dollar Archives - Page 5 of 8 - The Automatic Earth

The dollar rose to a 14-year peak against a basket of major currencies on Thursday after the Federal Reserve boosted the number of projected interest rate hikes for 2017, rejuvenating the month-long Trump rally and knocking emerging market currencies. The Fed’s 25 basis-point interest rate increase on Wednesday was widely anticipated by financial markets though they appeared to have been caught out by the central bank signal of three hikes in 2017, up from around two flagged at its September policy meeting. The relatively hawkish Fed stance came as U.S. president-elect Donald Trump takes over with promises to boost growth through tax cuts, spending and deregulation. “The rate hike projections for 2017 being increased to three shows that Fed’s board is having to factor in the impact of Trump’s policies,” said Junichi Ishikawa at IG Securities in Tokyo.

The dollar index extended its overnight rally and was up 0.5% at 102.270. It touched 102.620, its highest since January 2003. The euro was down 0.2% at $1.0512 after sliding to $1.0468, a trough not seen in 21 months. The greenback set a 10-month high of 117.860 yen early on Thursday and was last up 0.3% at 117.390. The allure of higher U.S. yields took a predictable toll on emerging Asian currencies. The Chinese yuan fell to its lowest levels in more than eight years, after the central bank set the daily mid-point at the lowest since mid 2008. Low-yielding currencies such as the Singapore dollar and Korean won came under pressure, as investors grew anxious over the risk of capital being sucked out of regional economies toward dollar-based assets.

Yellen hiked rates and dotplot.

• Dollar Jumps as Fed Pulls the Trigger While Stocks, Debt Decline (BBG)

The dollar rallied, while Treasury yields spiked as the Federal Reserve signaled a steeper path for in interest rates going forward after their first hike to borrowing costs in 2016. U.S. equities slumped the most since October. The greenback climbed to its strongest level in 10 months versus the yen, advancing against most of its major peers as as traders speculated that U.S. rates may be elevated faster than previously thought. Utilities and energy shares drove the S&P 500 Index down 0.8% as two-year Treasury yields soared to their highest level in seven years. The dollar’s gains sent oil tumbling as gold also retreated. Emerging-market currencies were among the biggest decliners, while Asian index futures diverged amid the yen’s drop.

“The bottom line is that this is more hawkish than the markets expected,” said Dennis Debusschere at Evercore ISI in New York. “I don’t think the shift higher in the dots was priced in. The consensus going in was that they’d wait until they had details of the fiscal program before they actually raised the rate forecast, and they did that before they saw the details.” What was only the second U.S. rate increase in a decade tied off a volatile year for markets, with investors whipsawed by ructions in Chinese trading, then the shock wins for Brexit and Donald Trump. The Fed moving further into tightening territory puts it at the vanguard of a shift globally from easing monetary policy toward an increased focus on fiscal stimulus.

After hiking by 25 basis points, the central bank said it expects three rate increases in 2017, up from two in its September forecasts. Speaking to reporters after the decision, Fed Chair Janet Yellen sought to downplay the significance of that change in the projections. “This is a very modest adjustment in the path of the federal funds rate,” Yellen said during the press conference. The decision to raise rates is “a vote of confidence in the economy,” she said, noting that some fed officials, but not all, incorporated the assumption of a change in fiscal policies when making their forecasts.

“.. it appears the final bastion of safety has cracked”.

• Fed Fallout Escalates: China Bond Market Crashes Most On Record (ZH)

After a bubblicious surge higher over the last few months (as China’s hot money swishes from one trending-higher market to another), China’s bond market is collapsing. As Chinese money-markets tighten into new year, yuan weakens, and capital outflows accelerate, so it appears the final bastion of safety has cracked. Chinese bond futures crashed overnight by the most on record, erasing in a week the gains of the last 18 months. The rally began in 2014, buoyed by slowing economic growth and a monetary-easing cycle that kicked off in November that year. Now that is over…

As Chinese liquidity pressures ripple up from the short-term repo markets…

Offshore Yuan has tumbled 5 handles since The Fed raised rates…

And Japanese stocks cannot hold a bid despite the weaker yen. It appears Janet’s message about Trump’s fiscal plan is starting to sink in.

“They’re playing whack-a-mole constantly. They try to bring down one bubble, and something pops up somewhere else. They do that, and something comes up somewhere else..”

• Higher US Interest Rates Next Year Could Make Big Problems For China (CNBC)

Rising interest rates in the United States have an obvious effect on the world’s biggest economy — but less obvious is the impact those rates could have on the second biggest. Higher interest rates in the United States could make it harder for China to manage its exploding debt, as the Asian giant increasingly depends on borrowing in order to keep growing — while simultaneously trying to block capital from fleeing for more fruitful shores in America. “If the Federal Reserve [keeps increasing] interest rates in the United States, the single biggest casualty of that this time is going to be China, because there’s so much money just waiting to leave” the country, said Ruchir Sharma at Morgan Stanley. Sharma spoke Tuesday evening as part of a panel at the Asia Society in New York.

Sharma pointed out that over the last year, China has moved from one bubble to another: commodities, stocks and, currently, real estate. That is not a sustainable way for China to grow, he said, especially considering that China’s “debt increase over the last five years has been 60 percentage points as a share of its economy.” “They’re playing whack-a-mole constantly. They try to bring down one bubble, and something pops up somewhere else. They do that, and something comes up somewhere else,” said Sharma, who noted that housing prices in China’s largest cities have increased between 30 and 50% over the last 18 months alone. Fed officials on Wednesday approved the first U.S. interest rate increase in a year. The 0.25 percentage point hike was widely expected, but the more aggressive pace for future increases outlined by the Fed — three next year instead of the two that were previously expected — was not.

Rising U.S. rates typically mean better yields for U.S. Treasurys and a stronger U.S. dollar. And indeed, both bond yields and the greenback immediately moved higher after Wednesday’s announcement. “I certainly think we could hit a 3 (percent on the 10-year Treasury yield) by the first quarter” of next year, Rick Rieder, CIO, global fixed income at BlackRock, told CNBC on Wednesday. The 10-year was last at 3% in January 2014. [..] the ability to keep financing its “massive debt binge” is impaired, Sharma said, if too much money bleeds out of the system. And China needs a lot of money — and more and more of it — to keep hitting the largely arbitrary 6% GDP growth rate that Beijing has mandated for the country. “Today in China, it’s taking $4 in debt to create a dollar of GDP growth,” said Sharma

Oh no, it was never gone. It’s only been growing the whole time.

• Shadow Banking in China Appears to Have Made a Roaring Comeback (BBG)

Time to don the tin hats? Chinese shadow-banking activity registered a surprise jump in November, throwing into sharp relief how policy makers are struggling to make good on their vow to rein in the runaway loan growth that threatens the stability of the financial sector. Often cast as one of the weakest links in the global financial system given the potential threat it poses to Asia’s largest economy, shadow credit – which consists of trust loans, entrusted loans and bank-acceptance bills –rose sharply to 479 billion yuan ($69 billion), after having dropped to 55 billion yuan in October. The surprise rebound may be a reaction to expectations for continuing yuan weakness as companies look to increase their local-currency liabilities at the expense of dollar-denominated obligations.

“Today’s surprising data will likely trigger some regulatory concerns,” David Qu, China economist at Australia & New Zealand Banking, wrote in a note to clients on Wednesday, citing the size and opacity of off-balance sheet lending from trust companies, brokerages, micro-lenders, pawn-shops and even real-estate companies. The rise could reflect “short-term speculation due to expectations of renminbi depreciation and producer-price inflation,” analysts at Nomura Holdings Inc, led by Zhao Yang, wrote in a report on Wednesday. Efforts to curtail shadow lending may exacerbate this month’s liquidity squeeze, as the yield on 10-year government bonds shoots up to 3.24% from 2.74% at the end of October – their highest level in more than a year.

“If Chinese regulators start to restrict shadow banking activities, there may be spillover effects to the bond market due to liquidity tightening,” Qu adds, referring to the prospect that redemptions from wealth-management funds would force asset managers to trim their bond positions. Last month’s credit binge wasn’t confined to the shadow financial system. Total social finance, the broadest measure of new lending, expanded the most since March at 1.74 trillion yuan, up from 896.3 billion yuan in October. [..] The 11.8% increase on a year-on-year basis was driven by household lending growth, reflecting how property curbs have yet to kick in, as well as expansion in the shadow-banking sector.

Tens of billions eating crow at that table. Trump knows exactly what Bezos, Cook etc. said about him not long ago. Eric Schmidt just about ran Hillary’s campaign.

• Trump Meets With Tech Titans: “No Formal Chain Of Command Around Here” (CNBC)

A confab of tech titans had a “productive” meeting with President-elect Donald Trump at Trump Tower on Wednesday, Amazon CEO Jeff Bezos told CNBC, as Trump moved to mend fences with Silicon Valley before taking office in January. Apple, Alphabet, Microsoft, Amazon, Facebook, Intel, Oracle, IBM, Cisco and Tesla were among the C-suite executives in attendance, with Apple CEO Tim Cook and Tesla CEO Elon Musk expected to get private briefings, according to transition staff. During the campaign, Trump issued a number of barbs directed at Bezos and his businesses, but at the meeting both men appeared nothing but complimentary. “I found today’s meeting with the president-elect, his transition team, and tech leaders to be very productive,” Bezos said.

“I shared the view that the administration should make innovation one of its key pillars, which would create a huge number of jobs across the whole country, in all sectors, not just tech—agriculture, infrastructure, manufacturing—everywhere.” Though many tech leaders actively opposed his election, Trump said at the meeting he was interested in helping tech do well — and that the executives can call any time, since there’s no formal chain of command. “We want you to keep going with the incredible innovation,” Trump said. “There’s no one like you in the world….anything we can do to help this go along, we’re going to be there for you. You can call my people, call me — it makes no difference — we have no formal chain of command around here.”

As someone commented on Twitter: “Carney’s baby is all grown up”.

• Canada’s Gravity-Defying Household Debt Swells to C$2 Trillion (BBG)

The appetite for bank borrowing remained unabated in the third quarter, setting fresh records for total credit and mortgage borrowing, Statistics Canada reported Wednesday. The widely-followed ratio of household debt to after-tax income rose to another record high of almost 167%. The numbers will intensify concern among policy makers the economy has become over-reliant on bank borrowing, and is vulnerable to a housing downturn and rising interest rates. The latest report covers the three months before Finance Minister Bill Morneau tightened mortgage lending rules again in October, a move designed to discourage Vancouver and Toronto home buyers from signing larger mortgages than they could handle.

“Household indebtedness continues to defy gravity and remains the Achilles heel of the Canadian economy,” said Charles St-Arnaud at Nomura Securities, who has worked in Canada’s finance department and central bank. “Continued increase in yields and job losses remain the biggest risks.” Credit-market debt climbed to C$2.005 trillion ($1.53 trillion) from C$1.980 trillion in the prior quarter. Those obligations jumped by 1.3% in the third quarter, faster than the 0.9% gain in household income. Total consumer debt exceeded the size of Canada’s economy for a second straight quarter, accounting for 101.2% of gross domestic product in the July-to-September period. Debts have climbed alongside the Vancouver and Toronto housing boom, fueled by job growth and rock-bottom borrowing costs.

Elections, anyone?

• EU Politicians Believe UK Post-Brexit Trade Deal Could Take Decade (G.)

Europe’s politicians believe a trade deal with the UK could take up to a decade or more and could still fail in the final stages, Downing Street has been warned by the UK’s ambassador to the EU. Sir Ivan Rogers, who conducted David Cameron’s renegotiation with the EU prior to the referendum, is reported to have told the prime minister that European politicians expected that a deal would not be finalised until the early to mid-2020s, according to the BBC. That deal could still be rejected by any of the 27 national parliaments during the ratification process. It is understood Rogers was reporting back conversations he had had with European politicians, rather than giving his own advice to the British government. “It is wrong to suggest this is advice from our ambassador to the EU,” a Number 10 spokesman said. “Like all ambassadors, part of his role is to report the views of others.”

Former Tory minister Dominic Raab, a leave campaigner, said it was “reasonable to set out a worst-case scenario of five to 10 years to iron out all the detail of a trade deal.” He told BBC Radio 4’s Today programme: “The crucial question is whether we maintain barrier-free trade in the meantime, in which case there’s no real problem. I have to say it’s very unlikely in the interim that the EU would want to erect trade barriers.” The reports come after Brexit secretary, David Davis, told a select committee hearing that “everything is negotiable” within a year and a half of the formal article 50 notification in March. The deal would then take about six months to be agreed by European leaders, the European parliament and the British parliament, he said.

Try these on for size: “Murray is a controversial figure who was removed from his post as a British ambassador amid allegations of misconduct.” Misconduct? Well: “Murray was a vocal critic of human rights abuses in Uzbekistan while serving as ambassador between 2002 and 2004, a stance that pitted him against the UK Foreign Office.”

• Ex-UK Ambassador: Clinton Emails Leaked By “Disgusted” Dem. Whistleblower (DM)

A Wikileaks envoy today claims he personally received Clinton campaign emails in Washington D.C. after they were leaked by ‘disgusted’ whisteblowers – and not hacked by Russia. Craig Murray, former British ambassador to Uzbekistan and a close associate of Wikileaks founder Julian Assange, told Dailymail.com that he flew to Washington, D.C. for a clandestine hand-off with one of the email sources in September. ‘Neither of [the leaks] came from the Russians,’ said Murray in an interview with Dailymail.com on Tuesday. ‘The source had legal access to the information. The documents came from inside leaks, not hacks.’ His account contradicts directly the version of how thousands of Democratic emails were published before the election being advanced by U.S. intelligence.

Murray is a controversial figure who was removed from his post as a British ambassador amid allegations of misconduct. He was cleared of those but left the diplomatic service in acrimony. His links to Wikileaks are well known and while his account is likely to be seen as both unprovable and possibly biased, it is also the first intervention by Wikileaks since reports surfaced last week that the CIA believed Russia hacked the Clinton emails to help hand the election to Donald Trump. Murray’s claims about the origins of the Clinton campaign emails comes as U.S. intelligence officials are increasingly confident that Russian hackers infiltrated both the Democratic National Committee and the email account of top Clinton aide John Podesta. In Podesta’s case, his account appeared to have been compromised through a basic ‘phishing’ scheme, the New York Times reported on Wednesday.

U.S. intelligence officials have reportedly told members of Congress during classified briefings that they believe Russians passed the documents on to Wikileaks as part of an influence operation to swing the election in favor of Donald Trump. But Murray insisted that the DNC and Podesta emails published by Wikileaks did not come from the Russians, and were given to the whistleblowing group by Americans who had authorized access to the information. ‘Neither of [the leaks] came from the Russians,’ Murray said. ‘The source had legal access to the information. The documents came from inside leaks, not hacks.’ He said the leakers were motivated by ‘disgust at the corruption of the Clinton Foundation and the tilting of the primary election playing field against Bernie Sanders.’

‘I don’t understand why the CIA would say the information came from Russian hackers when they must know that isn’t true,’ he said. ‘Regardless of whether the Russians hacked into the DNC, the documents Wikileaks published did not come from that.’ Murray was a vocal critic of human rights abuses in Uzbekistan while serving as ambassador between 2002 and 2004, a stance that pitted him against the UK Foreign Office.

“The former CIA official said the Obama administration may feel compelled to respond before it leaves office. “This whole thing has heated up so much,” he said. “I can very easily see them saying, `We can’t just say wow, this was terrible and there’s nothing we can do.'”

Well, if Obama is truly getting involved, he has 4 days in which to turn 37 Republican electors against Trump. As for the potential fallout, which may include various forms of social conflict should the Trump victory be overturned in the 11th hour at the Electoral College, then Putin will truly win as a result of what may then follow.

• US Accuses Vladimir Putin Of “Personal Involvement” In Election Hack (ZH)

And just like that the narrative of Russia hacking the presidential election has escalated to the highest possible level, and has officially jumped the shark. Moments ago, following a month-long barrage of unsubstantiated stories in the press accusing the Russian government of indirectly hacking the US presidential election, which culminated with last night’s 8,000 word NYT expose, and which followed a schism between the FBI and CIA, in which the former disputed the latter’s “fuzzy and ambiguous” claims that Russia sought to influence the presidential elections, moments ago the NBC News reported that U.S. intelligence officials believe with “a high level of confidence” that Russian President Vladimir Putin became personally involved in the covert Russian campaign to interfere in the U.S. presidential election.

Perhaps because the official narrative has so far been unable to gather traction with the previous “shotgun approach” in which just “Russia” was accused of handing the election to Trump, four short days before the Electoral College vote, the narrative has changed and it now involves the very pinnacle of Russia’s government: the president himself. Citing two senior officials with direct access to the information, NBC reports that “new intelligence shows that Putin personally directed how hacked material from Democrats was leaked and otherwise used. The intelligence came from diplomatic sources and spies working for U.S. allies, the officials said.” So why did Putin hack a few million rust belt Americans into believing that their lives under Obama, and by extension Hillary, were bad enough that they demanded a change? NBC provides the following spoonfed logic:

Putin’s objectives were multifaceted, a high-level intelligence source told NBC News. What began as a “vendetta” against Hillary Clinton morphed into an effort to show corruption in American politics and to “split off key American allies by creating the image that [other countries] couldn’t depend on the U.S. to be a credible global leader anymore,” the official said.

Ultimately, the CIA has assessed, “the Russian government wanted to elect Donald Trump.” And this is where the latest turn in the story falls apart, because even NBC – which will blast this report on prime time TV to all America – admits “the FBI and other agencies don’t fully endorse that view”, but it adds “few officials would dispute that the Russian operation was intended to harm Clinton’s candidacy by leaking embarrassing emails about Democrats.”

As I said, looks like Tsipras has had enough.

• Eurozone Suspends Short-Term Debt Relief for Greece (WSJ)

Greece’s European creditors suspended proposed debt-relief measures for the country after the Greek government surprised them by announcing it would boost welfare benefits for low-income pensioners, a sign of escalating tensions over the country’s bailout. The moves come as Athens and its international creditors—which include the eurozone and the IMF—are struggling to conclude their latest review of the country’s rescue plan of as much as €86 billion ($92 billion) in loans. “The institutions have concluded that the actions of the Greek government appear to not be in line with our agreements,” a spokesman for Jeroen Dijsselbloem, the Dutch finance minister who presides over the group of his eurozone counterparts, said in a statement on Twitter.

“No unanimity now for implementing short-term debt measures,” he added. The step puts further pressure on Greece’s government, which is considering calling snap elections in 2017 as it grapples with slumping popularity and is losing hope of winning concessions on deeper debt relief or austerity from the eurozone and the IMF. Greece’s embattled Prime Minister Alexis Tsipras surprised Greeks and the country’s creditors last week with handouts that his government hadn’t previously discussed with bailout supervisors, which represent eurozone governments and the IMF. Mr. Tsipras promised 1.6 million pensioners a Christmas bonus of between €300 and €800. He also suspended a planned increase in sales tax for Aegean islands that have received large numbers of refugees from the Middle East and elsewhere.

Eurozone officials expressed frustration that the country’s creditors were not told in advance by Greece of its plans—widely seen as a lure to voters ahead of elections—and said the new measures would have to be assessed to determine whether they were in line with the country’s bailout commitments. “We will adhere to the [bailout] program to the letter, but whatever outperformance in revenue arises by following to the program, we will not ask anyone in order to give this money to those most in need,” Mr. Tsipras said Tuesday from the small island of Nisyros.

Can you imagine the opposition in your country doing this? They would risk being persecuted for treason. In Europe, it’s the new normal. But he might as well ask Putin.

• Greek Opposition Leader To Seek Backing In Brussels For Snap Polls (Kath.)

In talks with officials on the sidelines of a summit of the European People’s Party in Brussels that started Wednesday, conservative New Democracy leader Kyriakos Mitsotakis is to press his argument that Greece needs snap elections to sweep away the current leftist-led government and bring in a more reform-friendly administration. Mitsotakis is to meet Thursday with European Commission President Jean-Claude Juncker and European Economic and Monetary Affairs Commissioner Pierre Moscovici, among others.

ND sources are hoping that EU officials will welcome Mitsotakis’s call for political change, coming as it does just a few days after Prime Minister Alexis Tsipras unsettled the country’s creditors by announcing Christmas bonuses for thousands of pensioners and vowing to keep in place a value-added tax discount for remote islands that the government had promised its lenders to revoke. The meetings come as ND leads leftist SYRIZA by a wide margin in opinion polls. Mitsotakis’s argument is that snap polls would not be destabilizing, as they had been in January 2015, as ND is a reformist power compared to the SYRIZA coalition with Independent Greeks which the conservative party describes as “unreliable and opportunistic” in its policy-making.

Debt Rattle November 19 2016

Nov 192016

November 19, 2016 Posted by Raúl Ilargi Meijer at 9:49 am Finance Tagged with: bonds, dollar, Kuroda, lobbyists, mortgage, refugees, rupee, surveillance, Trump, yen Comments Off

Unknown Dutch Gap, Virginia. Picket station of Colored troops 1864

• Financial Conditions Are Rigged Against Donald Trump (BBG)

• Big Short’s Steve Eisman: ‘Europe is Screwed’ (G)

• Emerging Markets Borrowers Owe $3.2 Trillion In -Rising- Dollar Debt (BBG)

• Dollar’s Rapid Gain Triggers Angst in Emerging Markets (WSJ)

• Global Bonds Post Biggest Two-Week Loss in 26 Years (BBG)

• Bond Carnage hits Mortgage Rates. But This Time, it’s Real (WS)

• US Dollar Sees Steepest 2-Week Gain Against Yen Since January 1988 (R.)

• Bank of Japan Surprises With Plan to Buy Unlimited JGBs at Fixed Rates (WSJ)

• US Banks Close Rupee Exchanges After Large Bills Ruled Illegal (BBG)

• Lobbyists Leave Trump Transition Team After New Ethics Rule (Pol.)

• The Rise Of The ‘Un-Lobbyist’ (Mother Jones)

• UK Approves ‘Most Extreme Surveillance In History Of Western Democracy’ (AFP)

• Far-Right Group Attacks Refugee Camp On Greek Island Of Chios (G.)

Just as I wrote on election day in America is The Poisoned Chalice.

• Financial Conditions Are Rigged Against Donald Trump (BBG)

The reaction in financial markets to Trump’s election victory – much like the win itself – has defied conventional wisdom, with U.S. equities surging following a sharp drop as the results came in. But if you’re an occasional real estate developer — a self-professed “low interest rate guy” who wants to fix America’s trade deficit while bringing factories back from overseas – it might seem as though markets have been rigged against you. The U.S. dollar spot index (DXY) touched levels not seen since the Clinton administration on Friday morning, and the yield on the 10-year U.S. Treasury has increased by more than 50 basis points since Nov. 9.

This rise in the greenback and borrowing costs for the U.S. constitutes a tightening of financial conditions — a potential obstacle to U.S. growth, as servicing new debt has become more expensive and goods produced domestically are now less attractive to foreigners. Earlier this week, the Goldman Sachs Financial Conditions Index rose above 100 to hit levels not seen since March, when the financial backdrop was trending in a more accommodative direction following the market turmoil that started 2016. The index tracks changes in interest rates, credit spreads, equity prices, and the value of the U.S. dollar: a rise indicates that financial conditions have tightened. “A stronger USD implies lower domestic inflation and higher real rates, a headwind to U.S. growth,” writes Neil Dutta at Renaissance Macro Research.

In her testimony before Congress on Thursday, Federal Reserve Chair Janet Yellen highlighted this rise in the U.S. dollar as well as interest rates since the election — but not the gains in the stock market. This may serve as an implicit nod at what’s reflected in many financial conditions indexes: There’s a certain degree of asymmetry at play, with the rise in the greenback and U.S. Treasury yields far outweighing the tightening of credit spreads and rise in stock values. That asymmetry perhaps speaks to an unintentional and counterintuitive overlap between how the president-elect and the Federal Reserve interpret how changes in financial conditions affect real economic activity.

“What is very negative is that in every country in Europe, the largest owner of that country’s sovereign bonds are that country’s banks..”

• Big Short’s Steve Eisman: ‘Europe is Screwed’ (G)

In the Oscar-winning The Big Short, Steve Carell plays the angry Wall Street outsider who predicts (and hugely profits from) the great financial crash of 2007-08. [..] In real life he is Steve Eisman, he is still on Wall Street, and he is still shorting stocks he thinks are going to plummet. And while he’s tight-lipped about which ones (unless you have $1m to spare for him to manage) it is evident he has one major target in mind: continental Europe’s banks – and Italy’s are probably the worst. Why Italy? Because, he says, the banks there are stuffed with “non-performing loans” (NPLs). That’s jargon for loans handed out to companies and households where the borrower has fallen behind with repayments, or is barely paying at all. But the Italian banks have not written off these loans as duds, he says.

Instead, billions upon billions are still on the books, written down as worth about 45% to 50% of their original value. The big problem, says Eisman, is that they are not worth anywhere near that much. In The Big Short, Eisman’s staff head to Florida to speak to the owners of newly built homes bundled up in “mortgage-backed securities” rated as AAA by the investment banks. What they find are strippers with loans against multiple homes but almost no income, the mortgages arranged by sharp-suited brokers who know they won’t be repaid, and don’t care. Visiting the housing estates that these triple-A mortgages are secured against, they find foreclosures and dereliction. In a mix of moral outrage at the banks – and investing acumen – Eisman and his colleagues bought as many “swaps” as possible to profit from the inevitable collapse of the mortgage-backed securities, making a $1bn profit along the way.

This time around, Eisman is not padding around the plains of Lombardy because he says the evidence is in plain sight. When financiers look to buy the NPLs off the Italian banks, they value the loans at what they are really worth – in other words, how many of the holders are really able to repay, and how much money will be recovered. What they find is that the NPLs should be valued at just 20% of their original price. Trouble is, if the Italian banks recognise their loans at their true value, it wipes out their capital, and they go bust overnight. “Europe is screwed. You guys are still screwed,” says Eisman. “In the Italian system, the banks say they are worth 45-50 cents in the dollar. But the bid price is 20 cents. If they were to mark them down, they would be insolvent.”

[..] Trump’s victory has sent the bond markets into disarray, with the yield on government bonds rising steeply. While this sounds good for savers – interest rates could rise – it is bad news for the holders of government bonds, which fall in value when the yield rises. Eisman sees that as another woe for Europe’s banks, who hold vast amounts of “sovereign bonds”. “What is very negative is that in every country in Europe, the largest owner of that country’s sovereign bonds are that country’s banks,” he says. As the bonds decline in value, then the capital base of the banks deteriorates.

The usual victims.

• Emerging Markets Borrowers Owe $3.2 Trillion In -Rising- Dollar Debt (BBG)

[..] Companies in these more-vulnerable economies have $340 billion of debt coming due through 2018, and they are going to have a hard time paying all that back if investors keep withdrawing their cash. [..] After the election of Donald Trump as the next U.S. president, many expect his infrastructure spending programs and trade policies to lead to higher consumer prices in the world’s biggest economy. Bonds tend to do poorly when inflation accelerates, especially because such an environment would prompt the Fed to raise benchmark interest rates faster than many expect. That would bad for all types of debt but particularly for notes in emerging markets. That’s because investors will migrate back to higher-rated bonds in developed economies instead of those in less-proven nations.

Also, more U.S. growth typically means a stronger dollar, which is a significant problem for emerging-market nonbank borrowers, which have accumulated more than $3 trillion in dollar-denominated debt, according to BIS data. The higher the dollar rises, the more expensive it becomes to pay back the debt. And already this week, the currency has surged because of the sudden prospect of tighter Fed policies and faster U.S. growth. The sheer scale of leverage in the economy, including “the large increase of emerging-market debt, much of it denominated in dollars,” is one of the biggest risks in the financial system right now, Adair Turner, former U.K. Financial Services Authority chairman, said in a Bloomberg Television interview Friday. All that money is owed to somebody, and a failure to pay it back will cause big ripple effects.

if the US doesn’t manipulate its currency lower soon, it’s going to lose export markets.

• Dollar’s Rapid Gain Triggers Angst in Emerging Markets (WSJ)

The dollar extended its powerful rally, spurring central banks in developing countries to take steps to stabilize their own currencies and threatening to create headwinds for the long-running U.S. expansion. The US currency moved closer to parity with the euro after rising for the 10th straight day, the dollar’s longest winning streak against the euro since the European currency’s inception in 1999. The dollar also moved higher against the yen, which fell to its weakest levels against the U.S. currency since May 30. The gains are even greater against many emerging-market currencies, prompting central banks in a number of countries to intervene to slow the slide. The Mexican peso has fallen 11% against the dollar to record lows since the election, while the Brazilian real has tumbled 6.3%.

The currency’s gains make foreign goods and travel cheaper for U.S. consumers and could give a boost to exports from Japan and Europe. But they also are reigniting fears that the dollar’s strength could slow U.S. corporate profit growth and intensify capital flight from the developing world, which would complicate the prospects for economic growth. “The strong dollar is destabilizing for markets, for foreign assets, for emerging-market nations that pay back their debt in dollars,” said Jonathan Lewis, chief investment officer Fiera Capital. “That’s pretty significant.” The dollar’s gains have been driven by bets that fiscal spending and tax cuts proposed by President-elect Donald Trump will spur U.S. economic growth, as well as by the rising probability that the Federal Reserve will raise interest rates next month.

Too much is moving in the same direction. Sheep don’t make for healthy markets.

• Global Bonds Post Biggest Two-Week Loss in 26 Years (BBG)

Bonds around the world had their steepest two-week loss in at least 26 years as President-elect Donald Trump sends inflation expectations surging. The Bloomberg Barclays Global Aggregate Index has fallen 4% since Nov. 4. It’s the biggest two-week rout in data going back to 1990. Federal Reserve Chair Janet Yellen contributed to the decline by saying Thursday an interest-rate hike could come “relatively soon.” “We’ve seen a sharp and swift move since the election, which is pricing in the potential future policies of Trump,” said Sean Simko at SEI Investments in Oaks, Pennsylvania. “The big question is to what extent these policies are going to be implemented, and how quickly are they going to be implemented.”

Treasury 10-year note yields climbed five basis points, or 0.05 percentage point, to 2.35% as of 5 p.m. in New York, reaching the highest since November 2015, according to Bloomberg Bond Trader data. The 2% security due in November 2026 closed at 96 27/32. “Trump is a game changer,” Park Sung-jin at Mirae Asset Securities. “I was bearish, but the current level is more than I expected.” The selloff has gone fast enough that it’ll probably pause before yields press higher in 2017, Park said. Yellen, addressing U.S. lawmakers Thursday, signaled the U.S. central bank is close to lifting interest rates as the economy continues to create jobs at a healthy clip and inflation inches higher.

The president-elect’s pledges include tax cuts and spending $500 billion or more over a decade on infrastructure, a combination that’s seen as spurring quicker growth and price gains in the world’s biggest economy. Trump has also blamed China and Mexico for American job losses and threatened punitive tariffs on imports, a move that may spur inflation. The difference between yields on U.S. 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, rose to as much as 1.97 percentage points this week, the highest since April 2015.

It’s not just global markets being hit, the US ‘homeowner’ will also pay the price.

• Bond Carnage hits Mortgage Rates. But This Time, it’s Real (WS)

The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quoted at 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.” One of the other three months on that short list occurred at the end of 2010 and two “back to back amid the 2013 Taper Tantrum,” when the Fed let it slip that it might taper QE Infinity out of existence. Investors were not amused. From the day after the election through November 16, they yanked $8.2 billion out of bond funds, the largest weekly outflow since Taper-Tantrum June.

The 10-year Treasury yield today jumped to 2.36% in late trading the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July! The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%. [..] I still think that pullback in yields is going to happen any day now. As I said, nothing goes to heck in a straight line. In terms of dollars and cents, this move has wiped out a lot of wealth. Bond prices fall when yields rise. This chart shows the CBOT Price Index for the 10-year note. It’s down 5.6% since July:

The 30-year Treasury bond went through a similar drubbing. The yield spiked to 3.01%. The mid-week pullback was a little more pronounced. Since the election, the yield has spiked by 44 basis points and since early July by 91 basis points (via StockCharts.com). Folks who have this “risk free” bond in their portfolios: note that in terms of dollars and cents, the CBOT Price Index for the 30-year bond has plunged 13.8% since early July!

This will now be scaring Abe and Kuroda.

• US Dollar Sees Steepest 2-Week Gain Against Yen Since January 1988 (R.)

The dollar rose to its highest level since April 2003 against a basket of currencies on Friday, marking its biggest two-week increase since March 2015 as traders piled bets on a massive dose of fiscal stimulus under a Trump U.S. presidency. Also stoking the dollar rally were growing expectations the Fed would raise interest rates next month on signs of rising inflation and improved economic growth. The greenback has climbed 7.3% against the yen in two weeks, its steepest such gain since January 1988 and its second-strongest performance in the era of floating exchange rates. The dollar has been on a tear following Donald Trump’s Nov. 8 victory over Hillary Clinton, tracking surging U.S. Treasury yields amid concerns government borrowing to fund possible stimulus programs could stoke inflation.

Traders have seized on the tax cuts, deregulation and infrastructure spending that Trump campaigned on as negatives for bonds and positives for the dollar. “It has caused a wave of dollar buying across the board,” said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago. To be sure, it remained unclear how many, if any, of the policy proposals would materialize. Trump’s stance on immigration and trade, if they become law, could hurt the dollar, analysts said. “The dollar is the wild card,” said Richard Bernstein, CEO of Richard Bernstein Advisors. The dollar index, hit 101.48, its highest since early April 2003 before paring gains to 101.25, up 0.4% on the day.

Yeah, like that’s in your power… “’Interest rates may have risen in the U.S., but that doesn’t mean that we have to automatically allow Japanese interest rates to increase in tandem’, Mr. Kuroda said.”

• Bank of Japan Surprises With Plan to Buy Unlimited JGBs at Fixed Rates (WSJ)

The Bank of Japan on Thursday offered to buy an unlimited amount of Japanese government bonds at fixed rates for the first time since the introduction of a new policy framework—a sign of its concerns over recent rises in yields. The move is the first clear sign from the central bank that it intends to take action to keep a lid on rising yields, and took market participants by surprise. “I thought there was still a lot more room left” before the BOJ took action, said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management. The BOJ’s move followed a sharp rise in government bond yields globally, sparked by expectations that the presidency of Donald Trump would lift inflation and growth.

Japanese government bond yields have risen as well, but not as sharply. The 10-year yield rose to its highest level since March on Wednesday. Yields on two-year and five-year Japanese government bonds fell Thursday after the BOJ’s announcement. The 10-year yield also briefly fell to 0.010% after hitting as high as 0.025% earlier in the morning. Speaking in parliament, Bank of Japan Gov. Haruhiko Kuroda said he wouldn’t allow market pressure from abroad to dictate the course of Japanese government bond yields, highlighting his resolve to hold interest rates down. “Interest rates may have risen in the U.S., but that doesn’t mean that we have to automatically allow Japanese interest rates to increase in tandem,” Mr. Kuroda said.

And the winner is … plastic.

• US Banks Close Rupee Exchanges After Large Bills Ruled Illegal (BBG)

Aruna Desai has a problem with the thousands of Indian rupees she has with her in the U.S. – she can’t find a bank to exchange her funds and couldn’t give the money away if she tried. Since Indian PM Narendra Modi removed 500- and 1,000-rupee notes from circulation, currency exchange providers in the U.S. have been unable to take the outlawed bills. Some of the country’s biggest banks, including JPMorgan and Citigroup work with vendors to provide rupees to clients and those vendors have made the bills unavailable, spokesmen for the banks said. Wells Fargo also said it can’t supply rupees at this time, while Bank of America said it has never accepted the currency for exchange. “If you have a euro, you can go to a bank and exchange it,” Desai, 76, of Cliffside Park, New Jersey, said. “For an Indian rupee, I don’t think there’s any bank that does that here.”

Five-hundred rupee ($7.34) and 1,000-rupee notes ceased to be legal tender Nov. 9, Modi said last week in a surprise announcement, sweeping away 86% of the total currency in circulation. The move has been seen as an attempt to fulfill his election promise of curbing tax evasion and recovering illegal income, locally known as black money, stashed overseas. The notes will have to be deposited in banks by the end of December, Modi said. “For our clients, it’s very hard,” Nandita Chandra, head of Great Indian Travel’s New York office, said in a telephone interview while visiting New Delhi. “A lot of people are affected and we don’t have a culture that is credit-card friendly, it’s a cash-based economy.”

Mastercard, the second-largest payment network, heralded the move as one that will reduce crime and drive growth in the Indian economy. Modi’s “bold action and leadership is a critical step in positioning India to be a leader in the global cashless and digital economy movement,” Porush Singh, the firm’s president for South Asia, said in a statement. “Mastercard is committed to working with the government to provide the cashless solutions that combat corruption and create growth, and inclusion for all members of society.”

Will Washington fall apart without the lobbyists who keep it standing up?

• Lobbyists Leave Trump Transition Team After New Ethics Rule (Pol.)

At least three lobbyists have left President-elect Donald Trump’s presidential transition operation after the team imposed a new ethics policy that would have required them to drop all their clients. CGCN’s Michael Catanzaro, who was responsible for energy independence; Michael Torrey, who was running the handoff at the Department of Agriculture; and Michael McKenna of MWR Strategies, who was focused on the Energy Department, are no longer part of the transition, POLITICO has learned. Lobbyists who piled into the transition when it was being run by New Jersey Gov. Chris Christie were caught off-guard Wednesday by a new ethics policy requiring them to terminate their clients.

“Throughout my time assisting the transition effort, I have adhered closely to the code of ethical conduct and confidentiality agreement that was provided to me,” Torrey said in a statement. “When asked recently to terminate lobbying registration for clients whom I serve in order to continue my role with the transition, I respectfully resigned from my role.” Torrey represents the American Beverage Association, Dean Foods and pizza franchise Little Caesars. Before founding Michael Torrey & Associates in 2005, he was Agriculture Secretary Ann Veneman’s deputy chief of staff, advised Kansas Sen. Bob Dole and worked at the Commodity Futures Trading Commission. Catanzaro lobbies for the American Fuel and Petrochemical Manufacturers, a refining group, as well as Hess, Encana, Noble Energy and Devon Energy.

Let’s see how many will be left come January 20.

• The Rise Of The ‘Un-Lobbyist’ (Mother Jones)

On Wednesday, Donald Trump’s transition team announced one phase of the president-elect’s plan to “drain the swamp” of corruption—a prohibition on registered lobbyists serving in his administration and a five-year lobbying ban for Trump officials who return to the private sector. Trump’s plan effectively doubles down on a policy that the Obama administration already has in place—one that many good government groups and lobbyists alike believe may have created a new problem: un-lobbyists—that is, influence-peddlers who avoid registering as lobbyists to skirt the administration’s rules.

Obama, like Trump, campaigned on a platform of aggressively rooting out the influence of lobbyists. After taking office, he put in place several major good-government initiatives, including a ban on lobbyists serving in his administration and a two-year cooling-off period before ex-administration officials could register to lobby. Once Obama’s lobbying rules took effect, there was a sharp decline in the number of registered lobbyists. Industry insiders and watchdog groups that track the influence game noted that the decrease was not due to lobbyists hanging up their spurs as hired guns for corporations and special interests. Rather it appeared that lobbyists were finding creative ways to avoid officially registering as such. There was no less influence-peddling going on, but now there was less disclosure of the lobbying that was taking place.

The problem lies with the definition of who is a lobbyist. The federal government requires anyone who spends more than 20% of their time on behalf of a client while making “lobbying contacts”—an elaborate and specifically defined type of contact with certain types of federal officials—to register as a lobbyist and file quarterly paperwork disclosing their clients and the bills or agencies he or she sought to sway. But by avoiding too many official “lobbying contacts” and limiting how much income that kind of work accounts for, lobbyists can shed the scarlet L, describing themselves as government affairs consultants or experts in advocacy and public policy.

All governments will use all new technology to encroach ever more on all people’s lives.

• UK Approves ‘Most Extreme Surveillance In History Of Western Democracy’ (AFP)

The British parliament this week gave the green light to new bulk surveillance powers for police and intelligence services that critics have denounced as the most far-reaching of any western democracy. The Investigatory Powers Bill would, among other measures, require websites to keep customers’ browsing history for up to a year and allow law enforcement agencies to access them to help with investigations. Edward Snowden, the former US National Security Agency contractor turned whistleblower, said the powers “went further than many autocracies”. “The UK has just legalised the most extreme surveillance in the history of western democracy,” he tweeted.

The bill, the first major update of British surveillance laws for 15 years, was passed by the House of Lords and now only needs rubber-stamping by Queen Elizabeth II. Prime Minister Theresa May introduced the bill in March when she was still interior minister, describing it as “world-leading” legislation intended to reflect the change in online communications. It gives legal footing to existing but murky powers such as the hacking of computers and mobile phones, while introducing new safeguards such as the need for a judge to authorise interception warrants. But critics have dubbed it the “snooper’s charter” and say that, in authorising the blanket retention and access by authorities of records of emails, calls, texts and web activity, it breaches fundamental rights of privacy.

The EU needs to act to stop this. But instead it still hardly resettles refugees at all, and won’t even allow for the refugees to be hosted in mainland Greece. Ugliness guaranteed. Couldn’t have been more effective if they planned it.

• Far-Right Group Attacks Refugee Camp On Greek Island Of Chios (G.)

Dozens of people have been driven out of a refugee camp on the Greek island of Chios after two successive nights of attacks by a far-right group. At least two people were wounded after attackers threw Molotov cocktails and rocks as big as boulders from elevated areas surrounding the Souda camp, activists said. Three tents were burned down and three others were hit by rocks. A 42-year-old Syrian man was assaulted, while a Nigerian boy was hit by a rock. Fearing a third attack on Friday night, about 100 former occupants refused to re-enter the camp, instead taking shelter in a nearby car park. “We do not have any kind of protection,” Mostafa al-Khatib, a Syrian refugee, told the Guardian. “No one cares about us.” Gabrielle Tan, an aid worker with Action From Switzerland, a grassroots organisation working on Chios, said those sheltering in the car park included families with babies and toddlers.

“They’d rather sleep outside in the cold than go back inside,” said Tan. The mayor of Chios said the attackers were thought to be affiliated with Greece’s main far-right party, Golden Dawn. “Of course Golden Dawn supporters are suspected to have participated,” Manolis Vournous told the Guardian. Activists and camp occupants said the rocks appeared to have been thrown with the intention of killing people. Tan said: “These rocks were probably the size of a shoebox, weighing approximately 15kg. Some of them I can’t even lift.” There were conflicting reports about who started the clashes on Wednesday. According to Vournous, the unrest began after Algerians and Moroccans stole alcohol and fireworks from a shop, frightening local residents. But some activists claimed the events escalated after a planned assault by Golden Dawn.

Debt Rattle November 15 2016

Nov 152016

November 15, 2016 Posted by Raúl Ilargi Meijer at 9:41 am Finance Tagged with: Assange, bird flu, bonds, Brexit, China, crisis, dollar, India, quake, trade war, Trump 2 Responses »

George N. Barnard Atlanta, Georgia. View on Marietta Street 1864

• UK Government Has No Plan For Brexit, Leaked Memo Says (BBC)

• Why India Wiped Out 86% Of Its Cash Overnight (BBC)

• Asian Currencies Drop to 7-Year Low Against US Dollar (BBG)

• The Euro-Dollar Parity Bet Is Back (BBG)

• ‘Trump Thump’ Whacks Bond Market For $1 Trillion Loss (R.)

• China: Trump’s First Crisis? (JP Smith)

• China’s Central Bank Faces Trump Headache (BBG)

• The World’s Biggest Real Estate Binge Is Coming To A City Near You (BBG)

• America Has Abdicated Its Leadership of the West (Spiegel)

• Memo to Trump: Defense Spending Must Be For Actual Defense (Ron Paul)

• The Democratic Party Had a Good if Not Great Candidate in Bernie Sanders (CP)

• Russian Economy Minister Detained Over Alleged $2 Million Bribe (R.)

• EU Threatens Turkey With Economic Sanctions (TT)

• Julian Assange Faces Second Day Of Questioning (ITV)

• Highly Contagious Strain Of Bird Flu Sweeps Through Europe ( DW)

• 100,000 Landslides and Hundreds of Tremors After New Zealand Quake (G._

It’s only been 5 months, after all….: “Whitehall is working on 500 Brexit-related projects and could need 30,000 extra staff..”

• UK Government Has No Plan For Brexit, Leaked Memo Says (BBC)

The government has no overall Brexit plan and a negotiating strategy may not be agreed by the cabinet for six months, a leaked memo has suggested. The memo – obtained by The Times and seen by the BBC – warns Whitehall is working on 500 Brexit-related projects and could need 30,000 extra staff. However, there is still no common exit strategy “because of divisions within the cabinet”, the leaked document adds. A government spokesman said it “didn’t recognise” the claims made in the memo. Prime Minister Theresa May hopes to invoke Article 50 – beginning the formal two-year process for leaving the EU – by the end of March next year. However, BBC political correspondent Chris Mason – who has seen the memo – says the document shows how “complex, fraught and challenging delivering Brexit will be”.

The leaked Cabinet Office memo – written by an un-named consultant and entitled “Brexit Update” of 7 November – suggests it will take another six months before the government decides precisely what it wants to achieve from Brexit or agrees on its priorities. The report criticises Mrs May, who it says is “acquiring a reputation of drawing in decisions and details to settle matters herself” – an approach it describes as being “unlikely to be sustainable”. The Times says the document also identifies cabinet splits between Foreign Secretary Boris Johnson, Brexit Secretary David Davis and International Trade Secretary Liam Fox on one side, and Chancellor Philip Hammond and Business Secretary Greg Clark on the other.

According to the newspaper, the memo said: “Every department has developed a ‘bottom-up’ plan of what the impact of Brexit could be – and its plan to cope with the ‘worst case’. “Although necessary, this falls considerably short of having a ‘government plan for Brexit’ because it has no prioritisation and no link to the overall negotiation strategy.” The memo also suggests the government does not have enough officials to implement Brexit quickly, while departments are developing individual plans resulting in “well over 500 projects”. It estimates an additional 30,000 extra civil servants could be required to meet the workload. The document also says big businesses could soon “point a gun at the government’s head” to secure what they need to maintain jobs and investment.

Tax evasion.

• Why India Wiped Out 86% Of Its Cash Overnight (BBC)

India is in the middle of an extraordinary economic experiment. On 8 November, Prime Minister Narendra Modi gave only four hours’ notice that virtually all the cash in the world’s seventh-largest economy would be effectively worthless. The Indian government likes to use the technical term “demonetisation” to describe the move, which makes it sound rather dull. It isn’t. This is the economic equivalent of “shock and awe”. Do not believe reports that this is primarily about bribery or terror financing, the real target is tax evasion and the policy is very daring indeed. Mr Modi’s “shock and awe” declaration meant that 1,000 and 500 rupee notes would no longer be valid. These may be the largest denomination Indian notes but they are not high value by international standards – 1,000 rupees is only £12. But together the two notes represent 86% of the currency in circulation.

Think of that, at a stroke 86% of the cash in India now cannot be used. What is more, India is overwhelmingly a cash economy, with 90% of all transactions taking place that way. And that is the target of Mr Modi’s dramatic move. Because so much business is done in cash, very few people pay tax on the money they earn. According to figures published by the government earlier this year, in 2013 only 1% of the population paid any income tax at all. As a result huge numbers of Indians have stashes of tax-free cash hidden away – known here as “black money”. Even the very poorest Indians have some cash savings – maybe just a few thousand rupees stored away for a daughter’s wedding, the kids’ school fees or – heaven forbid – an illness in the family.

But lots of Indians have much more than that. It is not unusual for half the value of a property transaction to be paid in cash, with buyers turning up with suitcases full of 1,000 rupee notes. The size of this shadow economy is reckoned to be as much as 20% of India’s entire GDP. Mr Modi’s demonetisation is designed to drive black money out of the shadows. At the moment you can exchange up to 4,000 (£48) of the old rupees every day in cash for new 500 (£6) and 2,000 (£24) rupee notes. There is no limit to the amount that can be deposited in bank accounts until the end of December, but the government has warned that the tax authorities will be investigating any deposits above 250,000 rupees (£2,962).

This may continue for a while. Energy in the crosshairs.

• Asian Currencies Drop to 7-Year Low Against US Dollar (BBG)

A gauge of emerging Asian currencies is heading for the lowest close since March 2009 as the dollar surged after Donald Trump’s unexpected election victory. The Bloomberg-JPMorgan Asia Dollar Index, which tracks 10 regional currencies, is down 2% this year. As recently as August it was up 1.7%. Emerging assets have tumbled in the past week as the president-elect is seen unleashing a spending surge, pushing the Federal Reserve to raise interest rates.

The euro is way overvalued anyway, of course. Parity would sake the south to its core, though, much more than the north.

• The Euro-Dollar Parity Bet Is Back (BBG)

Donald Trump’s electoral upset has breathed new life into the bet that diverging economic paths will drive the euro toward parity with the dollar for the first time since 2002. Traders see about a 45% chance the European currency will sink to $1 in the next year, about double the probability assigned a week ago. The president-elect’s pledges to boost spending and cut taxes are fueling speculation that economic growth will accelerate, pushing the Federal Reserve to raise interest rates more quickly. That sentiment sent a gauge of the dollar to the strongest since February on Monday, while the euro fell to about $1.07, touching its lowest since 2015.

For Deutsche Bank, the world’s fourth-biggest currency trader, the election results are enough to jolt the euro out of a range it’s been stuck in for months and push it below $1 in 2017. Calls for parity crumbled this year as the Fed cut back on the number of expected rate hikes, even as the ECB continued to add unprecedented amounts of stimulus. Now Trump’s win is rekindling the wager that drove the dollar to back-to-back annual gains in 2014-2015, for its biggest two-year rally since the euro’s 1999 debut. “Divergence is back,” George Saravelos, a strategist at Deutsche Bank in London, wrote in a report dated Nov. 13. “The Trump victory has changed things.”

The Trump fairytale lacks all sense of reality. He’s going to stumble upon a zillion roadblocks on his way to get the best of what he can get, and that means volatility.

• ‘Trump Thump’ Whacks Bond Market For $1 Trillion Loss (R.)

Donald Trump’s stunning victory for the White House may mark the long-awaited end to the more than 30-year-old bull run in bonds, as bets on faster U.S. growth and inflation lead investors to favor stocks over bonds. A two-day thumping wiped out more than $1 trillion across global bond markets worldwide, the worst rout in nearly 1-1/2 years, on bets that plans under a Trump administration would boost business investments and spending while firing up inflation. “We’ve had a sentiment shift in the bond market. We’ve seen it, too. People have already started reallocating out of bonds and into stocks,” said Jeff Gundlach, CEO of DoubleLine Capital. “The cracks have been forming for five years – we’re in this slow-grinding higher phase in yields,” he said.

The stampede from bonds propelled longer-dated U.S. yields to their highest levels since January with the 30-year yield posting its biggest weekly increase since January 2009. In the stock market, the blue chip Dow Jones industrial average finished out its best week in five years on Friday as it marked a record high close. The 10-year German Bund yield rose to its highest level in eight months, while the 10-year British gilt yield climbed to its highest level prior to Brexit. [..] While investors dumped most types of bonds after Trump’s victory, they piled into Treasury inflation-protected securities as a hedge against a pick-up in inflation. “You are seeing interest in TIPS right now from a widening investors base,” said Brian Smith, portfolio manager at TCW in Los Angeles, which has $197 billion in assets. Investors poured $1 billion into TIPS in the week ended Nov. 9, the second-biggest inflows since records began in October 2002.

Trump may hand China exactly what it needs but is afraid to face.

• China: Trump’s First Crisis? (JP Smith)

There is a growing possibility that China will be at the epicentre of President-elect Trump’s first crisis, triggered by concerns over the potential impact of protectionist measures on China’s trade surplus, which currently supports the increasingly fragile financing chains supporting corporate debt that the IMF estimates at around 155% of GDP. Trump’s pledges to impose tariffs of up to 45% on Chinese manufactured goods threatens to drive a significant uptick in the amount of capital flight from the renminbi, while the prospect of measures to change the US tax system to encourage companies to repatriate cash to the are already pulling the dollar higher.

At this point the likelihood of Trump actually delivering on his protectionist rhetoric is secondary to the psychological impact on resident corporate and household savers of any potential threat to the current uneasy equilibrium within the Chinese economy. The situation could quickly become much more acute than the one faced by the FOMC earlier this year, when the Fed appears to have backed off raising rates primarily due to concerns about China, so that President Trump will have to make a decision whether to clarify his intentions towards China and possibly repudiate his key campaign pledge at a relatively early stage of his presidency.

The consequences of his not doing so could be to precipitate an economic and financial crisis within China, that would obviously have major adverse consequences for the regional and global economies and also some potentially very serious implications for geopolitical stability. In brief, our longstanding bearish view on China has rested on the governance factors at both a central and local government level that have led to massive cost factor subsidies driving overcapacity across a broad range of industries. This has resulted in very high levels of debt which are being financed from an increasing range of institutions and instruments, most recently the city and county banks and shadow financing instruments, all of which are lack transparency even by Chinese standards.

No-one disputes any more that an increasing amount of financing is being used to service and roll over existing loans and that higher write-offs are not keeping pace with the flow of doubtful loans. The financing structures that surround the overcapacity industries are increasingly fragile especially on a regional level; Chinese enterprises are simply too interconnected to fail. Over the course of 2016, there have been some indications of a visible improvement in both the macro-economic and corporate numbers, as well as some of the more physical and therefore reliable indications of activity such as power production and freight journeys. This has, however, been a function of the massive monetary and fiscal stimulus beginning in the second half of 2015, to head off a potential crisis in response to the plunge in the onshore equity market.

“As if defusing the world’s biggest debt bomb while keeping economic growth humming wasn’t tough enough..”

• China’s Central Bank Faces Trump Headache (BBG)

As if defusing the world’s biggest debt bomb while keeping economic growth humming wasn’t tough enough, Donald Trump’s shock election victory has just made the policy outlook even more complex for People’s Bank of China Governor Zhou Xiaochuan. The president-elect’s threats to slap tariffs of up to 45% on Chinese imports cast a shadow over the economy’s stabilization and the world’s most crucial trade relationship. Protectionism may fuel more international use of the yuan, according to Standard Chartered, while UBS says tariffs may push the PBOC to let the yuan fall further. Longer-term ambitions like capital account opening and yuan internationalization are also clouded, hinging on whether President Trump delivers on candidate Trump’s promises.

The PBOC’s monetary policy becomes trickier, and harder to keep neutral, amid “huge uncertainty” about Trump’s impact on China, according to Larry Hu at Macquarie in Hong Kong. “It’s hard to tell what would be actual policies instead of just campaign rhetoric,” Hu wrote in a note. Even before Trump takes office Jan. 20, there’s reason to think his campaign threats to impose tariffs and label China a currency manipulator may be tempered by the reality of governing. He’s already signaled there may be some watering down of other contentious issues such as building a wall on the Mexican border and scrapping President Barack Obama’s health care program. There’s a low probability that the PBOC will cut its benchmark interest rates or the required reserve ratio for banks this year, the state-run Xinhua News Agency reported Tuesday. The central bank has held its main rates at record lows for more than a year to support growth.

Whatever happened to people’s right to shelter?

• The World’s Biggest Real Estate Binge Is Coming To A City Near You (BBG)

If they were anywhere else in Beijing, the five young women in cowboy hats and matching red, white, and blue costumes would look wildly out of place. But here at the city’s biggest international property fair – a frenetic gathering of brokers, developers and other real estate professionals all jockeying for the attention of Chinese buyers – the quintet of wannabe Texans fits right in. As they promote Houston townhouses (“Yours for as little as $350,000!”), a Portugal contingent touts its Golden Visa program and the Australian delegation lures passersby with stuffed kangaroos. Welcome to ground zero for the world’s largest cross-border residential property boom. Motivated by a weakening yuan, surging domestic housing costs and the desire to secure offshore footholds, Chinese citizens are snapping up overseas homes at an accelerating pace.

They’re also venturing further afield than ever before, spreading beyond the likes of Sydney and Vancouver to lower-priced markets including Houston, Thailand’s Pattaya Beach and Malaysia’s Johor Bahru. The buying spree has defied Chinese government efforts to restrict capital outflows and shows little sign of slowing after an estimated $15 billion of overseas real estate purchases in the first half. For cities in the cross-hairs, the challenge is to balance the economic benefits of Chinese demand against the risk that rising home prices spur a public backlash. “The Chinese have managed to accumulate very large amounts of wealth, and the opportunities to deploy that capital in their own market are somewhat restricted,” said Richard Barkham at CBRE, the world’s largest commercial property brokerage. “China has more than a billion people. Personally, I think we have just seen a trickle.”

I have too much to say on this to say it here.

• America Has Abdicated Its Leadership of the West (Spiegel)

Even history sometimes leans toward pathos. In January 2017, when Donald Trump is sworn in as the 45th president of the United States, the American Age will celebrate its 100th birthday – and its funeral. The West was constituted in its modern form in January 1917. World War I was raging in Europe at the time and in Washington, D.C., President Woodrow Wilson told his country that it was time for Americans to take responsibility for “peace and justice.” In April he said: “The world must be made safe for democracy.” He declared war on Germany and sent soldiers to Europe to secure victory for the Western democracies – and the United States assumed the leadership of the Western world. It was an early phase of political globalization. One hundred years later: Trump.

Trump, who wants nothing to do with globalization; Trump, who preaches American nationalism, isolation, partial withdrawal from world trade and zero responsibility for a global problem like climate change. And all of this after a perverse election campaign marked by resentment, racism and incitement. Human dignity is the centerpiece of the Western project. Following the revolutions in France and the US in the late 18th century, states began guaranteeing human rights for the first time. Human rights have a normative character, as Heinrich August Winkler argued in his monumental work “History of the West.” And a racist cannot embody this normative project. Trump has no sense of dignity – neither for himself nor others. He does not qualify as the leader of the Western world, because he is both unwilling and incapable of assuming that role.

We now face emptiness – the fear of the void. What will happen to the West, to Europe, to Germany without the United States as its leading power? Germany is a child of the West, particularly of the United States, brought to life with American generosity, long spoon-fed and now in a deep state of shock. The American president was always simultaneously our president, at least a little, and Barack Obama was a worthy president of the West. Now, though, we must come to terms with a lack of Western leadership. What were those 100 years like? The history of the modern West can be told in many ways: as a heroic tale, as a story of greed, as a mission or as a tale of fear. This article is about 100 years of fear, in particular the fear for our freedom, a quintessentially American paranoia that spread to the rest of the West. The word is not being used negatively here; we are talking about fear as a bulwark protecting us against danger. There are good fears and bad fears.

“If the answer to these questions is “yes,” then I am afraid we should prepare for economic collapse in very short order.”

• Memo to Trump: Defense Spending Must Be For Actual Defense (Ron Paul)

[..] The military budget is something very different from the defense budget. The military budget is the money spent each year not to defend the United States, but to enrich the military-industrial complex, benefit special interests, regime-change countries overseas, maintain a global US military empire, and provide defense to favored allies. The military budget for the United States is larger than the combined military spending budget of the next seven or so countries down the line. To get the military budget in line with our real defense needs would require a focus on our actual interests and a dramatic decrease in spending. The spending follows the policy, and the policy right now reflects the neocon and media propaganda that we must run the rest of the world or there will be total chaos. This is sometimes called “American exceptionalism,” but it is far from a “pro-American” approach.

Do we really need to continue spending hundreds of billions of dollars manipulating elections overseas? Destabilizing governments that do not do as Washington tells them? Rewarding those who follow Washington’s orders with massive aid and weapons sales? Do we need to continue the endless war in Afghanistan even as we discover that Saudi Arabia had far more to do with 9/11 than the Taliban we have been fighting for a decade and a half? Do we really need 800 US military bases in more than 70 countries overseas? Do we need to continue to serve as the military protection force for our wealthy NATO partners even though they are more than capable of defending themselves? Do we need our CIA to continue to provoke revolutions like in Ukraine or armed insurgencies like in Syria?

If the answer to these questions is “yes,” then I am afraid we should prepare for economic collapse in very short order. Then, with our economy in ruins, we will face the wrath of those countries overseas which have been in the crosshairs of our interventionist foreign policy. If the answer is no, then we must work to convince our countrymen to reject the idea of Empire and embrace the United States as a constitutional republic that no longer goes abroad seeking monsters to slay. The choice is ours.

“Their corrupt Democratic Party had a good if not great candidate in Bernie Sanders and their DNC deliberately fought to keep him from winning the primaries..”

• The Democratic Party Had a Good if Not Great Candidate in Bernie Sanders (CP)

It’s hard to empathize with the corporate liberals who streamed from the Javits Center in tears [last] Tuesday night. Their corrupt Democratic Party had a good if not great candidate in Bernie Sanders and their DNC deliberately fought to keep him from winning the primaries. In every poll taken during his campaign, Sanders beat Donald Trump in a hypothetical general election. Oh, they’ll start pouring out their bile now, blaming everyone but themselves and their candidate. It was the media’s fault for popularizing Trump (a Clinton strategy). It was the FBI’s fault for re-opening the email case (thanks to Huma Abedin’s ex). It was stupid Middle America’s fault for being racist and sexist (was that why they voted for Trump?). It was third-party supporters who screwed us in Florida again (Paul Krugman and Rachel Maddow are furious that leftists didn’t vote for their heroine). It was Russia’s fault for hacking the DNC (no evidence) and plotting to invade Europe (no evidence).

In Hillary’s farewell speech, she kept to form and quoted scripture–the very last guide she has used to shape her political life. In other words, she remained a hypocrite. She talked to little girls who think she is a great flagbearer for womankind, even though she precipitated the brutal destruction of infrastructure, the breakdown of law and order, and the eventual collapse of the Libyan state, throwing thousands of brown women, boys and girls into extreme danger and exile. She exported the same plan to Syria. And she supported a coup d’état in Honduras that has now led to predictably vicious repression and regular homicide. The truth is, Hillary was a terrible candidate. Like Al Gore. She was charmless and toneless. In an election atmosphere typified by personality politics, Hillary lacked one.

She had a rich track record of foreign policy meltdowns at the State Department and a feckless tenure in the Senate. She alienated Congress in 1993 when she failed to get health care reform passed. And she evidently used high office to peddle access and influence to Clinton Foundation donors. Her positions had changed repeatedly, suggesting she couldn’t be trusted. This, compounded by the scandal surrounding her lazy use of email in the trafficking of confidential information, and ham-fisted attempts to cover it up, cast her in the dimmest of lights with many Americans. An albatross husband still despised by conservatives and who loomed hungrily behind the floodlights of her campaign–didn’t help either.

Russia’s energy and banking sectors remain murky fields.

• Russian Economy Minister Detained Over Alleged $2 Million Bribe (R.)

Russian Economy Minister Alexei Ulyukayev has been detained over a $2-million bribe allegedly received for a “positive” assessment, which led to oil producer Rosneft acquiring a 50% stake in Bashneft, the country’s Investigative Committee said on Tuesday. He is the highest-ranked statesman in Russia arrested since the failed coup in 1991. The Investigative Committee, which directly reports to President Vladimir Putin, said the investigation would put forward charges soon. “Ulyukayev was detained at night, immediately after interrogation,” an Investigative Committee official told Reuters. It was not immediately clear, what exactly Ulyukayev, who has overseen massive government privatization, has been accused of, but Russian news outlet RT reported that the minister had been detained in the act of taking the bribe.

Kremlin spokesman Dmitry Peskov told TASS news agency that “this is a serious accusation”. “In any case, only a court is able to decide anything,” he was quoted as saying. RT reported that Peskov said he did not know if Putin was aware of the minister’s detention. According to RT, if found guilty, Ulyukayev could face a fine up to 100 times the size of the bribe plus the loss of the right to serve in some state positions and undertake certain activities for up to 15 years. A prison sentence of as long as 15 years and a fine that was 70 times the size of the bribe were other potential outcomes following a guilty verdict, RT said.

I’ve said it 1000 times: Turkey will never be a member of the EU. Countries will leave as soon as that propect gets real.

• EU Threatens Turkey With Economic Sanctions (TT)

Turkey-EU relations braced for a major showdown after the Turkish government renewed its push for bringing the death penalty back, leading to mutual recriminations, trading barbs over recent days. To reveal the gravity of the situation and its meaning for the EU, European Parliament (EP) President Martin Schulz even spoke about possible economic sanctions against Turkey over draconian emergency practices that destroyed central pillars of democracy and the rule of law. As Turkey’s record on human rights hits lows, its ramifications for the EU accession process becomes evidently palpable with dying prospects for membership in the foreseeable future. The unrelenting political crackdown inside Turkey has left the EU with few options seen deterrent to force Ankara to change its policies at home.

Speaking to German’s Bild am Sonntag newspaper, Schulz said about the political climate in Brussels where EU leaders discuss imposing economic sanctions against Turkey in response to President Recep Tayyip Erdogan’s actions to curb the opposition. The consideration of such an option is preferred to terminating entire talks between Turkey and the EU, he argued. “We as the EU will have to consider which economic measures we can take,” Schulz said. One of the arguments he brought forward is that the breakdown in relations would leave the EU with no leverage and option that it could wield influence Turkey to help the opposition and those who are held in pre-trial detention

But his warnings and comment fell on deaf ears in Ankara, prompting a swift rebuke from Turkish Foreign Minister Mevlut Cavusoglu, who called on Schulz to do whatever possible to back up his threats. Speaking at a press conference in Ankara along with his Chinese counterpart, Cavusoglu called on Schulz to remove banners and booths of Kurdistan Workers’ Party (PKK), which Turkey and the EU consider as a terrorist group, from EP building in Brussels. His criticism refers to periodic protests of pro-PKK groups near EP headquarters in Brussels as European Kurds demonstrate there against the Turkish state, set up tents and booths filled with PKK flags and images of imprisoned PKK chief Abdullah Ocalan.

If Sweden had a case, they would have made it eons ago. What a disgrace as a country.

• Julian Assange Faces Second Day Of Questioning (ITV)

WikiLeaks founder Julian Assange will be questioned for a second day inside the Ecuadorian Embassy in London over a sex allegation. Swedish prosecutor Ingrid Isgren and Swedish police inspector Cecilia Redell will once again interview Assange through a representative of the Ecuadorian government. They said a DNA sample will be taken if he gives consent. It is believed Assange was “fully cooperative” during their initial meeting on Monday. The process could take three days, before Swedish authorities decide on their next move.

However Ms Isgren will not be giving interviews during her stay in London. A statement said: “As the investigation is ongoing, it is subject to confidentiality. “This confidentiality also applies according to Ecuadorian legislation for the investigative measures conducted at the embassy. “Therefore, the prosecutors cannot provide information concerning details of the investigation after the interview.”

Still waiting for the big one.

• Highly Contagious Strain Of Bird Flu Sweeps Through Europe (DW)

The German state of Schleswig-Holstein widened protection measures on Monday to protect against an outbreak of the H5N8 influenza virus among wild birds, which has spread to poultry. All farms – including smallholdings – will be required to tighten biosecurity, with the use of protective clothing and footwear, and the widespread disinfection of all farm buildings and vehicles used to transport poultry. Over the weekend, 30,000 chickens were culled as a precaution at a farm close to the northern city of Grumby, which saw an outbreak of the virus. The affected breeder farm is currently being disinfected and cleaned, Schleswig-Holstein’s environment ministry said on Monday.

Two smaller poultry farms in the same state and the neighboring Mecklenburg-Western Pomerania were also affected over the weekend, but neither states registered new H5N8 cases on Monday, local officials said. So far, five German states have seen bird flu outbreaks, including the southern state of Baden-Württemberg, which reported cases around Lake Constance, which is bordered by Switzerland and Austria. The state of Saxony also confirmed the H5N8 virus was detected in a dead heron at a lake near the city of Leipzig. On Monday, Denmark sought to contain its own outbreak among wild birds by ordering a farm to destroy hundreds of thousands of eggs imported from Germany, as a precaution. Some 300,000 eggs from the farm in Grumby were supplied to a hatchery in the Danish town of Baekke, near Kolding. They are all expected to be destroyed by Tuesday.

Still waiting for the big one here as well. Jitters all around.

• 100,000 Landslides and Hundreds of Tremors After New Zealand Quake (G._

Up to 100,000 landslides were caused by New Zealand’s 7.8 magnitude earthquake, officials said, as aftershocks continued to shake parts of both islands of New Zealand and emergency crews worked to help people in the main affected areas. A major relief effort continued on Tuesday, with thousands of people stranded by the quake, which blocked roads and damaged many buildings across parts of the North and South islands. Emergency services and defence personnel were evacuating hundreds of tourists and residents from Kaikoura, the heavily hit South Island town, amid more strong aftershocks on Tuesday.

The powerful earthquake killed two people. It struck just after midnight on Sunday, destroying farm homesteads, sending glass and masonry toppling from buildings in the capital, Wellington, on the North Island and cutting road and rail links throughout the north-east of the South Island. As aftershocks continued to rattle the region on Wednesday, emergency services cordoned off streets in Wellington and evacuated several buildings due to fears one of them might collapse. Gale-force winds and rain were hampering recovery efforts as wild weather brought floods to the Greater Wellington region. Hundreds of aftershocks continued to rock the region. A 5.4 tremor was among the bigger aftershocks and was felt strongly in Wellington.

Debt Rattle October 21 2016

Oct 212016

October 21, 2016 Posted by Raúl Ilargi Meijer at 9:43 am Finance Tagged with: bubble, Dickens, dollar, euro, Greece, hacking, Hillary, lions, Trump, war, yuan Comments Off

Lewis Wickes Hine Game of craps. Cincinnati, Ohio 1908

NICOLE FOSS is the keynote speaker tonight, October 21, at the

Community Solutions Conference
McGregor Hall, Antioch College
Yellow Springs, Ohio
7.30 pm

• Dollar Near 7-Month High As Euro Slides, Asia Slips (R.)

• Another Thing Trump, Hillary Get Wrong In This Election: The National Debt (F.)

• Trump’s Candidacy – the Good and the Bad of It (Stockman)

• China Property Prices Rise At Fastest Pace On Record In September (CNBC)

• Yuan Hits Record Low Against Dollar in Offshore Trading (WSJ)

• China’s Property Frenzy Spurs Risky Business (WSJ)

• China’s Local Governments Are Getting Into The Venture Capital Business (BBG)

• The Sharing Economy is Creating a Dickensian World (Das)

• ‘Lions Hunting Zebras’: Ex-Wells Fargo Bankers Describe Abuses (NYT)

• Washington Foreign Policy Elites Not Sorry To See Obama Go (WaPo)

• Hacking Democracy (ZH)

• Italy Shields Russia From EU Sanctions Threat (EUO)

• Draghi Says Athens Should Focus On Reforms, And The Eurozone On Debt (Kath.)

• 126,956 Greeks Work In Private Sector For €100 Per Month (KTG)

“The European Central Bank removed a source of immediate risk for traders by revealing that it did not discuss tapering its QE program at this month’s meeting..”

• Dollar Near 7-Month High As Euro Slides, Asia Slips (R.)

Asian stocks were mostly lower on Friday as the dollar climbed to seven-month highs against a basket of currencies and dragged down crude oil prices, cooling investor risk appetite. The greenback was boosted by a fall in the euro after the ECB shot down talk it was contemplating tapering its monetary easing – sending the common currency to its lowest since March. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.3%. South Korea’s Kospi lost 0.4% and Australian stocks shed 0.1%, weighed down by a retreat in energy shares. Singapore fell 0.4% while Shanghai added 0.3%. Japan’s Nikkei rose 0.3% , brushing a six-month high, as the yen weakened against the dollar.

U.S. stocks ended a choppy session on Thursday slightly lower as investors digested the latest round of earnings, with a sharp drop in telecoms offset by gains in healthcare. The ECB left its ultra-loose monetary policy unchanged on Thursday but kept the door open to more stimulus in December, with ECB President Mario Draghi dousing recent market speculation that the central bank may begin tapering its €1.7 trillion asset-buying program. “The European Central Bank removed a source of immediate risk for traders by revealing that it did not discuss tapering its QE program at this month’s meeting,” wrote Ric Spooner, chief market analyst at CMC Markets. “Decisions are being deferred until December pending the outcome of research – meaning that meeting will be a key focus for markets.”

Debt explained in the vein of Steve Keen.

• Another Thing Trump, Hillary Get Wrong In This Election: The National Debt (F.)

As if there aren’t enough things to be upset about as it is, here’s another: neither candidate’s position on the debt and the deficit makes economic sense (something they each reinforced in last night’s Las Vegas debate). If they act on their campaign promises, we will most certainly be facing an economic downturn, if not an outright disaster. 1. Public sector deficits must, by definition, be private sector surpluses. If one entity spends more than it earns (the public sector) then another must earn more than it spends (you and me). This is an inescapable accounting identity. 2. Public sector debt must, by definition, be a private sector asset. If one entity adds liabilities, another adds assets–another inescapable law of accounting. 3. It is impossible for a nation to be forced to default in debt denominated in its own currency. Not unlikely, not improbable, but impossible. This is not my opinion, it’s a fact, albeit a poorly known one.

4. U.S. public debt to foreign countries like China has nothing to do with the budget deficit. It’s a result of the trade deficit. The federal government’s budget could have been in surplus for the past 100 years, but whenever we buy more from China than we sell to them, they have leftover cash which they use to buy our financial assets. These may include but are not limited to Treasury Bills. No amount of budget balancing will affect debt to China. 5. The private sector cannot consistently generate sufficient demand to create jobs for everyone who wants one. As technology and productivity have increased, so it has become more difficult. Entrepreneurs cannot be blamed for adding self-checkout lanes, they have families and stockholders. But it means the store can sell the same volume of output with fewer employees–unemployment therefore rises.

Hence, we need the public sector to spend in deficit so that a.) the private sector can net save and b.) jobs are created to supplement those generated by the market system. And it creates neither a default risk nor inflation–unless we are already at full-employment, which means we don’t need to be spending that much in the first place! It is noteworthy that when, in the midst of the Great Depression, the government decided to try to reduce the deficit, unemployment jumped from 14% (after having fallen from nearly 25%) to 19%. Once WWII hit, however, any worries about government spending went right out the window and unemployment plummeted to 1.9%. There’s no reason we can’t be there right now. Only bad policy can stand in our way.

Dave’s new book, Trumped, is out. “God help America if she becomes president.”

• Trump’s Candidacy – the Good and the Bad of It (Stockman)

America is heading for a devastating financial collapse and prolonged recession that will make the last go-round look tame by comparison. The entire recovery is one giant Potemkin village of phony economics and egregious financial asset inflation. It isn’t even a mixed or debatable story. Beneath the “all is awesome” propaganda of the establishment institutions is a broken system hurtling toward ruin. For example, during the month of July 2016, when the Democrats were convening in Philadelphia to confirm a third Obama term and toast 25-years of Bubble Finance, exactly 98 million Americans in the prime working ages of 25 to 54 years had jobs, including part-time gigs and self-employment. That compares to 98.1 million during July 2000. That’s right. After 16 years of the current regime we have 5 million more prime working age Americans and not a single one of them with a job.

At the same time, the number of persons in households receiving means-tested benefits has risen from 50 million to 110 million. Even as the economic wagon has faltered and become loaded with dependents, however, the financial system has grown by leaps and bounds. For example, during those same 16 years public and private debt outstanding in America has risen from $28 trillion to $64 trillion. The value of publicly traded equity has increased from $25 trillion to $45 trillion. And the net worth of the Forbes 400 has nearly doubled from $1.2 trillion to $2.4 trillion. In a word, the U.S. economy is a ticking time bomb. Main Street economics and Wall Street finance have become radically and dangerously disconnected owing to the reckless falsification of financial markets by the Fed and Washington’s addiction to endless deficits and crony capitalist bailouts and boodle.

There is not a remote chance that this toxic brew can be sustained much longer. Under those circumstances the very last thing America will need in 2017–18 when it hits the fan is a lifetime political careerist and clueless acolyte of the state who knows all the right words and harbors all the wrong ideas. Indeed, during the coming crisis America will need a brash disrupter of the status quo, not a diehard defender. Yet when the Dow index drops by 7,000 points and unemployment erupts back toward double digits, Hillary Clinton’s only impulse will be to double down. That is, to fire-up the printing presses at the Fed from red hot to white heat, plunge the nation’s fiscal equation back into multi-trillion deficits and crank-out Washington’s free stuff like never before.

A combination of a Clinton White House and the devastating day of reckoning just ahead would result in Big Government on steroids. It would also tilt the Imperial City toward war in order to distract the nation’s disgruntled voters in their tens of millions. Indeed, her prospective war cabinet — including Victoria Nuland and Michéle Flournoy — is comprised of the actual architects of Washington’s unprovoked NATO siege on Russia’s own doorsteps. God help America if she becomes president.

And Beijing keeps pretending they want to cool it down.

• China Property Prices Rise At Fastest Pace On Record In September (CNBC)

China property prices rose at the fastest pace on record in September, fueling fears of a market bubble in the world’s second-largest economy. Property prices climbed 11.2% on-year in September in 70 major cities while prices were up 2.1% from August, according to Reuters calculations using data from the National Bureau of Statistics. In August, prices rose 9.2% from a year ago. Home prices in the second-tier city of Hefei recorded the largest on-year gain at 46.8%, compared with on-year gains of 40.3% in August. Top August performer Xiamen posted an on-year rise of 46.5% against an increase of 43.8% in August. Prices in Shenzhen, Shanghai and Beijing rose 34.1%, 32.7% and 27.8% on an annual basis respectively, according to Reuters.

Underpinning the strong growth was simply “debt” said independent analyst, Fraser Howie, who is also co-author of “Red Capitalism” and “Privatizing China.” “A decade ago you could make a case for strong property in China (with) genuine demand and relatively low leverage in the sector. This is certainly not the case now. You are seeing a lot of leverage in the property sector, both retail and commercial,” he told CNBC’s “Squawk Box”. The quick gains in property prices in China came after the Chinese government introduced measures aimed at boosting home sales earlier this year to reduce large inventories in an effort to limit an economic slowdown. Recent fears of overheating, however, prompted local governments in China to announce a flurry of property market cooling measures in recent weeks. Any impact from those measures was not reflected in the latest data.

Despite the property cooling measures, Howie said the broad theme of how the Chinese government was responding to the situation was recurrent. “For five to six years or so, you have on-again-off-again cooling measures in the property market, trying to make property more affordable and it’s still nowhere near affordable,” he added. The Chinese government, he said, “has no clear plan”. “It’s just a bubble, they try to pull it back; they rein it in a bit, they let it go again when it impacts the real economy.”

It’s gettiing time for the IMF to comment on this.

• Yuan Hits Record Low Against Dollar in Offshore Trading (WSJ)

The yuan hit a record low against the U.S. dollar in offshore trading Friday after strong earnings on Wall Street and weakness in the euro boosted the strength of the greenback. The dollar reached a high of 6.75651 against the Chinese currency, which trades freely around the clock in offshore markets such as Hong Kong, its biggest trading center. It was last trading up 0.2% at 6.7582. The yuan has been traded outside China since 2010. Hong Kong’s markets are closed today as a typhoon lashes the city, with the yuan breaching its previous record around 7.41 a.m. local time, typically a time when market liquidity is thin. The People’s Bank of China later set its daily reference rate for the yuan traded in mainland China at 6.7558 against the U.S. dollar.

Onshore, the yuan is allowed to trade 2% either side of this level. The currency last traded at 6.7519 against the greenback, while its offshore counterpart weakened further after the fixing. “Overnight we saw a broadly stronger U.S. dollar,” says Qi Gao, Asia foreign exchange strategist at Scotiabank. He anticipates further strength in the greenback in the weeks running up to the U.S. Federal Reserve’s December meeting, at which the central bank may deliver its first rate increase in a year.

“This is actually what we’re told by banks’ client managers to do to meet [regulatory] requirements.”

• China’s Property Frenzy Spurs Risky Business (WSJ)

Xiong Meifang was about $30,000 short two months ago for a 30% down payment on an $895,000 apartment in the southern part of Beijing. To make up the difference, the 31-year-old graphic designer took out a line of credit from a national bank. She said the bank told her she could use the loan however she wanted. China bans borrowing for down payments. A surge in such financing offered by nonbank lenders earlier this year led to a regulatory clampdown. But as banks increasingly turn to mortgage lending, there are new signs of risky practices. In some instances, banks offer credit lines to borrowers buying apartments with few questions asked. In others, banks work with independent loan brokers or property agents to funnel money into down-payment financing.

Data released Tuesday showed medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first. Easy credit has fanned a property-buying craze in many Chinese cities this year, helping shore up an otherwise weak economy. Government data on Wednesday showed GDP expanded by 6.7% from a year earlier in the third quarter, matching expectations, largely on the strength of the hot property market and loose monetary policies. In the past two weeks, two dozen cities have asked banks to tighten home-lending standards. Financial regulators are seeking to rein in the relatively new practice of banks working with brokers and others, such as developers, to help home buyers come up with down payments.

[..] On paper, the purpose of the loan can’t be for the home purchase itself. But the company could help arrange a contract with, say, a decorator, to show a bank that the loan would be for home decoration, the representative said, adding that ultimately the bank can’t check how the money is used. [The broker] charges a 3% flat fee on the amount of any loans it helps arrange. “It’s all legal, of course,” said the representative. “This is actually what we’re told by banks’ client managers to do to meet [regulatory] requirements.”

While they have huge debts with the shadow banks. What could go worng?

• China’s Local Governments Are Getting Into The Venture Capital Business (BBG)

China’s next billion-dollar startup could have backing from an investor with more money than Warren Buffett and a knack for promoting spicy duck-neck delicacies. The Hubei provincial government is armed with 547 billion yuan ($81 billion) earmarked for investments that can diversify a job base dependent on steel, mining and cars. And the bureaucrats in the heartland region along the Yangtze River are letting professionals do the work – allocating the money to investment houses Sequoia Capital, TCL Capital and CBC Capital. Local governments across China are getting into the venture-capital business, deploying a combined 3 trillion yuan as the Communist Party resolves to modernize the economy and reduce debt-fueled spending on infrastructure. The money is meant to spur development of biotechnology, internet and high-end manufacturing companies that can replace the stumbling heavy industries sapping economic growth.

“Our focus is more on the sector than the return,” said Wang Hanbing, who oversees $6 billion as chairman of the Yangtze River Industry Fund, one of several using Hubei government money. “We encourage people to bring real jobs back to Hubei.” China is grappling with a profusion of economic difficulties such as declining exports, surging home prices and skyrocketing corporate debt. The State Council signaled last month it had a bigger appetite for venture capital, urging local administrations to play a leading role and promising to level the playing field for foreign VC funds. Policy makers want to curb the proliferation of borrowing by regional authorities to pay for infrastructure projects that prop up growth. Local government financing vehicles borrow on behalf of governments, which often are barred from doing so. Through September, the debt issued by more than 1,600 such vehicles soared 47% from a year ago to 1.5 trillion yuan.

The same effect as globalization: bring down wages..

• The Sharing Economy is Creating a Dickensian World (Das)

Cheerleaders frame the sharing economy in lofty utopian terms: The sharing economy isn’t business but a social movement, transforming relationships between people in a new form of internet intimacy and humanitarianism. Exchanges are economic. Buyers are primarily concerned about access to services at low costs rather than social objectives. Providers are motivated by money, using their assets and labor to get by in an unforgiving and poor economic environment.

The major financial backers of the sharing economy aren’t philanthropists. They are Wall Street and Silicon Valley’s 1%, related venture-capital firms and a few institutional investors, such as sovereign-wealth funds. The amount of capital provided is substantial. Given the normal five-to-seven-year cycle for such investments, the pressure to deliver results will increase, bringing it into conflict with the social or altruistic objectives espoused. Ultimately, the sharing economy will influence how traditional businesses operate. Traditional automobile makers could offer a car-sharing service, such as BMW’s Drive Now. Users can access a car as needed, paying only for usage. These types of changes may decrease rather than increase revenue as it substitutes hiring arrangements for outright purchases.

But perhaps the real issue is that the sharing economy reverses progress in labor markets. Whatever the gains from increased efficiency, it recreates a Dickensian world for a part of the population. Formal employment protects labor from exploitation and deprivation to varying degrees. The sharing economy transfers the risk of economic uncertainty from the employer to the employee with potentially tragic consequences. Most important, the underlying economic premise is false. Consumption constitutes 60%-70% of activity in advanced economies. In 1914, Henry Ford doubled his workers’ pay from $2.34 to $5 a day, recognizing that paying people more would enable them to afford the cars they were producing. Reduction of income levels and employment security ultimately reduces consumption and economic activity, impoverishing most within societies.

They should take the lot of them, everyone involved, and ban them from ever working in banking or finance again.

• ‘Lions Hunting Zebras’: Ex-Wells Fargo Bankers Describe Abuses (NYT)

Mexican immigrants who speak little English. Older adults with memory problems. College students opening their first bank accounts. Small-business owners with several lines of credit. These were some of the customers whom bankers at Wells Fargo, trying to meet steep sales goals and avoid being fired, targeted for unauthorized or unnecessary accounts, according to legal filings and statements from former bank employees. “The analogy I use was that it was like lions hunting zebras,” said Kevin Pham, a former Wells Fargo employee in San Jose, Calif., who saw it happening at the branch where he worked. “They would look for the weakest, the ones that would put up the least resistance.”

Wells Fargo would like to close the chapter on the sham account scandal, saying it has changed its policies, replaced its chief executive and refunded $2.6 million to customers. But lawmakers and regulators say they will not let it go that quickly, and emerging evidence that some victims were among the bank’s most vulnerable customers has given them fresh ammunition. This week, three members of the Board of Supervisors in San Francisco, Wells Fargo’s hometown, introduced a resolution calling on the city to cut all financial ties with the bank. They cited both the recent scandal and past cases — particularly the $175 million that Wells Fargo paid in 2012 to settle accusations that its mortgage brokers had discriminated against black and Hispanic borrowers.

You may not like Trump, but do you like war any better?

• Washington Foreign Policy Elites Not Sorry To See Obama Go (WaPo)

There is one corner of Washington where Donald Trump’s scorched-earth presidential campaign is treated as a mere distraction and where bipartisanship reigns. In the rarefied world of the Washington foreign policy establishment, President Obama’s departure from the White House – and the possible return of a more conventional and hawkish Hillary Clinton — is being met with quiet relief. The Republicans and Democrats who make up the foreign policy elite are laying the groundwork for a more assertive American foreign policy, via a flurry of reports shaped by officials who are likely to play senior roles in a potential Clinton White House. It is not unusual for Washington’s establishment to launch major studies in the final months of an administration to correct the perceived mistakes of a president or influence his successor.

But the bipartisan nature of the recent recommendations, coming at a time when the country has never been more polarized, reflects a remarkable consensus among the foreign policy elite. This consensus is driven by a broad-based backlash against a president who has repeatedly stressed the dangers of overreach and the need for restraint, especially in the Middle East. “There’s a widespread perception that not being active enough or recognizing the limits of American power has costs,” said Philip Gordon, a senior foreign policy adviser to Obama until 2015. “So the normal swing is to be more interventionist.” In other instances, the activity reflects alarm over Trump’s calls for the United States to pull back from its traditional role as a global guarantor of security.

“The American-led international order that has been prevalent since World War II is now under threat,” said Martin Indyk, who oversees a team of top former officials from the administrations of Obama, George W. Bush and Bill Clinton assembled by the Brookings Institution. “The question is how to restore and renovate it.”

Very clear video. But then, it was of course always a stupid thing to claim that US elections cannot be rigged.

• Hacking Democracy (ZH)

“Those who cast the votes decide nothing. Those who count the votes decide everything.” – Joe Stalin.

With the mainstream media lambasting Trump for daring to suggest the election process is rigged – despite hard evidence – this is the hack that proved America’s elections can be stolen using a few lines of computer code. The ‘Hursti Hack’ in this video is an excerpt from the feature length Emmy nominated documentary ‘Hacking Democracy’. The hack of the Diebold voting system in Leon County, Florida, is real. It was verified by computer scientists at UC Berkeley.

Brussels is as crazy as the US Democrats.

• Italy Shields Russia From EU Sanctions Threat (EUO)

Italy has shielded Russia and Syria from a threat of new sanctions, amid warnings by some leaders that Russia was trying to “weaken” the EU. EU leaders said in a joint statement in Brussels on Thursday (20 October) that: “The EU is considering all available options, should the current atrocities [in Syria] continue.” They also urged “the Syrian regime and its allies, notably Russia” to “bring the atrocities to an end”, referring to Russian and Syrian airstrikes on the city of Aleppo in Syria that have caused severe civilian casualties. Germany, France, and the UK had wanted to threaten sanctions more explicitly.

“The EU is considering all options, including further restrictive measures targeting individuals and entities supporting the regime, should the current atrocities continue”, they had suggested saying. Italian prime minister Matteo Renzi led opposition, also shared by some other states, to the threat, diplomats said. He said while leaving the summit that “if we want to speak with Russia then we have to leave the door open”. He also said he did not think “that the difficult situation in Syria could be solved by additional sanctions on Russia”.

Europe has but one purpose: to humiliate Greece. Britain better watch out.

• Draghi Says Athens Should Focus On Reforms, And The Eurozone On Debt (Kath.)

European Central Bank President Mario Draghi on Thursday called on the Greek government to focus its efforts on implementing reforms agreed with the country’s creditors, noting that the ECB will examine the issues of Greece’s debt sustainability and its possible involvement in the Central Bank’s quantitative easing program when the time is right. “Discussions on the sustainability of the Greek debt continued” at an ECB meeting earlier in the day, he said. “We expressed concern, and steps should be taken.” Draghi said the ECB will conduct its own independent assessment of Greece’s debt.

“When the time comes we will examine independently the issue of the debt sustainability,” Draghi said, adding that “until then it is premature to speculate and weave scenarios,” an apparent reference to Greek calls for inclusion in the ECB’s QE program. Draghi appeared to indicate that the ECB would proceed with its assessment of Greece’s debt once there has been action from both sides: work from Athens in implementing reforms and action from Greece’s eurozone partners in lightening its debt burden. The timing of Draghi’s comments was significant. They came a day before Greek Prime Minister Alexis Tsipras is to meet with German Chancellor Angela Merkel on the sidelines of an EU leaders’ summit in Brussels for talks that are expected to touch on Greece’s debt problem and the progress of reforms.

As supermarket prices are as high as in the rest of Europe.

• 126,956 Greek Workers Earn €100 Per Month, 343,760 Between €100 and €400 (KTG)

When it comes to escape the nightmare of unemployment, one may grab all possible and impossible opportunities and even accept jobs with wages that let you come home with a loaf of bread, two tomatoes and a tiny piece of cheese. The data released by the Labor Ministry are shocking: 126,956 employees in the private sector are paid a gross monthly salary of €100. 343,760 employees are paid monthly salaries between €100 and €400 gross. This category of workers have part-time or rotating work contracts. Working time: 2-3 days per week or even a few hours a week. €100 per month gross could be €55-60(?) net – enough to cover transport cost and make a living at €1 per day. PS a friend recently got a job for €300 gross – net should be around €250-230. Working hours are 4 hours per day, four days per week. She has been jobless for 4 years.

Debt Rattle October 3 2016

Oct 032016

October 3, 2016 Posted by Raúl Ilargi Meijer at 9:37 am Finance Tagged with: Abenomics, Deutsche, dollar, Fukushima, Greece, Kuroda, pound, refugees, yuan 7 Responses »

NPC Congressman John C. Schafer of Wisconsin 1924

• Is the U.S. Dollar Set to Soar? (CH Smith)

• Pound Nears Three-Decade Low as May Sets Date for Brexit Trigger (BBG)

• China Seeking To Succeed Where Japan Failed In Reserve Currency Push (BBG)

• Deutsche Bank Races Against Time To Reach US Settlement (R.)

• German Economy Minister Accuses Deutsche Bank Of Hypocrisy (Pol.)

• It’s Not Just Deutsche. European Banking is Utterly Broken (Tel.)

• Kuroda Blamed For Abenomics Failure, Ruins Chance Of Second Term (BBG)

• BOJ Deploys US World War II Tactics That Failed to Spur Prices (BBG)

• Canada’s Big Bet on Stimulus Draws Global Attention (WSJ)

• Jail Wells Fargo CEO and Chairman John Stumpf! (Nomi Prins)

• The Government Is Turning the Entire United States into a Debtors Prison (TAM)

• Fukushima Has Contaminated The Entire Pacific Ocean, Going To Get Worse (TA)

• Hungary’s Refugee Referendum Not Valid After Voters Stay Away (G.)

• Vulnerable Refugees To Be Moved From ‘Squalid’ Camps On Greek Islands (G.)

• Germany Wants Migrants Sent Back To Greece, Turkey (AFP)

As the Automatic Earth has said for many years, he USD won’t be the first to go. It’s about dollar-denominated debt.

• Is the U.S. Dollar Set to Soar? (CH Smith)

Which blocs/nations are most likely to face banking/liquidity crises in the next year? Hating the U.S. dollar offers the same rewards as hating a dominant sports team: it feels righteous to root for the underdogs, but it’s generally unwise to let that enthusiasm become the basis of one’s bets. Personally, I favor the emergence of non-state reserve currencies, for example, blockchain crypto-currencies or precious-metal-backed private currencies – currencies which can’t be devalued by self-serving central banks or the private elites that control them. But if we set aside our personal preferences and look at fundamentals and charts, odds seem to favor the U.S. dollar making a major move higher in the next few months. Let’s start with a national index of finance-power which combines GDP, military spending, banking, foreign direct investment (FDI) and foreign exchange:

The key take-away is the preponderance of the U.S. and the Anglo-American alliance, a.k.a. the special relationship of Great Britain and the U.S. The U.S. exceeds Germany, China, Japan and France combined, and the U.S.-Great Britain alliance is roughly equal to the next 10 nations: the four listed above plus The Netherlands, Switzerland, Italy, Spain, Canada and the Russian Federation. We don’t have to like it, but as investors it’s highly risky to act like it isn’t reality.

If the whining about Beautiful Brexit would finally stop in the UK, maybe they could do something constructive.

• Pound Nears Three-Decade Low as May Sets Date for Brexit Trigger (BBG)

The pound approached the three-decade low set in the days following the Brexit referendum after U.K. Prime Minister Theresa May said she’ll begin the process of withdrawal from the European Union in the first quarter of 2017. Sterling dropped to the weakest level since July 6, the day it reached its 31-year low of $1.2798, and slipped against all of its 31 major peers. Hedge-fund data showed speculators raised bets that the currency would fall. May told delegates at her Conservative Party’s annual conference that she’ll curb immigration, stoking speculation the nation is headed toward a so-called hard Brexit. Stocks of U.K. exporters rose, boosted by the weaker currency. “We’re back to the Brexit risks,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “Sterling has taken a bit of a knock.”

Let’s see large-scale global issuance of debt in yuan. Then we talk.

• China Seeking To Succeed Where Japan Failed In Reserve Currency Push (BBG)

Like the yuan, the yen’s march toward liberalization was gradual and marked with ambivalence. Under the Bretton Woods system after World War II, the Japanese currency was fixed at 360 a dollar, before a trading band was introduced in 1959 to make it slightly more flexible. For three decades, all capital flows except those explicitly permitted were banned, making it easier for the government to achieve policy goals. It wasn’t until 1998 that approval or notification requirements for financial transactions and outward direct investments were abolished. The push to internationalize the yen initially came from the U.S., which wanted greater global use to fuel appreciation and reduce Japan’s trade surplus with America. China’s situation now isn’t dissimilar.

Having thrived on an economic model of closed borders and accumulation of reserves for decades, its capital account is still closed, individuals’ foreign-exchange conversions are capped and inter-country money flows occur mainly through specific programs. Policy makers have tightened controls on outflows in the past year after the yuan’s August 2015 devaluation exacerbated depreciation pressures. The currency was little changed Friday at 6.68 per dollar. Lowering the hurdles to create a true freely traded currency might risk a flight of capital during times of weakness, a concept China doesn’t always seem comfortable with. “Everyone wants this thing called ‘exorbitant privilege,’ but if you try to give it to them, they get furious and they tell you to stop,” said Michael Pettis, a finance professor at Peking University.

“Countries like China that are running huge surpluses because of insufficient domestic demand – basically they are creating the role of the dollar as the dominant reserve currency.” The term “exorbitant privilege,” coined by former French finance minister Valery Giscard D’Estaing in 1965, referred to the benefits the U.S. received for the dollar’s status. Daniel McDowell, a Syracuse University political science assistant professor who studies international finance, made the point that the appeal of a nation’s sovereign debt market plays a key role in a currency’s internationalization. The yen never became a major reserve currency because its government bonds weren’t as attractive or as plentiful as the U.S., he said.

Everyone’s just trying to save face by now. Merkel, Obama, DOJ.

• Deutsche Bank Races Against Time To Reach US Settlement (R.)

Deutsche Bank is throwing its energies into reaching a settlement before next month’s presidential election with U.S. authorities demanding a fine of up to $14 billion for mis-selling mortgage-backed securities. The threat of such a large fine has pushed Deutsche shares to record lows, and a cut-price settlement is urgently needed to reverse the trend and help to restore confidence in Germany’s largest lender. Its shares won’t trade in Germany on Monday because of a public holiday, but they will resume trading on the U.S. market later on Monday. A media report late on Friday that Deutsche and the U.S. Department of Justice were close to agreeing on a settlement of $5.4 billion lifted the stock 6% higher, but that report has not been confirmed.

The Wall Street Journal reported on Sunday that the bank’s talks with the DOJ were continuing. Details are in flux, with no deal yet presented to senior decision makers for approval on either side, the paper said, citing people familiar with the matter. “Clearly, so long as a fine of this order of magnitude ($14 billion) is an even remote possibility, markets worry,” UniCredit Chief Economist Erik F. Nielsen wrote in a note on Sunday. Ratings agency Moody’s said it would be positive for bondholders if the lender could settle for around $3.1 billion, while a fine as high as $5.7 billion would dent 2016 profitability but not significantly impair the bank’s capital position.

[..] The Bild am Sonntag newspaper wrote on Sunday that Deutsche’s chairman had informed Berlin just before it disclosed the potential $14 billion fine but had not asked for help. The same newspaper quoted the president of the Bavarian Finance Centre, Wolfgang Gerke, as saying that the German government should step in and buy a 20% stake in the bank before its value fell any further. The group represents financial services companies in the southern German state. “Fundamentally, I’m against state interventions,” he told the newspaper, but added that in this case a government stake would be “a signal that could turn the whole market”.

Making Merkel’s day, no doubt. It wasn’t nearly hard enough for her yet.

• German Economy Minister Accuses Deutsche Bank Of Hypocrisy (Pol.)

Germany’s economy minister has highlighted the irony of Deutsche Bank blaming speculators for its falling share price when the bank itself has built its business on speculation. “I did not know if I should laugh or get angry that the bank that made speculation a business model is now saying it is a victim of speculators,” Sigmar Gabriel told journalists on a plane to Tehran on Sunday, Der Spiegel reported. The threat of a $14 billion fine by U.S. authorities over the sales of mortgage-backed securities before the financial crisis sent Deutsche Bank’s shares to new lows this month. Gabriel was responding to a letter sent by Deutsche Bank CEO John Cryan to staff Friday blaming “new rumors” for causing the plunge in share prices and saying “forces” wanted to weaken trust in Germany’s largest bank.

“US banks won’t be nearly as badly hit by the measure as their European counterparts, which is no doubt why their regulators are gunning so hard for it.”

• It’s Not Just Deutsche. European Banking is Utterly Broken (Tel.)

[..] as is evident from the events of the last week, the banking crisis itself is far from over. Nine years after the initial eruption, it still rumbles on, with the epicentre now moved from the US to Europe. Only it’s not the same crisis; in large measure, it is completely different. Today’s mayhem is not so much the result of reckless bankers and asleep at the wheel regulators, but rather of the public policy response to the last crisis itself – that is to say, regulatory over-reach and central bank money printing. All eyes are naturally focused on the specific problems of Deutsche Bank, but Deutsche is in truth no more than the canary in the coal mine. As Tidjane Thiam, chief executive of Credit Suisse, observed last week, as an entire sector, European banks are still “not really investable”.

Much the same disease as afflicts Continental banks also applies to British counterparts, including RBS, Barclays and even Lloyds. All are fast being enveloped by a perfect storm of negatives, and this time around, it is substantially the policymakers and law enforcers who are to blame. There are essentially four factors at work here. First, it’s virtually impossible to make money out of banking in a zero interest rate environment, frustrating attempts to rebuild capital buffers after the bad debt write-downs of recent years. In circumstances where central banks have bought right along the yield curve, flattening it down to virtually nothing, the margin from maturity transformation all but disappears. Much the same thing has happened to the once lucrative returns of investment banking.

Even Goldman Sachs has been forced to admit that it is struggling to cover its cost of capital. Second is ever tougher international capital requirements, the latest instalment of which is dubbed Basel IV. The renewed crackdown is understandable, given what occurred nine years ago, but also ill-conceived and discriminatory, unfairly penalising European banks against their American counterparts. The technical details need not concern us too much here, suffice it to say that in order to stop banks gaming the system, regulators are attempting to impose a so-called “output floor”, tightly limiting the scope for easier capital requirements on risk weighted assets. US banks won’t be nearly as badly hit by the measure as their European counterparts, which is no doubt why their regulators are gunning so hard for it.

That is so convenient for Abe…

• Kuroda Blamed For Abenomics Failure, Ruins Chance Of Second Term (BBG)

Governor Haruhiko Kuroda has ruined his chances of getting a second full term, according to Nobuyuki Nakahara, who has advised the prime minister on the economy and was an intellectual father of the Bank of Japan’s first run at quantitative easing in 2001. The central bank’s switch to yield-curve targeting compounds its earlier error of adopting negative interest rates and is a disappointing move away from monetary-base expansion, Nakahara, 81, said in an interview on Sept. 30. In a stinging attack on the BOJ’s recent actions, he said the decision to conduct a comprehensive review of monetary policy had invited defeat on reflationist efforts and would raise questions about Abenomics as a whole.

Prime Minister Shinzo Abe’s economic program consists of three so-called arrows: the first being aggressive monetary policy, the second fiscal spending and the third structural reform. The central bank’s program, which began when Abe tapped Kuroda for the BOJ role in early 2013, has been the most prominent and highly debated aspect of Abenomics. “They are trying to clean up the mess of negative rates. It’s impossible to do a stupid thing like keeping the yield curve under government control,” said Nakahara. “They changed the regime to rates from quantity, meaning those who support quantitative easing were defeated. Reflationists on the BOJ policy board lost. An exit from deflation is going to be far away.”

After being greeted with fanfare when he took the helm, Kuroda, 71, now faces a reversal of fortunes on multiple fronts. Markets have moved against him and critics are growing more vocal. The extended honeymoon he enjoyed with a rising stock market and falling yen are long gone and his 2% inflation goal is nowhere in sight. Kuroda has less than 19 months to go in his term. While no BOJ governor has been tapped for a second five-year term since the 1960s, Kuroda’s central role in Abenomics has led to speculation that he may be different.

If you don’t know what deflation is, you can’t fight it.

• BOJ Deploys US World War II Tactics That Failed to Spur Prices (BBG)

In deciding to target bond yields, Japan is deploying a monetary strategy to combat deflation used by its former enemy in World War II. The trouble is that America’s experience back then suggests that the tactics probably won’t work on their own. Economists who have studied that period say that it was increased government spending, along with heightened inflation expectations, that eventually led to a stepped-up pace of U.S. price increases more than a half century ago. Once inflation was humming along, the Federal Reserve’s strategy of pegging long-term interest rates did nothing to put a lid on it, which is why the central bank pushed for a 1951 agreement with the Treasury to abandon the long-term yield fix.

If inflation expectations are contained, simply targeting yields won’t necessarily spur price pressures, according to Barry Eichengreen, a professor at the University of California at Berkeley who co-wrote a paper on U.S. monetary and financial policy from 1945 to 1951. But if people already expect faster inflation, then the tool can help promote it. That’s not a helpful conclusion for Bank of Japan Governor Haruhiko Kuroda and his colleagues, who last month switched the focus of their monetary stimulus to controlling yields across a range of maturities, after simply expanding the monetary base through debt purchases. It set the target for the yield on the 10-year Japanese government bond at around 0%.

Another piece of their new framework: trying to shock inflation expectations higher by pledging to keep stimulus in place until prices are rising even faster than their 2% target. Their struggle is to overturn subdued household and corporate expectations that have been set hard by decades of deflation. For the Fed in World War II and its aftermath, capping long-term yields at 2.5% had nothing to do with inflation per se. Its goal was to limit the government’s borrowing costs and so support the war effort. Inflation was held down by price controls during the war, then spiked higher after hostilities ended, hitting a high of 19.7% in 1947. The surge proved short-lived, as an economic recession that began late the following year produced a return of the deflation that had plagued the country during the Great Depression.

And if successful, they’re all going to do it? Oops, too late.

• Canada’s Big Bet on Stimulus Draws Global Attention (WSJ)

In the global struggle to boost growth, a Canadian experiment in fiscal spending is providing a test case for some of the world’s biggest economies. PM Justin Trudeau’s Liberal government unveiled a plan last spring to spend heavily on tax benefits and infrastructure, with $120 billion CAD (US$91.39 billion) going into infrastructure over the next decade, including about one-tenth of that on short-term projects. It’s a bold bet to inject life into an economy struggling with a rout in commodity prices, especially crude oil, which was once Canada’s top export. It also highlights the limits of monetary stimulus, since the country’s central bank cut rates twice in 2015, to 0.5%, and has acknowledged—as its counterparts around the world have—that monetary policy becomes a less powerful tool when interest rates are already low.

Mr. Trudeau’s big infrastructure spend will be largely financed by a bigger deficit, which is projected to reach C$29.4 billion this fiscal year, or about 1.5% of GDP. That’s a sharp turn from the balanced-budget promise of his Conservative predecessor, who hewed the austerity path Mr. Trudeau is now shunning. Canada’s efforts stand in contrast to many of the world’s economies, whose finance ministers and central bankers meet this week in Washington for semiannual meetings of the International Monetary Fund and World Bank. Some—like Australia, also hit by the commodity rout—are trying to use coordinated fiscal and monetary policy. But larger advanced economies are holding firm to tight budgets, making Canada’s embrace of debt-fueled stimulus unusual.

“The eyes of the world—the economists—will be watching to see how Canada performs,” said Martin Eichenbaum, a Northwestern University economist who is also an international fellow at the C.D. Howe Institute, a Canadian think tank. “We’re all watching to see: Will they get it right?”

Yeah. Not going to happen….

• Jail Wells Fargo CEO and Chairman John Stumpf! (Nomi Prins)

Consider this. You’re a mob boss. You run a $1.8 trillion network of businesses across state lines and continents. Many of these are legit, but a select subset of them – not so much. Every so often the illegal components flare up; some Washington commission launches an investigation, someone blows a whistle, people lose their homes, a pack of investors sheds a ton of money and lawsuits fly. You get reprimanded and have to pay lawyers and accountants overtime to deal with the paperwork. You settle on fines with the government — $10 billion worth. Then you keep going with no one the wiser, no wings clipped, no hard time. After all of that — you say you’re sorry, forfeit some money you didn’t even make yet, and (maybe) resign with boatloads more of it.

This is what we’re dealing with regarding Wells Fargo CEO and Chairman John Stumpf. He could be a really nice guy and wears some lovely tailored attire. (Hell, even Al Capone cared about proper milk expiration date labels.) But he’s also a crook, plain and simple. He’s cheated shareholders and taxpayers and customers, and used a stockpile of FDIC-backed deposits as fodder for illicit activities that have been repeatedly investigated and fined. And he made hundreds of millions of dollars doing it. This is not conjecture, nor sour grapes from the nonmillionaire swath of the population. It’s based on documented facts. But by no means is Wells the only guilty bank on the street, or Stumpf the only “apologetic” CEO. Apologies are cheap, and so is money when it’s a small piece of a much larger pie.

Somewhere, Jamie Dimon and Lloyd Blankfein are sighing in relief that this time it was Stumpf and not one of them, the other two of the three (of the Big Six bank) CEOs left standing since the crisis. These are just some highlights of those nearly $10 billion in total fines Wells agreed to, rather than take matters to court, since 2009. The sheer sum of those fines reveal a recidivist attitude toward ethics, regulations and the law. The associated transgressions were all committed under Stumpf’s leadership. There’s no way a regular citizen committing a fraction of a fraction of anything like these wouldn’t be in jail. Complexity is no excuse for criminal behavior. Nor is calling these practices “abuses” rather than felony fraud for misleading, at the very least, investors and shareholders in a publicly traded mega-company that violates securities laws.

… but if not the Wells Fargo CEO, at least some people will go to jail…

• The Government Is Turning the Entire United States into a Debtors Prison (TAM)

Since the United States was founded, citizenship has represented a safe haven from oppressive regimes around the world. By preserving the principles of small government and free markets, those who were willing to work hard found success, and America became a magnet for innovation. But as the U.S. continues to erode personal and economic freedom, more people than ever before are handing over their U.S. passports to seek better opportunities abroad. The staggering amount of debt held by the American empire ensures the public will be working it off for generations to come. The government has already begun its campaign to make it more difficult to leave the country, and it has also begun to crack down on the finances of the eight million Americans living abroad.

Regardless of whether you’re a millionaire with multiple foreign bank accounts or a recent college graduate with a boatload of debt, the status of being a United States citizen brings with it a burden that will only grow heavier over time. Since 2008, the number of individuals giving up their citizenship has increased by almost 560%, setting new records each of the past three years. Some of these expats are motivated by the extra tax load paid when working abroad, while others are trying to avoid student loan debt. Others have just had enough of the encroaching police state. Every taxpayer left in the country now owes more than $149,000 of the national debt, so it’s no surprise the tide is beginning to turn. By hook or by crook, in the coming years, citizens will be fleeced of that money through higher taxes, savings that are inflated away, and an overall drop in their standard of living.

Many can see the writing on the wall and have become determined to protect themselves from the years of economic repression coming down the pipe. Draconian steps have already been taken to slow the rate of expatriation. For one, the IRS has broadened its reach into foreign bank accounts through the Foreign Account Tax Compliance Act. Through agreements with over 100 nations, the law is able to require all financial institutions abroad to report the account details of any American customers they have. With access to this new information, the IRS can revoke the passports of potential tax evaders and hinder their ability to travel using yet another additional power the agency was granted last year.

The gift that keeps on contaminating.

• Fukushima Has Contaminated The Entire Pacific Ocean, Going To Get Worse (TA)

What was the most dangerous nuclear disaster in world history? Most people would say the Chernobyl nuclear disaster in Ukraine, but they’d be wrong. In 2011, an earthquake, believed to be an aftershock of the 2010 earthquake in Chile, created a tsunami that caused a meltdown at the TEPCO nuclear power plant in Fukushima, Japan. Three nuclear reactors melted down and what happened next was the largest release of radiation into the water in the history of the world. Over the next three months, radioactive chemicals, some in even greater quantities than Chernobyl, leaked into the Pacific Ocean. However, the numbers may actually be much higher as Japanese official estimates have been proven by several scientists to be flawed in recent years.

If that weren’t bad enough, Fukushima continues to leak an astounding 300 tons of radioactive waste into the Pacific Ocean every day. It will continue do so indefinitely as the source of the leak cannot be sealed as it is inaccessible to both humans and robots due to extremely high temperatures. It should come as no surprise, then, that Fukushima has contaminated the entire Pacific Ocean in just five years. This could easily be the worst environmental disaster in human history and it is almost never talked about by politicians, establishment scientists, or the news. It is interesting to note that TEPCO is a subsidiary partner with General Electric (also known as GE), one of the largest companies in the world, which has considerable control over numerous news corporations and politicians alike.

Could this possibly explain the lack of news coverage Fukushima has received in the last five years? There is also evidence that GE knew about the poor condition of the Fukushima reactors for decades and did nothing. This led 1,400 Japanese citizens to sue GE for their role in the Fukushima nuclear disaster. Even if we can’t see the radiation itself, some parts of North America’s western coast have been feeling the effects for years. Not long after Fukushima, fish in Canada began bleeding from their gills, mouths, and eyeballs. This “disease” has been ignored by the government and has decimated native fish populations, including the North Pacific herring. Elsewhere in Western Canada, independent scientists have measured a 300% increase in the level of radiation.

It won’t stop Orban.

• Hungary’s Refugee Referendum Not Valid After Voters Stay Away (G.)

The Hungarian prime minister, Viktor Orbán, has failed to convince a majority of his population to vote in a referendum on closing the door to refugees, rendering the result invalid and undermining his campaign for a cultural counter-revolution within the European Union. More than 98% of participants in Sunday’s referendum sided with Orbán by voting against the admission of refugees to Hungary, allowing him to claim an “outstanding” victory. But more than half of the electorate stayed at home, rendering the process constitutionally null and void.

Orbán himself put a positive spin on the low turnout. He argued that while “a valid [referendum] is always better than an invalid [referendum]” the extremely high proportion of no-voters still gave him a mandate to go to Brussels next week “to ensure that we should not be forced to accept in Hungary people we don’t want to live with”. He argued that the poll would encourage a wave of similar votes across the EU. “We are proud that we are the first,” he said.

NOTE: Less than 2 weeks ago, the EU refused Greece permission to move the refugees to the mainland, because they might try to travel north.

“Athens will be overwhelmed, [as will] the mainland, people will be forced to live in fields, there will be scenes we’ll never have imagined.”

• Vulnerable Refugees To Be Moved From ‘Squalid’ Camps On Greek Islands (G.)

Greece is poised to transfer thousands of refugees from overcrowded camps on its Aegean islands to the mainland amid escalating tensions in the facilities and protests from irate locals. The government said unaccompanied minors, the elderly and infirm would be among the first to be moved as concerns mounted over the future of a landmark EU-Turkey deal to stem migrant flows. “The situation on the islands is difficult and needs to be relieved,” said deputy minister for European affairs Nikos Xydakis. “Accommodation on the mainland will be more suitable. We will start with transfers of those who are most vulnerable, always in the sphere of implementing and protecting the EU-Turkey agreement.”

The operation, expected to be put into motion this week, came as Ankara warned the pact would not hold if Brussels failed to honour its pledge to allow Turks visa-free travel to the bloc. In a fiery speech before the newly reconvened parliament at the weekend, Turkish president Erdogan gave his clearest signal yet that the six-month-old agreement was in danger of collapse because of slow progress over visa liberalisation. [..] Refugee flows, although rising again, have dropped by 90% since the deal was signed. [..] Western diplomats in the Greek capital raised the spectre of chaos if the agreement collapsed. “If it does, there will be an influx of a million or more and this country is totally unprepared,” one European ambassador confided. “Athens will be overwhelmed, [as will] the mainland, people will be forced to live in fields, there will be scenes we’ll never have imagined.”

[..] Acknowledging that camp conditions were far from ideal, Xydakis blamed the backlog in asylum applications on the EU’s failure to dispatch promised staff and push ahead with an agreed relocation scheme to other parts of the continent. “We were promised 400 experts in asylum procedures but so far only have around 29 on the islands. We are continuing to recruit and look for more staff but it is not easy,” he said. “The deal is not only in the hands of Turkey but Europe … some EU states are not respecting but neglecting their responsibilities.”

To reiterate what I said yesterday on this topic:

“It was Germany that last year declared Dublin null and void. They will say that was only temporaray, but regulations like this are not light switches that selected parties can flick on and off when it suits them.

What happens now is quite simply that both the refugees and Greece are the victims of Angela Merkel’s falling poll numbers. And that is insane. It’s cattle trade. Athens should take Berlin to court over this.

Greece is already little more than a greatly impoverished holding pen for the unwanted, and it threatens to fall much deeper into the trap. That’s why the Automatic Earth effort to support the poorest people is not just still needed, but more now than ever. We will soon start a new campaign to that end. In the meantime, please do continue to donate through our Paypal widget in amounts ending in $.99 or $.37.”

• Germany Wants Migrants Sent Back To Greece, Turkey (AFP)

Germany called Sunday for asylum seekers who entered the European Union via Greece to be forced to return there, while also urging Athens to send more migrants back to Turkey. In an interview with a Greek daily, German interior minister Thomas de Maiziere said he wants to reinstate EU rules which oblige asylum seekers to be sent back to Greece as the first EU country they reached. “I would like the Dublin convention to be applied again… we will take up discussions on this in a meeting with (EU) interior ministers” later in October, he told the Greek daily Kathimerini. The Dublin accord gives responsibility for asylum seekers’ application to the first country they reach – which put Greece on the frontline of more than a million migrants who arrived in the EU last year.

The accord also says asylum seekers should be sent back to the first country they arrived in if they subsequently reach another EU state before their case is examined. A huge proportion of the migrants ended up in Germany. But this clause was suspended for Greece in 2011 after the country lost an EU legal complaint which condemned the mistreatment of migrants seeking international protection. “Since then, the EU has provided substantial support, not only financially,” to Greece to improve its asylum seeker procedures, the German minister said. In an interview on German television Sunday evening, De Maiziere also criticised Athens for failing to fully implement an EU agreement with Turkey to return migrants there.

The EU reached a deal with Turkey in March to stop the influx to the Greek islands in return for financial aid and eased visa conditions for its citizens. But the deal has looked shaky in the wake of a coup attempt in Turkey in July. “Greece must carry out more expulsions,” he told the ARD television station.

Debt Rattle September 4 2016

Sep 042016

September 4, 2016 Posted by Raúl Ilargi Meijer at 9:58 am Finance Tagged with: backlash, Christmas, dollar, ECB, G20, insult, Ireland, Le Pen, mergers, Obama, surplus, taxes Comments Off

NPC “Georgetown-Marines game” 1923

• Dollar Hegemony Endures As Share Of Global Transactions Keeps Rising (AEP)

• US Has 9.93 Million More Government Workers Than Manufacturing Workers (CI)

• German Budget Surpluses Are Bad For The Global Economy (Economist)

• ECB’s Mersch: Central Banking Based On “Mathematical Models”, Not Reality (ZH)

• Europe’s Broken Banks Need the Urge to Merge (BBG)

• Economic Czars Warn G-20 of Risk From Populist Backlash on Trade (BBG)

• Chinese Consumers Take Credit For Boom In Car Loans (R.)

• 6 Steps To Avoiding All EU (Incl. Irish) And US Taxes Via Ireland (PP)

• Rural France Pledges To Vote For Marine Le Pen As Next President (G.)

• Shops Set For Christmas Price Hikes As Millions Of Shipments Stranded (Ind.)

• Row On Tarmac An Awkward G20 Start For US, China (R.)

• Barack Obama ‘Deliberately Snubbed’ By Chinese In Chaotic Arrival At G20 (G.)

• Half The Forms Of Life On Earth Will Be Gone By 2050 (ZH)

It’s nice to be able to agree with Ambrose once in a while.

• Dollar Hegemony Endures As Share Of Global Transactions Keeps Rising (AEP)

The US dollar is tightening its grip on the global financial system at the expense of the euro, entrenching American hegemony and rendering the US Federal Reserve more powerful than at any time in history. Newly-released data from the Bank for International Settlements (BIS) show that the dollar’s share of the $5.1 trillion in foreign exchange trades each day has continued rising to 87.6pc of all transactions. It is the latest evidence confirming the extraordinary resilience of the dollar-based international order, confounding expectations of US financial decline a decade ago. Roughly 60pc of the global economy is either in the dollar zone or closely tied to it through currency pegs or ‘dirty floats’, and the level of debt issued in dollars outside US jurisdiction has soared to $9 trillion.

This has profound implications for monetary policy. The Fed has become the world’s central bank whether it likes it or not, setting borrowing costs for much of the global system. The BIS data shows that the volume of transactions in which the euro was on one side of the trade has slipped to 31.3pc from 37pc in 2007. The dollar share has ratcheted up to 87.6pc over the same period. It is much the same picture for the foreign exchange reserves of central banks, a good barometer of global trust. The dollar share has recovered to 63.6pc, roughly where it was a decade ago. The euro share has tumbled over the last eight years from 28pc to 20.4pc, and is barely above Deutsche Mark share in the early 1990s.

“There are no foreseeable rivals to the dollar as a viable reserve currency,” said Eswar Prasad from Cornell University, author of “The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance”. “The US is hard to beat. The US has deep financial markets, a powerful central bank and legal framework the rest of the world has a great deal of trust in,” he said. The eurozone is crippled by the lack of a unified EU treasury, joint bond issuance, and a genuine banking union to back up the currency. It would require a change in the German constitution to open the way for fiscal union, an unthinkable prospect in the current political climate.

Many years ago I dubbed it the ‘Bulgaria Model’.

• US Has 9.93 Million More Government Workers Than Manufacturing Workers (CI)

The August jobs report was filled with some interest factoids, like there are now 9.93 million government workers than there are manufacturing workers. That is a ratio of 1.81 government workers for every manufacturing worker. Such was not always the case. But a variety of factors such as labor cost differentials, EPA regulations and taxes had led to manufacturing jobs to be sent overseas. Now a 1.81 government to manufacturing employment ratio is called OVERHEAD. And you wonder why high paying manufacturing jobs are fleeing to other countries?

“German saving and Greek suffering are two sides of the same coin..”

• German Budget Surpluses Are Bad For The Global Economy (Economist)

On August 24th Germans received news to warm any Teutonic heart. Figures revealed a larger-than-expected budget surplus in the first half of 2016, and put Germany on track for its third year in a row in the black. To many such excess seems harmless enough—admirable even. Were Greece half as fiscally responsible as Germany, it might not be facing its eighth year of economic contraction in a decade. Yet German saving and Greek suffering are two sides of the same coin. Seemingly prudent budgeting in economies like Germany’s produce dangerous strains globally. The pressure may yet be the undoing of the euro area. German frugality and economic woes elsewhere are linked through global trade and capital flows.

In recent years, as Germany’s budget balance flipped from red to black, its current-account surplus—which reflects net cross-border flows of goods, services and investment—has soared, to nearly 9% of German GDP this year. The connection between budgets and current accounts might not be immediately obvious. But in a series of papers published in 2011 IMF economists found evidence that cutting budget deficits is associated with reduced investment, greater saving and a shift in the current account from deficit toward surplus. Two IMF economists, John Bluedorn and Daniel Leigh, reckoned that a fiscal consolidation of one percentage point of GDP led to an improvement in the ratio of the current-account balance to GDP of 0.6 percentage points.

On that reckoning, the German government’s thriftiness accounts for a small but meaningful share of its growing current-account surplus; perhaps as much as three percentage points of GDP over the past five years.

That has helped to resurrect an old problem. Global imbalances were a scourge of the world economy before the financial crisis of 2007-08. Back then, China and oil-exporting economies accounted for the surplus side of the world’s trade ledger, which reached nearly 3% of the world’s GDP on the eve of the crisis. Other countries, notably America, ran correspondingly large current-account deficits, financed in part by flows of investment from surplus countries that flooded into the country’s overheating housing market. A similar dynamic played out in miniature within the euro area, as core economies like Germany ran current-account surpluses and peripheral countries like Spain ran deficits.

Taking away their powers is the only solution. But … that’s not going to happen.

• ECB’s Mersch: Central Banking Based On “Mathematical Models”, Not Reality (ZH)

At first (literally the day the Fed announced QE1) it was just “tinfoil fringe blogs” who predicted the failure of the central bank’s attempt to boost the economy by printing money, instead warning that all the Fed would do is unleash an unprecedented income and wealth divide that may culminate in civil war and hyperinflation. Then, gradually, analysts, pundits and even the mainstream press admitted the truth, i.e., that tin-foilers were right all along, until recently even the Fed’s own mouthpiece, Jon Hilsenrath, one day before the Jackson Hole meeting wrote that “Years of Fed Missteps Fueled Disillusion With the Economy and Washington”, an article which set the stage for the pivot to the US issuance of much more debt, because apparently $9 trillion in new debt under Obama is not considered enough “fiscal stimulus.”

However, with virtually everyone else now slamming central banks for fooling the world for the past 7 years that they knew what they were doing, now that even Yellen admitted she has no idea what will happen in just the next 3 years projecting a 70% confidence interval of the Fed Funds rate of between 0% and 5% by the end of 2018 (we wonder what a 100% confidence would look like)…

.. overnight central bankers themselves attacked central bank policies, when ECB board member Yves Mersch warned on Saturday against using “extreme [policy] measures [with] unacceptable side effects” to shore up the eurozone’s weak economy, which he said could undermine trust in the single currency, a warning aimed squarely at Mario Draghi. Mersch’s comments come amid a growing debate over whether central banks in Europe and Japan should bolster economic growth by turning to even more tools such as “helicopter money.” Even more ludicrous, as we reported yesterday, Reuters already lobbed a tentative trial balloon, hinting that the ECB may be “forced” to buy ETFs and equities having virtually run out of bonds to monetize. Still, despite all ongoing ECB deflationary counter-measures, eurozone inflation was just 0.2% in August, far below the ECB’s near-2% target. Investors are increasingly concerned that the central bank is running out of tools.

Surprisingly, at this point Mersch joined the Weidmann bandwagon, and cautioned against “academic proposals [that] seem to prefer sophisticated models to social psychology.” Or in other words, for the first time, a central banker has suggested that broken (which is a far more accurate definition that sophisticated) financial models should be ignored when dealing with reality. “We cannot fulfill our mandate with mathematical equations, but only with instruments that maintain trust in the currency,” Mersch said at an annual economic forum on the shores of Lake Como, Italy. Expanding his tongue in cheek criticism of Mario Draghi’s relentless crusade to hurt the euro and reflate asset prices at all costs, Mersch then said that “extreme measures or legal violations of our mandate aren’t among those instruments.”

Restructure. Only way. And again, not going to happen.

• Europe’s Broken Banks Need the Urge to Merge (BBG)

The recent flurry of excitement at the idea that Germany’s Deutsche Bank and Commerzbank contemplated a merger reinforces the view that the European finance industry is ripe for consolidation. Banking leaders themselves talk about the need for mergers in an overbanked market, but no one among the bigger banks seems to want to go first. If something doesn’t change soon, Europe won’t have a banking industry worthy of the name. The relentless collapse in bank share prices this year may speak to difficult market conditions, but they also suggest that Europe’s banking model is broken, amid a deadly combination of negative interest rates, anemic economic growth and a lack of clarity about the future regulatory outlook (albeit in large part because European banks have fought every line of every proposed rule change).

The region’s banks have lost almost a quarter of their value this year, according to the Stoxx 600 Banks index. As Germany has by far the least consolidated banking sector in the euro zone, it’s no surprise that both Commerzbank and Deutsche Bank have done even worse. Merger talk sparked a bit of a rally in the two German banks in recent days, even though the discussions, reported to have taken place over two weeks this summer, have been abandoned. With both banks embarking on major cost-cutting and restructuring projects, it may have been too early to talk of a merger.

It’s all in the choice of terminology: populism, protectionism, they sound very negative, so they are what you read. But it makes no difference: without growth, centralization withers away all by itself.

• Economic Czars Warn G-20 of Risk From Populist Backlash on Trade (BBG)

The heads of three world economic bodies warned of the risk to trade from the protectionist headwinds sweeping many developed nations as global leaders met in Hangzhou, China. In a panel session Saturday ahead of the Group of 20 summit, Christine Lagarde, Managing Director of the IMF, urged business chiefs to lobby governments to help keep trade flows up as she issued a warning about the outlook for growth into 2017. Her views were echoed by Roberto Azevedo, Director-General of the WTO. “Trade is way too low and has been way too low for a long time,” Lagarde said. “There is at the moment an undercurrent of anti-trade movement. It’s at the political level. It’s at the public opinion level” and also being reflected in policy, she added.

“If there is no international trade, if there is no cross-border investment, if services, capital, people and goods do not cross borders, then it’s less activity for you, it’s less jobs in whichever country you are headquartered,” she said. Lagarde’s comments come as momentum for ratifying the U.S.-led Trans-Pacific Partnership, which would link 12 nations making up about 40% of the world economy, falters in the final months of U.S. President Barack Obama’s term. Both presidential candidates have spoken against the deal, which does not include China, while progress on a U.S.-EU trade and investment deal, known as TTIP, has also stalled.

France’s trade minister Matthias Fekl said late last month that the U.S. hasn’t offered anything substantial in negotiations with the EU on the free-trade deal and that talks should come to an end. His comments followed those of German Economy Minister Sigmar Gabriel, who said discussions on the TTIP “have de-facto broken down, even if no one wants to say so.” Many Western nations are grappling with a mood of protectionism that is leading to calls for caution on free trade, and on foreign investment in things like property and utilities. Chinese companies recently were dealt a blow on prospective projects in both the U.K. and Australia.

Let’s see: more debt AND more cars. It’s a win-win! Happy days!

• Chinese Consumers Take Credit For Boom In Car Loans (R.)

Chinese households, traditional savers with an aversion to debt, are rapidly warming to the idea of borrowing to buy a car, as automakers push financing deals to boost sales and margins in an increasingly competitive market. Nearly 30% of Chinese car buyers bought on credit last year, up from 18% in 2013, according to analysts from Sanford C. Bernstein and Deloitte, helping a rebound in the car market after a sticky 2015. That is welcome news to China’s government, which wants consumers to borrow and spend more to shift its slowing economy away from heavy industry and investment-led growth. Beijing resident Wang Danian said he planned to buy his first car on credit, saying it was the smart move.

“I can use my cash to do other things,” the 28-year-old said. “If I use all my savings at once to buy a car, and then something happens, I can’t manage the risk.” Six consumers interviewed by Reuters said they would all consider loans, lured by low-fee and interest-free deals, with half saying they’d prefer to buy on credit and save cash for other items. “I’d estimate after the manufacturer came out with the low-interest deal that about 30% of potential cash buyers switched to buying on credit,” said a salesman at a Volkswagen dealership in eastern China’s Jiangsu province who gave his name as Mr. Zhao. That is still a far cry from the more than 80% of cars bought on loans in the United States, but Deloitte predicts China will reach 50% by 2020.

[..] China’s auto market struggled last year thanks to the slowest economic growth in 25 years and a stock market rout, but rebounded in October when the government cut sales tax on smaller cars. By July, vehicle sales were rising at their fastest monthly rate in three and a half years. “While the government’s tax reduction was the most obvious explanation for the rebound in Chinese car sales at the end of 2015, soaring auto financing penetration represented another, lesser noticed, driver of the boom,” Bernstein said in April.

Excellent thread from The Property Pin. A lot more under the link.

• 6 Steps To Avoiding All EU (Incl. Irish) And US Taxes Via Ireland (PP)

1. Making the Intellectual Property (IP). Let’s say that Apple US spent $200m (validly) developing iOS (it’s iPhone operating system). What Apple does next is to “sell” a non-US version of iOS to an Apple Ireland entity (generic name), for c $500m. Apple US will then pay full US taxes on this gain of $300m. Easy so far. The US IRS is already starting to probe these “internal” sales.

2. Stepping up the IP value (when the “magic” happens). Specialist IP corporate finances (why Dublin accountancy firms have big corporate finance practices) make two discoveries. First, if the Apple device has no iOS software, it can’t function. iOS is the “secret sauce” (like a drug patent). They then show Apple Ireland that it has done an amazing deal at the expense of its parent, Apple US. They show that if the non-US version of iOS is converted in to 200 different languages (and local network formats), then Apple Ireland can sell devices all over the world (fancy that). The global commercial value is over €50bn (why many MNC jobs in Ireland are “localisation”, or language translation, jobs). Apple has the tax equivalent of “Alchemy”.

3. Avoiding tax on the IP step-up. A €50bn gain in Apple Ireland is going to incur tax (both Irish and US), and would distort Ireland’s National Accounts (our 2014 GDP was only €200bn). Apple, and the Irish State, worked a scheme to have Apple Ireland both resident in Ireland (essential so Apple Ireland can avail of EU TP (Transfer Pricing) rules; you can’t do EU TP from Cayman, or worse, “Stateless” locations), and non-resident in Ireland (to avoid Irish tax). The EU’s Apple report, proves the recent 26% increase in Irish GDP (“leprechaun economics”) was all Apple, forced to unwind it’s “dual” status (as EU report drew near). Apple paid a once-off tax on the transfer (€500m vs. €50bn gain), which increased our EU GDP levies by 380m. Per Annum.

4. Executing the TP of this IP into Europe. Before step 3., if Apple Ireland sold an iPhone in Germany for €500, Apple Germany would offset valid incurred cash costs (Apple China/Foxconn manufacturing costs of about €150, and Apple Germany marketing costs of about €50) giving a German profit of €300 on that iPhone. German Revenue would take €100 of this in German taxes, and €200 can go back to Ireland. EU TP rules allow EU resident companies, like Apple Ireland, to charge Apple Germany a share of their €50bn IP value, expressed as a royalty charge. Charging this royalty to Apple Germany wipes out all Apple’s German profits. Apple Germany pays no German taxes, and the full €300 goes back to Apple Ireland tax-free.

5. The Cherry on Top. EU challenged step 4. in 2011 (we will get to CCCTB), but the UK Veto stopped it (Osborne was turning Britain into an even bigger EU tax-haven than Ireland). Despite Ireland having the “golden ticket” of being INSIDE the EU’s TP system (why Apple Ireland had to be legally resident in Ireland), AND having the lowest EU corporate tax rate, that was not enough. In 2010, Apple Ireland’s tax rate collapsed from a tiny 0.5% to effectively 0%. Apple Ireland’s profits quadrupled (and doubled every year after). The Irish State had perfected a “straw” for Apple, stuck into the EU, allowing Apple to suck all its EU profits (Germany, France, Italy etc.), via Ireland, to offshore locations, free of EU, Irish and US taxes.

6. Locking it in. US tax law requires US MNCs to remit non-US profits back to the US for final taxing. US tax rate is high at 35% (even by EU standards). The Double Tax Treaty system allows the MNCs to get a credit for taxes paid in the countries in which the profits were made. If Apple pays 35% on German profits, no further US taxes apply. The US IRS allows MNCs to leave non-US profits outside of the US if these non-US profits are going to be re-invested in the non-US location. Apple claimed this right in their US 10K Returns (Margrethe showed how Apple violate this). That is how Apple built the largest offshore cash hoard of modern economic history. Profits from the EU, on which they have never paid EU, Irish or US taxes. Period.

In France, as in UK and US and many other places, voters vote against someone, not for.

• Rural France Pledges To Vote For Marine Le Pen As Next President (G.)

In the picturesque hamlet of Brachay, in scorching late summer heat, Marine Le Pen was preaching to the politically converted. “Marine, président”, they chanted. “On va gagner” (we’re going to win). A banner stretching the length of one of the stone buildings overlooking the village square read: “Marine: Save France.” Le Pen’s stump speech was the most closely watched and significant campaign launch of la rentrée, the national return to work after the long summer holidays, and the leader of France’s far-right Front National was welcomed like a conquering hero. Le Pen has been largely absent from the political scene for several weeks and has refrained from adding her 10 cents’ worth to the raging polemic over the burkini and rows about security following deadly attacks by Islamic fundamentalists, both fertile ground for her party.

In the meantime, the country’s governing Socialists and centre-right opposition Les Républicains have engaged in what one FN heavyweight described with schadenfreude as a “bloodbath, left and right”. The Parti Socialiste is bitterly split and in turmoil over whether François Hollande, with his calamitous popularity ratings will, or indeed should, stand for a second term. The alternative, to stand down, would be unprecedented for a serving leader. Emmanuel Macron, the finance minister who resigned last week, might be the rabbit that the party pulls out of the hat, but he is disliked by the PS’s leftwing, which is fielding its own candidates. In any case, Macron has not said whether he will even throw his hat into the presidential ring.

On the right, things are scarcely more harmonious. The deadline for Les Républicains candidates is Friday, and already former president Nicolas Sarkozy, mayor of Bordeaux Alain Juppé and former prime minister François Fillon have either announced they are standing or are expected to do so. Amid this political free-for-all, Le Pen is trying to throw off the party’s divisive reputation and market herself as a politician above and beyond the fray of the same-old-same-old French elite: a new, unifying, patriotic force who will break the shackles of Europe, end “mass immigration” and give France back to the French. Her slogan is La France apaisée – a soothed France.

So if people have to spend more to buy the same stuff, that’s good for the economy, right?

• Shops Set For Christmas Price Hikes As Millions Of Shipments Stranded (Ind.)

Summer is not yet over but Christmas could be about to get more expensive as millions of gifts including TVs and electrical gadgets could be stranded at sea for months. Retailers have been thrown into turmoil after one of the world’s largest shipping companies collapsed into bankruptcy. South Korean company Hanjin’s vessels have been seized at Chinese ports, while others have been banned from docking until unpaid fees are received. As a result, the cost of transporting goods from Asia to the US and Europe has jumped by more than half, threatening margins as retailers begin stocking up for Christmas. September marks the start of the busiest period of the year for transporting goods.

The US National Retail Federation, the world’s largest retail trade association, wrote to Penny Pritzker, secretary of commerce, on Thursday, urging them to work with the South Korean government, ports and others to prevent disruptions. The bankruptcy is having “a ripple effect throughout the global supply chain” that could cause significant harm to both consumers and the economy, the association wrote. “Retailers’ main concern is that there (are) millions of dollars’ worth of merchandise that needs to be on store shelves that could be impacted by this,” said Jonathan Gold, the group’s vice president for supply chain and customs policy.

“Some of it is sitting in Asia waiting to be loaded on ships, some is already aboard ships out on the ocean and some is sitting on US docks waiting to be picked up. It is understandable that port terminal operators, railroads, trucking companies and others don’t want to do work for Hanjin if they are concerned they won’t get paid.” With an estimated half a million 40-foot containers full of goods stuck at sea or in ports there appears to be little hope of a quick resolution to the issue. September marks the start of the busiest time of the year for transporting goods, but a Korean court on Thursday set a deadline of 25 November to submit a plan to resolve the dispute.

Hilarious!

• Row On Tarmac An Awkward G20 Start For US, China (R.)

A Chinese official confronted U.S. President Barack Obama’s national security adviser on the tarmac on Saturday prompting the Secret Service to intervene, an unusual altercation as China implements strict controls ahead of a big summit. The stakes are high for China to pull off a trouble-free G20 summit of the world’s top economies, its highest profile event of the year, as it looks to cement its global standing and avoid acrimony over a long list of tensions with Washington. Shortly after Obama’s plane landed in the eastern city of Hangzhou, a Chinese official attempted to prevent his national security adviser Susan Rice from walking to the motorcade as she crossed a media rope line, speaking angrily to her before a Secret Service agent stepped between the two.

Rice responded but her comments were inaudible to reporters standing underneath the wing of Air Force One. It was unclear if the official, whose name was not immediately clear, knew that Rice was a senior official and not a reporter. The same official shouted at a White House press aide who was instructing foreign reporters on where to stand as they recorded Obama disembarking from the plane. “This is our country. This is our airport,” the official said in English, pointing and speaking angrily with the aide. The U.S. aide insisted that the journalists be allowed to stand behind a rope line, and they were able to record the interaction and Obama’s arrival uninterrupted, typical practice for U.S. press traveling with the president.

“.. the leader of the world’s largest economy, who is on his final tour of Asia, was forced to disembark from Air Force One through a little-used exit in the plane’s belly..”

• Barack Obama ‘Deliberately Snubbed’ By Chinese In Chaotic Arrival At G20 (G.)

China’s leaders have been accused of delivering a calculated diplomatic snub to Barack Obama after the US president was not provided with a staircase to leave his plane during his chaotic arrival in Hangzhou ahead of the start of the G20. Chinese authorities have rolled out the red carpet for leaders including India’s prime pinister Narendra Modi, Russian president Vladimir Putin, South Korean president Park Geun-hye, Brazil’s president Michel Temer and British prime minister Theresa May, who touched down on Sunday morning. But the leader of the world’s largest economy, who is on his final tour of Asia, was forced to disembark from Air Force One through a little-used exit in the plane’s belly after no rolling staircase was provided when he landed in the eastern Chinese city on Saturday afternoon.

When Obama did find his way onto a red carpet on the tarmac below there were heated altercations between US and Chinese officials, with one Chinese official caught on video shouting: “This is our country! This is our airport!” “The reception that President Obama and his staff got when they arrived here Saturday afternoon was bruising, even by Chinese standards,” the New York Times reported. Jorge Guajardo, Mexico’s former ambassador to China, said he was convinced Obama’s treatment was part of a calculated snub. “These things do not happen by mistake. Not with the Chinese,” Guajardo, who hosted presidents Enrique Peña Nieto and Felipe Calderón during his time in Beijing, told the Guardian.

“I’ve dealt with the Chinese for six years. I’ve done these visits. I took Xi Jinping to Mexico. I received two Mexican presidents in China. I know exactly how these things get worked out. It’s down to the last detail in everything. It’s not a mistake. It’s not.” Guajardo added: “It’s a snub. It’s a way of saying: ‘You know, you’re not that special to us.’ It’s part of the new Chinese arrogance. It’s part of stirring up Chinese nationalism. It’s part of saying: ‘China stands up to the superpower.’ It’s part of saying: ‘And by the way, you’re just someone else to us.’ It works very well with the local audience. “Why [did it happen]?” the former diplomat, who was ambassador from 2007 until 2013, added. “I guess it is part of Xi Jinping playing the nationalist card. That’s my guess.”

I am not optimistic.

• Half The Forms Of Life On Earth Will Be Gone By 2050 (ZH)

Humanity should start saving nature and switch to 80% renewables by 2030, otherwise the Earth will keep losing species, and within 33 years around 800,000 forms of life will be gone, conservation biologist Reese Halter told RT’s News with Ed. Humans have changed the Earth so much that some scientists think we have entered a new geological age. According to a report in the Science Magazine, the Earth is now in the anthropocene epoch. Millions of years from now our impact on Earth will be found in rocks just like we see fossils of plants and animals which lived years ago – except this time scientists of the future will find radioactive elements from nuclear bombs and fossilized plastic.

RT: Tell us about this new age.
Reese Halter: Yes. There are three things that come to mind. First of all, imagine you’re back on the football field. Each year in America – America alone – we throw away the equivalent of one football field, a 100 miles deep. That is the first thing. The second thing, we’ve entered the age of climate instability. That means from burning subsidized climate altering fossil fuels our food security is in jeopardy. The third thing that is striking is we’re losing species a thousand times faster than in the last 65 million years. At this rate within 33 years, by midcentury – that means 800,000 forms of life, or half of everything we know will be gone. The only way we can reverse this is to two things: save nature now, our life support system, and we do this by switching to 80% renewables by 2030. It is a WWIII mentality. In America we have the technology; we have the blueprint. We lack the political will just right now. But in the next short while we will, because it is a matter of survival.

RT: We’ve just gone through the hottest month on record. There is plenty of data out there to suggest that we truly are entering something our world has never seen in our lifetime. To brand it as a new geological age, what impact is that going to have? RH: It’s got the impact that humans are here. As I said earlier, we’re talking a 160% more than mother Earth can sustain 7.4 billion people. The way to do it is to pull it back to 90%. If we were a big bathtub the ring will read: toxicity, toxicity, toxicity. We’ve got to peal that back, because what we do to the Earth, we do to ourselves.

Debt Rattle February 5 2016

Feb 052016

February 5, 2016 Posted by Raúl Ilargi Meijer at 10:08 am Finance Tagged with: Assange, austerity, China, dollar, Fed, food, IMF, oil, Saudi, SEC, yuan 2 Responses »

Harris&Ewing “Congressional baseball game. President and Mrs. Wilson.” 1917

• Dollar Tumbles As Fed Rescues China In The Nick Of Time (AEP)

• SocGen: China Only Months Away From Depleting Its Currency Reserves (MW)

• China Foreign Reserves Head for Record Drop on Yuan Defense (BBG)

• Citi: ‘We Should All Fear Oilmageddon’ (BBG)

• Just 0.1% Of Global Oil Output Has Been Halted By Low Prices (BBG)

• US Running Out Of Space To Store Oil (CNN)

• Obama Proposes $10-a-Barrel Oil Tax (MW)

• IMF Honing Tools To Rescue EMs From China Spillover (Reuters)

• BOJ Board Among Those Surprised By Negative Interest Rate Plan (Reuters)

• US Banks Targeted By Activist Investors (Reuters)

• Two Anonymous Whistleblowers Are Pounding on the SEC’s Door Again (Martens)

• Europe’s Ports Vulnerable As Ships Sail Without Oversight (FT)

• Portugal’s Anti-Austerity Budget Provokes Brussels Showdown (FT)

• Saudis Say Cash Crunch Won’t Derail an Ambitious Foreign Agenda (BBG)

• World Food Prices Tumble Near 7-Year Low (CNBC)

• Julian Assange Should Be Freed, Entitled To Compensation: UN Panel (AP)

But that won’t last.

• Dollar Tumbles As Fed Rescues China In The Nick Of Time (AEP)

The US dollar has suffered one of the sharpest drops in 20 years as the Federal Reserve signals a retreat from monetary tightening, igniting a powerful rally for commodities and easing a ferocious squeeze on dollar debtors in China and emerging markets. The closely-watched dollar index (DXY) has fallen 3pc this week to 96.44 and given up all its gains since late October. This has instant effects on the world’s inter-connected financial system, today more geared to the US exchange rate and Fed policy than at any time in modern history. David Bloom, from HSBC, said the blistering dollar rally of the past three years is largely over and may go into reverse as weak economic figures in the US force the Fed to pare back four rate rises loosely planned for this year.

A more dovish Fed and a weaker dollar is a bitter-sweet turn for the Bank of Japan and the ECB as they try to push down their currencies to stave off deflation. Their task has become even harder. The euro has rocketed by more than 3pc this week to $1.12 against the dollar. In trade-weighted terms the euro is 5pc higher than it was in March, when the ECB began quantitative easing, showing just how difficult it has become for authorities to drive down their exchange rates. Everybody is playing the same game. Yet a halt to the dollar rally is a huge relief for companies and banks around the world that have borrowed a record $9.8 trillion in US currency outside the US, up from $2 trillion barely more than a decade ago. These debtors have faced a double shock from the rising dollar and a jump in global borrowing costs.

RBS calculates that more than 80pc of the debt of Alibaba, CNOOC, Baidu and Tencent is in US dollars, with Gazprom, Vale, Lukoil and China Overseas close behind. China’s central bank (PBOC) can breathe easier as it burns through foreign reserves to defend the yuan against capital flight. Wei Yao, from Societe Generale, said China’s holdings have fallen by $800bn to an estimated $3.2 trillion and are just months away from the danger zone. She warned that markets are likely to become “transfixed” on the rate of decline once reserves near $2.8 trillion, testing the credibility of the PBOC and raising the risk that Beijing will be forced to let the currency slide – with drastic global consequences. If so, only a change of course by the Fed can buy time for China to get a grip and avert a drift into dangerous waters.

Luckily it’s Lunar New year now.

• SocGen: China Only Months Away From Depleting Its Currency Reserves (MW)

China is burning through its foreign-currency reserves at such a blistering pace that the country will run down its cushion in a few months, forcing the government to wave the white flag and float the yuan, says Société Générale global strategist Albert Edwards. “The market remains content that massive firepower remains to support the renminbi. It does not,” Edwards, a perma-bear with a propensity for doom-and gloom-prognoses, said in a report published Thursday. Société Générale, using the IMF’s rule of thumb on reserve adequacy, estimates that China’s foreign-currency reserves are at 118% of the recommended level. But that cushion is likely to evaporate soon on a combination of capital flight and the continuing effort by financial authorities to stem a dramatic drop in the currency.

China’s reserves totaled $3.33 trillion in December, according to official government data. Edwards estimated that China’s foreign-exchange reserves fell by about $120 billion in January, a trend that is likely to continue in the foreseeable future. “When foreign exchange reserves reach $2.8 trillion—which should only take a few more months at this rate—foreign exchange reserves will fall below the IMF’s recommended lower bound,” he said. That is likely to trigger a “tidal wave of speculative selling,” which in turn will force the People’s Bank of China to allow the yuan to freely float within six months. The yuan currently moves within a trading band set by the People’s Bank of China that the central bank can change at will.

“We estimate that if capital outflows maintain their current pace, the PBoC would be unable to defend the yuan for more than two to three quarters,” Wei Yao, Société Générale’s China economist, said in a report published earlier this month. “China’s reserves have already fallen by $663 billion from mid-2014, and a further decline of this scale would start to severely impair the Chinese authorities’ ability to control the currency and mitigate future balance of payments,” she said. Against this backdrop, Société Générale is projecting the yuan to sink to 7.5 against the U.S. dollar this year, significantly weaker than 7 yuan to the buck predicted by most economists. The dollar is currently at 6.56 yuan.

Lowball du jour: “The economy itself cannot turn this around.”

• China Foreign Reserves Head for Record Drop on Yuan Defense (BBG)

China’s foreign-exchange reserves, already at a three-year low, are poised to post a second consecutive record monthly drop as policy makers intervene to support the yuan. The central bank will say Sunday that the currency hoard fell by $118 billion to $3.2 trillion in January, according to economists’ estimates in a Bloomberg survey. That would exceed a record $108 billion decline in December, which brought last year’s total draw-down to more than half a trillion dollars and capped the first annual decrease in the reserves since 1992. Policy makers are burning through billions of dollars to hold up a weakening currency amid flagging growth and $1 trillion in capital outflows last year. The yuan sank to a five-year low last month as the People’s Bank of China set the reference rate at an unexpectedly weak level, a signal that it’s more tolerant of depreciation as growth slows.

“China is facing a significant capital outflow problem,” said Krishna Memani at Oppenheimer in New York. “It’s an astounding reduction in their capital account position. This is an issue they’ve been aware of, and they have to find a way of managing it. The economy itself cannot turn this around.” The draw-down has accelerated since the central bank’s surprise devaluation of the currency in August. Reserves tumbled $94 billion that month, a record at the time. Another cut to the yuan’s reference rate last month spurred a stock sell-off that has helped push the Shanghai Composite Index down 21 percent this year and into a bear market.

The benefits of low prices…

• Citi: ‘We Should All Fear Oilmageddon’ (BBG)

Markets are currently in a well-oiled “death spiral,” according to Citigroup analysts led by Jonathan Stubbs. “It appears that four inter-linked phenomena are driving a negative feedback loop in the global economy and across financial markets,” the analysts write, citing the resilient U.S. dollar, lower commodities prices, weaker trade and capital flows, and declining emerging market growth. “It seems reasonable to assume that another year of extreme moves in U.S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks,” the analysts add.

“Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon.” Their case is bolstered by a collection of charts showing the linkages between the four factors cited above, including the importance of lofty oil prices to the ready supply of petrodollars circulating in the world economy and flowing to financial assets. Oil exporters have enjoyed more than $6 trillion flowing into their current accounts, according to Citi’s estimates, implying some $4 trillion of capital in sovereign wealth funds (SWFs).

“But, the collapse in oil/commodity prices and sharp fall in the pace of world trade means that these same economies will likely experience an aggregate current account deficit for the first time since 1998,” says Citi. “In turn, this is likely to put pressure on SWF and broader emerging market liquidity as governments and emerging market economies would need to ‘lean’ on reserves in order to maintain economic, political and social stability. This has clear feedback loops across emerging markets.” Accordingly, the impact of the feedback loop is being felt far and wide in financial markets, extending even to U.S. inflation expectations. Where once 10-year inflation breakevens had little relationship with the price of oil they have for the past two years moved in tandem.

Pump and Jump.

• Just 0.1% Of Global Oil Output Has Been Halted By Low Prices (BBG)

After a year of low oil prices, only 0.1% of global production has been curtailed because it’s unprofitable, according to a report from consultants Wood Mackenzie that highlights the industry’s resilience. The analysis, published ahead of an annual oil-industry gathering in London next week, suggests that oil prices will need to drop even more – or stay low for a lot longer – to meaningfully reduce global production. OPEC and major oil companies like BP and Occidental Petroleum are betting that low oil prices will drive production down, eventually lifting prices. That’s taking longer than expected, in part due to the resilience of the U.S. shale industry and slumping currencies in oil-rich countries, which have lowered production costs in nations from Russia to Brazil.

The Wood Mackenzie analysis provides an estimate for the amount directly impacted by low prices – to the tune of 100,000 barrels a day since the beginning of 2015 – rather than output affected as new projects build up and aging fields decline. Canada, the U.S. and the North Sea have been affected the most by closures related to low prices. The International Energy Agency does estimate year-over-year change, and says global production in the fourth quarter was 96.9 million barrels a day. It forecast that outside OPEC, output will fall this year by 600,000 barrels a day, the largest annual decline since 1992. Last year, non-OPEC output rose 1.4 million barrels a day. “Since the drop in oil prices last year there have been relatively few production shut-ins,” according to the report.

The company, which tracks production and costs at more than 2,000 oilfields worldwide, estimates that another 3.4 million barrels a day of production are losing money at current prices, of about $35 a barrel. It cautioned against expecting further closures, because “many producers will continue to take the loss in the hope of a rebound in prices.” For major oil companies, a few months of losses may make more sense than paying to dismantle an offshore platform in the North Sea, or stopping and restarting a tar-sands project in Canada, which may take months and cost millions of dollars. “There are barriers to exit,” said Robert Plummer at Wood Mackenzie.

China must have the same issue.

• US Running Out Of Space To Store Oil (CNN)

The U.S. now has nearly 503 million barrels of commercial crude oil stockpiled, the Energy Information Administration said on Wednesday. It’s the highest level of supply for this time of the year in at least 80 years. The sky-high inventories are the latest sign that the U.S. oil boom is still alive and kicking. U.S. oil production is near all-time highs despite the epic crash in oil prices from $107 a barrel in June 2014 to just $30 a barrel now. Sure, domestic oil production has slowed – but just barely. Oil stockpiles are so high that certain key storage locations are now “bumping up against storage and logistical constraints,” according to Goldman Sachs analysts. In other words, these facilities are nearly overflowing. Cushing, Oklahoma is the delivery point for most of the oil produced in the U.S. This key trading hub is currently swelling with 64 million barrels of oil.

That represents a near-record 87% of the facility’s total storage capacity as of November, according to the EIA. “There is a fear of tank topping in Cushing. We’re seeing it get to its brims,” said Matthew Smith at ClipperData. Cushing has had to ramp up its storage capabilities in recent years just to deal with all this oil. If this key hub ran out of room to stockpile oil, that crude would have to be diverted elsewhere – and that would hurt oil prices. “There would be a ripple effect across the U.S. that would impact prices everywhere,” said Smith. Global inventories also remain high, with the International Energy Agency recently saying the world is “drowning” in oil. The agency is bracing for oversupply of 1.5 million barrels per day in the first half of 2016.

Wall Street is nervously watching supply constraints since they can have dramatic repercussions on prices. More so than other commodities, oil is vulnerable to so-called “operational stress” due to the expensive and sophisticated infrastructure that is needed for storage. “Each time the market brushes up against infrastructure constraints, oil prices will likely spike to the downside to make oil supplies back off,” Goldman wrote. By comparison, it’s relatively easy to pile up unwanted metals in an open space like a warehouse. “Aluminum only needs a grassy field,” Goldman wrote. To put these storage issues into context, Goldman estimates $1 billion of gold would fit into a bedroom closet. Crude oil of the same value would require 17 supertanker ships that can hold about 2 million barrels of oil each.

Timing, sir?

• Obama Proposes $10-a-Barrel Oil Tax (MW)

President Barack Obama is proposing a $10-a-barrel tax on oil to pay for clean transportation projects, the White House said Thursday. The tax, which will be part of the budget request Obama unveils next week, would be paid for by oil companies and gradually phased in over five years. It would apply to imported oil, not exported U.S. oil, White House National Economic Council Director Jeff Zients told reporters. Obama’s proposal lands in the midst of the 2016 election campaigns, and is likely to be harshly criticized by both Republican presidential candidates and lawmakers. In past years, Obama has proposed eliminating subsidies for the oil-and-gas industries. But those efforts have never made it through Congress. House Majority Whip Steve Scalise of Louisiana said the proposal could be Obama’s worst idea ever.

The tax would add roughly 25 cents to a gallon of gasoline, at current prices. The White House said Obama’s plan would boost investments in clean transportation by about 50%. Zients said the administration recognized oil companies would “likely pass on some of these costs” to consumers. But he added that the U.S.’s “crumbling infrastructure imposes a huge cost on American families,” by reducing competitiveness and by adding time and fuel costs to workers who are stuck in traffic. Brian Milne, energy editor and product manager at Schneider Electric, said the tax would “definitely” increase gasoline prices. “Maybe the president thinks because oil and gasoline prices are low, he can slip the tax through that will eventually be passed on to consumers without many realizing that they’re paying the government more to fuel their vehicles and warm their houses,” Milne said in an email. “However, I don’t think it will have enough support to move through Congress.”

IMF sees great opportunities for power grabs. Pennies on the dollar. Or the SDR, rather.

• IMF Honing Tools To Rescue EMs From China Spillover (Reuters)

China can avoid a “hard landing” if Beijing pursues reforms to state enterprises and sticks to a more market-driven and well-communicated exchange rate policy, IMF Managing Director Christine Lagarde said on Thursday. But Lagarde said spillovers from China’s transition to a slower, more sustainable growth rate would continue to pressure oil and commodity exporters around the globe, increasing demands for financing help from the IMF and other international institutions. She told an online media briefing that the IMF wanted to be ready to handle any emerging market difficulties with new and improved financing tools.

“China is going through that massive, multi-faceted transition and we do not expect a hard landing of China as has been talked about for many years,” Lagarde said. She noted that China’s transition will still be difficult and create market volatility, however. Oil and metals prices, now two thirds below their most recent peaks in 2014, will likely stay low for some time. As a result, the international financial safety net “needs to be strong and needs to be readily available to face any circumstances,” Lagarde said.

The IMF will be working in coming months to improve existing financing instruments, such as credit and liquidity lines, as well as new instruments to address their situations. Lagarde’s remarks came as several oil and commodity exporters, including Peru, Nigeria, Angola and Azerbaijan, are in talks with the World Bank on financing to cope with widening budget deficits. In a speech earlier on Thursday at the University of Maryland, Lagarde said a larger and more robust financial safety net would reduce the need for many emerging market countries to hold large foreign exchange reserves, freeing up funds for investments in infrastructure and education.

The smell of Abenomics in the morning. This kind of decision making kills so much trust it can’t possibly be worth the price paid. But Abe gets to kick the can a while longer…

• BOJ Board Among Those Surprised By Negative Interest Rate Plan (Reuters)

Just days before the Bank of Japan stunned financial markets with its radical adoption of negative interest rates, members of the central bank’s own policy board had also been taken by surprise by the move. Most of the nine board members were only told of the scheme in the week leading up to last Friday’s rate review, according to interviews with more than a dozen officials familiar with the deliberations. The startling speed and secrecy with which such a major policy shift was executed suggest its intent was more about delivering a shock to markets that would weaken the yen, than about maximising the stimulative impact of further easing. That would be in keeping with the single-minded style of central bank Governor Haruhiko Kuroda, people who know him well or have worked with him say, but could risk entrenching divisions between BOJ policymakers.

“If you’re a board member, you’re told about the plan at the last minute,” said a former board member, speaking on condition of anonymity. “It’s hard to argue against it or draft a counter proposal when there’s so little time left.” Kuroda had been saying for months that taking rates below zero was not a timely option, a position he had repeated as recently as Jan. 21. But the global market turbulence that greeted the start of 2016 had been threatening two planks of Prime Minister Shinzo Abe’s reflationary agenda – rising asset prices and a cheap yen. Before leaving for the annual World Economic Forum in Davos on Jan. 22, Kuroda instructed his staff to come up with options for further easing of the BOJ’s already ultra-loose policy, and report back to him when he returned to Tokyo three days later.

Expanding the bank’s massive asset purchasing programme, known as “quantitative and qualitative easing” (QQE), by 10-20 trillion yen ($83-$167 billion) was one option, sources said, though it was quickly ruled out as too weak to shock markets. Something more arresting was needed, and few investors were predicting negative rates. “The key was to show people that the BOJ will really do anything to achieve 2% inflation,” said a BOJ official. The complex plan, formulated by four top officials from the monetary affairs department, drew on studies of negative interest rate policies in Denmark, Switzerland and Sweden. By charging interest on just a fraction of banks’ deposits with the BOJ, they hoped to ease the pain on financial institutions and get around one of the big problems of twinning negative interest rates with QQE – that the central bank is force-feeding lenders cash it then penalises them for holding.

Thinking bailouts?

• US Banks Targeted By Activist Investors (Reuters)

Activist investors are putting the U.S. banking sector in their crosshairs, betting that headwinds whipping through the industry will accelerate consolidation among lenders. While these activist hedge funds have already targeted some major financial companies, such as insurer AIG and auto loan lender Ally Financial, banks have historically stayed out of their sights. Activists launched 97 campaigns last year aimed at the U.S. financial sector, around triple the amount from 2009, according to Thomson Reuters Activism data. Of those campaigns, 22 were aimed at banks, up from eight in 2009, the data show. The number has increased every year since the 2008 financial crisis.

Hedge funds such as Ancora Advisors, Clover Partners and Seidman & Associates are buying up stakes in lenders across the U.S., from community banks to large regional lenders. Driving these investments is the view that ultra-low interest rates, lagging returns on equity and tough regulations will push more banks to merge, with buyers willing to pay a hefty multiple to a bank’s tangible book value. Activist investors interviewed by Reuters say another factor is exposure to energy-related loans, which is driving down the valuations of certain banks and making them all the more vulnerable to a takeover. “Bigger banks are back in the market doing deals,” said Ralph MacDonald at law firm Jones Day. U.S. bank mergers and acquisitions volume rose 58% last year to $34.5 billion, according to Thomson Reuters data.

Last week alone saw two mergers. Huntington Bancshares said it would acquire FirstMerit for $3.4 billion in stock and cash, combining two Ohio-based lenders. And Chemical Financial said it was merging with Talmer Bancorp in an all-Michigan transaction that will create a bank with $16 billion in assets. To be sure, activists’ bets on banks are not without risk – especially if they get the timing wrong. The S&P 500 Financials index is down 14% since mid-December on fears that the Federal Reserve will take longer than previously expected to raise interest rates, hurting banks’ profitability. Another worry is that oil prices drop further, making a bank’s energy loan book more of a liability than an opportunity.

A takeout by a larger rival is also never a guarantee, but that is a risk activists are willing to take. On Monday, Hudson Executive Capital, a New York-based hedge fund, announced it had acquired a $56 million stake in Dallas-based Comerica Bank, a lender with $71 billion in assets under management. Among the banks that could buy Comerica is North Carolina-based BB&T Bank, according to activist investors who spoke to Reuters. [..] Zions Bancorporation, a Salt Lake City lender with $60 billion in assets, is another bank that activists said is vulnerable to an approach.

And will be ignored again.

• Two Anonymous Whistleblowers Are Pounding on the SEC’s Door Again (Martens)

Last night ABC began its two-part series on the Bernie Madoff fraud. Viewers will be reminded about how investment expert, Harry Markopolos, wrote detailed letters to the SEC for years, raising red flags that Bernie Madoff was running a Ponzi scheme – only to be ignored by the SEC as Madoff fleeced more and more victims out of their life savings. Today, there are two equally erudite scribes who have jointly been flooding the SEC with explosive evidence that some Exchange Traded Funds (ETFs) that trade on U.S. stock exchanges and are sold to a gullible public, may be little more than toxic waste dumped there by Wall Street firms eager to rid themselves of illiquid securities. The two anonymous authors have one thing going for them that Markopolos did not.

They are represented by a former SEC attorney, Peter Chepucavage, who was also previously a managing director in charge of Nomura Securities’ legal, compliance and audit functions. We spoke to Chepucavage by phone yesterday. He confirmed that two of his clients authored the series of letters. Chepucavage said further that these clients have significant experience in trading ETFs and data collection involving ETFs. Throughout their letters, the whistleblowers use the phrase ETP, for Exchange Traded Product, which includes both ETFs and ETNs, Exchange Traded Notes. In a letter that was logged in at the SEC on January 13, 2016, the whistleblowers compared some of these investments to the subprime mortgage products that fueled the 2008 crash, noting that regulators and economists were mostly blind to that escalating danger as well. The authors wrote:

“The vast majority of ETPs have very low levels of assets under management and illiquid trading volumes. Many of these have illiquid underlying assets and a large group of ETPs are based on derivatives that are not backed by physical assets such as stocks, bonds or commodities, but rather swaps or other types of complex contracts.

Many of these products may have been designed to take what were originally illiquid assets from the books of operators, bundle them into an ETP to make them appear liquid and sell them off to unsuspecting investors. The data suggests this is evidenced by ETPs that are formed, have enough volume in the early stage of their existence to sell shares, but then barely trade again while still remaining listed for sale. This is reminiscent of the mortgage-backed securities bundles sold previous to the last financial crisis in 2008.”

If you look beyond the obvious play on fearmongering, this is still curious.

• Europe’s Ports Vulnerable As Ships Sail Without Oversight (FT)

As Europe’s politicians struggle to control a deepening migrant crisis and staunch the rising threat of Islamist terrorism on their borders, little attention is being paid to the continent’s biggest frontier: the sea. New data highlight the extent to which smuggling, bogus shipping logs, unusual coastal stop-offs and inexplicable voyages are increasing across the Mediterranean and Atlantic for ships passing through Europe’s ports — with little or nothing being done to combat the trend. There is currently no comprehensive system to track shipments and cargos through EU ports and along its approximately 70,000km of coastline — a deficiency that has long been exploited by organised criminals and which could increasingly prove irresistible to terrorists too, say European security officials.

“So far, the thing about maritime security, and particularly terrorists exploiting weaknesses there, is that it’s the dog that’s not barked,” says former Royal Navy captain Gerry Northwood, chief operating officer of Mast, a maritime security company, and commander of the counter-piracy task force in the Indian Ocean. “But the potential is there. The world outside Europe – North Africa for example – is awash with weapons. If you can get a bunch of AK47s into a container, embark that container from Aden then you could get them into Hamburg pretty easily. A whole armoury’s worth.” In January, 540 cargo ships entered European ports after passing through the territorial waters of terrorist hotspots Syria and Libya, as well as Lebanon, for unclear or uneconomic reasons during the course of their voyages.

The number of vessels using flags of convenience — using the ensign of a state different to that in which a ship’s owners reside to mask identity or reduce tax bills — is also rising. Of the 9,000 ships that passed through European waters last month, 5,500 used flags of convenience.

“We have to be demanding and disciplined [over the budget], but Portugal is not a pupil. There are no professor-states or student-states in the EU.”

• Portugal’s Anti-Austerity Budget Provokes Brussels Showdown (FT)

Portugal’s new Socialist government faces an embarrassing rejection of its first “anti-austerity” budget by the European Commission on Friday after eleventh-hour talks failed to break a stalemate over additional cuts needed to bring Lisbon in line with EU deficit rules. Portuguese officials expressed confidence they would overcome objections from the commission, which last week warned Lisbon it risked “serious non-compliance” with the bloc’s fiscal rules. At the same time, they continued to show defiance, insisting they would not return to the spending policies of the previous centre-right administration. “We cannot continue following a path of blind austerity,” Augusto Santos Silva, Portugal’s foreign minister, told RTP television on Wednesday.

“We have to be demanding and disciplined [over the budget], but Portugal is not a pupil. There are no professor-states or student-states in the EU.” The commission announced it would hold a special meeting on Friday afternoon to decide whether Portugal’s 2016 budget — submitted three months late after protracted post-election coalition negotiations — would be rejected. If it is, it would mark the first time a eurozone government has had its spending plan vetoed by Brussels since the new crisis-era rules went into effect in 2011. Lisbon’s tussle with Brussels calls into question the government’s ability to deliver on election pledges to roll back years of austerity by cutting taxes and increasing public sector wages without running foul of the EU’s strict budgetary rules.

After Portugal emerged from its bailout in 2014, it was supposed to bring its deficit under the EU ceiling of 3% of economic output by 2015. But economic forecasts published by Brussels on Thursday, which take into account the government’s initial budget plan, show Lisbon with a 4.2% deficit in 2015 — and deficits above 3% in both 2016 and 2017. The 3.4% deficit projected for 2016 is in sharp contrast to the 2.6% Lisbon has forecast. Lisbon, however, said the commission’s forecasts do not take into account revisions to its budget proposals made over the past week. Under eurozone rules, a country that misses its deficit target must at least demonstrate it is undertaking significant economic reforms. But the Portuguese budget reins back such measures, prompting a warning from Brussels that its efforts were “well below” target.

Desperate regime.

• Saudis Say Cash Crunch Won’t Derail an Ambitious Foreign Agenda (BBG)

Saudi Arabia won’t let the plunge in oil prices derail a regional agenda that includes waging war in Yemen and funding allies in Syria and Egypt, Foreign Minister Adel al-Jubeir said in an interview. “Our foreign policy is based on national security interests,” al-Jubeir said on Thursday at the Ministry of Foreign Affairs headquarters in the kingdom’s capital, Riyadh. “We will not let our foreign policy be determined by the price of oil.” The world’s largest oil exporter, traditionally a cautious actor on the Middle Eastern stage, has become more assertive during the 13-month reign of King Salman. Saudi Arabia is fighting in Yemen against Shiite rebels it says are backed by Iran. It’s also sending billions of dollars to Egypt, to fend off instability in the most populous Arab country, and arming the increasingly beleaguered rebels in Syria’s civil war.

That’s a costly agenda to finance with Brent crude at the lowest in more than a decade. The oil shock left Saudi Arabia with a budget deficit of about $98 billion last year, pushing the kingdom to cut spending on energy subsidies and building projects. It’s also considering selling sovereign bonds and shares in its giant state oil company. The return to world markets of Iran, Saudi Arabia’s regional rival, is set to add to global supply. Sanctions on the Islamic Republic “are being lifted and will be removed as long as Iran complies with the terms of the nuclear agreement,” al-Jubeir said. “We believe there is sufficient room in the market for countries who produce oil.” Tensions between the two OPEC members have undermined efforts to end the war in Syria, where Saudi Arabia supports mainly Sunni militant groups trying to overthrow President Bashar al-Assad, who’s backed by Iran.

The countries are also at loggerheads over Yemen, though Western diplomats have played down Saudi claims about Iran’s involvement on the Houthi rebel side there. The Saudi-led intervention in Yemen, which began with airstrikes in March last year and has escalated to include ground troops, “was a war that nobody wanted to wage,” al-Jubeir said. “This was a war to protect Yemen from collapsing and to protect the kingdom from the dangers of a militia that is armed with ballistic missiles and in possession of an air force that is allied with Iran and Hezbollah.” Saudi Arabia said this week that 375 of its civilians have been killed by missile strikes around the border with Yemen. The United Nations says about 6,000 Yemenis have died in the conflict.

While the U.S. has expressed support for the Saudi engagement in Yemen, in other areas the longstanding alliance between the countries has shown signs of fraying. Saudi officials have expressed concerns about last year’s U.S.-backed nuclear agreement with Iran, and were angered when the U.S. called for former Egyptian President Hosni Mubarak to step down in 2011.

Deflation.

• World Food Prices Tumble Near 7-Year Low (CNBC)

World food prices fell to almost a seven-year low at the start of the year on the back of sharp declines in commodities, particularly sugar, according to the latest data from the UN. The Food Price Index, published by the UN’s Food and Agriculture Organization (FAO), averaged 150.4 points in January, down 16% from a year earlier and registering its lowest level since April 2009. The trade-weighted index tracks international market prices for five key commodity groups – major cereals, vegetable oils, dairy, meat and sugar – on a monthly basis. In January, the Sugar Price Index showed the largest declines having fallen 4.1% from December, its first drop in four months. The FAO said the drop was down to improved crop conditions in Brazil, the world’s leading sugar producer and exporter. The second largest declines were seen in the FAO’s Dairy Price Index which dropped by 3.0% in the same time period “on the back of large supplies, in both the EU and New Zealand, and torpid world import demand,” the FAO noted.

The Cereals and Vegetable Oils indices both saw declines of 1.7% in January from the previous month and the Meat Price Index fell 1.1%. The main factors underlying the lingering decline in basic food commodity prices are “the generally ample agricultural supply conditions, a slowing global economy, and the strengthening of the U.S. dollar,” the FAO noted. Food commodities are not the only ones suffering from demand failing to keep up with a glut in supply with oil prices suffering a similar fate with a steady decline since mid-2014. Signaling no let-up in production, the food agency raised its forecasts for worldwide cereal crops in 2016. “As a result of the upgraded production and downgraded consumption forecasts, world cereal stocks are set to end the 2016 seasons at 642 million tons, higher than they began,” the agency noted.

Far from over. Pyrrhic.

• Julian Assange Should Be Freed, Entitled To Compensation: UN Panel (AP)

A UN human rights panel says WikiLeaks founder Julian Assange has been “arbitrarily detained” by Britain and Sweden since December 2010. The UN Working Group on Arbitrary Detention said his detention should end and he should be entitled to compensation. Swedish prosecutors want to question Assange over allegations of rape stemming from a working visit he made to the country in 2010 when WikiLeaks was attracting international attention for its secret-spilling ways. Assange has consistently denied the allegations but declined to return to Sweden to meet with prosecutors and eventually sought refuge in the Ecuadorean embassy in London, where he has lived since 2012.

Debt Rattle January 16 2016

Jan 162016

January 16, 2016 Posted by Raúl Ilargi Meijer at 9:46 am Finance Tagged with: dollar, earnings, Fed, oil, PCBs, recession, refugees, retail, stocks, Treasuries Comments Off

DPC Union Station, Worcester, Massachusetts 1906

• US Stocks Post Worst 10-Day Start To A Year In History (MW)

• What Goes Up, Comes Down Considerably Faster (ZH)

• Wall Street Hemorrhages As Oil Tumbles And China Fears Deepen (Reuters)

• Weak US Data Deluge Points To Sharply Slower Growth (Reuters)

• A Recession Worse Than 2008 Is Coming (Michael Pento)

• Looming Recession Shifts Fed Support From Equities To Dollar, Banks (Brodsky)

• Global Earnings Downgrades Haven’t Been This Bad in Seven Years (BBG)

• Retail Sales in U.S. Decrease to End Weakest Year Since 2009 (BBG)

• Wal-Mart to Shut Hundreds of Stores (BBG)

• A New Year Of Turmoil For China (WaPo)

• Currency War Revival Seen After Yen, Euro Rally (BBG)

• One Year On, ‘Franckenschock’ Still Hurts Swiss (CNBC)

• America’s Student-Debt Crisis Is Only Getting Worse (MW)

• MH-17’s Unnecessary Mystery (Robert Parry)

• Toxic Chemicals In Scottish Waters Wiping Out Killer Whales (Scotsman)

• Baby Found Dead On Greece Migrant Boat (AP)

History being written.

• US Stocks Post Worst 10-Day Start To A Year In History (MW)

U.S. stocks closed sharply lower Friday, locking in the worst 10-day start to a calendar year ever, as oil prices plunged and investors worried about slowing growth in the U.S. During the course of the session, the S&P 500 broke below its Aug. 24 low—which several market strategists said would be tantamount to a major sell signal—to trade at its lowest level since October 2014. The Dow Jones Industrial Average was briefly down as much as 537 points. Oil appeared to be the main driver of concern. Both the U.S. and global benchmarks settled below $30 a barrel, as investors feared that supplies will continue to rise as Iran prepares to enter the market ad Russia continues pumping oil to help support its flagging economy.

”There’s not a lot of people willing to take their foot off the gas and prices are adjusting accordingly,” said David Meier, portfolio manager at Motley Fool Asset Management. “As a result of that you’re seeing fear just creep in.” The Dow slumped 390.97 points, or 2.4%, to 15,988.08, while the S&P 500 slid 44.85 points, or 2.3%, to 1,876.99, led lower by the financial, technology and energy sectors. The Nasdaq Composite tumbled 126.59 points, or 2.7%, to 4,488.42. All Dow components ended in negative territory, as were all 10 sectors on the S&P 500. Selling began in China after official data showed that new bank loans were lower than expected in December as lenders sharply curtailed activity amid worries about slowing growth and bad debt.

In a bid to boost liquidity, China’s central bank said it pumped $15 billion of funds into the market via a medium-term lending facility on Friday. The Shanghai Composite dropped 3.5% and is down 20% from a Dec. 22 high, which by one definition puts it in a bear market. All of this was exacerbated as options stopped trading ahead of their expiration on Saturday. Dave Lutz, head of ETFs at JonesTrading, said because of how the market was positioned, options dealers needed to sell more futures to hedge their positions as stocks fell.

Yeah, those are real losses. Transitory is no longer a valid term.

• What Goes Up, Comes Down Considerably Faster (ZH)

What goes up, comes down considerably faster. For global stocks, Bloomberg notes, the way down ($15 trillion lost in 7 months) has been much easier than the climb up ($30 trillion added in 4 years).

With markets from Asia to Europe entering bear markets this month, stocks worldwide have lost more than $14 trillion, or 20%, in value from a record last June amid worries over global growth and deepening oil declines. The pace of the drop has been so fast that it has already unraveled about half of the rally since a low in 2011. And here is a bonus chart from Bank of America, which looks at the S&P on an equal weighted basis, to avoid such aberrations as the collapsing market breadth phenomenon, also known as FANG. Spot the symmetry.

“Initially when oil was down, the convenient line was ‘Well, it’s good for the other nine sectors’.. [..] Now, it’s contagion to Main Street and Wall Street.”

• Wall Street Hemorrhages As Oil Tumbles And China Fears Deepen (Reuters)

Wall Street bled on Friday, with the S&P 500 sinking to its lowest since October 2014 as oil prices sank below $30 per barrel and fears grew about economic trouble in China. Pain was dealt widely, with the day’s trading volume unusually high and more than a fifth of S&P 500 stocks touching 52-week lows. The major S&P sectors all ended sharply lower. The Russell 2000 small-cap index dropped as much as 3.5% to its lowest since July 2013. The energy sector dropped 2.87% as oil prices fell 6.5%, in part due to fears of slow economic growth in China, where major stock indexes also slumped overnight. The energy sector has lost nearly half its value after hitting record highs in late 2014. “Initially when oil was down, the convenient line was ‘Well, it’s good for the other nine sectors’,” said Jake Dollarhide, CEO of Longbow Asset Management.

“That tune has changed. Now, it’s a contagion to the other nine sectors. It’s a contagion to Main Street and Wall Street.” The technology sector was the day’s biggest loser, sliding 3.15% as weak quarterly results from chipmaker Intel weighed heavily on chip stocks. The S&P 500 has fallen about 12% from its high in May, pushing it into what is generally considered “correction territory.” China’s major stock indexes shed over 3%, raising questions about Beijing’s ability to halt a sell-off that has now reached 18% since the start of the year. The Dow Jones industrial average dropped 2.39% to end at 15,988.08 and the S&P 500 fell 2.16% to 1,880.33. The Nasdaq Composite lost 2.74% to 4,488.42. For the week, the Dow fell 2.2%, the S&P 500 lost 2.2% and the Nasdaq dropped 3.3%. U.S. stock exchanges will be closed on Monday in observance of Martin Luther King Jr. Day, while China’s equity markets will be open.

And this is news to whom, exactly?

• Weak US Data Deluge Points To Sharply Slower Growth (Reuters)

U.S. retail sales fell in December as unseasonably warm weather undercut purchases of winter apparel and cheaper gasoline weighed on receipts at service stations, the latest indication that economic growth braked sharply in the fourth quarter. The growth picture was further darkened by other data on Friday showing industrial production fell in December, dragged down by cutbacks in utilities and mining output. Business inventories were also weak, posting their biggest drop in just over four years in November. Signs the economy has hit a soft patch – together with weak inflation, a stock market sell-off and faltering global growth – raises doubts on whether the Federal Reserve will raise interest rates again in March. The Fed lifted its benchmark overnight interest rate from near zero last month, the first rate hike in nearly a decade.

“The economy got hit from all sides in December. If these weak data keep going into 2016, the outlook is going to grow even dimmer given the recent financial market turbulence and the fears over what a slowdown in China means for the rest of the world,” said Chris Rupkey, chief economist at MUFG Union Bank in New York. The Commerce Department said retail sales slipped 0.1% after increasing 0.4% in November. For all of 2015, retail sales rose just 2.1%, the weakest reading since 2009, after advancing 3.9% in 2014. Retail sales excluding automobiles, gasoline, building materials and food services fell 0.3% after a 0.5% gain the prior month. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Though another report from the University of Michigan showed its consumer sentiment index rose to 93.3 early this month from a reading of 92.6 in December, households were less upbeat about current conditions, reflecting the recent equity market turmoil. Friday’s reports joined weak data on construction, manufacturing and export growth in suggesting that growth slowed abruptly in the final three months of 2015. They could raise fears that the malaise from manufacturing and export-oriented sectors was filtering to the rest of the economy.

“Now that this debt bubble is unwinding, growth in China is going offline”

• A Recession Worse Than 2008 Is Coming (Michael Pento)

The S&P 500 has begun 2016 with its worst performance ever. This has prompted Wall Street apologists to come out in full force and try to explain why the chaos in global currencies and equities will not be a repeat of 2008. Nor do they want investors to believe this environment is commensurate with the dot-com bubble bursting. They claim the current turmoil in China is not even comparable to the 1997 Asian debt crisis. Indeed, the unscrupulous individuals that dominate financial institutions and governments seldom predict a down-tick on Wall Street, so don’t expect them to warn of the impending global recession and market mayhem. But a recession has occurred in the U.S. about every five years, on average, since the end of WWII; and it has been seven years since the last one — we are overdue.

Most importantly, the average market drop during the peak to trough of the last 6 recessions has been 37%. That would take the S&P 500 down to 1,300; if this next recession were to be just of the average variety. But this one will be worse. A major contributor for this imminent recession is the fallout from a faltering Chinese economy. The megalomaniac communist government has increased debt 28 times since the year 2000. Taking that total north of 300% of GDP in a very short period of time for the primary purpose of building a massive unproductive fixed asset bubble that adds little to GDP. Now that this debt bubble is unwinding, growth in China is going offline.

The renminbi’s falling value, cascading Shanghai equity prices (down 40% since June 2014) and plummeting rail freight volumes (down 10.5% year over year), all clearly illustrate that China is not growing at the promulgated 7%, but rather isn’t growing at all. The problem is that China accounted for 34% of global growth, and the nation’s multiplier effect on emerging markets takes that number to over 50%. Therefore, expect more stress on multinational corporate earnings as global growth continues to slow. But the debt debacle in China is not the primary catalyst for the next recession in the United States. It is the fact that equity prices and real estate values can no longer be supported by incomes and GDP. And now that the Federal Reserve’s quantitative easing and zero interest-rate policy have ended, these asset prices are succumbing to the gravitational forces of deflation. The median home price to income ratio is currently 4.1; whereas the average ratio is just 2.6.

An inevitable development that we’ve long predicted.

• Looming Recession Shifts Fed Support From Equities To Dollar, Banks (Brodsky)

Investors are blaming Fed rate hikes, and hence a strong dollar, for weakening global output, commodity prices, and global equity prices so far in 2016. The Fed knows exactly what it’s doing. Equity returns are certainly dismal thus far in 2016. Through January 14 at 14:00PM EST, the MSCI World Index had declined by 8.6%. Accordingly, “the markets” had begun to doubt the Fed’s resolve to hike rates four times in 2016. Fed funds futures implied the December Fed Funds rate at 0.70%, up only 34 basis points from the current rate (0.36%). This implies the market is betting the Fed will hike once or twice more. Clearly, investors see the equity markets as the leading indicator of Fed policy. We disagree.

The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt. By raising rates, it increases the exchange value of the U.S. dollar. We have argued that global output growth would have to naturally decline given the extraordinary leverage already built into the global economy, leaving observers to acknowledge in 2016 that recession is near. We have argued further that the Fed is very aware of an imminent global slowdown, and that a logical strategy in such an environment would be for it to import global capital by keeping the dollar un-challenged as a store of value.

We would like to reiterate and refine our view: despite increasing discomfort among equity investors, we think the Fed will remain resolute in its effort to maintain or increase the interest rate differential between U.S. and foreign sovereign rates. The one thing that would change the Fed’s current policy would be if global growth shows signs of increasing – not decreasing. If the world economy were to strengthen then the Fed’s incentive to keep the dollar strong would fade. Investors should consider this meaningful shift in policy when deciding how to allocate across asset classes. As we noted in The Pain Trade last year, falling long-term Treasury yields are the last thing speculative (i.e., levered) investors expect. Following this week’s auctions, it may be time for them to cover shorts.

“Global equity markets are suffering so far in 2016 because the Fed’s primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar. Buy USDs and Treasuries”

Bubbles have limited lifespans.

• Global Earnings Downgrades Haven’t Been This Bad in Seven Years (BBG)

Stocks are losing their last line of defense. Amid a selloff that erased more than two years of gains – about $14 trillion – from global stocks now on the brink of a bear market, at least earnings stood as a potential bright spot. Those hopes are fading: analyst profit downgrades outnumbered upgrades by the most since 2009 last week, according to monthly data from a Citigroup index that tracks such changes. Declines in oil and and other commodities, the withdrawal of Federal Reserve support, Europe’s fragile recovery and China slowdown fears are combining to jeopardize one of the few remaining stock catalysts after a global rally of as much as 156% since 2009. And profit growth estimates are still too high for this year and 2017, says Bankhaus Lampe’s Ralf Zimmermann.

“The momentum in the global economy is slowing down to such an extent that people are seriously talking about recession,” said Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “This is not just China, it’s far more widespread. There are few places to hide. Even defensives will feel the pain.” Economists’ projections for worldwide expansion in 2016 have dropped steadily in the past months to just 3.3%, with estimates for China and the U.S. falling since the summer. The biggest bears are getting more bearish – DoubleLine Capital’s Jeffrey Gundlach sees global growth slowing to just 1.9% in 2016, making it the worst year since the aftermath of the financial crisis in 2009.

This earnings season may not provide much reassurance, say strategists at JPMorgan. Analysts project a 6.7% contraction in fourth-quarter profits for Standard & Poor’s 500 Index members. For peers in Europe, estimates call for growth of just 2.7% for all of 2015, about half the pace predicted four months ago. Investors are also running for the door – they pulled about $12 billion from global stock funds last week.

No, no, no ‘socking away’, they’re paying off debt: “Americans probably preferred to sock away the savings from cheaper fuel..”

• Retail Sales in U.S. Decrease to End Weakest Year Since 2009 (BBG)

Sales at U.S. retailers declined in December to wrap the weakest year since 2009, raising concern about the momentum in consumer spending heading into 2016. The 0.1% drop matched the median forecast of 84 economists surveyed by Bloomberg and followed a 0.4% gain in November, Commerce Department figures showed Friday in Washington. For all of 2015, purchases climbed 2.1%, the smallest advance of the current economic expansion.

The slowdown, including electronics stores, clothing merchants and grocers, indicates Americans probably preferred to sock away the savings from cheaper fuel instead of splurging during the holiday season. While hiring has been robust in recent months, faster wage gains remain elusive, one reason household spending may have a tougher time accelerating as the new year gets under way. “There isn’t anything encouraging in this report,” said Thomas Simons at Jefferies in New York. “It’s very disappointing. The labor market is in good shape, which suggests the outlook is probably better than this.”

“I think they need to exit some markets totally and close a lot more than they are closing.”

• Wal-Mart to Shut Hundreds of Stores (BBG)

Wal-Mart plans to shutter 269 stores, the most in at least two decades, as it abandons its experimental small-format Express outlets and looks to streamline the chain. The move by the largest private employer in the U.S. will affect about 10,000 jobs domestically at 154 locations, according to a statement Friday. Overseas, the effort will eliminate 6,000 jobs and includes the closing of 60 money-losing stores in Brazil, a country where Wal-Mart has struggled. The plan will affect less than 1% of its total square footage and revenue, the company said. CEO Doug McMillon took the step after reviewing the chain’s 11,600 stores, evaluating their financial performance and fit with its broader strategy.

The move also marks the end of its pilot Wal-Mart Express program, a bid to create a network of small corner stores to compete with dollar-store chains and drugstores. Wal-Mart will continue its larger-size Neighborhood Markets effort, though 23 poor-performing stores in that chain also will be closed. The company is still expanding its footprint in the U.S., adding 69 new stores and 6,000 jobs in January alone. “We invested considerable time assessing our stores and clubs and don’t take this lightly,” McMillon said. “We are supporting those impacted with extra pay and support, and we will take all appropriate steps to ensure they are treated well.”

Wal-Mart shares fell 1.8% to $61.93 in New York as the broader market tumbled. They have lost 29% of their value over the past 12 months, dragged down by slow growth and profit declines. Some investors may be disappointed that the cuts aren’t deeper, said Brian Yarbrough, an analyst with Edward Jones. “I don’t think this is enough to move the needle,” he said. “I think they need to exit some markets totally and close a lot more than they are closing.”

“The endgame of Chinese communist rule has now begun.”

• A New Year Of Turmoil For China (WaPo)

A year ago, Chinese President Xi Jinping appeared to be living what he called the “Chinese Dream.” China’s economy seemed strong, its military power was growing and Xi was aggressively consolidating domestic political power. But Xi is off to a bad new year. The Chinese economy is slowing sharply, with actual gross domestic product growth last year now estimated by U.S. analysts at several points below the official rate of 6.5%. The Chinese stock market has fallen 15% this year, and the value of its currency has slipped. Capital flight continues, probably at the $1 trillion annual rate estimated for the second half of last year. But China’s economic woes are manageable compared with its domestic political difficulties. Xi’s anti-corruption drive has accelerated into a full-blown purge.

The campaign has rocked the Chinese intelligence service, toppled some senior military commanders and frightened Communist Party leaders around the country. Jittery party officials are lying low, avoiding decisions that might get them in trouble; the resulting paralysis makes other problems worse. “Xi is in an unprecedentedly powerful position. But because he has dismantled the tools of collective leadership that had been built up over decades, he owns this crisis,” said Kurt Campbell, who was the Obama administration’s top Asia expert until 2013. He worries that Xi will “double down” on his nationalistic push for greater power in Asia, which is one of the few themes that can unite the country. “To scale back shows weakness, which Xi can ill afford now,” Campbell said.

Chinese sometimes use historical parables to explain current domestic political issues. The talk recently among some members of the Chinese elite has been a comparison between Xi’s tenure and that of Yongzheng, the emperor who ruled China from 1722 to 1735. Yongzheng waged a harsh campaign against bribery, but he came to be seen by many Chinese as a despot who had gained power illegitimately. “A lot of historical events of that period are repeating in China today, from power conspiracy to corruption, from a deteriorating economy to an external hostility threat,” one Chinese observer said in an email. Xi’s political troubles illustrate the difficulty of trying to reform a one-party system from within.

Much as Mikhail Gorbachev hoped in the 1980s that reforms could revitalize a decaying Soviet Communist Party, Xi began his presidency in 2013 by attacking Chinese party barons who had grown rich and comfortable on the spoils of China’s economic boom. Many of Xi’s rivals were proteges of former President Jiang Zemin, which meant that Xi made some powerful enemies. David Shambaugh, a China scholar at George Washington University, was an outlier when he argued in March that Xi’s reform campaign would backfire. “Despite appearances, China’s political system is badly broken, and nobody knows it better than the Communist Party itself,” he wrote in the Wall Street Journal. “The endgame of Chinese communist rule has now begun.”

The USD is the only possible winner.

• Currency War Revival Seen After Yen, Euro Rally (BBG)

A flare-up in the global currency war is looming, as a resurgent yen and euro threaten to give policy makers in Japan and Europe an incentive to add monetary stimulus. Japan’s currency advanced versus the dollar for the third time in four weeks, while the euro climbed versus most of its peers. Hedge funds lifted bets on yen strength to the highest in more than three years, and pared wagers against the European common currency. The greenback suffered as sentiment cooled for further currency-supportive interest-rate increases in the U.S. amid sustained market volatility and weaker-than-forecast domestic economic data.

A growing divergence in U.S. growth and monetary policy versus the rest of the world has stalled amid signs the American economy can’t wholly escape a slowdown in China and a patchy recovery elsewhere. That’s weighing on the dollar, while stymieing the economic goals of the Bank of Japan and ECB, which benefit when their currencies depreciate. Further monetary easing is on the cards if the yen strengthens beyond 115 per dollar and the euro gains toward $1.15, according to Lee Ferridge, head of macro strategy for North America at State Street Global Markets. “The currency war is still alive and well,” Ferridge said. “If the dollar starts to suffer, then the ECB or the BOJ come back into play.”

$23 billion lost in 2015. How much worse could not acting have been?

• One Year On, ‘Franckenschock’ Still Hurts Swiss (CNBC)

The Swiss National Bank’s (SNB) decision to scrap its cap on the franc against the euro a year ago today shocked markets and sent the country’s currency rocketing 30%. One year on, the franc is still high, 10% up against the euro, and export-focused Switzerland is still feeling the pain. Looking back at the SNB’s shock move James Watson, MD for UK and Europe at ADS Securities, told CNBC “a lot of people were caught in the headlights.” Hashtags such as #Francogeddon and #Franckenschock were soon trending on Twitter. The decision to impose a maximum value on the franc – the cap had been in place at 1.20 franc per euro since 2011 when investors seeking a safe haven amid the turmoil created by the euro zone debt crisis pushed the franc higher – was made to help Swiss exporters compete.

Switzerland’s goods exports grew by 3.5% in 2014, exceeding the record set in 2008. After the cap was lifted, Swiss exports weakened in the first 11 months of 2015, down 3% according to Swiss Customs Office data, although they picked up to growth of 1% in November. Swiss watch sales – the country exports iconic luxury brands such as Hublot and LVMH’s Tag Heuer – remain depressed and recorded their worst November in five years. “I don’t think the SNB really thought about what the effect would be of what they did,” Watson said. The SNB argued that recent falls in the currency meant that maintaining the peg was no longer justifiable. Analysts have also argued the SNB removed the peg for political reasons. The expected introduction of quantitative easing by the ECB at the time also meant that defending the level against an even weaker euro would have required yet more intervention.

Watson believes the central bank took the approach of stimulating the economy, but “maybe they didn’t give it as much thought as they could have”. While it has been painful for exporters, the strong franc has also made imports cheaper. Inflation for 2015 is forecast at –1.1%. Domestic demand looks set to remain robust, according to the bank, which expects growth of approximately 1.5% this year. For 2015, the SNB anticipates growth of just under 1% in Switzerland. Unemployment stood at 4.9% in the third quarter of 2015, according to the ILO, still well below the 6.3% recorded in November in neighbor Germany. The central bank has also indicated that it is prepared to take measures to curb the strength of the franc. The currency, which has weakened in recent months to trade at about 1.09 euros, is still “considerably” overvalued according to the SNB. Vice chairman Fritz Zurbrügg said in speech earlier this week “business as usual is still a long way off”.

Servitude.

• America’s Student-Debt Crisis Is Only Getting Worse (MW)

It’s getting harder and harder to graduate college without taking on student loans. Nearly 70% of bachelor’s degree recipients leave school with debt, according to the White House, and that could have major consequences for the economy. Research indicates that the $1.2 trillion in student loan debt may be preventing Americans,from making the kinds of big purchases that drive economic growth, like house and cars, and reaching other milestones, such as having the ability to save for retirement or move out of mom and dad’s basement. This student debt crisis has become so huge it’s even captured the attention of presidential candidates who are searching for ways to make college more affordable amid an environment of dwindling state funding for higher education and rising college costs. But meanwhile, the approximately 40 million Americans with student debt have to find ways to manage it.

[..] A few numbers to consider (and some that bear repeating):
• The total outstanding student loan debt in the U.S. is $1.2 trillion, that’s the second-highest level of consumer debt behind only mortgages. Most of that is loans held by the federal government.
• About 40 million Americans hold student loans and about 70% of bachelor’s degree recipients graduate with debt.
• The class of 2015 graduated with $35,051 in student debt on average, according to Edvisors, a financial aid website, the most in history.
• One in four student loan borrowers are either in delinquency or default on their student loans, according the Consumer Financial Protection Bureau.

Over the past few decades a variety of factors coalesced to make student debt an almost-universal American experience. For one, state investment in higher education dwindled and colleges made up the difference by raising tuition. At the same time, financial aid hasn’t kept up with tuition growth. In the 1980s, the maximum Pell Grant — the money the federal money gives to low-income students to attend college — covered more than half the cost of a four-year public school, according to The Institute for College Access and Success, a think tank focused on college affordability. Now, it covers less than one-third the cost.

18 months after MH-17 was shot down, it has become a full-tard propaganda tool for the west. There’s zero respect for the victims and their families.

• MH-17’s Unnecessary Mystery (Robert Parry)

[..] despite the flimsiness of the “blame-Russia-for-MH-17” case in July 2014, the Obama administration’s rush to judgment proved critical in whipping up the European press to demonize President Vladimir Putin, who became the Continent’s bete noire accused of killing 298 innocent people. That set the stage for the EU to accede to U.S. demands for economic sanctions on Russia. The MH-17 case was deployed like a classic piece of “strategic communication” or “Stratcom,” mixing propaganda with psychological operations to put an adversary at a disadvantage. Apparently satisfied with that result, the Obama administration stopped talking publicly, leaving the impression of Russian guilt to corrode Moscow’s image in the public mind.

But the intelligence source who spoke to me several times after he received additional briefings about advances in the investigation said that as the U.S. analysts gained more insights into the MH-17 shoot-down from technical and other sources, they came to believe the attack was carried out by a rogue element of the Ukrainian military with ties to a hard-line Ukrainian oligarch. But that conclusion – if made public – would have dealt another blow to America’s already shaky credibility, which has never recovered from the false Iraq-WMD claims in 2002-03. A reversal also would embarrass Kerry, other senior U.S. officials and major Western news outlets, which had bought into the Russia-did-it narrative. Plus, the EU might reconsider its decision to sanction Russia, a key part of U.S. policy in support of the Kiev regime.

Still, as the MH-17 mystery dragged on into 2015, I inquired about the possibility of an update from the DNI’s office. But a spokeswoman told me that no update would be provided because the U.S. government did not want to say anything to prejudice the ongoing investigation. In response, I noted that Kerry and the DNI had already done that by immediately pointing the inquiry in the direction of blaming Russia and the rebels. But there was another purpose in staying mum. By refusing to say anything to contradict the initial rush to judgment, the Obama administration could let Western mainstream journalists and “citizen investigators” on the Internet keep Russia pinned down with more speculation about its guilt in the MH-17 shoot-down. So, silence became the better part of candor. After all, pretty much everyone in the West had judged Russia and Putin guilty. So, why shake that up?

PCBs ware phased out decades ago.

• Toxic Chemicals In Scottish Waters Wiping Out Killer Whales (Scotsman)

Killer whales could vanish from Scottish waters as a result of the lingering effects of toxic chemicals banned more than 30 years ago, according to new international research. Scientists say European seas are a global hotspot of contamination from man-made polychlorinated biphenyls (PCBs), which weaken the immune systems of whales and dolphins and seriously affect their reproduction. The seas around the Hebrides are home to the UK’s only known resident killer whales, known as the West Coast Community. Only eight are left in the pod, after a female died earlier this month. But experts at the international conservation charity, the Zoological Society of London (ZSL), say the group will go extinct in the future as no young have been recorded in more than 20 years.

And other killer whale and dolphin populations around Europe face the same fate. The researchers suggest a failure to breed could be down to high levels of man-made PCBs building up in the animals body fat. “The long life-expectancy and position as apex or top marine predators make species like killer whales and bottlenose dolphins particularly vulnerable to the accumulation of PCBs through marine food webs”, said Dr Paul Jepson, a wildlife vet at ZSL and lead author of the study. “Few coastal orca populations remain in western European waters. Those that do persist are very small and suffering low or zero rates of reproduction. The risk of extinction therefore appears high for these discrete and highly contaminated populations.”

“Without further measures, these chemicals will continue to suppress populations of orcas and other dolphin species for many decades to come.” Dr Jepson’s team will analyse samples taken from the West Coast killer whale known as Lulu, who died recently after entanglement in fishing gear. “This Scottish population feeds on seals, so PCB exposure through diet will be much higher than for killer whales that only eat fish”, he said. “I think the group will, very regrettably, become extinct. Like any animal population, once you stop reproducing you will eventually die out.” But killer whales are very long-lived animals -at least one adult female has lived to over 100 years old in the wild- so local extinction can still take a long time to play out.

Why the EU must be disbanded.

• Baby Found Dead On Greece Migrant Boat (AP)

Greek authorities say a baby has been found dead after a boat full of migrants reached the small eastern Aegean Sea island of Farmakonissi, while 63 people were picked up alive. The incident raises to four the number of deaths that Greek authorities recorded Friday, as migrants continue to make the short but dangerous sea crossing from nearby Turkey to Greeces Aegean islands despite the winter weather. Earlier, three children drowned and 20 people were rescued when another boat carrying migrants foundered off the islet of Agathonissi.

Debt Rattle January 4 2016

Jan 042016

January 4, 2016 Posted by Raúl Ilargi Meijer at 9:10 am Finance Tagged with: China, commodities, crash, dollar, hedge funds, oil, refugees, retail, risk, stocks, wage growth 2 Responses »

AP Refugee carries child in freezing waves off Lesbos 2016

• China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)

• China Factories Struggle As Weak Exports Drag Industry In Asia (Reuters)

• China’s Tech Sector Likely Faces Tougher Sledding in 2016 (WSJ)

• Obama Dollar Rally Is Forecast to Join Clinton, Reagan Upturns (BBG)

• Global Stock Markets Overvalued And Unprepared For Return Of Risk (Telegraph)

• Reserve Bank of Australia Index of Commodity Prices (RBA)

• As Hedge Funds Go, So Goes The World (John Rubino)

• Japan Central Bank Turns Activist Investor To Revive Economy (Reuters)

• UK Set For Worst Wage Growth Since 1920s, 3rd Worst Since 1860s (Guardian)

• UK High Street Retailers Feel The Pinch As Shoppers Stay At Home (Guardian)

• Big Oil Faces Longest Period Of Investment Cuts In Decades (Reuters)

• New EU Authority Budgets For 10 Bank Failures In Four Years (FT)

• Fed’s Fischer Supports Higher Rates If Markets Overheat (BBG)

• Cash Burning Up For Shipowners As Finance Runs Dry (FT)

• The 20% World: The Odds Of The Unthinkable Are Going Up (BBG)

• Greece Warns Creditors On ‘Unreasonable Demands’ Over Pensions (FT)

• Sweden To Impose ID Checks On Travellers From Denmark (Guardian)

• Refugees Hold Terrified, Frozen Children Above The Waves Off Lesbos (DM)

Great start to the year.

• China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)

China halted trading in stocks, futures and options after a selloff triggered circuit breakers designed to limit swings in one of the world’s most volatile equity markets. Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7%, according to data compiled by Bloomberg. An earlier 15-minute halt at the 5% level failed to stop the retreat, with shares extending losses as soon as the market re-opened. The selloff, the worst-ever start to a year for Chinese shares, came on the first day the circuit breakers took effect. The $7.1 trillion stock market is starting the year on a down note after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders.

Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990. “Stay short, or go home,” said Mikey Hsia at Sunrise Brokers. “That’s all you can do.” The halts took effect as anticipated, without any technical issues, Hsia said. About 595 billion yuan ($89.9 billion) of shares changed hands on mainland exchanges before the suspension, versus a full-day average of about 1 trillion yuan over the past year, according to data compiled by Bloomberg.

Under the circuit breaker rules finalized last month, a move of 5% in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7% closes the market for the rest of the day. The CSI 300, comprised of large-capitalization companies listed in Shanghai and Shenzhen, fell as much as 7.02% before trading was suspended. Chinese shares listed in Hong Kong, where there is no circuit breaker, extended losses after the halt on mainland exchanges. The Hang Seng China Enterprises Index retreated 4.1% at 2:12 p.m. local time. “Investors are using Hong Kong to hedge their positions,” said Castor Pang at Core-Pacific Yamaichi. “The circuit breaker may increase selling pressure further.”

China needs a big clean-up.

• China Factories Struggle As Weak Exports Drag Industry In Asia (Reuters)

China’s factory activity shrank for a 10th straight month in December as surveys across Asia showed industry struggling with slack demand even as the policy cupboard is looking increasingly bare of fresh stimulus. Uncertainty over the economic outlook was exacerbated by a flare up in tensions between Saudi Arabia and Iran, that has sent investors scurrying from stocks to safe havens such as the Japanese yen. Japan’s Nikkei fell over 2% and Shanghai lost more than 3%. The Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) slipped to 48.2 in December, below market forecasts of 49.0 and down from November’s 48.6. That was the lowest reading since September and well below the 50-point level which demarcates contraction from expansion.

It followed a fractional increase in the official PMI to 49.7. There was a faint stirring of hope as PMIs in South Korea and Taiwan both edged above the 50 mark, though more thanks to a pick up in domestic demand than any revival in exports. Weighed down by weak demand at home and abroad, factory overcapacity and cooling investment, China is expected to post its weakest economic growth in 25 years in 2015, with the rate of expansion slipping to around 7% from 7.3% in 2014. “Absent vibrant external demand, we think it’s a consensus view that China’s GDP growth is poised to slow further to ‘about’ 6.5% in 2016,” ING said in a research note. The drag from industry comes as China makes gradual progress in its transformation to a more service-driven economy.

Not so smart money: “More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014..”

• China’s Tech Sector Likely Faces Tougher Sledding in 2016 (WSJ)

Investors who poured billions into China’s homegrown technology companies scored big during 2015. But increasingly it looks like the easy money has been made and this year could prove tougher as China’s tech companies face high expectations from investors. Many Chinese privately held startups rewarded investors, as valuations more than doubled during 2015 and a wave of management buyout offers buoyed investors in U.S.-listed Chinese tech companies. More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014 according to data from CB Insights and Dealogic. Investors marked up their holdings in Chinese privately held startups during the year even as they put lower price tags on some of their Silicon Valley investments.

Most investors aren’t required to publicly disclose their valuations of startup holdings, which are often valued based on their most recent round of fundraising. But mutual fund Fidelity Blue Chip Growth Fund, which has marked down some of its Silicon Valley startup investments, instead increased the value ascribed to its January investment in the $15 billion Chinese shopping app Meituan.com by more than 20% through the end of November. Investors have seen their bet on Chinese ride-hailing company Didi Kuaidi Joint Co. nearly triple from a $6 billion valuation in February to $16 billion in September.

The higher valuations and cash-burning of many startups are giving some investors pause. In recent months, some have become more cautious about putting fresh cash into big startups, as China’s rocky domestic stock market put local initial public offerings on hold. “The huge swings in the public markets have spilled over into the later-stage venture investment market,” says Richard Ji, founder of All-Stars Investment, an investor in Chinese startups like $46 billion smartphone maker Xiaomi Corp. and ride-sharing company Didi Kuaidi Joint Co. “Valuations overall have softened and companies are offering better terms to investors.”

Smashing US exports, emerging and commodities currencies in the process.

• Obama Dollar Rally Is Forecast to Join Clinton, Reagan Upturns (BBG)

The dollar has an opportunity to make history. After three straight years of gains, strategists are forecasting the U.S. currency will be a world beater again in 2016, strengthening against seven of 10 developed-world peers by the end of the year, according to the median estimate in a Bloomberg survey. That outlook is backed by the Federal Reserve’s stated intent to continue raising interest rates while peers in the rest of the world keep them flat or lower. The rally that started during President Barack Obama’s second term is poised to join a category defined by only the biggest, most durable periods of dollar strength since the currency’s peg to gold ended in 1971.

Of the two other rallies that share that distinction, during the terms of Presidents Ronald Reagan and Bill Clinton, neither stopped at four years. “This is the third big dollar rally we’ve had,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. “The Obama dollar rally, I think, is being fueled by the divergence in monetary policy.” The U.S. currency will end 2016 higher against its major counterparts except the Canadian dollar, British pound and the Norwegian krone, posting its biggest gains against the New Zealand and Australian dollars and the Swiss franc, according to forecasts compiled by Bloomberg.

“UK shares have steadily risen for more than 70 months..”

• Global Stock Markets Overvalued And Unprepared For Return Of Risk (Telegraph)

Investors face a rude awakening in 2016 as the return of risk brings an end to the era of unparalleled financial excess. Central bankers actions to save creditors by reducing borrowing costs to near zero created a Dorian Gray style economy that pursued returns without consequences. We are about to unveil the reality of those decisions after six years in a world devoid of financial responsibility.

[..] The realisation of losses is something that many in the cosseted world of investment will never have experienced. The collapse in high-yield bond prices is already causing paralysis. Third Avenue Management, a $800m high-yield mutual fund, was forced to halt redemptions in order to run down the fund in an orderly fashion as investors clamoured for the exit. The holders of certain bonds in Portuguese bank Novo Banco reacted with fury when they were informed they faced losses last week under a recapitalisation plan. The fact that an investor in the debt of a Portuguese bank is surprised that losses are even a possibility is laughable, if it wasn’t also deeply troubling. The return of risk will turn many of the investment decisions made during the past six years on their head.

Out will go unprofitable companies that relied on constant support from shareholders for stellar growth. In will come companies with solid profit track records that can generate enough cash to fund themselves. The lofty valuations in the technology sector are looking particularly exposed. When the world economy stumbled in 2008 it was only concerted action that pulled it back from the brink. The situation now is very different with the US pursuing monetary tightening, and China devaluing its currency to arrest the decline. Emerging markets have been crippled by a currency collapse and the drop in commodity prices has undermined the budgets of Canada, Norway, Australia, Venezuala and Saudi Arabia. The flow of funds out of developed Western equity markets is becoming alarming.

We enter 2016 as the bull run in the FTSE 100 is looking particularly long in the tooth. UK shares have steadily risen for more than 70 months. The goldilocks scenario of cheap debt and low wages is coming to and end and placing corporate profits under pressure. The Institute of Directors has already warned UK profits may be past their peak. This leaves investors in the FTSE 100 exposed with shares trading on 16 times forecast earnings, a premium to the long run average of 15. Even more worrying when you consider earnings have to increase by 14pc in 2016 to achieve that rating, if earnings remain flat in the year ahead the market is trading on more than 20 times earnings.

Scary graph of the day.

• Reserve Bank of Australia Index of Commodity Prices (RBA)

Preliminary estimates for December indicate that the index declined by 4.9% (on a monthly average basis) in SDR terms, after declining by 3.1% in November (revised). The decline was led by the prices of iron ore and oil. The base metals subindex declined slightly in the month while the rural subindex was little changed. In Australian dollar terms, the index declined by 6.0% in December. Over the past year, the index has fallen by 23.3% in SDR terms, led by declines in the prices of bulk commodities. The index has fallen by 17.1% in Australian dollar terms over the past year. Consistent with previous releases, preliminary estimates for iron ore, coking coal and thermal coal export prices are being used for the most recent months, based on market information. Using spot prices for these commodities, the index declined by 5.3% in December in SDR terms, to be 25.6% lower over the past year.

John provides a slew of examples I have no space for here.

• As Hedge Funds Go, So Goes The World (John Rubino)

How do you make money in a world where history is meaningless? The answer, for a growing number of big fund managers, is that you don’t. Hedge funds, generally the most aggressive species of money manager, do a lot of “black box” trading in which bets are placed on previously-identified patterns and relationships on the assumption that those patterns will repeat in the future. But with governments randomly buying stocks and bonds and bailing out/subsidizing everything in sight, old relationships are distorted and strategies that worked in the past begin to fail, as do the money managers who rely on them.

[..] Why should regular people care about the travails of the leveraged speculating community? Because these guys are generally considered to be the finance world’s best and brightest, and if they can’t figure out what’s going on, no one can. And if no one can, then risky assets are no longer worth the attendant stress. In response, a system that had previously embraced leverage and “alternative” asset classes will go risk-off in a heartbeat, and all those richly-priced growth stocks and trophy buildings and corporate bonds will find air pockets under their prices. And since pretty much everything else now depends on high asset prices, things will get ugly in the real world.

A case can be made that such a contagion is already underway but is being hidden from Americans by the recent strength of the dollar. According to Deutsche Bank, when measured in dollars the rest off the world is now deeply in recession and falling fast. In other words, Main Street is vulnerable to leveraged trading algorithms and Brazilian bonds because it’s not just exotica that is overleveraged. Virtually all governments have to refinance trillions of short-term debt each year. Corporations have borrowed record amounts of money in this expansion (and wasted much of it on share buy-backs). Pension funds (the last remaining leg of the middle-class stool for millions of Americans) are grossly underfunded and will have to slash benefits if their portfolios decline from here.

Risk-off, in short, is no longer just a temporary swing of the pendulum, guaranteed to reverse in a year or two. As amazing as this sounds, we’ve borrowed so much money that as hedge funds go, so goes the world.

Desperation writ large.

• Japan Central Bank Turns Activist Investor To Revive Economy (Reuters)

Japan’s central bank, which dominates the domestic bond market, has begun to call the shots in the equity market as well – to the point where asset managers are looking to design investment funds with the Bank of Japan in mind. The bank has blazed a trail in global central banking by becoming something of an activist investor in pursuit of economic revival, using its influence as a mainly indirect owner of shares to support firms that spend more cash at home. The bank, which owns about $54 billion in exchange-traded funds (ETFs), is ramping up its purchases but has yet to give any detailed investment criteria, beyond a preference for firms with growing capital expenditure and investment in its staff.

“We’re willing and considering to add such a product,” said Kohei Sasaki at Mitsubishi UFJ Kokusai Asset Management. “We’ve already contacted index vendors on this matter.” Bank of Japan Governor Haruhiko Kuroda and Prime Minister Shinzo Abe have been calling on companies to raise capital expenditure and wages to spur the economy, after repeated monetary and fiscal stimulus over the past three years failed to lift it out of a funk of weak consumption and deflation. So far, their pleas have failed to prod companies into action, despite many of them making record profits on the back of the central bank’s zero interest rates and a weak yen.

Losing patience, Kuroda said last month the bank would buy 300 billion yen ($2.5 billion) a year of ETFs, in addition to 3 trillion yen it already assigns each year to ETFs. It said the extra purchases would target funds whose underlying firms were “proactively making investment in physical and human capital”. Though he did not go into detail, the comment was an invitation for asset managers and index compilers to come up with some “Abenomics” ETFs which would be full of listed firms doing their bit to revive consumption and the broader economy. “We’ve already started trying to develop some kind of solution to the demand,” said Seiichiro Uchi, managing director for index compiler MSCI in Tokyo.

This is a policy thing, not some freak accident.

• UK Set For Worst Wage Growth Since 1920s, 3rd Worst Since 1860s (Guardian)

The 10 years between 2010 and 2020 are set to be the worst decade for pay growth in almost a century, and the third worst since the 1860s, according to new research. Research from the House of Commons Library shows that real-terms wage growth is forecast by the Office for Budget Responsibility to average at just 6.2% in this decade, compared with 12.7% between 2000 and 2010. The figures show that real-terms wage growth was lower only in the decades between 1920 and 1930 and between 1900 and 1910. Wage growth averaged at 1.5% in the 1920s and at 1.8% in the 1900s. Owen Smith, shadow work and pensions secretary, who commissioned the research, said that a “Tory decade of low pay” would see “workers’ pay packets squeezed to breaking point”.

“Even with this year’s increase in the minimum wage, the Tories will have overseen the slowest pay growth in a century and the third slowest since the 1860s,” he said. George Osborne has justified cuts to in-work benefits by arguing that the government is transitioning the UK from being “a low-wage, high-welfare economy to a high-wage, low-welfare economy”, a claim that Smith said was contradicted by wage-growth figures. In the autumn statement, the chancellor abandoned plans to cut £4bn from working tax credits, under pressure from the opposition and many backbench Tory MPs. However, Labour has pointed out there will be cuts to in-work benefit payments for new claimants put on the new universal credit system – championed by the work and pensions secretary, Iain Duncan Smith – which rolls at least six different benefits into one.

Reasons given: weather and terrorism. Couldn’t be lack of spending money, could it?

• UK High Street Retailers Feel The Pinch As Shoppers Stay At Home (Guardian)

Record-breaking discounts on offer in the post-Christmas sales have so far failed to attract a rush of bargain hunters to the high street, raising fears that Marks and Spencer, John Lewis and Next will be forced to report disappointing trading figures for the festive period. The number of high street shoppers from Monday 28 December to Friday 1 January was down 3% compared with the same period in 2014, according to research firm Springboard. A year ago, retailers had been celebrating a jump of 6.2%. Retail experts had predicted a stampede to the shops on Boxing day after retailers offered discounts topping last year’s average of more than 50%. They are desperate to clear cold-weather clothing that has remained on the shelves during record mild weather.

While Boxing Day had offered some hope of a pick-up in trade, the following week – which included a bank holiday – was poor. Shopper behaviour differed markedly in different parts of the country, with footfall down by almost 7% in Wales and by 5.8% in the West Midlands, but up in Scotland and the east of England by 11.3% and 4.5% respectively. In London and the south-east, the affluent engine of consumer spending, numbers were also in decline, dropping 4.5% and 3.3% respectively. But Springboard figures showed that some of this trade appeared to have migrated to shopping centres, where numbers were up 3.3% in Greater London and ahead by 8.8% in the south-east. As well as unexpectedly mild weather leaving little demand for winter clothing stock, shoppers are also thought to have been put off venturing out by heavy rainstorms and concerns about potential terrorist attacks.

Will M&A’s be 2016 story?

• Big Oil Faces Longest Period Of Investment Cuts In Decades (Reuters)

With crude prices at 11-year lows, the world’s biggest oil and gas producers are facing their longest period of investment cuts in decades, but are expected to borrow more to preserve the dividends demanded by investors. At around $37 a barrel, crude prices are well below the $60 firms such as Total, Statoil and BP need to balance their books, a level that has already been sharply reduced over the past 18 months. International oil companies are once again being forced to cut spending, sell assets, shed jobs and delay projects as the oil slump shows no sign of recovery. U.S. producers Chevron and ConocoPhillips have published plans to slash their 2016 budgets by a quarter. Shell has also announced a further $5 billion in spending cuts if its planned takeover of BG Group goes ahead.

Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22% fall to $595 billion in 2015, according to the Oslo-based consultancy Rystad Energy. “This will be the first time since the 1986 oil price downturn that we see two consecutive years of a decline in investments,” Bjoernar Tonhaugen, vice president of oil and gas markets at Rystad Energy, told Reuters. The activities that survive will be those that offer the best returns. But with the sector’s debt to equity ratio at a relatively low level of around 20% or below, industry sources say companies will take on even more borrowing to cover the shortfall in revenue in order to protect the level of dividend payouts.

Shell has not cut its dividend since 1945, a tradition its present management is not keen to break. The rest of the sector is also averse to reducing payouts to shareholders, which include the world’s biggest investment and pension funds, for fear investors might take flight. Exxon Mobil and Chevron benefit from the lowest debt ratios among the oil majors while Statoil and Repsol have the highest debt burden, according to Jefferies analyst Jason Gammel.

Amounts look utterly useless.

• New EU Authority Budgets For 10 Bank Failures In Four Years (FT)

The new EU authority that took over the job of winding up failing banks on January 1 has budgeted enough money to wind up 10 banks over the next four years, a tender sent to financial services firms shows. The tender, seen by the Financial Times, says the Single Resolution Board (SRB) is seeking €40m in “accounting advice, economic and financial valuation services and legal advice” to be used in the resolution of struggling eurozone banks from 2016-2020. Industry sources said such advice would cost between €4m and €5m per large case, so the SRB will be able to resolve eight to 10 banks. A spokeswoman for the SRB confirmed the tender’s details, but said the budget should not be interpreted as firm prediction of the number of banks the authority expects to resolve over the coming years.

“The SRB has made a reasonable estimation of the amount,” she said. “This estimation can be negotiated and adjusted.” In the aftermath of the 2008 financial crisis, which saw a series of chaotic and inconsistent collapses, eurozone leaders hammered out a complex protocol for handling bank failures. The goal is to be able to wind up even one of the region’s biggest banks over a single weekend under the guiding arm of the Brussels-based SRB and national resolution authorities. The authority is chaired by Elke König, a former president of the German regulator BaFin.

Many industry insiders and policy watchers are sceptical about whether an orderly wind-down in such a tight timeframe is really possible, especially in cases as complicated as the implosion of the Greek and Cypriot banking systems. As such, the first case the SRB handles will be closely watched. The SRB wants to have the best advice money can buy. The tender, which has not yet been awarded, is only open to large international firms; those offering accountancy or valuation advice must have annual sales of at least €5m the last three years, those offering legal advice must have at least €10m.

Yeah. What are the odds? Which markets? China’s?

• Fed’s Fischer Supports Higher Rates If Markets Overheat (BBG)

Federal Reserve Vice Chairman Stanley Fischer said it might be necessary for the central bank to increase interest rates if financial markets were overheating, though the first line of defense should be using regulatory tools to prevent bubbles from developing. “If asset prices across the economy – that is, taking all financial markets into account – are thought to be excessively high, raising the interest rate may be the appropriate step,” Fischer said in a speech at the annual American Economic Association meeting in San Francisco on Sunday. He suggested that might be particularly true in the U.S., where many of the so-called macro-prudential regulatory tools to tackle financial market excesses are either lacking or untested. Such tools would include, for example, adjusting lending rules to try to rein in borrowing.

Fischer did make clear that he thought “macro-prudential tools, rather than adjustments in short-term interest rates, should be the first line of defense” in tackling asset bubbles, while spelling out that “the real issue of whether adjustments in interest rates should be used to deal with problems of potential financial instability is macroeconomic.” Fischer didn’t address the current state of financial markets, although other policy makers, including Fed Chair Janet Yellen, have indicated that they do not see them, on the whole, as being overheated. Fischer was among three Fed policy makers who made public remarks at the AEA meeting on Sunday. San Francisco Fed President John Williams discussed estimates of long-run neutral rates, while Cleveland’s Loretta Mester delivered her outlook for the U.S. economy and explained why the Fed would not react to short-term swings in economic data.

Baltic Drier.

• Cash Burning Up For Shipowners As Finance Runs Dry (FT)

During stumbles in the market for shipping dry bulk commodities since the financial crisis, DryShips — the listed vehicle of George Economou, one of the industry’s best-known figures — has proved adept at dodging trouble. Diversification into owning oil-drilling rigs — through Ocean Rig, in which DryShips now holds only a minority stake — proved robustly profitable when oil prices were high. The company also diversified into oil tankers. However, slumps in earnings for dry bulk carriers and in oil prices have left the company scrabbling to stay afloat. On December 7, it announced an $820m loss for the third quarter after it was forced to take a $797m write-off for the value of its entire remaining fleet of dry bulk vessels, many of which it has been selling off. In October, the company announced that it was borrowing $60m from an entity controlled by Mr Economou.

The challenges facing DryShips are among the most acute of those facing nearly all dry bulk shipping companies after a slump in earnings drove most owners’ revenues well below their operating costs. Owners are haemorrhaging cash. Owners of Capesize ships — the largest kind — currently bring in around $3,000 a day less than the $8,000 they cost to operate. The losses for the many owners who have to service debts secured against vessels are far higher. Basil Karatzas, a New York-based corporate finance adviser, points out that in an industry that has already been making steady losses for 18 months, such substantial losses quickly mount up. “If you have 10 ships and you’re losing $3,000 to $4,000 per day per ship, that’s, let’s say, $40,000 per day, times 30 in a month, times 12 in a year,” he says. “You are losing some very serious money.” The question is how long dry bulk owners — and the private equity firms which have invested heavily in the companies — can survive the miserable market conditions.

Odd take, but amusing.

• The 20% World: The Odds Of The Unthinkable Are Going Up (BBG)

If you want to pick a number for 2016, how about 20%? Look around the politics of the Western world, and you’ll see that a lot of once-unthinkable ideas and fringe candidates suddenly have a genuine chance of succeeding. The odds are usually somewhere around one in five – not probable, but possible. This “20% world” is going to set the tone in democracies on both sides of the Atlantic – not least because, as anybody who bets on horse racing will tell you, eventually one of these longshots is going to canter home. Start with President Donald Trump. Gamblers, who have been much better at predicting political results than pollsters, currently put the odds of the hard-to-pin-down-but-generally-right-wing billionaire reaching the White House at around 6-1, or 17%.

Interestingly, those are roughly the same odds as the ones offered on Jeremy Corbyn, the most left-wing leader of the Labour Party for a generation, becoming the next British prime minister. In France, gamblers put the likelihood of Marine Le Pen winning France’s presidency in 2017 at closer to 25%, partly because the right-wing populist stands an extremely good chance of reaching the runoff. Geert Wilders, another right-wing populist previously described as “fringe,” perhaps stands a similar chance of becoming the next Dutch prime minister. Other once-unthinkable possibilities could rapidly become realities. America’s version of Corbyn, Bernie Sanders, whom Trump recently described as a “wacko,” is currently trading around 5%, no worse than Jeb Bush.

Plus, Sanders has assembled the sort of Corbynite coalition of students, pensioners and public-sector workers that tends to outperform in primaries. If Hillary Clinton stumbles into another scandal, the Democrats could yet find themselves with a socialist contending for the national ticket. And it’s not just “wacko” candidates; some unthinkable events are also distinctly possible. This year, perhaps as early as June, Britain may vote to leave the European Union. Bookmakers still expect the country to go for the status quo, though most pundits are less certain about this than they were about the Scottish referendum in 2014, which turned out to be an uncomfortably close race for the British establishment.

Investors are used to the political world serving up surprises. These surprises, however, have usually involved one mainstream party doing much better or worse than expected – and things continuing as normal. Not this time. With Trump in charge, America would have a wall along the Rio Grande and could well be stuck in a trade war with China. Le Pen wants to take France out of the euro and renegotiate France’s membership in the EU. It’s hard to tell what would do more damage to the City of London: a Brexit that could lead to thousands of banking jobs moving to the continent; or a Corbyn premiership, which could include a maximum wage and the renationalization of Britain’s banks, railways and energy companies.

Moreover, in the 20% world, some nasty possibilities make others more likely. If Britain leaves the European Union, Scotland (which, unlike England, would probably have voted to stay in) might in turn try to leave Britain. If Le Pen manages to pull France out of the euro, the union’s chances of dissolution increase. And you can only guess what a President Trump would do to U.S. relations with Latin America and the Muslim world.

How much longer for Tsipras?

• Greece Warns Creditors On ‘Unreasonable Demands’ Over Pensions (FT)

Greek Prime Minister Alexis Tsipras has said his government “will not succumb to unreasonable demands” as it prepares to send the country’s creditors proposals on crucial reforms to the pension system this week. “The creditors have to know that we are going to respect the agreement,” Mr Tsipras said in an interview with Real News newspaper on Sunday, referring to reforms demanded in exchange for Greece’s €86bn bailout agreement last year. However, he pledged that Greece “won’t succumb to unreasonable and unfair demands” for more pension cuts. Mr Tsipras said that Greece will reform its pension system through measures targeting additional proceeds of about €600m in 2016, adding that “we have no commitment to find the money exclusively from pension cuts”.

On the contrary, “the agreement provides the option of equivalent measures”, he said, admitting however, that the pension system is “on the brink of collapse” and needs to be overhauled. Greece’s proposals are due to be sent to the creditors via email on Monday. The aim is to reach an agreement when the representatives of the creditors return to Athens later in January. The proposals include increases in employer insurance contributions by 1% and employee contributions by 0.5%. Taxes on banking transactions may also be introduced to secure the targeted €600m and avoid any further cuts. But creditors have indicated that further pension cuts are inevitable.

They have already expressed their scepticism about increasing the contributions paid by employers and workers, stressing the potential wider economic impact on struggling businesses. Mr Tsipras’s comments were echoed by the finance minister Euclid Tsakalotos, who warned of forthcoming difficulties in negotiations with creditors. “There will be victories and defeats,” he said in an interview with Kathimerini newspaper. The government is rushing to finalise and submit the new pension bill to parliament for voting by January 15 so that the first review of the bailout package can be completed and discussion on debt relief can begin. Mr Tsipras’ governing majority is expected to be sorely tested by any pension reform legislation. The government’s majority has slid from 155 seats to 153, only two seats from the required minimum.

How much longer for the EU?

• Sweden To Impose ID Checks On Travellers From Denmark (Guardian)

Sweden is set to drastically reduce the flow of refugees into the country by imposing strict identity checks on all travellers from Denmark, as Scandinavian countries compete with each other to shed their reputations as havens for asylum seekers. For the first time since the 50s, from midnight on Sunday travellers by train, bus or boat will need to present a valid photo ID, such as a passport, to enter Sweden from its southern neighbour, with penalties for travel operators who fail to impose checks. Passengers who fail to present a satisfactory document will be turned back.

“The government now considers that the current situation, with a large number of people entering the country in a relatively short time, poses a serious threat to public order and national security,” the government said in a statement accompanying legislation enabling the border controls to take place. The move marks a turning point for the Swedish ruling coalition of Social Democrats and Greens, which earlier presented itself as a beacon to people fleeing conflict and terror in Asia and the Middle East. “My Europe takes in people fleeing from war, my Europe does not build walls,” Swedish prime minister Stefan Löfven told crowds in Stockholm on 6 September. But three months and about 80,000 asylum seekers later, the migration minister told parliament: “The system cannot cope.”

[..] Critics of Sweden’s refugee crackdown fear it will cause a “domino effect” as countries compete to outdo each other in their hostility to asylum seekers. “Traditionally, Sweden has been connected to humanitarian values, and we are very worried that the signals Sweden is sending out are that we are not that kind of country any more,” said Anna Carlstedt, president of the Red Cross in Sweden, whose staff and volunteers have often been the first line of support for new arrivals in the country. Other Scandinavian countries have recently announced their intention to stem the flow of refugees. In his new year address, Denmark’s liberal PM Lars Løkke Rasmussen said the country was prepared to impose similar controls on its border with Germany, if the Swedish passport checks left large numbers of asylum seekers stranded in Denmark.

The shame deepens still.

• Refugees Hold Terrified, Frozen Children Above The Waves Off Lesbos (DM)

Parents were forced to hold their children above freezing January waves as they struggled to reach shore on the Greek island of Lesbos on Sunday. The group of migrants and refugees were helped to disembark by volunteers, although several were forced to wade to the beach after falling overboard. Photographs show one father struggling to reach shore as he tried to hold his tiny, terrified daughter above the waves. Another image shows a group gathered around a woman in tears, while in another photograph, a little girl cries as she sits wrapped in a giant, silver thermal blanket after the harrowing crossing from Turkey. Once on shore, the group were handed thermal blankets stamped with the logo of the UNHCR as they sat on the beach near the town of Mytilene.

It comes the day after charity workers created a giant peace sign out of thousands of life-jackets on the hills of the Greek island, in honour of those who have died while making the perilous crossing in the hope of reaching Europe. The onset of winter and rougher sea conditions do not appear to have deterred the asylum-seekers, with boats still arriving on the Greek islands daily. Elsewhere, Turkish coastguards rescued a group of 57 migrants and refugees, including children, after they were left stranded on a rocky islet in the Aegean Sea. The group was trying to reach Greece by making the perilous journey across the sea, but they hit trouble after leaving the Turkish resort of Dikili, in Izmir province.

Debt Rattle Christmas Day 2015

Dec 252015

December 25, 2015 Posted by Raúl Ilargi Meijer at 9:44 am Finance Tagged with: deportation, dollar, Fed, jobless claims, money creation, refugees, retail Comments Off

Jack Delano Brockton, Mass., Enterprise newspaper office on Christmas Eve 1940

• Switzerland To Vote On Banning Banks From Creating Money (Telegraph)

• US Retailers At Risk Of Missing Even Modest Holiday Sales Goals (Reuters)

• High Street Christmas Shopping Figures Grim Reading For Retailers (Guardian)

• Lower Jobless Claims Don’t Point to Robust US Labor Market (WSJ)

• African Firms Hit by Dollar Shortages (WSJ)

• Why The Fed Will Never Succeed (Macleod)

• The Perils of Fed Gradualism (Stephen Roach)

• The Political Consequences of Financial Crises (Davies)

• Yanis Varoufakis Talks Again, Insults Everybody (Politico)

• 2015 Year In Review – Scenic vistas from Mount Stupid (Collum)

• Black Lives Matter Protests Roil Cities Across The US (LA Times)

• US Plans Mass Deportation of Illegal Central American Migrants (WSJ)

• In The Bleakness Of The Calais Migrant Camp, A Light Shines Out (Guardian)

• Refugee NGOs On Greek Islands To Be Coordinated (Kath.)

Well, we can hope…

• Switzerland To Vote On Banning Banks From Creating Money (Telegraph)

Switzerland will hold a referendum to decide whether to ban commercial banks from creating money. The Swiss federal government confirmed on Thursday that it would hold the plebiscite, after more than 110,000 people signed a petition calling for the central bank to be given sole power to create money in the financial system. The campaign – led by the Swiss Sovereign Money movement and known as the Vollgeld initiative – is designed to limit financial speculation by requiring private banks to hold 100pc reserves against their deposits. “Banks won’t be able to create money for themselves any more, they’ll only be able to lend money that they have from savers or other banks,” said the campaign group. Under Switzerland’s direct democracy, a referendum can be held if a motion gains 100,000 signatures within 18 months of launching.

If successful, the sovereign money bill would give the Swiss National Bank a monopoly on physical and electronic money creation, “while the decision concerning how new money is introduced into the economy would reside with the government,” says Vollgeld. The idea of limiting all money creation to central banks was first touted in the 1930s and supported by renowned US economist Irving Fischer as a way of preventing asset bubbles and curbing reckless lending. In modern market economies, central banks control the creation of banknotes and coins but not the creation of all money, which occurs when a commercial bank offers a line of credit. Central banks aim to influence the money supply with monetary policy and regulatory tools. The SNB was established in 1891, with exclusive power to mint coins and issue Swiss banknotes.

But over 90pc of money in circulation in Switzerland now exists in the form “electronic” cash created by private banks, rather than the central bank. Members of the initiative committee for Monetary Reform (Vollgeld-Initiative) hand over boxes with more than 120.000 signatures at the Federal Chancellery in Bern, Switzerland “Due to the emergence of electronic payment transactions, banks have regained the opportunity to create their own money,” said the Swiss Sovereign Money campaign. “The decision taken by the people in 1891 has fallen into oblivion.”

Referenda on monetary matters are not new in Switzerland. Last year, the country voted by more than 78pc to reject a law calling for the central bank to increase its gold reserves from 7pc to 20pc. Unlike the gold vote – which was seen as a precursor to re-introducing the Gold Standard in Switzerland – economists have been more supportive of the idea of “sovereign money” as a way to stabilise the economy and prevent excess credit growth. Iceland – which saw its bloated banking system collapse in spectacular fashion in 2008 – has also touted an abolition of private money creation and an end to fractional reserve banking. A date for the Swiss referendum has not been set.

Translation: it’s a lousy shopping season.

• US Retailers At Risk Of Missing Even Modest Holiday Sales Goals (Reuters)

Retailers are struggling to meet even modest forecasts for the holiday shopping season this year after the “Super Saturday” before Christmas failed to live up to its nickname, industry research groups said. The last Saturday before Christmas often sets the annual record for retail sales, vying with Thanksgiving weekend’s Black Friday. In recent years, last-minute shopping has determined the success of the season, and a relatively weak final weekend bodes poorly for retailers. This year Super Saturday weekend sales in stores and online rose 4% to $55 billion, after a 2.5% gain last year, according to retail consultancy and private-equity fund Customer Growth Partners. That puts overall store and online sales from the start of November through Dec. 22 on track to rise 3.1%, below the 3.2% pace the firm forecast and down from 4.1% growth in the same period last year.

“Sales have been sluggish so far this year as most consumers are still buying close to need,” said Craig Johnson, president of Customer Growth Partners. “What’s worse is the marked deceleration from a year ago,” he said. Last year, last-minute sales gained in the final 10 days of the holiday season, driven by savings from lower gasoline prices. If sales, spurred by gift card redemptions, hold up in the week after Christmas this year, retailers could move closer to meeting performance forecasts, consultants and retail experts said. The National Retail Federation, the leading industry body, has forecast a 3.7% rise in store and online sales this year. Discounts across categories have been deeper than last year, in the range of 20% to 50%, said Traci Gregorski at analytics firm Market Track.

But consultants said the discounting still had not been enough to boost store traffic materially. Promotions earlier in November took a toll on in-store sales during the Thanksgiving weekend, when total spending was the same as last year, according to the NRF.

Lousy shopping in Britain too.

• High Street Christmas Shopping Figures Grim Reading For Retailers (Guardian)

High streets are continuing to suffer as shoppers saved on gifts and splashed their spare cash in restaurants and pubs in the days before Christmas. The number of shoppers visiting UK stores slid 9% year on year on Monday and Tuesday, dashing hopes of a late rush to stores, according to analysts at Springboard. Diane Wehrle, insights director at Springboard, said about 2% of the decline in shopper numbers was likely to be linked to the timing of Christmas Day, which is one day later in the week than last year. The changing of shopping habits towards buying online and unseasonably balmy temperatures have also meant there is little demand for new coats, boots and knitwear. The Black Friday discount day in late November may also have eaten up sales.

“There is a downward movement in footfall anyway but we are seeing greater drops in the run-up to Christmas this year,” Wehrle said. “It’s partly because we have now got Black Friday and that has fed the habit to shop online. Retailers have gone hell for leather with with bargains but a lot of those will have been bought online for click & collect later.” The poor shopper numbers will make grim reading for retailers who have been banking on a late rush this year. Bonmarché and Game Digital have already issued profit warnings as demand has failed to materialise this year and analysts expect more will follow. Shares in Marks & Spencer slid earlier this week after analysts at Nomura predicted sales of clothing and homewares at established stores would slump 5.5% over the three months to the end of the year.

The retailer has been offering 30% off knitwear, one of its key seasonal ranges, since 10 December, as chains including Debenhams, Bhs, Dorothy Perkins, H&M and Gap have all got out their sale banners. Veteran analyst Richard Hyman has predicted a shake-out in the new year, as shops count the cost of a lacklustre Christmas. “There’s a lot of zombie-looking, ailing retailers that are not long for this world,” he said. High street stores are particularly suffering as shoppers switch to the internet. In-store spending slid 2.3% in the first 10 days of December according to Barclaycard, while online spending rose 9.4%, leaving overall spending virtually flat year on year.

“The greatest concern in the labor market now aren’t those who recently lost their jobs, but the persistently large number out of work for months or years, and those stuck in low-paying and part-time jobs.“

• Lower Jobless Claims Don’t Point to Robust US Labor Market (WSJ)

The fewest Americans since 1973 will seek new unemployment benefits this year, but that doesn’t mean the labor market is back to full health. In total, less than 15 million American will make first-time requests for government assistance this year–about half as many claims as were made in 2009–and far fewer than the number filed during the 1980s and 90s when the economy was expanding at a stronger clip. The greatest concern in the labor market now aren’t those who recently lost their jobs, but the persistently large number out of work for months or years, and those stuck in low-paying and part-time jobs. At the same time, a larger portion of those newly laid off isn’t seeking benefits.

Initial claims are seen as a proxy for layoffs, but other separation measures show that layoffs have plateaued, or even increased this year. The Labor Department recorded 17.4 million layoffs and discharges during the first 10 months of the year, nearly unchanged from the same period in 2014. Outplacement consultants Challenger, Gray & Christmas report the number of layoffs announced by typically large companies through November was 28% higher than through the first 11 months of last year, partly reflecting cutbacks in the energy industry. Economists usually expect hiring to strengthen when new claims decline. But that hasn’t happened this year. Through November, employers added a monthly average of 210,000 jobs to payrolls.

For all of last year, the average was 260,000. The average level of weekly claims was about 10% higher in 2014. Claims readings could be distorted because a smaller share of those laid off are applying for benefits. The share of laid off workers seeking benefits has fallen this year to just above 50%, according to the National Employment Law Project, a group that advocates for the unemployed. The rate is down from record high of almost 80% just after the recession ended.

Seen from miles away.

• African Firms Hit by Dollar Shortages (WSJ)

Valentine Ozigbo is struggling to obtain a key construction ingredient as he refurbishes and builds hotels in Nigeria: the U.S. dollar. Some of Africa’s largest economies, including Nigeria, Angola, Ethiopia and Mozambique, are restricting access to the greenback to protect dwindling reserves. That is causing problems for businesses from Mr. Ozigbo’s Transcorp Hotels to international giants like General Electric and Coca-Cola, all of which are struggling to get the dollars they need for imports or to send profits back home. The shortage comes as the inflow of dollars from resource exports, from oil to cotton, has plummeted with the prices of these commodities. The commodity rout also is putting pressure on local currencies, which some central banks are trying to support with their dwindling supply of dollars.

This dollar squeeze is frustrating investors, increasing costs and delaying projects. It may hamper future investment in countries reeling from the fall in commodity prices. “It’s been a rough ride for a lot of companies in Nigeria, if not all the companies,” said Mr. Ozigbo, chief executive of Transcorp Hotels. Nigeria gets more than 90% of its foreign-currency reserves from oil exports. Since June 20, 2014, when the U.S. oil price was at $107.26, the U.S. oil price has declined 66% through Tuesday’s close of $36.14, amid oversupply and weak growth in demand. Oil’s decline sent the value of the naira, Nigeria’s currency, sharply lower at the start of the year. In March, the Central Bank of Nigeria fixed its exchange rate at around 199 naira to the dollar. By this month, its currency reserves were down 18% to $29.5 billion from the same month last year.

In the summer, the central bank introduced a list of 41 items, from meat to concrete, that it won’t release dollars for. But no matter what a buyer wants their dollars for, their request has to be vetted against this list, slowing down any attempt to buy the currency. Angola now lists industries—including the oil and food sectors—that have priority for the country’s dollar reserves, In Mozambique, the government requires companies to convert half of any dollar revenues into the local currency, as it looks to shore up its reserves. “It’s obviously not like it used to be, where you would go to the bank and get your dollars,” said Jay Ireland, the Africa chief executive officer for GE. “Now it’s a process that they require and it takes longer,” he said, talking about Nigeria and Angola.

Mr. Ireland said GE remains committed to long-term projects in Africa, but the dollar shortage means that it now takes local clients longer to buy GE products priced in dollars. Coca-Cola has been in Africa for almost a century and can obtain dollars from across its businesses. Still, the beverage giant is concerned that its suppliers will start to feel the pinch as they struggle to fund imports that they need. “If there are no changes in monetary policy it might become a bigger challenge and that is a space we are watching very closely,” said Adeola Adetunji, Coca-Cola’s managing director in Nigeria. “Business is not as usual.”

“The fundamental question is actually far broader than whether or not the Fed should be raising rates: rather, should the Fed be managing interest rates at all?” No, of course not.

• Why The Fed Will Never Succeed (Macleod)

The Fed will never succeed in its attempt to manage inflation and unemployment by varying interest rates. This is because it and its economists do not accept the relationship between, on one side, the money it creates and the bank credit its commercial banks issue out of thin air, and on the other the disruption unsound money causes in the economy. This has been going on since the Fed was created, which makes the question as to whether the Fed was right to raise interest rates recently irrelevant. Furthermore, it’s not just the American people who are affected by the Fed’s monetary management, because the Fed’s actions affect nearly everyone on the planet. The Fed does not even admit to having this wider responsibility, except to the extent that it might have an impact on the US economy.

That the Fed thinks it is only responsible to the American people for its actions when they affect all nations is an abrogation of its duty as issuer of the reserve currency to the rest of the world, and it is therefore not surprising that the new kids on the block, such as China, Russia and their Asian friends, are laying plans to gain independence from the dollar-dominated system. The absence of comment from other central banks in the advanced nations on this important subject should also worry us, because they appear to be acting as mute supporters for the Fed’s group-think. This is the context in which we need to clarify the effects of the Fed’s monetary policy. The fundamental question is actually far broader than whether or not the Fed should be raising rates: rather, should the Fed be managing interest rates at all? Before we can answer this question, we have to understand the relationship between credit and the business cycle.

There are two types of economic activity, one that correctly anticipates consumer demand and is successful, and one that fails to do so. In free markets the failures are closed down quickly, and the scarce economic resources tied up in them are redeployed towards more successful activities. A sound-money economy quickly eliminates business errors, so this self-cleansing action ensures there is no build-up of malinvestments and the associated debt that goes with it. When there is stimulus from monetary inflation, it is inevitable that the strict discipline of genuine profitability that should guide all commercial enterprises takes a back seat. Easy money and interest rates lowered to stimulate demand distort perceptions of risk, over-values financial assets, and encourages businesses to take on projects that are not genuinely profitable. Furthermore, the owners of failing businesses find it possible to run up more debts, rather than face commercial reality. The result is a growing accumulation of malinvestments whose liquidation is deferred into the future.

“..the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents.”

• The Perils of Fed Gradualism (Stephen Roach)

The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy. Largely for that reason, and fearful of “Japan Syndrome” in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period. The federal funds rate was held at a 46-year low of 1% through June 2004, before being raised 17 times in small increments of 25 basis points per move over the two-year period from mid-2004 to mid-2006. Yet it was precisely during this period of gradual normalization and prolonged accommodation that unbridled risk-taking sowed the seeds of the Great Crisis that was soon to come.

Over time, the Fed’s dilemma has become increasingly intractable. The crisis and recession of 2008-2009 was far worse than its predecessors, and the aftershocks were far more wrenching. Yet, because the US central bank had repeatedly upped the ante in providing support to the Asset Economy, taking its policy rate to zero, it had run out of traditional ammunition. And so the Fed, under Ben Bernanke’s leadership, turned to the liquidity injections of quantitative easing, making it even more of a creature of financial markets. With the interest-rate transmission mechanism of monetary policy no longer operative at the zero bound, asset markets became more essential than ever in supporting the economy.

Exceptionally low inflation was the icing on the cake – providing the inflation-targeting Fed with plenty of leeway to experiment with unconventional policies while avoiding adverse interest-rate consequences in the inflation-sensitive bond market. Today’s Fed inherits the deeply entrenched moral hazard of the Asset Economy. In carefully crafted, highly conditional language, it is signaling much greater gradualism relative to its normalization strategy of a decade ago. The debate in the markets is whether there will be two or three rate hikes of 25 basis points per year – suggesting that it could take as long as four years to return the federal funds rate to a 3% norm.

But, as the experience of 2004-2007 revealed, the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents. With prospects for a much longer normalization, those risks are all the more worrisome. Early warning signs of troubles in high-yield markets, emerging-market debt, and eurozone interest-rate derivatives markets are particularly worrisome in this regard.

Swing to the right.

• The Political Consequences of Financial Crises (Davies)

Three German economists, Manuel Funke, Moritz Schularik, and Christoph Trebesch, have just produced a fascinating assessment based on more than 800 elections in Western countries over the last 150 years, the results of which they mapped against 100 financial crises. Their headline conclusion is stark: “politics takes a hard right turn following financial crises. On average, far-right votes increase by about a third in the five years following systemic banking distress.” The Great Depression of the 1930s, which followed the Wall Street crash of 1929, is the most obvious and worrying example that comes to mind, but the trend can be observed even in the Scandinavian countries, following banking crises there in the early 1990s.

So seeking to explain, say, the rise of the National Front in France in terms of President François Hollande’s personal and political unpopularity is not sensible. There are greater forces at work than his exotic private life and inability to connect with voters. The second major conclusion that Funke, Schularik, and Trebesch draw is that governing becomes harder after financial crises, for two reasons. The rise of the far right lies alongside a political landscape that is typically fragmented, with more parties, and a lower share of the vote going to the governing party, whether of the left or the right. So decisive legislative action becomes more challenging. At the same time, a surge of extra-parliamentary mobilization occurs: more and longer strikes and more and larger demonstrations.

Control of the streets by government is not as secure. The average number of anti-government demonstrations triples, the frequency of violent riots doubles, and general strikes increase by at least a third. Greece has boosted those numbers recently. The only comforting conclusion that the three economists reach is that these effects gradually peter out. The data tell us that after five years, the worst is over. That does not seem to be the way things are moving now in Europe, if we look at France’s recent election scare, not to mention Finland and Poland, where right-wing populists have now come to power. Maybe the answer is that the clock starts ticking on the five years when the crisis is fully over, which is not yet true in Europe.

Politico.eu doesn’t seem to like Yanis much.

• Yanis Varoufakis Talks Again, Insults Everybody (Politico)

In an interview published in Thursday’s edition of the Dutch newspaper De Volkskrant, Varoufakis took dozens of hard swings at those who have vilified him and his negotiation tactics. Among the greatest hits were Varoufakis claiming the Eurogroup is a place fit only for psychopaths, calling German Finance Minister Wolfgang Schäuble a puppet master and bashing Eurogroup President Jeroen Dijsselbloem as an ineffectual tool of the Germans. Here are the highlights:

1. It was one big coup d’état – European partners came to an agreement with Tsipras’s left-wing government on a third bailout after a hot summer of tense negotiations and slow progress. Many still blame the Varoufakis for the disastrous turn of events. Does Varoufakis agree? “No! I won’t do that. It was nothing but a coup, one big coup d’état. And it succeeded,” he said. “I’m not taking any responsibility for that,” he said. “My speeches were moderate, my plans measured, my advisors were not left-wing lunatics. There was another reason that the other side poured poison and lies over me, and portrayed me as a dangerous radical while I was the most right wing minister in the cabinet. If I was a crazy left-wing lunatic, they wouldn’t have been afraid of me.” “No, they wanted to get rid of me because I knew what I was talking about.”

Jeroen Dijsselbloem, the president of the Eurogroup of finance ministers, confirmed to the Dutch broadcaster NOS that he pushed Tsipras to pull out his finance minister. The Dutchman said he didn’t think Varoufakis had a mandate to negotiate, and thus “I went to do this with the prime minister instead,” he said in an interview to be broadcasted next Monday.

2. Dijsselbloem is a puppet, Schaüble his master – Varoufakis clashed repeatedly with his fellow finance ministers in the Eurogroup. Soothing the egos of politicians and power brokers was not his strong suit. When asked who dominated the meetings, he said: “(German Finance Minister) Wolfgang Schäuble. He’s the puppet master who pulls all the strings. All the other ministers are marionettes. Schäuble is the grandmaster of the Eurogroup. He decides who becomes the president, he determines the agenda, he controls everything.” The Greek ex-minister is especially hard for Dijsselbloem. “[He] has no real power. Dijsselbloem has no authority; he is a soldier, a puppet … He can’t make any decisions without calling Schäuble.”

“Dijsselbloem is a cog in a machine that he doesn’t understand himself,” he said later in the interview. “There was absolutely no reason for me to speak with Jeroen because he was neither willing nor able to have a real discussion, let alone interested.” But one leader gets praise from the Greek economist: the European Central Bank’s President Mario Draghi: “A formidable economist,” Varoufakis called him, adding that “Draghi is very frustrated by the suffocating limitations of his ECB mandate.”

3. Eurogroup is the place to be — if you’re a psychopath – “Anyone who speaks about blissful moments in the Eurogroup should be locked up immediately for being a dangerous lunatic,” the ex-minister said laughingly. “The Eurogroup is a very unpleasant place, including for Schäuble, Dijsselbloem and the ECB president Draghi. Centers of power are stressful by definition, with big egos and continuous conflict.” “If you’re a psychopath and you thrive on conflict, then the Eurogroup is the place to be.” Asked whether it was a place for power-hungry politicians, he said: “Ultimately, almost no one has any power … [Individuals] power is undermined by opposing power, everyone cancels each other out. I’ve seen a lot of frustration in the Eurogroup.”

Dave’s annual endless litany.

• 2015 Year In Review – Scenic vistas from Mount Stupid (Collum)

I am penning my seventh “Year in Review.” These summaries began exclusively for myself, evolved into a sort of holiday cheer for a couple hundred e-quaintances with whom I had been affiliating since my earliest days as a market bear in the late ’90s, and metastasized into the Tower of Babble—longer than a Ken Burns miniseries—summarizing the human follies that capture my attention each year. Jim Rickards kindly called it “a perfect combination of Mel Brooks, Erwin Schrodinger & Howard Beale.” I wade through the year’s most extreme lunacies as well as a few special topics while trying to find the overarching themes. I love conspiracy theories and detest detractors who belittle those trying to sort out fact from fiction in a propaganda-rich world.

“..the most wonderful time of the year and a winter of discontent..”

• Black Lives Matter Protests Roil Cities Across The US (LA Times)

It’s the most wonderful time of the year and a winter of discontent, a season of police bullhorns and Christmas lights. Demonstrators protesting police shootings of black men confronted last-minute holiday shoppers and travelers in California and the Midwest this week, seeing the crowds as an opportunity to draw attention to their cause. In Chicago on Thursday, more than 100 demonstrators marched down North Michigan Avenue, the city’s premier shopping corridor, and laid down on the street for a “die-in.” They also blocked access to some stores where Christmas Eve shoppers were hoping to wrap up their tardy gift-buying. The demonstrators were again protesting the October 2014 police shooting of Laquan McDonald, a black 17-year-old carrying a knife who was killed when a Chicago police officer shot him 16 times.

The officer, Jason Van Dyke, has been charged with first-degree murder. Footage released last month appeared to show McDonald walking away from Van Dyke, sparking protests that have yet to fully die down, much as the Black Lives Matter movement has remained in national headlines since last year’s protests in Ferguson, Mo. “When one part of Chicago is affected, all of Chicago is affected,” one of the demonstrators, Alex Thiedmann, said of the “Black Christmas” demonstration on North Michigan Avenue. “If I remain silent, I become an oppressor.” Onlookers affected by the protest had a mixed response. Emily Grossman, 36, was kept from getting an iPhone at the Apple Store. “I hate to put myself first, but this is BS,” she said.

Rabiah Muhammad came downtown for a doctor’s appointment but stopped to watch the protests. “I was walking down the street and I saw all these beautiful people of all ages and colors,” she said. “I think it’s a bigger problem than the city of Chicago. It’s an American problem. This kind of brutality? That’s not what our country is supposed to be.” [..] “On one of the busiest travel days of the year, Black Lives Matter is calling for a halt on Christmas as usual in memorial of all of the loved ones we have lost and continue to lose this year to law enforcement violence without justice or recourse,” a statement from Black Lives Matter organizers said.

“It is time that the administration acknowledged once and for all that these mothers and children are refugees just like Syrians.”

• US Plans Mass Deportation of Illegal Central American Migrants (WSJ)

To staunch the flow of illegal migrants to the U.S., the Department of Homeland Security has been preparing a national operation to deport Central American families who have evaded removal orders, according to a government official. Starting early next month, U.S. Immigration and Customs Enforcement, a DHS unit, plans to start rounding up hundreds of families that entered the U.S. illegally and who have ignored a final order to leave the country, said the official. Such an order is issued by a judge in immigration court. The number of families showing up at the southwest border has spiked in recent months as gang-related violence grips El Salvador and Honduras. The region also has been plagued by drought.

Typically, the migrants, many of them women and children, turn themselves in at the border and make asylum claims. U.S. authorities then release them, often to live with relatives here, while their cases are adjudicated. DHS Secretary Jeh Johnson in recent months has warned that those whose claims are denied in immigration court could be removed from the country. A spokeswoman for Immigration and Customs Enforcement didn’t dispute an operation has been planned to pursue Central Americans with removal orders. In a statement, the spokeswoman said the agency “focuses on individuals who pose a threat to national security, public safety and border security.” “As Secretary Johnson has consistently said, our border is not open to illegal immigration, and if individuals come here illegally, do not qualify for asylum or other relief, they will be sent back consistent with our laws and our values,” the statement said.

The operation, which was first reported by the Washington Post, has caused controversy in Mr. Johnson’s agency, the official said, with some within DHS opposed to targeting people who have fled violence in their countries of origin. The official said that the operation’s goal is twofold: It aims to send the message to would-be crossers that they won’t be allowed to remain in the U.S. It also seeks to address safety concerns involved as adults entrust their lives and those of their children to human smugglers. “Jeh Johnson wants to send a message to Central Americans: Don’t come north. But Washington hasn’t solved the underlying problem of massive violence in their home countries that is causing them to come north in the first place,” said Margaret Stock, an immigration attorney in Anchorage, Alaska.

[..] The possible roundup for deportation of families caught immigrant advocates by surprise. “This is the last thing we expected from the administration at this point, given the court decision,” said Marielena Hincapie, executive director of the National Immigration Law Center, an advocacy organization in Los Angeles. “It is time that the administration acknowledged once and for all that these mothers and children are refugees just like Syrians.”

Bit too focused on the Noble Brit, but cool.

• In The Bleakness Of The Calais Migrant Camp, A Light Shines Out (Guardian)

If this had been a conventional disaster, the United Nations would have come in and then the big aid agencies would have got busy. But this is Europe, which is meant to be beyond the need of such help. So the UN and UNHCR are not in Calais, while there’s little sign of Oxfam, Save the Children or the Red Cross. That’s not because they don’t care: aid workers tell visiting politicians they feel they have no mandate to operate in Europe (though Médecins Sans Frontières is there, its first such operation on French soil). As for the French and British governments, their only presence comes in the form of uniformed security personnel policing the barbed wire perimeter, watching – but not helping – the people within, tasked with preventing them breaking out and heading for the tunnel or sea that might take them to England.

The camp has been left instead to the volunteers. That big warehouse – with its kitchen, its clothes-sorting operation and its workshop where carpenters, some professional, some amateur, churn out timber frames for shelters as fast as they can construct them – has been set up by a small, Calais charity, L’Auberge des Migrants. It has grown tenfold in three months, helped by the ad hoc efforts of assorted British groups. The result is that, for the outsider, the atmosphere can seem to be part refugee camp, part Glastonbury. Threading their way around the muddy paths and dirt tracks are countless young Brits, dreadlocked and nose-studded, friendly and eager. Some are there to teach English in the pop-up classroom. Some are helping out at the library (announced by the sign that says “Jungle Books”).

Some are on hand in the large, domed tent set up by two young British playwrights that serves as a kind of arts centre. Musicians from Syria, Iraq or Afghanistan sit in a circle and play songs from the old country. On the walls are drawings or photographs made by refugees. One shows a tree-fringed lake, covered in morning mist. The caption says, “Sometimes I come here and stand for a few minutes, imagining that this is what England looks like.” Judged by the usual standards of policy, this is awful. Both the French and UK governments are guilty of an appalling abdication of responsibility, insisting that the Calais camp is not their problem and so turning their backs on it. They won’t supply it with the basics necessary for human existence, lest they be seen to legitimise or entrench it. This is a shameful response, putting politics before fundamental human decency.

And yet fury cannot be the only response to the camp. Admiration is the right reaction too. First for the migrants and refugees themselves, for their resilience and dignity – for the ingenuity that has seen them build a high street full of chipboard restaurants and plywood cafes, as well as mosques and at least one church. But it’s impossible not to admire the volunteers too. For no pay, they have given up comfortable lives to build or cook or teach, to provide for people they have never met because they know that, if they don’t, no one else will. Some are young or retired, with time on their hands. Others have put busy jobs or careers on hold. But none of them had to trade comfortable lives for working in the mud and squalor of the Jungle. No one forced them to rent a van, fill it with tarpaulins or bulk packs of rice and take it across the Channel.

They did it simply because they were moved by the sight of their fellow human beings in distress. And this is what sets them apart from the governments that claim to represent them. The volunteers saw in the faces of those refugees not a problem to be addressed – or, more accurately, avoided – but people just like them. The same is true of all those who have given, and are still giving, to the Guardian’s unprecedentedly successful Christmas appeal. Within a few hours of the Paris attacks, someone tweeted the advice they’d learned from Fred Rogers, the long-serving face of American children’s television. Don’t look at the killers. Look for the helpers. In what has often been a harsh, dark year, this ragtag, impromptu army of volunteers has been a point of light. They are the very best of us.

This will not go well. It will lead to the biggest NGOs ordering around the rest of them. And to EU border forces to step in.

• Refugee NGOs On Greek Islands To Be Coordinated (Kath.)

A special committee will be formed under the General Secretariat for the Aegean to coordinate dozens of nongovernmental organizations on the Greek islands receiving the biggest inflows of refugees and migrants, Kathimerini has learned. Alternate Minister for Immigration Yiannis Mouzalas visited Lesvos on Wednesday, where he met with authorities and inspected progress on the construction of a registration center. Mouzalas also met with Susan Sarandon, who is on the island helping with rescue efforts. The US actress reportedly said that she plans to make a documentary on her experiences. Arrivals from the Turkish coast on Greece’s islands remain steady at around 3,500-4,000 people a day, coast guard officials said, adding that they have rescued roughly 100,000 people this year. Hundreds of migrants have not been so lucky on the crossing. On Wednesday, seven children, four men and two women drowned as they tried to reach Farmakonisi.

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