. In an interview with Deutsche Welle, Mouzalas said Ankara’s failure to clamp down on human traffickers put an excess burden on the country’s shoulders. “Smuggling networks are still in full operation… The deportation of migrants who have traveled from Turkey is also a big problem,” Mouzalas said. Greek authorities had carried out 130 deportations in the past 15 days, he said, while some 30,000 people had arrived from Turkey over the same period.

The International Organization for Migration (IOM) confirmed Tuesday that 31,244 migrants and refugees had arrived in Greece by sea since the beginning of 2016, compared with just 1,472 recorded arrivals in January last year. Meanwhile the Greek minister rebuffed criticism that his government had turned down EU help to deal with the crisis. He said that although Athens had officially requested 1,800 staff from EU border agency Frontex, only 900 were dispatched to Greece. Mouzalas did acknowledge delays in completing the five hot spots for registering and processing migrants and refugees on the islands of Lesvos, Samos, Leros, Kos and Chios. Speaking to German newspaper Sueddeutsche Zeitung, European Union Migration Commissioner Dimitris Avramopoulos said Greece – and Italy – must set up hot spots within the next four weeks.

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Big turnaround, big relief for Greece. But big problems elsewhere.

• EU To Scrap ‘First Country’ Asylum Claim Rule (FT)

Brussels is to scrap rules that make the first country a refugee enters responsible for any asylum claim, revolutionising the bloc’s migration policy and shifting the burden from its southern flank to its wealthier northern members. The “first-country” requirement is the linchpin of the EU refugee system. But it has become politically toxic for EU leaders as Germany and other states criticise frontier countries such as Greece and Italy for failing to register and shelter the 1.1m people that have poured into Europe from the Middle East and North Africa. The policy essentially broke down last year, when Germany waived its right to send hundreds of thousands of asylum-seekers back to other EU member states, but exhorted its reluctant partners to shoulder more responsibility.

The European Commission has concluded the rule – which is part of the Dublin regulation – is “outdated” and “unfair”, and will be scrapped in a proposal to be unveiled in March, according to officials briefed on its contents. The move could oblige some EU members such as Britain to take in many more refugees, since it would become harder to send them back to neighbouring countries. It could also increase the pressure on EU members to back a formal quota system and common asylum rights and procedures to spread the burden across the union. European Council president Donald Tusk on Tuesday warned that the EU had “no more than two months to get things under control” or face “grave consequences”.

Changing the rules on who is responsible for refugees when they arrive would mark a victory for Italian prime minister Matteo Renzi, who has repeatedly argued that the law is unfair and that other member states should do more to help with the refugee crisis. Replacing the “first country of entry” principle is likely to prove technically and politically tricky. Countries in northern Europe such as the UK are net beneficiaries from the status quo, able to transfer asylum-seekers back to other EU states quickly. Although the UK has an opt-out on EU migration policy, it has opted into the Dublin rules for this reason. In practice, the current rules have broken down.

Last autumn, German chancellor Angela Merkel controversially waived the country’s right to return Syrian refugees to the first country of entry, generating both praise and opprobrium from her peers – before reversing course and triggering months of chaotic border openings and closures across Europe. Transfers to Greece have been effectively banned since 2011 after the European Court of Human Rights declared that the country’s asylum system was unfit for purpose even before the recent influx.

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Don’t just talk, call that emergency assembly.

• Children On Syrian Refugee Route Could Freeze To Death: UN (Reuters)

Thousands of refugee children traveling along the migration route through Turkey and southeastern Europe are at risk from a sustained spell of freezing weather in the next two weeks, the United Nations and aid agencies said on Tuesday. The U.N. weather agency said it forecast below-normal temperatures and heavy snowfall in the next two weeks in the eastern Balkan peninsula, Turkey, the eastern Mediterranean and Syria, Lebanon, Israel and Jordan. “Many children on the move do not have adequate clothing or access to the right nutrition,” said Christophe Boulierac, spokesman for the U.N. children’s agency UNICEF. Asked if children could freeze to death, he told a news briefing: “The risk is clearly very, very high.”

Children were coming ashore on the Greek island of Lesbos wearing only T-shirts and soaking wet after traveling on unseaworthy rubber dinghies, the charity Save the Children said in a statement. “Aid workers at the border reception center in Presevo say there is six inches of snow on the ground and children are arriving with blue lips, distressed and shaking from the cold,” it said. It said temperatures were forecast to drop to -20 degrees Celsius (-4°F) in Presevo in Serbia and -13 degrees (9°F) on the Greek border with Macedonia. Last year children accounted for a quarter of the one million migrants and refugees arriving across the Mediterranean in Europe, Boulierac said. The UN refugee agency UNHCR said a daily average of 1,708 people had arrived in Greece so far in January, just under half the December daily average of 3,508.

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Well, obviously.

• Doctors Without Borders Says EU Worsens Refugee Crisis, Aids Smugglers (AP)

The aid group Doctors Without Borders said Tuesday attempts by various European Union nations to deter migrants have put thousands of people in danger and created more business for smugglers. In a report, it said border closures and tougher policing only encourage people seeking sanctuary or jobs to use other routes to get to Europe. MSF’s head of operations, Brice de le Vingne, said “policies of deterrence, along with their chaotic response to the humanitarian needs of those who flee, actively worsened the conditions of thousands of vulnerable men, women and children.” The group urged the EU to create more legal ways to come to Europe and allow asylum applications at the land border between Turkey and Greece.

More than 1 million migrants arrived in the EU last year, however they have not always been welcomed. Meanwhile, the EU’s top migration official says so-called “hotspots” should be up and running in Greece and Italy within a month in an effort to better control how migrants flow into the bloc and conduct early security checks on them. The hotspots are intended to register new arrivals, take fingerprints and other data, and perform background checks. Those with no chance of asylum would quickly be sent home, while others would be more evenly distributed among EU nations. Migration Commissioner Dimitris Avramopoulos was quoted by Germany’s Sueddeutsche Zeitung on Tuesday as saying he sees no immediate end to the flood of asylum seekers and that it’s critical to get hotspots running quickly.

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And nobody’s preparing, all they talk about is fewer refugees, even zero.

• Rate Of Refugee Arrivals In Greece Dwarfs 2015 Pace (AFP)

Greece has seen 21 times more migrants arrive on its shores so far this month than in all of January 2015, the International Organization for Migration said Tuesday. Since the beginning of 2016, IOM said 31,244 migrants and refugees had arrived in Greece by sea, compared with just 1,472 recorded arrivals on the Greek islands in January last year. “This is a huge jump,” spokesman Itayi Viriri told reporters in Geneva, warning that it does not bode well for the rest of the year. “If the trend as it is now continues then certainly were looking at another record number,” he cautioned. In 2015, more than one million migrants and refugees made the perilous Mediterranean crossing to Europe – nearly half of them Syrians fleeing a civil war that has been raging for nearly five years.

Although the number of arrivals in Greece last year was initially small, by the end of the year the country alone saw well over 850,000 arrivals. The continued influx will likely add to the EUs dissatisfaction with Turkey, a hub for migrants seeking to reach Europe which has on occasion been criticised by its Western partners for not doing enough to limit the numbers crossing the Aegean Sea. Ankara and Brussels in November agreed a plan to stem the flow by providing Turkey with €3 billion of EU cash as well as political concessions for Turkish cooperation in tackling Europes worst refugee crisis since World War II. IOM said Tuesday that nearly 90% of those who have arrived in Greece so far this year are Syrians, Afghans and Iraqis. Most of them are not staying in Greece. IOM cited numbers from Greek police showing that nearly 31,000 migrants had crossed the border to Macedonia since the beginning of the month.

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Time for us to leave.

• More Plastic Than Fish In The Sea By 2050 (Guardian)

As a record-breaking sailor, Dame Ellen MacArthur has seen more of the world’s oceans than almost anyone else. Now she is warning that there will be more waste plastic in the sea than fish by 2050, unless the industry cleans up its act. According to a new Ellen MacArthur Foundation report launched at the World Economic Forum on Tuesday, new plastics will consume 20% of all oil production within 35 years, up from an estimated 5% today. Plastics production has increased twentyfold since 1964, reaching 311m tonnes in 2014, the report says. It is expected to double again in the next 20 years and almost quadruple by 2050. Despite the growing demand, just 5% of plastics are recycled effectively, while 40% end up in landfill and a third in fragile ecosystems such as the world’s oceans.

Much of the remainder is burned, generating energy, but causing more fossil fuels to be consumed in order to make new plastic bags, cups, tubs and consumer devices demanded by the economy. Decades of plastic production have already caused environmental problems. The report says that every year “at least 8m tonnes of plastics leak into the ocean – which is equivalent to dumping the contents of one garbage truck into the ocean every minute. If no action is taken, this is expected to increase to two per minute by 2030 and four per minute by 2050 “In a business-as-usual scenario, the ocean is expected to contain one tonne of plastic for every three tonnes of fish by 2025, and by 2050, more plastics than fish [by weight].”

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Debt Rattle January 11 2016

Jan 112016
 
 January 11, 2016  Posted by at 9:29 am Finance Tagged with: , , , , , , , , ,  2 Responses »


Thin White Duke

• David Bowie Dies Aged 69 (Reuters)
• Chinese Stocks Down 5%, As Rout Ricochets In Asia (MarketWatch)
• Chinese Stocks Extend Rout as Economic Growth Concerns Deepen (BBG)
• Yuan Liquidity Extremely Tight, Interbank Rates Soar In Hong Kong (BBG)
• London Hedge Fund Omni Sees 15% Yuan Drop, and More in a Crisis (BBG)
• Australia Bet The House On Never-Ending Chinese Growth (Guardian)
• India Concerned About Chinese Currency Devaluation (Reuters)
• China PM: We’ll Let Market Forces Fix Overcapacity (Reuters)
• Fed’s Williams: “We Got It Wrong” On Benefits Of Low Oil Prices (ZH)
• Free Capital Flows Can Put Economies In A Bind (Münchau)
• Pensions, Mutual Funds Turn Back to Cash (WSJ)
• UK House Price To Crash As Global Asset Prices Unravel (Tel.)
• The West Is Losing The Battle For The Heart Of Europe (Reuters)
• Newly Elected Catalan President Vows Independence From Spain By 2017 (RT)
• Dutch ‘No’ To Kiev-EU Accord Could Trip Continental Crisis: Juncker (AFP)
• Britain Abandons Onshore Wind Just As New Technology Makes It Cheap (AEP)
• 400,000 Syrians Starving In Besieged Areas (AlJazeera)
• World’s Poor Lose Out As Aid Is Diverted To The Refugee Crisis (Guardian)

Bowie’s secret: hard work.

• David Bowie Dies Aged 69 From Cancer (Reuters)

David Bowie, a music legend who used daringly androgynous displays of sexuality and glittering costumes to frame legendary rock hits “Ziggy Stardust” and “Space Oddity”, has died of cancer. He was 69. “David Bowie died peacefully today surrounded by his family after a courageous 18-month battle with cancer,” read a statement on Bowie’s Facebook page dated Sunday. Born David Jones in the Brixton area of south London, Bowie took up the saxophone at 13. He shot to fame in Europe with 1969’s “Space Oddity”. But it was Bowie’s 1972 portrayal of a doomed bisexual alien rock star, Ziggy Stardust, that propelled him to global stardom. Bowie and Ziggy, wearing outrageous costumes, makeup and bright orange hair, took the rock world by storm.

Bowie said he was gay in an interview in the Melody Maker newspaper in 1972, coinciding with the launch of his androgynous persona, with red lightning bolt across his face and flamboyant clothes. He told Playboy four years later he was bisexual, but in the eighties he told Rolling Stone magazine that the declaration was “the biggest mistake I ever made”, and he was “always a closet heterosexual”. The excesses of a hedonistic life of the real rock star was taking its toll. In a reference to his prodigious appetite for cocaine, he said: “iI blew my nose one day in California,” he said. And half my brains came out. Something had to be done.”

Bowie kept a low profile after undergoing emergency heart surgery in 2004 but marked his 69th birthday on Friday with the release of a new album, “Blackstar”, with critics giving the thumbs up to the latest work in a long and innovative career. British Prime Minister David Cameron tweeted: “I grew up listening to and watching the pop genius David Bowie. He was a master of re-invention, who kept getting it right. A huge loss.” Steve Martin from Bowie’s publicity company Nasty Little Man confirmed the Facebook report was accurate. “It’s not a hoax,” he told Reuters.

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Close to circuit breaker again. Plunge protection.

• Chinese Stocks Down 5%, As Rout Ricochets In Asia (MarketWatch)

China shares slid Monday, and losses in other regional markets deepened, as a rout that knocked trillions of dollars off global stocks last week ricochets back to Asia. The Shanghai Composite Index fell 5.3% to 3,018 and the smaller Shenzhen Composite Index was last down 3.5%. Shares in Hong Kong sank to their lowest in roughly 2.5 years. The Hang Seng Index was off 2.4% at 19,970, on track to close below 20,000 for the first time since June 2013. A gauge of Chinese firms listed in the city fell 3.5%. Australia s benchmark was down 1.3%, and South Korea’s Kospi fell 0.7%. Japan s market was closed for a national holiday. Worries about weakness in the Chinese yuan and how authorities convey their market expectations continue to unnerve investors.

Poorly telegraphed moves last week exacerbated volatility in China, and triggered selling that spread to the rest of the region, the U.S. and Europe. Concerns about China’s stalling economy, with the yuan weakening 1.5% against the U.S. dollar last week, has sparked selling in commodities and currencies of China s trading partners, and sent investors to assets perceived as safe. “There’s no reason for Chinese stock to move up for now”, said Jiwu Chen, CEO of VStone Asset Management. He said investors are closely watching for hints in coming days from officials on their outlook for shares and the yuan, noting that authorities have nudged the yuan stronger starting Friday.

Earlier Monday, China’s central bank fixed the yuan at 6.5833 against the U.S. dollar, guiding the currency stronger from its 6.5938 late Friday. It was the second day the bank guided the yuan stronger, after eight sessions of weaker guidance. The onshore yuan can trade up or down 2% from the fix. The onshore yuan, which trades freely, was last at 6.6727 to the U.S. dollar, compared with 6.6820 late Friday. It reached a five-year low of 6.7511 last Thursday. China’s central bank appears to have spent huge amounts of dollars to support the yuan amid decelerating economic growth and the onset of higher U.S. interest rates. The country’s foreign-exchange regulator said over the weekend that its reserves are relatively sufficient. Reserves dropped by $107.9 billion in December, the biggest monthly drop ever.

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“Policy makers have to be cautious in using intervention as they can’t rescue the market all the time.”

• Chinese Stocks Extend Rout as Economic Growth Concerns Deepen (BBG)

Chinese stocks fell, extending last week’s plunge, as factory-gate price data fueled concern the economic slowdown is deepening. The Shanghai Composite Index slid 2.4% to 3,109.95 at the break, led by energy and material companies. The producer price index slumped 5.9% in December, extending declines to a record 46th month, data over the weekend showed. The Hang Seng China Enterprises Index tumbled 3.5% at noon, while the Hang Seng Index fell below the 20,000 level for the first time since 2013. “Pessimism is the dominant sentiment,” said William Wong at Shenwan Hongyuan Group in Hong Kong. “The PPI figure confirms the economy is mired in a slump. Market conditions will remain challenging given weak growth and volatility in external markets and the yuan’s depreciation pressure.”

Extreme market swings this year have revived concern over the Communist Party’s ability to manage an economy set to grow at the weakest pace since 1990. Policy makers removed new circuit breakers on Friday after blaming them for exacerbating declines that wiped out $1 trillion this year. [..] The offshore yuan erased early losses after China’s central bank kept the currency’s daily fixing stable for the second day in a row, calming markets after sparking turmoil last week. While state-controlled funds purchased Chinese stocks at least twice last week, according to people familiar with the matter, there was little evidence of intervention on Monday. “Sentiment is very poor,” said Castor Pang, head of research at Core Pacific Yamaichi Hong Kong. “I don’t see any clear signs of state buying in the mainland market. Policy makers have to be cautious in using intervention as they can’t rescue the market all the time.”

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Yuan shortage.

• Yuan Liquidity Extremely Tight, Interbank Rates Soar In Hong Kong (BBG)

Interbank yuan lending rates in Hong Kong climbed to records across the board after suspected intervention by China’s central bank last week mopped up supplies of the currency in the offshore market. The city’s benchmark rates for loans ranging from one day to a year all set new highs, with the overnight and one-week surging by the most since the Treasury Markets Association started compiling the fixings in June 2013. The overnight Hong Kong Interbank Offered Rate surged 939 basis points to 13.4% on Monday, while the one-week rate jumped 417 basis points to 11.23%. The previous highs were 9.45% and 10.1%, respectively. “Yuan liquidity is extremely tight in Hong Kong,” said Becky Liu, senior rates strategist at Standard Chartered in the city.

“There was some suspected intervention by the People’s Bank of China last week, and the liquidity impact is starting to show today.” The offshore yuan rebounded from a five-year low last week amid speculation the central bank bought the currency, an action that drains funds from the money market. Measures restricting overseas lenders’ access to onshore liquidity – which make it more expensive to short the yuan in the city – have also curbed supply. The PBOC has said it wants to converge the yuan’s rates at home and abroad, a gap that raises questions about the currency’s market value and hampers China’s push for greater global usage as it prepares to enter the IMF’s reserves basket this October. The offshore yuan’s 1.7% decline last week pushed its discount to the Shanghai price to a record, prompting the IMF to say that it will discuss the widening spread with the authorities.

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What would make one think this is not a crisis?

• London Hedge Fund Omni Sees 15% Yuan Drop, and More in a Crisis (BBG)

Omni Partners, the $965 million London hedge fund whose wagers against China helped it beat the industry last year, said the yuan may fall 15% in 2016, and even more if the nation has a credit crisis. The currency, which tumbled to a five-year low last week, would have to drop to 7 or 7.5 a dollar to meaningfully reverse its appreciation and be commensurate with the depreciation of other slowing emerging markets, Chris Morrison, head of strategy of Omni’s macro fund, said in a telephone interview. The yuan slumped 1.4% last week to around 6.59 in Shanghai. “While Chinese authorities have been intervening heavily in the dollar-yuan market, they cannot ultimately fight economic fundamentals,” Morrison said, adding that even the 7-7.5% forecast would be too conservative if China were to have a credit crisis.

“You’ll be talking about the kind of moves that Brazil and Turkey have seen, more like 50%, and that’s how you can create serious numbers like 8, 9 and 10 against the dollar.” The yuan’s biggest weekly loss since an Aug. 11 devaluation prompted banks including Goldman Sachs and ABN Amro Bank, which Bloomberg data show had the most-accurate forecasts for the yuan over the past year, to cut their estimates for the currency. The options market is also signaling that the yuan’s slide has plenty of room to run, with the contracts indicating there’s a 33% chance that the yuan will weaken beyond 7 a dollar, data compiled by Bloomberg show.

The declining currency, a debt pile estimated at 280% of GDP and a volatile equity market are complicating Premier Li Keqiang’s efforts to boost an economy estimated to grow at the slowest pace in 25 years. While intervention stabilized the yuan for almost four months following an Aug. 11 devaluation, the action led to the first-ever annual decline in the foreign-exchange reserves as capital outflows increased. Policy makers also propped up shares in the midst of a $5 trillion rout last summer, including ordering stock purchases by state funds. While a weaker yuan would support China’s flagging export sector, it also boosts risks for the nation’s foreign-currency borrowers and heightens speculation that the slowdown in Asia’s biggest economy is deeper than official data suggest.

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A hard rain is gonna fall.

• Australia Bet The House On Never-Ending Chinese Growth (Guardian)

Over the last couple of decades, China has undergone profound change and is often cited as an economic growth miracle. Day by day, however, the evidence becomes increasingly clear the probability of a severe economic and financial downturn in China is on the cards. This is not good news at all for Australia. The country is heavily exposed, as China comprises Australia’s top export market, at 33%, more than double the second (Japan at 15%). A considerable proportion of Australia’s current and future economic prospects depend heavily on China’s current strategy of building its way out of poverty while sustaining strong real GDP growth.

To date, China has successfully pulled hundreds of millions of its people out of poverty and into the middle class through mass provision of infrastructure and expansion of housing markets, alongside a powerful export operation which the global economy has relied upon since the 1990s for cheap imports. Though last week’s volatile falls on the Chinese stock markets alongside a weakening yuan sent shockwaves through the global markets, Australia’s exposure lies much deeper within the Chinese economy. The miracle is starting to look more and more fallible as it slumps under heavy corporate debts and an over-construction spree which shall never again be replicated in our lifetimes or that of our children.

As of the second quarter of 2015, China’s household sector debt was a moderate 38% of GDP but its booming private non-financial business sector debt was 163%. Added together, it gives a total of 201% and its climbing rapidly. This may well be a conservative figure, given it is widely acknowledged the central government has overstated GDP growth. Australia, though it frequently features high on lists of the world’s most desirable locations, currently has the world’s second most indebted household sector, at 122% of GDP, soon to overtake Denmark in first place. Combined with private non-financial business sector debt, Australia has a staggering total of 203%, vastly larger than public debts at all levels of government.

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There’ll be alot of this.

• India Concerned About Chinese Currency Devaluation (Reuters)

India on Friday called the slide in China’s yuan a “worrying” development for its flagging exports and said it was discussing possible measures to deal with a likely surge in imports from its northern neighbour. Trade Minister Nirmala Sitharaman said the yuan’s fall would worsen India’s trade deficit with China. While the government would not rush into any action, it had discussed likely steps it could take to counter an expected flood of cheap steel imports with domestic producers and the finance ministry, she said. The comments came a day after China allowed the biggest fall in the yuan in five months, pressuring regional currencies and sending global stock markets tumbling as investors feared it would trigger competitive devaluations.

“My deficit with China will widen,” she told reporters. India’s trade deficit with China stood at about $27 billion between April-September last year compared with nearly $49 billion in the fiscal year ending in March 2015. India steel companies such as JSW Ltd have asked the government to set a minimum import price to stop cheap imports undercutting them. A similar measure was adopted in 1999. “We have done ground work but are not rushing into it,” Sitharaman said when asked if India would impose a minimum import price for steel.

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?? “..even during an enormous steel glut last year, China had to import certain high-quality steel products, such as the tips of ballpoint pens. ..”

• China PM: We’ll Let Market Forces Fix Overcapacity (Reuters)

China will use market solutions to ease its overcapacity woes and will not use investment stimulus to expand demand, Premier Li Keqiang said during a recent visit to northern Shanxi province, according to state media. “We will let the market play a decisive role, we will let businesses compete against each other and let those unable to compete die out,” the state-run Beijing News quoted Li as saying. “At the same time, we need to prioritize new forms of economic development.” Li said the country needed to improve existing production facilities because even during an enormous steel glut last year, China had to import certain high-quality steel products, such as the tips of ballpoint pens.

China needed to set ceilings on steel and coal production volumes and government officials should use remote sensing equipment to check companies, the premier also said, according to the article, which was re-posted on the State Council’s website. During his visit to Chongqing earlier this month, President Xi Jinping said China would focus on reducing overcapacity and lowering corporate costs.

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As I said from the start. ZH did too. Seems such an easy thing to predict, because such a large part of our economies depend on jobs connected with oil.

• Fed’s Williams: “We Got It Wrong” On Benefits Of Low Oil Prices (ZH)

In late 2014 and early 2015, we tried to warn anyone who cared to listen time and time and time again that crashing crude prices are unambiguously bad for the economy and the market, contrary to what every Keynesian hack, tenured economist, Larry Kudlow and, naturally, central banker repeated – like a broken – record day after day: that the glorious benefits of the “gas savings tax cut” would unveil themselves any minute now, and unleash a new golden ago economic prosperity and push the US economy into 3%+ growth. Indeed, it was less than a year ago, on January 30 2015, when St. Louis Fed president Jim Bullard told Bloomberg TV that the oil price drop is unambiguously positive for the US. It wasn’t, and the predicted spending surge never happened. However, while that outcome was not surprising at all, what we were shocked by is that on Friday, following a speech to the California Bankers Association in Santa Barbara, during the subsequent Q&A, San Fran Fed president John Williams actually admitted the truth.

The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.

And there you have it: these are the people micromanaging not only the S&P500 but the US, and thus, the global economy – by implication they have to be the smartest people not only in the room, but in the world. As it turns out, they are about as clueless as it gets because the single biggest alleged positive driver of the US economy, as defined by the Fed, ended up being the single biggest drag to the economy, as a “doom and gloomish conspiracy blog” repeatedly said, and as the Fed subsequently admitted. At this point we would have been the first to give Williams, and the Fed, props for admitting what in retrospect amounts to an epic mistake, and perhaps cheer a Fed which has changed its mind as the facts changed… and then we listened a little further into the interview only to find that not only has the Fed not learned anything at all, but is now openly lying to justify its mistake. To wit:

I would argue that we are seeing [the benefits of lower oil]. We are seeing them where we would expect to see them: consumer spending has been growing faster than you would otherwise expect.

Actually John, no, you are not seeing consumer spending growing faster at all; you are seeing consumer spending collapse as a cursory 5 second check at your very own St. Louis Fed chart depository will reveal:

But the absolute cherry on top proving once and for all just how clueless the Fed remains despite its alleged epiphany, was Wiliams “conclusion” that consumers will finally change their behavior because having expected the gas drop to be temporary, now that gas prices have been low for “over a year” when responding to surveys, US consumers now expect oil to remain here, and as a result will splurge. So what Williams is saying is… short every energy company and prepare for mass defaults because oil will not rebound contrary to what the equity market is discounting. We can’t wait for Williams to explain in January 2017 how he was wrong – again – that a tsunami of energy defaults would be “unambiguously good” for the US economy.

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Capital controls, protectionism, we’ll see all this and more.

• Free Capital Flows Can Put Economies In A Bind (Münchau)

When Margaret Thatcher took power in Britain in 1979, one of her first decisions as prime minister was to scrap capital controls. It was the beginning of a new era and not just for Britain. Free capital movement has since become one of the axioms of modern global capitalism. It is also one of the “four freedoms” of Europe’s single market (along with unencumbered movement of people, goods and services). We might now ask whether the removal of the policy instrument of capital controls may have contributed to a succession of financial crises. To answer that, it is instructive to revisit a debate of three decades ago, when many in Europe invested their hopes in a combination of free trade, free capital mobility, a fixed exchange rate and an independent monetary policy — four policies that the late Italian economist, Tommaso Padoa-Schioppa, called an “inconsistent quartet”.

What he meant was that the combination is logically impossible. If Britain, say, fixed its exchange rate to the Deutschmark, and if capital and goods could move freely across borders, the Bank of England would have to follow the policies of the Bundesbank. In the early 1990s, Britain put this to the test, joining the single European market and pegging its currency to Germany’s. The music soon stopped; after less than two years in the exchange-rate mechanism, sterling went back to a floating exchange rate. Other European countries took a different course, sacrificing monetary independence and creating a common currency. Both choices were internally consistent. What has changed since then is the rising importance of cross-border finance. Many emerging markets do not have a sufficiently strong financial infrastructure of their own.

Companies and individuals thus take out loans from foreigners denominated in euros or dollars. Latin America is reliant on US finance, just as Hungary relies on Austrian banks. With the end of quantitative easing in the US and rising interest rates, money is draining out of dollar-based emerging markets. Theoretically, it is the job of a central bank to bring the ensuing havoc to an end, which standard economic theory suggests it should be able to do so long as it follows a domestic inflation target. But if large parts of the economy are funded by foreign money, its room for manoeuvre is limited — as the French economist Hélène Rey has explained. In the good times, Prof Rey finds, credit flows into emerging markets where it fuels local asset price bubbles. When, years later, liquidity dries up and the hot money returns to safe havens in North America and Europe, the country is left in a mess.

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Unease.

• Pensions, Mutual Funds Turn Back to Cash (WSJ)

U.S. public pension plans and mutual funds are sheltering more of their holdings in cash than they have in years, a sign of growing stress in financial markets. The ultradefensive stance reflects investors’ skittishness about global economic growth and uncertain prospects for further gains in assets. Pension funds have the added need to cut more checks as Americans retire in greater numbers, while mutual funds want cash to cover the risk that investors spooked by volatile markets will pull out more of their money. Large public retirement systems and open-end U.S. mutual funds have yanked nearly $200 billion from the market since mid-2014, according to a Wall Street Journal analysis of the most recent data available from Wilshire Trust Universe, Morningstar and the federal government.

That leaves pension funds with the highest cash levels as a percentage of assets since 2004. For mutual funds, the percentage of assets held in cash was the highest for the end of any quarter since at least 2007. The data run through Sept. 30, but many money managers say they remain very conservative. Pension consultants say some fund managers are considering socking even more of their assets into cash as they wait for the markets to calm down. “Some clients are asking us, ‘Would we be crazy to put 10% or 15% of our assets into cash?’,” said Michael A. Moran Goldman Sachs. Public pensions and mutual funds collectively manage $16 trillion, close to the value of U.S. gross domestic product, so even small shifts in their holdings can ripple through the trading world.

The movement of longer-term money to the sidelines has left the market increasingly in the hands of investors such as hedge funds, high-speed traders and exchange-traded funds that buy and sell more frequently, potentially leaving it more vulnerable to sharp swings, according to some money managers. [..] Managers of some pension plans and mutual funds said they limited their losses last year by moving more of their holdings into cash. Returns on cash-like securities were basically zero in 2015, while the Dow Jones Industrial Average fell 2.2% and the S&P 500 declined 0.7%. New York City’s $162 billion retirement system has more than tripled its cash holdings since mid-2014 to cut the plan’s interest-rate exposure. As a result, New York City’s allocations to plain vanilla stocks and fixed-income securities have fallen.

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“In the US following the December rate rise the cost of mortgages has soared by 50pc. ”

• UK House Price To Crash As Global Asset Prices Unravel (Tel.)

House prices have broken free from reality and defied gravity for far too long, but they are an asset like anything else, and there are six clear reasons a nasty correction looms in the coming year . Asset prices around the world soared as central bankers embarked on the greatest money printing experiment in history. While much of that money flowed into the stock market, a great deal also found its way into house prices. What we are now witnessing on trading screens around the world is the unwinding of the era of monetary excess, and house prices will not escape the fallout. The end of easy money began when the US stopped its third QE programme in October 2014. That date marks the point the US balance sheet, or amount of money in the system, stopped rising, having soared from $800m in 2008 to more than $4 trillion.

Without an ever-increasing supply of money the world economy is now slowing sharply. The first assets to be impacted by the downturn were commodities. The price of things such as oil are set daily in one of the largest and most highly traded markets across the world and as a result it is highly sensitive to any changes in demand and supply. Admittedly there are also supply-side factors impacting the oil price, but the weak demand from a slump is still a major factor. The next asset to fall was share prices. There was a delay of about 12 months because even though shares are also traded daily, their value depends on the profits of the company, and the impact of the commodity collapse took about a year to feed through. There is a delayed effect on property prices because the market is so inefficient.

Transactions can take up to three months to complete and the property itself may have to languish on the market for even longer. The prices are also dictated by estate agents, who have an interest in inflating them to raise fees. The number of transactions is also still about 40pc below that of 2006 and 2007, which allows prices to stray from the fundamentals for a longer period. It is true that Britain is suffering from a housing shortage, which drove UK house prices to a record high of an average of £208,286 in December, but like all asset prices they are on borrowed time. The fundamentals of demand and supply in UK housing will undergo a huge shift in the year ahead. A large portion of the demand for UK housing will fall away as the benefits of buy-to-let have effectively been killed off in recent budgets.

George Osborne slapped a huge tax increase on buy-to-let in the summer Budget, which will take effect from 2017 onwards. The removal of mortgage interest relief was the first stage and was followed by hiking stamp duty four months later in the November review. This could prove a double whammy on the housing market, turning potential buyers into sellers, and flooding the market with additional supply. A survey of landlords suggested 200,000 plan to exit the sector. The rapid growth of buy-to-let during the past decade looks set to be slammed into reverse.

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Implosion.

• The West Is Losing The Battle For The Heart Of Europe (Reuters)

A little over a quarter of a century ago, Europe celebrated the healing of the schism that Communism enforced on it since World War Two, and which produced great tribunes of freedom. Lech Walesa, the Polish shipyard electrician, climbed over his yard wall in Gdansk to join and then lead a strike in 1980 – lighting the fuse to ignite, 10 years and a period of confinement later, a revolution that couldn’t be squashed. He was elected president in 1990. Vaclav Havel, the Czech writer and dissident who served years in prison for his opposition to the Communist government, emerged as the natural leader of the democrats who articulated the frustration of the country. He was elected president of the still-united Czechoslovakia in 1989.

Jozsef Antall, a descendant of the Hungarian nobility who opposed both the Hungarian fascists and communists, was imprisoned for helping lead the 1956 revolt against the Soviet Union. And he was foremost in the negotiations to end Communist rule in the late 1980s. He survived to be elected prime minister in 1990. These men were inspirations to their fellow citizens, heroes to the wider democratic world and were thought to be the advance guard of people who would grow and prosper in a Europe eschewing every kind of authoritarianism. Havel could say, with perfect certainty, that the Communists in power had developed in Czechs “a profound distrust of all generalizations, ideological platitudes, clichés, slogans, intellectual stereotypes… we are now largely immune to all hypnotic enticements, even of the traditionally persuasive national or nationalistic variety.”

It isn’t like that now. Poland, largest and most successful of the Central European states has, in the governing Law and Justice Party, a group of politicians driving hard to remold the institutions of the state so that their power withstands all challenge. The government has sought to pack the constitutional court with a majority of its supporters; extended the powers of the intelligence services and put a supporter at their head; and signed into law a measure which puts broadcasting under direct state control.

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Democracy under scrutiny.

• Newly Elected Catalan President Vows Independence From Spain By 2017 (RT)

The Catalan parliament has sworn in Carles Puigdemont as the president of Catalonia. He will lead the region in its push towards independence from Spain by 2017. “We begin an extremely important process, unparalleled in our recent history, to create the Catalonia that we want, to collectively build a new country,” Puigdemont told the Catalan parliament, vowing to continue with his predecessor Artur Mas’ initiative to pull the region into independence. Puigdemont’s candidacy was backed by 70 lawmakers while 63 voted against, with two abstentions. The parliament has been in deadlock since Spain’s ruling party won most of the seats in September elections but failed to obtain a majority.

The Catalan parties had to agree on a new leader before Monday to avoid holding new regional elections. In a “last minute change”, Catalonia’s former president Artus Mas agreed to step down on Saturday and not seek reelection as pro-independence ‘Together for Yes’ coalition representative. The new candidate was backed by the anti-capitalist Popular Unity Candidacy (CUP) party, whose 10 seats has allowed them to secure a majority in the 135-seat chamber. The Catalan 18-month roadmap to independence suggests the approval of its own constitution and the building of necessary institutions, such as a central bank, judicial system and army.

Meanwhile Spanish Prime Minister Mariano Rajoy reiterated on Sunday that he would block any Catalan move towards independence to “defend the sovereignty” and “preserve democracy and all over Spain.” Catalonia has a population of 7.5 million people and represents nearly a fifth of Spain’s economic output. The local population has been dissatisfied with their taxes being used by Madrid to support poorer areas of the country.

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Shut up! Show some respect for democracy.

• Dutch ‘No’ To Kiev-EU Accord Could Trip Continental Crisis: Juncker (AFP)

European Commission chief Jean-Claude Juncker urged Dutch voters Saturday not to oppose an EU cooperation deal with Ukraine, saying such a move “could open the doors to a continental crisis”. A citizens’ campaign in the Netherlands spearheaded by three strongly eurosceptic groups garnered more than 300,000 votes needed to trigger a non-binding referendum on the deal, three months from now. Observers said the vote, set for April 6, pointed more towards broader euroscepticism among the Dutch than actual opposition to the trade deal with Kiev, which fosters deeper cooperation with Brussels. A Dutch ‘no’ “could open the doors to a continental crisis,” Juncker told the authoritative NRC daily newspaper in an interview published on Saturday.

“Let’s not change the referendum into a vote about Europe,” Juncker urged Dutch voters, adding: “I sincerely hope that (the Dutch) won’t vote no for reasons that have nothing to do with the treaty itself.” Should Dutch voters oppose the deal, Russia “stood to benefit most,” he said. The 2014 association agreement provisionally came into effect on January 1 and nudges the former Soviet bloc nation towards eventual EU membership. On a visit to the Netherlands in November, Ukranian President Petro Poroshenko hailed the deal as the start of a new era for the Ukraine. Dutch Prime Minister Mark Rutte has said his government was bound by law to hold the referendum, and would afterwards assess the results to see if any change in policy was merited.

Although the results are not binding on Rutte’s Liberal-Labour coalition, the referendum is likely to be closely watched as eurosceptic parties – including that of far-right politician Geert Wilders – rise in the Dutch polls ahead of elections due in 2017. Russia has been incensed by the EU’s move to bring Ukraine closer to the European fold.

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Ambrose won’t let go of his techno dreams.

• Britain Abandons Onshore Wind Just As New Technology Makes It Cheap (AEP)

The world’s biggest producer of wind turbines has accused Britain of obstructing use of new technology that can slash costs, preventing the wind industry from offering one of the cheapest forms of energy without subsidies. Anders Runevad, CEO of Vestas, said his company’s wind turbines can compete onshore against any other source of energy in the UK without need for state support, but only if the Government sweeps away impediments to a free market. While he stopped short of rebuking the Conservatives for kowtowing to ‘Nimbyism’, the wind industry is angry that ministers are changing the rules in an erratic fashion and imposing guidelines that effectively freeze development of onshore wind. “We can compete in a market-based system in onshore wind and we are happy to take on the challenge, so long as we are able to use our latest technology,” he told the Daily Telegraph.

“The UK has a tip-height restriction of 125 meters and this is cumbersome. Our new generation is well above that,” he said. Vestas is the UK’s market leader in onshore wind. Its latest models top 140 meters, towering over St Paul’s Cathedral. They capture more of the wind current and have bigger rotors that radically change the economics of wind power. “Over the last twenty years costs have come down by 80pc. They have come down by 50pc in the US since 2009,” said Mr Runevad. Half of all new turbines in Sweden are between 170 and 200 meters, while the latest projects in Germany average 165 meters. “Such limits mean the UK is being left behind in international markets,” said a ‘taskforce report’ by RenewableUK. The new technology has complex electronics, feeding ‘smart data’ from sensors back to a central computer system.

They have better gear boxes and hi-tech blades that raise yield and lower noise. The industry has learned the art of siting turbines, and controlling turbulence and sheer. Economies of scale have done the rest. This is why average purchase prices for wind power in the US have fallen to the once unthinkable level of 2.35 cents per kilowatt/hour (KWh), according to the US energy Department. At this level wind competes toe-to-toe with coal or gas, even without a carbon tax, an increasingly likely prospect in the 2020s following the COP21 climate deal in Paris. American Electric Power in Oklahoma tripled its demand for local wind power last year simply because the bids came in so low. “We estimate that onshore wind is either the cheapest or close to being the cheapest source of energy in most regions globally,” said Bank of America in a report last month.

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This is where EU, Turkey wish to send people back into.

• 400,000 Syrians Starving In Besieged Areas (AlJazeera)

As aid agencies prepare to deliver food to Madaya, on the outskirts of Damascus, and two other besieged towns in Idlib province, an estimated 400,000 people are living under siege in 15 areas across Syria, according to the UN. A deal struck on Saturday permits the delivery of food to Madaya, currently surrounded by forces loyal to Syrian President Bashar al-Assad, and the villages of Foua and Kefraya in Idlib, both of which are hemmed in by rebel fighters. Due to a siege imposed by the Syrian government and the Lebanese Hezbollah group, an estimated 42,000 people in Madaya have little to no access to food, resulting in the deaths of at least 23 people by starvation so far, according to the charity Doctors Without Borders (MSF).

Reports of widespread malnutrition have emerged, some of them suggesting that Madaya residents are resorting to eating grass and insects for survival. In Kefraya and Foua, about 12,500 people are cut off from access to aid supplies by rebel groups, including al-Nusra Front. On December 26, Syrian government forces set up a checkpoint and sealed off the final road to Moadamiyah, a rebel-controlled town on the outskirts of Damascus, demanding that opposition groups lay down their arms and surrender. The Moadamiyah Media Office, run by pro-opposition activists, estimates that 45,000 civilians are stuck in the area for more than two weeks. The organisation said on Saturday that a siege that started in April 2013 and lasted a year, resulted in the deaths of 16 local residents due to a lack of food and medicine. It said the current one has killed one local resident so far this year: an eight-month-old boy who died from malnutrition on January 10.

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As we enter another crisis ourselves, we will need to become more generous. Or face chaos.

• World’s Poor Lose Out As Aid Is Diverted To The Refugee Crisis (Guardian)

Sweden is one of the most generous countries in the world when it comes to international aid. Along with other Scandinavian countries, it has given bounteously to less fortunate nations for many years. With a population of under 10 million, it also takes more than its fair share of asylum seekers – an estimated 190,000 last year, with a further 100,000 to 170,000 expected to arrive in 2016. This is proving to be an expensive business. The Swedish migration agency says the cost of assimilating such a large number of asylum seekers will be €6.4bn (£4.4bn) this year – and a debate is raging about whether the aid budget should be raided to help meet the bill. In 2015, 25% of the aid budget was spent on refugees. One proposal is to raise that figure to 60%.

Other countries are responding in similar fashion. Italy raised its aid spending in 2015, but the extra money was mostly spent domestically on those who successfully made the dangerous voyage across the Mediterranean from north Africa. Final figures for development assistance collated by the OECD show that global aid spending rose to a record level of $137.2bn (£94bn) in 2014 – an increase of 1.2% on the previous year. But the money is not going to those countries that are in the greatest need. Spending on the least developed countries (LDCs) fell by almost 5% and as a share of the total fell below 30% for the first time since 2005. Donor countries are increasingly dipping into their aid budgets to deal with the migration crisis or diverting money that would previously have gone to sub-Saharan Africa to countries that are deemed to be fragile, such as Egypt, Pakistan and Syria, but are not classified as LDCs.

What’s more, the trend is likely to have continued and accelerated in 2015, a year that saw far more people arriving in Europe from north Africa and the Middle East. Italy was already spending 61% of its aid budget on refugees in 2014. For Greece, the other country on the front line, the figure was 46%. It is hardly surprising that the governments in Rome and Athens have responded in this way. Both have had austerity measures foisted upon them and are seeking to make ends meet as best they can. The fact is, though, that the entire development assistance system is creaking under the strain at a time when demands for aid are increasing.

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Debt Rattle January 10 2016

Jan 102016
 
 January 10, 2016  Posted by at 10:09 am Finance Tagged with: , , , , , , , , , ,  3 Responses »


DPC Levee, Ohio River at Louisville, Kentucky 1905

• The US Economy Is Dead In The Water (Stockman)
• America, Your Credit Rating Stinks (BBG)
• Up To A Million Americans Will Be Kicked Off Food Stamps This Year (HuffPo)
• How Debt Conquered America (Thacker)
• Saudis Told To Prop Up Currency Amid Global Devaluation War Fears (Tel.)
• Could Saudi Aramco Be Worth 20 Times Exxon? (WSJ)
• Saudi Arms Sales Are In Breach Of International Law, Britain Is Told (Observer)
• China Heightens the Contradictions (BBG)
• Germany’s Sparkassen: Banking On Capital Exports (Coppola)
• VW Proposes Catalytic Converter To Fix US Test Cheating Cars (Reuters)
• ‘Tax Wall Street,’ Trump Pledges After Worst Market Week Since 2011 (BBG)
• Heavily Armed Men Offer ‘Security’ For Oregon Militia At Refuge (Guardian)
• Two-Thirds Of Tory MPs Want Britain To Quit European Union (Observer)
• EU Eyes Start Of Greek Reforms Review January 18 (Reuters)
• ‘Greek Government Has Solid Majority To Pass Pension Reform’ (Reuters)
• Anger Over Fate Of Child Refugees Denied UK Asylum Hearing (Observer)

Seasonable adjustments strike again.

• The US Economy Is Dead In The Water (Stockman)

Here’s a newsflash that CNBC didn’t mention. According to the BLS, the US economy generated a miniscule 11,000 jobs in the month of December. Yet notwithstanding the fact that almost nobody works outdoors any more, the BLS fiction writers added 281,000 to their headline number to cover the “seasonal adjustment.” This is done on the apparent truism that December is generally colder than November and that workers get holiday vacations. Of course, this December was much warmer, not colder, than average. And that’s not the only deviation from normal seasonal trends. The Christmas selling season this year, for example, was absolutely not comparable to the ghosts of Christmas past. Bricks and mortar retail is in turmoil and in secular decline due to Amazon and its e-commerce ilk, and this trend is accelerating by the year.

So too, energy and export based sectors have been thrown for a loop in the last few months by a surging dollar and collapsing commodity prices. Likewise, construction activity has been so weak in this cycle—-and for the good reason that both commercial and residential stock is vastly overbuilt owing to two decades of cheap credit—–that its not remotely comparable to historic patterns. Never mind. The BLS always adds the same big dollop of jobs to the December establishment survey come hell or high water. In fact, the seasonal adjustment has averaged 320,000 for the last 12 years! For crying out loud, folks, every December is different—–and not just because of the vagaries of the weather. Capitalism is about incessant change and reallocation of economic activity and resources.

And now the globalized ebbs and flows of economic activity have only accentuated the rate and intensity of these adjustments. Yet the statistical wizards at the BLS think they can approximate a seasonal adjustment factor for December that at +/- 300k amounts to just 0.2% of the currently reported 144.2 million establishment survey jobs, and an even smaller fraction of the potential adult work force which is at least 165 million. But that’s a pretentious stab in the dark. The December seasonal adjustment (SA) could just as easily be 0.3% of the job base or 0.1%, depending upon the specific point in the business cycle and structural trends roiling the economy.

[..] So what happened to the non-seasonally adjusted (NSA) job count in December at similar points late in the course of prior cycles? Well, in December 1999 about 140,000 jobs were added and in December 2007 there was a NSA gain of 212,000. This time we got the magnificent sum of 11,000, and by the way, last year was only 6,000. The real news flash in the December “jobs” report, therefore, is that even by the lights of the BLS’ rickety, archaic and virtually worthless establishment survey, the domestic economy is dead in the water. We are not on the verge of “escape velocity”, as our foolish monetary politburo keeps insisting; the US economy is actually knocking on the door of recession.

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Here come your tax hikes.

• America, Your Credit Rating Stinks (BBG)

They are home to the nation’s credit elite, and they have another thing in common: the tech industry. Certain neighborhoods on the West Coast boast residents with some of the best credit, according to a new report by free credit score site Credit Sesame. Those zip codes1 include the main stomping grounds of Microsoft, Yahoo!, and Google. Between the coasts, and certainly away from the tech plutocracy, the story is different. The average score for all U.S. states combined is a lowly 604, considered subprime by many lenders, said Stew Langille, Credit Sesame’s chief strategy officer. The highest credit score possible is 850, although only a rare few have reached it. Those close to it reside in zip codes of Seattle (Redmond, Wash., to be precise), with an average score of 719 under TransUnion’s FICO rival, VantageScore. They also populate parts of Mountain View, Calif., (748) Sunnyvale, Calif., (730) and San Francisco (707).

[..] While credit scores are supposed to be based on how you manage your credit, Credit Sesame stats show a strong correlation with income. In Mountain View, Calif., median household income is $92,125, the Census Bureau says, and the percentage of people living below the poverty line is just below 11%. Among the lowest-scoring zip codes in Chicago and Detroit, median income is $19,5483 and $26,648, respectively. The percentage of people living in poverty in Chicago’s Southside is 47.4%; it’s 42.8% for Detroit. Those with the top credit scores in the study benefit from a virtuous cycle. They have high incomes and work in growing industries. More money means you can enter more transactions, such as taking out and repaying loans, which strengthen your credit score. Homeowners showed higher overall credit scores than renters, for example.

The highly educated citizens of Silicon Valley are probably more credit savvy, too. “Potentially part of the problem is that if you don’t have a high level of education, and you’re busy working and managing your life, it’s hard to know what to do to get the optimal credit score,” said Langille. You won’t know, for example, that how much of your credit line you use makes up about 30% of your credit score. And speaking of credit usage, whether on a credit card or home equity line of credit, Credit Sesame looked at that too. It graded the pool of 2.5 million users on a scale of A to F, with those using the smallest percentage of available credit getting the best scores. That leaves less than 19% of Americans with an A, using zero to 10% of available credit. And it leaves 57% of Americans with an F, meaning that they use 70% or more of available credit. [..] Many credit experts recommend that people use less than 30% of the credit available to them to avoid having their credit score dinged.

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For not finding work…

• Up To A Million Americans Will Be Kicked Off Food Stamps This Year (HuffPo)

As many as a million Americans will be kicked off food stamps this year thanks to the return of federal rules targeting unemployed adults without children. That’s according to a new analysis by the Center on Budget and Policy Priorities, a liberal Washington, D.C. think tank, which finds that no fewer than 500,000 people will lose benefits. “The loss of this food assistance, which averages approximately $150 to $170 per person per month for this group, will cause serious hardship among many,” the Center on Budget says. New Jersey, North Carolina, Georgia and 20 other states will allow able-bodied adults without dependents to receive food assistance for only three months unless they work at least 20 hours per week.

Though states are carrying out the policy, it’s a requirement of federal law that had been waived for the past several years because of widespread joblessness. With unemployment rates tumbling, the rule is returning. Several states brought it back ahead of schedule last year, and by the end of this year, only a handful of states will qualify for waivers from the rule. “It’s inexplicable how anyone could call compliance with a federal policy a punitive action by the state,” a spokesman for New Jersey Gov. Chris Christie (R) told AP last week in response to criticism that the policy punishes poor people. The three-month limit has traditionally been called a “work requirement,” but the Center on Budget quibbles with that characterization because work or qualifying “work activities” are not necessarily available.

“Because this provision denies basic food assistance to people who want to work and will accept any job or work program slot offered, it is effectively a severe time limit rather than a work requirement, as such requirements are commonly understood,” the Center says. “Work requirements in public assistance programs typically require people to look for work and accept any job or employment program slot that is offered but do not cut off people who are willing to work and looking for a job simply because they can’t find one,” it adds.

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A great history lesson.

• How Debt Conquered America (Thacker)

The tragedy of the Spaniards’ devastation of untold millions of native lives was compounded by seven million African slaves who died during the process of their enslavement. Another 11 million died as New World slaves thereafter. The Spanish exploitation of land and labor continued for over three centuries until the Bolivarian revolutions of the Nineteenth Century. But even afterward, the looting continued for another century to benefit domestic oligarchs and foreign businesses interests, including those of U.S. entrepreneurs. Possibly the only other manmade disasters as irredeemable as the Spanish Conquest – in terms of loss of life, destruction and theft of property, and impoverishment of culture – were the Mongol invasions of the Thirteenth and Fourteenth centuries.

The Mongols and the Spaniards each inflicted a human catastrophe fully comparable to that of a modern, region-wide thermonuclear war. Unlike Spaniards, Anglo-American colonists brought their own working-class labor from Europe. While ethnic Spaniards remained at the apex of the Latin American economic pyramid, that pyramid in North America would be built largely from European ethnic stock. Conquered natives were to be wholly excluded from the structure. While contemporary North Americans look back at the Spanish Conquest with self-righteous horror, most do not know the majority of the first English settlers were not even free persons, much less democrats. They were in fact expiration-dated slaves, known as indentured servants.

They commonly served 7 to 14 years of bondage to their masters before becoming free to pursue independent livelihoods. This was a cold comfort, indeed, for the 50% of them who died in bondage within five years of arriving in Virginia – this according to “American Slavery, American Freedom: The Ordeal of Colonial Virginia” by the dean of American colonial history, Edmund S. Morgan. Also disremembered is that the Jamestown colony was founded by a corporation, not by the Crown. The colony was owned by shareholders in the Virginia Company of London and was intended to be a profit-making venture for absentee investors. It never made a profit. After 15 years of steady losses, Virginia’s corporate investors bailed out, abandoning the colonists to a cruel fate in a pestilential swamp amidst increasingly hostile natives.

Jamestown’s masters and servants alike survived only because they were rescued by the Crown, which was less motivated by Christian mercy than by the tax it was collecting on each pound of the tobacco the colonists exported to England. Thus a failed corporate start-up survived only as a successful government-sponsored oligarchy, which was economically dependent upon the export of addictive substances produced by indentured and slave labor. This was the debt-genesis of American-Anglo colonization, not smarmy fairy tales featuring Squanto or Pocahontas, or actor Ronald Reagan’s fantasized (and plagiarized) “shining city upon a hill.”

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“The S&P 500 endured its worst start to a year since 1928, while European equities suffered their biggest opening year losses for over 45 years.”

• Saudis Told To Prop Up Currency Amid Global Devaluation War Fears (Tel.)

Saudi Arabia should use its massive foreign exchange reserves to defend the riyal, amid fears the world is descending into a new phase of global currency wars, the World Bank has said. The kingdom’s shaky currency peg with the dollar has come under record pressure this week as the price of oil has plummeted to near 12-year lows at $32-a-barrel. With the global stock markets in turmoil, analysts fear a Saudi devaluation could spark a new wave of deflation and competitive “beggar-thy-neighbour” policies in a fragile global economy. But the world’s largest producer of Brent crude should continue to defend its exchange rate by drawing down on its war chest of reserves, according to Franziksa Ohnsorge, lead economist at the World Bank. “For now they have large reserves, and reserves can be used during an adjustment period”, Ms Ohnsorge told The Telegraph.

Oil accounts for more than three-quarters of Saudi Arabia’s government revenues. But a record supply glut has led to the kingdom burning through its reserves at a record pace in order to defend its 30-year-old exchange rate regime. Central bank reserves have dropped from a peak of $735bn to around $635bn this year – a pace of spending which will exhaust the kingdom’s fiscal buffers within five years, Bank of America Merrill Lynch calculate. A fresh round of conflict with rivals Iran and a sustained low oil price world would reduce this cushion substantially, said David Hauner at BaML. The monarchy has vowed to stick by the exchange regime and is instead planning to strengthen its coffers through the unprecedented flotation of its state-owned oil giant, Aramco.

Concerns about the Saudi peg come as fears that China was engineering on its own covert currency devaluation rippled through global markets this week. The S&P 500 endured its worst start to a year since 1928, while European equities suffered their biggest opening year losses for over 45 years. More than £85bn was also wiped off the FTSE 100 in a torrid start to 2016 trading. Investment bank Goldman Sachs has warned Beijing may soon abandon its support for the renminbi and engineer a full-blown devaluation. “Just as the US and European phases of the financial crisis were eventually curtailed by currency devaluation and quantitative easing, the fear is that emerging market economies and even China might need to do the same”, said Peter Oppenheimer at Goldman.

Faced with declining revenues, the Saudi monarchy has been forced to unveil a radical programme of government austerity to compensate for the 70pc decline in Brent prices over the last 18 months. Markets are now betting the kingdom will have to abandon its exchange rate regime – which has fixed the riyal at 3.75 to the dollar since 1986. Forward contracts for the riyal have soared to their highest levels in nearly 20 years – a sign that investors no longer believe in the viability of the peg.

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Depends how far Exxon plunges?!

• Could Saudi Aramco Be Worth 20 Times Exxon? (WSJ)

Saudi Arabia’s potential sale of shares in its state-owned oil giant could lead to a publicly listed company valued in the trillions of dollars, more than 10 times Apple’s peak of about $756 billion. Saudi Arabian Oil Co., better known as Saudi Aramco, on Friday held out the prospect of an IPO on the Saudi stock exchange. Aramco said it was considering “the listing in capital markets of an appropriate percentage of the company’s shares and/or the listing of a bundle of its downstream subsidiaries.” That potential drew attention because the company produces more than 10% of the world’s oil supply every day and controls a large chain of refineries and petrochemical facilities to complement its exploration and production operations.

Taken together the business could be valued at more than $10 trillion by some estimates. Exxon, the largest non-state-controlled oil company, has a market value of $317 billion. Mohammad al-Sabban, an independent oil analyst and former senior adviser to the Saudi oil ministry, said it was unlikely the Saudi kingdom would list shares in the parent. That could open it up to scrutiny about financial controls and lift a veil on information that the royal family regards as state secrets. More likely is a Saudi Aramco listing of parts of its refining and chemical operations, Mr. Sabban and others said. That would still be significant given the size of those businesses. A person familiar with the national oil company said Western banks likely are months away from hearing what the Saudis’ decision will be.

There hasn’t been serious discussions with banks about the particulars of any stock offering, that person added. One clue to the scale of Aramco’s domestic refining operations is its Sadara Chemical complex in the eastern city of Jubail. It will be the largest petrochemicals project ever built at one time when it starts full operations in 2017. Built in partnership with Dow Chemical, it has already been earmarked for an IPO this year to raise the funds to pay its $20 billion price-tag.

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As if they care.

• Saudi Arms Sales Are In Breach Of International Law, Britain Is Told (Observer)

The government has been put on notice that it is in breach of international law for allowing the export of British-made missiles and military equipment to Saudi Arabia that might have been used to kill civilians. The hugely embarrassing accusation comes after human rights groups, the European parliament and the UN all expressed concerns about Saudi-led coalition attacks in Yemen. Lawyers acting for the Campaign Against the Arms Trade (CAAT) have stepped up legal proceedings against the Department for Business, Innovation and Skills, which approves export licences, accusing it of failing in its legal duty to take steps to prevent and suppress violations of international humanitarian law.

In a 19-page legal letter seen by the Observer, CAAT warns that the government’s refusal to suspend current licences to Saudi Arabia, and its decision “to continue the granting of new licences” for military equipment that may be destined for use in Yemen, is unlawful. The letter cites article two of the EU Council Common Position on arms sales, which would compel the UK to deny an export licence if there was “a clear risk” that equipment might be used in a violation of international humanitarian law. Lawyers for CAAT have given the government 14 days to suspend licences allowing the export of military equipment to Saudi Arabia, pending the outcome of a review of its obligations under EU law and its own licensing criteria.

A failure to comply would see proceedings against the government, which would force it to explain in the high court what steps it has taken to ensure that UK military hardware is not being used in breach of international law. “UK weapons have been central to a bombing campaign that has killed thousands of people, destroyed vital infrastructure and inflamed tensions in the region,” said Andrew Smith of CAAT. “The UK has been complicit in the destruction by continuing to support airstrikes and provide arms, despite strong and increasing evidence that war crimes are being committed.”

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Beijing just ordered a new magic wand.

• China Heightens the Contradictions (BBG)

Another tumultuous week for China’s stock markets has dealt yet another blow to global confidence in Beijing’s policy makers. Each tripped circuit-breaker and policy reversal has underscored the inherent contradiction China faces — between the leadership’s desire for the certainty of state control and the benefits of free markets. This contradiction has been part of the Chinese economic system since pro-market reform began in the early 1980s. The government’s model encouraged private enterprise, foreign investment and international trade while keeping the “commanding heights” of the economy – the financial sector, critical industries – firmly in state hands. The system may have run counter to classical economics, but it was effective, transforming China from an impoverished basket case to the world’s second-largest economy, and earning Beijing’s policy makers a reputation for sagacity and infallibility.

The problem is that this tension between state and market becomes more dangerous as an economy advances. We know this is true from the experiences of Japan and South Korea, which both used systems similar to China’s, produced similar results and then suffered similar problems. China’s current woes of high debt, excess capacity and a strained financial sector are all creations of the state-market conundrum. The only way to solve it is for the state to allow the market to hold more and more sway over the economy. That allows resources to be allocated more wisely, productivity to improve and entrepreneurship to flourish. Yet it also requires the party to relinquish control. China’s leaders are not unaware of the need for such change. That’s why they’ve promised to free up capital flows, liberalize the currency, reform the state sector and slash red tape. But that sticky contradiction remains firmly in place.

The Communist Party plenum in 2013 that drew up a long-term road map for economic reform enshrined the state-market conflict as a core principle of Chinese policy. The plenum’s communique declares the twin goals of creating an economy “centering on the decisive role of the market” but “with public ownership playing a dominant role.” That conflict is at the heart of the stock-market fiasco. Setting the expansion of capital markets as a priority, the government made the mistake of propagating equity investments on a wide scale. Then, when prices began to tumble last summer, the government, terrified by the instability, jumped in to “fix” the problem. Now policy makers have trapped themselves – attempting to control a market too big and complex to answer to bureaucrats. Instead of developing a respected stock exchange, the state has undermined its credibility.

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A complicated mess.

• Germany’s Sparkassen: Banking On Capital Exports (Coppola)

German households save a very high proportion of their earnings. Unlike the UK and Ireland, where households save principally in the form of pensions and property, German savers like to keep their money in banks. The success of the public savings banks stems from their role as principal savings vehicle for the famously thrifty German savers. In fact, they are a little too successful. Savings banks have excess deposits. Ordinarily, an excess of deposits over lending opportunities would drive down interest rates to zero or below. Interest rates have fallen at Sparkassen, but not as much as might be expected, given Germany’s dismal record of both private and public sector investment. So how do Sparkassen manage to maintain positive returns to savers?

Simple. They place their excess deposits with larger institutions – the regional public banks (Landesbanken), and the Frankfurt-based asset manager Dekabank Group. Landesbanken provide wholesale banking services both within Germany and cross-border, while Dekabank manages an asset portfolio of about 155bn Euros, some of it in Luxembourg and Switzerland. In other words, Sparkassen export their excess deposits. The Sparkassen model depends on there being a tier of compliant larger banks that will find profitable investment opportunities both inside and outside Germany to generate the returns that Sparkassen want to provide to savers. The Landesbanken and Dekabank together act like a giant sump.

The sump used to work well. Landesbanken pooled liquidity for the Sparkassen and lent to larger enterprises, while Dekabank invested excess deposits. But then the Landesbanken over-extended themselves, loading up on – among other things – American subprime MBS, risky investments in the Balkans and Irish property loans. In the 2008 financial crisis, several of the Landesbanken had to be bailed out. Since then, the Sparkassen’s equity stakes in the Landesbanken have gradually shrunk, replaced with municipal government ownership. Without this, the Sparkassen would have taken heavy losses. In 2011, the German Savings Bank Association (the Sparkassen’s umbrella organisation) bought out the Landesbanken’s stake in Dekabank. The Landesbanken are still too damaged to deliver the returns that Sparkassen want, and their new prudent lending model is not going to deliver much in the future either.

So Dekabank, not Landesbanken, should now be regarded as the asset management part of the Sparkassen empire. The sump has changed its nature. But it doesn’t generate the returns that it used to – asset managers have to “reach for yield” to make respectable returns these days, and after their experience with the Landesbanken, the savings banks are understandably not too happy for their asset manager to do anything too risky. So the result is a profits squeeze for Sparkassen. They aren’t getting the returns, either on their own lending or on their assets under management at Dekabank, that they need in order to give positive returns to savers.

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Only interesting question that remains: can US risk bankrupting the company?

• VW Proposes Catalytic Converter To Fix US Test Cheating Cars (Reuters)

Volkswagen engineers have come up with a catalytic converter that could be fitted to around 430,000 cars in the United States as a fix for vehicles capable of cheating emissions tests, German daily Bild am Sonntag reported. The converter would be fitted to cars with the first generation of the EA 189 diesel engine, the paper reported on Sunday, without providing information on its sources. A source familiar with the matter told Reuters that the proposal for a technical solution VW has drawn up includes a new catalytic converter system made in part from new materials.

Volkswagen has struggled to agree with U.S. authorities on a fix for vehicles fitted with the emissions test cheating devices, Reuters reported this week, showing how relations between the two sides remained strained four months after the scandal broke. The fix would need to be approved by the U.S. Environmental Protection Authority, and Volkswagen CEO Matthias Mueller hopes to convince EPA officials at a meeting on Wednesday in Washington, Bild am Sonntag further added.

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“I’m really good at that stuf..”

• ‘Tax Wall Street,’ Trump Pledges After Worst Market Week Since 2011 (BBG)

Republican presidential front-runner Donald Trump pledged to “tax Wall Street” as he sought to use a severe stock market selloff to plant new seeds of fear among voters during a campaign rally Saturday in Ottumwa, Iowa. At times, the real estate mogul sounded more like Democratic presidential candidate Senator Bernie Sanders, a constant critic of Wall Street, than a billionaire candidate running for the Republican presidential nomination. “There’s a bubble,” Trump told his audience in southeastern Iowa, noting the nation’s high level of debt. “You see the stock market is starting to, you know, see what’s going on,” he said. “It’s starting to have some very bad weeks and some very bad numbers.”

Volatility skyrocketed in financial markets last week as anxiety about global growth increased. The Standard & Poor’s 500 Index tumbled 6 percent on the week, the biggest drop since September 2011 and the steepest slide over five days to begin a year on record. Trump said his financial experience was right for such troubled times. “I’m really good at that stuff,” he said. “I know Wall Street. I know the people on Wall Street. We’re going to have the greatest negotiators of the world, but at the same time I’m not going to let Wall Street get away with murder. Wall Street has caused tremendous problems for us. We’re going to tax Wall Street.” Trump also highlighted his independence from campaign contributions. “I don’t care about the Wall Street guys,” he said. “I’m not taking any of their money.”

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How is this not a third world country, private armies, warlords and all?!

• Heavily Armed Men Offer ‘Security’ For Oregon Militia At Refuge (Guardian)

A large group of heavily armed men showed up to the wildlife refuge occupation in eastern Oregon on Saturday, further escalating tensions and causing internal conflicts at the protests. Just as a number of the regular occupiers at the Malheur national wildlife refuge were finishing up a morning press conference, a fleet of more than a dozen vehicles drove up to the site. Men armed with rifles got out of their trucks and began stationing themselves along a road. The men said they were with a group called the Pacific Patriot Network and were a “neutral party”, there to provide security and protection for everyone at the refuge.

LaVoy Finicum, a regular spokesman for the armed militia, which has occupied the federal land since last Saturday, told the men they were not welcome or needed and that the militia was trying to minimize conflicts – not bring more guns to the compound. Ammon Bundy, the leader of the militia, had no idea a new group of armed men would be coming, according to Todd Macfarlane, who said he was acting as a liaison between the militia and the public. “Ammon felt blindsided,” Macfarlane said. “This was not a welcome development. We are trying to de-escalate here – then boom, they all show up.” Many of the men with the so-called Pacific Patriot Network declined to speak to reporters, saying they had orders to abide by a “media blackout”. Some were carrying semi-automatic rifles.

Joe Oshaughnessy, with a group calling itself the North American Coalition of Constitutional Militias, said his organization and the Pacific Patriot Network were trying to provide a “buffer zone” between government officials and the occupation, meaning they could help diffuse any conflicts that might arise. “They do not want to cause any trouble,” he said, adding: “Some of these guys are unarmed.” But the presence of yet another armed group only seemed to create further concerns and disputes as the occupation entered its second week with no end in sight. “We’ve got this image with long guns – that is not what we want,” said Jon Pratt, a Utah resident who has been at the occupation since Friday. “These guys are a third party. They do not represent the Bundys … and if they’re coming to keep the peace, I would’ve left the guns behind.”

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Clear enough?

• Two-Thirds Of Tory MPs Want Britain To Quit European Union (Observer)

Two-thirds of Conservative MPs now support Britain’s exit from the European Union, despite David Cameron’s clear preference for staying in, according to senior sources within the party. Key figures in Tory high command say analysis of public statements and private views expressed by their 330 MPs shows that at least 210 now believe that the UK would be better off “out”. The surge in support within the parliamentary party for leaving will greatly encourage “out” campaigners, who believe many people will take their lead from local MPs when they decide which way to vote. However, party managers say the total number of Tory MPs who will join the campaign to leave could turn out to be significantly fewer – around 110 – if in the next few months opinion polls begin to point towards a close result or a win for the pro-EU side.

“Certainly at least two-thirds want to leave as it stands,” said a senior party figure. “But if things are very tight some will be bought off by offers of patronage and will be reluctant to take a different line to the prime minister. Plenty will not want their careers blighted by being on the wrong side of such an important debate.” The Observer has also been told that soundings taken by MPs show the “vast majority” of grassroots activists now want to quit the EU – and that most will not be swayed by whatever deal Cameron achieves in his attempt to renegotiate UK membership. Last week Cameron, in effect, conceded that his party was split from top to bottom over Europe when he agreed that members of his government, including cabinet ministers, would be allowed to speak out against the official line during the campaign, which is expected to be later this year.

While the holders of the top offices of state – including the chancellor, George Osborne, the foreign secretary, Philip Hammond and the home secretary, Theresa May – are likely to back staying in, other senior ministers, including the work and pensions secretary, Iain Duncan Smith, the leader of the House of Commons, Chris Grayling, and the Northern Ireland secretary, Theresa Villiers, want to campaign to leave. The spotlight will inevitably now turn to Boris Johnson, who attends cabinet in his role as mayor of London and sees himself as a future leader of the party. A longstanding critic of the EU, Johnson has yet to indicate whether he will campaign to stay in or leave.

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What would happen if pensions were cut along ‘Greek lines’ in countries like Holland, France? A two-tier union will not survive.

• EU Eyes Start Of Greek Reforms Review January 18 (Reuters)

European creditors have penciled in Jan. 18 as the start of a review of reforms agreed under Greece’s latest bailout and aim to finish it in February, opening the door to talks on debt relief, euro zone officials said on Friday. “The first review mission is tentatively to start in the week beginning on Jan 18th. In practice, it might probably be a bit later,” one senior official said. A Commission spokesperson confirmed the EU executive expected the review mission to start later in January, but not the exact date. The formal review, the first since the euro zone and Greece agreed on a third bailout package in August, is to include controversial reforms like changes to Greece’s pension system, a plan for which Athens sent to Brussels this week.

Euro zone officials said the broad outline of the Greek pension reform was acceptable, but it was still unclear if the measures would bring the desired fiscal effect. For European creditors, one of the key aims of the reform is to increase incentives for Greeks to work longer. “We don’t have a problem with the broad architecture of the reform. But does it add up? We need to get more numbers and technical data from Athens to be able to tell,” a second official said. The official said that while there was no real urgency to closing the reform review, a pre-requisite for further loan disbursements and for the start of promised talks on debt relief, Greece’s liquidity situation was tightening. Greece will have to pay around €1.4 billion in interest in February, around €470 million of which would be on loans from the euro zone bailout fund EFSF and the rest on other bonds, a third official said. The country’s government also owes around €7 billion to various companies in unpaid invoices, putting some on the edge of bankruptcy.

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SYRIZA and Europe’s main problem: Democracy can pass swiftly from the booth to the street.

• ‘Greek Government Has Solid Majority To Pass Pension Reform’ (Reuters)

Greece’s leftist government will be able to push through a crucial pension reform in parliament, part of measures the country has agreed to under its international bailout, the deputy prime minister said in a newspaper interview released on Saturday. Greece has drafted a proposal to overhaul its ailing pension system, which envisages merging all six pension funds into one and a possible cut of future main pensions by up to 30 percent. It plans to submit the proposal to parliament by the end of the month and to hold a vote on it in early February. Prime Minister Alexis Tsipras’s government has a parliamentary majority of just three seats and the reform, which opposition parties and many pensioners and workers oppose, will test its resolve to implement actions agreed with international creditors.

Asked whether Tsipras’ ruling coalition has secured enough support from lawmakers for the reform, Deputy Prime Minister Yannis Dragasakis said in an interview with Avgi newspaper: “The government has a strong and solid (parliamentary) majority.” “But passing the relevant law won’t be enough,” he said, adding that the government should also secure backing from workers and political parties to implement the changes. Hundreds of Greek pensioners and workers marched in central Athens on Friday to protest against the plan, which is part of a package of reforms Athens needs to implement to conclude the first review of its €86 billion bailout and start debt relief talks.

A representative of the country’s international lenders said on Saturday that the review could be wrapped up within a reasonable time frame as long as Greece stuck to its reform program. “The Greek government demonstrated a certain degree of commitment to delivering on its mandate to implement the Memorandum of Understanding (MoU) which was agreed last August with the other euro area governments,” the ECB’s Monetary Policy Strategy division head Rasmus Rueffer said in an interview with Proto Thema newspaper.

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This is France, Britain.. What on earth have we become? “Every unaccompanied child the Observer spoke to testified to alleged police brutality. All claimed to have had either pepper sprays, water cannon or truncheons used on them. …”

• Anger Over Fate Of Child Refugees Denied UK Asylum Hearing (Observer)

Under a clause in the EU’s Dublin Regulation covering hearing of asylum claims, refugees who have close family members in a particular EU country can claim asylum there. But according to campaigners, the Home Office has in numerous cases chosen to ignore that right. Masud was among a group of children listed in a legal challenge against the Home Office that will be heard in London on 18 January. Lawyers had handpicked the young Afghan as one of the most desperate cases in Calais – a vulnerable and lonely child who deserved to be urgently reunited with a family member. “Masud was a 15-year-old boy in need of protection, a boy in need of his sister here in the UK,” said the Bishop of Barking, Peter Hill, a spokesperson for campaign group Citizens UK.

“Every single night, desperate children are climbing into lorries and jumping on to train tracks to try and reach their families. Our government must act to honour its obligations and help these children.” On Saturday, Citizens UK launched an online petition demanding that David Cameron act to stop more teenagers from dying as they attempt to reach their relatives. Shadow immigration minister Keir Starmer, who visited the Jungle on Friday, announced that he would be writing to the home secretary, Theresa May, on Monday, asking why pledges she made last year to implement the Dublin Regulation and help the most vulnerable migrants – unaccompanied children – had led to so little action on the ground.

Aid charities have reported a surge in the volume of unaccompanied youngsters living in tents in Calais with no support from the French state. Others warn they are vulnerable to traffickers, describing the child protection issues as enormous. “We are aware that there is an increasing trend for unaccompanied minors to be facilitated into and across the EU,” a Europol spokesman said, adding that about 7,000 had been reported among the flow of refugees – a figure they said was rising. Liz Clegg, who runs an independent women’s and children’s hospital in the Jungle, estimates that there are hundreds of unaccompanied children in the camp at any given point. [..] Provisional work to identify Jungle migrants who have a clear legal right to live in Britain under the Dublin Regulation has tentatively identified 200, scores of them unaccompanied children.

“They all have the right to transfer their claim to Britain, so what is going on? It’s disgusting,” said Clegg. Charities warn that many unaccompanied minors simply disappear from the Jungle, often mysteriously. “We’ve even had siblings who don’t know where the other has gone,” added Clegg. “Sometimes we never hear of them again.” Of the seven refugees who once shared a tent with Masud and Nabi, four are believed to have made it to England, one is in Paris, the youngest is dead and Nabi remains in the Jungle. Elizabeth Fraser, whose charity Miracle Street provides a generator for refugees to use in the Jungle, said: “So many unaccompanied children seem to go missing. I remember once there were three Afghan brothers aged 10, 13, 16, and after a few days they also went. Nobody knows where to.”

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Debt Rattle January 8 2016

Jan 082016
 
 January 8, 2016  Posted by at 9:50 am Finance Tagged with: , , , , , , , , ,  7 Responses »


Unknown Charleston, SC, after bombardment. Ruins of Cathedral of St John and St Finbar 1865

• Slowing Productivity Fast Becoming A Global Problem (Lebowitz)
• Dow, S&P Off To Worst Four-Day Jan Start Ever As China Fears Grow (Reuters)
• US Stock Markets Continue Plunge (Guardian)
• China Has Not One Insolvable Problem, But Many Of Them (Mish)
• Capital Flight Pushes China To The Brink Of Devaluation (AEP)
• China Stocks Rebound as State Funds Said to Buy Equities (BBG)
• China’s Yuan Fixing Calms Markets as Asian Stocks Rally With Oil (BBG)
• The Decline Of The Yuan Destroys Belief In Central Banking (Napier)
• One Big Market Casualty: China Regulators’ Reputation (CNBC)
• China Orders Banks To Limit Dollar Buying This Month To Stem Outflows (CNBC)
• Yuan Depreciation Risks Competitive Devaluation Cycle (Reuters)
• China’s Forex Reserves Post Biggest Monthly Drop On Record (Xinhua)
• China’s Stock Market Is Hardly Free With Circuit Breakers Gone (BBG)
• Iran Severs All Commercial Ties With Saudi Arabia (Reuters)
• Saudi Arabia Considers IPO For World’s Biggest Energy Company Aramco (Guardian)
• VW Weighs Buyback of Tens of Thousands of Cars in Talks With US (BBG)
• Human Impact Has Pushed Earth Into The Anthropocene (Guardian)
• Europe’s Economy Faces Confidence Test as Borderless Ideal Fades (BBG)
• Turkey Does Nothing To Halt Refugee Flows, Says Greece (Kath.)

We’ve reached the end of a line. Not even the narrative works from here.

• Slowing Productivity Fast Becoming A Global Problem (Lebowitz)

In “The Fed And Its Self-Defeating Monetary Policy” we focused our discussion on U.S. productivity, but weak and slowing productivity growth is not just an American problem. All of the world’s leading economies are, to varying degrees, exhibiting the same worrisome pattern. And slowing productivity is something investors across asset classes should pay attention to in 2016. The graph below compares annualized productivity trends from three time periods – the 7 years immediately preceding the financial crisis, the 5 years immediately following the crisis, and the 2 most recently reported years (2013 and 2014). The black dots display the change in trend from pre to post crisis.

In all cases the black dots are below zero representing slowing productivity growth. More troublesome, the world’s largest economies are most recently reporting either negligible productivity growth or a decline in productivity. Assuming that demographics are already “baked” and debt has been over-used to produce non-productive growth since well before the crisis, good old-fashioned productivity gains are what the global economy requires to produce durable organic growth in the developed world. Central bankers, politicians and investors are well advised to understand this dynamic.

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Jobs numbers today will be big.

• Dow, S&P Off To Worst Four-Day Jan Start Ever As China Fears Grow (Reuters)

U.S. stocks sold off further on Thursday, giving the Dow and S&P 500 their worst four-day starts to a year ever, dragged down by another drop in Chinese equities and oil prices at 12-year lows. China allowed the biggest fall in its yuan currency in five months, adding to investor fears about the health of its economy, while Shanghai stocks were halted for the second time this week after another steep selloff. Oil prices fell to 12-year lows and copper prices touched their lowest since 2009, weighing on energy and materials shares. Shares of Freeport McMoran dropped 9.1% to $5.61. All 10 S&P 500 sectors ended in the red, though, and the Nasdaq Biotech index fell 4.1%. “People see the weakness in China and in the overall equity market and think there’s going to be an impact on corporations here in the United States,” said Robert Pavlik at Boston Private Wealth in New York.

“When you have a market that begins a year with weakness, people are sort of suspect anyway. The economy isn’t moving all that well, the outlook is modest at best, and they don’t want to wait for the long term. China creates more uncertainty.” The Dow Jones industrial average closed down 392.41 points, or 2.32%, to 16,514.1, the S&P 500 had lost 47.17 points, or 2.37%, to 1,943.09 and the Nasdaq Composite had dropped 146.34 points, or 3.03%, to 4,689.43. The Dow has lost 5.2% since the end of 2015 in the worst first four trading days since the 30-stock index was created in 1928. The S&P 500 is down 4.9% since Dec. 31, its worst four-day opening in its history, according to S&P Dow Jones Indices, while the Nasdaq is down 6.4%.

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Serious losses and serious jitters.

• US Stock Markets Continue Plunge (Guardian)

US stocks continued to fall on Thursday as fears of an economic slowdown in China spooked investors around the world. The Dow Jones industrial average fell 392.41 points, or 2.32%, capping its worst four-day start to a year in more than a century. The S&P 500 posted its largest daily drop since September, losing 47.17 points, or 2.37%, to 1,943.09 and the Nasdaq Composite dropped 146.34 points, or 3%, to 4,689.43. The falls followed another day of turmoil on the world’s stock markets amid more signs that the Chinese economy is slowing. China moved early to try to head off more panic, scrapping a new mechanism that Beijing had initially hoped would prevent sharp selloffs.

Beijing suspended the use of “circuit breakers” introduced to halt trading after dramatic selloffs. The circuit breakers appear to have exacerbated the selloffs, as would-be sellers waited for the markets to open again in order to sell. The decision came after the breaker was tripped for the second time in a week as the market fell 7% within half an hour of opening. Signs of problems in the world’s second largest economy triggered selling in Europe. The German DAX was the worst performer, falling 2.29%, as manufacturing firms were hit by fears about China’s impact on the global economy. In London the FTSE 100 staged a late rally but still ended the day down 119 points, or 1.96%, at 5,954. That’s a three-week low, which wipes around £30bn ($43.86bn) off the index.

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Well put.

• China Has Not One Insolvable Problem, But Many Of Them (Mish)

Yuan and Capital Flight
• China needs to prop up the yuan to slow capital flight.
• China needs to let the yuan drop to support exports.
• China needs to float the yuan and remove capital controls to prove it really deserves to be taken seriously as a reserve currency.
• If the yuan sinks, capital flight will increase and China risks the ire of US congress and those play into protectionist sentiment, notably Donald Trump.
• Artificial stabilization of the yuan will do nothing but create an oversized move down the road as we saw in Switzerland.

SOEs and Malinvestments
• China needs to write off malinvestments in state owned enterprises (SOEs).
• If China does write off malinvestments in SOEs it will harm those investing in them, generally individual investors who believed in ridiculous return guarantees.
• If China doesn’t write off malinvestments it will have to prop up the owners of those enterprises, mainly the ruling class, at the expense of everyone else, delaying much needed rebalancing.

Property Bubble
• China needs to fill tens of millions of vacant properties, but no one can afford them.
• If China makes the properties affordable it will have to cover the losses, or builders will suffer massive losses.
• If China subsidizes losses for the builders, there are still no real jobs in in the vacant cities.
• If China does not subsidize the losses, the builders and current investors will both suffer massive damage.

Jobs
• China is losing exports to places like Vietnam that have lower wage points.
• Property bubbles, the overvalued yuan, SOEs, and capital flight all pose conflicting problems for a government desperate for job growth.

Stock Market
• China’s stock market is insanely overvalued (as are global equity markets in general). Many investors are trapped. A sinking stock market and loss of paper profits will make overvalued properties even more unaffordable.
• Propping up the market, as China has attempted (not very effectively at that), encourages more speculation.

Pollution
• Curtailing pollution will cost tens of millions of jobs.
• Not curtailing pollution will cost tens of millions of lives.

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“Our new base case is that the Chinese government will simply let the debt party go on until it eventually collapses under its own weight..”

• Capital Flight Pushes China To The Brink Of Devaluation (AEP)

China is perilously close to a devaluation crisis as the yuan threatens to break through the floor of its currency basket, despite massive intervention by the central bank to defend the exchange rate. The country burned through at least $120bn of foreign reserves in December, twice the previous record, the clearest evidence to date that capital outflows have reached systemic proportions. “There is certainly a sense that the situation is spiraling out of control,” said Mark Williams, from Capital Economics. Mr Williams said the authorities botched a switch in early December from a dollar currency peg to a trade-weighted exchange basket, accidentally setting off an exodus of money. Skittish markets suspected – probably wrongly – that it was camouflage for devaluation. The central bank is now struggling to pick up the pieces.

Global markets are acutely sensitive to any sign that China might be forced to abandon its defence of the yuan, with conspiracy theories rampant that it is gearing up for currency war in a beggar-thy-neighbour push for export share. Any such move would send a powerful deflationary impulse though a world economy already on its knees, and risk setting off a chain-reaction through Asia, replicating the 1998 crisis on a larger and more dangerous scale. The confused signals coming from Beijing sent Brent crude crashing to an 11-year low of $32.20. They have also set off a parallel drama on China’s equity markets. The authorities shut the main exchange after the Shanghai Composite index plunged 7.3pc in less than half an hour, triggering automatic circuit-breakers. The crash wiped out $635bn of market capitalisation in minutes.

It was triggered by a witches’ brew of worries: a fall in China’s PMI composite index for manufacturing and services below the boom-bust line of 50, combined with angst over an avalanche of selling by company insiders as the deadline neared for an end to the share-sales ban imposed last year. Faced with mayhem, regulators have retreated yet again. They have extended the ban, this time prohibiting shareholders from selling more than 1pc of the total float over a three-month period. The China Securities Regulatory Commission said the move was to “defuse panic emotions”. The freeze on sales is an admission that the government is now trapped, forced to keep equities on life-support to stop the market crumbling. The commission said its “national team” would keep buying stocks if necessary, doubling down on its frantic buying spree to rescue the market last year.

[..] Jonathan Anderson, from Emerging Advisors Group in Shanghai, said the latest burst of stimulus – led by an 18pc rise in credit – is clear evidence that Beijing is unwilling to take its medicine and deflate the country’s $27 trillion loan bubble. “The debt ratio is rocketing upwards. China is still adding new leverage at a massive, frenetic pace,” he said. “The authorities have clearly shown that they have no intention of addressing leverage problems. Our new base case is that the Chinese government will simply let the debt party go on until it eventually collapses under its own weight,” he said.

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Light. Tunnel. Oncoming freight train.

• China Stocks Rebound as State Funds Said to Buy Equities (BBG)

Chinese stocks gained in volatile trading after the government suspended a controversial circuit breaker system, the central bank set a higher yuan fix and state-controlled funds were said to buy equities. The Shanghai Composite Index rose 3% at 1:34 p.m. local time, after falling as much as 2.2% earlier. Regulators removed the circuit breakers after plunges this week closed trading early on Monday and Thursday. The central bank set the currency’s reference rate little changed Friday after an eight-day stretch of weaker fixings that roiled global markets. State-controlled funds purchased Chinese stocks on Friday, focusing on financial shares and others with large weightings in benchmark indexes, according to people familiar with the matter.

“The scrapping of the circuit breaker system will help to stabilize the market, but a sense of panic will remain, particularly among retail investors,” said Li Jingyuan, general manager at Shanghai Bingsheng Asset Management. “The ‘national team’ will probably continue to buy stocks significantly to stabilize the market.” While China’s high concentration of individual investors makes its stock-market notoriously volatile, the extreme swings this year have revived concern over the Communist Party’s ability to manage an economy set to grow at the weakest pace since 1990. The selloff has spread around the world this week, sending U.S. equities to their worst-ever start to a year and pushing copper to the lowest levels since 2009.

[..] The flip-flop in the circuit breaker rule adds to the sentiment among global investors that authorities are improvising – and improvising poorly – as they try to stabilize markets and shore up the economy. “They are changing the rules all the time now,” said Maarten-Jan Bakkum, a senior emerging-markets strategist at NN Investment Partners in The Hague with about $206 billion under management. “The risks seem to have increased.” Investors should expect more volatility in Chinese markets as the government attempts to shift away from a planned economy to one driven by market forces, Mark Mobius, chairman of the emerging markets group at Franklin Templeton Investments, wrote in a blog post on Thursday. Policy makers face a “conundrum” as they seek to maintain financial stability while at the same time loosening their grip on markets, he said.

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“Global shares have lost more than $4 trillion this year..”

• China’s Yuan Fixing Calms Markets as Asian Stocks Rally With Oil (BBG)

China’s efforts to stabilize its markets showed early signs of success as the yuan strengthened and regional equities rallied for the first time in five days. Treasuries and the yen fell as demand for havens eased. The Shanghai Composite Index gained 2.4% at the midday break after the securities regulator suspended a controversial circuit-breaker system. Asia’s benchmark share index pared its biggest weekly drop since 2011. The yuan rose 0.1% in onshore trading after the People’s Bank of China ended an eight-day stretch of setting weaker reference rates. Crude oil rallied, while Treasuries and the yen headed for their first declines this week. Global shares have lost more than $4 trillion this year as renewed volatility in Chinese markets revived doubts over the ruling Communist Party’s ability to manage the world’s second-largest economy.

The tumult has heightened worries over competitive devaluations and disinflation as emerging-market currencies tumbled with commodities. Investors will shift their attention to America’s economy on Friday as the government reports monthly payroll figures, a key variable for U.S. interest rates. “The PBOC may have been surprised at how badly China and global stock markets reacted to yuan depreciation,” said Dennis Tan at Barclays in Singapore. “They may want to keep the yuan stable for a while to help calm the stock market.” The PBOC set the yuan’s daily fixing, which restricts onshore moves to a maximum 2% on either side, at 6.5636 per dollar. That’s 0.5% higher than Thursday’s onshore effective closing price in the spot market and ends an eight-day reduction of 1.42%.

China’s markets regulator abandoned the circuit breaker just days after it was introduced, as analysts blamed the new mechanism for exacerbating this week’s selloff. Mainland exchanges shut early on Thursday and Monday after plunges of 7% in the CSI 300 triggered automatic halts. Chinese shares rallied after a volatile start to the day that sent the Shanghai Composite down as much as 2.2%. Producers of energy and raw-materials led the advance as investors gravitated to some of last year’s most beaten-down stocks and state funds were said to intervene to by purchasing shares with large index weightings.

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China will be exporting a crushing deflation.

• The Decline Of The Yuan Destroys Belief In Central Banking (Napier)

The key failure of control is in China because that failure will overwhelm other seeming successes. In 2012 this analyst labelled one chart “the most important chart in the world”. It was a chart of China’s foreign exchange reserves. It showed how they were declining and The Solid Ground postulated that this would produce a decline in real economic activity in China and higher real interest rates in the developed world. The result of these two forces would be deflation, despite the amount of wind puffed below the wings of the global economy in the form of QE. Of course, no sooner had this report been issued than China’s grand falconer got to work by borrowing hundreds of billions of USD through its so-called commercial banking system!

The alchemical process through which this mandated capital inflow supported the exchange rate while permitting money creation in China stabilized the global economy- for a while. However, by 2014 it was ever more difficult to borrow more money than the people of China were desperate to export and the market began to win. Since then foreign reserves have been falling and the grand falconer has tried to support the exchange rate while simultaneously easing monetary policy to boost economic growth. I’m no falconer but isn’t this akin to trying to get a bird to fly while tying back its wings? Some investors, well paid to believe six impossible things before breakfast, did not question the ability of the grand Chinese falconer to fly a falcon with tethered wings.

They changed their minds briefly as the bird plummeted earthwards in August 2015 but still the belief in the ability to reflate the economy and simultaneously support an overvalued exchange rate continued. In January 2016 this particular falcon, let’s call it the people’s falcon, was more ‘falling with attitude’ than flying. This bird does not fly and if this bird does not fly the centre does not hold. A major devaluation of the RMB is just beginning and the faith in all the falconers will wane as deflation comes to the world almost seven years after the falconers first fanned the winds of QE supposed to levitate everything.

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Whack-a-mole.

• One Big Market Casualty: China Regulators’ Reputation (CNBC)

The wobbles in China that rocked financial markets this week have not only cast doubts over the economy, they’ve also shaken confidence in policymakers’ ability to stem the volatility. For two decades, China’s frenetic growth has been the source of the world’s envy, with investors placing faith in the ability of policymakers to help transform China from a manufacturing-led powerhouse to a consumer-driven economy . As the economy stutters and regulators scramble to contain wild moves in the yuan and stocks, analysts are calling out what appears to be a ham-fisted approach to managing market volatility.

“Market volatility this week suggests that nobody really knows what the policy is right now. Or if the government itself knows or is capable of implementing the policy even if there is one,” DBS said in a currency note Friday. “The market’s message was loud and clear that more clarity and less flip-flopping is needed going forward.” China-listed stocks plunged this week, with trade suspended completely in two sessions after the CSI 300 index dropped more than 7 percent, triggering a circuit breaker meant to limit market volatility. The China Securities Regulatory Commission (CSRC) suspended the circuit-breaker system, implemented for the first time on Monday, before the start of trade Friday. The quick regulatory flip-flops spurred a lot of derision among social media commentators.

“The CSRC all treated us as experiments to make history. When it failed, it concluded with ‘lacking experience,’ and that’s it,” Weibo user Li Hua posted. “I strongly call for resignation of related personnel who designed this policy! There’s no cost of failure so that decision makers can do whatever they want.” Another factor weighing on faith in China’s regulators: Policy makers at the central bank, the People’s Bank of China (PBOC), have tinkered again with its currency without providing much indication to the market about its endgame. On Thursday the PBOC allowed the yuan to fall by the most in five months, to the lowest level since the fixing mechanism was established in 2011.

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Money will continue to flow out no matter what they do.

• China Orders Banks To Limit Dollar Buying This Month To Stem Outflows (CNBC)

China’s foreign exchange regulator has ordered banks in some trading hubs to limit dollar purchases this month, three people with direct knowledge said on Friday, in the latest attempt to stem capital outflows. The spread between the onshore and offshore markets for the yuan, or renminbi, has been growing since the devaluation last year, spurring Beijing to adopt a range of measures to curb outflows of capital. All banks in certain trading hubs, including Shenzhen, have been affected, the people added. China suspended forex business for some foreign banks, including Deutsche, DBS and Standard Chartered at the end of last year.

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Beggar all of thy neighbors.

• Yuan Depreciation Risks Competitive Devaluation Cycle (Reuters)

The depreciation of the Chinese yuan risks triggering a cycle of competitive devaluation and is causing enormous worry in the world’s financial markets, Mexican Finance Minister Luis Videgaray said on Thursday. China allowed the biggest fall in the yuan in five months on Thursday, sending global markets down on concerns that China might be aiming for a devaluation to help its struggling exporters and that other countries could follow suit. “This is one of the worst starts of the year for all the world’s markets,” Videgaray said at an event in Mexico City. “There is a real worry that in the face of the slowing Chinese economy that the public policy response is to start a round of competitive devaluation,” he said.

Mexico has been committed to a freely floating currency since a devastating financial crisis in the mid-1990s and authorities refrain from some of the more direct forms of intervention seen in other emerging markets. Mexico’s peso slumped to a record low on Thursday, triggering two auctions of $200 million each by Mexico’s central bank to support the currency. The country’s program of dollar auctions, under which the central bank can sell up to $400 million a day, is set to expire on Jan. 29. Videgaray said policymakers would announce if the plan would be maintained or modified before that deadline. He noted the program’s goal is not to defend a certain peso level but to ensure sufficient order and liquidity in the market. “We have managed to achieve this objective in a satisfactory manner,” he said. “Up until now, there has been no decision to modify the mechanism.”

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Can’t be a good sign no matter what they say.

• China’s Forex Reserves Post Biggest Monthly Drop On Record (Xinhua)

China’s foreign exchange reserves posted the sharpest monthly fall on record in December, official data showed Thursday. Foreign exchange reserves fell to $3.33 trillion at the end of last month, the lowest level in more than three years and down by 108billion dollars from November, according to the People’s Bank of China. The fall in December extended a month-on-month decline of $87.2 billion registered in November. The yuan has been heading south since the central bank revamped the foreign exchange mechanism in August to make the rate more market-based. The yuan has been losing ground as the Chinese economy is expected to register its slowest pace of growth in a quarter of a century in 2015.

Meanwhile, the United States raised interest rates in December and more rises are expected in 2016. The onshore yuan (CNY), traded in the Chinese mainland, declined 4.05% against the greenback in 2015. Li Huiyong, analyst with Shenwan Hongyuan Securities, said the faster decline indicated greater pressure for capital outflow as the yuan depreciated. On Thursday, the central parity rate of the yuan weakened by 332 basis points to 6.5646 against the U.S. dollar, its weakest level in nearly five years, according to the China Foreign Exchange Trading System. “An appropriate size for China’s forex reserves should be around 1.5 trillion U.S. dollars. There is still large room for necessary operations to sustain a stable yuan,” Li said.

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They need to let it go. But won’t.

• China’s Stock Market Is Hardly Free With Circuit Breakers Gone (BBG)

China’s removal of market-wide circuit breakers after just four days still leaves investors facing plenty of restrictions in how they trade. A 10% daily limit on single stock moves and a rule preventing investors from buying and selling the same shares in a day remain in force. Volume in what was once the world’s most active index futures market is minimal after authorities curtailed trading amid a summer rout, making it more difficult to implement hedging strategies. Officials unveiled curbs Thursday on share sales by major stockholders just a day before an existing ban was due to expire. And the activity of foreign investors is limited by quotas, given either to asset managers or to users of the Hong Kong-Shanghai exchange link.

“Although there’s more ability now for offshore participation, it’s largely a market that’s restricted the domestic users,” said Ric Spooner at CMC Markets Asia Pacific. “That means it doesn’t get the arbitrage benefits that international investors bring. It’s a work in progress.” There’s also the prospect that regulators and executives will dust off last year’s playbook as they seek to stem losses. At the height of the summer rout, about half of China’s listed companies were halted, while officials investigated trading strategies, made it harder for investors to borrow money to buy equities and vowed to “purify” the market. Chinese equities seesawed in volatile trading on Friday, with the CSI Index rising 1.3% as of 10:02 a.m. local time after climbing 3.1% and sinking 1.7%.

The gauge slid 12% in the first four days of the week, two of which were curtailed as the circuit breakers triggered market-wide halts for the rest of the day. The flip-flop on using the mechanism, which was meant to help stabilize the market, is adding to investor concern that authorities are improvising. Policy makers weakened the yuan for eight days straight through Thursday, and authorities were said to intervene on Tuesday to prop up equities. Policy makers used purchases by government-linked funds to bolster shares as the CSI 300 plunged as much as 43% over the summer. State funds probably spent $236 billion on equities in the three months through August, according to Goldman Sachs.

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Saudi rocket attack on embassy in Yemen.

• Iran Severs All Commercial Ties With Saudi Arabia (Reuters)

Relations between Iran and Saudi Arabia deteriorated even further on Thursday as Tehran severed all commercial ties with Riyadh and accused Saudi jets of attacking its embassy in Yemen’s capital. A row has been raging for days between Shi’ite Muslim power Iran and the conservative Sunni kingdom since Saudi Arabia executed cleric Nimr al-Nimr, an opponent of the ruling dynasty who demanded greater rights for the Shi’ite minority. Saudi Arabia, Bahrain, Sudan, Djibouti and Somalia have all broken off diplomatic ties with Iran this week, the United Arab Emirates downgraded its relations and Kuwait, Qatar and Comoros recalled their envoys after the Saudi embassy in Tehran was stormed by protesters following the execution of Nimr and 46 other men.

In a cabinet meeting chaired by Iran’s President Hassan Rouhani on Thursday, Tehran banned all imports from Saudi Arabia. Saudi Arabia had announced on Monday that Riyadh was halting trade links and air traffic with the Islamic Republic. Iran also said on Thursday that Saudi warplanes had attacked its embassy in Yemen’s capital, Sanaa, an accusation that Riyadh said it would investigate. “Saudi Arabia is responsible for the damage to the embassy building and the injury to some of its staff,” Foreign Ministry Spokesman Hossein Jaber Ansari was quoted as saying by the state news agency, IRNA. Residents and witnesses in Sanaa said there was no damage to the embassy building in Hadda district.

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Aramco is so big, it may be impossible to value.

• Saudi Arabia Considers IPO For World’s Biggest Energy Company Aramco (Guardian)

Saudi Arabia is considering a stock market listing for its national oil group – the world’s biggest energy company and probably the most valuable company on the planet. Saudi Aramco is a highly secretive organisation but is likely to be valued at well over $1tn (£685bn). Any public share listing would be viewed as a potent symbol of the financial pain being wreaked by low prices on the world’s biggest crude exporting country. Prince Muhammad bin Salman, the country’s highly influential deputy crown prince, confirmed in an interview on Monday with the Economist magazine that a decision would be taken within months whether to raise cash in this way, even as oil company shares are depressed at this time.

“Personally I am enthusiastic about this step,” he said. “I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around.” The sale via an initial public offering (IPO) of any part of Saudi Aramco would be a major change in direction for a country, which has jealously guarded its enormous – and cheaply produced – oil reserves. Aramco’s reserves are 10 times greater than those of Exxon, which is the largest publicly listed oil company. The prince, considered the power behind the throne of his father King Salman, is keen to modernise the largely oil-based Saudi economy by privatisation or other means but it also needs to find money.

The country is under pressure, with oil prices plunging to their lowest levels in 11 years and more than 70% below where they were in June 2014. This has put huge strain on Saudi public spending plans, which were drawn up when prices were much higher and pushed the public accounts into deficit.

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A long way from salvation.

• VW Weighs Buyback of Tens of Thousands of Cars in Talks With US (BBG)

Volkswagen may buy back tens of thousands of cars with diesel engines that can’t be easily fixed to comply with U.S. emissions standards as part of its efforts to satisfy the demands of regulators, according to two people familiar with the matter. Negotiations between the German automaker and the U.S. Environmental Protection Agency are continuing and no decisions have been reached. Still, a buyback would be an extraordinary step that demonstrates the challenge of modifying vehicles that were rigged to pass emission tests. VW has concluded it would be cheaper to repurchase some of the more than 500,000 vehicles than fix them, said the people, who declined to be cited by name.

One person said the number of cars that might be bought back from their owners totals about 50,000, a figure that could change as talks continue. “We’ve been having a large amount of technical discussion back and forth with Volkswagen,” EPA Administrator Gina McCarthy said Thursday, when asked about the possibility of VW having to buy back some vehicles. “We haven’t made any decisions on that.” McCarthy told reporters after an event in Washington Thursday that VW’s proposals to bring its cars into compliance with emissions standards have so far been inadequate. “We haven’t identified a satisfactory way forward,” McCarthy said. The EPA is “anxious to find a way forward so that the company can get into compliance,” she said.

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“..the presence of isotopes from nuclear weapons testing..”

• Human Impact Has Pushed Earth Into The Anthropocene (Guardian)

There is now compelling evidence to show that humanity’s impact on the Earth’s atmosphere, oceans and wildlife has pushed the world into a new geological epoch, according to a group of scientists. The question of whether humans’ combined environmental impact has tipped the planet into an “anthropocene” – ending the current holocene which began around 12,000 years ago – will be put to the geological body that formally approves such time divisions later this year. The new study provides one of the strongest cases yet that from the amount of concrete mankind uses in building to the amount of plastic rubbish dumped in the oceans, Earth has entered a new geological epoch.

“We could be looking here at a stepchange from one world to another that justifies being called an epoch,” said Dr Colin Waters, principal geologist at the British Geological Survey and an author on the study published in Science on Thursday. “What this paper does is to say the changes are as big as those that happened at the end of the last ice age . This is a big deal.” He said that the scale and rate of change on measures such as CO2 and methane concentrations in the atmosphere were much larger and faster than the changes that defined the start of the holocene. Humans have introduced entirely novel changes, geologically speaking, such as the roughly 300m metric tonnes of plastic produced annually. Concrete has become so prevalent in construction that more than half of all the concrete ever used was produced in the past 20 years.

Wildlife, meanwhile, is being pushed into an ever smaller area of the Earth, with just 25% of ice-free land considered wild now compared to 50% three centuries ago. As a result, rates of extinction of species are far above long-term averages. But the study says perhaps the clearest fingerprint humans have left, in geological terms, is the presence of isotopes from nuclear weapons testing that took place in the 1950s and 60s. “Potentially the most widespread and globally synchronous anthropogenic signal is the fallout from nuclear weapons testing,” the paper says. “It’s probably a good candidate [for a single line of evidence to justify a new epoch] … we can recognise it in glacial ice, so if an ice core was taken from Greenland, we could say that’s where it [the start of the anthropocene] was defined,” Waters said.

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It’s all become a joke.

• Europe’s Economy Faces Confidence Test as Borderless Ideal Fades (BBG)

Here’s the latest in a long line of threats to Europe’s economy: the border guard. Danish officers checking travel documents on the boundary with Germany this week aren’t out to stymie trade or hinder tourism – they’re under orders from politicians anxious to stem the flow of refugees. Even so, analysts are beginning to worry about what could happen to the already-embattled region when the free movement of people is called into question. Like the euro, the single currency used by 19 of the European Union’s 28 nations, the Schengen Agreement has long been touted by politicians as an irrevocable pillar of a multi-national union, allowing unimpeded travel between states for business or pleasure. So with an already fragile recovery, monetary policy stretched trying to fend off deflation and companies deferring investment, the mere threat that Schengen could unravel may be hard to shrug off.

“If in the migrant crisis Schengen were to disintegrate, this would send a disastrous signal to markets: the European project would be seen as in fact reversible,” said Wolfango Piccoli, managing director of Teneo Intelligence in London. “Nobody could blame investors if against that backdrop, they would suddenly start to re-evaluate the reliability of promises made by European institutions in the euro-zone crisis.” The EU says Europeans make over 1.25 billion journeys within the Schengen zone every year, which comprises 26 countries from the Barents Sea to the eastern Mediterranean. It also includes countries such as Iceland and Norway that aren’t part of the EU. Signed in 1985, Schengen took effect 10 years later. In normal times, it means travelers within the bloc aren’t subjected to border checks, and external citizens holding a visa for one country may usually travel without restriction to all.

These aren’t normal times and now the edifice of carefree travel across the continent is cracking. During 2015, the arrival of people fleeing wars and persecution in Asia, Africa and the Middle East exceeded 1 million, sparking political tension and public debate over how, and where, to settle the newcomers. Denmark’s decision to establish temporary controls seems, according to the EU, to be covered by Schengen rules that allow such curbs in emergencies. But it’s not the first; that move came hours after Sweden started systematic ID checks at its borders, while Germany was forced to take similar action in September along its frontier with Austria. Hungary erected a fence at its borders with Serbia and Croatia last year.

Read more …

€3 billion, Angela.

• Turkey Does Nothing To Halt Refugee Flows, Says Greece (Kath.)

Turkey has not taken any action to clamp down on human traffickers and between 3,000 and 4,000 migrants and refugees are reaching Greece every day, Immigration Policy Minister Yiannis Mouzalas said Thursday. Mouzalas suggested in an interview on Skai TV that Ankara has not lived up to its pledges to stem the flow of people traveling across the Aegean to Greece. “It has not done anything to stop human trafficking, as is evident from the migratory flows.” The minister said that the high level of arrivals has continued because the news that some migrants are not being allowed through European borders has yet to filter through but, at the same time, refugees waiting to cross from Turkey are concerned that if they do not do so soon they will be prevented from reaching Central and Northern Europe.

“The high rate has to do with refugees’ fear that the borders will close for everyone,” he said, adding that he thought this possibility is “very likely.” “When the message reaches Morocco that Moroccans are not being allowed to cross into Europe but are being held and repatriated, the flows will drop.” Mouzalas said that around half of the people arriving in Greece over the last two months have been undocumented migrants.

Read more …

Deleveraging as a Biblical Plague

Aug 132015
 
 August 13, 2015  Posted by at 9:28 pm Finance Tagged with: , , , , , , ,  28 Responses »


Gustave Doré The Ninth Circle of Hell (Treachery) 1857

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Debt Rattle August 13 2015

Aug 132015
 
 August 13, 2015  Posted by at 10:49 am Finance Tagged with: , , , , , , , , ,  5 Responses »


DPC Royal Street, New Orleans 1900

• China Adds a Chainsaw to Its Juggling Act (Pesek)
• China Weakens Yuan For A Third Straight Day On Thursday (CNBC)
• Deflation Ice Age Looms After Yuan Move, Albert Edwards Says (Bloomberg)
• China’s Currency Devaluation Could Spark ‘Tidal Wave Of Deflation’ (Guardian)
• China Could Trigger The Biggest Financial Rout Since 2008 (MarketWatch)
• China Intervenes To Support Tumbling Yuan (MarketWatch)
• Yuan’s Plunge Marks End of Chinese Stability for Global Economy (Bloomberg)
• China Cannot Risk The Global Chaos Of Currency Devaluation (AEP)
• Devaluation Hints at China’s Rising Distress Over Economy (NY Times)
• Yuan Bear in Wilderness in 2014 Now Warns of China Credit Crisis (Bloomberg)
• China’s Slowdown Threatens Euro’s Core More Than Periphery (Reuters)
• Greece Is About To Be Dismantled And Fed To Profit-Hungry Corporations (Ind.)
• Greek Government Criticizes Rebel Lawmakers Before Bailout Vote (Reuters)
• Varoufakis: Greece Bailout Deal ‘Will Not Work’ (AFP)
• Varoufakis Exit Marked ‘Sea Change’ In Greek Talks, EU Sources Say (Reuters)
• Germany Criticises Greek Bailout Agreement (FT)
• There’s A New Twist In The Austrian Bad Bank Saga (Coppola)
• Lawrence Lessig Wants To Crowdfund His Way To The Presidency (Forbes)
• Canadians Piling Up ‘Good Debt,’ Report Says (Globe and Mail)
• Canadian Government Spent Millions On Secret Tar Sands Advocacy (Guardian)
• Don’t Freak Out, But Scientists Think Octopuses ‘Might Be Aliens’ (IE)

Headline Of The Day/Week/Month. Hands down.

• China Adds a Chainsaw to Its Juggling Act (Pesek)

Chinese President Xi Jinping has just added a chainsaw to what had already been a pretty daunting juggling act. All year he’s been trying to keep aloft two giant economic bubbles – one in debt, one in stocks. This week he added a much more unwieldy prop, the value of the yuan, to the show. As I’ve argued, China is entirely justified in lowering its exchange rate, so far by 2.8%. It’s a risky move, but worth taking if it stabilizes the world’s second-biggest economy and nudges it toward a market-determined financial system – assuming Xi’s team truly knows what it’s doing. The problem for China’s president is this latest challenge threatens his ability to manage the other two. As China guides its currency lower, it heightens default risks on foreign-currency debt and increases the odds of capital flight, which would slam stock prices.

It’s not that China lacks latitude to devalue its currency. Before Tuesday’s 1.9% cut in the central bank’s reference rate, the yuan had risen about 15% on a trade-weighted basis in 12 months. But there are other considerations that should constrain Chinese policy. The Group of Seven nations would throw a fit if China lowered the yuan’s value any further; China could even become a target for candidates in the 2016 U.S. presidential election. That’s why Wednesday’s devaluation by an additional 0.9% raised more questions than it answers. The whole idea of devaluing is to do it all at once: make a huge, one-time step, ride out the turbulence and move on. China, it appears, favors a drip-by-drip approach.

That could dent the market’s confidence in the country’s policy makers. Will investors, analysts, risk managers, executives and journalists feel they can still rely on Chinese pronouncements, or will they have to sit on pins and needles every morning, waiting to see how much the People’s Bank of China lops off the yuan? As Ray Dalio of Bridgewater sees it, Beijing’s “promises to defend it here will need to be kept or it will lead to a loss of credibility – like the implied promise to support the stock market at around 3,500 needs to be defended or it will lead to the appearance that the marketplace is more powerful than the government.” Failure to hold the line, Dalio says, “will add currency volatility to stock market volatility and economic volatility on the government’s list of worries.”

It’s not clear whether Xi’s team understands the trap it’s setting for itself. Beijing is already stuck on what hedge-fund manager Jim Chanos calls a “treadmill to hell” as local governments amass $4 trillion of debt and credit. The Chinese government has also ensnared itself in a dangerous cycle of stock-market interventions that imperil its global clout. Wednesday’s bloodbath in shares of major e-retailer Alibaba demonstrates the worsening state of economic fundamentals.

Read more …

One-off cubed.

• China Weakens Yuan For A Third Straight Day On Thursday (CNBC)

The People’s Bank of China (PBoC) weakened the yuan against the dollar for a third consecutive day on Thursday, following reports the central bank intervened to stem the currency’s sharp slide late on Wednesday. The PBoC set the yuan fixing at 6.4010, compared to the previous day’s close of 6.3870, sending the currency to 6.40 per dollar in morning trade. Thursday’s fix was 1.1% below Wednesday’s fix of 6.3306, a pause from the aggressive weaker fixings in recent days: On Tuesday the fix weakened 1.9% and then 1.6% on Wednesday. Traders said Thursday’s slower pace of devaluation made sense following reports by the Wall Street Journal that the central bank asked state-owned lenders to sell dollars on its behalf in the last 15 minutes of U.S trading on Wednesday, which caused the yuan to rally 1% against the greenback after falling to fresh four-year lows in intraday trade.

Earlier on Wednesday, the PBoC warned it was not pursuing steady depreciation in response to allegations that Beijing was manipulating the currency to boost exports. The central bank has yet to confirm the supportive action, but it is broadly being treated as fact by market insiders. Wednesday’s intervention signaled the central bank may have gotten cold feet about its commitment to loosen the reins on the exchange rate. Experts say the PBoC acted to prevent the renminbi from falling too rapidly, a consequence that was widely flagged when the PBoC first announced a more market-oriented yuan just 24 hours earlier.

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It will take a long time and huge effort for people to understand what this means.

• Deflation Ice Age Looms After Yuan Move, Albert Edwards Says (Bloomberg)

China’s currency devaluation took Albert Edwards a step closer to realizing his doomsday prediction: deflation spreading from Asia to the U.S. and Europe and sending economies crashing. Tumbling emerging-market currencies will now accelerate their declines, curbing import costs in developed nations and triggering a broad drop in prices that will undermine economic growth, according to Edwards, the top-ranked global strategist at Societe Generale. “Make no mistake, this is the start of something big, something ugly,” Edwards wrote in a report on Wednesday. Edwards has long maintained a view he refers to as the Ice Age, when deflation will eventually cover the earth. China’s surprise change to its currency regime this week takes investors one step closer to this outcome, Edwards said.

It will eventually result in an emergency of similar magnitude to the collapse of Lehman Brothers Holdings Inc. in 2008 and the ensuing global financial crisis, he said. “We expect the acceleration of emerging market devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession,” he wrote. Renowned for his prescient warning in the late 1990s of an impending Asian crisis, he’s also been telling investors to reduce their holdings in equities for almost 20 years. At the end of 2012 he said the New Year would bring nothing but disappointment, just before U.S stocks proceeded to soar 30%. The world’s second-biggest economy shocked markets this week by depreciating its currency by the most in two decades, with the goal of aligning the yuan more closely to the market rate.

China’s decision to make its goods cheaper for the rest of the world to buy also makes it more difficult for wages and consumer prices to increase globally. The yuan fell on Thursday in a third day of losses since Tuesday’s devaluation as the central bank’s reference rate dropped 1.1%. Inflation expectations for the U.S. tumbled this week to the lowest since January. The gap between yields on U.S. five-year notes and similar-dated Treasury Inflation Protected Securities shrank to show traders expect annual consumer-price growth to average 1.27% through 2020. “The key thing here is that Tuesday’s devaluation is not just a one-off –- you will see persistent weakness” from here on, Edwards wrote. “This move will transform perceptions about the resilience of the U.S. economy.”

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I wrote ‘tidal wave’ 36 hours ago for an upcoming artile. Need to find a new metaphor now.

• China’s Currency Devaluation Could Spark ‘Tidal Wave Of Deflation’ (Guardian)

“Make no mistake, this is the start of something big, something ugly.” City economist Albert Edwards rarely minces his words, but his reaction to China’s devaluation, which sent shockwaves through global markets, underlined how powerfully Beijing’s move may be felt thousands of miles away. Edwards, of the bank Société Générale, argues that as well as creating a challenge for China’s Asian rivals, by making its exports more competitive, a cheaper yuan will send “a tidal wave of deflation” breaking over the world economy. Central banks in the US and the UK have primed investors for interest rate rises, with the Bank of England Mark Carney pointing to the turn of the year for a move, and Janet Yellen, at the Federal Reserve, signalling that a tightening could start as soon as September.

Edwards argues that instead of pushing up rates, central banks in the west should be preparing themselves to ward off a deflationary slump. In the period running up to the financial crisis of 2008, which became known as the “Great Moderation”, inflation in the west was kept under control by the influx of cheap commodities and consumer goods from China and other low-wage economies. Economies including the UK and the US were able to expand more rapidly than they otherwise might have done, without generating a surge in inflation. But today, with inflation already close to zero – indeed at zero in the UK – China’s decision to devalue could bring a fresh wave of price weakness to the west.

Cheap goods are great news when economic demand is relatively strong; but economists fret about falling prices because entrenched deflation can prompt businesses and consumers to postpone spending – hoping prices have farther to fall – and blunt policymakers’ standard tool of interest rate cuts. Erik Britton, of City consultancy Fathom, said: “We’re all going to feel it: we’ll feel it through commodities; we’ll feel it through manufactured goods exports, not just from China but from everywhere that has to compete with it; and we’ll feel it through wages.”

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Can’t really say China triggers it. It’s just one of many causes, a mere symptom really.

• China Could Trigger The Biggest Financial Rout Since 2008 (MarketWatch)

So much for that “one-time correction.” The People’s Bank of China let the yuan drop again overnight, fixing the currency 1.6% below Tuesday’s close, following the 1.9% devaluation heard around the world a day ago. It then had to intervene to keep things from getting out of hand. Cue continued freakout for global markets. Deutsche Bank, for one, is predicting the yuan is overvalued by around 10%, so if the yuan continues to weaken, things could yet get a lot darker for markets. And stocks aren’t dealing well with the new China reality they’ve seen so far. Jani Ziedins of the Cracked Market blog says the U.S. market’s reaction — the S&P 500 fell 1% Tuesday, and futures are pointing sharply lower on Wednesday — looks a bit overdone.

Still, he says, it’s understandable given the reasons behind it — fears of much bigger economic problems in China. Good news? “…if a crumbling Chinese economy cannot bring down this market, then nothing will and all we can do is hang on and enjoy the ride,” he says. Ziedins says watch the next two days to get some insight into the market’s psyche. Either selling is revving up to drop this market to levels not seen in years or this emotional purge will exhaust itself, and a rebound will follow, he predicts. Our chart of the day shows just how long it’s been since the S&P 500 has had a decent correction. But if death crosses and visions of rotting Apples are disturbing your sleep, you aren’t alone.

”The darkest horizon ever approaches, infused with Chinese black coal,” predicts the Fly, blogging for iBank Coin. It’s time to be cautious, he says. If you really want to shiver your timbers, then check out our call of the day. One of the biggest bears out there is riding the China devaluation to the hilt, talking boils and puss and predicting a financial crisis a la 2008. Brr…

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First devalue, then support it. Not terribly reassuring.

• China Intervenes To Support Tumbling Yuan (MarketWatch)

China intervened on Wednesday to prop up the yuan in the last minutes of trading, according to people familiar with the matter, in an apparent attempt to prevent an excessive fall in the currency as the authorities seek to give the market more say in setting the exchange rate. The yuan had dropped nearly 2% to its lowest level against the dollar during mainland trading, with one dollar buying about 6.45 yuan, as the People’s Bank of China followed through on its pledge to let market forces play a bigger role in determining the yuan’s value. To that end, the central bank set Wednesday’s reference rate for the yuan based on the currency’s closing level in the previous trading session.

In the past, it had often ignored the daily market moves, at times setting the level–also known as the midpoint, or fixing–so that the yuan was stronger against the dollar even on days after the market indicated it should have been weaker. But the move led to more selling of the yuan, and a statement by the central bank earlier in the day trying to reassuring investors that there was “no economic basis” for continued yuan depreciation largely failed to stabilize the market. The PBOC then instructed state-owned Chinese banks to sell dollars on its behalf in the last 15 minutes of Wednesday’s trading, according to the people. The result: The yuan jumped about 1% in value against the dollar in the final moments of trading, bringing it to a level where one dollar would buy 6.3870 yuan. The Chinese currency is now down 2.8% since Monday’s closing.

Read more …

Big important point. China’s the end of the line.

• Yuan’s Plunge Marks End of Chinese Stability for Global Economy (Bloomberg)

For about two decades China’s yuan was an anchor of stability for the global economy, helping it navigate Asian and global crises by holding steady even as other currencies slid. That era appears to be over. The yuan fell for a third day as the central bank’s reference rate dropped 1.1%. It recorded its steepest fall in 21 years after the People’s Bank of China said Tuesday it will allow markets a greater role setting its value. Commodities from oil to industrial metals plunged and policy makers around the region weighed responses, with Vietnam widening the trading band for its currency on Wednesday. An extended slide in the value of the yuan risks triggering a series of competitive devaluations and threatens a global deflation shock as prices of exports and commodities fall.

Morgan Stanley said Wednesday that China’s export of deflationary pressures “is not a marginal event” given its $10 trillion economy and a deepening slump in producer prices. “Until Tuesday the two biggest economies in the world – the U.S. and China – had shared the burden of stronger currencies,” said Stephen Jen at hedge fund SLJ Macro Partners. “But we have likely seen China breaking off, leaving the U.S. as the sole economy bearing the burden.” The currency realignment will lower profit margins and exports in the U.S., said Jen. It should also enable China and Asia to export some deflation to the rest of the world, he said. The yuan’s depreciation will lead to a profit and export volume transfer from China’s trading partners into China, wrote Morgan Stanley analysts.

China’s economy needs a competitive devaluation against other Asian producers and that points to weak global growth, lower commodity prices and lower inflation worldwide, according to Bill Gross. In the short term, China’s currency move will amplify challenges to global growth and add volatility to markets that have lost some of their fundamental anchoring, wrote Bloomberg View columnist Mohamed El-Erian. “The Chinese currency has been known for its predictability over the past two decades and now that has gone,” said Tao Dong at Credit Suisse in Hong Kong. “China is the second largest economy, the biggest buyer of commodities and machineries, the anchor for Asian economies.”

Read more …

Ambrose’s basic point is China is doing just fine, thank you. But… “China’s fixed investment reached $5 trillion last year, matching the whole of Europe and North America combined.” Thing is, AEP,it was all borrowed.

• China Cannot Risk The Global Chaos Of Currency Devaluation (AEP)

If China really is trying to drive down its currency in any meaningful way to gain trade advantage, the world faces an extremely dangerous moment. Such desperate behaviour would send a deflationary shock through a global economy already reeling from near recession earlier this year, and would risk a repeat of East Asia’s currency crisis in 1998 on a larger planetary scale. China’s fixed investment reached $5 trillion last year, matching the whole of Europe and North America combined. This is the root cause of chronic overcapacity worldwide, from shipping, to steel, chemicals and solar panels. A Chinese devaluation would export yet more of this excess supply to the rest of us. It is one thing to do this when global trade is expanding: it amounts to beggar-thy-neighbour currency warfare to do so in a zero-sum world with no growth at all in shipping volumes this year.

It is little wonder that the first whiff of this mercantilist threat has set off an August storm, ripping through global bourses. The Bloomberg commodity index has crashed to a 13-year low. Europe and America have failed to build up adequate safety buffers against a fresh wave of imported deflation. Core prices are rising at a rate of barely 1pc on both sides of the Atlantic, a full six years into a mature economic cycle. One dreads to think what would happen if we tip into a global downturn in these circumstances, with interest rates still at zero, quantitative easing played out, and aggregate debt levels 30 percentage points of GDP higher than in 2008. “The world economy is sailing across the ocean without any lifeboats to use in case of emergency,” said Stephen King from HSBC in a haunting report in May.

Whether or not Beijing sees matters in this light, it knows that the US Congress would react very badly to any sign of currency warfare by a country that racked up a record trade surplus of $137bn in second quarter, an annual pace above 5pc of GDP. Only deficit states can plausibly justify resorting to this game. Senators Schumer, Casey, Grassley, and Graham have all lined up to accuse Beijing of currency manipulation, a term that implies retaliatory sanctions under US trade law. Any political restraint that Congress might once have felt is being eroded fast by evidence of Chinese airstrips and artillery on disputed reefs in the South China Sea, just off the Philippines. It is too early to know for sure whether China has in fact made a conscious decision to devalue. Bo Zhuang from Trusted Sources said there is a “tug-of-war” within the Communist Party.

All the central bank (PBOC) has done so far is to switch from a dollar peg to a managed float. This is a step closer towards a free market exchange, and has been welcomed by the US Treasury and the IMF. The immediate effect was a 1.84pc fall in the yuan against the dollar on Tuesday, breathlessly described as the biggest one-day move since 1994. The PBOC said it was a merely “one-off” technical adjustment. If so, one might also assume that the PBOC would defend the new line at 6.32 to drive home the point. What is faintly alarming is that the central bank failed to do so, letting the currency slide a further 1.6pc on Wednesday before reacting. The PBOC put out a soothing statement, insisting that “currently there is no basis for persistent depreciation” of the yuan and that the economy is in any case picking up. So take your pick: conspiracy or cock-up.

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Hints?

• Devaluation Hints at China’s Rising Distress Over Economy (NY Times)

Whenever China’s economy swooned in recent downturns, its currency never buckled. It held steady, or strengthened, even as China’s neighbors or trading partners scrambled to cut the value of their own currencies to deal with the fallout. With the Chinese renminbi now taking its biggest plunge in decades, the worry is that the country’s already slowing economy is even worse off and the government is panicking. By the official measures, the economy is growing at 7%, right in line with government targets. It is a steady pace that the leadership has indicated can support decent job growth and put more money into consumers’ pockets. But a look below the surface shows a different, more worrisome picture. The data coming out of China, too, is somewhat suspect.

Economists now wonder whether, despite official figures showing growth, some provinces and regions could be dealing with outright recessions. “To be honest, no one has a clue where the economy is, and I don’t think that it’s properly measured,” said Viktor Szabo, a senior investment manager at Aberdeen Asset Management. “Definitely there is a slowdown. You can have an argument about what level it is, but it’s not 7%,” he added. The government’s aggressive action on the currency has brought the economy into sharp focus. China allowed the renminbi to weaken even further on Wednesday after a sharp devaluation the previous day. The currency’s official fixing against the dollar is down 3.5% over the last two days. On a typical day, the renminbi rises or falls just a small fraction of a percentage point.

While the government said the decision was intended to make the currency more market oriented, the devaluation was also largely a gift to exporters. In relative terms, it makes China’s shipments of clothing or electronics to consumers in the United States or Europe more affordable. “I don’t see this mini-devaluation as some kind of outrageous act,” said George Magnus, an economic adviser to the bank UBS and an associate at Oxford University’s China center. “But it is part of an array of other economic and financial stimulus measures designed to shore up the flagging growth rate.” The government has taken the usual steps by cutting interest rates and freeing up more money for banks to lend. But the leadership has also turned to more unconventional means in recent months to try to cushion the blow as the economy’s once-runaway expansion sinks back to earth.

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“The PBOC is telling people that if they want to take their money out, please do..”

• Yuan Bear in Wilderness in 2014 Now Warns of China Credit Crisis (Bloomberg)

In a March 2014 report, Daiwa Securities Co. senior economist Kevin Lai forecast a 10% drop in the yuan by the end of 2015 and warned China needed “very delicate” policy to avert a crisis. He’s still worried, and no longer so alone. The currency has devalued 3.7% since Tuesday morning, when the People’s Bank of China cut its daily reference rate by a record and said it would let the market play a greater role in the fixing. Lai, whose uber-bearish prediction is now halfway to fulfillment, estimates China has some $3 trillion of dollar-denominated debt outstanding which has suddenly become more expensive. “The PBOC is telling people that if they want to take their money out, please do,” Lai said in an interview Wednesday.

“As the selling pressure increases, this could spin into a currency and a credit crisis. They’re exporting the crisis.” The yuan’s tumble roiled Asian currencies and equities this week, even as the central bank said there’s no economic basis for a continuous fall. The cost to insure Chinese government debt against nonpayment rose to the highest in two years, advancing six basis points Tuesday to 107.5 basis points, according to data provider CMA. Chinese corporations have sold bonds and gotten bank loans offshore at a record pace in the past three years and now are the biggest component of major fixed-income indexes in the region.

These issuers will buy dollars as they seek to protect themselves from the currency move, Lai said, increasing the pressure on the yuan and making it even more difficult to pay back their foreign dues. In his March 2014 note and a subsequent report in October, Lai outlined how fake export invoicing, metals purchases and disguised foreign investment had driven $1 trillion of short-term speculative flows into China. He sees the yuan falling to 6.60 per dollar, or more, by the end of 2015, from 6.44 now.

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Core deflation?!

• China’s Slowdown Threatens Euro’s Core More Than Periphery (Reuters)

Few parts of the world will remain unscathed by the plunging stock markets and economic slowdown rocking China, but the companies of Europe’s soft underbelly may weather it best. Countries comprising the euro zone’s periphery, such as Spain, Italy and Portugal, have relatively small exposure to the world’s growth engine. Core countries like Germany, France and The Netherlands have much deeper links. Strong demand from China has fuelled the boom in Germany’s German auto industry, the success of France’s luxury and fashion empires and solid growth in the Dutch and Finnish chemicals and capital goods sectors. Investment by their companies has grown accordingly.

But that demand may be cooling. China’s factory activity shrank in July at the fastest rate in two years, the country’s stock markets have slumped 30% since mid-June and growth could soon fall below 7% for the first time since early 2009. “Germany has products China wants. But we’ve got slowing global trade, slowing global growth, and Germany has already benefited from its currency weakness advantage,” said Stewart Richardson, partner at RMG Wealth Management in London.” “Germany suffers if China suffers. So on European equities, the periphery outperforms Germany,” he said. European stocks have been the destination of choice for investors this year, with cash flowing in from emerging markets and the United States. A net $80 billion has gone into European equity funds this year, according to Bank of America Merrill Lynch.

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Now’s the time for Tsipras to be bold.

• Greece Is About To Be Dismantled And Fed To Profit-Hungry Corporations (Ind.)

Greece is heading towards its third “bailout”. This time €86 billion is on the table, which will be packaged up by international lenders with a bundle of austerity and sent off to Greece, only to return to those same lenders in the very near future. We all know the spiralling debt cannot and will not be repaid. We all know the austerity to which it is tied will make Greece’s depression worse. Yet it continues. If we look deeper, however, we find that Europe is not led by the terminally confused. By taking those leaders at their word, we’re missing what’s really going on in Europe. In a nutshell, Greece is up for sale, and its workers, farmers and small businesses will have to be cleared out of the way.

Under the eye-watering privatisation programme, Greece is expected to hand over its €50 billion of its “valuable state assets” to an independent body under the control of the European institutions, who will proceed to sell them off. Airports, seaports, energy systems, land and property – everything must go. Sell your assets, their contrived argument goes, and you’ll be able to repay your debt. But even in the narrow terms of the debate, selling off profitable or potentially profitable assets leaves a country less able to repay its debts. Unsurprisingly the most profitable assets are going under the hammer first. The country’s national lottery has already been bought up. Airports serving Greece’s holiday islands look likely to be sold on long-term lease to a German airport operator.

The port of Pireus looks likely to be sold to a Chinese shipping company. Meanwhile, 490,000 square meters of Corfu beachfront have been snapped up by a US private equity fund. It has a 99-year lease for the bargain price of €23million. According to reporters, the privatisation fund is examining another 40 uninhabited islands as well as a massive project on Rhodes which includes an obligatory golf course. Side-by-side with the privatisation is a very broad programme of deregulation which declares war on workers, farmers and small businesses. Greece’s many laws that protect small business such as pharmacies, bakeries, and bookshops from competition with supermarkets and big businesses are to be swept away. These reforms are so specific that the EU is writing laws on bread measurements and milk expiry dates. Incredibly, Greece is even being told to make its Sunday opening laws more liberal than Germany’s. Truly a free market experiment is being put into place.

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Let’s please never forget: Opposing views discussed out in the open are democracy’s lifeblood.

• Greek Government Criticizes Rebel Lawmakers Before Bailout Vote (Reuters)

The Greek government criticized rebels within its ranks intent on opposing a new bailout deal in Thursday night’s parliamentary vote, saying a government without a majority “cannot go far” and raising the possibility of early elections. With opposition support, parliament is preparing to approve the €85 billion bailout deal that Greece needs to avoid defaulting on a debt repayment next week. The agreement is expected to easily pass since opposition parties have promised to support Prime Minister Alexis Tsipras to ensure Greece does not return to financial chaos. But the vote will test the strength of a rebellion by anti-austerity lawmakers of Tsipras’s leftist Syriza party, which could raise pressure on him to call snap elections as early as September.

Government spokeswoman Olga Gerovasili said that after the parliamentary vote, the focus would shift to a meeting of euro zone finance ministers on Friday who must also back the bailout, Greece’s third in the past five years. However, she acknowledged there would be a parliamentary rebellion and signaled that the government would struggle in the coming months if Syriza remained disunited. “It is known that some Syriza lawmakers will not vote in favor of the accord,” she told Mega TV. “A government that does not have a governing majority cannot go far.” Far-left members of Syriza insist the government should stand by its promises on which it was elected in January to reverse waves of spending cuts and tax rises imposed since 2010, which have had a devastating effect on an already weak economy.

The rebels, who include some former ministers, have already voted against the government on the austerity deal, angered by Tsipras’s capitulation to the creditors’ demands as Greece edged close to an economic precipice last month. As Greece needs the deal to make a €3.2 billion debt repayment to the ECBon Aug. 20, Tsipras asked parliamentary speaker Zoe Konstantopoulou to expedite debate on the bill approving the bailout. Konstantopoulou, a Syriza hardliner who opposes the deal, responded by calling a series of parliamentary committee meetings to consider the bill on Thursday, delaying the start of the plenary debate that is likely to last well beyond midnight before the vote is held.

Gerovasili made clear the government’s displeasure. “Ms Konstantopoulou has her own ways,” she said. “There are two differing views which are creating disharmony.” Pressed on speculation that Syriza might formally split, leading to elections in the autumn, she said: “It is possible that in the future there could be procedures to seek a new mandate from the people… This will happen when there is an assessment that there must be fresh elections.”

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“The IMF… is throwing up its hands collectively despairing at a program that is simply founded on unsustainable debt…”

• Varoufakis: Greece Bailout Deal ‘Will Not Work’ (AFP)

Greece’s former finance minister Yanis Varoufakis on Wednesday warned that the latest bailout deal was doomed to fail despite Prime Minister Alexis Tsipras saying he was “confident” of ending economic uncertainty. In a implicit criticism of his former ally Tsipras, he told BBC radio: “Ask anyone who knows anything about Greece’s finances and they will tell you this deal is not going to work.” “The Greek finance minister… says more or less the same thing,” he added. The controversial politician resigned the day after Greeks voted against a proposed bailout in a July 5 referendum, accusing the country’s creditors of “terrorism.” Varoufakis told the BBC that Germany’s veteran Finance Minister Wolfgang Schaeuble had had to “go to the Bundestag and effectively confess this deal is not going to work”.

“The IMF… is throwing up its hands collectively despairing at a program that is simply founded on unsustainable debt… and yet this is a program that everybody is working towards implementing,” he said. Tsipras on Wednesday said he was confident that his debt-crippled nation would secure loan support from a third international bailout which is up for parliamentary approval this week. “I am and remain confident that we will succeed in reaching a deal and in loan support (from the European Stability Mechanism)… that will end economic uncertainty,” he said. Greece and its creditors are under pressure to finalize a deal by next Thursday when Athens must repay some €3.4 billion to the ECB. Germany on Wednesday said it needed more time to comb through the 400-page text setting out the fiscal and other policy measures Greece must take in exchange for the lifeline.

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“Much better than Varoufakis. More conciliatory, constructive – and modest.”

• Varoufakis Exit Marked ‘Sea Change’ In Greek Talks, EU Sources Say (Reuters)

Negotiations on a bailout deal between Greece and its creditors reached this week underwent a “sea change” after combative finance minister Yanis Varoufakis was removed from the talks, EU sources said on Wednesday. The deal, which will provide Greece with the new money needed to prevent financial meltdown and keep it from crashing out of the single currency, was reached after months of often bad-tempered talks with international lenders. The mood apparently changed after the appointment of Euclid Tsakolotos as finance minister in place of Varoufakis early last month. “There was a sea change in the negotiations with the Greek authorities in recent weeks,” one of the EU sources said.

“The new Greek finance minister has an absolutely different attitude in the talks than the previous one. Talks were very constructive,” the source said. Varoufakis, a charismatic motorbike-riding academic who described himself as an “erratic Marxist,” was feted as a political rock star when he took the finance portfolio after the left-wing Syriza party emerged victorious from an election in January. But as the debt talks dragged on the confrontational Varoufakis lost the confidence of his negotiating partners, irritating German Finance Minister Wolfgang Schaeuble in particular and accusing Europe of “terrorism” in its attempts to resolve the Greek crisis.

He further riled the Germans, the main contributors to a series of rescue packages for Greece, by saying an outline deal last month was like the Versailles treaty which forced crushing reparations on Germany after World War One and led to the rise of Adolf Hitler. In a development that prompted widespread shock and disbelief in Greece, Varoufakis confirmed that he had made secret preparations to hack into citizens’ tax codes to create a parallel payment system. Mild-mannered and professorial, Tsakalotos marked a clear change in style from his leather-jacketed predecessor. One official in Brussels described him last month as: “Much better than Varoufakis. More conciliatory, constructive – and modest.”

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The conquering force.

• Germany Criticises Greek Bailout Agreement (FT)

Germany criticised an outline deal between Athens and its bailout monitors as insufficient, upsetting eurozone attempts to smooth the way to a new €85bn rescue for Greece. Germany’s finance ministry outlined its objections in a paper circulated to its eurozone counterparts just hours before the Greek parliament was due to debate on Wednesday the painful austerity and reform package that had been reluctantly accepted by the radical left government of prime minister Alexis Tsipras. It also sets up a potentially difficult meeting of eurozone finance ministers on Friday who are due to decide whether to approve the deal — or grant Athens a bridging loan to give the negotiators time to rework the agreement.

Berlin did not make clear whether it would ask for such a delay on Friday. The finance ministry denied that it was rejecting the deal and said it was only raising “some open questions that need to be addressed in the euro group”. These include delays in planned reforms, debt sustainability and the role of the IMF, which has helped EU institutions finance the past two Greece packages. The German intervention revives memories of last month’s acrimonious summit, when Wolfgang Schäuble, Berlin’s hawkish finance minister, openly aired the possibility of a temporary Greek exit from the euro. It punctures the optimism that had been building in Brussels that a deal could be done in time for Athens to pay a €3.2bn debt to the ECB on August 20.

The German paper concedes that “large parts” of the reform programme laboriously agreed last month were indeed included in the outline deal, ranging from tax collection to competition in tourist property rentals. But it says some measures are delayed until October or November and some others “are not yet specified”. Berlin is particularly concerned about a proposed delay in establishing a planned €50bn privatisation fund, which is due to take control of Greek state assets. Amid arguments about how authority over this fund would be shared by the Greek government and EU institutions, the negotiators agreed on a task force to sort out the issue by December. The German report says drily: “Just to set up a task force is not sufficient.”

[..] Meanwhile, the memorandum of understanding, obtained by the FT, makes clear how challenging the plan is for Mr Tsipras’s government, not least in the face of splits in his ruling Syriza party. It highlights how extensive external control of the Greek economy will be, how quickly Athens must implement reforms in the coming weeks and months, and how demanding are the budget plans.

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Will the entire country be affected? Is a Troika loan in the offing?

• There’s A New Twist In The Austrian Bad Bank Saga (Coppola)

Austria’s province of Carinthia is in trouble again. Followers of the Hypo Alpe Adria (HAA) saga will know that under its erstwhile leader Joerg Haider (who conveniently died in a car crash in 2008) Carinthia’s government guaranteed HAA’s loans, bonds and subordinated debt to the value of about €11bn, which is more than 5 times its annual income. These are “deficiency guarantees”, which means they only kick in if the borrower actually defaults. When HAA failed in 2008, the Austrian federal government prevented the guarantees from kicking in by nationalizing it, buying it from the German Landesbank BayernLB for a nominal €1. From then until 2014 it remained frozen, rescued but not resolved.

Clearly things couldn’t stay that way for ever. Last year, the Austrian federal government passed a law called the Hyposanierunggesetz (Hypo Reorganisation Law), usually known as HaaSanG, which voided deficiency guarantees issued by Carinthia on €890m of HAA subordinated debt and on 800m euros of loans from BayernLB. HAASanG was intended to protect taxpayers by forcing losses on to subordinated debt holders and BayernLB. But the subordinated debt holders fought back. And in a landmark judgment, the Austrian Constitutional Court has found in their favor. Declaring HaaSanG “unconstitutional”, it has repealed it, reinstating not only the guarantees on subordinated debt but also the guarantees on BayernLB’s loans. Carinthia is now once again liable for losses under these guarantees.

Admittedly, this is only 1.69bn of Carinthia’s 11bn total notional liability. And the Austrian federal government is still insisting that the much larger bail-in of subordinated and unsecured creditors under Austria’s version of the European Bank Recovery & Resolution Directive (EBRRD), known as BaSAG, will proceed. The repeal of HAASanG is a setback, but not a showstopper. But there is more to come.

The Austrian newspaper Der Standard reports that the Vienna Commercial Court has petitioned for repeal of BaSAG’s special bail-in provisions for Heta at the Constitutional Court. If this is successful, then all guarantees on HAA assets currently in the HETA “bad bank” and against which bonds have been issued will be reinstated. We know Carinthia can’t possibly honor the guarantees, so if subordinated debt holders suddenly rank pari passu with senior unsecured debt holders because of their reinstated guarantees, losses will have to be shared by everyone equally – including the Austrian federal government.

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Cute, but..

• Lawrence Lessig Wants To Crowdfund His Way To The Presidency (Forbes)

Lawrence Lessig wants to make it to the Oval Office, pass just one bill and then resign. On Tuesday, the Harvard Law professor and reform activist, released a video announcing his exploratory bid for president. In the video, Lessig explained his plan to run as a “referendum president” on a platform of sweeping political reform—the core of which would be campaign finance reform—in an effort to fix America’s “rigged” political system. In keeping with his platform, Lessig launched a crowdfunding campaign to fund his potential run. If he manages to raise one million dollars by Labor Day, Lessig will officially declare his candidacy and make a run for office for 2016.

Lessig believes that money in politics has stripped America of a truly democratic political system and wants to change that. This is not the first time the professor has delved into politics. In 2014, Lessig co-founded Mayday PAC, a super PAC billed as “a crowdfunded Super PAC to end all Super PACs and the corruption of private money.” With 27 days to go, Lessig’s crowdfunding campaign raised more than $128,800 at the time of publication. Forbes spoke with Lessig about his plan to “unrig the system,” his motivations and the challenges he has yet to face. Can you explain your plan and this concept of a “referendum president”? How would your plan circumvent all these issues facing the other democratic candidates currently in the running?

It’s my view that if we had a referendum on this issue with the American public, it would overwhelmingly produce support for the reform. But we don’t have a referendum power, so this is a way to hack on into the system. So a candidate for president says, “I am going to do this one thing and when that thing is over, I will step aside.” In that process you have a candidate whose election would be a mandate for that one thing and could stand up to Congress and say, here is that one thing and if you don’t do it, you are going to have the wrath of the people who say that you have not respected their mandate. When they do it then we will have created a Congress that is actually free to lead rather than compelled to follow the money.

What motivated you to explore this option?

I had been watching the Democratic Party candidates talk about really incredibly bold and inspiring ideas about what they want to do in the next administration, but I come from Massachusetts—our senator is Elizabeth Warren—and as Warren likes to say, “the system is rigged.” What increasingly frustrated me was the failure to connect that fact to strategy for actually making it possible to achieve these bold ideas. The system is rigged, what that means is that you have to unrig the rigged system first. So what is the plan for unrigging that rigged system and where is the priority for that plan? What led me to do this was recognizing that I didn’t think that any of the candidates actually could do this. If you enter office office with a mandate that is divided among seven or eight issues, it’s hard to stand up to the most powerful interest in the United States and say to them that you are going to have to yield to this because so much else is hanging on what the administration does.

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Country in a coma.

• Canadians Piling Up ‘Good Debt,’ Report Says (Globe and Mail)

Canadians are borrowing more, but much of what they owe is “good debt,” a new report suggests. The average amount of debt Canadians now hold rose significantly to about $93,000 in June from $76,140 a year earlier, according to the report released Wednesday by Bank of Montreal. The report, which looks at major contributors to overall household debt in the country, found credit card debt and mortgage debt listed as the top two types. Of the Canadians surveyed, 80% said they are in debt. While the percentage stayed the same as last year, so-called “smart purchases” such as home purchases, home repairs/renovations and education expenses topped the list of debt sources for Canadians.

49% of Canadians said buying a home was a significant contributor to their current debt, with 34% saying it was the main factor. Home sales are up 6% in the first half of 2015 from the same period a year ago, according to BMO Economics, with hot housing markets adding fuel to debt levels. Last week, The Real Estate Board of Greater Vancouver reported sales of existing homes in the region soared 30% in July compared with a year earlier, causing benchmark prices to rise more than 11%. The Toronto Real Estate Board reported home sales rising 8% to hit a new July record, with prices jumping 9.4% for the year. “Home sales remain resilient across most of the country, led by soaring transactions in Toronto and Vancouver,” said BMO Nesbitt Burns Inc. economist Sal Guiatieri.

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“Conservative government used public money on outreach campaign to counter criticism..” I say sue ’em.

• Canadian Government Spent Millions On Secret Tar Sands Advocacy (Guardian)

Conservative government used public money on outreach campaign to counter criticism of controversial Alberta tar sands. Canada’s Conservative government spent several million dollars on a tar sands advocacy fund as its push to export the oil faltered, documents reveal. In its 2013 budget, the government invested $30 million over two years on public relations advertising and domestic and international “outreach activities” to promote Alberta’s tar sands. The outreach activities, which cost $4.5 million and were never publicly disclosed, included efforts to “advance energy literacy amongst BC First Nations communities.” The Harper government has been trying to ship tar sands to the British Columbia coast via two pipelines, Northern Gateway and Kinder Morgan, which scores of First Nations communities have pledged to block because of environmental and economic concerns.

With Canada’s federal election in full swing, Prime Minister Stephen Harper has been on the defensive over his backing of the tar sands, which have derailed the country’s emissions reduction targets and, since the crash of oil prices, destabilized its economy. According to the government documents, other outreach activities included research to support Canadian lobbying against a European environmental measure that would have hampered tar sands exports. Canada has succeeded in delaying the measure – the EU Fuel Quality Directive – several times. The government also partnered with the International Energy Agency to “advance knowledge” about unconventional fuels like fracked shale gas, which several Canadian provinces have passed moratoriums against.

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“.. as if the octopus genome had been “put into a blender and mixed“

• Don’t Freak Out, But Scientists Think Octopuses ‘Might Be Aliens’ (IE)

Not to send you into a meltdown or anything but octopuses are basically ‘aliens’ – according to scientists. Researchers have found a new map of the octopus genetic code that is so strange that it could be actually be an “alien”. The first whole cephalopod genome sequence shows a striking level of complexity with 33,000 protein-coding genes identified – more than in a human. Not only that, the octopus DNA is highly rearranged – like cards shuffled and reshuffled in a pack – containing numerous so-called “jumping genes” that can leap around the genome. “The octopus appears to be utterly different from all other animals, even other molluscs, with its eight prehensile arms, its large brain and its clever problem-solving abilities,” said US researcher Dr Clifton Ragsdale, from the University of Chicago.

“The late British zoologist Martin Wells said the octopus is an alien. In this sense, then, our paper describes the first sequenced genome from an alien.” The scientists sequenced the genome of the California two-spot octopus in a study published in the journal Nature. They discovered unique genetic traits that are likely to have played a key role in the evolution of characteristics such as the complex nervous system and adaptive camouflage. Analysis of 12 different tissues revealed hundreds of octopus-specific genes found in no other animal, many of them highly active in structures such as the brain, skin and suckers. The scientists estimate that the two-spot octopus genome contains 2.7 billion base pairs – the chemical units of DNA – with long stretches of repeated sequences.

And although the genome is slightly smaller than a human’s, it is packed with more genes. Reshuffling was a key characteristic of the creature’s genetic make-up. In most species, cohorts of certain genes tend to be close together on the double-helix DNA molecule. A gene is a region of DNA that contains the coded instructions for making a protein. In the octopus, however, there are no such groupings of genes with related functions. For instance, Hox genes – which control body plan development – cluster together in almost all animals but are scattered throughout the octopus genome. It was as if the octopus genome had been “put into a blender and mixed”, said co-author Caroline Albertin, also from the University of Chicago.

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Debt Rattle August 12 2015

Aug 122015
 
 August 12, 2015  Posted by at 9:15 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle August 12 2015


DPC Belle Isle Park Aquarium, Detroit 1905

• Greek Debt Deal Reached But Targets Branded ‘Utterly Unachievable’ (Telegraph)
• Dow Death Cross Is A Bearish Omen For The Stock Market (MarketWatch)
• China Stuns Financial Markets By Devaluing Yuan For Second Day Running (Guardian)
• China Roils Markets Second Day as Yuan Cut by 1.6%; Bonds Rally (Bloomberg)
• How The Dollar’s Rise Led To China’s Yuan Devaluation (MarketWatch)
• Roach Sees Currency Wars Just Getting Worse After Yuan Decision (Bloomberg)
• China’s Devaluation And The Impossible Trinity (Beckworth)
• Yuan Move Threatens to Add $10 Billion to China Inc.’s Debt Costs (Bloomberg)
• One of China’s Most Popular Trades May Be Coming to an End (Tracy Alloway)
• Goldman Says China Yuan Move Is Attempt to Get Ahead of the Fed (Bloomberg)
• The Fed Is In A Bind (Haselmann)
• An Economic Earthquake Is Rumbling (Livingston)
• The Social Cost of Capitalism (Paul Craig Roberts)
• Yanis Varoufakis Backs Wikileaks Bounty To Crack TTIP (Telegraph)
• Euromaniacs: An Addiction To Euroin (Diego Fusaro)
• PKK Leader: Turkey Is Protecting Islamic State By Attacking Kurds (BBC)
• 50,000: More Migrants Reached Greece In July Than During All Of 2014 (Quartz)
• Greece Sends Police Reinforcements To Kos In Migrant Crisis (Kathimerini)
• United Nations Failing To Represent Vulnerable People, Warn NGOs (Guardian)

Bill submitted to Greek parliament, vote due on Friday morning. Chances of a split in SYRIZA are large.

• Greek Debt Deal Reached But Targets Branded ‘Utterly Unachievable’ (Telegraph)

Greece has agreed the broad terms of a new three-year bail-out deal with its international creditors, though experts warned that severe austerity demands mean the country’s fiscal targets remained “utterly unachievable”. Technical details of the deal were finalised in the early hours of Tuesday morning, paving the way for Greece to unlock around €85bn in new loans. The measures include increases in the retirement age, opening up the energy and pharmaceutical industries and new taxes on shipping firms. More measures will follow in October. While Euclid Tsakalotos, Greece’s finance minister, said there were just “two or three” details remaining to reach an accord, Germany, the country’s biggest creditor, has called for more time to complete a deal.

Angela Merkel, the German Chancellor, is understood to have told Greek prime minister Alexis Tsipras that she would prefer to give Greece a second bridging loan rather than rush a deal through. Mr Tsipras rejected the idea, arguing that it would ride roughshod over an agreement with the eurozone that had been struck after marathon talks on July 12 and implemented by the Greek government. Under the terms of Greece’s third rescue package, the country will be required to post a primary deficit no larger than 0.25pc of GDP this year. In 2016, the country is required to post a surplus of 0.5pc of GDP rising to 1.75pc in 2017 and 3.5pc in 2018. Greece had previously proposed a primary surplus target of 1pc of GDP this year and 2pc in 2016.

Officials claimed the deal would reduce Greece’s obligations with regards to primary surpluses by 11pc of GDP over the next three years, meaning Greece would avoid austerity measures worth around €20bn over that period. The Greek parliament must now pass the reforms agreed with creditors, ahead of a meeting of eurozone finance ministers expected on Friday. However, Costas Lapavitsas, a Syriza MP and professor of economics at SOAS university in London, criticised the package, and suggested he would vote against it. “To lower the targets because the economy is in recession is one thing. To present this as lightening the recessionary burden is quite another and wrong. Nothing has been lightened because the tax rises have already been voted in,” he said.

Capital Economics described the fiscal targets as “fantasy” and “utterly unachievable”, while Raoul Ruparel, co-director at the think-tank Open Europe, said: “The new targets have not been so much negotiated as made inevitable by the recent economic destruction – claiming savings thanks to significant economic downturn has a touch of claiming success in cutting off your nose to spite your face,” he said.

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Moving averages intersect.

• Dow Death Cross Is A Bearish Omen For The Stock Market (MarketWatch)

A rare “death cross” appeared Tuesday in the chart of the Dow Jones Industrial Average, suggesting the stock market may have already begun a new long-term downtrend. Although chart watchers have seen the bearish technical pattern coming for some time, it can still send a chill down bulls’ spines when it is finally confirmed. The fact that the Dow industrials’ death cross follows the appearance of one in its sister index, the Dow Jones Transportation Average, warns that this one is more than a one-off event. A death cross is said to have occurred when the 50-day simple moving average, which many use to track the short-term trend, crosses below the 200-day moving average, which is widely used to gauge the health of the longer-term trend.

For the Dow industrials, it marked the first time the 50-day moving average, which ended Tuesday at 17,806.99, was below the 200-day moving average, at 17,813.42, since Dec. 30, 2011, according to FactSet. Therefore, many technicians see the death cross as marking the spot that a shorter-term pullback morphs into a longer-term downtrend. The Dow closed down 1.2% suffer an eighth loss in the past nine sessions. It has lost 5% since its record close of 18,312.39 on May 19. Some argue that death crosses have very little predictive value, since some previous ones have appeared right around market bottoms. For example, a death cross appeared on July 7, 2010, when the Dow closed at 10,018.28. The Dow’s closing low for the year had actually been hit two sessions earlier, at 9,686.48.

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One day after claiming it was a one-off.

• China Stuns Financial Markets By Devaluing Yuan For Second Day Running (Guardian)

China stunned the world’s financial markets on Wednesday by devaluing the yuan for the second day running, sparking fears that the world’s second largest economy is in worse shape than investors believed. The currency hit a four-year low on Wednesday after the People’s Bank of China set the yuan’s daily midpoint even weaker than in Tuesday’s devaluation. With the bank having said that Tuesday’s move was a “one-off depreciation”, the rapid drop in the value of China’s currency – around 4% in the last two days – dealt a blow to appetite for risky assets, and markets across the region plunged amid concerns that Beijing has embarked on a damaging currency war. Stocks, currencies and commodities came under heavy pressure as money managers feared it could ignite a currency war that would destabilise the global economy.

The Nikkei stock market index in Japan was down more than 1% while the Hang Seng in Hong Kong was down 1.64%. The Australian dollar, often seen as a proxy for the Chinese economy, fell again to a fresh six-year low of US$72.25c, having been sold off heavily on Tuesday. The US dollar, on the other hand, rose strongly again against all Asian currencies. Oil was hit, too, with Brent futures were down 31c at $48.87 per barrel at 0251 GMT. US crude was trading at $43.02 per barrel, down 6 cents from Tuesday when it marked its lowest settlement since March 2009. Key industrial and construction materials nickel, copper and aluminium also hit six-year lows. “China’s currency moves will hurt appetite for risky assets such as equities and commodities,” said Rajeev De Mello, head of Asian fixed income at Schroders in Singapore.

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Well, the IMF says they like it.

• China Roils Markets Second Day as Yuan Cut by 1.6%; Bonds Rally (Bloomberg)

China’s unexpected decision on Tuesday to devalue the yuan and shift to a more market-determined rate sparked concern that the world’s second-largest economy is faltering. Vietnam widened the trading band on its currency Wednesday, underscoring the risk of competitive devaluations. Traders are seeking safety in government debt as China’s move reduces inflation expectations and eases pressure on the Federal Reserve to raise interest rates. China’s government “is focused on domestic issues rather than global implications at the moment, employing all the possible means to stabilize the economy,” said Ronald Wan at Partners Capital in Hong Kong. “A weaker yuan means weaker consumption power and Chinese demand for foreign products and commodities will weaken.”

The yuan is heading for its biggest two-day drop since 1994 and has returned to levels last seen in August 2011. There’s no economic or financial “basis” for the exchange rate to fall continuously, the PBOC said in a statement Wednesday. Traders increased bets on further movement in the currency, with options volume surging to more than triple the 5-day average for the time of day, Depository Trust & Clearing Corp. data showed. China’s central bank said Tuesday that market-makers who submit prices for the reference rate will have to consider the previous day’s closing spot rate, foreign-exchange demand and supply, as well as changes in major currency rates. Previous guidelines made no mention of those criteria.

The IMF welcomed China’s move to devalue the yuan and said it doesn’t directly impact the country’s push to win reserve-currency status. The devaluation is aimed at buying China some flexibility against continued dollar appreciation as the Fed prepares to lift rates, according to Goldman Sachs.

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Beijing is way behind the ball.

• How The Dollar’s Rise Led To China’s Yuan Devaluation (MarketWatch)

The Obama administration, like many U.S. administrations before it, has long pushed China to allow the market to play a greater role in setting the exchange rate. U.S. officials have long argued that China’s currency is undervalued, giving the country’s exporters an unfair advantage over manufacturers in the U.S. and elsewhere. As recently as April, the Treasury Department praised China’s decision to allow the yuan to appreciate over recent years, but maintained the currency was still undervalued. But forex analysts note Beijing’s willingness to allow the yuan to appreciate over recent years, taking its cue from a rising U.S. currency. That’s made the yuan the second-best-performing emerging-market currency over the past 12 months, noted Jane Foley at Rabobank. China’s real effective exchange rate has been rising at the same time.

Kit Juckes, global macro strategist at Société Générale, noted that since the taper tantrum during the summer of 2013, the yuan has fallen 3% versus the dollar. But over the same time, the yen is down 23%, the euro is down 18% and other Asian currencies have dropped between 5% and 25%. Against the other so-called BRIC emerging market currencies—Brazil, Russia and India—the yuan has gained more than 50% over the last decade, Juckes said, in a note. The yuan’s valuation “has looked increasingly unsustainable as the others have seen their currencies tumble, and the 1.9% adjustment today is far too small to change that,” he said. “Via the dollar-yuan peg, China is in effective importing the Fed’s tighter policy bias at a time when its own economy is struggling,” said Rabobank’s Foley.

Much will depend on whether the devaluation is, as China says, a one-time move or if Beijing takes further action to weaken the yuan. “The renminbi will presumably come under additional downward pressure and a new gap has already opened up between the reference and market rates. But we expect the PBOC to resist this pressure—it has done over most of the past year—rather than continue to ratchet the reference rate lower,” said Julian Jessop at Capital Markets. “As well as the political sensitivities, allowing further big falls would encourage ‘one-way’ speculation and undermine the credibility of the description of today’s move as a one-time correction.” Nonetheless, China’s move is unwelcome news for its Asian neighbors, who saw their currencies knocked lower in the wake of the move. In that regard, China’s move is seen as a belated salvo in the so-called currency wars.

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No doubt.

• Roach Sees Currency Wars Just Getting Worse After Yuan Decision (Bloomberg)

China’s shock move to devalue the yuan risks opening a new front in a currency war that stretches from the euro zone to Japan as nations look to energize their economies. The People’s Bank of China slashed the yuan’s fixing by a record 1.9% on Tuesday, sparking the currency’s biggest one-day loss since the official and market exchange rates were united in 1994. It triggered the steepest selloff among Asian currencies in almost seven years, led by slides in South Korea’s won and the Taiwan and Singapore dollars. The euro and the yen tumbled 18% against the greenback in the past 12 months as monetary policies diverged in the U.S., Europe and Japan.

“In a weak global economy, it will take a lot more than a 1.9% devaluation to jump-start Chinese exports,” said Stephen Roach, a senior fellow at Yale University and former Morgan Stanley chairman in Asia. “That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.” China’s devaluation shook global markets just as the currency war appeared to be losing steam in Asia, with Australia and New Zealand toning down calls for weaker rates and Japan refraining from expanding stimulus this quarter.

Even with almost all major currencies losing ground against the dollar this year amid rising expectations for increased borrowing costs in the U.S., China maintained a de facto peg since March amid a push for the yuan to win reserve status at the International Monetary Fund. “They built into the market an expectation that they were keeping the currency stable,” said Ray Farris at Credit Suisse. “Then all of a sudden they blinked. Because they blinked today, markets will continue to look for similar conditions in the future. If exports are falling off a cliff, then against the background of this development, markets will expect more” depreciation, he said.

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It’s like when you say you want a job done good, cheap and fast: pick two.

• China’s Devaluation And The Impossible Trinity (Beckworth)

So China devalued its currency peg almost 2% against the dollar. It happened just as I was wrapping up a twitter debate on this very possibility, a very surreal experience. Many more twitter discussions erupted after the announcement of this policy change and I got sucked into a few of them. My key takeaways from these discussions on the yuan devaluation are as follows. First, this devaluation was almost inevitable: the economic outlook in China had been worsening. The question is why? As I explained in my last post, the proximate cause is the Fed’s tightening of monetary conditions. China’s currency is quasi-pegged to the dollar and that means U.S. monetary policy gets imported into China.

The gradual tightening of U.S. monetary conditions since the end of QE3 has therefore meant a gradual tightening of Chinese monetary conditions. Recently, it has intensified with the Fed signalling its plans to tighten monetary policy with a rate hike. U.S. markets have priced in this anticipated rate hike and caused U.S. monetary conditions to further tighten. Through the dollar peg this tightening has also been felt in China and can explain the slowdown in economic activity. Consequently, China had to loosen the dollar choke hold on its economy via a devaluation of its currency.

There is, however, a more fundamental reason for the devaluation. China has been violating the impossible trinity. This notion says a country can only do on a sustained basis two of three potentially desired objectives: maintain a fixed exchange rate, exercise discretionary monetary policy, and allow free capital flows. If a country tries all three objectives then economic imbalances will build and eventually give way to some kind of painful adjustment. China was attempting all three objectives to varying degrees. It quasi-pegged its currency to the dollar, it manipulated domestic monetary conditions through adjustment of interest rates and banks’ require reserve ratio, and it allowed some capital flows. This arrangement could not last forever, especially given the Federal Reserve’s passive tightening of monetary policy.

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Talk about lowballing…

• Yuan Move Threatens to Add $10 Billion to China Inc.’s Debt Costs (Bloomberg)

The biggest offshore borrowers in Asia are about to understand the costs of a devaluation. Chinese companies, which have $529 billion in dollar and euro bonds and loans outstanding, could see their debt costs jump by $10 billion after the People’s Bank of China devalued the yuan by 1.9%, according to Bloomberg-compiled data. The weaker yuan increases expenses for firms that have to exchange it into those currencies to pay interest and principal on offshore borrowings. Chinese corporations have sold bonds and gotten bank loans offshore at a record pace and now are the biggest component of major fixed-income indexes in the region. A narrow trading band for their home currency meant that many did not hedge against exchange losses that Tuesday’s devaluation, the biggest in two decades, now threatens.

“Most Chinese companies don’t hedge their forex exposure,” said Ivan Chung, an analyst at Moody’s Investors Service. “The sudden devaluation in the currency will add pressure to those with offshore dollar debt, especially the property sector that relies heavily on offshore debt.” The central bank cut its daily reference rate for the currency by a record, triggering the yuan’s biggest one-day loss since China unified official and market exchange rates in January 1994. “Chinese property developers have lots of offshore debt outstanding – more than 20% of their total debt for some – and the majority of them have high leverage and weak cash flow,” said Christopher Lee at Standard & Poor’s in Hong Kong. “If the yuan depreciation sustains, they will face pressure on servicing their debt.”

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Carry me Carry.

• One of China’s Most Popular Trades May Be Coming to an End (Tracy Alloway)

Years of the Chinese yuan practically pegged to the U.S. dollar gave succor to a massive carry trade that involved mainland speculators borrowing from overseas banks at relatively low rates and then investing in higher-yielding renminbi-denominated assets. Pocketing the spread between the two netted hefty returns, but the era of “peak” China carry looks to be coming to an end following China’s move to devalue its currency. While the exact size of the carry trade is unknown, the Bank for International Settlements estimates that dollar borrowing in China jumped five-fold since 2008 to reach more than $1.1 trillion.

Global dollar borrowing is something like $6 trillion to $9 trillion, according to the BIS, thanks largely to an emerging market borrowing spree. The speed and nature of the China carry trade unwind will now depend largely on the pace of the dollar’s appreciation. It’s doubtful that Chinese authorities want to see a disorderly unwind of any sort. Still, the flipside is that China still has some pretty impressive foreign exchange reserves, which could soften the blow from an unwind of the carry trade. The devaluation may also have the added benefit of taking some of the froth out of a Chinese market that has arguably been overheated by foreign borrowing.

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Duh..

• Goldman Says China Yuan Move Is Attempt to Get Ahead of the Fed (Bloomberg)

China’s shock devaluation of its currency is designed to cushion it from rising along with the dollar after a projected interest-rate increase from the Federal Reserve, according to Goldman Sachs. “This is about Fed liftoff most obviously and further dollar strength,” Goldman Sachs chief currency strategist Robin Brooks wrote in a note to clients. “It certainly makes sense for China’s policy makers to buy some flexibility ahead of Fed liftoff, in particular since the fix had become very peg-like in its stability in recent months.” Goldman Sachs projects the dollar strengthening 20% on a trade-weighted basis by the end of 2017. The yuan fell the most Tuesday since China ended a dual-currency system in January 1994 after the central bank cut its daily reference rate by 1.9%.

China has stepped up efforts to boost old growth drivers as new ones fail to offset slowing investment and trade. Developing markets are feeling the strain as domestic growth slows while the U.S. nears its first interest-rate increase in almost a decade. Until Tuesday, China had kept the yuan steady against the dollar, effectively pushing it higher against other emerging-market currencies and hurting its exporters. While the change is reminiscent of Swiss abandonment of the franc’s ceiling versus the euro in January, which anticipated quantitative easing from the ECB, China isn’t looking to push the currency significantly lower, according to Brooks. The change is a one-time correction, a spokesman for the People’s Bank of China said Tuesday. “Our bias is that the move overnight was more about buying flexibility as opposed to the beginning of a large devaluation trend,” New York-based Brooks wrote.

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“..total credit outstanding (household, corporate, government and financial) has expanded by over $50 trillion in the past 30 years, while GDP has expanded by only $13 trillion.”

• The Fed Is In A Bind (Haselmann)

The intention of Fed policy over the past 30 years has been to self-correct business cycles into a ‘steadier state’ by easing interest rates into weakness and hiking them into strength. Unfortunately, there is political-asymmetry between easing and hiking which has resulted in the stair-stepping of official interest rates down to the zero lower bound. Interest rates that are held lower than the ‘natural or normal rate’ (discussed in a moment) may have short-term benefits, yet there are longer-term costs that aggregate and eventually need to be addressed. These costs are then typically dealt with by lowering interest rates even farther away from the normal or natural rate. Eventually the Fed ends up worsening the very business cycles they intended to smooth out.

The fact that rates today have reached zero means that the day of reckoning is quickly approaching, because monetary policy has reached the practical limits of what it can do. Thus, the multi-decade credit era is coming to an end. Credit-based consumption is unsustainable. US corporate issuance has broken a new record in four successive years. According to David Stockman, the amount of total credit outstanding (household, corporate, government and financial) has expanded by over $50 trillion in the past 30 years, while GDP has expanded by only $13 trillion. In addition, while the whole world has gotten significantly more indebted, it also has terrible demographics to contend with. The S&P over this same 30-year period has returned just over 6% adjusted for inflation, while real GDP has been just above 2%.

The market has risen 3 times faster than national output in real terms. A sizable equity market correction could happen merely because the bubble-blowing machine is losing its wind. Certainly, the magnitude of the monetary and debt-based fuel that has powered equities in the past will not be available going forward. An economy runs most efficiently in the long-run when the price of money, i.e., the official interest rate, does not veer too far from the level where savings and investment can find a clearing price (i.e., the natural rate of interest). This is called the Wicksellian Differential, i.e., the difference between the money rate and natural rate of interest. It postulates that when the natural rate is higher than the money rate, the disequilibrium will drive credit expansion.

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Debts have shifted but not disappeared.

• An Economic Earthquake Is Rumbling (Livingston)

While the people sleep, an economic earthquake rumbles underneath. The day that they begin to feel the quake draws near. History will record that in this decade more people will lose more money (forget about the trillions of dollars already lost) than at any time in our history, including during the Great Depression. At the same time, a very small group has made and will make huge sums of money. During the Y2K scare (a real hoax) many people stored food. Then, after Y2K, many people wanted to dump their cache; and some did. We advised readers at the time to store food simply because of the crisis world we live in, but to store those foods that you could rotate and consume. Stored food is a hedge against inflation. It’s a hedge against natural disaster. It’s a hedge against economic collapse.

It was our advice before, and it has been our advice since. This advice is still valid. People who don’t have some stored food don’t realize how dependent they are on the system and government. Of course, the system was designed and created to make the people dependent on government. That makes them easier to control. Many people have been in hard times since 2008, thanks to bursting housing and derivatives bubbles — both fueled by the Federal Reserve’s money printing and both predicted by meand by many other writers. For those of us who are not well-connected (those of us who are not in the 1%), there has been no relief. While the banksters got bailouts and Wall Street and the banksters benefited from the money printers, the middle class was impoverished. Savings were wiped out.

More working-age people than ever before are not working. More young workers than ever before are still living with their parents because they are either out of work or working at low-paying jobs. More people than ever before are on the government dole. Welfare pays more than most jobs. Retirement funds have been cashed out and spent on living expenses. [..] The default rate of companies with the lowest credit rating is at its highest level since 2013. The auto loan debt bubble is at $900 billion, fueled by easy credit and long-term loans (more than 60 months on even used cars) that put the car buyer upside down as he drives off the lot and keeps him there. U.S. mortgage holders are carrying the most non-mortgage debt they’ve had in more than 10 years; 81% of that is automobile debt. Student loan debt held by mortgage holders is the highest it’s ever been, with the average balance owed at nearly $35,000. Almost 5.7 million homeowners remain underwater on their mortgages.

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Externalities. Our economic systems’ highly destructive 800 pound gorilla.

• The Social Cost of Capitalism (Paul Craig Roberts)

Few, if any, corporations absorb the full cost of their operations. Corporations shove many of their costs onto the environment, the public sector, and distant third parties. For example, currently 3 million gallons of toxic waste water from a Colorado mine has escaped and is working its way down two rivers into Utah and Lake Powell. At least seven city water systems dependent on the rivers have been shut down. The waste was left by private enterprise, and the waste was accidentally released by the Environmental Protection Agency, which might be true or might be a coverup for the mine. If the Lake Powell reservoir ends up polluted, it is likely that the cost of the mine imposed on third parties exceeds the total value of the mine’s output over its entire life.

Economists call these costs “external costs” or “social costs.” The mine made its profits by creating pollutants, the cost of which is born by those who had no share in the profits. As this is the way regulated capitalism works, you can imagine how bad unregulated capitalism would be. Just think about the unregulated financial system, the consequences we are still suffering with more to come. Despite massive evidence to the contrary, libertarians hold tight to their romantic concept of capitalism, which, freed from government interference, serves the consumer with the best products at the lowest prices. If only. Progressives have their own counterpart to the libertarians’ romanticism. Progressives regard government as the white knight that protects the public from the greed of capitalists. If only.

[..] The two largest reservoirs, Lake Mead and Lake Powell, are at 39% and 52% of capacity. The massive lakes on which the Western United States is dependent are drying up. And now Lake Powell is faced with receiving 3 million gallons of waste water containing arsenic, lead, copper, aluminum and cadmium. Wells in the flood plains of the polluted rivers are also endangered. The pollutants, which turned the rivers orange, flowed down the Animas River from Silverton, Colorado through Durango into the San Juan River in Farmington, New Mexico, a river that flows into the Colorado River that feeds Lake Powell and Lake Mead. All of this damage from one capitalist mine.

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Makes a lot of sense.

• Yanis Varoufakis Backs Wikileaks Bounty To Crack TTIP (Telegraph)

Yanis Varoufakis, the former Greek finance minister, has donated to a $110,000 bounty to reward whoever leaks the text of a major EU-US trade deal. Mr Varoufakis was named yesterday as one of a number of public figures said to have donated to a fund set up by Wikileaks, the secret-sharing website, to encourage the leaks of documents surrounding Transatlantic Trade and Investment Partnership (TTIP). Others said to have donated to the fund include Vivienne Westwood, the fashion designer; Daniel Ellsberg, the Pentagon papers leaker; Slavoj Zizek, the philosopher; and Evgeny Morozov, the journalist. Julian Assange, the Wikileaks founder, was also named as a donor. So far some $24,000 dollars has been raised of the target.

Wikileaks wants the text of the proposed deal to be leaked. It is not clear whether such a single text exists. The deal will break down tariff and regulatory barriers between the EU and US, adding around £94 billion to the European economy and cutting the price of goods such as jeans and cars. David Cameron is a major advocate, seeing it as essential to save the EU s economies from decline, and has pledged to put rocket boosters under the deal. It has met stiff opposition from the left and radical right in Britain and the continent, who argue it will allow corporations to sue the Government for market access and force greater private provision in the NHS.

Some French farmers claim it will allow the spread of US “Frankenfoods”, such as chlorine-washed chicken, genetically modified crops and hormone-treated beef. Advocates say most controversial element the ability of companies to challenge governments in the courts is commonplace in global trade deals. Mr Assange said: “The secrecy of the TTIP casts a shadow on the future of European democracy. Under this cover, special interests are running wild, much as we saw with the recent financial siege against the people of Greece. The TTIP affects the life of every European and draws Europe into long term conflict with Asia. The time for its secrecy to end is now. Mr Varoufakis, an economist, had a toxic relationship with EU officials and European leaders, and he left office before a bailout deal could be signed. I shall wear the creditors loathing with pride, he said on resigning in July.

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Word of the week: Euroin.

• Euromaniacs: An Addiction To Euroin (Diego Fusaro)

Italy, and not only Italy but indeed all of the Eurozone countries should get out of the Euro as soon as possible because the Euro has proven to be a real financial coup d’état that has enabled the imposition of a neoliberal regime and the removal of all forms of social rights and the removal of any form of guaranteed healthcare and public ownership, all in favour of privatisation. The Euro has been the Trojan Horse with which neoliberalism has imposed its wishes and it’s a bit like a charging rhinoceros that is impossible to stop, to appease or for that matter to control in any way. You simply have to move out of its way before it tramples you! We simply have to get out of the Euro as soon as possible!

Generally speaking, and I use Gramsci’s words here, the Euro is a sort of Passive Revolution, in other words a revolution by which the dominant capitalist power after 1989 strengthened itself, strengthening its own structure and ridding itself of the ties and restrictions of the State and the public, of the Sovereign National Government, in order to impose the power of the unfettered economy, in other words the power of the banks and the Financial world no longer disciplined by the State and by what Hegel’s Philosophy would refer to as Ethical forces, i.e. those powers that are capable of disciplining the Economy and to place it at the service of the community. The Euromaniacs, and I am using this term that I have borrowed from my journalist friend Alessandro Montanari, are those people that are totally unable to overcome their absolute addiction to the Euro.

Just like drug addicts, these guys keeping on wanting more Euro and more Europe, even though the Euro continues to cause social and political catastrophes, including the end of public ownership, the end of social security and the downward spiral towards poverty here in Italy. They resort to using oracle-like, almost theological terminology such as: “What we need is more Europe! It’s paradoxical. No less paradoxical in fact than if someone were faced with the tragedy of a drug addict and said: “What we need are more drugs!Nowadays, anyone looking at the twin tragedies of Europe and the Euro and obsessively and compulsively repeats: “What we need is more Euro, more Europe!”is no more and no less than an addiction to Euroin.

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A huge powderkeg.

• PKK Leader: Turkey Is Protecting Islamic State By Attacking Kurds (BBC)

The man leading the Kurdistan Workers’ Party (PKK) has accused Turkey of trying to protect the Islamic State group by attacking Kurdish fighters. Cemil Bayik told the BBC he believed President Recep Tayyip Erdogan wanted IS to succeed to prevent Kurdish gains. Kurdish fighters – among them the PKK – have secured significant victories against IS militants in Syria and Iraq. But Turkey, like a number of Western countries, considers the PKK a terrorist organisation. A ceasefire in the long-running conflict with the group appeared to disintegrate in July, when Turkey began bombing PKK camps in northern Iraq, at the same time as launching air strikes on IS militants. Observers say PKK fighters have been on the receiving end of far more attacks than IS.

But Turkish officials deny that the campaign against IS group is a cover to prevent Kurdish gains. On Wednesday, Turkey said it was planning a “comprehensive battle” against IS. “The Turkish claim they are fighting Islamic State… but in fact they are fighting the PKK,” Cemil Bayik told BBC’s Jiyar Gol. “They are doing it to limit the PKK’s fight against IS. Turkey is protecting IS. “[President] Erdogan is behind IS massacres. His aim is to stop the Kurdish advance against them, thus advancing his aim of Turkishness in Turkey.”

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A 12-fold increase. And even now, where is the EU? This is sufficient reason NOT to remain a member: moral degenerancy.

• 50,000: More Migrants Reached Greece In July Than During All Of 2014 (Quartz)

It is a “crisis within a crisis.” That’s how prime minister Alexis Tsipras describes the massive influx of migrants to Greece, straining the resources of a country that is already strapped for cash. Nearly 50,000 migrants came to Greece in July—more than the whole of 2014. So far this year, more than 130,000 illegal border crossings have been made in Greece, according to Frontex, the EU’s border agency. The vast majority of migrants come from Syria and Afghanistan, seeking asylum in the EU after a treacherous journey in overcrowded, makeshift boats across the eastern Mediterranean—now the busiest route for people seeking a better life in Europe.

Even Greece’s shattered economy is better than what Afghans, Syrians, and others leave behind. But most migrants hope to travel further into Europe in search of jobs, stability, and states more receptive to asylum claims. But if they’re caught or rescued in Greece, in most cases they must be processed there. The UN recently described conditions for migrants in popular Greek landing spots as “total chaos,” with a severe lack of food, sanitation, and shelter. But an EU plan to distribute migrants more evenly across the bloc has stalled, with many countries rejecting proposed quotas. This weekend alone, the Greek coast guard pulled another 1,400 people out of the sea, according to reports. Tsipras recently called for urgent assistance from the rest of the EU: “This problem surpasses us,” he said.

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Better instruct them well.

• Greece Sends Police Reinforcements To Kos In Migrant Crisis (Kathimerini)

The Greek Police (ELAS) has sent additional officers to the eastern Aegean island of Kos to help deal with a burgeoning migrant crisis there which escalated into violent clashes Tuesday. ELAS chief Dimitris Tsaknakis has dispatched 12 officers from the force’s immigration unit to the island, including one Arab-speaking employee, to help accelerate the process of identifying some 7,000 immigrants there, most believed to be Syrian. Local authorities allocated a municipal gymnasium and an old soccer field for officers to interview the immigrants and issue them with documents allowing them to remain in the country for six months. The officers arrived on the island on Monday and had interviewed around 750 migrants by late last night, a police source told Kathimerini.

The process of identifying the arrivals was brusquely interrupted Tuesday when a fracas broke out between migrants and police officers as the former were being transferred to the old soccer stadium. Police used truncheons and even fire extinguishers to keep back the immigrants in an apparent bid to avert a stampede amid a crush to enter the stadium. Responding to the rising tensions, ELAS ordered two riot police units to be flown to the island on a C-130 military transport aircraft. Tsaknakis also ordered the transfer of some 250 additional officers to be stationed on Kos and other islands in the eastern Aegean such as Lesvos and Samos which have been besieged by large numbers of immigrants. Kos Mayor Giorgos Kyritsis said local authorities were overwhelmed and warned of “bloodshed if the situation degenerates.”

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UN equals special interests.

• United Nations Failing To Represent Vulnerable People, Warn NGOs (Guardian)

Vulnerable people are prevented from gaining representation at the United Nations by a committee dominated by countries with repressive regimes, according to concerned NGOs. Organisations have told the Guardian how they face lengthy hold-ups, bizarre questioning and intimidation as they negotiate with the UN committee on non-governmental organisations, the group which decides which organisations get official UN status, and is currently made up of countries including Cuba, China, Russia, Pakistan and Qatar. Last month, Freedom Now, which works with prisoners of conscience around the world, finally won a six year battle to get official status, in the face of fierce opposition from China.

It took an intervention from US ambassador Samantha Power, who said she was determined “to put an end to the inexcusable attempt to deny Freedom Now’s official NGO status”. But this case is far from unique, with NGO workers from around the world warning that vulnerable people are being denied representation at the UN by the dysfunctional nature of the NGO committee and its parent body the Economic and Social Council (Ecosoc), which produces policy and makes recommendations on economic, social and environmental issues at the UN. In order to work at the UN, make speeches and gain access to important officials, organisations need to submit applications for special consultative status to the NGO committee.

The UN offers no guidance or time limit on how long it takes for applications to be processed by the committee. The 19 members of the committee are elected by other states every four years. The committee must always contain a set number of countries from each region; with four from Asian states and five from African states, for example. Jessica Stern, from the International Gay and Lesbian Human Rights Commission which took three years to get special consultative status, told the Guardian that it is “almost impossible” for NGOs to operate in the UN as without this official status. She added that negotiating with the committee can be both costly and time-consuming, meaning that many organisations simply give up.

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Debt Rattle August 11 2015

Aug 112015
 
 August 11, 2015  Posted by at 9:23 am Finance Tagged with: , , , , , , , , ,  1 Response »


Howard Hollem Assembly and Repairs Department Naval Air Base, Corpus Christi 1942

• China Slashes Yuan Reference Rate by Record 1.9% (Bloomberg)
• How To Anger Asia And The Fed In One Go: Devalue The Yuan (CNBC)
• Emerging Stocks Head for Two-Year Low After China Devalues Yuan (Bloomberg)
• China Joins The Global Devaluation Party (Coppola)
• Chinese Spurn Unprecedented 30% Car Discounts Amid Slowdown (Bloomberg)
• U.S. Consumers Rein in Spending Growth Plans, New York Fed Says (Bloomberg)
• Greece And Lenders Reach Deal On Third Bailout (Kathimerini)
• Germans And Slovaks Stand Ready To Scupper Greek Deal (Telegraph)
• Germany Gained €100 Billion From Greece Crisis, Study Finds (AFP)
• Greek Military: Armed and Financially Dangerous (Zeit)
• Deflation Stalks the Euro Zone (Bloomberg)
• Bank of Russia Gets Putin’s Praise as Ruble Rebounds With Crude (Bloomberg)
• Impeaching Rousseff Would Set Brazil On Fire: Senate Chief (Reuters)
• UK Farming Unions Call For ‘Seismic Change’ In Way Food Is Sold (Guardian)
• New Zealand A ‘Virtual Economic Trade Prisoner Of China’ (Nz Herald)
• EU To Provide $3.6 Billion Funding For Migrant Crisis Over 6 Years (Reuters)
• French Police Say Time To ‘Bring In British Army’ To Calais (RT)
• History In Motion (Pantelis Boukalas)
• Japan Restarts Sendai Nuclear Reactor Despite Public Opposition (Fairfax)
• A Good Week For Neutrinos (Butterworth)

I haven’t seen anyone in the US whine about currency manipulators yet. Da Donald?

• China Slashes Yuan Reference Rate by Record 1.9% (Bloomberg)

China devalued the yuan by the most in two decades, ending a de facto peg to the dollar that’s been in place since March and battered exports. The People’s Bank of China cut its daily reference rate for the currency by a record 1.9%, triggering the yuan’s biggest one-day loss since China unified official and market exchange rates in January 1994. The change was a one-time adjustment, the central bank said in a statement, adding that it plans to keep the yuan stable at a “reasonable” level and will strengthen the market’s role in determining the fixing. “It looks like this is the end of the fixing as we know it,” said Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group. “The one-off devaluation of the fix and allowing more market-based determination takes us into a new currency regime.”

The PBOC had been supporting the yuan to deter capital outflows and encourage greater global usage as China pushes for official reserve status at the IMF. The intervention contributed to a $300 billion slide in the nation’s foreign-exchange reserves over the last four quarters and made the yuan the best performer in emerging markets, eroding the competitiveness of Chinese exports. [..] The currency’s closing levels in Shanghai were restricted to 6.2096 or 6.2097 versus the dollar for more than a week through Monday and daily moves has been a maximum 0.01% for a month. The devaluation triggered declines of at least 0.9% in the Australian dollar, South Korea’s won and the Singapore dollar, while Hong Kong’s Hang Seng Index of shares rose 0.7%.

China has to balance the need to boost exports with the risk of a cash exodus, Tom Orlik, chief Asia economist at Bloomberg Intelligence, wrote in a research note. He estimates a 1% depreciation in the real effective exchange rate boosts export growth by 1 percentage point with a lag of three months. At the same time, a 1% drop against the dollar triggers about $40 billion in capital outflows, he wrote. “The risk is that depreciation triggers capital flight, dealing a blow to the stability of China’s financial system,” Orlik wrote. The calculation from China’s leaders is that with their $3.69 trillion of currency reserves “they can manage any risks from capital flight,” he said.

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The Fed must have been expecting this.

• How To Anger Asia And The Fed In One Go: Devalue The Yuan (CNBC)

A new Asian currency war and a delayed Federal Reserve rate hike; these are the potential market-shaking implications of Beijing’s decision to devalue the yuan, strategists told CNBC. “If they are true to their word today and this is a new regime for the fixed mechanism, we might think about using the word ‘floating’ associated with the Chinese exchange rate—that’s a massive change,” noted Richard Yetsenga, head of global markets research at ANZ, referring to Tuesday’s announcement by the People’s Bank of China to allow the yuan to depreciate as much as 2% against the U.S. dollar.

The move took global traders by surprise, with many pointing to weak July trade data, the recent stock market rout’s spillover impact on consumption, and aspirations for inclusion into the IMF’s Special Drawing Rights basket as factors motivating Beijing. “It’s an interesting move which means several things: when the People’s Bank of China first started lowering interest rates and reserve requirements, that freed up bank lending, which likely went to stocks. Now this yuan re-engineering will help companies that represent the greater economy, i.e. exporters, not just companies heavily weighted in stock markets,” explained Nicholas Teo, market analyst at CMC Markets.

China may be focused on becoming more market-oriented, but Tuesday’s announcement is the latest in a series of competitive devaluations in Asia and other emerging markets, traders said. “Clearly, this is a shock to the rest of Asia. If you look at China’s top trading partners—Korea, Japan, the U.S. and Germany—this is a competitive hit to the exports of those countries. China is exporting disinflation to countries who receive Chinese exports. This is especially negative for Asia currencies,” noted Callum Henderson, global head of FX Research at Standard Chartered.

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There never was another option.

• Emerging Stocks Head for Two-Year Low After China Devalues Yuan (Bloomberg)

Emerging-market stocks headed for a two-year low and currencies sank after China devalued the yuan amid a deepening slowdown in its economy. China Southern Airlines and Air China sank at least 12% in Hong Kong on concern a weaker yuan will boost the value of their dollar-denominated debt. Indonesian stocks fell to a 17-month low. China’s currency slid the most in two decades versus the dollar. South Korea’s won fell 1.3% and Malaysia’s ringgit extended declines to a 1998 low. Russia’s ruble lost 0.6%. The MSCI Emerging Markets Index slid 0.4% to 884.02 at 3:28 p.m. in Hong Kong. China’s central bank cut its reference rate by 1.9%, triggering the yuan’s biggest one-day loss since the nation unified official and market exchange rates in 1994.

Data on Tuesday showed China’s broadest measure of new credit missed economists’ forecasts last month. “This is another effort by China to boost economic growth as a weaker currency could increase exports,” said Rafael Palma Gil, a trader at Rizal Commercial Banking Corp., which has $1.8 billion in trust assets. Investors should favor companies that earn dollars over those with large dollar-denominated debts, he said. MSCI’s developing-nation stock index has fallen 7.3% this year and trades at 11.2 times projected 12-month earnings, data compiled by Bloomberg show. The MSCI World Index has added 3.3% and is valued at a multiple of 16.4.

Eight out of 10 industry groups fell, led by industrial shares. China Southern Airlines tumbled 17% and Air China was poised for the biggest drop since April 2009. Hong Kong’s Hang Seng China Enterprises Index fell 0.6%, erasing earlier gains. The Shanghai Composite Index was little changed. Indonesia’s Jakarta Composite Index tumbled 2% on concern the yuan devaluation may weaken exports from Southeast Asia’s largest economy. Shipments to China, Indonesia’s third-largest trading partner, had already dropped 26% in the first half of 2015, according to government data.

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Beggar thy neighbor to the bottom of the barrel.

• China Joins The Global Devaluation Party (Coppola)

As Chinese economic performance has worsened in recent months there has been a growing divergence between RMB “central parity” (the unofficial official exchange rate) and the RMB’s market rate. This increased sharply when the most recent statistics were released. Maintaining a higher parity than the market wants is costly, as Russia could tell you: China has been unloading its foreign reserves at a rate of knots to support its currency. Maintaining too high a parity is costly in other ways too. China’s precious export-led growth strategy is at risk from the rising dollar. The “macroeconomic and financial data” referred to by the PBOC includes sharply falling exports, particularly to the EU and Japan. July’s export figures were dismal, and the trade surplus was well below forecast.

Add to this the massive over-leverage of the Chinese economy – overtly engineered by the government – and recent stock market volatility, and devaluation was inevitable. The only surprise is that the PBOC has not acted sooner. Indeed, why hasn’t it acted sooner? After all, the Fed has been passively tightening monetary policy for a year now, ending QE and repeatedly signalling that rate hikes are on the horizon. This is principally why the yuan REER has been rising. Furthermore, both the ECB and the Bank of Japan are doing QE, depressing the Euro and the yen and forcing smaller countries to defend their currencies. Emerging market economies are particularly badly affected, but we shouldn’t forget about Switzerland, which is still trying to prevent its currency appreciating as capital flows in from the troubled Eurozone. Capital inflows can be every bit as damaging as capital outflows. Reuters has an explanation for the PBOC’s reluctance to join the devaluation party:

Analysts say Beijing has been keeping its yuan strong to wean its economy off low-end export manufacturing. A strong yuan policy also supports domestic buying power, helps Chinese firms to borrow and invest abroad, and encourages foreign firms and governments to increase their use of the currency.

This brings us back to the liberalization of the Chinese financial economy. China needs the yuan to be widely accepted OUTSIDE China if it is to have any chance of becoming one of the IMF’s SDR basket currencies – the essential prelude to becoming a global reserve currency. Hence PBOC’s reluctance to devalue. So now, having been forced to devalue because of bad economic news, the PBOC is making a virtue out of necessity. Devaluing the yuan is presented as part of its liberalization strategy. Not that the PBOC has any intention of moving to a free float any time soon, though its statement does signal that it might widen the band.

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Might as well give them away. Next year’s models are on the way.

• Chinese Spurn Unprecedented 30% Car Discounts Amid Slowdown (Bloomberg)

Bill Shen wants to upgrade his 8-year-old Citroen to something fancier, maybe an Audi or a BMW. But the Shanghai resident is in no hurry. Cars keep getting cheaper. Facing the slowest growth in new car sales in four years, dealerships in China have chipped away at retail prices in the past several months. Now discounts of at least 30% are being offered in major cities on hundreds of models. Audi’s top-of-the-range A8L luxury sedan, originally listed for 1.97 million yuan ($317,000), is now going for 1.28 million yuan, according to Autohome, a popular car-pricing portal. “Prices are getting lower all the time, even as cars are getting better,” said Shen, 37, who works for an auto parts company. “If it’s not urgent, one can wait.”

Consumers like Shen represent the biggest threat to China’s new-vehicle market, which overtook the U.S. in 2009 to become the world’s biggest. With the Chinese economy flagging, and government curbs on car registrations and stock market volatility deterring would-be car buyers, the auto industry is pulling out unprecedented offers to drum up sales. Their success may be reflected in industry sales figures for July slated for release on Tuesday by both the Passenger Car Association and China Association of Automobile Manufacturers. “This round of price cuts is the worst in China’s auto industry history in terms of the number of models involved and the depth of the cuts,” said Su Hui, a deputy division head at the state-backed China Automobile Dealers Association and a 26-year veteran of the trade.

“Nobody saw it coming, not the government, not the automakers, not the dealers.” Besides discounting prices, carmakers and dealers are offering incentives such as subsidized insurance, zero down-payments, interest-free financing and boosting trade-in prices, according to brokerage Sanford C. Bernstein. Peugeot Citroen and Mazda. have warned of a looming price war that will damage profit margins. BMW said this month that slowing sales in China may force it to revise this year’s profitability goals.

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They’re broke just like the Chinese?!

• U.S. Consumers Rein in Spending Growth Plans, New York Fed Says (Bloomberg)

U.S. consumers last month envisioned the slowest rate of growth in their planned spending in at least two years, according to a survey by the Federal Reserve Bank of New York released on Monday. The New York Fed’s July Survey of Consumer Expectations found that households expect to increase spending by 3.5% over the next year, down from the 4.3% gain seen in June, according to the median response. It was the lowest reading since the survey started in 2013. Median expected inflation over the next year was unchanged at 3%. The monthly New York Fed survey comes ahead of the release of a Commerce Department report on Thursday that is forecast to show U.S. retail sales rose 0.6% in July after falling 0.3% in June.

The Fed is looking for signs that the labor market and inflation have returned to normal before beginning to raise its benchmark federal funds rate. Most economists expect policy makers will act at their next meeting on Sept. 16-17. The Fed has kept rates near zero since 2008 to combat the worst economic crisis since the Great Depression. Spending data are important because the consumer underpins the Fed’s optimism that economic growth will accelerate. “That’s really fundamental to our improved outlook,” Chicago Fed President Charles Evans said during a breakfast with reporters last month. “We are really counting on the consumer playing a strong role.”

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Tentatively for now.

• Greece And Lenders Reach Deal On Third Bailout (Kathimerini)

Greece and its lenders have reached an agreement on the terms of a third bailout, government sources said early on Monday. The deal appears to have been concluded shortly after 8 a.m. local time following a marathon last session of talks that began on Monday morning. Emerging from the Hilton hotel, where the negotiations were taking place, Finance Minister Euclid Tsakalotos suggested a deal is in place. “We are very close,” he told reporters. “There are a couple of very small details remaining on prior actions.”

Kathimerini understands that the agreement involves the government having to immediately implement 35 prior actions. The measures demanded include changes to tonnage tax for shipping firms, reducing the prices of generic drugs, a review of the social welfare system, strengthening of the Financial Crimes Squad (SDOE), phasing out of early retirement, scrapping tax breaks for islands by the end of 2016, implementation of the product market reforms proposed by the OECD, deregulating the energy market and proceeding with the privatization program already in place.

Should the agreement be finalized, it is likely to be voted on in Greek Parliament on Thursday. This would be followed on Friday by a Eurogroup and the process of other eurozone parliaments approving the deal. The European Stability Mechanism would then be in a position to disburse new loans to Athens before August 20, when Greece has to pay €3.2 billion to the ECB. Greece is aiming to receive €25 billion in the first tranche, allowing it to pay off international lenders, reduce government arrears and have €10 billion left for bank recapitalization.

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Good. We wouldn’t want anything to run smoothly, would we? Where’s the fun in that?

• Germans And Slovaks Stand Ready To Scupper Greek Deal (Telegraph)

Eurozone creditor governments raised fresh concerns about the viability of a new Greek rescue package on Monday despite hopes from Athens that an agreement to unlock vital rescue funds was inching ever closer. Greeca and its creditor partners reportedly agreed on fiscal targets the country will need to hit over the next two years, on Monday evening. They would amount to a baseline of 0pc in 2015, followed by a primary surplus of 0.5pc the following year, and 1pc in 2017, according to an official quoted by Reuters. The targets would represent significant easing of the initial austerity measures demanded from Athens Leftist government, and reflect the severity of the damage that has been wrought to the economy by capital controls.

Creditors projections assume Greece will contract by another 0.5 pc in 2016, before returning to a 2.3% growth in 2017, the official added. However, in a sign of continued dissent among the ranks of Europe’s creditor nations, both Germany and Slovakia stood firm on the tough conditions Athens must accept as its price to stay in the eurozone. Sloviakian prime minister Robert Fico, who represents one of the most hardened member states against further eurozone largesse to Greece, insisted his government would not stump up a “single cent” in debt write-offs on Greece’s €330bn debt mountain. Without debt relief, the IMF has said it will pull out of talks with Athens until there is an “explicit and concrete agreement”, jeopardising the entire basis of a new three-year rescue package.

But Mr Fico said Slovakia would reject any attempt to cut the value of Greece’s debt and was “nervous” about the current status of talks between the Syriza government and its creditors. “Slovakia will not adopt a single cent on Greek sovereign debt, as long as I am prime minister”, he told Austria’s Der Standard. “There are other options: You can drag redemption dates but this also has limits: We can not wait 100 years until Greece repays its debts.” The IMF has recommended a maturity extension of another 30 years on Greece’s debt mountain; the country will already be paying back its creditors in 2057. Mr Fico added that he “wholeheartedly” supported German finance minister Wolfgang Schaeuble’s proposal for a “temporary” eurozone exit for Greece during eleventh hour summit talks in July.

“There are no rules in the EU over a euro exit…But that does not mean however, that you can not create the rules. The proposal with a fixed-term euro exit has advantages. I support the agreement reached for Greece, but we will be watching very closely what is happening now. We are nervous.”

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Meanwhile, in the real world..

• Germany Gained €100 Billion From Greece Crisis, Study Finds (AFP)

Germany, which has taken a tough line on Greece, has profited from the country’s crisis to the tune of €100 billion, according to a new study Monday. The sum represents money Germany saved through lower interest payments on funds the government borrowed amid investor “flights to safety”, the study said. “These savings exceed the costs of the crisis – even if Greece were to default on its entire debt,” said the private, non-profit Leibniz Institute of Economic Research in its paper. “Germany has clearly benefited from the Greek crisis.” When investors are faced with turmoil, they typically seek a safe haven for their money, and export champion Germany “disproportionately benefited” from that during the debt crisis, it said.

“Every time financial markets faced negative news on Greece in recent years, interest rates on German government bonds fell, and every time there was good news, they rose.” Germany, the eurozones effective paymaster, has demanded fiscal discipline and tough economic reforms in Greece in return for consenting to new aid from international creditors. Finance Minister Wolfgang Schaeuble has opposed a Greek debt write-down while pointing to his own government’s balanced budget. The institute, however, argued that the balanced budget was possible in large part only because of Germany’s interest savings amid the Greek debt crisis.

The estimated €100 billion euros Germany had saved since 2010 accounted for over 3% of GDP, said the institute based in the eastern city of Halle. The bonds of other countries – including the United States, France and the Netherlands – had also benefited, but “to a much smaller extent”. Germany’s share of the international rescue packages for Greece, including a new loan being negotiated now, came to around €90 billion, said the institute. “Even if Greece doesn’t pay back a single cent, the German public purse has benefited financially from the crisis,” said the paper.

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And on top of the €100 billion German profit from Greece, there are the secret side deals with German arms industry. That the Troika will refuse for Syriza to cut.

• Greek Military: Armed and Financially Dangerous (Zeit)

The Bonn International Center for Conversion has listed Greece among the most militarized countries since 1990. It was ranked ninth in 2014, ahead of all other NATO members – despite Greece’s financial crisis. “Athens’ high arms expenditures and extensive weapons purchases over the past years have contributed to the desolate budget situation,” according to BICC. The figures show that Greece invested nearly €6 billion in its military in 2000. Eight years later, the figure was €8.6 billion. In 2009, Europe’s NATO member countries spent an average of 1.7% of their GDPs on defense – Greece was at 3.1%. The country was among the world’s five biggest arms importers between 2005 and 2009, according to the Stockholm International Peace Research Institute.

Athens’ high arms expenditures and extensive weapons purchases over the past years have contributed to the desolate budget situation. In May 2010, Greece had to be saved from financial ruin, and eventually received a loan package of hundreds of billions of euros. The government used some of this money to buy more weapons. Now, even more cash is on the table. The Greek government, led by Alexis Tsipras, has accepted a number of conditions connected to the deal. Greece must save money. The value-added tax has been increased, pension payments are to decrease, state-owned companies are to be privatized, and corruption weeded out. But only marginal consideration has been given to the country’s huge military expenditures. The army remains sacrosanct.

Politicians and others in Germany have often harshly criticized Mr. Tsipras. But the critics seem to forget that debt-ridden Greece until recently was ordering armaments worth billions of euros from Germany. Between 2001 and 2010, Greece was the most important customer for the German defense industry. During this period, Greece bought 15% of all of Germany’s exports, SIPRI estimates. Greece’s armed forces have nearly 1,000 German-developed model Leopard 1 and 2 combat tanks. Including models from other countries, Greece has 1,622 tanks. The German military has 240 Leopard tanks in service. (That number is to increase by around 90 because of the crisis in Ukraine.) While the German armed forces have been shrinking and phasing out military equipment for years, Greece has gone the other way. No other E.U. country has more combat tanks today.

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A very flawed article that presents predictions by Bloomberg Survey economists as fact.

• Deflation Stalks the Euro Zone (Bloomberg)

The euro zone is poised to record its ninth quarter of economic growth, with economists predicting that gross domestic product figures scheduled for release Friday will show the economy expanded by 0.4% in the second three months of the year. Unfortunately for the ECB, that revival isn’t dispelling the risk that disinflation will worsen into deflation. For reasons that future historians of economic policy may struggle to unravel, modern central bankers have decided that the Goldilocks rate of acceleration for consumer prices to run not too hot, not too cold, is 2%. And while forecasts compiled by Bloomberg suggest that economists expect the U.S. to achieve that state of inflationary nirvana in the first three months of next year, prices in the euro region are seen languishing at 1.5% in the first quarter of 2016 and then decelerating.

That outlook helps to explain why almost a quarter of the market for euro-zone government bonds has negative yields, meaning investors are paying for the privilege of keeping their money in $1.5 trillion of securities, according to data compiled by Bloomberg reporters Lukanyo Mnyanda and David Goodman. It has been almost a year, for example, since German two-year notes paid more than zero. The disparity in the inflation outlooks for the euro region and the U.S. is also driving a divergence in borrowing costs. As Bloomberg strategist Simon Ballard points out, investment-grade borrowers are paying more to borrow dollars than euros, and the gap has reached its widest level since at least December 2009.

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I said it before: Elvira Nabiullina is a smart cookie. Moreover, Russian debt levels are very low compared to western nations. The demise of Putin is greatly exaggerated in the western press.

• Bank of Russia Gets Putin’s Praise as Ruble Rebounds With Crude (Bloomberg)

Russian President Vladimir Putin commended the central bank for its efforts to keep the ruble stable after policy makers called for calm as the currency bounced back from a six-month low. “The central bank is doing a lot to strengthen the national currency or in any case to ensure its stability and the stability of the financial system as a whole,” Putin said at a meeting with Governor Elvira Nabiullina. “I see how persistent you are in going down that path.” The Bank of Russia said on Monday that corporate debt payments in 2015 won’t overwhelm the foreign-exchange market with “excessive demand” after redemptions last year helped spark the worst currency crisis since 1998.

Companies and lenders have to repay as much as $35 billion out of the $61 billion that falls due from September to December, the central bank said on its website. The rest may be rolled over or refinanced because some of it is owed to affiliated companies, it said. [..] Policy makers are short on instruments as they try to avert another ruble collapse after a rushed switch to a freely floating currency in November. While the central bank has faced questions about its commitment to allow the market to set the ruble’s exchange rate, the Russian leadership has been more unabashed in acknowledging a measure of control over the currency market as the economy succumbs to a recession. Putin said in June that a weaker ruble was helping Russian companies weather the economic crisis.

The central bank last month halted foreign-currency purchases, started in mid-May to boost reserves, after a renewed slide in commodity prices triggered further ruble declines. It defended the operations as compatible with its free float and has pledged to avoid interventions unless the ruble’s swings threatened financial stability. With its statement on Monday, the central bank is conducting “verbal intervention aimed at stabilizing market sentiment regarding the ruble,” Dmitry Dolgin, an economist at Alfa Bank in Moscow, said by e-mail. “There are concerns on the market that the looming repayment of external debt will exert significant pressure on the balance of currency demand and supply on the domestic market, especially under the conditions of falling oil prices.”

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Her popularity rate is at 8%.

• Impeaching Rousseff Would Set Brazil On Fire: Senate Chief (Reuters)

The president of Brazil’s Senate said on Monday that attempting to impeach President Dilma Rousseff was not a priority and warned that seeking her removal in Congress would “set the country on fire.” Renan Calheiros, who is often critical of the administration, struck a more positive tone amid a deepening political crisis after seven months into Rousseff’s second term. Many of the president’s opponents in Congress have called for her impeachment for allegedly breaking the law by doctoring fiscal accounts to allow her government to spend more in the run-up to her re-election in October. Calheiros, a leader of the country’s biggest party, the PMDB, spoke to reporters after meeting with Finance Minister Joaquim Levy to discuss the government’s fiscal austerity plan.

He promised to bring to a vote this week a bill that rolls back payroll tax breaks, which would save the government nearly 13 billion reais ($3.78 billion) a year. The rollback is the last key bill to be approved in an austerity package aimed at preserving the country’s investment-grade rating. The Brazilian real, buffeted by political uncertainty in recent weeks, added some gains after Calheiros’ comments. The lower chamber of Congress, whose speaker recently defected to the opposition, decides whether to start an impeachment process, which then goes to the Senate for a final ruling. Rousseff would be suspended as soon as the lower chamber agrees to impeach her, which requires two-thirds of the votes.

Rousseff’s support in Congress is rapidly fading as the economy heads toward a painful recession and a widening corruption scandal at state oil company Petrobras rattles the country’s political and business elite. Her popularity is at record lows and opponents plan a nationwide anti-government protest on Sunday. Congress has resisted Rousseff’s austerity efforts by watering down measures to cut expenditure and raise taxes, while passing bills that raise public spending.

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But.. but.. that’s protectionism…!

• UK Farming Unions Call For ‘Seismic Change’ In Way Food Is Sold (Guardian)

Farming is in a “state of emergency” and a “seismic change” is needed to the way food is sold in Britain, agriculture leaders have warned after a crisis summit on falling milk prices. Leading farming unions called on the government to introduce long-term contracts between farmers, distributors and supermarkets and to force retailers to clearly label whether their products are British or imported. The emergency summit in London followed days of protests from farmers over the sharp fall in the prices they are being paid for milk. Asda and Morrisons distribution centres have been blockaded, farmers have removed cartons of milk from supermarkets and cows were paraded through the aisles of an Asda store in Stafford.

Figures from AHDB Dairy, the trade body, show that the average UK farmgate price for milk – the price that farmers are paid – has fallen by 25% over the last year, to 23.66p per litre. Industry experts claim it costs farmers 30p per litre to produce milk, meaning farms have been thrown into chaos by the drop in prices. Farmers have blamed the fall in prices on a supermarket price war but retailers claim the drop reflects declining commodity prices and an oversupply of milk, partly caused by Russia’s block on western imports. Farmers For Action, the campaign group behind the milk protests, is scheduled to meet representatives from Morrisons on Tuesday to discuss the crisis.

The farming unions warned of “dire consequences for the farming industry and rural economy” if the way in which food is sold does not change in the near future. The presidents of the NFU, NFU Scotland, NFU Cymru, Ulster Farmers Union and four other unions, said: “We would urge farm ministers across the UK to meet urgently. They need to admit that something has gone fundamentally wrong in the supply chain and take remedial action. “In general, voluntary codes are not delivering their intended purpose. Government needs to take action to ensure that contracts to all farmers are longer-term and fairer in apportioning risk and reward. “Government also needs to urgently ensure that rules are put in place regarding labelling so that it is clear and obvious which products are imported and which are British.”

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Sold their soul.

• New Zealand A ‘Virtual Economic Trade Prisoner Of China’ (Nz Herald)

No one doubts the benefits of extending our trade opportunities – but many are alarmed at a dangerous naivety in what passes for our trade policy. That policy reflects our unfortunate dependence on a single commodity; our anxiety to maximise our one trading advantage by currying favour with powerful trading partners has led us into some treacherous waters. We have, for example, rapidly built up a Chinese market for our dairy produce with the result that – without any assurance that that market will remain open to us – we are now virtually economic prisoners, forced to meet almost any Chinese demand in order to retain a market that has become our life blood.

We have chosen, for example, to avert our gaze from the obvious effects of Chinese intervention in the Auckland property market for fear of offending Chinese opinion. More importantly, we have apparently not recognised that the Chinese interest goes beyond merely buying our products in a normal trading relationship, but extends to obtaining control of the productive capacity itself. Dairy farms themselves, processing plants, manufacturing capacity, expertise of various sorts are now owned by Chinese operators; their production increasingly by-passes New Zealand economic entities and suppliers and is marketed by Chinese companies directly to the Chinese consumer.

There are of course many instances of Chinese capital being deployed across the globe in pursuit of assets and capacity. This is not a cause for criticism – the Chinese are entitled like anyone else to pursue their own interests. It is simply a statement of fact. We, however, seem unaware of what is happening. It is no accident that this direct supply to the Chinese market has accompanied a fall in the proportion of New Zealand dairy production handled by Fonterra. While the proportion of our dairy production under Chinese control is still quite small, there can be little doubt that it will grow.

Low dairy prices will force the sale of a number of farms to foreign owners. As the Chinese increasingly control their own sources of supply, their reduced requirements for dairy produce on international markets will inevitably mean downward pressure on prices. Nor is it just the ownership of the physical product that has passed into foreign and often Chinese hands. The decision to allow non-farmer ownership of “units” (or, in other words, shares) in Fonterra has meant that we must now face the prospect of a significant part of the income stream from our most important industry to pass into private and often foreign hands.

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Over 6 years?! How about right now, and handle the issue properly?

• EU To Provide $3.6 Billion Funding For Migrant Crisis Over 6 Years (Reuters)

The European Commission on Monday approved €2.4 billion of aid over six years for countries including Greece and Italy that have struggled to cope with a surge in numbers of immigrants. Italy is to receive the most aid – nearly €560 million, while Greece will receive €473 million. Tensions have escalated this year as thousands of migrants from the Middle East and Africa try to gain asylum in the European Union. In Calais, a bottleneck for migrants attempting to enter Britain illegally through the Eurotunnel from France, has seen several migrant deaths this month.

Britain has already received its €27 million from the commission in emergency aid funding, which it applied for in March. France will receive its €20 million later this month. Neither country has requested additional aid for security in Calais and will not receive funds from the latest aid program. “We are now able to disburse the funding for the French national program and the UK has already received the first disbursement of its funding,” Natasha Berthaud, a European Commission spokeswoman, said. . “Both of these programs will, amongst other things, also deal with the situation in Calais.” The Commission plans to approve an additional 13 programs later this year, which will then be implemented by EU member states.

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The only answer Europe ever seems to have.

• French Police Say Time To ‘Bring In British Army’ To Calais (RT)

Police in Calais, from where thousands of illegal immigrants from Africa and the Middle East risk their lives trying to cross the English Channel to make it to the UK, have suggested bringing in the British army to curb the crisis. The head of the Alliance union for police deployed to the French port and Eurotunnel site, Bruno Noel, has warned that the situation could soon get out of control if additional help is not provided. He complained that his unit is “doing Britain’s dirty work.” “We have only 15 permanent French border police at the Eurotunnel site,” the Daily Telegraph quoted him as saying. “Can you imagine how derisory this is given the situation? “So I say, why not bring in the British Army, and let them work together with the French?” Mr Noel added.

According to different estimates, between 2,000 and 10,000 migrants in Calais are trying to cross the English Channel. Many have attempted to reach Britain by boarding trains through the tunnel or on lorries bound for UK destinations. Twelve people have died this year attempting to reach the UK. The numbers of migrants in the Calais camp, known as The Jungle, have soared over the past few months from 1,000 in April to nearly 5,000 by August. The first call to use British troops was made by Kevin Hurley (former Head of Counter Terrorism for City of London Police, an ex-Paratrooper and an expert on international security), who is currently Police and Crime Commissioner for Surrey. He said the problems stemming from the crowds of migrants trying to enter the UK from Calais through the Channel Tunnel could be dealt with efficiently by Gurkha regiments, based close by in Hythe, a small British coastal market town on the south coast of Kent.

The 700-strong 2nd Battalion of the Royal Gurkha Rifles has been based in the Shorncliffe and Risborough barracks just outside Hythe since 2000, according to Office of the Police and Crime Commissioner for Surrey. “I am increasingly frustrated by the huge numbers of illegal migrants who jump out of the backs of lorries at the first truck stop – Cobham Services in Surrey – and disappear into our countryside. There were 100 in the last month alone,” Mr Hurley said late last month. “But, while the UK and French governments decide their next prevention strategy we, the British police, have to deal with the immediate problem. The Gurkhas are a highly respected and competent force, and are just around the corner. They could help to ensure that our border is not breached,” he added.

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Mass migrations cannot be stopped.

• History In Motion (Pantelis Boukalas)

Throughout the history of mankind the walls protecting cities under siege were never able to keep a determined enemy away forever – a first wave would be followed by a second, and so on. But when that enemy conquered those cities, the waves would stop. However, the overwhelming waves of migrating people that are reaching our shores today, mobilized by the desperate need for survival as opposed to the desire to conquer, will simply keep coming. These desperate people are trying to escape Middle Eastern, Asian and African countries where poverty, war and a lack of freedom threaten their very existence. What has been set in motion now is not the persecution of certain populations, but history itself.

This process cannot be halted, no matter how many fences are erected, no matter how many high walls are put up, such as the ones under construction by Hungary at its border with Serbia, or those envisioned by controversial mogul Donald Trump, a candidate for the Republicans’ presidential ticket, at the US-Mexico border. As for the Channel Tunnel, do the British truly believe that 50,000 – instead of 5,000 – determined refugees in Calais could be prevented from crossing at the mere sight of police officers and weapons? A recent editorial in The New York Times was poignant: “Residents on the island of Lesbos – where many refugees from the Middle East land because of its proximity to Turkey – have responded generously, providing meals, blankets and dry clothing.

Their response should shame others in Europe, particularly the British government, which is panicking over the prospect that a mere 3,000 migrants in Calais, France, might make it across the English Channel.” So far, despite officials’ meetings, the positions of Central and Northern Europe with regard to the refugee issue leaves a lot to be desired. As if Italy’s southern borders and Greece’s eastern borders were not the European Union’s own borders.

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“..only two of 85 medical institutes and 15 of 159 nursing and other care facilities within a 30-kilometre radius of the Sendai plant had proper evacuation plans.”

• Japan Restarts Sendai Nuclear Reactor Despite Public Opposition (Fairfax)

Japan has restarted its first nuclear reactor since new safety rules were ordered in the wake of the 2011 Fukushima disaster, despite vocal public opposition and anxiety. After months of debate about safety, the No 1 reactor at the 30-year-old Sendai nuclear power plant, on the southwest island of Kyushu, became the first to be brought back to life on Tuesday morning. The reactor, one of 25 which have applied to restart, will begin generating power by Friday and reach full capacity next month. Prime Minister Shinzo Abe has made the restart of the country’s nuclear energy industry a priority of his administration, with the hiatus sending electricity bills soaring, providing a drag on his so-called Abenomics reforms, and serving to highlight Japan’s dependence on energy imports.

But with the scars of Fukushima yet to fade, newspaper polls have shown a majority of Japanese oppose the restart. Mr Abe’s personal approval ratings have also plumbed new depths, having also come under fire for pushing through a controversial new national security bill that will see Japanese troops fight overseas for the first time since World War II. “I would like Kyushu Electric to put safety first and take utmost precautions for the restart,” he said. Yoshihide Suga, the chief cabinet secretary, said “it is important for our energy policy to push forward restarts of reactors that are deemed safe”.

But local residents said they are worried about potential dangers from active volcanoes in the region, and there was no clarity around the evacuation plans for nearby hospitals and schools. An Asahi Shimbun newspaper survey found only two of 85 medical institutes and 15 of 159 nursing and other care facilities within a 30-kilometre radius of the Sendai plant had proper evacuation plans. About 220,000 people live within a 30-kilometre radius – the size of the Fukushima no-go zone – of the Sendai plant. “You will need to change where you evacuate to depending on the direction of the wind. The current evacuation plan is nonsense,” Shouhei Nomura, a 79-year-old former worker at a nuclear plant equipment maker, who now opposes atomic energy and is living in a protest camp near the plant told Reuters.

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A little physics fascination.

• A Good Week For Neutrinos (Butterworth)

Neutrinos are made by firing protons into a target. This produces lots of mess, including charged particles called pions (made of a quark and an antiquark), which travel a while and can be focussed into a beam. They eventually decay to neutrinos, which remain in a collimated beam and, mostly, just carry on without interacting with anything. Crucially though, a few of them will, by random luck (maybe bad luck from the neutrinos point of view) collide with normal matter, some of it (by good luck from the physicists point of view) the matter inside the NOvA far detector, which can measure what kind of neutrinos they were.

The vast majority of neutrinos produced when a pion decays are so-called “muon neutrinos”. This means when they interact they should produce muons (a heavier version of the electron). If the neutrinos did nothing odd during their 800 km journey to NOvA, about 200 of them should have been seen by now. However, only 33 turned up. Also, six electron neutrinos turned up, when only about one would be expected.

This is evidence that the neutrinos transmogrify, or “oscillate”, during their journey. That is, they change types. This behaviour is already known; it is how we know neutrinos have mass (in the original version of the Standard Model of particle physics they were massless), and it may be connected with mysterious fact that there is so much matter around and so little antimatter. Studying this kind of mystery is what Nova was built for, and this confirmation of neutrino oscillations is just the start.

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Debt Rattle November 27 2014

Nov 272014
 
 November 27, 2014  Posted by at 12:02 pm Finance Tagged with: , , , , , , , ,  2 Responses »


DPC Wall Street and Trinity Church, New York 1903

• Oil Price Fall Starts To Weigh On Banks (FT)
• Oil Sinks Further As OPEC Meeting Begins (MarketWatch)
• World On Brink Of Oil Price War As OPEC Set To Keep Pumping (Telegraph)
• Oil Bust of 1986 Reminds US Drillers of Price War Risks (Bloomberg)
• Drill On: U.S. Mantra as OPEC Power Wanes in the Face of Shale (Bloomberg)
• Oil Slump Reverberates After Nigeria Currency Devaluation (Reuters)
• Seadrill Plunges on Dividend Suspension as Oil Rig Market Sours (Bloomberg)
• Tightening By Superpower Fed Trumps Mini-Stimulus In Europe And Asia (AEP)
• China’s Industrial Profits Drop Most in Two Years Amid Slowdown (Bloomberg)
• Spanish Consumer Prices Decline More Than Forecast (Bloomberg)
• Juncker Investment Plan Questioned on Capital, Leverage (Bloomberg)
• Greece Paralyzed By Major Strike, Flights Stopped (Reuters)
• After Zero Rates, Sweden Ponders Next Steps To Avoid Deflation (Reuters)
• Europe’s Economy Faces Three Major Risks: Draghi (CNBC)
• Goldman Sachs, HSBC Sued By Jeweller For Fixing Platinum Prices (Independent)
• Attack Dogs Deployed To Save South Africa’s Rhinos (Bloomberg)

A loss of $340 million on just one loan.

• Oil Price Fall Starts To Weigh On Banks (FT)

Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850 million loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. Details of the loan emerged as delegates of Opec, the oil producers’ cartel, gathered in Vienna to address the growing glut in the supply of oil. Several Opec members have been calling for a production cut to shore up prices, but Saudi Arabia, Opec’s leader and largest producer, signalled that it would not push for a big change in the group’s output targets. Repercussions from the decline in the price of crude, which has dropped 30% since June, are spreading beyond the energy sector, hitting currencies, national budgets and energy company shares.

The price slide is having a serious impact on oil producers that rely on revenues from crude exports to balance their budgets. The Russian rouble has lost 27% of its value since mid-June, when crude began to fall, while the Norwegian krone is down 12% and on Wednesday the Nigerian naira touched a record low. Companies are also being hit, with BP’s shares down 17% since mid-June and Chevron’s down 11%. Shares in SeaDrill, one of the world’s biggest drilling rig owners, fell as much as 18% on Wednesday as it suspended dividend payments. The company has suffered from an oversupply of rigs as the majors respond to crude’s slide by cancelling projects. Now banks are also being affected, with Barclays and Wells said to face potential losses on an energy-related loan.

Earlier this year, the two banks led an $850 million “bridge loan” to help fund the merger of Sabine Oil & Gas and Forest Oil, U.S.-based oil companies. Investors, however, balked at buying the loan when it was first offered in June and slumping oil prices combined with volatile credit markets in the months since have scuppered further attempts to sell, or syndicate, the loan, according to market participants. With underwriting banks unable to offload the loan to investors they are now facing losses on the deal as the value of the two oil companies’ debt erodes. Sabine’s bonds were trading above their face value at around $105.25 in June, but have since fallen to $94.25 – firmly in “distressed” territory. Their yield – which moves inversely to price – has jumped from around 7.05% to 13.4%. Rival bankers estimate that if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.

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Isn’t it fun?

• Oil Sinks Further As OPEC Meeting Looms (MarketWatch)

Oil prices extended their losses and sunk to fresh four-year lows on Thursday as expectations of a cut in OPEC oil production faded following the Saudi Arabian oil minister’s comments Wednesday. On the New York Mercantile Exchange, light, sweet crude futures for delivery in January traded at $72.22 a barrel, down $1.47, or 2% in the Globex electronic session. January Brent crude on London’s ICE Futures exchange fell $1.92, or 2.5%, to $75.83 a barrel. The Organization of the Petroleum Exporting Countries meets in Vienna within a few hours to decide whether its members will cut production to remove some of the glut in supply in global markets and boost oil prices. The 12-member oil cartel typically steps in to adjust output when prices move sharply due to excess or insufficient supply. It currently has an oil production ceiling of 30 million barrels a day and has been producing in excess of this level in recent months.

Crude-oil prices have plummeted this year, losing almost 30% of their value since June, mainly due to rising U.S. oil production driven by the shale boom and slowing demand growth in Asia and Europe. Analysts say that OPEC will need to cut oil production much lower than its current ceiling for prices to make a significant recovery. Today’s OPEC meeting and any decision on production cuts is likely to set the tone for oil prices for the next few months and well into 2015. Forget about an OPEC cut: Three delegates told Reuters that OPEC was unlikely to take any action after Russia said it wouldn’t cut in tandem. On Wednesday, Saudi Oil Minister Ali al-Naimi said he expects the market “to stabilize itself eventually,” hinting he wouldn’t push for a cut in OPEC’s production targets. “This is a very clear indication that the Saudis and OPEC will do nothing at the meeting … It is not 100% rock solid or set in stone, but it is a very clear signal,” Michael Wittner, head of oil market research at Societe Generale said. His bearish price forecasts are for $70 Brent and $65 WTI for the next two years.

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“Saudi oil minister Ali Al-Naimi said: “The market will stabilise itself eventually”. Question is where and when.

• World On Brink Of Oil Price War As OPEC Set To Keep Pumping (Telegraph)

Oil slumped on Wednesday as expectations that Opec will cut production faded following dovish remarks by cartel kingpin Saudi Arabia, which could signal the beginning of a price war. Speaking on the sidelines ahead of Thursday’s critical meeting of the Organisation of Petroleum Exporting Countries (Opec) in Vienna, Saudi oil minister Ali Al-Naimi said: “The market will stabilise itself eventually”. His remarks were interpreted by the market as a signal that the cartel would keep its production ceiling at 30m barrels per day (bpd), which sent the price of crude lower. Brent crude – a global benchmark comprised of a blend of high-quality oil from 15 North Sea fields – fell 1.3pc to $77.30 per barrel after Mr Naimi’s comments, before recovering to trade flat at $78.29 by late afternoon. Brent crude has fallen 30pc since June. Crude traded in the US fell to as low as $74 per barrel as traders bet that Opec will allow the price to fall further amid growing signs of a global price war amid producers.

“There remains little prospect of any production cut being agreed at [Thursday’s] Opec meeting,” said brokers at Commerzbank. “Opec will merely agree to comply better with the current production target of 30m bpd. Iranian officials, traditionally seen as hawks within the cartel of mainly Middle East producers, also appeared to soften their position following an afternoon of closed door meetings with counterparts from Saudi Arabia and Kuwait. Bijan Zanganeh, Iran’s oil minister, told reporters after leaving the talks that Iran was now “close” to the Saudi position, heading into Thursday’s final discussion at the Opec secretariat. Rafael Ramirez, Venezuela’s Opec representative, had tried to galvanise support for production cuts to restore oil prices to around $100 per barrel, after talks with senior Russian oil officials on Tuesday delivered no immediate sign of a consensus. Although Russia is not a member of Opec’s 12 nations, the country is a major oil producer and has expressed concerns over falling prices.

Major Opec nations, Russia and US shale oil drillers now appear on the brink of a price war as these three giant producing blocs fight for a greater share of global demand. Although Opec states enjoy the lowest average production costs – in some cases around $2 per barrel – they have increasingly lost ground in North America, which remains the world’s largest consumer of oil. Some Opec members now want producers outside the cartel, including Russia and the US, to shoulder some of the responsibility for balancing the market by essentially cutting their output. UAE energy minister Suhail Al-Mazrouei said on Wednesday that Opec alone was not responsible for the stability of the oil market. “This is not a crisis that requires us to panic,” he said.

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“In 1986, the Saudis opened the spigot and sparked a four-month, 67% plunge that left oil just above $10 a barrel.” This time around, the Saudis will achieve that by simply not closing the spigot.

• Oil Bust of 1986 Reminds US Drillers of Price War Risks (Bloomberg)

The last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans. In 1986, the Saudis opened the spigot and sparked a four-month, 67% plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market. So while no one expects the Saudis to ramp up output now like they did then and U.S. shale oil companies are pledging to keep drilling regardless, the memory of that bust looms large for American industry executives on the eve of OPEC’s meeting tomorrow.

As the Saudis gather with officials from the 11 other OPEC nations in Vienna, analysts are split on whether the group will cut output to lift prices or leave production unchanged to fight for market share with shale drillers. “1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Massachusetts, who has covered the oil sector for 37 years. “It put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory.” The Organization of Petroleum Exporting Countries, responsible for about 40% of the world’s output, pumped 31 million barrels a day in October, exceeding its official target of 30 million. Oil has tumbled more than 30% from a 2014 peak in June.

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The more they drill, the lower prices will go. They’ll lose financing.

• Drill On: U.S. Mantra as OPEC Power Wanes in the Face of Shale (Bloomberg)

No matter what OPEC countries decide tomorrow about cutting oil output, U.S. producers already know what they’re going to do: drill on. As Saudi Arabia and its 11 fellow members of the Organization of Petroleum Exporting Countries meet for what’s viewed as the cartel’s most important conclave since 2008’s worldwide financial crisis, the U.S. has the most to gain and the least to lose. For the oil industry, a significant production cut by OPEC would lift prices and profits across the board and help finance further U.S. energy innovation. And while a weaker response – or no move – would put more pressure on energy companies, the industry is increasingly insulated by burgeoning North American output. “The U.S. oil industry is going to continue on its growth track whether OPEC comes out with a cutback or not,” Daniel Yergin, vice chairman of consultant IHS. “As oil prices go down, the U.S. industry is going up the learning curve and is better capable of coping with lower prices than it would have been two or three years ago.”

The swagger of U.S. producers in the face of plunging oil prices shows the confidence they’ve gained from upending OPEC’s six decades of market dominance with technology that wrings oil from dense rock for prices as low as $40 a barrel. The shale boom has placed the U.S. oil industry in its strongest position since OPEC began flexing its pricing power in the early 1970s. Investors are taking note, pouring money back into shale producers in the past 10 days after shares fell an average 20% since July. Beyond the ability of producers to remain profitable at lower prices, the broader U.S. economy is even less susceptible to whatever course OPEC might take. A shift away from industries like steelmaking and into services such as health care has helped make the economy less reliant than ever on oil and natural gas, according to government data compiled since 1950.

Since the 1973 Arab oil embargo, the first major shock brought about by OPEC coordination, the amount of oil and gas consumed in the U.S. to generate $1 of gross domestic product has fallen 64%. The U.S. in August imported an average of about 4.8 million barrels a day of crude and petroleum products, a 24% decline from 1986, the year when Saudi Arabia’s market machinations sent prices below $10 a barrel in a crushing blow to U.S. producers. As the services economy has grown, oil demand has fallen, with the U.S. burning 13% less oil in 2013 than 2005. Improvements in fuel consumption mean cars and trucks can travel further on each gallon of gasoline. The nation is 26%age points more efficient in terms of the the energy required to generate economic growth than the global average, according to the U.S. Energy Information Administration.

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” IMF data shows Nigeria, Russia and Saudi Arabia all need prices above $90 to balance their budgets.”

• Oil Slump Reverberates After Nigeria Currency Devaluation (Reuters)

The impact of sub-$80 oil prices rippled across energy-exporting emerging markets on Wednesday, with investors betting other countries will have to follow Nigeria in devaluing their currencies. Brent crude remained firmly below $80 per barrel and around a third lower from June levels after Saudi Arabia signaled it was unlikely to push for a major change in output when producers’ club OPEC meets on Thursday. Nigeria’s naira hit a record low near 178 per dollar – lower than its new target band of 160-176 per dollar – a day after the central bank devalued the currency by 8% and hiked rates by 100 basis points to conserve its reserves. Central bank governor Godwin Emefiele forecast a sustained drop in oil, saying the $73 per barrel assumed in Nigeria’s 2015 budget may be too optimistic.

“Oil remains on the back foot … it is a relevant dynamic for the rouble and for various parts of the Middle East and Africa,” said Manik Narain, emerging markets strategist at UBS in London. “We will see more pressure on local currencies there and Nigeria is an early example.” The risk that falling revenues will affect spending plans in oil-exporting countries, with unpredictable political and economic consequences, is a prime concern of investors. IMF data shows Nigeria, Russia and Saudi Arabia all need prices above $90 to balance their budgets. Sub-Saharan Africa’s other big oil producer, Angola, saw its kwanza currency trade near a record low hit on Tuesday.

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These guys are getting scared.

• Seadrill Plunges on Dividend Suspension as Oil Rig Market Sours (Bloomberg)

Seadrill fell the most in six years after the offshore driller controlled by billionaire John Fredriksen suspended dividends as the slump in oil prices weakens demand for rigs. Seadrill, which hadn’t frozen or cut dividends in six years, dropped as much as 19% in Oslo trading, the most since November 2008. The stock was down 17% to 118.3 kroner at 3:58 p.m., the lowest since July 2010. “The decision to suspend the dividend has been a difficult decision for the board,” Fredriksen, chairman of Bermuda-based Seadrill, said in a statement. “However, taking into consideration the significant deterioration in the broader offshore drilling and financing markets over the past quarter, the board believes this is the right course of action.”

The plunge in crude prices since June is blowing through the oil-services industry as clients peg back spending on finding and developing fields. Transocean, one of Seadrill’s largest competitors, earlier this month wrote down the value of its fleet by $2.76 billion. Halliburton, the second-biggest oil-service company, is buying the third-largest, Baker Hughes. Seadrill, which paid owners $1 a share for the first two quarters this year, said in August that level was sustainable until at least the end of 2015. Today’s surprise decision will strengthen the company’s capital position by about $2 billion a year, the company said. “Suspending dividends entirely is the most reasonable thing to do, since the market is looking so bleak,” said Robert Andre Jensen from SpareBank 1 Markets AS. “Fredriksen’s companies are known for paying dividends, but you have to focus on your chances to survive the downturn.”

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“The liquidity cycle is inflecting downwards. The odds of turbulence are rising ..”

• Tightening By Superpower Fed Trumps Mini-Stimulus In Europe And Asia (AEP)

The apparent tsunami of stimulus from central banks in Asia and Europe is a mirage. The world’s monetary authorities are on balance tightening. There may or may not be good reasons to buy equities at the current giddy heights, but reliance on the totemic powers and friendly intention of central banks should not be one of them. The US Federal Reserve matters most in a financial world that still moves to the rhythm of the 10-year US Treasury bond, and still runs on a de facto dollar standard. More than 40 currencies have dollar pegs or “dirty floats”, including China, joined to America’s hip whether they like it or not. Some $11 trillion of cross-border loans and bonds issued outside the US are denominated in dollars. The US capital markets are still a colossal $59 trillion, more than the total for Europe and Japan combined.

The Institute of International Finance says the impact of Fed action on capital flows to emerging markets is “twice as large” as moves by the European Central Bank. The Fed can hardly put off rate rises for much longer as the US economy grows at a 3.9pc clip and the jobless rate drops to a six-year low of 5.8pc. The “quit rate” tracked by labour economists as a barometer of the jobs market is suddenly surging, a clear sign that slack is vanishing and wage pressures will soon rise. The world is already turning on its axis even before the Fed pulls the trigger, as if the QE era were a memory. The dollar largesse that flooded the commodity nexus and drove the credit booms of Asia, Latin America and Africa is draining away. “The liquidity cycle is inflecting downwards. The odds of turbulence are rising,” said CrossBorder Capital, which monitors global flows.

Fresh money creation in Japan, China and the eurozone would not offset a liquidity squeeze by the Fed in a symmetric fashion even if it were happening, but it is not in fact happening on anything like an equivalent scale, and may not do so for a long time. The “happy handover” scenario is wishful thinking. China is tightening at a slower pace, but it is still tightening. The surprise rates cuts last week are less than meets the eye. The People’s Bank of China (PBOC) regulates the level of credit in the economy through curbs on quantity, not by adjusting the cost of credit. These controls are still in place. It is too early to conclude that President Xi Xinping has capitulated and ordered the PBOC to reflate, pushing the day of reckoning into the future once again. The balance of evidence is that Beijing is still attempting – with great difficulty – to deflate China’s $26 trillion credit boom before it turns into a national tragedy.

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” .. investment in fixed assets such as machinery expanded the least since 2001 ..”

• China’s Industrial Profits Drop Most in Two Years Amid Slowdown (Bloomberg)

Industrial profits in China fell the most in two years, underscoring the need for looser monetary conditions as the world’s second-largest economy slows. Total profits of China’s industrial enterprises fell 2.1% from a year earlier in October, the National Bureau of Statistics said today in Beijing. That compares with September’s 0.4% increase and is the biggest drop since August 2012, based on previously reported data.

The People’s Bank of China, which last week cut benchmark interest rates, refrained from selling repurchase agreements in open-market operations today for the first time since July, loosening monetary policy further. Mired by a property slump, overcapacity and factory-gate deflation, China is headed for its slowest full-year economic expansion since 1990. Data released Nov. 13 showed the economy’s slowdown deepened in October. Factory production rose 7.7% from a year earlier, the second weakest pace since 2009, while investment in fixed assets such as machinery expanded the least since 2001 from January through October. Retail sales gains also missed economists’ forecasts last month.

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And it’s supposed to be doing so well?!

• Spanish Consumer Prices Decline More Than Forecast (Bloomberg)

Spanish consumer prices fell more than economists forecast in November, which may raise concerns that deflation is taking hold in the euro region’s fourth-largest economy. Prices dropped 0.5% from a year earlier, the Madrid-based National Statistics Institute said today. The decline, based on a European Union measure, was bigger than the 0.3% forecast by economists in a Bloomberg News survey. Economic growth was unchanged at 0.5% in the third quarter, INE said in a separate release, confirming its Oct. 30 estimate. Euro-area data tomorrow is forecast to show inflation in the 18-nation currency region slowed to 0.3% in November to match the least since 2009.

European Central Bank policy makers are watching for signs that additional stimulus may be needed and have expert committees examining further measures to help boost near-stagnant growth to add to long-term loans and asset-purchase programs. “The data show risks of deflation remain high for some countries,” said Diego Trivino, chief economist at Intermoney Valores in Madrid. “Price drops in Spain are forced and structural as it’s the only way it can regain competitiveness in an environment of near-zero inflation in the euro region.” Spanish bond yields fell to a record low this week along with those of most members of the 18 nation euro region after ECB President Mario Draghi stoked speculation of a new stimulus program extending to sovereign bonds.

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Juncker is a windbag, and plans like this are what comes out of such bags.

• Juncker Investment Plan Questioned on Capital, Leverage (Bloomberg)

German Chancellor Angela Merkel said she supports the European Commission’s 315 billion-euro ($394 billion) investment plan “in principle” as businesses around Europe sounded a note of caution. “We stress that investments are important, but that it has to be clear above all where the projects of the future lie,” Merkel, who announced Germany’s own 10 billion-euro investment program earlier this month, told the Bundestag in Berlin yesterday. The investment plan unveiled by commission President Jean-Claude Juncker will use 5 billion euros in cash from the European Investment Bank and 16 billion euros in European Union guarantees. The start-up money, projected to have an impact of 15 times its size, will serve as capital for a new EIB unit that can share risk with private investors.

The fund doesn’t have sufficient capital, Spanish Economy Minister Luis de Guindos said in Madrid yesterday. He described the commission’s leverage projection as “a bit high.” It’s right to focus on measures “to raise growth prospects across Europe and the emphasis on increasing private-sector investment,” British Chancellor of the Exchequer George Osborne said in a statement. The program, called the European Fund for Strategic Investments, is set to be operational by mid-2015. It doesn’t require EU member nations to commit any new money or alter existing budget agreements. The Brussels-based commission will dedicate 8 billion euros of existing funds to backstop its guarantee.

“Using a small amount of public funds to leverage private-sector provision can be a successful way to ensure that we choose projects that drive productivity and growth,” said Markus Beyrer, director general at BusinessEurope, a lobby representing employers from 35 nations. “We hope the leverage ratios set out in the investment plan can be achievable, but we must ensure that projects taken forward are genuinely ones that would not have taken place without the new fund.” By taking on some of the risk of new projects through a first-loss liability, the investment fund aims to attract cash-rich banks and companies to support investments in energy, broadband and transport infrastructure and back risk finance for small and medium-sized companies.

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Go. Leave.

• Greece Paralyzed By Major Strike, Flights Stopped (Reuters)

Greek labour unions staged a 24-hour strike on Thursday that cancelled hundreds of flights, shut public offices and severely disrupted local transport, in the first major industrial action to cripple the austerity-weary country in months. Private sector union GSEE and its public sector counterpart ADEDY called the walkout to protest against planned layoffs and pension reform demanded by European Union and International Monetary Fund lenders who have bailed out Greece twice. All Greek domestic and international flights were cancelled after air traffic controllers joined the strike. Trains and ferries also halted services. Hospitals worked on emergency staff while tax and other local public offices remained shut. “GSEE is resisting the dogmatic obsession of the government and the troika with austerity policies and tax hikes,” the union said in a statement this week.

It accused the government of trying to take the labour market back to “medieval times” and of implementing policies that are causing a “humanitarian crisis”. Thousands of Greeks were preparing to march to parliament later on Thursday as part of rallies to mark the strike. The two unions last held a general strike in April. Major protests have declined sharply since then as frustration and anger give way to a mood of despondency and resignation over a jobless rate exceeding 25% and a sharp fall in incomes. Turnout at Thursday’s rallies could provide a key measure of the opposition facing Prime Minister Antonis Samaras’s conservative-led government, which is under pressure from EU/IMF lenders to impose more cutbacks to balance next year’s budget.

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Yep. Krugman was here.

• After Zero Rates, Sweden Ponders Next Steps To Avoid Deflation (Reuters)

What should a central bank do next when it already has zero interest rates and arguably still faces the threat of Japanese-style deflation? If it’s the Swedish Riksbank, it should keep cutting, and do so soon, says Lars Svensson. Svensson no longer has a say; he quit as a deputy Riksbank governor last year after failing to persuade fellow board members to cut rates aggressively. Last month, they heeded his advice, lowering the repo rate to 0% and pushing back the official forecast for when the Riksbank will start tightening monetary policy again to mid-2016. After years of tense, polarized meetings that eventually led to Svensson’s resignation, a united Riksbank now sees zero rates as enough to push inflation up toward its 2% target. Svensson disagrees, saying Sweden should go into negative rates – effectively charging banks to deposit funds at the central bank – to avoid the deflation which has trapped Japan in low economic growth punctuated by periodic recessions for more than a decade.

“From this point it is unlikely that the current policy at zero is enough,” he told Reuters. “They should lower to -0.25 or even -0.50. The next meeting would be the natural time.” The Riksbank’s next policy meeting is on Dec. 15, with its decision announced the following morning. Rate-setters have not ruled out negative rates, but Riksbank Governor Stefan Ingves has rejected the comparison with Japan, pointing to expected Swedish growth this year of around 1.9%, with the economy moving up a gear again in 2015. Nevertheless, Swedish consumer prices have been flat or falling for most of the last two years on an annual basis. Underlying inflation, the Riksbank’s preferred measure which excludes interest rate effects, was 0.6% in October.

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Draghi himself is a big risk.

• Europe’s Economy Faces Three Major Risks: Draghi (CNBC)

Europe’s recovery faces three risks – unemployment and a lack of productivity and structural reforms, according to the European Central Bank’s President, Mario Draghi. In a speech to be delivered to the Finnish Parliament later Thursday, Draghi concedes that the euro area economic outlook “is surrounded by a number of downside risks.” According to a transcript released ahead of the speech to Finnish lawmakers, Draghi will say that the euro zone’s “recovery will likely be dampened by high unemployment, sizeable unutilized capacity, and the necessary balance sheet adjustments….Inflation in the euro zone remains very low (and) meanwhile, we are facing continuously sluggish money and credit dynamics.”

“We have seen a weakening in the euro area’s growth momentum over the summer Also, most recent forecasts by private and public sector institutions have been revised downwards. Our expectation for a moderate recovery in the next years still remains in place, reflecting our monetary policy measures, the ongoing improvements in financial conditions, and the progress made vis-à-vis structural reforms and fiscal consolidation,” he said. His comments come amid speculation as to whether the ECB will implement a U.S.-style quantitative easing program to stimulate the euro zone economy in the face of slowing growth, disinflation and low consumer confidence – at a 9-month low in November.

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Why isn’t Washington suing them?

• Goldman Sachs, HSBC Sued By Jeweller For Fixing Platinum Prices (Independent)

Goldman Sachs and HSBC are among a group of banks being sued in the US for allegedly fixing platinum and palladium prices. Modern Settings — a jeweller that buys precious metals and derivatives set on their prices — claims the banks “were privy to and shared confidential, non-public information about client purchase and sale orders that allowed them to glean information about the direction” of prices. “This unlawful behaviour allowed defendants to reap substantial profits, while non-insiders, which include plaintiffs, were injured,” lawyers acting for the company added. Separately, HSBC is facing a probe into allegations that an employee leaked confidential client information to a major hedge fund, according to reports. The leak is alleged to have taken place in March 2010, when HSBC was advising Prudential on its failed bid for AIA. A senior HSBC trader is said to have alerted a trader at hedge fund Moore Capital Management about a transaction taking place.

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It’s going to take a lot more than dogs.

• Attack Dogs Deployed To Save South Africa’s Rhinos (Bloomberg)

Strapped into a black nylon harness, Venom abseils from a helicopter 100 feet to a bush clearing below. The two-year-old Belgian Shepherd’s master Marius slides down in tandem and unclips his ward. Then the dog races across the grass and tears down a man wearing a felt-stuffed bite suit. Venom is part of an army of dogs being trained as South African defense company Paramount Group’s contribution to fighting the poachers in South Africa, home to most of the world’s rhinos. Prized for their horns, which are used in Asian traditional medicine, a record 1,020 rhinos have been slaughtered in the country this year, triple the number three years ago.

The Malinois, as the breed is also known, “can work in extreme conditions,” Henry Holsthyzen, who runs Paramount’s K9 Solutions dog academy, said at a presentation of the year-old school yesterday. “It’s been proven useful in Iraq and Afghanistan. It’s high energy, highly intelligent and very fast. It’s an awesome package.” Rhino horns are made of the same material as human hair or finger nails, yet is more valuable than gold by weight. Prices for a kilogram range from $65,000 to as much as $95,000 in China and Vietnam, where consumers buy them in a powdered form to ingest as a supposed cure for cancer and to try improve their libido. South Africa is trying a number of measures to end the poaching, including setting up a protection zone within the Israel-sized Kruger National Park, moving rhinos to private ranches and deploying soldiers to fight poachers.

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