May 152016
 
 May 15, 2016  Posted by at 9:28 am Finance Tagged with: , , , , , , , , , , ,  13 Responses »


Jack Delano Brakeman H.B. Van Santford on the AT&SF line from Summit to San Bernardino 1943

Steve Keen Talks Debt, Trump and Gold (RT)
Economists Disagree With Voters Who See US Worse Off Today Than in 1960s (WSJ)
China: “It Appears That All The Engines Suddenly Lost Momentum” (R.)
Chinese Banks’ New Loans Plunge By More Than Half In April (R.)
Shell Eyes $40 Billion Non-Core Asset Spin-Off To Cut Its Huge Debt Pile (Tel.)
Moody’s Downgrades Saudi Arabia, Bahrain, Oman (AP)
German Professors And Entrepreneurs File Complaint Against ECB Policy (R.)
The Vultures’ Vultures: New Hedge-Fund Strategy Corrupts Washington (HuffPo)
Farmland Values Fall Sharply in Parts of the Midwest (WSJ)
Cameron’s Anti-Brexit ‘Remain’ Campaign Has A Major Trust Issue (Ind.)
German Government Plans To Spend €93.6 Billion On Refugees By End 2020 (R.)

Very interesting. I’ve said it a thousand times: everyone should let sink in what Steve has to say. It’s curious to see that people like Max agree with everything Steve says -as far as they can understand him-, but disagree with him on gold.

Steve Keen on Debt, Trump and Gold (RT)

Read more …

No, really, this is a serious WSJ article. Economists claim they know better then you about your own situation, and the paper gives them the space to utter their blubber. “You’re not really hungry, you’re just imagining that, and your hospital bill is not REALLY higher than it was 40 years ago, and in student debt was this high in 1970 too, don’t you remember?!”

Economists Disagree With Voters Who See US Worse Off Today Than in 1960s (WSJ)

When was America at its best? Put the question to voters and many will point as far back as the 1960s. Put the question to economists and they identify a much more recent peak in U.S. living standards. Forecasters in The Wall Street Journal’s monthly survey of business, academic and financial economists were asked to rate whether U.S. living standards were higher today or at various points in the past. Around 80% say those standards are higher today than during the 1990s or earlier. The 2016 presidential campaign has exposed worries among many voters about a U.S. in decline. The sentiment played a particular role in boosting the candidacy of businessman Donald Trump, with a campaign slogan pledging to “Make America Great Again.”

While many economists view the U.S. as not fully recovered from the recession that began in 2007 or the previous recession in 2001, that still leaves a 40-year disconnect compared to voters who see the U.S. in a half-century of decline. The Pew Research Center recently polled voters on the question “Compared with 50 years ago, life for people like you in America is better or worse?” A plurality of 46% said things were worse now. Only 34% said life today is better than in the 1960s. A Morning Consult poll asked voters whether the 1960s or 1980s were better than today. In that survey, 31% said the ‘60s were better and 37% said the 1980s were better. By contrast, 88% of economists said the U.S. is better today than in 1960 and 87% see today as better than 1980.

“Between technology and health advances, today is much better than in 1960,” said Amy Crews Cutts, chief economist at Equifax. By many of the measures economists are inclined to look at, it is not a close call. In 1960, the life expectancy of the average American was a full decade shorter than it is today, according to the Centers for Disease Control and Prevention. The median personal income, after adjusting for inflation, is 55% higher today than in 1960, according to the Census Bureau. These measures of overall well-being continued to rise throughout the 1980s and 1990s. Why do so many voters put such little stock in the past 50 years? Economists point to a few culprits.

First, wages or available jobs have deteriorated for some demographic groups, particularly men without a high-school diploma and men who worked in manufacturing (two groups with some overlap). Second, we have just lived through the “first decade where the average worker lost ground,” said Joel Naroff, chief economist of Naroff Economic Advisers. Overall incomes declined during the two most recent recessions, but not enough to set people back to a 1960s standard of living. About 53% of respondents in the Journal’s survey said the U.S. today is “about the same” or “worse” than it was in 2000. About 63% said the same about 2007. The survey of 70 economists was conducted from May 6 to May 10, though not every economist answered every question.

Read more …

And these are ‘official’ numbers, which for a reason that escapes me we‘re still clinging on to. So I ‘adapted’ the title.

China: “It Appears That All The Engines Suddenly Lost Momentum” (R.)

China’s investment, factory output and retail sales all grew more slowly than expected in April, adding to doubts about whether the world’s second-largest economy is stabilizing. Growth in factory output cooled to 6% in April, the National Bureau of Statistics (NBS) said on Saturday, disappointing analysts who expected it to rise 6.5% on an annual basis after an increase of 6.8% the prior month. China’s fixed-asset investment growth eased to 10.5% year-on-year in the January-April period, missing market expectations of 10.9%, and down from the first quarter’s 10.7%.

Fixed investment by private firms continued to slow, indicating private businesses remain skeptical of economic prospects. Investment by private firms rose 5.2% year-on-year in January-April, down from 5.7% growth in the first quarter. “It appears that all the engines suddenly lost momentum, and growth outlook has turned soft as well,” Zhou Hao, economist at Commerzbank in Singapore, said in a research note. “At the end of the day, we have acknowledge that China is still struggling.”

Read more …

The PBoC’s bizarro explanation:“..the figures don’t include new local government bond issuance to refinance debt previously issued by local government financing vehicles.” As if to say: don’t worry, we’re still borrowing like crazy, only now half of it is to refi what we couldn’t pay back.

Chinese Banks’ New Loans Plunge By More Than Half In April (R.)

China’s central bank said it has not changed its “prudent” monetary policy stance despite a disappointing release of April data showing banks had cut back sharply on new loans. Banks made 555.6 billion yuan ($85.21 billion) in net new yuan loans in April, much lower than expected and less than half the 1.37 trillion yuan seen in March, data showed on Friday. The People’s Bank of China (PBOC), in a question and answer posted on its website on Saturday, attributed the slide to seasonal and technical factors, including the fact that the figures don’t include new local government bond issuance to refinance debt previously issued by local government financing vehicles.

“If this is factored in, new loans in April were more than 900 billion yuan,” the PBOC said, in answer to a question as to whether the figures indicated a decline in the real economy. That number would match analysts previous forecasts for April. However, the bank also pointed to a decline in corporate bond financing, which came in over 500 billion less than March – while still up slightly from the same period last year, and noted that banks remain cautious given increased focus on asset quality control. “On the whole, current financial support to the real economy is still strong,” it said. “Prudent monetary policy has not changed.”

Read more …

Curious attempt to make deeply troubling problems look like great opportunities instead. Nobody wants to buy these assets and everyone knows they MUST sell, which is why Shell try to sell as much as $40 billion of it now, and in the way they do (IPO?!). And that would “..let Shell benefit from a sustained oil price recovery?!”

Shell Eyes $40 Billion Non-Core Asset Spin-Off To Cut Its Huge Debt Pile (Tel.)

Oil giant Royal Dutch Shell is eyeing a possible $40bn spin-off of non-core assets around the globe as it grapples with a $70bn debt pile following a takeover of BG Group earlier this year. Chief financial officer Simon Henry told analysts last week that a float of Shell’s non-core assets is “very much on the agenda”. The comments were made after the Anglo-Dutch multinational announced its intention to sell off assets totalling $30bn over the next three years in an attempt to protect its dividend, after the merger with BG left it with a stretched balance sheet. Analysts at Exane BNP Paribas are now concerned that despite its attempts to offload assets, “a dry market for asset sales leaves Shell exposed”.

Reducing Shell’s debt burden is “critical for shares to perform”, said Aneek Haq, of Exane BNP Paribas, but failure to do so may force management to “bite the bullet” and make a radical move, such as an initial public offering of the parts of Shell’s empire it wants to offload. Henry said: “There are no prima facie reasons why we would not look at such a monetisation route, if that was the best way to create value.” However, given the foundering oil price, he said it was “not obvious in today’s market” where such value would be. Unlike a divestment, an IPO of the company’s mature assets, which has been dubbed “Baby Shell” would let Shell benefit from a sustained oil price recovery. Mr Haq also believes such a move would refocus management on core assets and reduce net debt by more than $50bn over four years.

The non-core upstream assets, from markets such as the UK, Norway, New Zealand, Italy and Nigeria, are cash-generative, averaging at $4bn a year free cash flow, and adding additional assets from Kazakstan could “prove attractive for shareholders”, said Haq. Although a $40bn listing would be cumbersome, it is not unfamiliar territory. In 2014, Shell raised $920m by spinning off a pipeline of US assets, Shell Midstream Partners. Given its previous form, Henry said: “It should be clear that not only are we open to innovation, [but also] we are able to deliver such complicated deals and execute over a period of time.”

Read more …

These downgrades are expensive.

Moody’s Downgrades Saudi Arabia, Bahrain, Oman (AP)

Saudi Arabia’s credit rating has been downgraded by Moody’s because of the long and deep slump in oil prices. Moody’s Investors Service said it also downgraded Gulf oil producers Bahrain and Oman. It left ratings unchanged for other Gulf states including Kuwait and Qatar. Saudi Arabia is the world’s largest oil exporter. Moody’s cut the country’s long-term issuer rating one notch to A1 from Aa3 after a review that began in March. Crude prices fell from more than $100 in mid-2014 to under $30 a barrel in February, although they have recovered into the mid-$40s. Benchmark international crude settled on Friday at $47.83 a barrel.

“A combination of lower growth, higher debt levels and smaller domestic and external buffers leave the Kingdom less well positioned to weather future shocks,” Moody’s said in a note. Moody’s lowered Oman to Baa1 from A3 and Bahrain to Ba2 from Ba1. The ratings agency did not downgrade Kuwait, Qatar, the United Arab Emirates or Abu Dhabi, but it assigned a negative outlook to each. Oil prices slumped because of production that grew faster than demand. Surging production from shale operators in the US contributed to the glut. So did OPEC, which decided in November 2014, several months after prices began falling, to continue pumping rather than give up market share.

Read more …

Germany’s Constitutional Court has been asked for opinions on the ECB a dozen times now, but not much has come of it.

German Professors And Entrepreneurs File Complaint Against ECB Policy (R.)

A group of professors and entrepreneurs in Germany filed a complaint against the ECB’s monetary policy this week at the country’s top court, the Welt am Sonntag newspaper said. A complaint would open a new chapter in a long-running legal battle between the ECB and groups within the euro zone’s biggest economy who want to curb the bank’s power. A challenge to an emergency plan the ECB made at the height of the euro zone crisis is also back at Germany’s Constitutional Court after being rejected by Europe’s top court in June. The German court will make a final ruling this year. There has been widespread criticism in Germany of the ECB’s monetary policy in recent weeks, with politicians complaining that low interest rates are hitting the retirement provisions of ordinary Germans and could boost the right wing.

Welt am Sonntag said the issue in the latest complaint filed at the Constitutional Court was whether the ECB had overstepped its mandate by extensively buying government bonds and with its plan to start buying corporate bonds. The newspaper said the professors and entrepreneurs thought the ECB was starting programs that contained incalculable risks for the German central bank’s balance sheet, and hence for German taxpayers – under the pretence of reaching its inflation target of just under 2% in the medium term. “The ECB’s current policy is neither necessary nor appropriate to directly revive the economy in the euro zone by increasing the inflation rate to around 2% in terms of consumer prices,” Markus Kerber, a lawyer and professor of public finance who initiated the complaint, was quoted as saying.

Kerber said the ECB was losing sight of the principle of the “proportionality” of its measures, according to Welt am Sonntag. In March, the ECB unveiled a large stimulus package that included cutting its deposit rate deeper into negative territory, expanding it asset buying program and offering free loans to the corporate sector to stimulate growth. German central bank governor Jens Weidmann, who sits on the ECB’s Governing Council, said on Wednesday the ECB’s expansionary monetary policy stance was “justified for now” while Bundesbank board member Andreas Dombret also said the ECB’s policy was justified by a subdued growth outlook in the euro zone.

Read more …

“They may have finally gone too far. A backlash is brewing, threatening not just their current bets, but their various tax benefits too. One senior House Republican aide who’s worked closely with the hedge funds says that members of Congress have seen enough. “I think on the Fannie stuff, they’ve hurt themselves,” he said. “We’re like, fuck em. If they’re not your friends, they’re your enemies.”

The Vultures’ Vultures: New Hedge-Fund Strategy Corrupts Washington (HuffPo)

Take Robert Shapiro. A Harvard-trained political economist, Shapiro is the head of a consulting firm called Sonecon. That business card doesn’t do it for you? He’s got a few more in his wallet: Senior fellow at the Georgetown University School of Business. Adviser to the International Monetary Fund. Director of the Globalization Initiative at NDN, a progressive think tank. Shapiro, a Democrat, has advised presidents and presidential candidates, and has held powerful government posts. It stands to reason, then, that when he has thoughts on public policy, he can find an outlet ready to publish them. Recently, he’s had ideas on how the government can address the debt crisis in Puerto Rico and how it can end the conservatorship of Fannie Mae and Freddie Mac by moving them into the private market.

Before that, he had a take on how to deal with Argentina’s debt crisis. For all three, he produced academic-looking papers, complete with footnotes and charts. All three situations have one thing in common: If they were resolved the way Shapiro suggested, a variety of bets placed by a select group of the most politically powerful hedge funds would pay off in a huge way. In the case of Argentina, they mostly have. Fights over how to resolve the other two issues are still raging in Washington. For this article, we called Shapiro to ask on whose behalf he has been waging these intellectual battles. His answer was surprising in its honesty: He’s working with DCI Group, a political dark arts master known to be advocating on behalf of a group of powerful hedge funds that are changing how Washington works.

Shapiro, it turns out, is but one foot soldier in the hedge fund infantry. A review of public documents, tax filings and interviews with people involved finds that in each of the three campaigns, hedge funds have enlisted the same set of lobbyists, political operatives, dark money groups and think-tank experts spanning the political spectrum. No single document or set of disclosures ties all of these groups together. They don’t put out joint press releases, parade themselves around Washington as part of a coalition, or chat together on conference calls. Finding the players in this game, instead, is more a process of deduction. For a group of firms and experts to be working for vulture funds on the issue of Argentine debt is normal Washington practice. (Vulture’s meaning here isn’t pejorative: it refers to an investment strategy that feeds off of assets the market has left for dead.)

For the exact same people and groups to be working on the next big issue that these funds care about — the Puerto Rican debt crisis — could be a coincidence. But now, the hedge funds are focused on a third issue — government-sponsored enterprise reform, which refers to the effort to establish new housing finance policy in the wake of the federal takeover of lenders Fannie Mae and Freddie Mac. And it’s the same political firms and the same independent experts that are once again weighing in — coincidentally, all on the side of the hedge funds. Maybe it’s all coincidence, but let’s run the traps either way.

Read more …

Make basic human needs part of speculative financial markets and mayhem is inevitable. Some things do not belong in a casino. When will we learn? When we run out of water and food?

Farmland Values Fall Sharply in Parts of the Midwest (WSJ)

Real farmland values in parts of the Midwest fell at their fastest clip in almost 30 years during the first quarter, according to a regional Federal Reserve report on Thursday. Falling crop prices have weighed on land values from Kansas to Indiana over the past two years as farm income declined and investors who had piled into the asset at the start of the decade retrenched. Three regional Federal Reserve banks all reported year-over-year declines in farmland values in their districts and said the drops would continue, though their forecasts were based on surveys taken before the recent rally in corn and soybean prices.

The St. Louis Fed region that includes parts of the U.S. agricultural heartland in Illinois, Indiana and Missouri reported the steepest decline, with the average price of “quality” farmland falling 6.4% in the quarter, the biggest decline since its survey began in 2012. The Chicago Fed said prices for similar land in its district fell 4% from a year ago, the seventh successive quarterly decline. Adjusted for inflation, prices in an area that includes parts of Illinois, Indiana, Iowa, Michigan and Wisconsin fell 5%, the biggest quarterly drop since 1987. Declines in the Kansas City Fed’s district, which includes Kansas and Nebraska, were less pronounced, but the bank said prices for nonirrigated cropland fell 4% in the quarter.

Though some agricultural markets have rallied in recent weeks, prices for corn and wheat are still more than 50% lower than their 2012 peak, and the U.S. Department of Agriculture has projected that net U.S. farm income will fall this year to the lowest level in more than a decade. Commodity prices have declined as farmers in the U.S. and elsewhere harvested bumper crops, adding to already generous stockpiles. U.S. farmers have also been hit by the strength of the dollar, which has stymied demand to export their crops. The drop in land values has been accompanied by deteriorating credit conditions, with more loans taken out to cover farm operations even as repayment rates fell on existing debt.

Read more …

Wow: “Boris Johnson is trusted to tell the truth about Europe by twice as many voters as trust David Cameron..” I can’t imagine anyone trusting Boris, so what does that say about trust in Cameron?

Cameron’s Anti-Brexit ‘Remain’ Campaign Has A Major Trust Issue (Ind.)

Boris Johnson is trusted to tell the truth about Europe by twice as many voters as trust David Cameron, according to a ComRes poll for The Independent. By a two-to-one margin, 45% to 21%, voters say that Mr Johnson is “more likely to tell the truth about the EU” than Mr Cameron. By a smaller margin, 39% to 24%, campaigners for Leave generally are considered “more likely to tell the truth” than campaigners for Remain.

The Referendum Campaigns
• Following key speeches this week, Britons are more than twice as likely to say Boris Johnson would tell the truth about the EU than David Cameron (45% v 21%).
• Conservative voters also say Boris Johnson is more likely to tell the truth about the EU than the Prime Minister (42% v 27%).
• Similarly, Britons tend to say the campaigners for leaving the EU are more likely to tell the truth than the remain campaigners (39% v 24%), although a significant minority say they don’t know (38%).

The EU Referendum
• The British public remain divided over whether they would be personally better off if Britain left the EU or remained part of it (29% v 33%). Around two in five (38%) say they don’t know how the referendum outcome would personally affect them.
• There has been a rise in the proportion of Britons saying national security would be better if Britain left the EU – 42% say it would be stronger if Britain left, compared to 38% who say it would be stronger if Britain remained. This represents an increase of 7 points from March in favour of leaving (35% in March 2016).
• However, attitudes towards immigration are clear; British adults are more than twice as likely to say the government could control Britain’s borders better if it left the EU (57% v 27% if Britain remains).

Read more …

Presenting it this way makes it look like the money is lost. Presenting it as an investment would be a lot fairer.

German Government Plans To Spend €93.6 Billion On Refugees By End 2020 (R.)

Germany’s government expects to spend around €93.6 billion by the end of 2020 on costs related to the refugee crisis, a magazine said on Saturday, citing a draft from the federal finance ministry for negotiations with the country’s 16 states. The figure is likely to stoke concerns, particularly among growing anti-immigration movements, on the impact of new arrivals on Europe’s largest economy which took in more than a million people last year, many from Syria and other war zones. The numbers arriving have fallen this year, helped by a deal between the EU and Turkey that was designed to give Turks visa-free travel to Europe in return for stemming the flow of migrants.

German weekly news magazine Der Spiegel said the finance ministry’s calculations included the costs for accommodating and integrating refugees as well as tackling the root causes for people fleeing from crisis-stricken regions. Officials based their estimates on 600,000 migrants arriving this year, 400,000 next year and 300,000 in each of the following years, the report said, adding that they expected 55% of recognized refugees to have a job after five years. A spokesman for the finance ministry declined to comment on the figures but pointed to ongoing talks between the government and states, saying they would meet again on May 31 to discuss how to divide up the costs between them.

The report said that €25.7 billion would be needed for jobless payments, rent subsidies and other benefits for recognized asylum applicants by the end of 2020. Another €5.7 billion would be needed for language courses and €4.6 billion would be required for measures to help migrants get jobs, it added. The annual cost of dealing with the refugee crisis would hit €20.4 billion in 2020, up from around €16.1 billion this year, the report said.

Read more …

Oct 132015
 
 October 13, 2015  Posted by at 8:45 am Finance Tagged with: , , , , , , , , , , ,  3 Responses »


Russell Lee Columbia Gardens outdoor amusement resort, Butte, Montana 1942

US Debt Markets Shaken Amid More Corporate Downgrades And Defaults (WSJ)
Why US Banks Soon Will Be Singing The Blues (CNBC)
China Imports Slump 20% Amid Falling Commodity Prices, Weak Demand (Guardian)
China Trade Data Unsettle Asian Bourses (FT)
China’s Stock Rally-to-Rout Is About to Repeat (Bloomberg)
KKR Warns About Renewed Commodity, Emerging-Market Rout on China (Bloomberg)
Pimco’s Bear Case Only Gets Stronger as Emerging Currencies Jump (Bloomberg)
Switzerland to Impose 5% Leverage Ratio on Biggest Banks (Bloomberg)
Europeans Move To Undercut Global Bank Capital Rules (FT)
The Failure to Learn From Boom-Bust Cycles (WSJ)
Higher Interest Rates Would Throw Bank Profits a Lifeline (Bloomberg)
China’s Great Game: A New Silk Road To A New Empire (FT)
Angus Deaton Showed We’re Helping the Wrong People (Bloomberg)
US Annual Oil Output to Drop for First Time Since 2008 (WSJ)
Oil Sands Boom Dries Up in Alberta, Taking Thousands of Jobs With it (NY Times)
German Brand Dealt ‘Hammer Blow’ By VW Scandal And Weakening Economy (Telegraph)
Emissions Test Changes Could Make Diesels ‘Unaffordable’ (BBC)
Home Flipping Frenzy in Sydney Sparks Warnings on Housing Risks (Bloomberg)
TTIP Deal Would Remove People’s Rights To Access Basic Human Needs (Ind.)
Merkel Seeks Turkey’s Aid on Borders to Stem Refugee Flow to EU
Athens Rules Out Joint Sea Patrols With Turkey (Kath.)
Marine Food Chains At Risk Of Collapse (Guardian)
Antarctic Ice Melts So Fast Whole Continent May Be At Risk By 2100 (Guardian)

“Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis..”

US Debt Markets Shaken Amid More Corporate Downgrades And Defaults (WSJ)

Falling profits and increased borrowing at U.S. companies are rattling debt markets, a sign the six-year-long economic recovery could be under threat. Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis, and measures of debt relative to cash flow are rising. Analysts expect profits at large companies to decline for a second straight quarter for the first time since 2009. The market for riskier debt has become snarled, raising fears that companies could have trouble repaying their obligations following several years of record debt issuance, low corporate defaults and persistently low interest rates. Reflecting those concerns, investors are now demanding more yield to own corporate bonds relative to benchmark U.S. Treasury securities.

The softening U.S. corporate fundamentals have been largely overlooked as investors focused on sharp declines in the shares, bonds and currencies of many emerging-markets nations. Many analysts say the health of China remains the largest source of uncertainty in the global economy. But rising downgrades and an increase in U.S. corporate defaults indicate “some cracks on the surface” of the domestic-growth outlook, said Jody Lurie, corporate credit analyst at financial-services firm Janney Montgomery Scott LLC. Many investors closely monitor debt-market trends as an indicator of U.S. economic health. In August and September, Moody’s Investors Service issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades.

That’s the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession. Standard & Poor’s Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009, compared with just 172 upgrades. Meanwhile, the trailing 12-month default rate on lower-rated U.S. corporate bonds was 2.5% in September, up from 1.4% in July of last year, according to S&P. About a third of the downgrades targeted oil and gas companies or firms in other commodity-linked industries, following a plunge in oil prices in the second half of 2014, said Diane Vazza, head of global fixed-income research at S&P.

Read more …

“S&P 500 financials are expected to show a 3.8% annualized growth in profits [..] As recently as July analysts had been forecasting 9.9% growth..”

Why US Banks Soon Will Be Singing The Blues (CNBC)

With Wall Street banks about to report on how much money they’ve been making, estimates are moving in the wrong direction. Coming off a quarter in which the industry collectively reported $43 billion in profits, analysts had been hoping a rising rate environment and increasing demand would keep things moving for the $15.1 trillion sector. However, fading hopes for a rate hike in 2015 and other factors are making analysts nervous about just how the quarterly profit reports will shape up. JPMorgan Chase gets things started for the Big Four on Tuesday, with Bank of America and Wells Fargo on tap Wednesday and Citigroup due Thursday. Goldman Sachs reports Thursday as well and PNC will report Wednesday.

As a sector, S&P 500 financials are expected to show a 3.8% annualized growth in profits, according to S&P Capital IQ. While that’s better than the 5.1% decline projected for the entire index, it’s a big comedown from initial projections. Revenue is expected to grow 4.4%. As recently as July analysts had been forecasting 9.9% growth, and a year ago that expectation was a gaudy 27%. So even if results come in better than expected, they likely will remain well below the initially lofty hopes for financials, which were supposed to be 2015’s best-performing sector. Individual companies have seen substantial revisions in recent days.

Analysts have cut MetLife estimates from 88 cents a share to 77 cents, Goldman Sachs from $3.46 to $3.20 and Morgan Stanley from 68 cents to 63 cents, according to FactSet. Earnings expectations have been reduced for 53 of the 88 companies in the S&P 500’s financial sector. The weakness comes as loan growth has held fairly steady thanks to a robust climate in commercial real estate. The sector jumped 9.7% in the third quarter, its best of the year after rising 6.7% in 2014, according to Federal Reserve data. Investment banking also has been fairly solid throughout the year. While global revenue is down 10% year over year, it’s been flat at $28 billion in the U.S., thanks to a record $9.7 billion haul in mergers and acquisition revenue, according to Dealogic.

Read more …

Imports down 17.7% in yuan, over 20% in USD. Different numbers reflect the difference between calculations in yuan and in dollars.

China Imports Slump 20% Amid Falling Commodity Prices, Weak Demand (Guardian)

China’s imports fell heavily in September, official figures said, keeping pressure on policymakers to do more to stave off a sharper economic slowdown. Although exports fell less than expected by 3.7% from the same period last year, the value of imports tumbled more than 20% to register the 11th straight month of falls. Imports plunged 20.4% in September from a year earlier to $145.2bn, customs officials said, due to weak commodity prices and soft domestic demand. These factors will complicate Beijing’s efforts to stave off deflation, one of the headwinds threatening the world’s second biggest economy. Highlighting persistent weakness in demand at home and abroad, China’s combined exports and imports fell 8.1% in the first nine months of the year from the same period in 2014, well below the full-year official target of 6% growth.

“In general, there are no green shoots in this set of data,” said Zhou Hao, senior economist at Commerzbank in Singapore. “The growth of [trade] volume still remains low.” However, monthly figures were much more rosy. Exports to every major market except Taiwan rose from August, as did imports. Julian Evans-Pritchard of Capital Economics said monthly trends showed a steady rise to most major export markets in the US and Europe over the summer. “Basically, exports have been doing better since the second quarter, but that recovery trend has been masked on a year-on-year basis because the second half of 2014 was so strong.” Evans-Pritchard also said that import data had become unreliable given massive swings in prices due to the commodity downturn and a divergence between prices and trading volumes.

“For the major commodities like oil, copper, etc. we’re actually seeing a pretty healthy trend in import volumes.” Import volumes are a leading indicator for exports in China, given a large share of materials and parts re-exported as finished goods. “September’s import figure does not bode well for industrial production and fixed asset investment,” wrote ANZ economists in a research note reacting to the figures. “Overall growth momentum last month remained weak and third quarter GDP growth to be released [on 19 October] will likely have edged down to 6.4%, compared with 7% in the first half.” China posted trade surplus of $60.34bn for the month, the general administration of Customs said on Tuesday, higher than forecasts for $46.8 billion.

Read more …

China has a record surplus. Sounds good. Exports down ‘only’ 1.1% (still curious if you want to grow GDP by 7%). Imports down 17.7%. That will be largely raw materials. So what will they be able to produce for export next year?

China Trade Data Unsettle Asian Bourses (FT)

Chinese trade data rattled Asian markets as a bigger-than-expected fall in imports offset the cheer afforded by a record mainland trade surplus and slower pace of decline in exports. The Shanghai Composite was down 0.4% and the tech-focused Shenzhen Composite was up 0.3% after data showed China posted its biggest-ever trade surplus, in renminbi terms, of Rmb376.2 in September, up from Rmb368bn in August and comfortably ahead of economists’ expectations of Rmb292.4bn. That was underpinned by exports declining by 1.1% last month from a year earlier, an improvement from August’s 6.1% pace of decline. Economists expected exports to drop by 7.4%.

Imports fell 17.7% in September from a year ago, a bigger-than-forecast drop and larger than August’s 14.3% decline – less than encouraging in the context of China’s goal to shift its growth model from export-driven to consumption-based. Ahead of the trade data release, economists at ANZ said: “China’s exports have likely contracted in September, but its strong trade surplus should ease the pressure of capital outflows.” They reckon economic activity on the mainland remained sluggish in September, leading to their forecast of 6.4% economic growth in the third quarter. China’s official gross domestic product data are due on October 19, and analysts are increasingly bearish, tipping real growth at 6.7%, according to a Bloomberg survey of 25 economists, lower than the official full-year target of “around 7%”. Among other equities benchmarks, Hong Kong’s Hang Seng was down 0.3% and Australia’s S&P/ASX 200 was down 0.9%. Japan’s Nikkei, reopening after a long weekend, was down 0.9%.

Read more …

“As oil starts to move and materials follow, investors will by default feel more positive about China,” he said. “This is a bear market rally.”

China’s Stock Rally-to-Rout Is About to Repeat (Bloomberg)

In August, Thomas Schroeder correctly predicted a rebound in Chinese stocks wouldn’t last. Now, he says, the benchmark equity gauge will plumb new lows as a bear-market rally fails. The Shanghai Composite Index will climb to 4,100 in the next three months before slumping as much as 41% to 2,400 in early 2016, Schroeder, founder and managing director of Chart Partners, said. The benchmark index added 3.3% to close at 3,287.66 on Monday. Schroeder, a former Asian technical analysis chief at UBS, cited triangle and wedge patterns in making his call. The Shanghai Composite tumbled 29% in the third quarter, the biggest slump among benchmark global gauges, as a stock boom turned to bust amid concern about the slowdown in China’s economy and a crackdown on using borrowed money to buy equities.

The bottoming of oil prices and a rebound in emerging market currencies will help bolster a rally in the nation’s equities in the next two months, which will reverse as the Federal Reserve starts raising interest rates, Schroeder said. “As oil starts to move and materials follow, investors will by default feel more positive about China,” he said. “This is a bear market rally.” Schroeder predicted in August that the Chinese equity rout will worsen, with the Shanghai Composite likely sliding below 3,100 within two months. The measure fell to as low as 2,927.29 on Aug. 26. Technical analysts use past patterns to try to predict future movements. [..] “We haven’t seen a major low for the emerging markets,” said Schroeder, whose Chart Partners Group is a provider of trading strategies linked to technical analysis. “There’s likely to be more pain next year as the U.S. starts lifting rates.”

Read more …

Squeeze.

KKR Warns About Renewed Commodity, Emerging-Market Rout on China (Bloomberg)

There are few reasons to get excited about the recent rebound in commodities and emerging-market assets, according to KKR which correctly forecast the stock selloff in developing countries five months ago. China will continue to rein in credit growth, reducing the investments in factories and machinery that have been among the key drivers for the commodity boom in recent years, Henry McVey, global head of macro and asset allocation at KKR, one of the world’s largest private equity firms, wrote in a note posted on its website. “Many hard commodity prices are likely to suffer another leg down,” McVey and Frances Lim, who visited Asia recently, said in the note. “We would view any recovery as a bounce, not a sustained re-acceleration in the Chinese economy, as the structural headwinds remain significant.”

The MSCI Emerging Markets Index rose Monday to a two-month high, while commodities are trading around 6% above a 16-year low set in August, on speculation that China will take steps to shore up its faltering economy. The emerging-market stock gauge has still lost about 10% this year, heading for its third annual decline, as lower raw-material prices and the Chinese economic slowdown undermines exports in countries from Brazil to Malaysia. While some “targeted stimulus” in housing and infrastructure in recent months may help stabilize China’s economy, it won’t alter a slowing trajectory because the government needs to reduce debt and production overcapacity, McVey said. KKR,which manages $102 billion in assets, expects growth in China to slow to 6% in 2018, from 6.8% this year, which would be the least since 1990.

McVey, who previously worked as chief investment strategist at Morgan Stanley and a managing director at Fortress Investment, told investors in May to stay away from most of the publicly traded emerging-market companies. He said a buildup in debt and weakening currencies in emerging countries will lead to underperformance in stocks, a call foreshadowing an over 20% decline in the MSCI benchmark gauge over the next four months. McVey said growth in China’s fixed-asset investments, the biggest driver in the country’s rise over the past decade, will decline to as little as 5% a year, from 11% in August, and down from a peak of 34% in 2009.

Read more …

Dead cats bouncing all over the place.

Pimco’s Bear Case Only Gets Stronger as Emerging Currencies Jump (Bloomberg)

Pacific Investment Management Co. is sticking with its pessimistic outlook on emerging-market currencies, saying the biggest rally in 17 years has only bolstered the case for making bearish wagers. “These currencies look more interesting to be underweight from here than they were a week ago,” Luke Spajic, an emerging markets money manager at Pimco, whose developing-nation currency fund has outperformed 97% of peers during the past five years, said in a phone interview on Monday. Pimco, which oversees $1.52 trillion, said in an Oct. 1 report that it had short positions in currencies such as Malaysia’s ringgit, the Thai baht and the South Korean won. Emerging-market currencies surged last week, recording the biggest rally since 1998 as traders pushed back expectations for when the U.S. Federal Reserve will start raising interest rates.

While Spajic said he doesn’t know how long the rebound will last, he sees a “wave of deflationary pressure” across Asia that will eventually weigh on currencies as exports and economic growth projections decline. Pimco’s concerns echo those of the IMF, which cut its 2015 outlook for the global economic expansion to 3.1% on Oct. 6 from a July forecast of 3.3%. The fund cited a slowdown in emerging markets, saying the following day that high debt levels at banks and other companies have left developing economies susceptible to financial stress and capital outflows.

Read more …

Switzerland does as US does.

Switzerland to Impose 5% Leverage Ratio on Biggest Banks (Bloomberg)

Switzerland’s finance ministry will require the country’s biggest banks to have capital equal to about 5% of total assets after UBS Group AG and Credit Suisse Group AG sought to win easier terms, according to people briefed on the deliberations. The decision would mimic the U.S. leverage ratio for its biggest banks, which exceeds the 3% minimum set in a global agreement by the Basel Committee on Banking Supervision, according to the people, who asked not to be identified because the talks aren’t public. The Swiss government will also align its calculation of the ratio with the method employed in the U.S., resulting in fewer types of debt counting toward capital, one of the people said. The measure of financial strength has gained importance since the 2008 financial crisis as a means of making big banks less prone to collapse.

A government-appointed expert panel recommended in December that Switzerland follow the lead of the U.S., which in recent years has introduced some of the world’s toughest capital requirements. Zurich-based UBS and Credit Suisse reported Basel III leverage ratios of 3.6% and 3.7% at the end of the second quarter, indicating they would be more than 1%age point short of the new target. “Higher requirements mean that the banks will have fewer funds to return to shareholders,” said Andreas Brun at Zuercher Kantonalbank. “For UBS, whose investment case is based on rising dividend expectations, this is a big issue. For Credit Suisse, whose capital situation is worse, this means a higher dilution because of a bigger requirement of a capital increase.”

Read more …

Meanwhile in the EU, banks are still holier than thou.

Europeans Move To Undercut Global Bank Capital Rules (FT)

Several European countries are taking action to water down new global capital rules for their top financial institutions, causing concern among investors and EU officials. France is set to become the latest country to introduce legislation that would save its leading banks from having to issue tens of billions of euros of new bonds to meet the rules agreed by global regulators a fortnight ago, people familiar with the situation said. Brussels officials are so worried with the divergence in policies that they have started talks with EU countries on a more co-ordinated stance, two EU officials said. Market insiders said that investors were frustrated and that all banks could end up paying more when they issue debt.

The rules on “total loss absorbing capital” (TLAC) agreed on September 25 by the Financial Stability Board are one of the final pieces of a wave of post-crisis regulation designed to ensure there is never a repeat of the bank bailouts of recent times. The rules apply only to the world’s largest banks but have wider reach, according to Laurent Frings, analyst at Aberdeen Asset Management. “The view from investors to a large degree is that local regulators will force domestically important banks to work to the sale rules,” said Mr Frings. In the UK and Switzerland, banks such as UBS, Credit Suisse and Barclays are building up their “loss absorbing capital” by issuing new debt from bank holding companies that can be “bailed in” in a crisis. The banks will have to issue tens of billions of the new bonds to meet their TLAC requirements.

In Germany and Italy, however, legislators are passing laws to make traditional senior debt easier to bail in. This frees their banks of the obligation to issue new debt for TLAC. Several people close to the situation said that France would also propose a solution to help its banks. “Being a European authority we would always argue that it’s a good idea to put in place a European solution, and not try to come up with 19 or 28 solutions on that,” said Elke Koenig, president of the Single Resolution Board, the new EU-wide resolution authority for failing banks. “We’ve clearly given our support to the basic idea [of the German bank law] at the same time saying it would be preferential longer term to have a European solution.”

Read more …

Or the failure to see that this is not a boom-bust cycle?

The Failure to Learn From Boom-Bust Cycles (WSJ)

The plunge in commodity prices is thumping oil exporters around the globe. The scale of the beating rests largely on whether governments heeded the lessons from prior boom-bust cycles. Norway and Saudi Arabia built up sizable rainy-day funds and managed their windfalls from high prices conservatively. Now they’ve got considerable buffers against a downturn. Nigeria and Venezuela splurged and made few economic overhauls as prices surged. They’re now suffering as growth skids. The commodity bust is weighing heavily on resource-rich countries that represent 20% of the world’s economic output. The oil-price decline is supporting some of the largest consumers, such as the U.S. and Europe, that are key to keeping the global economy out of recession.

But it is providing less of an overall global boost than predicted just a year ago, while forcing more vulnerable economies to scramble in an uncertain environment. “The oil price drop came as a surprise,” said Angolan finance minister Armando Manuel. “It captured my country in a state in which we were not sufficiently diversified.” The commodity collapse and its effect on emerging economies drew wide attention in Lima, where the world’s finance ministers and central bankers gathered for the IMF’s annual meeting, which ended Sunday, against a backdrop of dimming global growth. The problem isn’t isolated to oil, fueling a much broader slump in major emerging markets from Brazil to South Africa.

Metal prices are in a long-term funk, hitting exporters of iron, copper and similar industrial commodities. Oil exporters are showing what may be in store for other major commodity exporters. Nigeria, which got nearly 65% of its government revenue from crude exports before the price plunge, has seen its projected 2015 growth slashed to less than 4% from more than 6% a year ago, according to the IMF. Kazakhstan’s growth rate has tumbled to 1.5% this year from 6% before the petroleum collapse. In Venezuela, where the state gets half its revenue from oil sales, the economy is shriveling by 10%.

Read more …

That’s the number 1 reason the Fed would love to hike rates.

Higher Interest Rates Would Throw Bank Profits a Lifeline (Bloomberg)

Having bailed them out and then helped to repair their balance sheets with record-low interest rates and bond-buying, policy makers may assist the financial industry once more when the U.S. Federal Reserve begins tightening monetary policy. That’s according to two recently published reports by the Bank for International Settlements and McKinsey & Co., both of which have highlighted the downsides of ultra-easy borrowing costs in the past. Based on seven years of data from 109 large international banks in 14 countries, the BIS confirmed a relationship between short-term rates and the slope of the curve for bond yields with bank profitability.

The conclusion drawn by Claudio Borio, the head of the monetary and economic department at the BIS, and colleagues is that the positive impact of being able to earn income by lending money out for higher rates over time is bigger than the hit of defaults and income that doesn’t carry interest. Even better news for the banks is that the effect is strongest when rates are lower and the yield curve isn’t that steep, as is now the case. That provides another reason for the BIS’s economists to again decry the unintended side-effects of accommodative monetary policy. They reckon that between 2011 and 2014, the average bank of those studied lost one year of profits as a result of low rates. “All this suggests that over time, unusually low interest rates and an unusually flat term structure erode bank profitability,” said Borio et al in the report, which was published on Oct. 1.

Return on equity at 500 global lenders was unchanged in 2014 at 9.5%, about the average of the last 35 years, according to the Sept. 30 study by McKinsey. Profit margins also continued a steady decline, dropping by 185 basis points in 2014, in part because of lower rates. It reckons tighter policy would boost return on equity by about 2 %age points. “Many in the industry are waiting for an interest rate rise or some other structural lift to profits,” McKinsey said. There is a sting in the tail. It warned that even if rates do rise, profit margins may still not return to their pre-crisis highs. “Much of the benefit will get competed away, and risk-costs will likely increase, especially in economies where the recovery is still fragile,” McKinsey said.

Read more …

China doesn’t, and won’t, have sufficient growth to execute these plans.

China’s Great Game: A New Silk Road To A New Empire (FT)

The granaries in all the towns are brimming with reserves, and the coffers are full with treasures and gold, worth trillions, wrote Sima Qian, a Chinese historian living in the 1st century BC. “There is so much money that the ropes used to string coins together rot and break, an innumerable amount. The granaries in the capital overflow and the grain goes bad and cannot be eaten”. He was describing the legendary surpluses of the Han dynasty, an age characterised by the first Chinese expansion to the west and south, and the establishment of trade routes later known as the Silk Road, which stretched from the old capital Xi an as far as ancient Rome.

Fast forward a millennia or two, and the same talk of expansion comes as China’s surpluses grow again. There are no ropes to hold its $4tn in foreign currency reserves -the world’s largest- and in addition to overflowing granaries China has massive surpluses of real estate, cement and steel. After two decades of rapid growth, Beijing is again looking beyond its borders for investment opportunities and trade, and to do that it is reaching back to its former imperial greatness for the familiar Silk Road metaphor. Creating a modern version of the ancient trade route has emerged as China’s signature foreign policy initiative under President Xi Jinping.

“It is one of the few terms that people remember from history classes that does not involve hard power …and it s precisely those positive associations that the Chinese want to emphasise”, says Valerie Hansen, professor of Chinese history at Yale University. If the sum total of China s commitments are taken at face value, the new Silk Road is set to become the largest programme of economic diplomacy since the US-led Marshall Plan for postwar reconstruction in Europe, covering dozens of countries with a total population of over 3bn people. The scale demonstrates huge ambition. But against the backdrop of a faltering economy and the rising strength of its military, the project has taken on huge significance as a way of defining China’s place in the world and its relations -sometimes tense- with its neighbours.

Read more …

Winner of the Fauxbel. Yawn.

Angus Deaton Showed We’re Helping the Wrong People (Bloomberg)

Presidential candidates from both parties are focusing, as usual, on the middle class. But what’s that? And why, exactly, does it deserve such attention? Princeton’s Angus Deaton, who on Monday was announced as the latest winner of the Nobel Memorial Prize for economics, has offered some intriguing answers. The most important is this: If you care about how people actually experience their lives, you should be concerned about people who earn less than $75,000 per year. Above that amount, Deaton’s evidence suggests that more money may not particularly matter. To understand why, we need to distinguish between two very different measures of human well-being. Researchers have traditionally proceeded by asking people to evaluate their overall life-satisfaction (say, on a scale of 1 to 10).

More recently, researchers have tried to capture people’s actual experiences in a more refined way, for example by asking them about their levels of stress, sadness, happiness and enjoyment during the day (again on a scale of 1 to 10). A key question: Does money buy happiness? Deaton, along with his coauthor Daniel Kahneman (a Nobel Prize winner in 2002), found that in the United States, the answer depends on which question you use. If people are asked about their overall life-satisfaction, money definitely matters. As people’s annual earnings go up, their self-reported life-satisfaction increases as well. But the same is not true for actual experiences. More income is definitely associated with less sadness and more happiness up to $75,000, but above that level people’s experienced happiness is the same regardless of income.

In terms of stress, another important indicator of people’s well-being, it’s a lot worse to earn $20,000 than $60,000 – but above $60,000, stress levels are not reduced by more money. What’s going on here? Deaton and Kahneman don’t exactly know, but they speculate that above a certain threshold, increases in income do not much affect people’s ability to engage in activities that matter most – which include spending time with friends, enjoying good health and taking time off from work. They also suggest that beyond that threshold, more money might have some negative effects, such as a reduced ability to enjoy small pleasures. But below the $75,000 threshold, many of life’s misfortunes have a much bigger negative impact. For the poor, getting divorced, having asthma, and being alone have far more severe effects. Even the benefits of the weekend turn out to be lower.

Read more …

Let’s see how much banks have buried away in shale loans.

US Annual Oil Output to Drop for First Time Since 2008 (WSJ)

U.S. oil output will decline in 2016 for the first time in eight years as producers slash spending, OPEC said Monday, while the producer group continues pumping at high levels. In its closely watched monthly oil market report, OPEC slashed its U.S. oil production forecast by 280,000 barrels a day next year, to 13.538 million barrels a day, a number that includes natural gas liquids. That would be about 60,000 barrels a day less than in 2015, the first decline since 2008. The finding is consistent with what the U.S. Energy Information Administration said last week, predicting that U.S. crude production would average about 8.9 million barrels a day in 2016, down from 9.2 million barrels a day in 2015.

OPEC said lower oil prices were forcing U.S. oil producers to cut spending and causing their wells to deplete faster than expected. OPEC producers continued to pump at high rates, the report said, with Saudi Arabia at 10.226 million barrels a day—slightly down from last month—and Iraq producing a near-record 4.143 million barrels a day. Overall the producer group was pumping 31.571 million barrels a day, the highest reported level since April 2012. The increasing levels of OPEC production—and the forecast declines in the U.S.–are part of a new order for the world’s petroleum industry since crude prices collapsed from over $100 a barrel last year to less than $50 this year.

Read more …

“We see kind of a lot of volatility over the next four or five years..”

Oil Sands Boom Dries Up in Alberta, Taking Thousands of Jobs With it (NY Times)

FORT McMURRAY, Alberta — At a camp for oil workers here, a collection of 16 three-story buildings that once housed 2,000 workers sits empty. A parking lot at a neighboring camp is now dotted with abandoned cars. With oil prices falling precipitously, capital-intensive projects rooted in the heavy crude mined from Alberta’s oil sands are losing money, contributing to the loss of about 35,000 energy industry jobs across the province. Yet Alberta Highway 63, the major artery connecting Northern Alberta’s oil sands with the rest of the country, still buzzes with traffic. Tractor-trailers hauling loads that resemble rolling petrochemical plants parade past fleets of buses used to shuttle workers.

Most vehicles carry “buggy whips” — bright orange pennants attached to tall spring-loaded wands — to help prevent them from being run over by the 1.6-million-pound dump trucks used in the oil sands mines. Despite a severe economic downturn in a region whose growth once seemed limitless, many energy companies have too much invested in the oil sands to slow down or turn off the taps. In addition to the continued operation of existing plants, construction persists on projects that began before the price fell, largely because billions of dollars have already been spent on them. Oil sands projects are based on 40-year investment time frames, so their owners are being forced to wait out slumps.

“It really is tough right now,” said Greg Stringham, the vice president for markets and oil sands at the Canadian Association of Petroleum Producers, a trade group that generally speaks for the industry in Alberta. “We see kind of a lot of volatility over the next four or five years.” After an extraordinary boom that attracted many of the world’s largest energy companies and about $200 billion worth of investments to oil sands development over the last 15 years, the industry is in a state of financial stasis, and navigating the decline has proved challenging. Pipeline plans that would create new export markets, including Keystone XL, have been hampered by environmental concerns and political opposition.

The hazy outlook is creating turmoil in a province and a country that has become dependent on the energy business. Canada is now dealing with the economic fallout, having slipped into a mild recession earlier this year. And Alberta, which relies most heavily on oil royalties, now expects to post a deficit of 6 billion Canadian dollars, or about $4.5 billion. The political landscape has also shifted. Last spring, a left-of-center government ended four decades of Conservative rule in Alberta. Federally, polls suggest that the Conservative party — which championed Keystone XL and repeatedly resisted calls for stricter greenhouse gas emission controls in the oil sands — is struggling to get re-elected in October.

Read more …

Merkel will find it harder to impose her will.

German Brand Dealt ‘Hammer Blow’ By VW Scandal And Weakening Economy (Telegraph)

The VW emissions scandal has dealt a “hammer blow” not just to Volkswagen’s reputation but potentially to the entire German national brand, according to a consultancy that calculates brand worth. The revelations that as many as 11 million diesel vehicles have been fitted with software designed to deceive emissions testers has damaged the German repuation of efficiency and reliability, said the report from Brand Finance. As a result, the value of the ‘Made in Germany’ brand has fallen 4pc – or $191bn – to $4.2 trn this year. The report added the scandal threatens to undo decades of accumulated goodwill and cast doubt over the efficiency and reliability of German industry.

However, the authors said Germany has attracted worldwide admiration for its sympathetic stance to migrants escaping Syria and other war-torn countries, which is boosting the country’s positive image. Not only has the county benefited from goodwill perceptions, but the migrants will also boost the economy, said the report. The country’s birth rate has been flagging and the influx of generally young people and families will boost Germany’s labour force, encouraging investment in Europe’s largest economy. Germany’s birth rate has collapsed to the lowest level in the world. A study by the World Economy Institute in Hamburg earlier this year said the country’s workforce will start plunging at a faster rate than Japan’s by the early 2020s due to the declining birth rate, seriously threatening the long-term viability of Europe’s leading economy.

Data last week showed German exports suffered their worst month since the global recession, as global demand slowed. Exports in Europe’s largest economy collapsed by 5.2pc in August – their largest drop since January 2009, according to figures from the country’s Federal Statistics Office. Overall the US remains the world’s most valuable national brand, having benefited from a large, wealthy market wanting to “buy American”. The country is worth $19.7 trn, when combining its strength as a brand with GDP data. Fast-growing superpower China, which has previously threatened to knock the US off the top spot, has instead been rocked by the recent stock market turbulence and slowing economic growth. Its brand worth slipped 1pc to $6.3 trn, when compared to the previous year. The UK comes in at fourth place, worth $3bn, a rise of 6pc from last year.

Read more …

Diesel is dead for luxury cars. French carmakers will be hit very hard, if only because Paris MUST scrap its huge diesel subsidies.

Emissions Test Changes Could Make Diesels ‘Unaffordable’ (BBC)

Making European emissions tests more stringent could make some diesel vehicles “effectively unaffordable”, a trade body has warned. The European Commission is trying to get vehicle makers to agree to bigger cuts in emissions from diesel engines. The pressure comes in the wake of the Volkswagen emissions scandal. The European Automobile Manufacturers’ Association (ACEA) said car companies needed enough time to implement changes to emissions testing. Diesel vehicles have been encouraged in many European markets because they can produce less carbon dioxide – a major greenhouse gas – than those with petrol engines.

The trade body said diesel was an important part of meeting future CO2 targets and it was important for the Commission to let manufacturers plan and implement necessary changes. The VW scandal, in which saw the German car maker admit rigging emissions tests, has put significant pressure on diesel vehicle manufacturers. Diesel engines emit higher levels of nitrogen oxide and dioxide (NOx) that are harmful to human health. European government officials have set out plans to introduce real-world measurements of NOx emissions rather than rely on laboratory tests. The new testing regime is due to start early next year, with the results coming into effect in 2017.

However, talks between officials in Brussels last week to discuss the plans are reported to have stalled. The ACEA said it would continue “to stress the need for a timeline and testing conditions that take into account the technical and economic realities of today’s markets”. The trade body added: “Without realistic timeframes and conditions, some diesel models could effectively become unaffordable, forcing manufacturers to withdraw them from sale.” Such a move would hit both consumers and jobs in the automotive sector, it said.

Read more …

They’ve denied the bubble for so long now, why not do it a while longer?

Home Flipping Frenzy in Sydney Sparks Warnings on Housing Risks (Bloomberg)

Sydney home prices soared 44% in the three years ended September, enticing speculators who’ve been partly inspired by home renovation shows on how to spruce up and sell homes for quick profits. The frenzy surrounding Sydney’s property boom, reminiscent of the exuberance in U.S. real estate before the 2008 financial crisis, has prompted regulators and Goldman Sachs to warn the market is overheated, while Bank of America Merrill Lynch on Monday said it expects prices to fall. Since September 2013, more than 1,500 houses and 800 apartments have been resold in less than a year in Sydney, for about 20% more on average, according to online property listing firm Domain Group. That compares with about about 530 houses and almost 400 apartments in the previous two years.

People need to be careful because “house prices aren’t going to continue to rise much more quickly than income; debt levels can’t keep rising faster than income,” Reserve Bank of Australia Deputy Governor Philip Lowe said at a conference in Sydney Tuesday. “Ideally, we’ll now go through a period of quite modest house price growth. I think that would de-risk household balance sheets a little and would probably be good for the economy.” Rushing to buy and sell homes is underscoring a build-up of mortgage risks as households take on record debt, lured by home-loan costs at the lowest in five decades. The housing debt to income ratio touched a record high of 132.8% in the three months ended June 30 up from 119.4% three years earlier, according to government data.

Read more …

That is the ultimate danger.

TTIP Deal Would Remove People’s Rights To Access Basic Human Needs (Ind.)

People’s access to basic rights such as water and energy could be at the mercy of multinational corporations, according to a new report into two controversial EU free trade deals. The report claims that the agreements could allow all public services to be locked into commercial deals that would place profit above the rights of individuals to access basic services – regardless of any possible consequences for welfare. According to the report, Public Services Under Attack, such deals would be “effectively irreversible.” They would allow multinational corporations to sue governments that try to regulate the cost of public services if it could be proved companies’ profits would be harmed.

The two trade agreements, the CETA (Comprehensive Economic and Trade Agreement) with Canada and the TTIP (Transatlantic Trade and Investment Partnership) with the US, are currently being negotiated. In their current state, it is claimed, all public services including health, education and energy could be at risk of privatisation. Under current WTO agreements, access to water is regarded as a basic human right. The new trade agreements would effectively undermine this, according to John Hilary, the executive director of War on Want, one of the campaign groups behind the report . He claims that in a worst-case scenario, if individuals were unable to pay their water bill, they would be denied access to it.

“Suddenly, instead of water being considered a human right, it would be treated as a commodity and people could be cut off if they can’t afford it,” Mr Hilary told The Independent. Previously, the UK Government has insisted that public services such as education and the NHS would be protected from such action. In November last year, the UK Government published a document on the deal, Separating Myth from Fact, in which it states: “TTIP will not change the way that the NHS, or other public services, is run. “The European Commission is following our approach that it must always be for the UK to decide for itself whether or not to open up our public services to competition.”

But Mr Hilary believes the public should be sceptical of such assurances. He said: “There is no truth in the government’s claim that public services are safe in TTIP. “Corporate lobbyists have made sure that key services such as health, education, post, rail and water are to be opened up to the private sector, and treaties such as TTIP will lock in that privatisation for ever. “As a result of the lobbying by these special interest groups in the services sector, it’s quite clear that public services are in the frame and any claim to the contrary is bogus.”

Read more …

Children are stil drowning, Angela. That should be your priority, not borders or camps.

Merkel Seeks Turkey’s Aid on Borders to Stem Refugee Flow to EU

German Chancellor Angela Merkel said Turkey needs to help stem the flow of Syrian refugees to Europe, setting the tone for her talks with Turkish leaders this week. “It’s necessary to look not just at the European dimension, but also to talk with Turkey about sensible border controls,” Merkel said Monday in a speech to party members in Stade near Hamburg. “We have to start getting more involved internationally. That’s why I will go to Turkey on Sunday.” With a record 800,000 or more refugees and migrants expected to arrive in Germany this year, Merkel is under pressure to offer solutions to an increasingly skeptical public as her approval ratings decline and she says Germany can’t stop the stream on its own. “We don’t know how many there will be,” she said.

In her speech to members of her Christian Democratic Union, Merkel said for the first time that her government is considering screening at Germany’s borders. This way, “we could possibly decide immediately” which people are economic migrants who wouldn’t qualify to stay in Germany as asylum seekers, Merkel said. While saying that all 28 European Union countries need to help stem the continent’s biggest refugee crisis since World War II, Merkel singled out Turkey as part of the solution. After EU leaders discuss the crisis at a summit in Brussels on Thursday, Merkel plans to travel to Ankara on Oct. 18 for talks with Turkish President Recep Tayyip Erdogan and Prime Minister Ahmet Davutoglu, her first official trip to Turkey since February 2013.

In Turkey, control over the border with EU member Greece “was given up at some point” because Turkey felt overwhelmed and its economy “isn’t doing so well anymore,” leaving Greece and the EU’s border patrol mission to deal with the refugee flow, Merkel said. “Naturally, we need to talk to Turkey about that.”

Read more …

And the ideas won’t fly anyway. Next. Bring in the German navy?!

Athens Rules Out Joint Sea Patrols With Turkey (Kath.)

Diplomatic sources in Athens Monday ruled out the prospect of Greek and Turkish naval forces conducting joint patrols in the eastern Aegean in a bid to curb a dramatic influx of migrants and refugees. Speaking to Kathimerini, the same sources from the Greek Foreign Ministry stated that no official European documents raise the issue of joint sea patrols – which was first reported in the German press ahead of the draft action plan signed last week between the European Union and Turkey on the support of refugees and migration management.

According to the plan, Turkey will “strengthen the interception capacity of the Turkish Coast Guard, notably by upgrading its surveillance equipment, increasing its patrolling activity and search and rescue capacity, and stepping up its cooperation with the Hellenic Coast Guard.” In an interview with Germany’s Bild newspaper published Monday, Chancellor Angela Merkel heralded closer cooperation between Greece, Turkey and EU border agency Frontex. “In the Aegean Sea, between Greece and Turkey, both NATO members, traffickers do whatever they want,” she told the paper. Diplomatic circles in Athens suggest that Ankara is tempted to use the refugee crisis as a tool for prompting additional EU aid, concessions on the issue of EU visas, or the creation of a buffer zone behind the Syrian border.

Read more …

Acidification.

Marine Food Chains At Risk Of Collapse (Guardian)

The food chains of the world’s oceans are at risk of collapse due to the release of greenhouse gases, overfishing and localised pollution, a stark new analysis shows. A study of 632 published experiments of the world’s oceans, from tropical to arctic waters, spanning coral reefs and the open seas, found that climate change is whittling away the diversity and abundance of marine species. The paper, published in the Proceedings of the National Academy of Sciences, found there was “limited scope” for animals to deal with warming waters and acidification, with very few species escaping the negative impact of increasing carbon dioxide dissolution in the oceans. The world’s oceans absorb about a third of all the carbon dioxide emitted by the burning of fossil fuels.

The ocean has warmed by about 1C since pre-industrial times, and the water increased to be 30% more acidic. The acidification of the ocean, where the pH of water drops as it absorbs carbon dioxide, will make it hard for creatures such as coral, oysters and mussels to form the shells and structures that sustain them. Meanwhile, warming waters are changing the behaviour and habitat range of fish. The overarching analysis of these changes, led by the University of Adelaide, found that the amount of plankton will increase with warming water but this abundance of food will not translate to improved results higher up the food chain.

“There is more food for small herbivores, such as fish, sea snails and shrimps, but because the warming has driven up metabolism rates the growth rate of these animals is decreasing,” said associate professor Ivan Nagelkerken of Adelaide University. “As there is less prey available, that means fewer opportunities for carnivores. There’s a cascading effect up the food chain. “Overall, we found there’s a decrease in species diversity and abundance irrespective of what ecosystem we are looking at. These are broad scale impacts, made worse when you combine the effect of warming with acidification. “We are seeing an increase in hypoxia, which decreases the oxygen content in water, and also added stressors such as overfishing and direct pollution. These added pressures are taking away the opportunity for species to adapt to climate change.”

Read more …

Run away.

Antarctic Ice Melts So Fast Whole Continent May Be At Risk By 2100 (Guardian)

Antarctic ice is melting so fast that the stability of the whole continent could be at risk by 2100, scientists have warned. Widespread collapse of Antarctic ice shelves – floating extensions of land ice projecting into the sea – could pave the way for dramatic rises in sea level. The new research predicts a doubling of surface melting of the ice shelves by 2050. By the end of the century, the melting rate could surpass the point associated with ice shelf collapse, it is claimed. If that happened a natural barrier to the flow of ice from glaciers and land-covering ice sheets into the oceans would be removed. Lead scientist, Dr Luke Trusel, Woods Hole Oceanographic Institution in Massachusetts, US, said: “Our results illustrate just how rapidly melting in Antarctica can intensify in a warming climate.”

“This has already occurred in places like the Antarctic Peninsula where we’ve observed warming and abrupt ice shelf collapses in the last few decades. “Our model projections show that similar levels of melt may occur across coastal Antarctica near the end of this century, raising concerns about future ice shelf stability.” The study, published in the journal Nature Geoscience, was based on satellite observations of ice surface melting and climate simulations up to the year 2100. It showed that if greenhouse gas emissions continued at their present rate, the Antarctic ice shelves would be in danger of collapse by the century’s end..

Read more …

Oct 102015
 
 October 10, 2015  Posted by at 9:46 am Finance Tagged with: , , , , , , , , , ,  5 Responses »


DPC Masonic Temple, New Orleans 1910

Deutsche Bank: Tip of the Iceberg for Cutbacks at European Banks? (WSJ)
Banks Take Spotlight As Earnings Season Heats Up (Reuters)
Standard Chartered ‘To Cut 1,000 Senior Jobs’ (BBC)
Margin Debt in Freefall Is Another Reason to Worry About S&P 500 (Bloomberg)
China Is Becoming A Big Red Flag For US Stocks (MarketWatch)
Buried In The Fed Minutes Is Another Downgrade To The US Economy (MarketWatch)
BofA: Here’s The Precise Moment When We Should Have Known QE Went Wrong (BBG)
Greek Debt Has Become Highly Unsustainable: IMF (Reuters)
ECB Should Focus Asset-Backed Purchases on Periphery: Pimco (Bloomberg)
The Hidden Debt Burden of Emerging Markets (Carmen Reinhart)
US Hedge Fund Threatens Peru With Lawsuit Over Debt (BBC)
Brazil: In A Hole And Still Digging (Ogier)
War on Islamic State: A New Cold War Fiction (Nafeez Ahmed)
Gene Patents Probably Dead Worldwide Following Australian Court Decision (ArsT)
EU Gets Ready To Lock Up, Deport Migrants (CNBC)
Greek Islands See Surge In Refugee Arrivals (Kath.)
No Place Left To Die On Greece’s Lesbos For Refugees Lost At Sea (Reuters)

UniCredit, Credit Suisse, Standard Chartered and Deutsche Bank. Next!

Deutsche Bank: Tip of the Iceberg for Cutbacks at European Banks? (WSJ)

Deutsche Bank’s warning that it expects a €6.2 billion third-quarter loss highlights a potentially bumpy financial-reporting season looming for European banks, as a slate of new chief executives confront concerns over profitability. Credit Suisse, Standard Chartered and Deutsche Bank, all under new chief executives, are among banks facing muted growth in their home markets and coping with more stringent regulation and capital requirements. Those issues, coupled with factors including uncertainty over China’s growth, U.S. interest rates and the slide in global commodities prices, have combined to depress profits for European banks. Meanwhile, U.S. rivals, most of which restructured fairly quickly following the global financial crisis, are now in growth mode, winning business away from European rivals, who have been slower to adapt.

European banks need to rethink quickly or risk losing more ground, according to analysts. Restructuring “remains top of the agenda” for Europe’s banks, analysts at Morgan Stanley wrote in a note this week, predicting U.S. banks once again would put in a better revenue performance this year in fixed income and equities and continue beating European rivals next year across investment banking. Deutsche Bank late on Wednesday took a multi-billion-dollar charge against assets in its investment bank and retail- and private-banking operations for the third quarter. It said the charge would materially impact third-quarter results, which it reports on Oct. 29. New CEO John Cryan on that day will announce a new strategy, widely expected to ratchet up the bank’s earlier attempts to cut costs and shed unwanted assets.

Credit Suisse Chief Executive Tidjane Thiam, who joined the bank in July, is expected to outline sharp investment banking cuts, as part of an effort to meet global capital rules and new Swiss bank-specific requirements. The bank is also thought to be readying a substantial capital increase to be unveiled alongside Mr. Thiam’s grand plan. A poll of investors by Goldman Sachs analysts found 91% expected the bank to raise more than 5 billion Swiss francs ($5.16 billion) in fresh capital. On Thursday, in response to an article in the Financial Times that reported that Credit Suisse planned to raise an amount in line with that figure, the bank said: “we are conducting a thorough assessment of Credit Suisse’s strategy, evaluating all options for the group, its businesses and its capital usage and requirements.”

Read more …

US banks are dropping too.

Banks Take Spotlight As Earnings Season Heats Up (Reuters)

The financial sector, recently a weak performer in the stock market, will garner the majority of investor attention next week as a number of big banks post their quarterly results. Goldman Sachs, Bank of America, Wells Fargo, Citigroup and JPMorgan – the five biggest U.S. banks by market cap – are due to report results as the sector has trailed the market in recent weeks and earnings estimates have fallen. Financial companies are expected to show earnings growth of 8.4%, behind only telecoms and consumer discretionary companies in expected growth for the quarter. However, that growth is down from the 14.8% expected at the start of the quarter, and down by half from the 17.8% growth expected at the start of the year.

In the last 30 days, banks have seen their estimates steadily lowered, with Goldman the biggest victim. Its estimates for the quarter are down by 25% in that time period. While the broader market has recovered from losses sustained in the latter half of August, banks have struggled. The Fed’s decision not to raise rates, coupled with economic concerns and worries about trading revenues, have tethered shares of the big banks. The S&P 500 financials index has underperformed the broader market, and has slumped 5.6% this year so far, compared with a 2.2% decline in the S&P 500. In the last month, the S&P 500 has gained 2.2%, but the five biggest financial institutions are all flat or down.

Read more …

That’s 1000 senior staff who were no longer contributing any profits.

Standard Chartered ‘To Cut 1,000 Senior Jobs’ (BBC)

Standard Chartered bank, a London-based lender that makes most of its profit in Asia, could cut up to 1,000 senior jobs, according to an internal memo sent to staff. The move from chief executive Bill Winters is meant to cut costs. The bank has grown very quickly since the financial crisis and some roles are now not needed, sources told the BBC. Standard Chartered said it had disclosed before “that there would be further personnel changes to come”. “We have already acted to reduce management layers, and a result will have up to 25% fewer senior staff,” the bank said in a statement. Mr Winters told staff in the memo that about a quarter of senior managers, of director level or above, would be cut. There are about 4,000 bankers in the grades affected by the decision.

The bank employs about 88,000 people in total. It has grown rapidly, from about 44,000 in 2005. Mr Winters took over from former diplomat Peter Sands in June and said he would simplify Standard Chartered with a “new management team and simpler organisational structure”. The bank has already shed some businesses, in Hong Kong, China and Korea, booking a gain of $219m and improving its capital position. Standard Chartered hired Mark Smith from Asia-focused rival HSBC to join as new chief risk officer. Mr Winters also cut the dividend to help the bank strengthen its capital base – a safety net protecting it from unexpected financial knocks. He has also not ruled out raising more capital if needed.

Read more …

Freefall? That little drop is nothing. Wait till it falls back to, say, 2010 levels. Margin debt levels simply indicate to what extent markets are casino’s.

Margin Debt in Freefall Is Another Reason to Worry About S&P 500 (Bloomberg)

Most people get concerned about margin debt when it’s shooting up. To Doug Ramsey, the problem now is that it’s falling too fast. The CIO of Leuthold Weeden whose pessimistic predictions came true in August’s selloff, says the tally of New York Stock Exchange brokerage loans flashed a bearish sign when it slid more than 6% in July and August. The retreat took margin debt below a seven-month moving average that suggests demand for stocks is dropping at a rate that should give investors pause. For years, bull market skeptics have warned that surging equity credit portended disaster for U.S. shares, pointing to a threefold runup between the market low in March 2009 and the middle of this year. Ramsey, who says that surge was never strong enough to form the basis of a bear case, is now worried about how fast it’s unwinding.

“Margin debt contracting is a sign of loss of investor confidence and it’s confirmation of a lot of other evidence we have that we’ve entered a cyclical bear market,” Ramsey said in a phone interview. “We got a lot of traditional warning signs leading up to the high in terms of market action, and deteriorating breadth and margin debt is important to the supply-demand analysis.” Margin debt, compiled monthly by the NYSE, represents credit extended by brokerages for clients to buy stock. It hews closely to benchmark indexes such as the S&P 500, primarily because equity is used to back the loans and as its value rises, so does the capacity to lend. “There’s a natural progression of the two moving together,” Tim Ghriskey at Solaris Asset Management said. “We look at it as being predictive if it gets too extreme on either side.”

NYSE margin debt surged from $182 billion to $505 billion in the six years ended in June 2015, roughly tracing the trajectory of the S&P 500, which tripled over the period. The biggest gains came in 2013, with credit rising 35% as U.S. stocks climbed 30% for the best returns in 16 years. Since June, it’s been the other way around, with margin debt falling 6.3% to $473 billion at the NYSE’s last update, which covered August. The S&P 500 slid 4.4% at the end of that period as stocks entered a correction. To Ramsey, a decline as precipitous as that is more worrisome than the preceding run-up. “A lot of people intimated when we broke out to a new high in margin debt a couple years ago that it was out of control, but the%age change in margin debt from the low of 2009 was almost identical to the S&P’s,” Ramsey said. “Now that trend has rolled over.”

Read more …

Sudden plunges on over-optimistic models.

China Is Becoming A Big Red Flag For US Stocks (MarketWatch)

China is fast becoming a major source of worry for the stock market again, after commentary from a number of U.S. companies this week warned that demand from the second-largest economy may have dropped sharply over the past month. That doesn’t bode well for the third-quarter earnings reporting season, which was already expected to be the worst quarter for U.S. companies in six years. Worries about a slowdown in China aren’t new. The more than 40% tumble in the Shanghai Composite and the devaluation of the yuan over the summer helped fuel the selloff on Wall Street in late August, when the S&P 500 index entered correction territory for the first time in about three years.

But those worries had been soothed somewhat, after the Chinese market stabilized in September, and following upbeat comments from some U.S. companies about how business in the country had improved. Nike helped spark some of that optimism in late September, after the blue-chip athletic apparel and accessories giant reported a 30% jump in sales in Greater China in its fiscal first quarter, which ended Aug. 31. But dire outlooks on China from Alcoa, Yum Brands and Nu Skin Enterprises this week could wipe away that optimism, especially considering how sudden the companies’ outlooks soured.

Read more …

“Over the last year, productivity has increased by just 0.7%, far below the long-run average of 2.2%. Why it is falling remains a puzzle.”

Buried In The Fed Minutes Is Another Downgrade To The US Economy (MarketWatch)

A goal of a 4% economy? That objective, mentioned frequently in the 2016 presidential race, is getting farther away, according to the latest projections from the staff of the Federal Reserve. Minutes of the Fed’s Sept. 16-17 policy meeting disclose the Fed staff further trimmed its assumptions for the rates of productivity and potential growth over the medium term. The minutes did not specifically quantify the new forecast of the Fed’s in-house economists. The Fed staff’s view was already gloomy. A mistaken leak this summer by the U.S. central bank revealed, going into the Fed’s June policy committee meeting, the U.S. central bank’s staff penciled in potential growth averaging just 1.74% over 2015-2020, according to the document now on the Fed’s website. That’s down from an average growth rate of 3.1% over the past 50 years.

Ordinarily those forecasts would have been kept secret for five years. Fed officials – in other words, the people who get to vote on interest rates – think the economy can growth a little faster than the staff. They pencil in 2.0% for the economy’s long-run growth rate. Potential growth in the long run is a function of two things: population growth and productivity. Productivity is the secret sauce of the economy but it has dropped off sharply since the Great Recession. Over the last year, productivity has increased by just 0.7%, far below the long-run average of 2.2%. Why it is falling remains a puzzle. With trend growth so low, the economy is in a pickle. Even moderate gross domestic product in the range of 2.0-2.5% that the Fed expects can produce inflation. “It’s a bad place to be,” said Robert Brusca, chief economist at FAO Economics.

Read more …

It went wrong when it began.

BofA: Here’s The Precise Moment When We Should Have Known QE Went Wrong (BBG)

“There’s no such thing as a free lunch” is an oft-quoted maxim in economics, and it seems like a maxim that could easily be applied to the Federal Reserve’s bond-buying program known as quantitative easing. In a new note titled “The real cost of QE,” Bank of America’s FX strategist Athanasios Vamvakidis takes a critical look at the U.S. central bank’s particular brand of unconventional monetary policy, and its changing relationship with financial markets. He contends that “excessive reliance on unconventional monetary policy” is not without side effects, many of which are only now being felt in markets.

At some point during Fed QE, the markets started reacting positively to bad news. In our view, this is when things started going wrong. Bad news became good news for asset prices, as markets expected more QE by the Fed. Asset prices were increasingly deviating from fundamentals, as the markets were trading the Fed instead of the economic reality. This was clearly not sustainable.

Vamvakidis argues that the market’s violent reaction to the Fed’s announcement in the spring of 2013 that it planned to “taper” its bond purchases was one sign that QE had already gone wrong.

We should have known something is wrong. The Fed “taper tantrum” could have been the first signal that QE had gone too far. The second warning may have been the across-the-board emerging markets sell-off that started in mid-2014, as QE tapering was coming to an end and the market started pricing Fed tightening, a sell-off that intensified substantially this year.

All of this doesn’t mean Vamvakidis believes QE should have never happened, of course. He does recognize that the Fed policy helped the U.S. avert another Great Depression in the aftermath of the financial crisis, but he doesn’t believe that bond-buying should be the first choice for action whenever something goes south in the economy. He calls the first round of QE “a necessity,” but is more skeptical of the Fed’s subsequent programs known as QE2 and QE3. Moreover, he notes that despite the continued expansion of balance sheets at a number of central banks around the world, monetary policy conditions have tightened and liquidity has fallen, as shown in the below BofAML chart:

Read more …

EU refuses to do anything in next 30 years?!

Greek Debt Has Become Highly Unsustainable: IMF (Reuters)

Greece cannot deal with its public debt through reforms alone and needs a significant extension of grace periods and longer maturities from its European creditors, the head of the IMF’s European department said. The European Commission has forecast in May that Greek debt would reach more than 180% of its gross domestic product this year and euro zone governments, the main creditors of Greece, have promised to start debt relief talks later this year, once Athens implements agreed reforms. “We think that Greek debt… has become highly unsustainable,” Poul Thomsen told a news conference in Lima, on the sidelines of a meeting of the IMF. “We think that Greece cannot deal with its debt without debt relief. Greece cannot deal with debt just through reforms and adjustment,” he said.

Thomsen said that the discussion on how to provide debt relief to Greece has shifted from a nominal haircut on the stock of its debt to capping gross financing needs. The chairman of euro zone finance ministers told Reuters on Thursday that there was broad support for capping Greece’s financing needs at 15% of GDP annually. “What the exact targets should be, we will have to discuss, but there is no doubt in our mind that if Europe wants to go the route of providing relief by lengthening the grace period and lengthening the repayment period, we are looking at a significant lengthening of the grace period and significant lengthening of the repayment period,” Thomsen said.

Read more …

Too late now.

ECB Should Focus Asset-Backed Purchases on Periphery: Pimco (Bloomberg)

The ECB should refocus its asset-backed securities purchase program on the countries most in need of its help, according to Pacific Investment Management Co. The ECB is too cautious in its acquisitions and should concentrate on buying bonds from nations with higher debt and deficits such as Spain and Portugal, Pimco money managers Felix Blomenkamp and Rachit Jain wrote in a note to investors. It has mainly bought notes secured by high-quality collateral, including prime mortgages and auto loans, from safer countries such as Germany, France and the Netherlands, they said.

Pimco is expanding on a similar call it made earlier this week for the ECB to concentrate on buying peripheral government bonds. The ECB is acquiring debt including asset-backed securities, which bundle individual loans into bonds that can transfer risk to investors from banks, to encourage lenders to offer more credit and stimulate Europe’s economy. “The ECB’s low risk appetite in ABS has guided its purchases primarily to select sectors in core countries, which in our view never really needed help to begin with,” they said. “ABSPP should be refocused to more specific sectors, especially in peripheral economies, where loan margins remain high and credit availability is scarce.”

Read more …

What to watch for going forward in EM: Derivatives and credit events.

The Hidden Debt Burden of Emerging Markets (Carmen Reinhart)

[..] it was not until after the eruption of the 1994-1995 peso crisis that the world learned that Mexico’s private banks had taken on a significant amount of currency risk through off-balance-sheet borrowing (derivatives). Likewise, before the 1997 Asian financial crisis, the IMF and financial markets were unaware that Thailand’s central-bank reserves had been nearly depleted (the $33 billion total that was reported did not account for commitments in forward contracts, which left net reserves of only about $1 billion). And, until Greece’s crisis in 2010, the country’s fiscal deficits and debt burden were thought to be much smaller than they were, thanks to the use of financial derivatives and creative accounting by the Greek government.

So the great question today is where emerging-economy debts are hiding. And, unfortunately, there are severe obstacles to exposing them – beginning with the opaqueness of China’s financial transactions with other emerging economies over the past decade. During its domestic infrastructure boom, China financed major projects – often connected to mining, energy, and infrastructure – in other emerging economies. Given that the lending was denominated primarily in US dollars, it is subject to currency risk, adding another dimension of vulnerability to emerging-economy balance sheets. But the extent of that lending is largely unknown, because much of it came from development banks in China that are not included in the data collected by the Bank for International Settlements (the primary global source for such information).

And, because the loans were rarely issued as securities in international capital markets, it is not included in, say, World Bank databases, either. Even where data exist, the figures must be interpreted with care. For example, data collected on a project-by-project basis by the Global Economic Governance Initiative and the Inter-American Dialog could provide some insight into Chinese lending to several Latin American economies. For example, it seems that, from 2009 to 2014, total Chinese lending to Venezuela amounted to 18% of the country’s annual GDP, and Ecuador received Chinese loans exceeding 10% of its GDP.

Read more …

The blessings of modern-day trade deals. The debt is 30 years old…

US Hedge Fund Threatens Peru With Lawsuit Over Debt (BBC)

A US hedge fund has threatened to sue Peru over bonds issued by the country’s former military regime. Hedge fund Gramercy purchased the defaulted debt at a discount in 2008 after other bondholders failed to reach a deal. Peru’s finance minister said the government would oppose any legal action outside its borders. Purchasing defaulted bonds on the cheap to make a profit in a settlement is a common hedge fund tactic. The country defaulted on the $5.1bn in bonds in the 1980s. Gramercy has threatened to bring a claim against Peru under a tribunal system established in a US-Peruvian trade deal. This type of action has been called “predatory” by groups in favour of sovereign debt relief plans. Argentina has been engaged in a prolonged court battle with hedge funds over bonds it defaulted on in 2005. This week Peru has played host to meetings of the World Bank and IMF. Among the topics discussed was how to help country’s restructure debt after a default to avoid drawn-out court battles.

Read more …

Brazil’s hole will get much deeper. How on earth can they stage a World Cup in 2018?

Brazil: In A Hole And Still Digging (Ogier)

Brazil has long been hailed as the country of the future. But the decision last month by Standard & Poor’s to strip Latin America’s largest economy of its coveted investment grade status provided confirmation — if any were needed — of its fall from grace. “Brazil is going through its worst period,” says Nicola Tingas, chief economist at Acrefi, a credit association for non-banking institutions. “There is structural disorder, which goes beyond the mere economic cycle. It destroys capital. Confidence has been destroyed. The economy has been weakened.” For a long time, the resilience of the Brazilian economy had confused the most pessimistic economists and offered bright opportunities for high yield investors. Dilma Rousseff herself challenged such “pessimists” during the latest presidential campaign.

But a year after she won a second presidential term, Brazil is in a terrible mess. Debt financing costs have soared and Brazil’s CDS spreads became greater than Russia’s that month when they neared 400 points. “The fiscal deterioration is now faster than our baseline scenario and the political risks remain challenging,” said Shelly Shetty, head of Latin American sovereigns at Fitch Ratings, during Fitch’s global sovereigns conference in New York in September. Joaquim Levy, the embattled finance minister, has publicly admitted the scale of the problem. “Obviously, the house is not in order,” he said in Congress after the government presented a budget blueprint that included a R$30bn ($7.6bn) deficit in early September. This marked the beginning of the end of the fiscal credibility of the government, according to most observers.

“People were aware of the risk of a downgrade,” says Monica de Bolle, a researcher at the Peterson Institute in Washington “Under these circumstances, nobody could have sent a budget that includes a deficit just under the nose of the credit rating agencies. And even after the downgrade, the [Brazilian] government has kept adopting a form of ostrich policy.” Recession has now settled in. The official forecast is one of a severe GDP contraction of 2.44%. Figures were revised last month from 1.5%. Marcelo Carvalho, the BNP Paribas Latin America chief economist, has forecast a further 2% decline next year. “A recession that lasts for two consecutive years is a very rare occurrence in Brazil. We have data that span a hundred years and this only happened once before in the early 1930s, just after the Great Depression. So we now have a scenario that is similar, despite the fact the world economy is not as ugly as it was after the 1929 crisis,” he says.

Read more …

The flipside of the western narrative.

War on Islamic State: A New Cold War Fiction (Nafeez Ahmed)

Russia is bombing “terrorists” in Syria, and the US is understandably peeved. A day after the bombing began, Obama’s Defence Secretary Ashton Carter complained that most Russian strikes “were in areas where there were probably not ISIL (IS) forces”. Anonymously, US officials accused Russia of deliberately targeting CIA-sponsored “moderate” rebels to shore-up the regime of Bashir al-Assad. Only two of Russia’s 57 airstrikes have hit ISIS, opined Turkish Prime Minister Ahmet Davutoglu in similar fashion. The rest have hit “the moderate opposition, the only forces fighting ISIS in Syria,” he said. Such claims have been dutifully parroted across the Western press with little scrutiny, bar the odd US media watchdog. But who are these moderate rebels, really?

The first Russian airstrikes hit the rebel-held town of Talbisah north of Homs City, home to al-Qaeda’s official Syrian arm, Jabhat al-Nusra, and the pro-al-Qaeda Ahrar al-Sham, among other local rebel groups. Both al-Nusra and the Islamic State have claimed responsibility for vehicle-borne IEDs (VBIEDs) in Homs City, which is 12 kilometers south of Talbisah. The Institute for the Study of War (ISW) reports that as part of “US and Turkish efforts to establish an ISIS ‘free zone’ in the northern Aleppo countryside,” al-Nusra “withdrew from the border and reportedly reinforced positions in this rebel-held pocket north of Homs city”.

In other words, the US and Turkey are actively sponsoring “moderate” Syrian rebels in the form of al-Qaeda, which Washington DC-based risk analysis firm Valen Globals forecasts will be “a bigger threat to global security” than IS in coming years. Last October, Vice President Joe Biden conceded that there is “no moderate middle” among the Syrian opposition. Turkey and the Gulf powers armed and funded “anyone who would fight against Assad,” including “al-Nusra,” “al-Qaeda in Iraq (AQI),” and the “extremist elements of jihadis who were coming from other parts of the world”. This external funding enabled Islamist factions to systematically displace secular Free Syria Army (FSA) leaders, culminating in the rise of IS. In other words, the CIA-backed rebels targeted by Russia are not moderates.

They represent the same melting pot of al-Qaeda affiliated networks that spawned the Islamic State in the first place. And they rose to power in Syria not in spite, but because of the US rubber-stamping the jihadist funnel through the so-called “vetting” process. This summer, for instance, al-Qaeda led rebels received accelerated weapons shipments in a US-backed operation to retake Idlib province from Assad. Notice here that the US priority was to rollback Assad’s forces from Idlib – not fight IS. Yet the brave Western press, so outspoken on Russian duplicity, somehow overlooked how this anti-ISIS coalition operation failed to target a single IS fighter.

Read more …

At least and at last one bit of good news.

Gene Patents Probably Dead Worldwide Following Australian Court Decision (ArsT)

Australia’s highest court has ruled unanimously that a version of a gene that is linked to an increased risk for breast cancer cannot be patented. The case was brought by 69-year-old pensioner from Queensland, Yvonne D’Arcy, who had taken the US company Myriad Genetics to court over its patent for mutations in the BRCA1 gene that increase the probability of breast and ovarian cancer developing, as The Sydney Morning Herald reports. Although she lost twice in the lower courts, the High Court of Australia allowed her appeal, ruling that a gene was not a “patentable invention.” The court based its reasoning on the fact that, although an isolated gene such as BRCA1 was “a product of human action, it was the existence of the information stored in the relevant sequences that was an essential element of the invention as claimed.”

Since the information stored in the DNA as a sequence of nucleotides was a product of nature, it did not require human action to bring it into existence, and therefore could not be patented. Although that seems a sensible ruling, the pharmaceutical and biotechnology industry has been fighting against this self-evident logic for years. The view that genes could be patented suffered a major defeat in 2013, when the US Supreme Court struck down Myriad Genetics’ patents on the genes BRCA1 and the similar BRCA2. The industry was hoping that a win in Australia could keep alive the idea that genes could be owned by a company in the form of a patent monopoly. The victory by D’Arcy now makes it highly likely that other judges around the world will take the view that genes cannot be patented.

This is a result that will have major practical consequences, and is likely to save thousands of lives. In the past, holders of gene patents were able to stop other companies from offering tests based on them, for example to detect the presence of the BRCA1 and BRCA2 genes that were linked with a greater risk of breast and ovarian cancers. This patent monopoly allowed companies like Myriad to charge $3,000 (£2,000) or more for their own tests, potentially placing them out of the reach of those unable to afford this cost, some of whom might then go on to develop cancer because they were not aware of their higher susceptibility, and thus unable to take action to minimise their risks.

Read more …

The shameless EUs reponse to tragedy: lock ’em up.

EU Gets Ready To Lock Up, Deport Migrants (CNBC)

European authorities have relocated its first group of migrants that have flocked to Europe as part of a bloc-wide plan to share the weight of the growing refugee crisis. However, those who fail to gain asylum may not be so lucky. A group of Eritrean refugees prepare to board a plane to travel to Sweden as part of a new programme of the European Union to relocate refugees at the Ciampino airport of Rome. Italy Friday sent 19 Eritrean men and women to Sweden as part of the first batch of migrants taking part in the relocation program. This, albeit small, start is part of the commitment made by EU member countries last month to relocate 160,000 asylum seekers throughout Europe over the next two years.

The agreement was reached in order to help alleviate pressure on countries like Italy and Greece, where over 470,000 migrants have landed since January alone, according to EU border agency Frontex. At the same time, however, Italy was deporting 28 Tunisians and 35 Egyptians back home. A press release by justice and interior ministers from across the EU Thursday revealed plans to ramp up deportations and prepare dedicated detention centers that would lock up migrants as a “last resort.” “When we talk about refugees, we need to also talk of those who are not refugees,” Dimitris Avramopoulos, European Commissioner for Migration, Home Affairs and Citizenship, said in a statement. “We need to be better and more effective, not just at helping people and offering refuge, but also at returning those who have no right to stay.”

“All of these actions have to go together,” he said. An expanded return program would see more migrants who fail to gain asylum status deported to their home countries. Ministers believe the move will deter migrants who lack legitimate asylum claims from making the journey to Europe, the statement explains. The €3.1 billion Asylum, Migration and Integration Fund will help finance the return program, along with the €800 million set aside for deportations by member states for the six years between 2014 and 2020. But EU countries should also be prepared to lock up migrants temporarily until they can safely return home , the statement adds.. “All measures must be taken to ensure irregular migrants’ effective return, including use of detention as a legitimate measure of last resort,” the press release stated.

Read more …

“All of a sudden, with the kind of weather that you have in the Balkans, this can be a tragedy at any moment..” Not can be, is, and has been for a long time.

Greek Islands See Surge In Refugee Arrivals (Kath.)

The number of refugees arriving on Greek islands has risen from 4,500 a day in late September to 7,000 over the past week, the International Organization for Migration (IOM) said Friday, as a toddler was found dead off the coast of Lesvos in the eastern Aegean. Speaking ahead of a visit to Lesvos Saturday and a meeting with Prime Minister Alexis Tsirpas in Athens later in the week, UN High Commissioner for Refugees Antonio Guterres said asylum seekers appeared to be making a move before weather conditions deteriorate. “All of a sudden, with the kind of weather that you have in the Balkans, this can be a tragedy at any moment,” Guterres said. The IOM data came as a baby died after the motor of the rubber dinghy carrying him and another 56 people broke down off Levsos, the coast guard said Friday.

The 1-year-old boy, whose nationality was not reported, was found unconscious and taken to a hospital, where he was pronounced dead. Also Friday, sources said that a police officer who was photographed kicking a refugee in a temporary reception center on Lesvos had been identified. He is expected to be summoned to explain himself following an urgent investigation into the incident. Meanwhile, the UN refugee agency (UNHCR) welcomed the departure Friday of a first group of asylum seekers from Italy to Sweden under the EU’s relocation scheme and expressed hope that the Greek program will start soon. “We think it will be a slow start but will accelerate once the process functions,” UNHCR spokesperson Melissa Fleming said.

Read more …

Running out of nameless graves.

No Place Left To Die On Greece’s Lesbos For Refugees Lost At Sea (Reuters)

He stood on the mud, crows cawing overhead, pointing at unmarked graves. “Here’s a mother with her baby. And here’s another young woman. Over there, that’s a 60-year-old man.” Buried beneath low mounds of earth, facing Mecca, lay Afghan, Iraqi and Syrian refugees who drowned this summer in the Aegean Sea trying to reach Europe in flimsy inflatable boats. Scanning the area, Christos Mavrakidis, a somber, hardened man who looks after one of the main cemeteries on Greece’s Lesbos island, listed the years of other deaths: “2013, 2014, 2015.” Now there is no room left in the narrow plot of land in the pauper’s section of St. Panteleimon cemetery, close to where the colonnaded tombs of wealthy Greeks are built in the classical Greek style, and flowers adorn lavish marble graves.

“Something must be done,” he said. “They are a lot. They are too many.” No one can say where the next bodies will be buried. Nearly half a million people, mostly Syrians, Afghans and Iraqis fleeing war and persecution, have made the dangerous journey to Europe this year. Almost 3,000 have died, the U.N. refugee agency estimates. Just 4.4 km off the Turkish coast, Lesbos, Greece’s third-biggest island and popular with tourists, is one of the preferred entry points for migrants into the EU. Arrivals surged in late summer to sometimes thousands a day as people rushed to beat autumn storms that make the Aegean Sea even more treacherous. The number of burials at St. Panteleimon has also risen. More than three dozen migrants are buried in a tiny, dusty plot on a hill overlooking the island. Four were buried there last week alone.

Some of the makeshift, earthen graves bear a small marble plaque with a name in paint or marker: “Saad 4-9-2015.” Others state simply: “Unknown 25-8-2015”; “Unknown 28-8-2015”; “No 14 5-1-2013”. The most recent graves lack any marking. Mavrakidis placed his hand over his mouth and nose, the air filled with what he called “the stench of death” rising from the open grave of a young Iraqi man whose body was exhumed that morning after his family managed to trace him through DNA. Many more dead have never been found. Locals say fishermen sometimes dump bodies back into the sea, like fish they are not permitted to catch, to avoid having to hand them over to the authorities and face questioning and bureaucracy.

Read more …

Oct 112014
 
 October 11, 2014  Posted by at 11:14 am Finance Tagged with: , , , , , , , ,  5 Responses »


DPC Sinking last tubular section, Michigan Central R.R. tunnel, Detroit River 1910

More S&P 500 Pain Seen as 10% Losses Spread (Bloomberg)
Volatility Keeps Rising; VIX Hits New 52-Week High (Barron’s)
US Stocks Close Out Worst Week Since May 2012 (AP)
Wall Street Goes Short Bonds at Bad Time as Debt Rallies (Bloomberg)
Dam Breaks In Europe As Deflation Fears Wash Over ECB Rhetoric (AEP)
Dennis Gartman Says The Euro ‘Is Doomed To Failure’ (CNBC)
Why Oil Is Plunging: The “Secret Deal” Between The US And Saudi Arabia (ZH)
Here’s Why Shale Oil Stocks Are Tanking (CNBC)
ECB Weighing First Step to Buying Yuan for Foreign Reserves (Bloomberg)
Deutsche Bank Latest ‘Untouchable’ Target for Munich Prosecutor (Bloomberg)
S&P: Negative Outlook For France’s Risky Reform (CNBC)
S&P Downgrades Finland To AA+ from AAA (CNBC)
Six Years After Lehman, US And UK Play Financial Crisis War Game (Guardian)
30-Year Mortgages Back Below 4%, But For How Long? (MarketWatch)
Ebola Screening at JFK Focusing on a Few Among Masses (Bloomberg)
China Pollution Levels Hit 20 Times Safe Limit (Guardian)

Some still see a very long bull market dead.

More S&P 500 Pain Seen as 10% Losses Spread (Bloomberg)

For most American stocks, the correction has arrived. While gauges such as the Standard & Poor’s 500 cling to gains for the year, declines that exceed the 10% are spreading in the broader market. In the Russell 3000 Index (RAY), for example, 79% of companies are down that much from their highs, according to data compiled by Bloomberg. That’s a bad sign to Doug Ramsey, the chief investment officer of Leuthold Group who correctly predicted in July 2013 that the U.S. bull market had months more to go. He said that when losses multiply in stocks away from benchmark indexes, it usually means the bigger companies are next. “We’re not expecting a bear market, but we are expecting a significant additional correction,” Ramsey, who helps oversee $1.7 billion at Minneapolis-based Leuthold, said by phone. “We’re seeing very classic late-cycle action where the Dow and S&P 500 are painting a very false picture of what’s going on underneath.”

Concern the rate of global growth is slowing and the Federal Reserve is preparing to raise interest rates has pushed the S&P 500 down 5.2% from its September record. The 1,700-stock Value Line Arithmetic index, which strips out weightings related to market value to show how the average U.S. stock has fared, is down 10% since July. An average of 7.9 billion shares a day changed hands on U.S. exchanges this week, the most since November 2011, as the Dow Jones Industrial Average erased its 2014 gain. The Chicago Board Options Exchange Volatility Index jumped 46% to 21.24, the highest since February. Three weeks of declines have broken the almost unprecedented calm that had enveloped markets for most of 2014. Eight trading days into October, the S&P 500 has posted six single-day moves exceeding 1%. The market went without any swings of that size for 62 days in May, June and July, the longest stretch since 1995.

Read more …

Markets need volatility simply to make money.

Volatility Keeps Rising; VIX Hits New 52-Week High (Barron’s)

Fear is rising. The CBOE Volatility Index (VIX) continued its upward climb today, rising 9% to 20.45 after earlier rising above 22 on the heels of eye-popping gains yesterday. UBS Strategist Julian Emanuel argues that volatility could keep rising. In a note published today, he wrote:

When considering the numerous geopolitical hot spots, public health concerns, the end of the Fed’s QE due on 10/29 and the unknown of elections in Brazil and Ukraine (10/26) and the US Midterm election on 11/4, we expect volatility to remain elevated, gravitating toward the long term mean of 20, with the potential to spike higher should 20142 s growth scare more closely resemble 20112 s (S&P 500 decline of 17.9%) rather than 20132 s (S&P 500 decline of 5.8%). Putting it into context, a VIX of 20 implies an average daily move in the S&P 500 of around 24 points and in the Dow Jones Industrial Average, 210 points. Expect more volatility!


The VIX, known as Wall Street’s fear gauge, has been rising since mid-June, when it fell below the 11 mark, the lowest levels since 2007. The index is inversely correlated with the S&P 500 and many view it as an indicator of market peaks. Today’s intraday high of 22.06 is also a 52-week high for the index. The bulls and bears are battling valiantly. Yesterday, the grizzlies won, with the Dow suffering a more than 300-point drop and continuing to fall today.

Read more …

More to come.

US Stocks Close Out Worst Week Since May 2012 (AP)

U.S. stocks are closing out a turbulent week with another loss, giving the market its worst week since May 2012. Technology shares were especially hard hit. Semiconductor makers slumped after Microchip Technology cut its sales forecast for the quarter and warned investors to expect bad news from others in the sector. The Dow Jones industrial average lost 115 points, or 0.7%, to 16,544 Friday. The Standard and Poor’s 500 fell 22 points, or 1.2%, to 1,906. The technology-heavy Nasdaq fell 102 points, or 2.3%, to 4,276. The stock market has been swinging sharply this week. The Dow had its biggest decline of the year Thursday, a day after its biggest gain. Bond prices rose. The yield on the 10-year Treasury note fell to 2.29%.

Read more …

That sounds terrible unwise.

Wall Street Goes Short Bonds at Bad Time as Debt Rallies (Bloomberg)

It’s been a painful week for Wall Street’s biggest bond brokers. Primary dealers had the biggest short position on benchmark government notes at the beginning of the month since last year’s taper tantrum. It was the wrong bet: The debt has gained 1.5% in October as 10-year Treasury yields plunged to the lowest since June 2013. The surprise rally has even the most experienced bond traders struggling to figure out how to maneuver in this market. On one hand, the Federal Reserve is slowing its unprecedented stimulus, suggesting that yields are poised to rise. On the other, central banks elsewhere across the globe are accelerating their easy-money policies to suppress borrowing costs and avoid deflation.

“Over the last year, what’s sort of been the market’s focus is everyone is bearish,” preparing for rates to rise, said David Ader, head of interest-rate strategy at CRT Capital Group LLC. Given banks’ unwillingness to take on risk in the face of new regulations, even a modest short position on a historical basis shows a meaningful bet, he said. The 22 primary dealers that trade with the U.S. central bank had a net $20.7 billion wager against notes maturing in the seven-to-eleven year range during the week ended Oct. 1, Fed data show. That’s the biggest short position on the notes since June 2013. It makes sense that Wall Street would bet against benchmark bonds given economists predict that 10-year Treasury yields will rise to 2.71% by year-end from 2.3% now, according to a Bloomberg survey. Of course, instead of rising this year, yields have fallen from 3% on Dec. 31.

Read more …

The Keynes camp knows the solution, as always. Always the same solution too.

Dam Breaks In Europe As Deflation Fears Wash Over ECB Rhetoric (AEP)

A key gauge of deflation risk in Europe is flashing red, dropping to record lows on fears of fresh recession and lack of decisive action by the European Central Bank. The sudden lurch downwards came as Bank of America warned that France’s debt ratio could rocket to 120pc of GDP within five years, unless the EU authorities take radical steps to reflate the region’s economy. Italy’s debt could threaten 150pc even earlier. The 5-year/5-year forward swap rate monitored closely by traders plummeted beneath 1.77pc on Friday morning as a global growth scare drove European stock markets to a 12-month low. “This rate is the most important market signal on the planet right now. Everybody is watching the chart, and it has just gone off a cliff,” said Andrew Roberts, credit chief at RBS. Bond markets echoed the refrain, with yields on 10-year German Bunds falling to an all-time low of 0.88pc on flight to safety, though the bond rally can also be seen as a bet by traders that the ECB will soon be forced to launch full-blown quantitative easing.

Mario Draghi, the ECB’s president, has adopted the 5Y/5Y rate as the bank’s policy lodestar, used to distill expectations of future inflation. Any fall below 2pc is deemed a risk that expectations are becoming “unhinged” and could lead to a Japanese-style deflation trap. Mr Roberts said the ECB’s plan for asset purchases – or “QE-lite” – does not yet add up to a coherent strategy. “We don’t think they can boost their balance sheet by more than €165bn over the next two years by buying asset-backed securities (ABS) and covered bonds together, given the haircut effects. The sums are trivial,” he said. RBS estimates that the inflation rate has already dropped to below 0.1pc in the eurozone if one-off tax rises and fees are stripped out, and this measure may turn negative in October. “Deflation is already knocking on the door. We think it could happen as soon as next month given the latest fall in food prices,” said Mr Roberts. “We are reaching the end game in Europe. If they don’t launch real QE and start reflation by the end of the year or soon after, the consequences are too awful to contemplate,” he said.

Read more …

Gartman’s right. Question is how much damage it can still do before it’s over.

Dennis Gartman Says The Euro ‘Is Doomed To Failure’ (CNBC)

Conflicting economic priorities in Europe likely will spell the end for the region’s common currency, widely followed investor Dennis Gartman said. The author of The Gartman Letter attributes much of the global market tumult this week to weakness in the European Union, and specifically remarks Thursday from European Central Bank President Mario Draghi. Speaking in Washington, Draghi, who famously promised two years ago to do “whatever it takes” to keep the EU together, emphasized that central banks can’t by themselves save the world and need cooperation from fiscal policy. It’s hardly the first time that message has been sent—former Federal Reserve Chairman Ben Bernanke often pleaded with Washington for fiscal policy coordination—but Gartman, writing in his daily missive, said global markets needed to hear more:

As the world awaited a hoped-for clear and precise statement that the ECB was prepared to actually take action on monetary policy and become expansionary, it instead heard a lecture explaining that he and the others on the ECB’s monetary policy committee had done all that they could do to try to strengthen the economy there and that the real battle had to be waged by the political authorities to reform the sclerotic nature of the economies there.

The result, he said, is a bifurcated Europe. On one side there are the “GAFs,” or Germany, Austria and Finland, who oppose U.S.-style quantitative easing, or asset purchases aimed at goosing financial markets. On the other side are the “FIGs,” or France, Italy and Greece, whose economies are struggling and need liquidity measures. So far, he said, the GAFs have won, and this is what is roiling markets that have come to depend on central bank largess since the financial crisis.

The (euro), we fear, is doomed to failure at this point. The political anger that has been evidenced in the battles over (European Commission president-elect) Mr. (Jean-Claude) Juncker’s proposed Cabinet … shall erupt in full flower in the days ahead. The FIG countries cannot abide further austerity; austerity in the face of 20+% unemployment is economic nonsense. On the other hand the GAFs, with sub 6% unemployment, really don’t need an expansionary monetary policy, can abide fiscal conservatism and will fight for both.

Read more …

This is what I’ve mentioned a few times already: using the price of oil to get at Russia. However, there’s much more to it than just changing Putin’s position on Syria, as the article claims. The US wants to break Putin, period, and gain control over Russian resources. Still, messing with Syria is messing with Russia’s only Middle East link, which is just too dangerous for Putin, and therefore a very risky approach. The Saudis may be overestimating their own savvy. Or they may just be getting very desperate.

Why Oil Is Plunging: The “Secret Deal” Between The US And Saudi Arabia (ZH)

Two weeks ago, we revealed one part of the “Secret Deal” between the US and Saudi Arabia: namely what the US ‘brought to the table’ as part of its grand alliance strategy in the middle east, which proudly revealed Saudi Arabia to be “aligned” with the US against ISIS, when in reality John Kerry was merely doing Saudi Arabia’s will when the WSJ reported that “the process gave the Saudis leverage to extract a fresh U.S. commitment to beef up training for rebels fighting Mr. Assad, whose demise the Saudis still see as a top priority.”

What was not clear is what was the other part: what did the Saudis bring to the table, or said otherwise, how exactly it was that Saudi Arabia would compensate the US for bombing the Assad infrastructure until the hated Syrian leader was toppled, creating a power vacuum in his wake that would allow Syria, Qatar, Jordan and/or Turkey to divide the spoils of war as they saw fit. A glimpse of the answer was provided earlier in the article “The Oil Weapon: A New Way To Wage War“, because at the end of the day it is always about oil, and leverage. The full answer comes courtesy of Anadolu Agency, which explains not only the big picture involving Saudi Arabia and its biggest asset, oil, but also the latest fracturing of OPEC at the behest of Saudi Arabia…

… which however is merely using “the oil weapon” to target the old slash new Cold War foe #1: Vladimir Putin. To wit:

Saudi Arabia to pressure Russia, Iran with price of oil

Saudi Arabia will force the price of oil down, in an effort to put political pressure on Iran and Russia, according to the President of Saudi Arabia Oil Policies and Strategic Expectations Center. Saudi Arabia plans to sell oil cheap for political reasons, one analyst says.  To pressure Iran to limit its nuclear program, and to change Russia’s position on Syria, Riyadh will sell oil below the average spot price at $50 to $60 per barrel in the Asian markets and North America, says Rashid Abanmy, President of the Riyadh-based Saudi Arabia Oil Policies and Strategic Expectations Center. The marked decrease in the price of oil in the last three months, to $92 from $115 per barrel, was caused by Saudi Arabia, according to Abanmy. 

With oil demand declining, the ostensible reason for the price drop is to attract new clients, Abanmy said, but the real reason is political. Saudi Arabia wants to get Iran to limit its nuclear energy expansion, and to make Russia change its position of support for the Assad Regime in Syria. Both countries depend heavily on petroleum exports for revenue, and a lower oil price means less money coming in, Abanmy pointed out. The Gulf states will be less affected by the price drop, he added. The Organization of the Petroleum Exporting Countries, which is the technical arbiter of the price of oil for Saudi Arabia and the 11 other countries that make up the group, won’t be able to affect Saudi Arabia’s decision, Abanmy maintained. The organization’s decisions are only recommendations and are not binding for the member oil producing countries, he explained.

Today’s Brent closing price: $90. Russia’s oil price budget for the period 2015-2017? $100. Which means much more “forced Brent liquidation” is in the cards in the coming weeks as America’s suddenly once again very strategic ally, Saudi Arabia, does everything in its power to break Putin.

Read more …

Because they’re worthless?

Here’s Why Shale Oil Stocks Are Tanking (CNBC)

Why are shale plays getting hit so hard? The short answer is, because oil is dropping. West Texas Intermediate has gone from $105 to $85 in three months. But a large part of the problem has to do with the way shale drilling is financed. Let’s say you own a shale company and you want to finance drilling a well in, say, the Bakken. You need $10 million (I am just using $10 million as an example). You have a demonstrated reserve value from the well of, say, $20 million. Here’s how you might finance the $10 million deal. First, get a line of credit from a bank based on the value of the reserves. In turn, the lender becomes a secured creditor. Let’s say that based on a value of $20 million, a secured lender is willing to put up $5 million. You can fund another $2 million from your own cash flow. Now you have $7 million. For the remaining $3 million, you go to the high-yield debt market, which of course is an unsecured creditor. Here’s what the deal looks like:

Secured creditor: $5 million
Cash flow: $2 million
Unsecured creditor: $3 million (high yield)
Total: $10 million

This is simplified, but you get the point. Now, let’s look at what happens when oil starts to drop fast, which is exactly our scenario. That secured creditor with the line of credit? He’s getting nervous, because now instead of reserves worth $20 million for your project, those reserves are now worth only, say, $16 million. That’s a problem. The line of credit you will be able to get will drop because as the price of oil drops banks don’t want to lend as much So, instead of $5 million, your secured creditor will only lend $4 million, and at a higher rate. Now you need $6 million more. Another problem: because the price of oil is down, you can’t contribute as much from your cash flow, so instead of $2 million that you contribute, you can only contribute $1 million. That’s $5 million total. You still need another $5 million, and now you have to go to the high-yield market. Except the high-yield market is aware of your problems, and they want a higher interest rate too. So here’s what this new deal looks like:

Secured creditor: $4 million
Cash flow: $1 million
Unsecured creditor: $5 million
Total: $10 million

This is a problem, because you are: 1) making less money from selling oil, and 2) shelling out a lot more money in interest to your creditors. As oil drops, you now run an increased risk of cash flow problems, and there is default risk in the debt. So you are making less money, and your one cheap source of financing (the line of credit) is shrinking, forcing you to go to high yield. You are in a debt spiral. Get it? So, at what point does all this start to get problematic? That’s not easy to answer, because every company is different. There are different yields from different wells, and some have more gas than oil. But there’s no doubt that things get a bit difficult for some producers when oil is in the low $80’s, which is where it is heading now. And rather than differentiate between companies…which is what analysts are paid to do…there is a lot of indiscriminate selling. Oil vs. gas, doesn’t matter. Sell and ask questions later.

Read more …

Could be a big booost for the yuan. Ironically, that’s the last thing China needs.

ECB Weighing First Step to Buying Yuan for Foreign Reserves (Bloomberg)

The European Central Bank will discuss next week whether to begin laying the groundwork to add the Chinese yuan to its foreign-currency reserves, according to two people with knowledge of the matter. Governing Council members gathering in Frankfurt for their Oct. 15 mid-month meeting will consider the move, said the people, who asked not to be named because the discussions aren’t public. Should officials eventually decide to buy the currency, initial purchases would be small and might start in a year at the earliest, one of them said Such a measure by the ECB would mark a major step in the internationalization of China’s currency, also known as the renminbi. While China is the world’s second-largest national economy, the yuan isn’t ranked among the most-held foreign reserve assets, according to data from the International Monetary Fund. The U.S. dollar leads at 61% of holdings. The agenda of the Governing Council is confidential, an ECB spokesman said, declining to comment further on the matter.

Speaking in Washington yesterday, former Bundesbank President Axel Weber predicted a greater international role for the yuan. “The emergence of the renminbi will be a big factor,” he said. “You will have an appreciation of the renminbi.” The ECB’s push comes against a backdrop of global central bank diplomacy to ease the way for China’s currency, after a series of swap agreements on emergency liquidity. Officials will review the IMF’s basket of so-called Special Drawing Rights, which doesn’t currently include the yuan, by 2015, according to the fund’s web site. China hopes its currency can join, Li Bo, head of the People’s Bank of China’s second monetary policy department, said in Hong Kong in March. The basket currently includes the dollar, euro, pound and yen.

Read more …

If the Americans won’t do it, German prosecutors are welcome to take over where they can.

Deutsche Bank Latest ‘Untouchable’ Target for Munich Prosecutor (Bloomberg)

Manfred Noetzel has a message for Deutsche Bank: Don’t mess with Bavarian justice. A day after his Munich Prosecutors Office sealed a $100 million settlement with Formula One’s Bernie Ecclestone in August, Noetzel’s team slapped criminal charges on five current and former executives at Germany’s largest bank. Noetzel, 64, is taking his fight on crime to the heart of the country’s financial industry as he reaches the pinnacle of a career that spans more than three decades and blazes a trail through the boardrooms of companies from Siemens to MAN and now Deutsche Bank. “Today, there’s no company that could say: ‘We’re untouchable, no one can get us,’” Noetzel, chief of the Munich Prosecutors Office, said in an interview. “Those times are over.”

The bank officials, including Co-Chief Executive Officer Juergen Fitschen and former CEOs Josef Ackermann and Rolf Breuer, were charged with attempted fraud for allegedly misleading a Munich appeals court in a lawsuit by the late media magnate Leo Kirch. His office has been investigating the Deutsche Bank cases since 2011 when the Munich appeals court said at a hearing that Ackermann, Breuer and two other managers lied to judges hearing a €2 billion ($2.5 billion) dispute between the lender and Kirch, who passed away in 2011. “To have yourself taken for a ride by deliberately wrong statements, aimed at subverting a clearly justified civil claim – no one puts up with that,” Noetzel said. “Neither does the Bavarian judiciary.

The integrity and impartiality of the administration of justice must be protected.” Deutsche Bank’s resolution of the more than 10-year-old civil dispute with Kirch’s heirs didn’t dissuade Noetzel from pursuing the case that may likely be the major one in the last year of his career in public service. The Frankfurt-based lender in February paid €925 million to the heirs of Kirch to end the litigation over the collapse of his media empire. Instead, a month later prosecutors added in-house lawyers and outside attorneys to the list of suspects, searched the bank for a third time and raided the offices of law firms that worked on the case. “The whole case is a declaration of war against Deutsche Bank,” said Martin Buecher, a defense lawyer in Cologne, who isn’t involved in the matter. “It’s also a demonstration of power.”

Read more …

Think maybe earlier experiences scared S&P away from expressing too harsh judgments on France?

S&P: Negative Outlook For France’s Risky Reform (CNBC)

Ratings agency S&P cut its outlook for France to negative from stable on Friday, amid growing concerns about the strength of the country’s economic recovery. Still, S&P affirmed France’s AA/A-1+ rating. France has been dubbed the “sick man” of the euro zone over recent months, after economic data which have continued to surprise on the downside. GDP failed to expand during the second quarter of this year after stalling in the first, and is expected to have grown only slightly—by 0.2%—in the third quarter, according to the Bank of France. “In our view, the French government’s budgetary position is deteriorating in light of France’s constrained nominal and real economic growth prospects,” S&P wrote in its research update on the country released Friday. S&P last downgraded France in November 2013, when it cut its sovereign credit rating to AA. Last month, rival credit agency Moody’s said it was keeping its Aa1 rating (the agency’s second highest) on French government debt, but maintained its negative outlook.

S&P pointed to France’s high per capita income and skilled workforce in explaining the affirmation of an AA rating. But the outlook revision “reflects our view of receding fiscal space for the French government in light of the economy’s constrained real and nominal growth prospects against the background of policy implementation risk,” S&P wrote. France’s finance minister, Michel Sapin, told CNBC as the S&P announcement came out that the change of outlook does not represent an issue with France, but is actually about the euro zone. “Of course it is about France,” Moritz Kraemer, who heads sovereign ratings for S&P, told CNBC in response to Sapin’s comments. “We indeed think that the risks are increasingly tilted towards the downside, which has to do with a number of things. Some of them are home-made, others of them are indeed sort of a pan-European phenomenon.” Kraemer said S&P is “now quite doubtful” that France can hit its 3% 2017 deficit target.

Read more …

With Germany on the cusp of recession, nothing in Europe is sacred anymore.

S&P Downgrades Finland To AA+ from AAA (CNBC)

Standard & Poor’s downgraded Finland’s sovereign debt rating to AA+ from AAA on Friday, citing economic weak development. It also revised the country’s outlook to “stable” from “negative.” The ratings agency said Finland could experience “protracted stagnation” due to its aging population, shrinking workforce and weakening external demand. In addition, S&P cited the country’s dwindling market share in the global IT industry and its relatively rigid labor market as contributing factors. Finland, which has an economy of about $256 billion, has struggled to consolidate its public finances and reduce public debt, the agency said. It expects the country’s deficit to widen to 2.7% of its gross domestic product in 2014.

Read more …

Fully confident they’ll get it right this time.

Six Years After Lehman, US And UK Play Financial Crisis War Game (Guardian)

The top financial brass from the Treasuries and central banks of Britain and the US are to take part in a war game, behind closed doors in Washington on Monday, to test how they would handle another Lehman Brothers-style banking crisis. Six years after the financial earthquake that led to the multibillion-pound taxpayer bailouts of Royal Bank of Scotland and Lloyds Banking Group, the most senior policymakers from both sides of the Atlantic will try to find out whether they are now any better prepared for the collapse of a bank deemed too big to fail. The chancellor, George Osborne, and Mark Carney, the governor of the Bank of England, will stay on at the end of the annual meetings of the International Monetary Fund and World Bank to head the UK team in the exercise, which is to be held at the offices of the Federal Deposit Insurance Commission – the organisation that guarantees US bank deposits.

They will be joined by 11 others, including the chairman of the Federal Reserve, Janet Yellen, the US treasury secretary, Jack Lew, and regulators from Britain and America, for a test of how the authorities would respond to two possible scenarios – the collapse of an American bank with UK operations and the failure of a British bank with operations in the US. Although the war game will not be based on any specific institution, UK banks with operations in the US include Barclays and HSBC, while US investment banks such as Goldman Sachs and Bank of America have a big presence in the City. Osborne said it was the first time a war game had been conducted at such a senior level. “We will work through how we would respond to the failure of a cross-border firm. We are going to make sure we could handle an institution previously regarded as too big to fail,” he said.

Read more …

Still sucking in the dupes.

30-Year Mortgages Back Below 4%, But For How Long? (MarketWatch)

Borrowers who thought they’d seen the last of 30-year fixed mortgages with interest rates below 4% got a pleasant surprise this week, as stock market selloffs, fears of another world-wide economic slowdown, and perhaps an Ebola scare helped drive down mortgage rates to their lowest levels in more than a year. Interest rates on the 10-year Treasury note have fallen to 2.55%, down from 2.61% a week ago, leading to some 30-year fixed mortgages dipping below 3.99% for the first time since June 2013, according to Bankrate.com. “We have seen a flurry of activity in the last 24 to 48 hours,” said Mark Livingstone, a mortgage broker at Cornerstone First Financial in Washington, D.C., who said the sharp fall in Treasurys has potential borrowers heading back into the market. “Everything has come down and we’re expecting it to come down a little bit more,” he said.

The drop in interest rates has corresponded with an increase in mortgage loan application volume, the Mortgage Bankers Association said Oct. 8, with its Market Composite Index increasing 3.8% for the week ending Oct. 3, from a week earlier. MBA’s Refinance Index rose 5% from the previous week. It was the first increase in three weeks, MBA said. The average contract rate for a conforming loan ($417,000 or less) on a 30-year fixed mortgage for the week ending Oct. 3 was 4.3%, down from 4.33% a week earlier, MBA said. For contracts greater than $417,000, or most jumbo loans, the rate decreased to 4.21% for the week ending Oct. 3, down from 4.28% a week earlier, MBA said. FHA loans through Oct. 3 dropped to 4%, down from 4.07% a week earlier. The MBA’s survey covers about three-quarters of all U.S. retail residential mortgage applications. A “parade of horribles” has driven down Treasury yields amid an equity market selloff, says Mike Fratantoni, chief economist with the Mortgage Bankers Association. “It’s a very strong flight to quality,” he said.

Read more …

A little cold? You can now be quarantined.

Ebola Screening at JFK Focusing on a Few Among Masses (Bloomberg)

John F. Kennedy International Airport begins added screening for arriving passengers today to help stem the spread of Ebola, the virus that’s killed more than 4,000 people this year in three African nations. While all international passengers will be sent through Customs and Border Protection’s primary inspection booth at the New York airport, inspectors will use special procedures for people listed on airlines’ manifests as having traveled from Liberia, Sierra Leone or Guinea. Anyone showing symptoms of the disease will be sent immediately to a Centers for Disease Control quarantine center inside the airport, Steve Sapp, a Customs spokesman, said in an e-mail. Others from the at-risk regions will be sent for a secondary examination to take their temperature, complete a health questionnaire and provide contact information. Travelers will be given health pamphlets with information on Ebola symptoms and contacts for medical professionals, according to a fact sheet from the CDC and Department of Homeland Security.

Anyone with a temperature over 101.5 degrees Fahrenheit (38.6 degrees Celsius) will be taken to the quarantine center, Sapp said. “Our hope is that the screening will improve vigilance and increase awareness about the Ebola disease for those individuals traveling from the affected areas,” said Jason McDonald, a CDC spokesman. Of the 275,000 daily airport customers, about 150 – or less than 0.1%- come to the U.S. from at-risk regions in Africa. About half the people who came to the U.S. from those three countries in the 12 months ending July 2014 arrived through JFK, according to Thomas Frieden, director of the CDC. 94% of passengers from the affected region to the U.S. fly through Kennedy and Washington Dulles, Newark Liberty, Chicago O’Hare and Atlanta Hartsfield airports. Those other four airports will get the enhanced entry screenings next week.

Read more …

China is so polluted we don’t know the half of it.

China Pollution Levels Hit 20 Times Safe Limit (Guardian)

Days of heavy smog shrouding swathes of northern China pushed pollution to more than 20 times safe levels on Friday, despite government promises to tackle environmental blight. Visibility dropped dramatically as measures of small pollutant particles known as PM2.5, which can embed themselves deep in the lungs, reached more than 500 micrograms per cubic metre in parts of Hebei, a province bordering Beijing. The World Health Organization’s guideline for maximum healthy exposure is 25. In the capital, buildings were obscured by a thick haze, with PM2.5 levels in the city staying above 300 micrograms per cubic metre since Wednesday afternoon and authorities issuing an “orange” alert. “It’s very worrying, the main worry is my health,” said a 28-year-old marketing worker surnamed Hu, carrying an anti-smog mask decorated with a pink pig’s nose as she walked in central Beijing. China has for years been hit by heavy air pollution, caused by enormous use of coal to generate electricity to power a booming economy, and more vehicles on the roads.

But public discontent about the environment has grown, leading the government to declare a “war on pollution” and vow to cut coal use in some areas. Nonetheless poor air quality has persisted with officials continuing to focus on economic growth, and lax enforcement of environmental regulations remains rife. In a sign of growing environmental activism, Greenpeace East Asia projected the message “Blue Sky Now!” on to a facade of the Drum Tower, a historic building north of the Forbidden City. The pollution – which also hit areas hundreds of kilometres from Beijing – comes as the city hosts a high-profile cycling tournament, the Tour of Beijing, and a Brazil-Argentina football friendly. Global heads of state from the US, Russia and Asia are set to gather in the capital for a key summit next month. City authorities said Thursday that they would place tighter restrictions on vehicle use during the APEC Economic Leaders’ Meeting in November, while requesting neighbouring areas to shut down polluting facilities.

Read more …