Dec 092014
 
 December 9, 2014  Posted by at 12:22 pm Finance Tagged with: , , , , , , , ,  2 Responses »


Martha McMillan Roberts Three sisters at Cherry Blossom Festival, Washington, DC” May 1941

Global Stocks Decline; Shanghai Slides 5% (CNBC)
China’s Stock Mania Decouples From Economic Reality (AEP)
Yuan Headed For Biggest Single-Day Loss Since 2008 (CNBC)
China Likely To Lower Growth Target To 7% For 2015 (MarketWatch)
A Universe Beneath Our Feet: 1 Million People Live Underground In Beijing (NPR)
Oil Drops as Deeper OPEC Discounts Signal Fight for Market Share (Bloomberg)
Oil To Stay At About $65 For Six Months, Kuwait Petroleum Says (Bloomberg)
Cheap Oil Also Means Cheap Copper, Corn And Sugar (Bloomberg)
Here Are 5 Global Problems Cheaper Oil May Fuel (MarketWatch)
A Global Map Of Oil Production Says A Lot About Oil’s Plunge (MarketWatch)
Will This Country Be The Next Oil Domino? (CNBC)
Someday, Draghi Will Thank Weidmann For Blocking QE (MarketWatch)
EU Draws Up $1.6 Trillion Wish List To Revive Economy (Reuters)
Strong Dollar May Have ‘Profound Impact’ On World Economy (MarketWatch)
World in a Box (John Rubino)
The Incredible Shrinking Incomes of Young Americans (Atlantic)
Q3 Buybacks Surge: See The Top 20 Repurchasers Of Their Own Stock (Zero Hedge)
Iceland Tests Hedge Funds as Showdown With Creditors Arrives (Bloomberg)
‘Madness Gene’ In All Of Us Wrecks The Economy, Destroys The Earth (Farrell)
Slain MassMutual Executive Held Wall Street “Trade Secrets” (Martens)
Sierra Leone Baffled As 3 Ebola Doctors Die In 3 Days (VoA)

“It’s not a stock market, it’s a casino.” But that’s not just true for China.

Global Stocks Decline; Shanghai Slides 5% (CNBC)

A continued fall in the price of oil and a rout in Chinese stocks weighed on investor sentiment on Tuesday, with global equities seeing heavy losses during the session. The German DAX, French CAC 40 and U.K.’s FTSE 100 all slipped over 1% at the open, with the pan-European Euro Stoxx 600 index down 1.24% in early trading. Meanwhile, Greek stocks slid 6%, with continued political jitters in the country adding to the declines. U.S. stock futures were also pointing lower, indicating triple-digit losses for the Dow Jones at around 8:00 a.m. GMT, before trimming losses as the European session gathered pace.

China was the main focus for investors as the country’s Shanghai Composite benchmark tumbled in the final hour of trade. It finished the session down 5.3% after rallying to a three-and-half-year high of 3,091 points earlier in the day. It marked its biggest one-day fall inpercentage terms since August 2009 “It’s not a stock market, it’s a casino,” Peter Elston, a global investment strategist at Seneca Investment Managers, told CNBC about the Chinese benchmark. “It’s always been the case – it’s an incredibly volatile market… it is all going to end in tears and it looks like that is starting to happen now.”

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Did Ambrose cause that Shanghai crash with this article last night?

China’s Stock Mania Decouples From Economic Reality (AEP)

China’s stock market boom has reached outright mania, with equities galloping higher at a parabolic rate, despite threats of a crackdown by regulators and the continued slowdown of the national economy. The Shanghai Composite Index has risen 32pc in the past six weeks, blowing through 3,000 to a three-and-a-half-year high even though corporate earnings are declining steeply. The China Securities Regulatory Commission said late last week that it would “increase market supervision, resolutely crack down and earnestly safeguard normal market order”. It warned that stock manipulators had been “raising their head” and would be dealt with. The cautionary words have been ignored by retail investors as they throng brokerage offices, lured by momentum trades. The government itself is partly responsible for letting the genie out by talking up “cheap stocks” in the official media two months ago, but now appears alarmed by what it has done.

Many families are taking out brokerage loans to buy stocks, increasing leverage and risk. Margin debt has risen to more than $130bn from nothing three years ago. This is now 1.2pc of GDP. “Turnover, leverage and account openings have all soared and there is a sense of mania taking hold,” said Mark Williams, from Capital Economics. The latest surge follows a shift by the Chinese authorities towards “targeted easing” in October, intended to stop the housing market crumbling after five months of falling prices. This was followed by a surprise cut in interest rates last month. But aspects of the equity surge are bizarre. Financial stocks have jumped most, yet the rate cut was negative for banks since it reduced their margins. Deflationary pressures are eroding wafer-thin profit margins. Chen Long, from Gavekal in Hong Kong, said the momentum on the Shanghai bourse has become unstoppable but is losing touch with economic fundamentals. “When the tide recedes, the backwash is likely to be vicious,” he said.

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China is as stimulus crazy and dependent as the rest.

Yuan Headed For Biggest Single-Day Loss Since 2008 (CNBC)

The Chinese yuan fell sharply against the U.S. dollar on Tuesday as tight onshore liquidity conditions fueled rising expectations of further monetary easing, according to analysts. The currency, which is still tightly controlled by the Chinese central bank, declined 0.5% to 6.203, putting it on track for its biggest single-day decline since 2008. “Despite the recent interest rate cut, domestic liquidity has tightened,” Nizam Idris, head of strategy, fixed income and currencies at Macquarie told CNBC, noting that short-term interest rates in China have risen sharply in recent days. The People’s Bank of China rate cut the 12-month benchmark lending rate by 0.40 percentage points to 5.6% on November 21.

This effectively reduced the cost of funds without increasing quantity of funds available, he said. As a result, the market is pricing in further monetary easing in the form of a reserve requirement ratio (RRR) cut, which could happen sometime this week, Idris said. The catalyst for the RRR reduction could be the consumer price inflation (CPI) data due out Wednesday. “If CPI again shows there are disinflationary pressures in the economy, this could strengthen the argument for easing,” Idris said. The consumer price index (CPI) rose 1.6% in October from the year-ago period, remaining at its slowest rate in five years. Idris says the yuan has declined at a much quicker pace than he initially anticipated. He expects the downtrend to continue, noting dollar-yuan could reach 6.25 over the next three months.

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Make that 4%. But that of course cannot be said out loud.

China Likely To Lower Growth Target To 7% For 2015 (MarketWatch)

As China’s top leadership convened Tuesday for the annual Central Economic Work Conference in Beijing, state media reported the government might cut 2015’s economic growth target to as low as 7%, down from the 2014 goal of “about 7.5%.” Lowering next year’s target is a “a high probability event,” and the most likely case is “to set a 7% target and realize a growth slightly higher than the target,” the state-run China News Service quoted Guan Qingyou, head of research at Minsheng Securities, as saying Tuesday. China’s economy is at a “gear-down” stage, and 7% growth is enough to create 10,000 new jobs, ensuring sufficient employment for the economy, the report quoted Niu Li, head of macroeconomic research at the government’s State Information Center policy think tank, as saying. Niu added that cutting the growth target can reduce the stress on local governments, allowing them to push ahead with reforms. China’s official growth target numbers usually aren’t publically announced until the national legislature convenes in the spring.

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What a world to live in.

A Universe Beneath Our Feet: 1 Million People Live Underground In Beijing (NPR)

In Beijing, even the tiniest apartment can cost a fortune — after all, with more than 21 million residents, space is limited and demand is high. But it is possible to find more affordable housing. You’ll just have to join an estimated 1 million of the city’s residents and look underground. Below the city’s bustling streets, bomb shelters and storage basements are turned into illegal — but affordable — apartments. Annette Kim, a professor at the University of Southern California who researches urbanization, spent last year in China’s capital city studying the underground housing market. “Part of why there’s so much underground space is because it’s the official building code to continue to build bomb shelters and basements,” Kim says. “That’s a lot of new, underground space that’s increasing in supply all the time. They’re everywhere.” She says apartments go one to three stories below ground. Residents have communal bathrooms and shared kitchens. The tiny, windowless rooms have just enough space to fit a bed.

“It’s tight,” Kim says. “But I also lived in Beijing for a year, and the city, in general, is tight.” With an average rent of $70 per month, she says, this is an affordable option for city-dwellers. But living underground is illegal, Kim says, since housing laws changed in 2010. And, in addition, there’s a stigma to living in basements and bomb shelters, as Kim found when she interviewed residents above ground about their neighbors directly below. “They weren’t sure who was down there,” Kim says. “There is actually very little contact between above ground and below ground, and so there’s this fear of security.” In reality, she says, the underground residents are mostly young migrants who moved from the countryside looking for work in Beijing. “They’re all the service people in the city,” she says. “They’re your waitresses, store clerks, interior designers, tech workers, who just can’t afford a place in the city.”

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“If you want to move product, you discount it ..”

Oil Drops as Deeper OPEC Discounts Signal Fight for Market Share (Bloomberg)

Brent and West Texas Intermediate fell to a five-year low as Iraq followed Saudi Arabia in cutting prices for crude sales to Asia, adding to signs that OPEC’s biggest members are defending market share. Futures dropped as much as 1.4% in London to the weakest intraday price since September 2009. Iraq, the second-largest producer in the Organization of Petroleum Exporting Countries, reduced its Basrah Light crude to the lowest in at least 11 years, a price list for January showed. Oil will remain at about $65 a barrel for half a year until OPEC’s output changes or demand expands, according to Kuwait Petroleum Corp. Crude is trading in a bear market as the highest U.S. production in three decades exacerbates a global glut. Saudi Arabia, which led OPEC’s decision to maintain rather than cut output at a Nov. 27 meeting, last week offered supplies to its Asian customers at the deepest discount in at least 14 years.

“If you want to move product, you discount it,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone today. “That is going to continue. Until there are cuts to production, there could be more pain to come.” Brent for January settlement declined as much as 90 cents to $65.29 a barrel on the London-based ICE Futures Europe exchange and was at $65.74 at 4:12 p.m. Singapore time. It slid $2.88 to $66.19 yesterday, the lowest close since September 2009. The European benchmark crude traded at a premium of $2.89 to WTI. Prices are down 41% this year. WTI for January delivery decreased as much as 80 cents, or 1.3%, to $62.25 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost $2.79 to $63.05 yesterday, the lowest since July 2009. Total volume was about 29% above the 100-day average.

Iraq’s Oil Marketing will sell Basrah Light to Asia at $4 a barrel below the average of Middle East benchmark Oman and Dubai grades, the steepest discount since August 2003 when Bloomberg started compiling the data. The company reduced prices to U.S. buyers by 30 cents and marked up shipments to Europe by 10 cents, the list obtained by Bloomberg News showed. Middle East producers including Iraq, Iran and Kuwait typically follow Saudi Arabia’s lead when setting crude export prices. The kingdom is the biggest member of OPEC, which supplies about 40% of the world’s crude.

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Gotta doubt that. Wishful thinking.

Oil To Stay At About $65 For Six Months, Kuwait Petroleum Says (Bloomberg)

Oil prices will stay at about $65 a barrel for at least half a year until OPEC changes its collective production or world economic growth revives, said the head of state-run Kuwait Petroleum Corp. Oil is trading in a bear market as the U.S. pumps at the fastest rate in more than three decades and demand expands more slowly. OPEC decided on Nov. 27 to maintain its output target, prompting a drop in European benchmark Brent crude to less than $70 a barrel for the first time since May 2010. “I think oil prices will stay around the current level of $65 for six or seven months until OPEC changes its production policy, or recovery in world economic growth become more clear, or a geopolitical tension arises,” Nizar Al-Adsani, KPC’s chief executive officer, said yesterday in Kuwait City.

Crude prices have declined about 40% from a June peak amid overproduction and sluggish growth in consumption. Saudi Arabia led OPEC’s decision to maintain rather than cut output last month in Vienna, citing the threat U.S. shale presents to the group’s market share, Iranian Oil Minister Bijan Namdar Zanganeh said on Nov. 28. Brent was 4 cents higher at $66.23 a barrel at 9:25 a.m. in London. Fellow OPEC member Iraq deepened the discount for its Basrah Light crude next month to customers in Asia to the greatest in at least 11 years, following Saudi Arabia’s lead as Middle Eastern producers seek to defend market share. Iraq set the discount at $4 a barrel below the average of Middle East benchmark Oman and Dubai grades, according to a statement yesterday from the country’s Oil Marketing Co.

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Everything in the world is grossly overvalued due to QE.

Cheap Oil Also Means Cheap Copper, Corn And Sugar (Bloomberg)

Lower fuel prices are compounding the longest commodity slump in a generation. Because energy accounts for as much as half the cost to produce food and metals, all sorts of commodities will keep dropping, according to SocGen and Citigroup. With inventories ample and slowing economies eroding demand, cheaper oil lowers the price floor for mining companies and farmers to remain profitable. Corn may drop another 3%, cotton 6.5% and gold as much as 5%, SocGen estimates. Costs are falling as surpluses emerge in copper and sugar and as the economy slows in China, the top consumer of energy, metals, pork and soybeans. The Bloomberg Commodity Index of 22 items is heading for a fourth straight annual drop, the longest slump since its inception in 1991. Brent crude, gasoline and heating oil are the biggest losers as an increase in U.S. drilling led to a price war with producers in OPEC.

“There’s been a structural change in oil, and there’s more to come,” said Michael Haigh, the head of commodities research at SocGen. “This will also ripple through other commodity markets, in some cases directly, and others indirectly.” Brent crude, the international benchmark, has tumbled 42% since the end of June to $65.51 a barrel as U.S. output jumped to a three-decade high. The price today touched $65.33, the lowest since September 2009. The Bloomberg Commodity Index fell 12% this year. The MSCI All-Country World Index of equities gained 3.1%, while the Bloomberg Dollar Spot Index climbed 9.8%. Falling oil prices will be a boon to consumers who can expect to pay less for food, Citigroup’s Aakash Doshi said in Dec. 3 report. About 45% of the operating expenses of growing and harvesting rice comes from inputs such as fuels, lubricants, electricity and fertilizer, according to a U.S. Energy Information Administration analysis of U.S. Department of Agriculture data. Energy accounts for about 54% of costs of corn and wheat.

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“Fragile governments will face a lot more stress.”

Here Are 5 Global Problems Cheaper Oil May Fuel (MarketWatch)

The abrupt slide in oil prices being celebrated by American consumers is a two-edged sword that could complicate U.S. geopolitical relations everywhere from Baghdad to Caracas, industry analysts say. The price slide gained speed last month as OPEC, led by Saudi Arabia, decided not to cut production. Check out our global map of oil production. MarketWatch spoke with researchers and experts across the country to get a sense of how cheaper oil will play out in a variety of locations. Here are five themes that emerged:

1. Fragile governments will face a lot more stress: Large portions of Iraq and Syria are now under the control of the militant Islamic group alternately known as the Islamic State, or the Islamic State of Iraq and Syria (ISIS). Before the U.S. bombing campaign began, the group was making as much as $1 million a day smuggling oil to users in Syria and Turkey, according to Treasury Department estimates in late October. However the ability of the U.S. to cut off all the oil is limited because it won’t bomb the actual oil wells, and the refining of the oil is done in simple backyard facilities, according to Joshua Landis, Director of the Center for Middle East studies at the University of Oklahoma. [..]

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Nice map.

A Global Map Of Oil Production Says A Lot About Oil’s Plunge (MarketWatch)

Global oil production is concentrated among a handful of giant producer countries and about a dozen more which produce more than 1 million barrels a day, according to the U.S. Energy Information Administration. For 2013, the U.S. averaged 7.45 million barrels per day of crude oil production, third behind Russia and Saudi Arabia. However, U.S. production has been surging thanks to fracking technologies that free up oil trapped in shale formations. Total U.S. crude oil production averaged 8.9 million barrels per day in October, according to the EIA and is expected to top 9 million barrels a day in December. For 2015, the EIA expects U.S. crude oil production to average 9.4 million barrels a day. That would be the highest annual average crude oil production since before the first OPEC oil embargo in 1973.

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Strange question. Who was first?

Will This Country Be The Next Oil Domino? (CNBC)

Nigeria started 2014 as a darling of investors seeking opportunities in ever more far-flung frontiers, but now the African economy could take a body blow from the oil price decline. “In a country plagued by deep regional and religious divisions, oil revenue is literally the glue that binds the fractious elites together,” RBC Capital said in a note last week, adding that Nigeria is likely the OPEC country with the most immediate risk for civil unrest amid oil price declines. “Nigeria has experienced coups in previous low price environments due in part to drying up patronage funds.” It’s a major shift from earlier this year when many major European and U.S. multinational companies said they were putting the country at the top of their list of frontier markets where they were considering investments.

Nigeria overtook South Africa as Africa’s largest economy this year, and investors were eyeing its robust long-term growth prospects, underpinned by the combination of natural resources, an impending demographic dividend and an underpenetrated consumer market. The country’s stock market surged more than 55% from the beginning of 2013 through its July peak, but shares have fallen around 23% since then as oil prices began a precipitous multi-month slide. Since this summer, Brent has fallen from above $115 per barrel to around $66.05 in Asian trade Tuesday, with many oil analysts predicting prices will continue to slide. “Nigeria’s overreliance on oil for fiscal and foreign-exchange earnings has left the economy very vulnerable following the sharp decline in oil prices,” Barclays said in a note last week. Despite Nigeria’s economy being considered one of sub-Saharan Africa’s most diversified, oil and gas contributed around 95% of export revenue and around 70% of fiscal revenue, Barclays noted.

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That’s what I think.

Someday, Draghi Will Thank Weidmann For Blocking QE (MarketWatch)

As Oscar Wilde might have written had he been a follower of the European Central Bank, for Mario Draghi, the ECB president, to lose one board member’s support over quantitative easing may be regarded as a misfortune; to lose two looks like carelessness; to lose three might be downright embarrassing. On the key question of whether the ECB will embark on hefty government-bond purchases, Draghi and the financial markets have been blowing smoke signals at each other for several months, playing with words, intentions, expectations, and political and economic sensitivities. If Weidmann and his allies, through a mixture of threats, blandishments, subterfuge and propaganda, can hold off the proponents of full-scale QE until next spring, the game may be over.

Without taking any decisions, Draghi has deftly achieved quite a number of his tactical objectives. He has brought down the value of the euro , lowered further the spreads between German and peripheral government bonds, and prevented a massive downturn on equity markets. The phrase ‘”thought leadership” is overused, but Draghi has given it a new meaning: achieving results just by thinking about them. Jens Weidmann, the Bundesbank president, is much denigrated, both in the conservative professorial hinterland of Germany where he is widely mocked for being too soft, and in other parts of Europe for being an obdurately retrograde hawk determined to drive Europe into the deflationary dust.

In fact he seems to be doing a good job of blocking (alongside others, including members of the ECB’s six-strong executive board) a further string of unconventional measures that would probably do little good and might well reverberate badly on the ECB and its reputation. In coming years, Draghi might have cause to thank Weidmann for protecting him from embarking on a path that would have badly dented his image as a policy maker who gets his way with cleverly spun words rather than risky actions that might backfire. Of course, Draghi has failed so far in his goal of restoring inflation to the ECB’s medium-term target of close-to-though-below 2%. And the euro area, as has long been evident, is mired in stagnation. But arguably both of these shortcomings have little to do with the direction and conduct of monetary policy.

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Absolutely. Europe needs more debt, channelled through Brussels. Great idea!

EU Draws Up $1.6 Trillion Wish List To Revive Economy (Reuters)

The European Union has drawn up a wish list of almost 2,000 projects worth €1.3 trillion ($1.59 trillion) for possible inclusion in an investment plan to revive growth and jobs without adding to countries’ debts. Investment has been a casualty of the financial crisis in Europe, tumbling around 20% in the euro zone since 2008, according to the European Central Bank. Following a call by European Commission President Jean-Claude Juncker, EU governments have submitted projects ranging from a new airport terminal in Helsinki to flood defenses in Britain, according to a document seen by Reuters. “Almost 2,000 projects were identified with a total investment cost of 1,300 billion euros of which 500 billion are to be realized within the next three years,” said the document, to be discussed by EU finance ministers on Tuesday.

Projects on the list, which officials stress is not definitive, also include housing regeneration in the Netherlands, a new port in Ireland and a €4.5 billion fast rail connection between Estonia, Latvia, Lithuania and Poland. Other job-creating schemes involve refueling stations for hydrogen fuel cell vehicles in Germany, expanding high-speed broadband networks in Spain and making France public buildings use less energy. Almost a third of the projects are energy related, another third are focused on transport and the remainder on innovation, the environment and housing. The EU’s executive Commission aims to have the first projects chosen and ready to attract private money in June. Many on the list have been frustrated by lack of financing or political problems affecting cross-broader projects.

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Yup. It’s going to kill emerging markets, for one thing.

Strong Dollar May Have ‘Profound Impact’ On World Economy (MarketWatch)

With the dollar marching closer to an eight-year high, the impact of a solid greenback has started to worry traders and economists. The Bank for International Settlements, referred to as the central bankers’ bank, warned in its quarterly review that the strengthening dollar could “have a profound impact on the global economy,” and particularly on emerging markets. “Should the U.S. dollar — the dominant international currency — continue its ascent, this could expose currency and funding mismatches, by raising debt burdens. The corresponding tightening of financial conditions could only worsen once interest rates in the United States normalize,” Claudio Borio, head of the monetary and economic department at BIS, said in a briefing about the quarterly review, which was published on Sunday.

The comments come at a time when investors are speculating when the Federal Reserve will introduce its first rate hike and lift the benchmark interest rates from its record low of close to 0%. A stellar U.S. jobs report on Friday furthered the expectation that the first tightening will come earlier than the mid-2015, helping the ICE Dollar Index log its largest weekly gain in five weeks. On Monday, the index continued to climb and was flirting with levels not seen since 2006. While the appreciating dollar might be attractive for Americans traveling overseas, it seriously affects other parts of the world economy, and in particular countries and companies that have taken out loans in dollars. In this regard, emerging markets could be facing a major setback, as they pay back and service the debt they’ve taken out in the U.S. currency.

BIS estimated that since the financial crisis, international banks have continued to increase their cross-border loans to emerging-market countries, amounting to $3.1 trillion. Most of this debt is in U.S. dollars. That means if the local currency continues to weaken against the dollar it “could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions,” BIS said in the quarterly report. Outstanding loans to China alone have more than doubled to $1.1 trillion since 2012, making the country the seventh largest borrower world-wide and sensitive to large swings in foreign currencies. Additionally, Chinese individuals have borrowed more than $360 billion through international debt securities, according to BIS. “Any vulnerabilities in China could have significant effects abroad, also through purely financial channels,” Borio said in his remarks.

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“Market pricing and bullish perceptions have diverged profoundly both from underlying risk (i.e. Credit, liquidity, market pricing, policymaking, etc.) and diminishing Real Economy prospects.”

World in a Box (John Rubino)

Of all the problems with fiat currency, the most basic is that it empowers the dark side of human nature. We’re potentially good but infinitely corruptible, and giving an unlimited monetary printing press to a government or group of banks is guaranteed to produce a dystopia of ever-greater debt and more centralized control, until the only remaining choice is between deflationary collapse or runaway inflation. The people in charge at that point are in a box with no painless exit. Prudent Bear’s Doug Noland describes the shape of today’s box in his latest Credit Bubble Bulletin:

Right here we can identify a key systemic weak link: Market pricing and bullish perceptions have diverged profoundly both from underlying risk (i.e. Credit, liquidity, market pricing, policymaking, etc.) and diminishing Real Economy prospects. And now, with a full-fledged securities market mania inflating the Financial Sphere, it has become impossible for central banks to narrow the gap between the financial Bubbles and (disinflationary) real economies. More stimulus measures only feed the Bubble and prolong parabolic (“Terminal Phase”) increases in systemic risk. In short, central bankers these days are trapped in policies that primarily inflate risk. The old reflation game no longer works.

In other words, most real economies (jobs, production of physical goods, government budgets) around the world are back in (or have never left) recession, for which the traditional response is monetary and fiscal stimulus — that is, lower interest rates and bigger government deficits. Meanwhile, the financial markets are roaring, which normally calls for tighter money and reduced deficits to keep the bubbles from becoming destabilizing. Both problems are emerging simultaneously and the traditional response to one will make the other much, much worse.

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Painful. Think about this when you hear the word ‘recovery’.

The Incredible Shrinking Incomes of Young Americans (Atlantic)

American families are grappling with stagnant wage growth, as the costs of health care, education, and housing continue to climb. But for many of America’s younger workers, “stagnant” wages shouldn’t sound so bad. In fact, they might sound like a massive raise. Since the Great Recession struck in 2007, the median wage for people between the ages of 25 and 34, adjusted for inflation, has fallen in every major industry except for health care.

Young People’s Wages Have Fallen Across Industries Between 2007 and 2013

These numbers come from an analysis of the Census Current Population Survey by Konrad Mugglestone, an economist with Young Invincibles. In retail, wholesale, leisure, and hospitality—which together employ more than one quarter of this age group—real wages have fallen more than 10% since 2007. To be clear, this doesn’t mean that most of this cohort are seeing their pay slashed, year after year. Instead it suggests that wage growth is failing to keep up with inflation, and that, as twentysomethings pass into their thirties, they are earning less than their older peers did before the recession. The picture isn’t much better for the youngest group of workers between 18 and 24. Besides health care, the industries employing the vast majority of part-time students and recent graduates are also watching wages fall behind inflation. (40% of this group is enrolled in college.)

Why are real wages falling across so many fields for young workers? The Great Recession devastated demand for hotels, amusement parks, and many restaurants, which explains the collapse in pay across those industries. As the ranks of young unemployed and underemployed Millennials pile up, companies around the country know they can attract applicants without raising starter wages. But there’s something deeper, too. The familiar bash brothers of globalization and technology (particularly information technology) have conspired to gut middle-class jobs by sending work abroad or replacing it with automation and software. A 2013 study by David Autor, David Dorn, and Gordon Hanson found that although the computerization of certain tasks hasn’t reduced employment, it has reduced the number of decent-paying, routine-heavy jobs. Cheaper jobs have replaced them, and overall pay has declined.)

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“When the wind turns and the selling begins, we urge everyone to short these names first.”

Q3 Buybacks Surge: See The Top 20 Repurchasers Of Their Own Stock (Zero Hedge)

Back in September, when we looked at the total amount of stock buybacks by S&P 500 companies, we observed that the “Buyback Party Is Over: Stock Repurchases Tumble In The Second Quarter” – according to CapIQ data, after soaring to a record $160 billion in Q1, the amount of repurchased stock dropped 20% to “only” $110 billion, which perhaps also explains why the market went absolutely nowhere in the spring and early summer. Our conclusion was that, if indeed this was the end of the buyback party, then “the Fed will have no choice but to step in again, and the central-planning game can restart again from square 1, until finally the Fed’s already tenuous credibility is lost, the abuse of the USD’s reserve status will no longer be a possibility, and the final repricing of assets to their true levels can begin.”

As it turns out our conclusion that it’s all over was premature (with the Fed getting some breathing room thanks to desperate corner offices eager to pump up their CEO’s equity-linked compensation), and as the just concluded Q3 earnings seasons confirms, what went down, promptly soared right back up, with stock repurchases in Q3 surging by 30% following the 30% drop in Q2, and nearly offsetting all the lost “corporate wealth creation” in the second quarter, with the total amount of stock repurchases by S&P 500 companies jumping from $112 billion to $145 billion, just shy of the Q1 record, and the second highest single quarter repurhcase tally going back to 2007, and before.

So who are the most glaring offenders of engaging in what James Montier calls the “World’s Dumbest Idea”, i.e., maximizing shareholder value almost entirely through buybacks? Here are the 20 S&P corporations who repurchased the most stock in 2014 through the end of Q3. (Incidentally these are also some of the best big name “performers” this year. When the wind turns and the selling begins, we urge everyone to short these names first.)

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And you thought Iceland’s troubles were over ..

Iceland Tests Hedge Funds as Showdown With Creditors Arrives (Bloomberg)

Iceland will this week tell hedge funds and other creditors in its failed banks how their claims can be settled. The government has designed a model to protect the krona from any jolts that might result from a capital outflow as currency controls are relaxed to enable repayment. The next step is to find out whether the creditors will accept the deal. “Creditors that are unfairly treated internationally do not just walk away,” Timothy Coleman, senior managing director of Blackstone Group, which is advising bondholders in Kaupthing Bank hf, said in an interview. “They will use every part of every legal system available to them to ensure that they are treated appropriately and fairly.” As Iceland starts to scale back currency restrictions in place since 2008, the central bank has suggested the process may involve an exit tax.

While Coleman emphasized that creditors have no interest in a deal that undermines Iceland’s financial stability, he made clear there are some pills bondholders won’t swallow. “I don’t think they are assuming an exit tax,” he said. Creditors in Kaupthing, once Iceland’s biggest bank, say they are owed $23 billion, according to the bank’s first-half report. That’s more than three times as much as the bank has in reported assets. “The debt against Kaupthing is trading below 30 cents on the dollar, so” creditors “understand there will be some negotiated cost,” Coleman said. Bondholders have three demands, he said: “The creditors want to secure a solution that respects the people of Iceland and their capital controls. That would be number one,” he said. “Number two would be to be paid back the money that they lent to the Icelandic banks. And, number three, the creditors have an expectation that they will be treated in accordance with international banking standards.”

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How can you not love Farrell?

‘Madness Gene’ In All Of Us Wrecks The Economy, Destroys The Earth (Farrell)

Oklahoma GOP Sen. James Inhofe’s book, “The Greatest Hoax: How the Global Warming Conspiracy Threatens Your Future,” reveals everything you need to know about the Republican Party’s position on climate change. Bad news. Climate science is hogwash. Inhofe trusts divine guidance: “God’s still up there. The arrogance of people to think that we, human beings, would be able to change what He is doing in the climate is to me outrageous.” Inhofe’s scheduled to regain his old position as Chairman of the Senate Environment and Public Works Committee in January, So start praying to God folks. Because once ol’ Jim’s back in power, America will burn in climate hell. He’s vowed to block all regulations aimed at cutting carbon emissions. Game-on. Forget lame duck. The Wall Street Journal sure got it right, “Obama Puts Climate on the 2016 Ballot” … and it’s Obama vs. Inhofe rumbling till the presidential elections … this means war … the Democrats verus every GOP science denier kowtowing to Big Oil’s cash.

So for the next two years Inhofe’s “hoax” rhetoric is going to look a lot like a rerun of the original “Godzilla” movie. And the GOP will be looking down the barrel of Obama’s mega USA-China Climate Accord … while Inhofe makes Americans look like scientific and technological Luddites at the UN Climate Conferences in Peru. America still has a great opportunity to take the lead next year at the big one, the UN Climate Conference in Paris. But if Inhofe, the GOP, their Big Oil backers and army of science-denial Luddites keep playing their “global warming is a hoax” card … well then, the whole world will see proof why the IMF just announced that with it’s $17.6 trillion GDP, China is now the world’s new No. 1 economy, replacing the U.S. for the first time in 142 years. Yes, the GOP’s “global warming is a hoax” gambit has actually helped China overtake America. We’re our own worst enemy. Unfortunately the takeover started when we started the unnecessary Iraq War, unwittingly surrendering our credit to China.

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Weird story from Pam Martens.

Slain MassMutual Executive Held Wall Street “Trade Secrets” (Martens)

On Thursday, November 20, 2014, the body of 54-year old Melissa Millan, a divorced mother of two school-age children, was found at approximately 8 p.m. along a jogging path running parallel to Iron Horse Boulevard in Simsbury, Connecticut. A motorist had spotted the body and called the police. According to the coroner’s report, it was determined that Millan’s death was attributable to a stab wound to the chest with an “edged weapon.” Police ruled the death a homicide, a rarity for this town where residents feel safe enough to routinely jog by themselves on the same path used by Millan. Information has now emerged that Millan had access to highly sensitive data on bank profits resulting from the collection of life insurance proceeds from her insurance company employer on the death of bank workers – data that a Federal regulator of banks has characterized as “trade secrets.”

Millan was a Senior Vice President with Massachusetts Mutual Life Insurance Company (MassMutual) headquartered in Springfield, Massachusetts and a member of its 39-member Senior Management team according to the company’s 2013 annual report. Millan had been with the company since 2001. According to Millan’s LinkedIn profile, her work involved the “General management of BOLI” and Executive Group Life, as well as disability insurance businesses and “expansion into worksite and voluntary benefits market.” BOLI is shorthand for Bank-Owned Life Insurance, a controversial practice where banks purchase bulk life insurance on the lives of their workers. The death benefit pays to the bank instead of to the family of the deceased. According to industry publications, MassMutual is considered one of the top ten sellers of BOLI in the United States. Its annual reports in recent years have indicated that growth in this area was a significant contributor to its revenue growth.

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Ebols hasn’t gone, even if the western press largely neglect it.

Sierra Leone Baffled As 3 Ebola Doctors Die In 3 Days (VoA)

Sierra Leone’s chief medical officer has said he is baffled by the deaths of three doctors from Ebola over a three-day period. Dr. Brima Kargbo said a survey conducted jointly with the U.S. Centers for Disease Control (CDC) found that 70 percent of infections did not come from either the country’s Ebola holding centers or treatment facilities. Kargbo said Dr. Aiah Solomon Konoyeima died Saturday, becoming the 10th Sierra Leonean physician to die of the virus. He said Konoyeima was the third doctor to die from Ebola since Friday. “We have Dr. Tom Rogers and Dr. [Dauda] Koroma, who were buried yesterday, and also Dr. Konoyeima,” Dr. Kargbo said. Rogers was a surgeon at the Connaught Hospital, the main referral unit in the capital, Freetown. He was reportedly being treated at the British-run Kerry Town Ebola treatment center. He was said to be responding well to treatment when his condition deteriorated dramatically on Friday.

Koroma died at the Hastings Treatment Center, which is run entirely by local Sierra Leone medics. Kargbo said it’s difficult for him to understand where the doctors got the disease. “It interesting to note that a survey was conducted together with the CDC and it came up very clear that more 70 percent of our infections did not come from either our holding or treatment facilities,” he said. He said it is possible doctors became infected from patients they had been treating. “Most definitely because, at the end of the day, if you follow the trend of the disease, the most affected persons are the health care workers and the caregivers or those who are taking care of persons with the virus,” Kargbo said.

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Dec 012014
 
 December 1, 2014  Posted by at 12:10 pm Finance Tagged with: , , , , , , , ,  1 Response »


Arthur Rothstein Family leaving South Dakota drought for Oregon Jul 1936

US Consumers Reduce Spending By 11% Over Thanksgiving Weekend (Bloomberg)
Stocks Have Been More Overvalued Only ONCE in the Last 100 Years (Phoenix)
The Imploding Energy Sector Is Responsible For A Third Of S&P 500 Capex (ZH)
Good Money After Bad: The Big Sell-Off of 2015 (Steen Jakobsen)
Can Oil Fall All The Way To $40? (CNBC)
Oil at $40 Possible as Market Transforms Caracas to Iran (Bloomberg)
‘We Are Entering A New Oil Normal’ (Jawad Mian)
Saudis Risk Playing With Fire In Shale-Price Showdown As Crude Crashes (AEP)
China Plays Big Role In Oil’s Slide (MarketWatch)
China Factory Gauge Drops as Shutdowns Add to Slowdown (Bloomberg)
China’s Slowdown Hits Iron-Ore Prices (MarketWatch)
China Winning in OPEC Price War as Hoarding Accelerates (Bloomberg)
Swiss Vote Against Gold Deals Blow to Investors Hurt by Slump (Bloomberg)
Swiss Headache To Continue Beyond Gold Vote (WSJ)
Moody’s Downgrades Japan As Concerns Grow (CNBC)
In Fading Japan Hinterland, Skeptics Doubt “Abenomics” Will Cure Ills (Reuters)
Eurozone Manufacturing Falls As Germany Contracts (CNBC)
So Banks Are Too Big To Fail. Are They Also Too Big To Regulate? (Guardian)
Tired’ Grillo Overhauls Leadership Of Italy’s 5-Star Movement (Reuters)
Commercial Seafood Set to Disappear from Oceans in 2048 (Alternet)
Ebola Death Toll in 3 West African Countries Most Affected Nears 7,000 (WSJ)

Shoppers are confident enough to not shop. Absolutely brilliant spin attempts, but the whole thing oozes desperation.

US Consumers Reduce Spending By 11% Over Thanksgiving Weekend (Bloomberg)

Even after doling out discounts on electronics and clothes, retailers struggled to entice shoppers to Black Friday sales events, putting pressure on the industry as it heads into the final weeks of the holiday season. Spending tumbled an estimated 11% over the weekend, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up. Consumers were unmoved by retailers’ aggressive discounts and longer Thanksgiving hours, raising concern that signs of recovery in recent months won’t endure.

The NRF had predicted a 4.1% sales gain for November and December – the best performance since 2011. Still, the trade group cast the latest numbers in a positive light, saying it showed shoppers were confident enough to skip the initial rush for discounts. “The holiday season and the weekend are a marathon, not a sprint,” NRF Chief Executive Officer Matthew Shay said on a conference call. “This is going to continue to be a very competitive season.” Consumer spending fell to $50.9 billion over the past four days, down from $57.4 billion in 2013, according to the NRF. It was the second year in a row that sales declined during the post-Thanksgiving Black Friday weekend, which had long been famous for long lines and frenzied crowds.

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How about them apples?

Stocks Have Been More Overvalued Only ONCE in the Last 100 Years (Phoenix)

Stocks today are overvalued by any reasonable valuation metric. If you look at the CAPE (cyclical adjusted price to earnings) the market is registers a reading of 27 (anything over 15 is overvalued). We’re now as overvalued as we were in 2007. The only times in history that the market has been more overvalued was during the 1929 bubble and the Tech bubble. Please note that both occasions were “bubbles” that were followed by massive collapses in stock prices.


Source: https://www.multpl.com/shiller-pe/

Then there is total stock market cap to GDP, a metric that Warren Buffett’s calls tge “single best measure” of stock market value. Today this metric stands at roughly 130%. It’s the highest reading since the DOTCOM bubble (which was 153%). Put another way, stocks are even more overvalued than they were in 2007 and have only been more overvalued during the Tech Bubble: the single biggest stock market bubble in 100 years.


Source: Advisorperspectives.com

1) Investor sentiment is back to super bullish autumn 2007 levels.
2) Insider selling to buying ratios are back to autumn 2007 levels (insiders are selling the farm).
3) Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).
4) Mutual fund cash levels are at a historic low (again investors are “all in” with stocks).
5) Margin debt (money borrowed to buy stocks) is near record highs.

In plain terms, the market is overvalued, overbought, overextended, and over leveraged. This is a recipe for a correction if not a collapse.

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This is exactly what I’ve been warning about for more than a week now. Oil is big enough as an industry to drag the whole market down.

The Imploding Energy Sector Is Responsible For A Third Of S&P 500 Capex (ZH)

We have previously discussed the implications that tumbling crude oil prices will have not only on some of the most levered companies with exposure to Brent prices, namely the vast majority of the US energy space with outstanding junk bonds which, as we explained before, should WTI drop to $60, it would “Trigger A Broader HY Market Default Cycle” (based on a Deutsche Bank analysis) leading to pain across the entire credit market (and in the process impairing the stock-buyback machinery which companies aggressively use to artificially boost their stock price), as well as on oil-exporting nations, whose economies are assured to grind to a halt leading to broad social unrest or worse, and lastly, on global asset liquidity, which is set to contract even more now that for the first time in over a decade, the net flow of Petrodollars will be an outflow (as explained in How The Petrodollar Quietly Died, And Nobody Noticed).

And while much has been said about the “benefits” the US economy is poised to reap as a result of the plunge in gas prices, which has been compared to a major tax cut (whatever happened to the core Keynesian tenet that “deflation” is the worst thing that can possibly happen) on the US consumer, almost nothing has been said about the adverse impact on US GDP as a result of tumbling fixed investment spending and CapEx. The reason, clearly, is that the collapse in new investment will more than offset the boost from incremental household spending. Here are the facts, per Deutsche Bank:

US private investment spending is usually ~15% of US GDP or $2.8trn now. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transportation equipment, with remaining 20-25% related to other industries or intangibles. Non-residential construction is 20% oil and gas producing structures and 30% is energy related in total. We estimate global investment spending is 20% of S&P EPS or 12% from US. The Energy sector is responsible for a third of S&P 500 capex. 35% of S&P EPS from investment and commodity spend, 15-20% US.

In short, while nobody knows just how many tens of billions in US economic “growth”, i.e., GDP, will be eliminated now that energy companies are not only not investing in growth spending or even maintenance, being forced to shut down unprofitable drilling operations and entering spending hibernation territory, the guaranteed outcome is that US GDP is set to slide as the CapEx cliff resulting from Brent prices dropping below the $75/bbl red line under which shale is broadly no longer profitable will offset any GDP benefit unleashed from the “supposed” increase in consumer spending (supposed because according to the latest NRF numbers, Thanksgiving spending was not only well below last year (with the average consumer spending $380.95 over Thanksgiving compared to $407.02 a year ago) but below even our worst case forecasts. So just where are all those external benefits to US retailers as a result of crashing gas prices?

Rhetorical questions aside, the real question is just how much will said GDP slide ultimately be? Sadly, this too will be one question the BEA will never answer, as instead the upcoming GDP plunge will be blamed once again on inclement weather as opposed to actually analyzing what is truly happening as America’s transformation to an oil-producing (and maybe exporting) powerhouse, is so rudely interrupted.

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The doomiest view of all made me also laugh out loud.

Good Money After Bad: The Big Sell-Off of 2015 (Steen Jakobsen)

The big selloff in 2015 will come from housing and housing-related investments as the marginal cost of capital rises through regulation and through “margin calls” on banks as their profit-to-GDP ratios grow too high for the economy to function properly. The dividend society is here and the true manifestation of Japanisation is not a future event but a thing we are living in right now… From a tactical point of view, I live in a very simple world:

[..] No, if there is any reality left in the world the market will realize — by its mistaken support for long USDJPY positions — that productivity gains and competitive edges are driven by the “need” to change… not from isolation but from cause and effect (but that’s also a 2015 story). In closing I have very little positions — the stock market is on a mission to kill the shorts (which will probably succeed), the FX market believes in Santa Japan and the ECB continues to do nothing but talk… but for now it’s enough to sell the product, which is risk-on at all costs.

The correction will be deeper and deeper as the market is dislocated through zero interest rates and an investing crowd that is rewarded for throwing all conservative risk rules overboard in a year where we again have double digit gains on… low interest rates. Let’s hope the ECB plays ball for the market to buy some more time; for now we are playing musical chairs, and when the music stops, more than one chair will be missing… How bad are things? Well, let me give you my starting slide from a presentation done in November:

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“”We’re seeing a lot of traders being forced into the market, a lot of hedges, because the prices have been so volatile toward the downside .. ”

Can Oil Fall All The Way To $40? (CNBC)

As oil prices drop to more than four-year lows, analysts are slashing their forecasts, with some predicting it could plunge as much as 40% to around $40 a barrel. “There is a possibility that if this price war becomes unmanageable, [we could] see prices down to about $40 a barrel [for WTI],” Jonathan Barratt, chief investment officer of Ayers Alliance Securities, told CNBC. But for oil to get all the way down to $40 a barrel would take “a massive lack of confidence in the economies, also a lack of pricing power,” Barratt said. Brent and WTI crude each fell more than 2% to as low as $67.90 and $64.10 a barrel respectively during Asian trade on Monday, levels last seen in 2010, as the European credit crisis was heating up. Global oil prices have plunged since peaking in June.

From around $115 a barrel, Brent crude has lost around a third of its price. Weak demand, a strong U.S. dollar and booming U.S. oil production are the three main reasons behind the fall, according to the IEA, which warned of a “new chapter” for oil markets, which could even affect the social stability of some countries. Saudi Arabia sparked talk of an oil price war as it has cut its official selling prices for some customers for four consecutive months through November. Part of oil’s drop has to do with supply conditions. Increased U.S. oil production has added to a glut in the world oil market. The U.S. now produces about 8.9 million barrels a day, while Saudi Arabia, the world’s largest producer, pumps about 9.6 million barrels a day.

But Barratt believes much of the price drop has to do with financial traders, citing the speed of the drop over the past few trading sessions amid relatively low volumes during the holiday period. “We’re seeing a lot of traders being forced into the market, a lot of hedges, because the prices have been so volatile toward the downside,” Barratt said. He isn’t alone in predicting oil could plunge to $40 a barrel – levels not seen in more than 10 years. Murray Edwards, chairman of Canadian Natural Resources, one of Canada’s biggest oil investors, predicted oil could fall as low as $30 a barrel before stabilizing at around $70-$75, according to a Financial Post article. While Forbes contributor Jesse Colombo, admittedly a perma-bear, said in an article that technical analysis suggests that if oil prices fall below $60 a barrel, $40 is the next major support.

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OPEC have turned into the proverbial cats in a sack.

Oil at $40 Possible as Market Transforms Caracas to Iran (Bloomberg)

Oil’s decline is proving to be the worst since the collapse of the financial system in 2008 and threatening to have the same global impact of falling prices three decades ago that led to the Mexican debt crisis and the end of the Soviet Union. Russia, the world’s largest producer, can no longer rely on the same oil revenues to rescue an economy suffering from European and U.S. sanctions. Iran, also reeling from similar sanctions, will need to reduce subsidies that have partly insulated its growing population. Nigeria, fighting an Islamic insurgency, and Venezuela, crippled by failing political and economic policies, also rank among the biggest losers from the decision by the Organization of Petroleum Exporting Countries last week to let the force of the market determine what some experts say will be the first free-fall in decades.

“This is a big shock in Caracas, it’s a shock in Tehran, it’s a shock in Abuja,” Daniel Yergin, vice chairman of Englewood, Colorado-based consultant IHS Inc. and author of a Pulitzer Prize-winning history of oil, told Bloomberg Radio. “There’s a change in psychology. There’s going to be a higher degree of uncertainty.” A world already unsettled by Russian-inspired insurrection in Ukraine to the onslaught of Islamic State in the Middle East is about be roiled further as crude prices plunge. Global energy markets have been upended by an unprecedented North American oil boom brought on by hydraulic fracturing, the process of blasting shale rocks to release oil and gas.

Few expected the extent or speed of the U.S. oil resurgence. As wildcatters unlocked new energy supplies, some oil exporters abroad failed to invest in diversifying their economies. Coddled by years of $100 crude, governments instead spent that windfall subsidizing everything from 5 cents-per-gallon gasoline to cheap housing that kept a growing population of underemployed citizens content. Those handouts are now at risk. “If the governments aren’t able to spend to keep the kids off the streets they will go back to the streets, and we could start to see political disruption and upheaval,” said Paul Stevens, distinguished fellow for energy, environment and resources at Chatham House in London, a U.K. policy group. “The majority of members of OPEC need well over $100 a barrel to balance their budgets. If they start cutting expenditure, this is likely to cause problems.”

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” The International Energy Agency says we could soon hit “peak oil demand”, due to cheaper fuel alternatives, environmental concerns, and improving oil efficiency.” But no slowdown anywhere!

‘We Are Entering A New Oil Normal’ (Jawad Mian)

Everyone believes that the oil-price decline is temporary. It is assumed that once oil prices plummet, the process is much more likely to be self-stabilizing than destabilizing. As the theory goes, once demand drops, price follows, and leveraged high-cost producers shut production. Eventually, supply falls to match demand and price stabilizes. When demand recovers, so does price, and marginal production returns to meet rising demand. Prices then stabilize at a higher level as supply and demand become more balanced. For the classic model to hold true in oil’s case, the market must correctly anticipate the equilibrating role of price in the presence of supply/demand imbalances.

By 2020, we see oil demand realistically rising to no more than 96 million barrels a day. North American oil consumption has been in a structural decline, whereas the European economy is expected to remain lacklustre. Risks to the Chinese economy are tilted to the downside and we find no reason to anticipate a positive growth surprise. This limits the potential for growth in oil demand and leads us to believe global oil prices will struggle to rebound to their previous levels. The International Energy Agency says we could soon hit “peak oil demand”, due to cheaper fuel alternatives, environmental concerns, and improving oil efficiency. The oil market will remain well supplied, even at lower prices. We believe incremental oil demand through 2020 can be met with rising output in Libya, Iraq and Iran.

We expect production in Libya to return to the level prior to the civil war, adding at least 600,000 barrels a day to world supply. Big investments in Iraq’s oil industry should pay-off too with production rising an extra 1.5-2 million barrels a day over the next five years. We also believe the American-Iranian détente is serious, and that sooner or later both parties will agree to terms and reach a definitive agreement. This will eventually lead to more oil supply coming to the market from Iran, further depressing prices in the “new oil normal”. [..] Our analysis leads us to conclude that the price of oil is unlikely to average $100 again for the remaining decade. We will use an oil rebound to gradually adjust our portfolio to reflect this new reality.

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Ambrose in July 2014: “A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even, victims of their own success in creating a supply glut. One chief executive acidly told the TPH Global Shale conference that the only time his shale company ever had cash-flow above zero was the day he sold it – to a gullible foreigner. [..] … the low-hanging fruit has been picked and the costs are ratcheting up. Three Forks McKenzie in Montana has a break-even price of $91. [..]”

And today: “The International Energy Agency said most of North Dakota’s vast Bakken field “remains profitable at or below $42 per barrel. The break-even price in McKenzie County, the most productive county in the state, is only $28 per barrel.“

Saudis Risk Playing With Fire In Shale-Price Showdown As Crude Crashes (AEP)

Saudi Arabia and the core OPEC states are taking an immense political gamble by letting crude oil prices crash to $66 a barrel, if their aim is to shake out the weakest shale producers in the US. A deep slump in prices might equally heighten geostrategic turmoil across the broader Middle East and boomerang against the Gulf’s petro-sheikhdoms before it inflicts a knock-out blow on US rivals. Caliphate leader Abu Bakr al-Baghdadi has already opened a “second front” in North Africa, targeting Algeria and Libya – two states that live off energy exports – as well as Egypt and the Sahel as far as northern Nigeria. “The resilience of US shale may prove greater than the resilience of OPEC,” said Alistair Newton, head of political risk at Nomura. Chris Skrebowski, former editor of Petroleum Review, said the Saudis want to cut the annual growth rate of US shale output from 1m barrels per day (bpd) to 500,000 bpd to bring the market closer to balance. “They want to unnerve the shale oil model and undermine financial confidence, but they won’t stop the growth altogether,” he said.

There is no question that the US has entirely changed the global energy landscape and poses an existential threat to OPEC. America has cut its net oil imports by 8.7m bpd since 2006, equal to the combined oil exports of Saudi Arabia and Nigeria. The country had a trade deficit of $354bn in oil and gas as recently as 2011. Citigroup said this will return to balance by 2018, one of the most extraordinary turnarounds in modern economic history. “When it comes to crude and other hydrocarbons, the US is bursting at the seams,” said Edward Morse, Citigroup’s commodities chief. “This situation is unlikely to stop, even if prevailing prices for oil fall significantly. The US should become a net exporter of crude oil and petroleum products combined by 2019, if not 2018.” OPEC has misjudged the threat. As late as last year, it was dismissing US shale as a flash in the pan. Abdalla El-Badri, the group’s secretary-general, still insists that half of all US shale output is vulnerable below $85.

This is bravado. US producers have locked in higher prices through derivatives contracts. Noble Energy and Devon Energy have both hedged over three-quarters of their output for 2015. Pioneer Natural Resources said it has options through 2016 covering two- thirds of its likely production. “We can produce down to $50 a barrel,” said Harold Hamm, from Continental Resources. The International Energy Agency said most of North Dakota’s vast Bakken field “remains profitable at or below $42 per barrel. The break-even price in McKenzie County, the most productive county in the state, is only $28 per barrel.”

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” .. if the industrial commodities that have fed China’s prodigious economic rise are taken as a guide, there is little need for debate: There has already been a hard landing ..”

China Plays Big Role In Oil’s Slide (MarketWatch)

All eyes have been on OPEC after its failure to agree to a production cut triggered the latest dramatic slide in the price of crude oil. But if you want to understand why the demand side of oil has been unraveling — and why it could continue — look no further than China. Opinion over the state of the world’s second-largest economy is typically divided between whether it is merely undergoing a rebalancing or a more painful slowdown after years of excessive credit growth. But if the industrial commodities that have fed China’s prodigious economic rise are taken as a guide, there is little need for debate: There has already been a hard landing, as all the prices of these resources have collapsed to multi-year lows. Now oil is falling in line as it too adjusts to a world where China is no longer bidding prices ever higher. Granted, oil is different from steel, iron ore and coal, where China is the world’s largest consumer (The U.S. still consumes almost twice as much oil as China). Yet Chinese demand is still pivotal.

China became the dominant source of growth in crude-oil demand as it joined the world economy in recent decades. Indeed, Société Générale comments China’s opening to world trade was responsible for lifting the oil price from around $20 a barrel to around $100. This price move approximately correlates with China joining the World Trade Organization at the beginning of the last decade, a period in which the nation, by itself, added the equivalent of Japanese and U.K. total oil consumption. The oil market is unlikely to find another country, or even a continent, that can take over this degree of heavy lifting in demand growth. Meanwhile, longer-term forecasts that China can maintain anything close to its recent pace of growth increasingly look misplaced. Until recently, many economists had assumed that it was only a matter of time before China’s appetite for oil would surpass that of the U.S. But there are a number of reasons to question such bullish forecasts. For one, we can expect the Chinese investment cycle to be in for a prolonged adjustment as it digests past excesses.

There is widespread evidence of industrial overcapacity, and last week researchers at China’s National Development Commission became the latest to highlight this issue. In a new report, they estimated $6.8 trillion of “ineffective investment” had been wasted. There are other signs that China’s thirst for oil is coming up against capacity constraints. After surpassing the U.S. as the biggest automobile market in the world in 2010, recent years have seen traffic jams and pollution become recurring problems. This has forced authorities to use administrative measures to rein in growth. We should also expect China’s future demand for oil to be more price-sensitive. In the past, demand appeared inelastic as growth continued even as crude prices reached triple-digits. But this period coincided with state-funded industry being the dominant driver, whereas demand for gasoline for cars can be expected to be dependent on the income growth of the middle class.

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It’s close to contraction, and that’s a a long way away from 7.5% growth.

China Factory Gauge Drops as Shutdowns Add to Slowdown (Bloomberg)

A Chinese manufacturing gauge fell as factory shutdowns aggravated a pullback in the economy, raising pressure on the central bank to ease policy further after it lowered interest rates for the first time in two years. The government’s Purchasing Managers’ Index (PMI) fell to an eight-month low of 50.3 in November, compared with the 50.5 median estimate of analysts in a Bloomberg survey and October’s 50.8. Readings above 50 indicate expansion. The government ordered factories in Beijing and surrounding regions to shut down during the Asia-Pacific Economic Cooperation forum to curb pollution. China’s central bank cut interest rates last month as the economy heads for its slowest full-year expansion since 1990.

“Today’s official PMI reading points to continued downward pressure on manufacturing activity,” said Julian Evans-Pritchard, China analyst in Singapore at Capital Economics Ltd. “The recent cut in the benchmark rate will do little to boost economic activity unless followed by a loosening of quantitative controls on lending, which policymakers will remain cautious about given concerns over mounting credit risk.” The official PMI is released by the National Bureau of Statistics and China Federation of Logistics and Purchasing in Beijing. The index is based on responses to surveys sent to purchasing executives at 3,000 companies. The final reading of another manufacturing PMI for November from HSBC Holdings Plc and Markit Economics was 50.0. It was unchanged from a preliminary reading.

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Iron, steel, oil, it’s all under huge pressure. All the producers have gambled on continuing growth. And there’s more: “Meanwhile, the biggest mining companies say they are still committed to plans to keep topping production records.”

China’s Slowdown Hits Iron-Ore Prices (MarketWatch)

China’s hunger for minerals to build skyscrapers, cars and bridges produced a decadelong surge in the price and production of key commodities. Now, exporting nations are feeling the hit as the China-fueled boom slows. Topping the list are big commodity players Australia and Brazil, but also smaller resource-rich countries, such as Guinea, Indonesia and Mongolia, where minerals make up a disproportionate share of the economy and employment. In countries specializing in crucial commodities, such as iron ore and coal, sluggish demand and falling commodity prices are reducing government tax revenue, increasing trade deficits and affecting currency values. The Australian dollar reached a four-year low in November against the U.S. dollar due in part to sliding raw-material prices and slowing Chinese demand growth for those commodities. J.P. Morgan this month cut its forecast for 2015 Australian economic growth to 2.8% from 3.3%, and Brazil recently halved its own growth forecast for 2014 to 0.9% from 1.8%.

Mining profits as a share of the economy in both countries more than doubled during the past 15 years, according to the World Bank. The longer-term impact of a collapse in commodity prices could be even more profound, hurting the economies of producing countries and boosting buying power in Western consumer economies. “The impact of oversupply could be a mess,” says Lourenco Goncalves, CEO of Cliffs Natural Resources, a midsize miner that laid off workers in Australia. Meanwhile, the biggest mining companies say they are still committed to plans to keep topping production records. Rio Tinto and BHP Billiton have been shipping cargoes from Australia’s remote northwest at record rates. For smaller countries, the growing dependence on mining is even more apparent. In Guinea, the share of mining profits as a percentage of GDP more than tripled to 18.3% between 2000 and 2012, the latest data available, according to the World Bank. And in Mongolia, it nearly doubled to 11.9%.

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All the news about a China slowdown, and then this?! I don’t believe the numbers presented here for a minute.

China Winning in OPEC Price War as Hoarding Accelerates (Bloomberg)

China is emerging as the winner from OPEC’s battle with rival oil producers as the world’s biggest energy consumer stockpiles crude. The nation’s efforts to boost reserves may increase its imports by as much as 700,000 barrels a day in 2015, according to London-based Energy Aspects. That’s more than half the global glut forecast by Citigroup Inc. after the Organization of Petroleum Exporting Countries refrained from cutting output at its meeting last week. Brent crude has slumped 41% from its peak in June. The dwindling number of investors still betting on a rebound in prices can at least count on Chinese demand.

OPEC decided to maintain output targets even as a shale boom boosts U.S. production to the highest in more than three decades and causes a global supply glut. As crude extends its slump to the lowest level in more than four years, China is seeking to build a strategic petroleum reserve. “This is a golden time window to acquire more strategic oil stockpiles at lower costs,” Gordon Kwan, the Hong Kong-based head of regional oil and gas research at Nomura Holdings Inc., wrote in an e-mail Nov. 28. China will be “a big beneficiary” from the OPEC decision, he said.

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“We’ll get more pressure on gold. The overall outlook is not looking great.”

Swiss Vote Against Gold Deals Blow to Investors Hurt by Slump (Bloomberg)

With no chance that the Swiss central bank will be the next big buyer of gold, it’s one more reason for investors to be bearish. Voters today rejected a referendum requiring the Swiss National Bank hold at least 20% of its 520-billion-franc ($540 billion) balance sheet in gold. Had it been approved, it would have led to purchases of at least 1,500 metric tons over five years. With lower oil prices reducing costs for consumers and the U.S. considering raising interest rates, demand is fading for hedges against inflation such as gold. Gold has lost 16% since peaking in March and investor holdings of exchange-traded products are near a five-year low. While prices probably won’t be affected too much by the “no” vote of the initiative called “Save Our Swiss Gold,” approval would have improved sentiment and increased prices by as much as $50 an ounce, HSBC estimated in November.

“Gold had received some support in the last couple of weeks” before the vote, Georgette Boele, an analyst at ABN Amro Bank, said by phone. “We’ll get more pressure on gold. The overall outlook is not looking great.” The proposal stipulating the SNB raise the portion of its assets held in gold from about 8% now was voted down by 77% to 23%. The initiative would have also prohibited the SNB from ever selling any of its bullion and required the 30% currently stored in Canada and the U.K. to be repatriated. Polls forecast the initiative’s rejection. Approval would have probably made Switzerland the world’s third-biggest holder by country of the metal. Analysts had said purchases would have been at least 1,500 tons over five years. Adding 300 tons a year would equal about 7% of annual global consumption. SNB policy makers had a higher estimate, forecasting 70 billion francs worth of gold, or about 1,932 tons.

Proponents of the initiative said boosting bullion holdings would help preserve national wealth. The SNB and national government had argued that approving the measure could undermine efforts to prevent the franc from surging against the euro and erode the bank’s annual dividend distribution to regional governments.

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“The starting point is that the SNB cannot let the floor go. They will fight for it. They will do whatever it takes to defend the floor ..”

Swiss Headache To Continue Beyond Gold Vote (WSJ)

A Swiss vote on whether the country’s central bank should drastically ramp up its gold holdings — forever– happens this Sunday. The result is likely to be a no if the latest polls are accurate. But even in case of a negative outcome the pressure on the Swiss National Bank to cut interest rates below zero will not go away. The franc has been flying high of late, in part because the market has sniffed the possibility that forcing the SNB to buy lots and lots of gold (that’s what the vote’s all about) could cause problems for the central bank’s efforts to hold the currency down. The Swiss central bank keeps a floor on the currency, which controls how strong it gets against the euro, to protect the country’s exporters from an overly strong franc, which would damage them at international level. In order to do this, it buys euros which are added to its balance sheet.

With the new requirement in place, the SNB would have to match euro purchases with equal amounts of gold, which would not only be costly, but also permanent as it would be banned from selling it. Many have suggested that negative interest rates might be a useful tool for the central bank to deflect buying of the franc in the case the Swiss vote for the bank to ramp up its gold holdings to 20% by buying 1500 tons of gold over a period of five years. After all, the SNB has repeatedly said it’s open to the idea of negative rates. Since opinion polls started to point more clearly to a no vote, the franc has backed down a little. But the market’s bet on negative rates has not subsided.

Libor three month futures on the Swiss franc suggest that the market is pricing 0.11 percentage point in cuts by the end of next year, or a 45% probability of a 0.25 percentage point cut by the end of 2015, said a trader at SocGen. “The market is expecting rate cuts in the future and in the Swiss case, negative rates, to follow in the ECB footsteps. ”That’s the rub: the European Central Bank cut its deposit rate below zero in June, and it’s still firmly in easing mode. This has weakened the euro against all currencies, including against the franc, with the euro trading just above the level set by the central bank. “The starting point is that the SNB cannot let the floor go. They will fight for it. They will do whatever it takes to defend the floor,” said Samy Char, investment strategist at Swiss asset manager Lombard Odier. Negative rates may be part of that mix, investors and analysts add.

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Abenomics is a colossal failure that was entirely foreseeable. And still the Krugmans of the world call for Europe to do what Japan did.

Moody’s Downgrades Japan As Concerns Grow (CNBC)

Fears over the future of Japan’s economy are growing – and Moody’s, the credit ratings agency, reflected this on Monday by cutting its credit rating to A1 from AA3. The news came just after the country’s main stock market, the Nikkei, closed at a seven-year high. Increased “uncertainty” over whether Japan Prime Minister Shinzo Abe can achieve his deficit-cutting goals, and “the timing and effectiveness of growth enhancing policy measures” have made Japanese government debt riskier in the medium term, analysts at Moody’s said in a release. They added that the outlook for the rating was stable.

Abe swept into power two years ago, and was hailed as a savior because of his plan to reinvigorate Japan’s moribund economy – known as “Abenomics”. The three main pillars of Abenomics are: a large fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to the country’s economy. Japan has been in a deflationary spiral for two decades, and it remains to be seen whether Abenomics can shake it out. Abe has called a snap election for December 14, in an effort to secure another four years to see his policies through. However, his popularity seems to be in decline. Japan’s economy is now back in recession after GDP shrank by 0.4% in the third three months of the year, on a quarter-on-quarter basis.

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How crazy is it that Abe is still set to win the December 14 snap election?

In Fading Japan Hinterland, Skeptics Doubt “Abenomics” Will Cure Ills (Reuters)

Mihoko Asaka wants to know how candidates in this month’s election in Japan will create jobs and halt the drastic population decline that is bleeding her home region of youth and vitality, but has little hope they will offer real solutions. Like many of his age group, her 25-year-old son left the largely rural prefecture of Akita in northeastern Japan to find work after graduating from college. “I’m interested to see how much they are listening to the voices from this region,” said Asaka, 57, waiting for a bus in Akita City, the prefecture’s capital. “But I don’t think our voices are being heard. They talk about money being thrown around, but we can’t see where it goes.” Critics say Prime Minister Shinzo Abe’s policies to end deflation and generate growth have helped mainly big cities, large companies and the rich by boosting share prices and exporters’ profits with a hyper-easy monetary policy that has slashed the value of the yen and sent asset prices higher.

All too aware of the criticism, Abe has made spreading the benefits of his “Abenomics” agenda to “every nook and cranny” of Japan a key plank of his Liberal Democratic Party (LDP) platform for the Dec. 14 lower house election. The LDP-led ruling coalition is expected to keep its lower house majority, so interest is focused on whether and to what extent its grip on two-thirds of the chamber erodes. Akita prefecture, with the dubious distinction of having Japan’s highest suicide rate and fastest-shrinking population, definitely needs a boost. Already, about 30% of its population is aged 65 and over compared to 25% nationwide, with the ratio predicted to rise to more than 40% by 2040, when Akita’s total population will have fallen by more than a third to 700,000.

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TEXT

Eurozone Manufacturing Falls As Germany Contracts (CNBC)

Euro zone manufacturing activity missed forecasts and slowed in November, with German activity contracting — hitting hopes of a pick-up in the bloc’s largest economy. Markit’s euro zone manufacturing PMI was nearly flat at 50.1 in November, missing analysts’ forecasts of 50.4. This was a fall from the 50.6 recorded in October. The latest figures will raise concerns among policymakers at the European Central Bank (ECB) who are battling extremely low inflation in the single currency bloc. Three of the euro zone’s largest economies – Germany, France and Italy – saw manufacturing activity contract in October. Germany’s November manufacturing PMI came in at 49.5, France’s reading was 48.4, and Italy’s figure was at 49, all below the 50 mark that signifies growth.

“With the final PMI coming in below the flash reading, the situation in euro area manufacturing is worse than previously thought. Not only is the performance of the sector the worst seen since mid-2013, there is a risk that renewed rot is spreading across the region from the core,” Chris Williamson, chief economist at Markit, said in a press release. “The sector has more or less stagnated since August, but we are now seeing, for the first time in nearly one-and-a-half years, the three largest economies all suffering manufacturing downturns.” The near-stagnant euro zone-wide PMI figure was driven by falling levels of new business and lackluster export orders, Markit said, alongside signs of slowing global growth. The fall in manufacturing growth also came amid continued price pressures with factories continuing to cut prices.

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“I am sure shareholders would trade an executive or two for a few billion less in regulator fines.”

So Banks Are Too Big To Fail. Are They Also Too Big To Regulate? (Guardian)

The broken culture of high street banking will take a generation to fix, according to a report this week. The thinktank New City Agenda calculated that over the past 15 years banks had incurred £38.5bn in fines and redress for the mistreatment of customers. Bank boards and their regulators acknowledge the need for change, and by all accounts this is a massive problem. So why should it take so long – and how can we force things to move faster? A few months ago, a dealer in old wine was given a 10-year sentence for misrepresenting the quality of the contents. A banker who misrepresented his or her product would not face anything like this penalty. Despite scandal after scandal, the absence of personal accountability persists.

The size of penalties varies by regulator, but the unwillingness to punish the individual perpetrator does not. The message being sent from the regulators to the banks is: “Here’s the deal: we fine you a ton of money; no one goes to jail; no individual is named; and the best part – you can settle the bill with your shareholders’ dough!” True, in Britain the government is proposing new laws to make criminal behaviour a crime. But tools already in place remain untouched. The UK has long had an “approved persons” regime administered initially by the Financial Services Authority, and now by the Prudential Regulatory Authority. The PRA determines who is fit and proper to hold key positions in finance. Most of the focus has been on who is approved and how. But prior authorisations can be revoked. One wonders why they haven’t.

Surely there is no shortage of scandal-linked wrongdoers. Who would not want them to act? Think about the list of those who have a stake in the matter. Banks serve multiple stakeholders. These include society, clients, shareholders, employees and executives. We have already mentioned society’s outrage and clients’ dismay. Both have been clamouring for justice. What about the others? Surely shareholders should want the unfit to be identified and punished. After all, the depth, breadth and persistence of the wrongdoing shows that either management were complicit in their subordinates’ actions, or they were too incompetent to prevent it. Take your pick, but both are cases for being banned as unfit for such responsibilities. I am sure shareholders would trade an executive or two for a few billion less in regulator fines.

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“I’m pretty tired, as Forrest Gump would say .. ”

Tired’ Grillo Overhauls Leadership Of Italy’s 5-Star Movement (Reuters)

Beppe Grillo, the unruly comic who built Italy’s 5-Star Movement into one of the most potent anti-establishment forces in Europe, is struggling to stop a steady slide following months of infighting and electoral setbacks. After a week that saw two local election defeats and two parliamentary members expelled from the party, Grillo announced his movement needed a more formal leadership structure. A five-member committee, approved by an online poll, will take over much day-to-day running with the aim of strengthening foundations for the future. The 66-year-old Grillo said he would remain as “guarantor” but what that means is unclear. “I’m pretty tired, as Forrest Gump would say,” he wrote in his blog beneath a mock-up of himself as the movie character, telling a band of followers that he is ending a marathon run across the country.

One of the most successful of the anti-system parties that have blossomed in Europe during the financial crisis, Grillo’s movement is fueled by anger at a corrupt and inefficient political class. It remains Italy’s second-biggest party but after its triumph in the 2013 elections, when it won 25% of the vote, it has struggled in parliament. In the latest of a string of disputes over issues including whether members may appear on television, two deputies were thrown out this week, accused of failing to repay state funding as party rules demand. The latest expulsions left the 5-Star Movement with 143 seats in parliament, compared with the 163 it won last year. It has done poorly in recent local elections, taking only 13% and 5% respectively last week in the regions of Emilia-Romagna and Calabria.

In its place, the anti-immigrant Northern League, which shares Grillo’s hostility to the euro, is capturing more of the protest vote, coming second in Emilia-Romagna, a traditional stronghold of the left. Even Silvio Berlusconi, fighting to regain influence following a conviction for tax fraud, has re-emerged. In an opinion poll last week, he beat Grillo’s personal approval rating for the first time in months. “Grillo’s tired. I’m in better form than ever,” he said on Saturday. Marco Travaglio, a prominent columnist for Il Fatto Quotidiano, a newspaper generally sympathetic to Grillo’s movement, wrote that the disputes were “suicidal” and would only strengthen Prime Minister Matteo Renzi, “who, with adversaries like this, can stay 100 years.”

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Wouldn’t that be something?

Commercial Seafood Set to Disappear from Oceans in 2048 (Alternet)

A prominent marine research ecologist says that commercial seafood could disappear from our oceans within the next three decades if humans don’t take action immediately. Boris Worm of Dalhousie University in Halifax, Canada said the oceans are quickly losing biodiversity and that nearly 30% of seafood species humans consume are already too small to harvest. If the long-term trend continues, there will be little or no seafood available for a sustainable harvest by 2048. Dr. Worm’s study was recently published in the journal Science and is an update of a study published in 2006. Importantly, the study is about the collapse of commercial catches, not species extinction. Catch collapse means that fish are caught at 10% or less of the rate they had been caught historically. Several media outlets have incorrectly stated that the study warns all seafood will be gone from the oceans.

CBS News, for example, reported that “the apocalypse has a new date: 2048” and that the oceans would be empty of fish at that time. To our knowledge, the television network has not issued a retraction. “We never said that,” says Dr. Worm. “We never talked about extinction. We talked about the collapse of the commercial catches.” Still, Worm and his international team of scientists and economists say that catch collapses paint a grim picture for the ocean and for human health. The accelerated loss of biodiversity, they say, is imperiled by overfishing, pollution, habitat loss and climate change. Saltwater ecosystems, including human populations that depend on it for survival, can be adversely affected by dwindling populations. Harmful algae blooms, coastal flooding and poor water quality can be the results of reduced fish populations. “Biodiversity is a finite resource, and we are going to end up with nothing left…if nothing changes,” says Worm.

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Still not going well at all. New warnings are iddues about the threat of ebola spreading.

Ebola Death Toll in 3 West African Countries Most Affected Nears 7,000 (WSJ)

Nearly 7,000 people have died from the Ebola virus disease in the three West African countries most affected by the current outbreak, according to new data from the World Health Organization. In an update, the United Nations health agency said 16,169 confirmed, suspected or probable cases of Ebola had been reported in Guinea, Liberia and Sierra Leone. The three countries are at the epicenter of the current outbreak. A total of 6,928 people have died of Ebola in the three countries since the outbreak began, the WHO said. Liberia reported the biggest rise in deaths; more than 1,000 since WHO data released on Wednesday The agency, which recently changed the format it uses for reporting Ebola data, provided no commentary as to why the death toll jumped.

However, a spokesman said via email that the increase was caused by previously unreported deaths now being counted in the official statistics, rather than a rash of new fatalities. The WHO has previously said some local authorities have had difficulty processing paperwork quickly. The agency has said its count may greatly underestimate the toll, and the U.S. Centers for Disease Control and Prevention has said it believes the actual count could be between two and four times the WHO numbers. Ebola causes high fever and internal bleeding. The disease spreads via bodily fluids and the corpses of its victims can be contagious.

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Nov 182014
 
 November 18, 2014  Posted by at 1:09 pm Finance Tagged with: , , , , , , , , , , ,  1 Response »


Dorothea Lange Saturday afternoon, Pittsboro, North Carolina Jul 1939

Japan PM Abe Calls Snap Election, Delays Sales Tax Hike (CNBC)
Japan Prepares Stimulus to Strengthen 2015 Growth After Recession Hit (Bloomberg)
Japan’s ‘Abenomics’ Can Survive Quadruple-Dip Recession (AEP)
‘Godfather’ Of Abenomics Admits It’s A Ponzi Game, Taxpayers May Revolt (ZH)
ECB’s Draghi: Buying Sovereign Bonds Is An Option (CNBC)
Draghi Says ECB Measures May Entail Buying Government Bonds (Bloomberg)
Draghi Seen Bypassing QE Qualms to Hit Balance-Sheet Goal (Bloomberg)
Industrial Output in U.S. Unexpectedly Fell in October (Bloomberg)
Deutsche Bank Scales Back Trading in Credit Derivatives (Bloomberg)
Flash Boys Invade $12.4 Trillion Treasury Market in New Era of Volatility (Bloomberg)
Wall Street to Reap $316 Million From Day of Mega Deals (Bloomberg)
Australia’s Record-Low Rates To Head Further South (CNBC)
US Pension Insurer Ran Record $62 Billion Deficit (AP)
All Aboard The Instability Express (James Howard Kunstler)
The Secret History Of Corruption In America (Stoller)
UK Grocery Sales In Decline For First Time In 20 Years (Guardian)
1 in 5 UK Supermarkets Must Close To Restore Profit Growth (Guardian)
Putin Warns He Won’t Let Ukraine Annihilate Eastern Rebels (Bloomberg)
Shale Drillers Plan Output Increases Despite Oil Price Decline (Bloomberg)
3 Billion Gallons Of Fracking Wastewater Pumped Into Clean CA Aquifers (ZH)
Modern Slavery Affects More Than 35 Million People (Guardian)
Ebola Doctors: The Last Working Consciences In The Western World (Guardian)

It’ll give him the power to totally sink the nation. All that’s missing is a few nuke plants and a major quake.

Japan PM Abe Calls Snap Election, Delays Sales Tax Hike (CNBC)

Japanese Prime Minister Shinzo Abe called a snap election and announced a delay in the second sales tax hike by 18 months after the country fell into recession. The move announced on Tuesday comes after growth numbers on Monday showed the world’s third-largest economy shrunk by an annualized 1.6% in the third quarter after a 7.3% contraction in the second quarter, shocking the markets. “I have decided not to raise the consumption tax to 10% next October and I have decided to delay a consumption tax hike for 18 months,” Abe said at a press conference. Japan has suffered since the first consumption tax hike from 5 to 8% in April.

Abe said the rise in the sales tax “acted as a heavy weight and offset a rise in consumption”. A second consumption tax hike was set for October 2015 which would have seen a 2% increase to 10%. Abe also said the lower house of parliament would be dissolved on November 21 and an election would be called in a move to strengthen his mandate for “Abenomics” – his set of economic policies. The Japanese Prime Minister admitted that it will be a “difficult election” but said he wanted the public to back his package of reforms. “There are differing opinions on the structural reforms we have proposed and I have decided that I need to hear the voice of the Japanese public on whether or not we should go forward with these reforms,” Abe said.

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There are still ‘analysts’ around who actually believe this stuff: “Household sentiment should be relaxed thanks to the delay in another VAT hike, helping improve spending attitude and facilitate consumption recovery”. Spending in Japan has been down for years, nothing to do with sales taxes.

Japan Prepares Stimulus to Strengthen 2015 Growth After Recession Hit (Bloomberg)

With Japan’s slump into its fourth recession since 2008 threatening the failure of the Abenomics reflation program, Prime Minister Shinzo Abe’s administration is taking steps to shore up growth for the coming year. Economy Minister Akira Amari told reporters yesterday in Tokyo there’s a high chance of a stimulus package. Etsuro Honda, an adviser to Abe, said a 3 trillion yen ($26 billion) program was appropriate and should go toward measures that directly help households, such as child care support. Abe, who holds a news conference later today, is also considering a postponement of an October sales-tax increase until 2017 – a move that would add 0.3 percentage point to growth in the coming fiscal year, according to the median estimate of economists surveyed by Bloomberg.

At stake for the prime minister is assuring re-election in a likely snap vote next month that may serve as a referendum on his policies. “Household sentiment should be relaxed thanks to the delay in another VAT hike, helping improve spending attitude and facilitate consumption recovery,” Kazuhiko Ogata, chief Japan economist at Credit Agricole SA in Tokyo, wrote in a note to clients yesterday, referring to the sales, or value-added, tax. “If Abe’s Liberal Democratic Party wins in the election, ‘Abenomics’ would be set” to be sustained until as long as until 2018, when he would run up against term limits as LDP head, according to Ogata.

Less than two years into Abenomics – a three-pronged strategy to pull Japan out of two decades of stagnation through monetary stimulus, fiscal flexibility and structural deregulation – the program has yet to spark sustained growth. An April sales-tax rise saw the economy sink into two straight quarters of contraction, a government report showed yesterday. Abe, 60, has yet to implement growth-strategy items from labor-market liberalization to the securing of a free-trade deal within the U.S.-led Trans-Pacific Partnership talks. Corporate-tax cut discussions have yet to see legislation enacted. In other areas, Abenomics has stirred Japan, achieving the end of 15 years of sustained deflation and spurring focus in the stock market on corporate returns on equity. The Topix index of shares has jumped 79% in the past two years.

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Once again, Ambrose is out of his league. And not as sure as the title suggests, since he also says: “This is a formidable task and may ultimately fail.” The rest is not arguments, but exclusively wishful thinking. And harking back to what Japan did in 1932 is cute, but also entirely hollow.

Japan’s ‘Abenomics’ Can Survive Quadruple-Dip Recession (AEP)

Abenomics is alive and well. Japan’s crash into its fourth recession since 2008 is a nasty surprise for premier Shinzo Abe but it tells us almost nothing about the central thrust of his reflation blitz The mini-slump is chiefly due to a one-off fiscal shock in April. Mr Abe defied warnings from Keynesian critics and unwisely stuck to plans drawn up by a previous (DPJ) government to raise the consumption tax from 5pc to 8pc. The essence of Abenomics is monetary reflation a l’outrance to lift the country out of deflation after two Lost Decades. The unstated purpose of this “First Arrow” is to lower real interest rates and raise the growth of nominal GDP to 5pc, deemed the minimum necessary to stop Japan’s debt trajectory from spiralling out of control. This is a formidable task and may ultimately fail. Public debt is already 245pc of GDP. Debt payments are 43pc of fiscal revenues. The population is expected to fall to from 127m to 87m by 2060. Given the grim mathematics of this, the inertia of the pre-Abe era was inexcusable.

Takuji Aida from Societe Generale said the tax rise was an “unnecessary diversion from Mr Abe’s reflationary goals” but will not have a lasting effect. The contraction of Japanese GDP by 0.4pc in the third quarter – following a 1.8pc crash in the second quarter – is certainly a public relations embarrassment, but less dreadful than meets the eye. The economy expanded by 0.2pc when adjusted for inventory effects. Machinery orders rose for a fourth month in September to 2.9pc. Retail sales jumped by 2.3pc. Danske Bank’s Fleming Nielsen says Japan’s economy will be growing at a 3pc rate again this winter. Mr Abe has shrugged off the tax debacle without much political damage. He is likely to call a snap election for December, win heartily, and suspend plans for a further rise in the sales tax to 10pc next October, ditching a policy he never liked anyway.

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Besides, Ambrose, the guy who thought it all up has this: ” .. there are always new taxpayers, so this is a feasible Ponzi game”. How bad can you get it when, as Ambrose himself said, ” .. the population is expected to fall to from 127m to 87m by 2060″? It’s a hopeless game.

‘Godfather’ Of Abenomics Admits It’s A Ponzi Game, Taxpayers May Revolt (ZH)

Koichi Hamada is a special adviser to prime minister Shinzo Abe and one of his closest confidants. That makes his comments, as The Telegraph reports, even more stunningly concerning. Focusing his attention on the fact that Japan must delay the 2nd stage of its planned consumption tax hike – for fear of derailing the ‘recovery’ – Hamada unwittingly, it seems, explains the terrible reality behind the so-called “godfather” of Abenomics’ perspective on the extreme monetary policy he has unleashed… Select stunning quotes that everyone should ignore and just BTFPonziD in Japan…

“The consumption tax hike is a great big turbulence to the Japanese economy. It may have erased almost two thirds of the benefits of Abenomics,” he told the Telegraph. “At the very least, a third of this great experiment is gone.” [..] “I used to say that we should wait until the third quarter figures are out. However, by various economic indicators, the GDP figures cannot be very optimistic,” he added. [..] “We should increase the consumption tax in the intermediate future,” he said. “This first shock starting in April has been countered by a monetary counter-move. But can we risk another shock in this way?” He also said that while he fully supported the Bank of Japan’s bond buying spree, he said there would be diminishing returns from quantitative easing the longer it went on. “I completely agree with Kuroda’s direction of policy, as well as his strategy of keeping quiet and surprising the market. Of course, if you repeat the same kind of action then the impact will be weaker,” he said.

[..] Marc Faber, the famous Swiss investor, has accused Japan of “engaging in a Ponzi scheme” because the BoJ is hoovering up most of the debt that has been issued by the government. While Mr Hamada agreed that Japan had created a “mild ponzi game”, he also said it was a “feasible” one because of Japan’s huge foreign reserves. “In a Ponzi game you exhaust the lenders eventually, and of course Japanese taxpayers may revolt. But otherwise there are always new taxpayers, so this is a feasible Ponzi game, though I’m not saying it’s good.” Mr Hamada said it was important that Japanese policymakers sent a clear signal that the government was willing to do whatever it takes to smash deflation and pave the way for wage increases for millions of workers. “I’m optimistic about wages, but the uncertainty is how long it takes,” he said. Business is still in doubt about whether Abenomics will continue. If they know it will continue and the profits of export firms are really soaring, they will start to share that with their employees.”

So to sum up… as long as the BoJ keeps buying stocks and bonds in ever-greater amounts (and Japan has more taxpayers to foot the bill) then the ponzi scheme can survive in its fiscally unsustainable way… what a total farce.

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Tell ‘im ee’s dreamin’.

ECB’s Draghi: Buying Sovereign Bonds Is An Option (CNBC)

The euro zone’s growth has weakened over the summer months, European Central Bank (ECB) President Mario Draghi told European lawmakers Monday, but stressed that he was willing to do more to stimulate the economy—including the purchase of government bonds. Speaking at the European Union’s Parliament, Draghi reiterated that the bank’s governing council remained “unanimous in its commitment to using additional unconventional instruments if needed.” He added: “The other unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds.” The comments helped the pan-European FTSEurofirst 300 close 0.5% higher on the day.

The central bank has already launched a slew of stimulus in an effort to boost the economy by easing credit conditions. These include cutting interest rates to record lows and announcing plans to purchase covered bonds and asset-backed securities (ABS) – and there are calls for the ECB to do more by launching a U.S. Federal Reserve-style sovereign bond-buying program. Further measures, “could include changes to the size and composition to the Eurosystem balance sheet, if warranted, to achieve price stability over the medium term,” Draghi added.

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“Data released today showed that officials accelerated covered-bond buying last week, with the total settled rising by more than €3 billion – up from €2.629 billion the week before.” Ahem: the goal is $1 trillion. At this rate, that’ll take 6 years.

Draghi Says ECB Measures May Entail Buying Government Bonds (Bloomberg)

ECB President Mario Draghi explicitly cited government-bond buying as a policy tool officials could use to stimulate the economy if the outlook worsens. “Other unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds,” Draghi said in Brussels today during quarterly testimony to lawmakers at the European Parliament. In opening remarks both today and after the ECB’s monthly policy decision, Draghi stopped short of mentioning government bonds when he said that officials had been tasked with the preparation of further stimulus measures. His comments today come weeks before the institution’s critical December meeting, when it will publish new forecasts that are likely to incorporate a lower outlook for the economy and inflation. Draghi will succeed in boosting the ECB’s balance sheet back toward €3 trillion ($3.74 trillion), though he’ll have to override some policy makers’ qualms on quantitative easing to do so, according to a majority of economists in Bloomberg’s monthly survey published today.

Until now, the ECB has restricted purchases of assets to covered bonds, though asset-backed securities are now on its shopping list too. Data released today showed that officials accelerated covered-bond buying last week, with the total settled rising by more than €3 billion – up from €2.629 billion the week before. As Draghi spoke, Italian and Spanish bonds rose. The ECB president began his comments in the parliament by presenting European lawmakers with a list of policy resolutions for them to pursue in 2015 as he insisted his institution alone can’t fix the economy. “2015 needs to be the year when all actors in the euro area, governments and European institutions alike, will deploy a consistent common strategy to bring our economies back on track,” Draghi said today. “Monetary policy alone will not be able to achieve this.” “Monetary policy has done a lot,” Draghi said. “It can do more if structural reforms are implemented. It can’t do everything.”

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Not sure the Bundesbank and Nowotny will look favorable on being called ‘qualms’. 60% of Bloomberg ‘experts’ think Draghi will win, and they’re hardly ever right about anything.

Draghi Seen Bypassing QE Qualms to Hit Balance-Sheet Goal (Bloomberg)

Mario Draghi will succeed in boosting the European Central Bank’s balance sheet back toward 3 trillion euros ($3.75 trillion), though he’ll have to override some policy makers’ qualms on quantitative easing to do so. That’s the majority view of economists in Bloomberg’s monthly survey, who have become more optimistic that the ECB president will meet his goal. Most predicted he’ll have to buy more than covered bonds and asset-backed securities though, and 72% said any stimulus expansion will be against the wishes of some national central-bank governors. Draghi, who has faced opposition to his most recent measures, told European lawmakers today that an expanded purchase program could include government bonds, as he insisted the ECB alone can’t fix the region’s economy. He also reiterated his pledge to be ready with further steps should the outlook worsen, and 95% of respondents in the survey said he’ll act on that promise either this year or in 2015.

“If private-sector asset purchases are insufficient, then sovereign bonds will then likely be included,” said Alan McQuaid, chief economist at Merrion Capital in Dublin. “This will be a hard sell internally.” Resistance to Draghi’s recent loosening of policy has come primarily from Germany. Bundesbank President Jens Weidmann has repeatedly warned of the risks of large-scale asset purchases, known as quantitative easing, and Executive Board member Sabine Lautenschlaeger has said the balance between cost and benefit for some non-standard tools is currently negative. Austria’s Ewald Nowotny joined Weidmann in opposing the ABS plan. That didn’t stop a fresh reference by Draghi on Nov. 6 to driving the balance sheet back toward its March 2012 level via asset purchases and targeted loans to banks. 60% of the economists surveyed said he’ll succeed, which implies that close to €1 euros of assets will be added. In last month’s survey just 39% said he’ll achieve his aim.

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Yup, that’s that strong revovered economy for you.

Industrial Output in U.S. Unexpectedly Fell in October (Bloomberg)

Industrial production in the U.S. unexpectedly dropped in October, weighed down by declines at utilities, mines and automakers that signal manufacturing started the fourth quarter on soft footing. Output fell 0.1% after a 0.8% increase in September that was smaller than previously estimated, figures from the Federal Reserve in Washington showed today. The median forecast in a Bloomberg survey of 83 economists projected a 0.2% gain. Factory production rose 0.2%, matching the prior month’s advance that was also revised down. A pickup in manufacturing is needed to help bolster the expansion, now is its sixth year, as global growth from Europe and Japan to emerging markets cools. Rising consumer confidence and the drop in gasoline prices are brightening the outlook for holiday sales, indicating factories will get a lift in the next few months.

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When CDS dries up, there will be major problems in the markets. It’s in the size: ” .. the market that shrank to less than $11 trillion from $32 trillion before the financial crisis”. So much money is evaporating it’s scary: “requiring large swaths of credit swaps to be backed by clearinghouses, which are capitalized by banks and require traders to set aside collateral, or margin, to cover losses”.

Deutsche Bank Scales Back Trading in Credit Derivatives (Bloomberg)

Deutsche Bank will stop trading most credit-default swaps tied to individual companies, exiting a business that new banking regulations have made costlier, according to a spokeswoman. The lender will instead focus on transactions in corporate bonds, while maintaining trading in the more active market for credit swaps tied to benchmark indexes, Michele Allison, a spokeswoman for the bank said today. The firm also will continue trading swaps tied to emerging-market borrowers and distressed companies, she said. The derivatives are used by hedge funds, banks and other institutional investors to protect against losses or to speculate on the ability of companies to repay their obligations. Deutsche Bank is exiting a part of the market that shrank to less than $11 trillion from $32 trillion before the financial crisis, data from the Bank for International Settlements show.

Dealing in credit swaps, which have been blamed for exacerbating the 2008 financial crisis, has become more expensive for lenders like Deutsche Bank as regulators across the U.S. and Europe require banks to hold more capital to back trades, reducing the returns for shareholders. “When liquidity providers leave the market, it becomes really questionable if the market is functioning efficiently,” Jochen Felsenheimer, founder of XAIA Investment said in a telephone interview. “Regulators continue to dry out the CDS market by putting more and more constraints.” Among measures that regulators have enacted since the crisis is requiring large swaths of credit swaps to be backed by clearinghouses, which are capitalized by banks and require traders to set aside collateral, or margin, to cover losses if they can’t make good on the transactions. Much of the market, where the privately negotiated trades have typically been done over phone calls and e-mails, is also being shifted to electronic systems.

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What could go wrong?

Flash Boys Invade $12.4 Trillion Treasury Market in New Era of Volatility (Bloomberg)

In a flash, the bond market went wild. What began on Oct. 15 as another day in the U.S. Treasury market suddenly turned into the biggest yield fluctuations in a quarter century, leaving investors worrying there will be turbulence ahead. The episode exposed a collision of forces – the rise of high-frequency trading and the decline of Wall Street dealers – that are reshaping the world’s biggest and most important bond market. Money managers say the $12.4 trillion Treasury market is becoming less liquid, meaning securities can no longer be traded as quickly and easily as they used to be, thanks in part to the Federal Reserve’s bond-buying program.

“The way the market is set up right now, we’ll see instances like we did on that day,” said Michael Lorizio, senior trader Manulife Asset Management, which oversees $281 billion. “There’s going to be a learning curve as to how to handle that.” The development reflects unintended consequences of new financial regulation, as well as steps the Fed has taken to breath life into the U.S. economy. The implications, however, extend far beyond Wall Street, because the Treasury market determines borrowing costs for governments, companies and consumers around the world. When the day began on Oct. 15, an unprecedented number of investors were betting that interest rates would rise and U.S. government debt would lose value. The news that morning seemed ominous. Ebola was spreading. So was war in the Middle East.

At 8:30 a.m. in Washington, the Commerce Department announced a decline in retail sales. The shift came all at once. The sentiment that the Fed would raise rates reversed. Traders who’d bet against, or shorted, Treasury bonds had to buy as many as they could as quickly as they could to limit their losses. By 9:38 a.m., 10-year Treasury yields plunged 0.34 percentage point, the most in five years. Analysts such as Jim Bianco, president of Bianco Research LLC in Chicago, blame the herd mentality of electronic traders. “A lot of these guys are focused on speed,” Bianco said. “They’re all uncreative and write the same program. When the stimulus comes in a certain way, every one of them comes to the same conclusion at exactly the same moment.”

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And we’ll see this as a positive, shall we?

Wall Street to Reap $316 Million From Day of Mega Deals (Bloomberg)

The five Wall Street banks that advised on $100 billion of takeovers announced yesterday by Halliburton and Actavis could reap as much as $316 million in fees for their work. Goldman Sachs and Bank of America will take home the lion’s share of that, with roles on both the $34.6 billion purchase of Baker Hughes Inc. by Halliburton, and the $66 billion acquisition of Allergan by Actavis. Goldman Sachs was the sole adviser to Baker Hughes, while Bank of America and Credit Suisse advised Halliburton. The three banks are set to receive as much as $143 million in total, Freeman & Co. said. Halliburton, the second-biggest oilfield services provider, agreed to buy No. 3 Baker Hughes, taking advantage of plunging crude prices to set up the biggest takeover of a U.S. energy company in three years. Actavis’s deal to acquire Allergan, meanwhile, will help the target rebuff a hostile approach from Valeant Pharmaceuticals International Inc.

Goldman Sachs and Bank of America were also advisers to Allergan, for which they may share as much as $92 million, according to Freeman. JPMorgan, meanwhile, may receive as much as $81 million as adviser to Actavis. Yesterday’s deals firmed up Goldman Sachs’s status as the No. 1 adviser on M&A, with almost $814 billion of total value to its credit. Morgan Stanley which didn’t have a role on either of the two large deals, ranks second with $653 billion of deals to its credit. Citigroup, which also didn’t have a role on either deal, slipped a spot in the rankings to No. 4, while Bank of America rose to third from fifth. The ranking lists, called league-tables, are used by banks when they pitch their services to clients. A strong track record can help them convince companies to hire them as advisers. “We are extremely proud of the performance and momentum of our M&A franchise and the strategic advice and solutions that we have delivered to our clients in 2014,” Citigroup spokesman Robert Julavits wrote.

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Fingers in your ears, a big bang is coming.

Australia’s Record-Low Rates To Head Further South (CNBC)

Australia’s economy faces myriad headwinds that could trigger interest rate cuts from the central bank, taking borrowing rates further south from current historic lows. “Leading indicators suggest that a case can be made for further cuts: Confidence is low and consistent with weak growth, inflation expectations are falling and the unemployment rate is rising,” Credit Suisse wrote in a note Friday, arguing that rates could fall to 1.5%. Consumer confidence slumped over 12% on year in November, according to a joint survey from the Melbourne Institute and Westpac, marking the ninth straight month of pessimists outnumbering optimists – the longest slump since the global financial crisis.

Meanwhile, Australia’s official jobless rate rose to a 12-year high of 6.2%in October. Lower inflation also paves the way for rate cuts, Credit Suisse said. Headline consumer price inflation cooled to an annual 2.3% during the third-quarter, the lower end of the central bank’s 2-3% target band. Most importantly, markets have started to price in cuts, it said. The dominant view among major banks is still for the Reserve Bank of Australia to hike interest rates in 2015, but Credit Suisse says the behavior of the spread between 10-year bond yields and the cash rate is “abnormal” and doesn’t reflect that view.

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One of multiple problems in US pensions.

US Pension Insurer Ran Record $62 Billion Deficit (AP)

The federal agency that insures pensions for about 41 million Americans saw its deficit nearly double in the latest fiscal year. The agency said the worsening finances of some multi-employer pension plans mainly caused the increased deficit. At about $62 billion for the budget year ending Sept. 30, it was the widest deficit in the 40-year history of the Pension Benefit Guaranty, which reported the data Monday. That compares with a $36 billion shortfall the previous year. Multi-employer plans are pension agreements between labor unions and a group of companies, usually in the same industry. The agency said the deficit in its multi-employer insurance program jumped to $42.4 billion from $8.3 billion in 2013. By contrast, the deficit in the single-employer program shrank to $19.3 billion from $27.4 billion.

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“The global economy has caught the equivalent of financial Ebola: deflation ..”

All Aboard The Instability Express (James Howard Kunstler)

The mentally-challenged kibitzers “out there” — in the hills and hollows of the commentary universe, cable news, the blogosphere, and the pathetic vestige of newspaperdom — are all jumping up and down in a rapture over cheap gasoline prices. Overlay on this picture the fairy tale of coming US energy independence, stir in the approach of winter in the North Dakota shale oil fields, put an early November polar vortex cherry on top, and you have quite a recipe for smashed expectations. Plummeting oil prices are a symptom of terrible mounting instabilities in the world. After years of stagnation, complacency, and official pretense, the linked matrix of systems we depend on for running our techno-industrial society is shaking itself to pieces.

American officials either don’t understand what they’re seeing, or don’t want you to know what they see. The tensions between energy, money, and economy have entered a new phase of destructive unwind. The global economy has caught the equivalent of financial Ebola: deflation, which is the recognition that debts can’t be repaid, obligations can’t be met, and contracts won’t be honored. Credit evaporates and actual business declines steeply as a result of all those things. Who wants to send a cargo ship of aluminum ore to Guangzhou if nobody shows up at the dock with a certified check to pay for it? Financial Ebola means that the connective tissues of trade start to dissolve, and pretty soon blood starts dribbling out of national economies.

One way this expresses itself is the violent rise and fall of comparative currency values. The Japanese yen and the euro go down, the dollar goes up. It happens in a few months, which is quickly in the world of money. Foolish US cheerleaders suppose that the rising dollar is like the rising score of an NFL football team on any given Sunday. “We’re numbah one!” It’s just not like that. The global economy is not some stupid football contest. When currencies change value quickly, as has happened since the past summer, big banks get into big trouble. Their revenue streams are pegged to so-called “carry trades” in which big blobs of money are borrowed in one currency and used to place bets in other currencies. When currency values change radically, carry trades blow up.

So do so-called “derivatives” such as bets on interest rate differentials. When the sums of money involved are grotesquely large, the parties involved discover that they never had any ability to pay off their losing bet. It was all pretense. In fact, the chance that the bet might go bad never figured into their calculations. The net result of all that foolish irresponsibility is that banks find themselves in a position of being unable to trust each other on virtually any transaction. When that happens, the flow of credit, a.k.a. “liquidity,” dries up and you have a bona fide financial crisis. Nobody can pay anybody else. Nobody trusts anybody. Fortunes are lost. Elephants stomp around in distress, then keel over and die, and a lot of “little people” get crushed in the dusty ground.

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Looks like a good book to get.

The Secret History Of Corruption In America (Stoller)

If there s one way to summarize Zephyr Teachout’s extraordinary book Corruption in America: From Benjamin Franklin’s Snuff Box to Citizens United, it is that today we are living in Benjamin Franklin’s dystopia. Her basic contention, which is not unfamiliar to most of us in sentiment if not in detail, is that the modern Supreme Court has engaged in a revolutionary reinterpretation of corruption and therefore in American political life. This outlook, written by Supreme Court Justice Anthony Kennedy in the famous Citizens United case, understands and celebrates America as a brutal and Hobbesian competitive struggle among self-interested actors attempting to use money to gain personal benefits in the public sphere.

What makes the book so remarkable is its scope and ability to link current debates to our rich and forgotten history. Perhaps this has been done before, but if it has, I have never seen it. Liberals tend to think that questions about electoral and political corruption started in the 1970s, in the Watergate era. What Teachout shows is that these questions were foundational in the American Revolution itself, and every epoch since. They are in fact questions fundamental to the design of democracy.

Teachout starts her book by telling the story of a set of debates that took place even before the Constitution was ratified – whether American officials could take gifts from foreign kings. The French King, as a matter of diplomatic process, routinely gave diamond-encrusted snuff boxes to foreign ambassadors. Americans, adopting a radical Dutch provision banning such gifts, wrestled with the question of temptation to individual public servants versus international diplomatic norms. The gifts ban, she argues, was evidence of a particular demanding notion of corruption at the heart of American legal history. These rules, bright-line rules versus corrupt-intent rules, govern temptation and structure. They cover innocent and illicit activity, as opposed to bribery rules which are organized solely around quid pro quo corruption.

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However you slice and dice it, that’s not a number from a recovering economy.

UK Grocery Sales In Decline For First Time In 20 Years (Guardian)

UK grocery sales have gone into decline for the first time in at least 20 years as a raging price war and the falling cost of food commodities hit Britain’s supermarkets. In good news for shoppers, the average price of a basket of everyday essentials such as milk, bread and vegetables now costs 0.4% less than it did a year ago, according to the latest figures from market research firm Kantar Worldpanel. But the figures highlight a painful few months for the UK’s biggest retailers with all of the “big four” supermarkets seeing sales fall back in the 12 weeks to 9 November. Tesco continues to be the worst performer with sales dropping by 3.7%, but Morrisons’ performance deteriorated at the fastest rate, with the slump in sales accelerating to 3.3%, from 1.3% a month ago.

Sainsbury’s trading figures also worsened, with sales down 2.5%. Asda’s sales also went into decline, for the first time in some months, although the Walmart-owned group was the only one of the big four to hold market share. Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel said: “The declining grocery market will be of concern to retailers as they gear up for the key Christmas trading season.” In a pattern that has continued throughout this year, the German discounters Aldi and Lidl continued to grow strongly, as did the up-market grocer Waitrose. But only Waitrose picked up the pace of growth, to 5.6%, shoring up its spot at the UK’s sixth largest supermarket. Aldi’s growth slowed to 25.5% from 29.1% last month, and more than 30% earlier this year, while Lidl’s growth slowed to 16.8% from 17.7% last month.

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Complaceny and hubris pay off.

1 in 5 UK Supermarkets Must Close To Restore Profit Growth (Guardian)

Supermarket chiefs need to take drastic action by shutting one in five of their stores if the financial health of the mainstream grocery chains is to recover from the damage being wreaked by altered shopping habits and the onslaught of the discounters, according to analysts at Goldman Sachs. A large closure programme is the only viable solution to bring about a return to profitable growth for the UK supermarket industry, the analysts said in a report. With 56% of Tesco’s stores bigger than 40,000 sq ft, the report concludes the market leader has the biggest problem on its hands. Profits at the three listed chains, Tesco, Sainsbury’s and Morrisons, have gone into reverse as weak food sales are exacerbated by the runaway growth of Aldi and Lidl. Further pressure is coming from structural changes in the market such as the growth of online and convenience store retailing.

Last week Sainsbury’s reported a first half loss of £290m as it counted the cost of pulling the plug on 40 new supermarket projects and wrote down the value of its underperforming stores. Goldman Sachs analyst Rob Joyce was gloomy about the ability of the major players to bounce back if the fight was based on price cuts alone. “We believe that any major price investments by Morrisons, Sainsbury’s or Tesco can be exceeded by the discounters,” he wrote. The unhealthy industry dynamic prompted him to predict large stores would suffer like-for-like sales declines of 3% a year until 2020, unless the big chains embrace the need for major surgery. Too much focus on profitability allowed the “discounters to get too strong”, with incumbents, until recently, reliant on pushing up prices to combat falling sales?, according to the report. But even Asda, which was the first of the big four to take on the discounters with a £1bn price cuts campaign, has started to show signs of strain.

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It’s a simple story.

Putin Warns He Won’t Let Ukraine Annihilate Eastern Rebels (Bloomberg)

Russian President Vladimir Putin warned he won’t allow rebels in eastern Ukraine to be defeated by government forces as European Union ministers met to consider imposing more sanctions on the separatists. “You want the Ukrainian central authorities to annihilate everyone there, all of their political foes and opponents,” Putin said in an interview yesterday with Germany’s ARD television. “Is that what you want? We certainly don’t. And we won’t let it happen.” German Chancellor Angela Merkel said yesterday the EU will keep its economic sanctions on Russia “for as long as they are needed.”

EU foreign ministers convened today in Brussels to discuss adding to sanctions that have limited access to capital markets for some Russian banks and companies and blacklisted officials involved in the conflict. New measures will likely target pro-Russian separatist leaders, the EU said. “Sanctions in themselves are not an objective, they can be an instrument if they come together with other measures,” European Union foreign policy chief Federica Mogherini told reporters before the meeting. She said the EU’s three-track strategy consists of sanctions, encouragement of reforms in Ukraine and dialogue with Russia. “We are very concerned about any possible ethnic cleansings and Ukraine ending up as a neo-Nazi state,” Putin said according to an English translation of his remarks published by the Kremlin.

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They’re afraid if they cut production, investors may pull out. So they keep on the treadmill until they blow up the entire thing.

Shale Drillers Plan Output Increases Despite Oil Price Decline (Bloomberg)

Shale drillers are planning on production growth with fewer rigs despite a worldwide glut that has sent crude prices to a four-year low. Companies including Devon Energy, Continental Resources and EOG Resources said they expect to pump more from their prime properties while cutting back in their least productive prospects. That puts the onus on OPEC nations, led by Saudi Arabia, to cut output if they want to stem the slide in global oil prices. “There’s a lot more production coming online this year and in the first half of 2015,” said Jason Wangler, an analyst at Wunderlich Securities. “This isn’t a machine that you can turn on and off with a switch. It’s going to take months, if not quarters, to turn it around.”

Domestic output topped 9 million barrels a day for the first time since at least 1983, the U.S. Energy Information Administration said Nov. 13. West Texas Intermediate crude, the U.S. benchmark oil contract, sank 18 cents yesterday to settle at $75.64 a barrel. Prices fell to $74.21 on Nov. 13, the lowest since 2010. “Certainly if prices fall even further than they are now, it’ll have some impact, and it may slow the growth rate of U.S. production,” said Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy in New York. “I still think, unless they fall significantly further, U.S. production is going to see dramatic increases in growth.”

Lower prices aren’t stopping U.S. shale drillers. Devon Energy, which pumped 136,000 barrels a day of crude in the third quarter, will boost output by as much as 25% next year, said John Richels, the company’s CEO, in a Nov. 5 earnings call. That rivals this year’s expansion, even though Devon will idle four of its six rigs in Oklahoma’s Mississippi Lime prospect. Continental Resources, which produced 128,000 barrels a day in the third quarter, trimmed $600 million from its 2015 drilling budget by shelving plans to add new rigs. Nonetheless, the Oklahoma City-based company said in its Nov. 6 earnings call it will increase output as much as 29%. Pioneer Natural Resources in Irving, Texas, the most active driller in West Texas’s Permian Basin, said in its Nov. 5 third-quarter call that it plans to add as much as 21%.

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Anything for a buck.

3 Billion Gallons Of Fracking Wastewater Pumped Into Clean CA Aquifers (ZH)

Dear California readers: if you drank tapwater this morning (or at any point in the past few weeks/months), you may be in luck as you no longer need to buy oil to lubricate your engine: just use your blood, and think of the cost-savings. That’s the good news. Also, the bad news, because as the California’s Department of Conservation’s Chief Deputy Director, Jason Marshall, told NBC Bay Area, California state officials allowed oil and gas companies to pump up to 3 billion gallons (call it 70 million barrels) of oil fracking-contaminated waste water into formerly clean aquifiers, aquifiers which at least on paper are supposed to be off-limits to that kind of activity, and are protected by the government’s EPA – an agency which, it appears, was richly compensated by the same oil and gas companies to look elsewhere.

And the scariest words of admission one can ever hear from a government apparatchik: “In multiple different places of the permitting process an error could have been made.” Because nothing short of a full-blown disaster prompts the use of the dreaded passive voice. And what was unsaid is that the “biggest error that was made” is that someone caught California regulators screwing over the taxpayers just so a few oil majors could save their shareholders a few billion dollars in overhead fees. And now that one government agency has been caught flaunting the rules, the other government agencies, and certainly private citizens and businesses, start screaming: after all some faith in the well-greased, pardon the pun, government apparatus has to remain:

“It’s inexcusable,” said Hollin Kretzmann, at the Center for Biological Diversity in San Francisco. “At (a) time when California is experiencing one of the worst droughts in history, we’re allowing oil companies to contaminate what could otherwise be very useful ground water resources for irrigation and for drinking. It’s possible these aquifers are now contaminated irreparably.”

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Our own countries are replete with mental slaves.

Modern Slavery Affects More Than 35 Million People (Guardian)

More than 35 million people around the world are trapped in a modern form of slavery, according to a report highlighting the prevalence of forced labour, human trafficking, forced marriages, debt bondage and commerical sexual exploitation. The Walk Free Foundation (WFF), an Australia-based NGO that publishes the annual global slavery index, said that as a result of better data and improved methodology it had increased its estimate 23% in the past year. Five countries accounted for 61% of slavery, although it was found in all 167 countries covered by the report, including the UK. India was top of the list with about 14.29 million enslaved people, followed by China with 3.24 million, Pakistan 2.06 million, Uzbekistan 1.2 million, and Russia 1.05 million.

Mauritania had the highest proportion of its population in modern slavery, at 4%, followed by Uzbekistan with 3.97%, Haiti 2.3%, Qatar 1.36% and India 1.14%. Andrew Forrest, the chairman and founder of WFF – which is campaigning for the end of slavery within a generation – said: “There is an assumption that slavery is an issue from a bygone era. Or that it only exists in countries ravaged by war and poverty. “These findings show that modern slavery exists in every country. We are all responsible for the most appalling situations where modern slavery exists and the desperate misery it brings upon our fellow human beings.

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That’s an excellent way to look at them.

Ebola Doctors: The Last Working Consciences In The Western World (Guardian)

Patients arrive at the Médecins Sans Frontières treatment centre in Sierra Leone 10 to an ambulance. The overcrowding means that by the time they get there, even those whose original symptoms may not have been Ebola will have been sufficiently exposed to catch it on the way in. Such is life in West Africa in the midst of the worst outbreak of the disease since it was first identified 38 years ago. Ebola Frontline – Panorama (BBC1) followed MSF doctor Javid Abdelmoneim – who, along with his colleagues, you can’t help but feel must be the owners of the last working consciences in the western world – on his month-long volunteer posting to the centre, treating some of the tens of thousands of people who have contracted Ebola since the epidemic began nine months ago.

Furnished with a specially adapted camera fitted to his goggles, one that can survive the chlorine sprayings and sluicings as part of the good doctor’s 20 minute decontamination procedure every time he leaves the tent full of his suffering and dying charges, we watch along with him as the disease plots its course through bodies, through families and through entire communities. People die quietly, for the most part. The loudest noise we hear is the wailing in grief of a woman who loses her sister. Their parents died before the cameras got there. Eleven-month-old Alfa is an Ebola orphan too, one of the estimated 10.3 million children directly or indirectly affected by the crisis. She dies alone, relieved of physical pain, Abdelmoneim hopes, by the morphine he gives her as her little body starts to fail, but “she looked frightened at the end”.

She is buried in a cemetery purpose-built for bodies that remain biohazards after death, one of hundreds of people marked only by patient ID numbers scrawled on paper labels attached to sticks driven into the ground. While the volunteer doctors, nurses and staff try to hold the line at the treatment centre – whose name they change to “case management centre” in recognition that all they can give is supportive, not curative care – the voiceover keeps us abreast of the rising death toll in Africa and the ponderous reactions and non-reactions of other nations to the crisis, and the delivery and non-delivery of promises and aid to the stricken regions. Last month the UN called for a twentyfold increase in help. Half of that has so far been donated. A plague on all our houses.

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Nov 102014
 
 November 10, 2014  Posted by at 10:30 am Finance Tagged with: , , , , , , , , , , ,  Comments Off on Debt Rattle November 10 2014


DPC Wanted: 500 men to eat frankfurters, Bowery, Rockaway, NY 1905

US Economic Growth Is All An Illusion (John Crudele)
The System Is Terminally Broken (Investment Research Dynamics)
Buybacks Biggest “Source Of Equity Demand In Recent Years” (Zero Hedge)
Myopic Domestic Delusion or Planned Monetary Demolition? (De Landevoisin)
What Stocks Say About The State Of The Global Economy (Zero Hedge)
China Factory-Gate Prices Decline for Record 32nd Month (Bloomberg)
Xi Dangles $1.25 Trillion as China Counters U.S. Refocus (Bloomberg)
China’s Stock Markets Change Forever Next Week (MarketWatch)
China’s $9 Trillion Untapped Market Spurs U.S. ETF Frenzy (Bloomberg)
Russia, China Add to $400 Billion Gas Deal With Accord (Bloomberg)
Russian Ruble Firms On Putin’s Backing (Reuters)
Banks Face 25% Loss Buffer as FSB Fights Too-Big-to-Fail (BW)
Jean-Claude Juncker Needs to Go (Bloomberg Ed.)
Draghi Summons Banking Know-How for Top Posts as ECB Role Shifts (Bloomberg)
Over 80% of Catalans Vote Yes at Independence Poll (RIA)
Letter Reveals 2010 ECB Funding ‘Threat’ To Ireland (BreakingNews.ie)
GM Ordered New Ignition Switches Long Before Recall (WSJ)
A 700-Kilometre Surveillance Fence Along The Canada-US Border (NPost)
Australia ‘Giving Up’ On Renewables (BBC)
Australia Renewables Investment Drops 70% From Last Year (Tim Flannery)
Why It’s Not Enough to Just Eradicate Ebola (NBC)

Haven’t seen anything by Crudele in a long time. My bad. Then again, he hides out at the NY Post of all places.

US Economic Growth Is All An Illusion (John Crudele)

As voters were coming out of the polls on Tuesday, pesky reporters were asking why they voted the way they did — and what was going through their heads The most popular response — from 45% of the voters — was the economy. Only 28% said their families were doing better financially. The economy is always the major issue in an election during times like these. So no one should have been shocked that voters took their anger out on the party that controls the White House, even though Republicans are just as much to blame for our economy’s failures. John Harwood, a political reporter for CNBC, asked a very good question before the votes were counted: Why? As in, “Why did people appear so angry and unhappy when the stock market was at record levels, the unemployment rate is down sharply, inflation is subdued and the number of jobs is increasing?”

Harwood’s explanation was that the benefits of this economic growth weren’t being evenly distributed and were being felt only by the blessed in the American economy — the upper 1%, if you will. Harwood is only a little right. Yes, the economy is blessing the few and leaving the rest of us in limbo. What Harwood and the rest of the folks who rely solely on Washington’s mainstream thinkers and Wall Street boosters for their information don’t realize is this: The economy isn’t really doing what the statistics say it is doing. Our nation’s economic statistics are nipped and tucked, massaged, managed, fabricated and dolled up. In short, our statistics are wrong and Main Street folks know it. Here’s what a Wall Street hedge fund mogul, Paul Singer, head of Elliott Management Corp., told his clients the other day: “Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth,” Singer wrote.

“When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.” I’m glad someone is reading my column. But it’s not like Singer — whom I don’t know — was willing to say that out loud so that everyone could understand. He wrote that in his newsletter to his clients. So, shhhhh! It’s a secret. Don’t tell Americans that the economy isn’t doing so well. (Oh, that’s right, they’ve already caught on.) I won’t get into the year-long investigation I have been conducting into the Census Bureau’s faulty economic data. Now that the Republicans control both houses of Congress, I’m sure what is going on at Census will be looked at very carefully. But fabrication of data isn’t the only problem. Put enough academics and statisticians in a room and they can turn any statistic into something it isn’t.

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Word: “What would happen if the Fed decided to “experiment” by removing this massive dead-pool of money from the banks? The money isn’t really “dead,” it’s keeping the banks from collapsing.”

The System Is Terminally Broken (Investment Research Dynamics)

The Fed has formally “ended” QE, but it hasn’t really. The Fed will continue reinvesting interest on its portfolio in more bonds and it will rollover maturities. We saw what happens to the stock market a few weeks ago when Fed official James Bullard asserted that the Fed needs to start raising rates: the S&P 500 quickly dropped 8%. Right at the bottom of the drop, the very same Bullard issued a statement suggesting that QE should be extended. This triggered an insanely abrupt “V” move back up to a new record high for the S&P 500. Bullard either did this intentionally or is a complete idiot. The stock market can’t function without Federal Reserve intervention. The stock market lost 8% quickly on just the thought that the Fed might start raising rates. Imagine what would happen if the Fed decided to “experiment” by shutting down its market intervention operations – both verbal and physical – for a month…

As for QE, if the Fed has achieved its objective of stimulating the economy, why doesn’t it start removing the $2.6 trillion of liquidity that it has injected into its member banks? This was money that was supposed to be directed at the economy. How come it’s sitting on bank balance sheets earning .25% interest? That’s $6.5 billion in free interest the Fed continues to inject into the Too Big To Fail banks. But why? What would happen if the Fed decided to “experiment” by removing this massive dead-pool of money from the banks? The money isn’t really “dead,” it’s keeping the banks from collapsing. I’m interested to watch the Government Treasury bond auctions now that the Fed is not there to soak up anywhere from 50-100% of each issue. I wonder if the banks will be moving their $2.6 trillion in Excess Reserves into new Treasury issuance. Obama is going around broadcasting the lie that the Government’s spending deficit in FY 2014 was something like $600 billion.

Yet, the amount of new Treasury bonds issued increased by $1 trillion over the same period. Either Obama is lying or the accountants at the Treasury committed a big typo. Either the Fed has found a way to continue opaquely monetizing new Government debt issuance, or the market is soon going to force U.S. interest rates up much higher.

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Time to raise rates, or companies will own all their own stock. Sort of like BOJ buying up all Japanese sovereign bonds. Snake eats tail.

Buybacks Biggest “Source Of Equity Demand In Recent Years” (Zero Hedge)

Spoiler alert: it’s not the Fed, even though the portfolio rebalancing channel courtesy of a $4.5 trillion Fed balance sheet certainly assured that the artificially inflated bubble in stocks, as a result of the Fed’s own purchases of bonds, is unlike anything seen before (and to all those debating whether the bubble is in bonds or stocks, here is the answer: it is in both). The answer, according to Goldman’s David Kostin is the following: “From a strategic perspective, buybacks have been the largest source of overall US equity demand in recent years.”

In other words, not only has the Fed made a mockery of fundamentals, the resulting ZIRP tsunami means that corporations can issue nearly-unlimited debt to yield chasing “advisors” managing other people’s money, and use it to buyback vast amounts of stock, which brings us to the latest aberation of the New Abnormal: the “Pull the S&P up by the Bootstaps” market, in which the only relevant question is which company can buyback the most of its own stock. Some further observations on the only thing that matters for equity demand in a world in which the Fed is, for the time being, sidelined:

Since the start of 4Q, a sector-neutral basket of 50 stocks with the highest buyback yields has outpaced the S&P 500.

And sure enough, with the market once again rewarding stock buybacks… companies will focus exclusively on stock repurchases in lieu of actual growth-promoting capital allocation such as CapEx (as predicted in April 2012):

We forecast S&P 500 cash spent on repurchases will rise by 18% in 2015 following a 26% jump in 2014.

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Very much worth a read. People leap into assumptions about Fed and IMF goals far too easily, if you ask me.

Myopic Domestic Delusion or Planned Monetary Demolition? (De Landevoisin)

So where is the impasse I point to? Well, as stated above, I am not quite so sanguine as Mr. Stockman is regarding the reasons behind our apparent self induced economic undoing. It is my contention that there exists ample motive behind the apparent policy insanity we are indeed witnessing and actually navigating through. What is being done is quite simply too plainly preposterous to be so innocently and readily dismissed. One has to consider what else may be driving the continuous and relentless stoking of a glaring, oncoming, head on collision train wreck dead ahead. No locomotive engineer can simply be assumed to be this brain dead, so completely out to lunch, it just doesn’t add up. Something else is at the heart of this mainlined monetary mayhem.

Call me a jaded cynic or even worse, a crackpot conspiracist, but when I see a country as majestic and powerful as the United States which has always stood for liberty and the pursuit of free enterprise, knowingly, willfully and conspicuously being undermined, as if being herded over a cliff like baffled buffaloe on the great plains, I smell a dubious dirty rat. Let us bear in mind, that the IMF Multinational Central Bankers are waiting in the wings to pick up the pieces of the train wreckage, with their deliberate SDR regime preparations. They are qualifying themselves to take on the existing immense capital account imbalances between the debtor and creditor nations. That will be a critical aspect of the developing picture.

As a new global monetary order begins to emerge and impose itself, the SDR composite will be expanded so as to address these utterly unsustainable trade imbalance. The envisaged multilateral SDR monetary instrument will be positioned to buy out the existing unserviceable sovereign debt loads, whereby the massively indebted nations of the developed world will cede a measure of influence to the creditor nations of the emerging world.

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Ouch!

What Stocks Say About The State Of The Global Economy (Zero Hedge)

The following two charts cut right through the headline propaganda and show all there is to know about the state of the global economy. The first is a chart of Global Cyclical stocks (Goldman ticker GSSBGCYC). The second shows Global Defensives (Goldman ticker GSSBGDEF). The resulting picture is worth 1000 Op-Eds welcoming you to yet another “global recovery.”

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And that economy is still supposed to grow at 7%?

China Factory-Gate Prices Decline for Record 32nd Month (Bloomberg)

China’s factory-gate prices fell for a record 32nd month in October and consumer prices remained subdued, raising pressure on policymakers to bolster the world’s second-largest economy as disinflation spreads. The producer-price index dropped 2.2% from a year earlier, the National Bureau of Statistics said in Beijing today, compared with the median projection of a 2% decline in a survey of analysts by Bloomberg News. Consumer prices rose 1.6% and the rate was unchanged from the prior month and matched economists’ estimates. China’s economy, burdened by overcapacity and weak domestic demand, is headed for the slowest full-year growth in more than two decades. Lower oil and metals prices are cutting costs at the factory gate, allowing China’s exporters to reduce prices and adding to deflationary pressures globally.

“China’s domestic demand remained soft and dis-inflationary risks are on the rise on the back of falling global commodity prices,” said Chang Jian, chief China economist at Barclays. “Subdued inflation offers room for more PBOC easing, but broad-based monetary easing will more likely to be triggered by disappointing growth numbers, which we will likely see in the coming months.” Chang said she expects the PPI drop will continue to 2015. Purchasing prices of fuels fell 3.8% in October from a year earlier, while ferrous metals costs dropped 6.9%, the NBS data showed. Prices of all nine components dropped. Oil prices have slumped into a bear market amid speculation of a global glut, slowing drilling at U.S. shale formations. Producers in OPEC countries are responding by cutting prices, resisting calls to reduce supply as they compete with the highest U.S. output in three decades.

“The extended drop in the PPI is affected by the prolonged decline of global oil prices and overcapacity in some domestic industries,” Yu Qiumei, a senior statistician at the NBS, said in a statement today. Eighteen of China’s 31 provinces and municipalities reported a nominal growth rate lower than the price-adjusted level for the first nine months of this year, signaling deflation. China’s imports moderated to a 4.6% increase in October from September’s 7% gain, according to data released by General Administration of Customs over the weekend.

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Ahem: “China’s development will generate huge opportunities and benefits and hold lasting and infinite promise.”

Xi Dangles $1.25 Trillion as China Counters U.S. Refocus (Bloomberg)

President Xi Jinping sought to counter U.S. efforts aimed at boosting influence in Asia by flexing China’s economic muscle days before a Beijing summit with his counterpart Barack Obama. Speaking to executives at a CEO gathering in Beijing, Xi outlined how much the world stands to gain from a rising China. He said outbound investment will total $1.25 trillion over the next 10 years, 500 million Chinese tourists will go abroad, and the government will spend $40 billion to revive the ancient Silk Road trade route between Asia and Europe. “China’s development will generate huge opportunities and benefits and hold lasting and infinite promise,” Xi said. “As China’s overall national strength grows, China will be both capable and willing to provide more public goods for the Asia Pacific and the world.”

China has used the Asia-Pacific Economic Cooperation forum summit under way in Beijing to put forward its own trade and economic proposals to strengthen its sway in Asia. Those incentives complement a greater assertiveness in territorial disputes and moves to upgrade its military after decades of U.S. dominance in the region. China is rolling out counteroffers for each promise made by President Barack Obama, whom he’ll meet this week in Beijing as part of the summit. Xi is pushing the Free Trade Area of the Asia-Pacific in response to the U.S.-backed Trans-Pacific Partnership, which excludes China. An Asia Infrastructure Investment Bank mostly financed with money from Beijing is seen as an answer to the Asian Development Bank and other multinational lenders where the U.S. and Japan have the most influence.

“Any time they have the chance to shape international economic rules or norms they are going to do that,” said Andrew Polk, resident economist at the Conference Board China Center for Economics and Business in Beijing. “It’s a bifurcated kind of response – there’s a reactive response to the developed world but trying to take a leadership role among other emerging economies.” While spelling out his message, Xi also made clear China is ready to accept a lower rate of growth, assuring executives that the economy is more resilient than ever and his government can safely guide the country through any slowdown. China’s economy is targeted to grow at about 7.5% this year, the slowest since 1990, and Xi said a growth rate around 7% would still make the country a top performer.

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Big deal, but with China doing far worse than they let on, what possible outcomes are there?

China’s Stock Markets Change Forever Next Week (MarketWatch)

When MarketWatch covers Chinese stocks, we usually focus on those listed in Hong Kong. The reason for this is that few outside of China – mainly just institutional investors with approved quotas – are able to buy what’s sold in Shanghai, Shenzhen and the other mainland Chinese bourses, while any investor in the world can buy Hong Kong-listed names. But this is all about to change in a big way next Monday, when China launches its game-changing “Shanghai-Hong Kong Stock Connect” program. For the first time ever, retail investors around the world will be able to invest in mainland Chinese equities.

In some high-profile cases, the same companies have stock listing in both Shanghai (known as “A-shares” when denominated in yuan) and Hong Kong (“H-shares”), though here too, opportunities exist in the form of arbitrage, as a given company’s A-shares and H-shares rarely trade at the same level. “Many international investors are completely excited,” Charles Li, the chief executive of bourse operator Hong Kong Exchanges & Clearing (HKEx) told MarketWatch at a recent media availability. “This is probably the last frontier market that has yet to open,” Li said, “and they [global investors] probably have never seen a rebalancing possibility like this scale anytime in past history.”

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I smell a huge rat. This has the potential to hide away the reality of global financial markets for a while. However, it also brings western scrutiny closer to China’s numbers.

China’s $9 Trillion Untapped Market Spurs U.S. ETF Frenzy (Bloomberg)

The race is on to give U.S. exchange-traded fund investors access to $9 trillion of stocks and bonds in mainland China. Money managers including BlackRock and CSOP have now registered almost 40 ETFs tracking the country’s domestic shares and debt with U.S. regulators, six times the number of existing funds. The products allow anyone with a U.S. brokerage account to gain exposure to Chinese securities that were previously off limits to all but a few qualified institutions. Equities in the biggest emerging market are heading for the best annual gain since 2009, outpacing shares of mainland companies listed overseas amid speculation government plans to ease capital controls will narrow the valuation discount on domestic securities. As programs including a planned bourse link between Hong Kong and Shanghai help open up China’s markets, fund providers are rushing to stake claims to the fees they hope will come from new investors.

“There is so much potential, you just can’t ignore China,” Patricia Oey, a senior analyst at investment data provider Morningstar Inc. in Chicago, said in a telephone interview. Fund companies “want to have a foot into a very big market. China is opening up and they want to be there.” BlackRock, the world’s largest money manager, is seeking to introduce its first U.S. exchange-traded fund that would invest directly in equities traded in Shanghai and Shenzhen, according to a Sept. 15 regulatory filing. CSOP, which runs a $6 billion ETF of China’s yuan-denominated A shares out of Hong Kong, filed to create a U.S. version three days later. While only a fraction of Chinese companies are listed or sell debt offshore, U.S. investors have piled almost $10 billion into ETFs that exclusively buy securities trading abroad, until recently one of the only ways for individuals to gain exposure to businesses from the world’s second-largest economy.

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“Together we have carefully taken care of the tree of Russian-Chinese relations. Now fall has set in, it’s harvest time, it’s time to gather fruit.”

Russia, China Add to $400 Billion Gas Deal With Accord (Bloomberg)

China has secured almost a fifth of the natural gas supplies it will need by the end of the decade after striking a second major deal with Russia. Russian President Vladimir Putin and Chinese President Xi Jinping signed the gas-supply agreement in Beijing the day before U.S. President Barack Obama arrived in the Chinese capital for the Asia-Pacific Economic Cooperation summit. The deal is slightly smaller than the $400 billion accord reached earlier this year, shortly after Russia’s annexation of Crimea. Russia’s Gazprom is negotiating the supply of as much as 30 billion cubic meters of gas annually from West Siberia to China over 30 years, it said yesterday. Another Russian company is discussing the sale of a 10% stake in a Siberian unit to state-owned China National Petroleum Corp.

Russia has turned to China to diversify its market and spur its economy as relations soured with the U.S. and Europe over the Ukraine crisis. The initial accord “will make Russia rely more on China both economically and politically,” Lin Boqiang, director of the Energy Economics Research Center at Xiamen University, said by phone. “China is probably the only country in the world that has both the financial ability and the market capacity to consume Russia’s huge energy exports on a sustainable basis over a long period of time,” said Lin. It gives Putin an opportunity to show Europe and the U.S. that his country won’t be isolated over Ukraine, he said. The two deals could account for almost 17% of China’s gas consumption by 2020, Gordon Kwan at Nomura wrote.

Russia may start selling gas to China within four to six years as part of the agreement with CNPC, Gazprom Chief Executive Officer Alexey Miller told reporters in Beijing. When the new supply deal begins, China will surpass Germany to become Russia’s biggest natural gas customer, according to CNPC’s website. “Together we have carefully taken care of the tree of Russian-Chinese relations,” Chinese President Xi Jinping said yesterday at a meeting with Putin at the economic forum. “Now fall has set in, it’s harvest time, it’s time to gather fruit.”

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It’s one sunny message after the other at the APEC summit.

Russian Ruble Firms On Putin’s Backing (Reuters)

The ruble firmed broadly on Monday after President Vladimir Putin said there were no reasons for the slide in the Russian currency. After a dramatic fall in previous week and volatile swings of 6% in its rate on Friday, the rouble traded 1.9% higher at 45.77 to the dollar at 0735 GMT. The Russian currency was 1.7% stronger at 57.07 against the euro. The Russian central bank said on Monday that it expects zero economic growth in 2015 and only 0.1% growth in 2016, in a three-year monetary policy strategy that anticipates Western sanctions against Russia will remain until the end of 2017. The central bank said that it was also calculating its base forecasts on the Urals oil price recovering to an average of $95 in 2015 but falling to $90 by the end of 2017, a long-term downward trend which it said would constrain economic growth.

Putin, wooing Asian investors on Monday at the Asia-Pacific Economic Cooperation summit in Beijing, said he was hopeful that speculation against the rouble would stop soon and that there was no fundamental economic reason for the currency’s slide. The rouble has slumped nearly 30% against the dollar this year as plunging oil prices and Western sanctions over the Ukraine crisis shrivelled Russia’s exports and investment inflows. Russia’s central bank, which limited its support for the rouble last week by cutting the size of its interventions to $350 million a day, said on Friday it would still intervene to support the rouble it sees threats to financial stability. Putin also said Russia and China intend to increase the amount of trade that is settled in yuan, as he ruled out capital controls for Russia.

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Long overdue and even now just a plan.

Banks Face 25% Loss Buffer as FSB Fights Too-Big-to-Fail (BW)

The world’s largest banks will have to build up their loss-absorbing liability buffers to see them through a crisis, as regulators tackle too-big-to-fail lenders six years after the collapse of Lehman Brothers Holdings Inc. The Financial Stability Board, led by Bank of England Governor Mark Carney, said today that the biggest banks may be required to have total loss absorbing capacity equivalent to as much as a quarter of their assets weighted for risk, with national regulators able to impose still tougher standards. The FSB is seeking comment on the rule, known as TLAC, which would apply at the earliest in 2019. Carney said the plans are a “watershed” in regulators’ mission to end the threat posed by banks whose size and systemic importance mean their failure would be catastrophic for the global economy.

“Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system,” he said. The rules are the latest step by the FSB in a five-year quest to boost banks’ resilience in the face of financial shocks. Agreement has already been reached on measures including tougher capital requirements and enhanced scrutiny by supervisors. The TLAC rules would apply to the FSB’s register of global systemically important banks. The latest list, published last week, contains 30 banks, with HSBC and JPMorgan identified as the most significant. The draft requirements announced by the FSB would measure banks’ ability to absorb losses in a crisis, shielding taxpayers from bailouts.

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For once, I agree with the Bloomberg editors.

Jean-Claude Juncker Needs to Go (Bloomberg Ed.)

Jean-Claude Juncker, the new president of the European Commission, was always a bad choice for the job, foisted on the bloc’s 28 national governments by a European Parliament eager to expand its powers. It’s becoming clear now just how poor a decision that appointment was. Juncker was the prime minister of Luxembourg, a tiny nation with a population 1/17th the size of London’s, for almost two decades. In that time, he oversaw the growth of a financial industry that became a tax center for at least 340 major global companies, not to mention investment funds with almost €3 trillion ($3.7 trillion) in net assets – second only to the U.S. Partly as a result of the Swiss-style bank secrecy rules and government-blessed tax avoidance schemes that helped draw so much capital, the people of Luxembourg have become the world’s richest after Qatar.

The tax arrangements, described in leaked documents provided by the International Consortium of Investigative Journalists, allegedly enabled multinationals, from Apple to Deutsche Bank, to reduce their tax liabilities on profits earned in other countries: The effective Luxembourg tax rates that resulted were as little as 0.25%. The countries where the money was made received nothing. It’s telling that these arrangements have long been shrouded in secrecy. (Only last month did Luxembourg’s government drop its opposition to new EU rules on banking transparency.) Juncker, you could say, made his country rich by picking the pockets of other countries, including those of the European Union he is now mandated to serve.

The commission was already conducting an investigation of Luxembourg’s tax arrangements. Juncker says he won’t interfere – but he won’t recuse himself, either. Indeed, his spokesman says he is “serene” in the face of the revelations. He shouldn’t be. At this point, he could best serve the European project by resigning. Juncker’s position as the head of the body investigating the tax practices he oversaw as prime minister is a clear conflict of interest. It’s possible the commission will find nothing improper about Luxembourg’s tax-avoidance paradise: The EU allows member governments wide latitude in taxing companies, so long as they don’t favor some over others. But with Juncker in charge of the commission, any such exoneration will fail to command public confidence.

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“Oh, jeez: “This macroprudential policy was born out of the gradual recognition that the financial system isn’t always rational.”

Draghi Summons Banking Know-How for Top Posts as ECB Role Shifts (Bloomberg)

Mario Draghi is seeking economists who understand banks, and he’s not afraid to look outside Frankfurt to find them. As the European Central Bank assumes the mantle of euro-area financial supervisor, its president has just staffed two key monetary-policy posts with non-ECB experts on how lenders function in the economy. The appointments mark a trend of turning to outsiders as the 16-year-old institution struggles to meet its changing responsibilities with existing staff. “People like Draghi have much more interest in how markets and supervision affect monetary policy than the old school,” said Anatoli Annenkov, senior European economist at Societe Generale SA in London. “It’s a reflection of the problems that the ECB is facing.” Sergio Nicoletti Altimari, a Bank of Italy financial-markets official who worked closely with Draghi during the latter’s time as governor there, will become director general for macroprudential policy and financial stability from Jan. 1.

Luc Laeven, a Belgian economist at the International Monetary Fund with a track record of analyzing financial crises, will become director general for research by March. Draghi is seeking people who can handle the new powers the ECB gained when it became the euro-area banking supervisor on Nov. 4. About 900 new staff have been hired so far who will be dedicated to oversight, and the role also brings the authority to promote financial stability throughout the economy with measures such as higher capital buffers or increased risk-weightings on lenders’ assets. This macroprudential policy was born out of the gradual recognition that the financial system isn’t always rational, and so someone needs to be watching for the emergence of risks that could escalate and broaden.

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Add this to the recent revelations of the corruption agonizingly close to Rajoy and his government, and Catalunya must feel stronger every day.

Over 80% of Catalans Vote Yes at Independence Poll (RIA)

An overwhelming majority of Catalans has supported the region’s independence, vice president of the autonomy’s government Joana Ortega said early Monday. There have been two question in the ballots: “Would you like Catalonia to become a state?” and “If yes, would you like Catalonia to become an independent state?” With 88.44% of the ballots counted, 80.72% of voters answered yes to both questions in the ballot, and 10.11% answered yes only to the first questions, according to Ortega. As few as 4% of the voters said no to both questions.

More than 2.25 million people out of 5.4 million eligible voters in the wealthy breakaway region of Catalonia in northeastern Spain voted on Sunday in the unofficial independence poll. Results of the vote are expected to come on Monday morning. Spanish government sees the voting as illegal and tried to block it by filing complaints to the Constitutional Court. However Catalan President Artur Mas has stated that Catalonia would carry out the consultation despite the central government’s protests. Earlier on Sunday the central government dismissed the vote as “useless” and unconstitutional.

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The ECB is no more beyond blackmail than the rest of Brussels is.

Letter Reveals 2010 ECB Funding ‘Threat’ To Ireland (BreakingNews.ie)

A top-level threat to cut emergency European funding to Ireland days before the humiliating international bailout will shock people, Public Expenditure Minister Brendan Howlin has said. Letters released today by the European Central Bank (ECB) confirm the Government was warned crisis funds propping up collapsed banks in 2010 would be withdrawn unless they asked for an €85bn rescue package. The missive from then-ECB president Jean Claude Trichet to the late former Finance Minister Brian Lenihan also demanded a written commitment to punishing austerity measures, spending cutbacks and an overhaul of the financial industry. Irish high-street banks were surviving on emergency funding – known as emergency liquidity assistance (ELA) – at the time and if stopped, it could have effectively shut down the property crash-ravaged lenders.

Mr Trichet urged a speedy response to his proposals, which have been interpreted by some as the Frankfurt central bank pushing Ireland into a bailout. “It is the position of the (ECB) Governing Council that it is only if we receive in writing a commitment from the Irish government vis-a-vis the Eurosystem on the four following points that we can authorise further provisions of ELA (Emergency Liquidity Assistance) to Irish financial institutions,” Mr Trichet wrote. The four points included Ireland seeking a bailout, agreeing to austerity, reforming banks and guaranteeing to repay emergency funds. Two days after the letter was sent on November 19 Ireland officially requested a rescue package from the ECB, the International Monetary Fund and the European Commission. Minister Howlin said the letters – published after a years-long campaign for their release – would “come as a shock to many people”.

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OK, now we know this, go get ’em! Take ’em to court already!

GM Ordered New Ignition Switches Long Before Recall (WSJ)

General Motors ordered a half-million replacement ignition switches to fix Chevrolet Cobalts and other small cars almost two months before it alerted federal safety regulators to the problem, according to emails viewed by The Wall Street Journal. The parts order, not publicly disclosed by GM, and its timing are sure to give fodder to lawyers suing GM and looking to poke holes in a timetable the auto maker gave for its recall of 2.5 million vehicles. The recall concerns a switch issue that is now linked to 30 deaths and has led to heavy criticism of the auto giant’s culture and the launch of a Justice Department investigation.

The email exchanges took place in mid-December 2013 between a GM contract worker and the auto maker’s ignition-switch supplier, Delphi Automotive. The emails indicate GM placed a Dec. 18 “urgent” order for 500,000 replacement switches one day after a meeting of senior executives. GM and an outside report it commissioned have said the executives discussed the Cobalt at the Dec. 17 meeting but didn’t decide on a recall. The emails show Delphi was asked to draw up an aggressive plan of action to produce and ship the parts at the time. In the months that followed, the size of the recall announced Feb. 7 would balloon and spark an auto-safety crisis, casting a shadow over the industry and leading to widespread calls for faster action by auto makers addressing safety concerns.

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” … the Border Integrity Technology Enhancement Project.” Alternatively, they could just burn the $92 million. Or give it to people who need it.

A 700-Kilometre Surveillance Fence Along The Canada-US Border (NPost)

A massive intelligence-gathering network of RCMP video cameras, radar, ground sensors, thermal radiation detectors and more will be erected along the U.S.-Canada border in Ontario and Quebec by 2018, the Mounties said Tuesday. The $92-million surveillance web, formally known as the Border Integrity Technology Enhancement Project, will be concentrated in more than 100 “high-risk” cross-border crime zones spanning 700 kilometres of eastern Canada, said Assistant Commissioner Joe Oliver, the RCMP’s head of technical operations. Airport search not racial profiling when based on customs officers’ on-the-job experience: court Customs officers are not guilty of racial profiling when they use on-the-job experience to decide who to stop and search at Canada’s airports, the Federal Court of Appeal has ruled.

“Officers on the front line, such as the officer herein, cannot be expected to leave their experience — acquired usually after many years of observing people from different countries entering Canada — at home,” Justice Marc Nadon said, writing on behalf of a three-person appeal panel. Justice Nadon made the comment in overturning a tribunal decision that quashed an $800 fine imposed against an Ottawa woman, Ting Ting Tam, who failed to declare some pork rolls in her luggage. “The concept involves employing unattended ground sensors, cameras, radar, licence plate readers, both covert and overt, to detect suspicious activity in high-risk areas along the border,” Assistant Commissioner Oliver told security industry executives attending the SecureTech conference and trade show at Ottawa’s Shaw Centre. “What we’re hoping to achieve is a reduction in cross-border criminality and enhancement of our national security.”

The network of electronic eyes is to run along the Quebec-Maine border to Morrisburg, Ont., then along the St. Lawrence Seaway, across Lake Ontario, and ending just west of Toronto in Oakville. The project was announced under the 2014 federal budget, but framed solely as a measure to improve the RCMP’s ability to combat contraband cigarette smuggling. The network will be linked to a state-of-the-art “geospatial intelligence and automated dispatch centre” that will, among other things, integrate the surveillance data, issue alerts for high-probability targets, issue “instant imagery” to officers on patrol and produce predictive analysis reports.

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The OZ government doesn’t seem to be in sync with its people.

Australia ‘Giving Up’ On Renewables (BBC)

Investment into renewable energy projects in Australia has dropped by 70% in the last year, according to a new report by a climate change body. The Climate Council says foreign investors are going to other countries because Australia’s government has no clear renewable energy policy. Australia has gone from “leader to laggard” in energy projects, it added. Another new report says Australia will need to raise its carbon emission reduction target to 40% by 2025. The damning report on the state of renewable energy, entitled Lagging Behind: Australia and the Global Response to Climate Change, said the country was losing out on valuable business. Investment that could be coming to Australia was going overseas “to countries that are moving to a renewables energy future”, said Tim Flannery, one of the report’s authors. He said most countries around the world had accelerated action on climate change in the last five years because the consequences had become more and more clear.

The report found China had retired 77 gigawatts of coal power stations between 2006 and 2010 and aimed to retire a further 20GW by next year. It also said the US was “rapidly exploiting the global shift to renewable energy” by introducing a range of incentives and initiatives to investors. The future of Australia’s renewable energy industry remains highly uncertain, the report concluded, because of a lack of clear federal government renewable energy policy. “Consequently investment in renewable energy in 2014 has dropped by 70% compared with the previous year,” it said. The second new report, by the Climate Institute, calls on Australia’s government to announce an “independent, transparent” process for setting the post 2020 carbon emission reduction targets. Erwin Jackson, deputy chief executive of the climate body, said too much of the political debate had “ignored growing scientific, investment and international realities”.

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With the amounts being thrown around, it looks risky to pull out.

Australia Renewables Investment Drops 70% From Last Year (Tim Flannery)

Australia’s most important trading partners and allies, such as China, the US and the European Union are strengthening their responses to climate change. Australia will be left in the wake of these big economies (and big emitters), according to the latest Climate Council report Lagging Behind: Australia and the Global Response to Climate Change. Australia’s retreat from being a global leader at tackling climate change is as impressive as our recent performances at the cricket. Looking on the bright side, even countries not known for their sunshine like Germany are going solar in a big way. Global momentum is building as more and more countries invest in renewable energy and put a price on carbon. 39 countries are putting a price on carbon. The EU and China (now with seven pilot schemes up and running) are home to the two largest carbon markets in the world, together covering over 3,000m tonnes (MtCO2) of carbon dioxide emissions.

There’s also plenty of action in the US: 10 states with a combined population of 79 million are now using carbon pricing to drive down emissions, including California, the world’s ninth largest economy. Yet, here in Australia, we now hold the dubious distinction of being the first country to repeal an operating and effective carbon price. Like carbon pricing, support for renewables is also advancing worldwide. In the last year, more renewable energy capacity was added than fossil fuels. Globally renewables attracted greater investment with US$192bn spent on new renewable power compared to US$102bn in fossil fuel plants. China is leading the charge on expanding renewable capacity. At the end of last year, China had installed a whopping 378GW of renewable energy capacity – about a quarter of renewables capacity installed worldwide, and over seven times Australia’s entire grid-connected power capacity.

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Don’t let the GOP find out Obama spends $6 billion on African health care systems.

Why It’s Not Enough to Just Eradicate Ebola (NBC)

The new U.S. plan to spend $6 billion fighting Ebola has a hidden agenda that aid workers approve of: not only stamping out the epidemic in West Africa, but starting to build a health infrastructure that can prevent this kind of thing from happening again. President Barack Obama’s $6.18 billion request is an enormous amount of money – six times what the U.S. has already committed and far more even than what the World Health Organization says is needed. Most is going for full frontal assault on Ebola – one that hasn’t really gotten off the ground yet, months into an epidemic that has been out of control despite an outcry from international groups and governments alike. But billions are also being quietly allocated to building a health care system in the countries suffering the most – a less sexy approach that could prevent another epidemic in the future. Most aid groups are focused on eradicating the virus, which has infected at least 13,000 people, probably more, and killed at least 5,000 of them.

That’s where the public support is; donors and taxpayers alike prefer to focus on a specific goal, and an emergency always gets attention. “Had we had those things in place, we would have detected this a lot earlier.” “We are not really a developmental organization,” said Dr. Armand Sprecher of Médecins Sans Frontières (Doctors Without Borders), one of the main groups fighting Ebola in West Africa. MSF focuses on providing targeted medical care. And while that has to be the first priority, it’s important to keep an eye on the long game, says Dr. Raj Panjabi, a founder and CEO of Last Mile Health, an aid group focused on helping people in the most remote corners of the world. “The goal has to be to not just contain Ebola,” Panjabi told NBC News. Ebola spread silently in villages and remote communities where there were no health care workers to diagnose Ebola and no way for them to report it even if they did catch it. “Had we had those things in place, we would have detected this a lot earlier,” said Panjabi.

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Oct 282014
 
 October 28, 2014  Posted by at 11:21 am Finance Tagged with: , , , , , , , , , ,  4 Responses »


Arthur Siegel Zoot suit, business district, Detroit, Michigan Feb 1942

Fears Grow Over QE’s Toxic Legacy (FT)
Draghi QE May Help Europe’s Rich Get Richer (Bloomberg)
Quantitative Easing Is Like “Treating Cancer With Aspirin” (Tim Price)
ECB Stress Tests Vastly Understate Risk Of Deflation And Leverage (AEP)
Under Full Capital Rules, 36 EU Banks Would Have Failed Test (Reuters)
3 Reasons Why You Should Expect A 30% Market Meltdown (MarketWatch)
US Banks See Worst Outflow of Money in ETF Since 2009 (Bloomberg)
The Great Recession Put Us in a Hole. Are We Out Yet? (Bloomberg)
China Fake Invoice Evidence Serve To Inflate Trade Data (Bloomberg)
Riksbank Cuts Key Rate to Zero as Deflation Fight Deepens (Bloomberg)
IMF Warns Gulf Countries Of Spending Squeeze (CNBC)
Shell Seeks 5 More Years for Arctic Oil Drilling Drive (Bloomberg)
Wind Farms Can ‘Never’ Be Relied Upon To Deliver UK Energy Security (Telegraph)
Equal Footing For Women At Work? Not Till 2095 (CNBC)
Lloyds Bank Confirms 9,000 Job Losses And Branch Closures As Profit Rises (BBC)
IRS Seizes 100s Of Perfectly Legal Bank Accounts, Refuses To Return Money (RT)
Bulk Of Americans Abroad Want To Give Up Citizenship (CNBC)
Tapering, Exiting, or Just Punting? (Jim Kunstler)
MH17 Might Have Been Shot Down From Air – Chief Dutch Investigator (RT)
MH17 Chief Investigator: No Actionable Evidence Yet In Probe (Spiegel)
Having Babies New Sex Ed Goal as Danes Face Infertility Epidemic (Bloomberg)
Medical Journal To Governors: You’re Wrong About Ebola Quarantine (NPR)

QE blows up the financial system instead of saving it. But some people and corporations will be much richer after.

Fears Grow Over QE’s Toxic Legacy (Tracy Alloway/FT)

“Bankruptcy? Repossession? Charge-offs? Buy the car YOU deserve,” says the banner at the top of the Washington Auto Credit website. A stock photo of a woman with a beaming smile is overlaid with the promise of “100% guaranteed credit approval”. On Wall Street they are smiling too, salivating over the prospect of borrowers taking Washington AutoCredit up on its enticing offer of auto financing. Every car loan advanced to a high-risk, subprime borrower can be bundled into bonds that are then sold on to yield-hungry investors. These subprime auto “asset-backed securities”, or ABS, have, like a host of other risky assets, been beneficiaries of six years of quantitative easing by the US Federal Reserve, which is due to come to an end this week. When the Fed began asset purchases in late 2008 the premise was simple: unleash a tidal wave of liquidity to force nervous investors to move out of safe investments and into riskier assets.

It is hard to argue that the tactic did not work; half a decade of low interest rates and QE appears to have sparked an intense scrum for riskier securities as investors struggle to make their return targets. Wall Street’s securitization machine has kicked back into gear to churn out bonds that package together corporate loans, commercial mortgages and, of course, subprime auto loans. At $359 billion sold last year, according to Dealogic data, issuance of junk-rated corporate bonds is at a record as companies take advantage of low rates to refinance debt and investors clamor to buy it. The question now is whether the rebound in sales of risky assets will prove to be a toxic legacy of QE in a similar way that the popularity of subprime mortgage-backed securities was partly spurred by years of low interest rates before the financial crisis. “QE has flooded the system with cash and you’re really competing with an entity with an unlimited balance sheet,” says Manish Kapoor of West Wheelock Capital. “This has enhanced the search for yield and caused risk appetites to increase.”

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That’s the goal.

Draghi QE May Help Europe’s Rich Get Richer (Bloomberg)

European Central Bank President Mario Draghi, fighting a deflation threat in the euro region, may need to confront a concern more familiar to Americans: income inequality. With interest rates almost at zero, Draghi is moving into asset purchases to lift inflation to the ECB’s target. The more he nears the kind of tools deployed by the Federal Reserve, the Bank of England and the Bank of Japan, the more he risks making the rich richer, said economists including Nobel laureate Joseph Stiglitz. In the U.S., the gap is rising between the incomes of the wealthy, whose financial holdings become more valuable via central bank purchases, and the poor. While monetary authorities’ foray into bond-buying is intended to stabilize economic conditions and underpin a real recovery, policy makers and economists are increasingly asking whether one cost may be wider income gaps – in Europe as well as the U.S.

“The more you use these unusual, even unprecedented monetary tools, the greater is the possibility of unintended consequences, of which contributing to inequality is one,” said William White, former head of the Bank for International Settlements’ monetary and economic department. “If you have all these underlying problems of too much debt and a broken banking system, to say that we can use monetary policy to deal with underlying real structural problems is a dangerous illusion.” The divide between rich and poor became part of a widespread public debate following the publication in English this year of Thomas Piketty’s “Capital in the Twenty-First Century.” He posited that capitalism may permit the wealthy to pull ahead of the rest of society at ever-faster rates.

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“As James Grant recently observed, it’s quite remarkable how, thus far, savers in particular have largely suffered in silence.”

Quantitative Easing Is Like “Treating Cancer With Aspirin” (Tim Price)

Shortly before leaving the Fed this year, Ben Bernanke rather pompously declared that Quantitative Easing “works in practice, but it doesn’t work in theory.” There is, of course, no counter-factual. We’ll never know what might have happened if the world’s central banks had not thrown trillions of dollars at the banking system, and instead let the free market work its magic on an overleveraged financial system. But to suggest credibly that QE has worked, we first have to agree on a definition of what “work” means, and on what problem QE was meant to solve. If the objective of QE was to drive down longer term interest rates, given that short term rates were already at zero, then we would have to concede that in this somewhat narrow context, QE has “worked”. But we doubt whether that objective was front and centre for those people – we could variously call them “savers”, “investors”, or “honest workers”. As James Grant recently observed, it’s quite remarkable how, thus far, savers in particular have largely suffered in silence.

So while QE has “succeeded” in driving down interest rates, the problem isn’t that interest rates were / are too high. Quite the reverse: interest rates are clearly too low – at least for savers. All the way out to 3-year maturities, investors in German government bonds, for example, are now faced with negative interest rates. And still they’re buying. This isn’t monetary policy success; this is madness. We think the QE debate should be reframed: has QE done anything to reform an economic and monetary system urgently in need of restructuring? We think the answer, self-evidently, is “No”. The answer is also “No” to the question: “Can you solve a crisis of too much indebtedness by increasing debt and suppressing interest rates?” The toxic combination of more credit creation and global financial repression will merely make the ultimate endgame that much more spectacular.

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Good summary of – part of – the reasons the tests are such a joke. “… the 39 largest European banks would alone need up to €450bn in fresh capital”. That’s so close to the Swiss estimates I quoted on Sunday, it sounds quite credible. And so different from the €9.5 billion cited by the test results, it’s ridiculous. Off by a factor of 50…

ECB Stress Tests Vastly Understate Risk Of Deflation And Leverage (AEP)

The eurozone’s long-awaited stress test for banks has been overtaken by powerful deflationary forces and greatly understates the risk of high debt leverage in a crisis, a chorus of financial experts has warned. George Magnus, senior advisor to UBS, said it was a “huge omission” for the European Central Bank to ignore the risk of deflation, given the profoundly corrosive effects that it can have on bank solvency. “Most of the eurozone periphery is already in deflation. They can’t just leave this out of their health check. It is a matter of basic due diligence,” he said. The ECB’s most extreme “adverse scenario” included a drop in inflation to 1pc this year, but the rate has already fallen far below this to 0.3pc, or almost zero once tax effects are stripped out. Prices have fallen over the past six months in roughly half of the currency bloc, and the proportion of goods in the EMU price basket in deflation has jumped to 31pc. “The scenario of deflation is not there, because indeed we don’t consider that deflation is going to happen,” said the ECB’s vice-president, Vitor Constancio.

The ECB had vowed to be tough in its first real test as Europe’s new super-regulator, promising to restore credibility after the fiasco of earlier efforts by the European Banking Authority in 2010 and 2011. The aim is to clean up the financial system once and for all, hoping that this will create more traction for the ECB’s mix of stimulus measures. Yet the bank has to walk a fine line since tough love would risk a further contraction of lending, and possibly a fresh crisis. The results released over the weekend suggest the ECB has opted for safety. Just 13 banks must raise fresh capital, mostly minor lenders in Italy and peripheral countries. They have nine months to find €9.5bn, a trivial sum set against the €22 trillion balance sheet of the lending system. Europe’s banks will have set aside an extra €48bn in provisions. Non-performing loans have jumped by €136bn.

Independent experts say the ECB has greatly under-played the threat of a serious shock. A study by Sachsa Steffen, from the European School of Management (ESMT) in Berlin, and Viral Acharya, at the Stern School of Business in New York, calculated that the 39 largest European banks would alone need up to €450bn in fresh capital. “The major flaw in the ECB test is that they don’t allow for systemic risk where there are forced sales and feedback effects, which is what happened in the Lehman crisis,” said Professor Steffen. Their study looked at levels of leverage rather than risk-weighted assets, which are subject to the discretion of national regulators and can easily be fudged. Most Club Med banks can defer tax assets, for example.

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That’s just Basel, you could add a whole lot more criteria.

Under Full Capital Rules, 36 EU Banks Would Have Failed Test (Reuters)

Europe’s banking health check has shown countries and lenders are implementing global capital rules at vastly different speeds, and 36 companies would have failed if new capital rules were fully applied. The euro zone is lagging behind countries outside the bloc in implementing the Basel III capital rules that are due to come into full force in 2019, potentially adding another challenge for the European Central Bank when it takes over supervision of euro zone lenders next month. “On a fully loaded basis, many banks have only passed the stress test by very thin margins or could be challenged in meeting the requirements, so they will be expected to do more,” said Carola Schuler, managing director for banking at ratings agency Moody’s. Some 25 European banks failed a health check of whether they could withstand a recession, and another 11 would have failed if the full Basel III rules had been applied, according to data from the European Banking Authority released on Sunday.

Europe had gained credibility, said Karen Petrou, co-founder of Federal Financial Analytics in Washington. But a similar exercise by the U.S. Federal Reserve was still tougher, among others because it requires banks to fully load Basel. “It’s still an easier and different one than the Fed stress test in many, many respects,” she said. “The Fed’s test is very qualitative. You can get all the numbers right and still fail.” The wider capital gap with fully implemented Basel rules could put pressure on more banks to improve the amount and quality of their capital, potentially impacting their profitability, growth plans and dividend payouts. Banks failed if they had common equity of 5.5% or less under a 2014/16 recession scenario. The EBA’s “stress test” was based on transitional capital rules, which vary by country, depending on how quickly they are phasing in rules. But for the first time, so-called ‘fully loaded’ Basel III ratios – applying all the new global rules – were released across Europe’s top 130 banks for analysts and investors to compare their capital strength.

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30% seems low.

3 Reasons Why You Should Expect A 30% Market Meltdown (MarketWatch)

In a commentary for MarketWatch just over two months ago, I predicted that the U.S. stock faced at least a 20% correction. The signals now point to a 30% downturn. This recent market volatility is just the beginning. The declines that corrected prices more than 10% in both the Russell 2000 Index and the Nasdaq Composite Index encompassed the majority of the market, and these stocks have begun their descent. Meanwhile, both the Dow Jones Industrial Average, containing 30 stocks, and the S&P 500 have yet to correct 10%, but historically they are the last to fall. My proprietary indicator called the CCT gave an ominous sell signal in the summer. Since then, the sell signal has increased in intensity and entered a 30% correction zone. The CCT measures several internal market components. It is a leading indicator that actually can be quantified.

The strongest component is the duration of buying versus the duration of selling. A healthy bull market sees mostly buying, indicated by the NYSE tick. The longer the buying persists with NYSE Tick readings in the plus column, the stronger the share price advances. But what happens when prices increase and the duration of the plus-column NYSE tick is less than the duration of the minus tick? This is a divergence, indicating lessening volume dedicated to the buying of a wide array of stock sectors. This duration buying has been lessening since July. Every rally shows less broad participation in all sectors of NYSE stocks. This is what happens in bear markets. A second component of the CCT focuses on the NYSE “big block” buying and selling in isolated segments of time. This is different than the duration component, as it measures isolated situations of what fund managers are doing.

A strong bullish market has numerous big blocks of buying. A print on the NYSE tick in excess of +1000 signifies fund buying by numerous entities, which accompanies a healthy bull market. But what happens when prices are climbing but no +1000 NYSE ticks are printed? This is a divergence indicating lack of interest by fund managers to commit large amounts of cash. Prices are getting ahead of buying interest, and that divergence cannot persist. We saw this phenomenon frequently in September as the S&P 500 recorded all-time highs. This also occurs in bear markets. A third and final component is the cumulative number of the NYSE tick. Each day I record the amount of total plus tick, less the amount of minus tick, on the NYSE. A bull market has a tight correlation of a up day for stock prices corresponding to a plus day in the cumulative NYSE tick.

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Why interest rates must and will rise.

US Banks See Worst Outflow of Money in ETF Since 2009 (Bloomberg)

The Financial Select Sector SPDR (XLF), an exchange-traded fund targeting banks and investment firms, had the biggest withdrawal last week since 2009 amid concern that low interest rates and market swings will hurt profits. Investors pulled $913.4 million from the $17.5 billion ETF, whose top holdings include Berkshire Hathaway, Wells Fargo and JPMorgan Chase, a shift that turned its flow of funds negative for the year. About 143 million shares of the ETF have been borrowed and sold to speculate on declines, the most since June 2012, according to exchange data compiled by Bloomberg. Banks have waited for years for higher rates and more robust trading to boost revenue from lending and market-making.

Weaker-than-expected global growth could prompt the U.S. central bank to slow the pace of eventual interest-rate increases, Federal Reserve Vice Chairman Stanley Fischer said Oct. 11. The severity of market swings this month also boosts the risk that banks will incur losses while facilitating client bets, and it may slow mergers and acquisitions. “Investors should have less exposure to financials than the broader market because we don’t think the prospects are that strong,” said Todd Rosenbluth, director of mutual-fund and ETF research at S&P Capital IQ in New York, referring to interest rates. If the Fed keeps rates low, “the upside in these financials is taken away,” said Charles Peabody, an analyst at Portales Partners LLC in New York.

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Is that even a question?

The Great Recession Put Us in a Hole. Are We Out Yet? (Bloomberg)

In October 2007, U.S. stocks were hitting an all-time high, jobs were plentiful and homes were expensive. Two months later, the Great Recession began to eviscerate the economy, ultimately sucking $10 trillion out of U.S. stocks, collapsing a housing bubble and pushing the unemployment rate to 10%. A lot of talk of financial irresponsibility – people living beyond their means – followed. Seven years later, most Americans have put their finances in order, reducing all kinds of consumer debt. So it’s no small insult, after the injury of the recession, that many aren’t being rewarded for smarter spending. Americans are making a lot less money and own fewer assets, the Federal Reserve said last month, even as stocks reach new highs. Housing prices recovered, though they’re still 13% below 2007 levels. Fewer Americans own houses they can’t afford – sending rents up 16%, to an average of $1,100 per apartment in metro areas.

On the bright side, housing’s collapse taught consumers about the dangers of debt. Americans have shed $1.5 trillion in mortgage debt and $139.4 billion in credit card and other revolving debt over the last six years. They were pushed by tighter credit rules and enticed by the chance to refinance at lower rates. But they also saved more diligently. The U.S. savings rate has doubled since 2007, to 5.4% in September. Educational loans are up, by $2,500 for the median family paying off student loans. But that’s prompted by tuition increases and a surge of people going back to school. Post-secondary enrollment jumped 15%, or 2.8 million, from 2007 to 2010, according to the U.S. Department of Education. Jobs may be coming back, but good jobs are still scarce. More than 7 million people are working part-time jobs when they’d prefer a full-time gig, 57% more than in 2007. And more than 3% of adults have left the workforce entirely since 2007, according to the U.S. labor force participation rate.

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What else are they faking?

China Fake Invoice Evidence Serve To Inflate Trade Data (Bloomberg)

The gap between China’s reported exports to Hong Kong and the territory’s imports from the mainland widened in September to the most this year, suggesting fake export-invoicing is again skewing China’s trade data. China recorded $1.56 of exports to Hong Kong last month for every $1 in imports Hong Kong registered, leading to a $13.5 billion difference, according to government data compiled by Bloomberg. Hong Kong’s imports from China climbed 5.5% from a year earlier to $24.1 billion, figures showed yesterday; China’s exports to Hong Kong surged 34% to $37.6 billion, according to mainland data on Oct. 13.

While China’s government has strict rules on importing capital, those seeking to exploit yuan appreciation can evade the limit by disguising money inflows as payment for goods exported to foreign countries or territories, especially Hong Kong. The latest trade mismatch coincided with renewed appreciation of China’s currency, leading analysts at banks and brokerages including Everbright Securities Co. and Australia & New Zealand Banking Group Ltd. to question the export surge. “This is definitely another important piece of evidence of over-invoicing exports to Hong Kong to facilitate money inflow into China,” said Shen Jianguang, chief Asia economist at Mizuho Securities. in Hong Kong. “So we shouldn’t be too optimistic about recent export data from China.” Doubts over the data raise broader concerns, as a surge in exports was believed to have underpinned economic growth in the third quarter. Shen said the economic outlook is “challenging” and more easing is “necessary.”

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Krugman wins again.

Riksbank Cuts Key Rate to Zero as Deflation Fight Deepens (Bloomberg)

Sweden’s central bank ventured into uncharted territory as it cut its main interest rate to a record low and delayed tightening plans into 2016 in a bid to jolt the largest Nordic economy out of a deflationary spiral. “The Swedish economy is relatively strong and economic activity is continuing to improve,” the Stockholm-based bank said in a statement. “But inflation is too low.” The benchmark repo rate was lowered to zero from 0.25%, the third reduction in less than a year. The bank was seen cutting to 0.1% in a Bloomberg survey of 17 economists. Only two economists had predicted a cut to zero. The Riksbank said it won’t raise rates until mid-2016 compared with a September forecast for the end of 2015. The “assessment is that the repo rate needs to remain at this level until inflation clearly picks up,” the Riksbank said in a statement. “It is assessed as appropriate to slowly begin raising the repo rate in the middle of 2016.” The move follows calls from former board members, politicians and economists to do more to prevent deflation from taking hold.

Consumer prices have dropped in seven of the past nine months and inflation has stayed below the bank’s 2% target for almost three years. Governor Stefan Ingves, who’s also chairman of the Basel Committee on Banking Supervision, has been reluctant to lower rates out of fear of stoking a build-up in consumer debt. Ingves raised the benchmark rate quickly after the financial crisis showed signs of easing in 2010. His reluctance since then to cut rates prompted Nobel Laureate Paul Krugman in April to accuse the Riksbank of a “sadomonetarist” approach to policy he said risked creating a Japan-like deflation trap. Now, Ingves is shaping Swedish policy to reflect moves elsewhere and bringing rates in line with those at the European Central Bank, whose benchmark is 0.05 percent, and the U.S. Federal Reserve, which has held its key rate close to zero since 2008. The ECB and Fed have also expanded their balance sheets through asset purchases to further stimulate growth.

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Don’t think they need the IMF to tell them they need to keep their young people satisfied or else.

IMF Warns Gulf Countries Of Spending Squeeze (CNBC)

Oil exporters in the crude-rich Gulf need to rationalize spending amid a deteriorating global economic outlook, the International Monetary Fund has warned. “In the GCC (Gulf Co-operation Council), years of fast growth since the global financial crisis, rising asset prices, rapid credit growth in some countries, and accommodative global monetary conditions call for a return to fiscal consolidation,” the IMF said in its biannual economic outlook for the Middle East and Central Asia. But the fund also cautioned against immediate policy responses, especially given that GCC exporters were were well-placed to handle the current volatility in global energy markets. “It is not likely to have an effect on economic activity this year or the next. We don’t think that it would make sense to have a knee-jerk reaction,” Masood Ahmed, Director, Middle East and Central Asia Department at the IMF, told CNBC. “It’s important to gradually moderate the base of fiscal spending”. The fund expected the GCC oil exporters’ economies to grow by 4.4% in 2014, accelerating to 4.5% in 2015.

A sharp decline in oil prices over the past month has prompted fierce debate about potential policy responses from Gulf governments. Over the weekend, Kuwaiti Finance Minister Anas Al-Saleh Gulf Arab joined those calling for cuts in spending to cover the shortfall in income. Global prices fell to four-year lows earlier this month, putting at risk abundant fiscal surpluses and savings generated in recent years. OPEC members are due to meet on November 27 in Vienna. According to Mohamed Lahouel, Chief Economist at the Department of Economic Development in Dubai, current or lower oil prices for a period of around four months would elicit spark fiscal decisions on the part of regional government as they scramble to safeguard capital gains. Not all industry experts agree that low oil prices are here to stay. Mohamed Al-Mady, CEO of Saudi Basic Industries (SABIC), one of the world’s largest petrochemical companies, told reporters on Sunday in Riyadh the recent declines would prove to be temporary, and that demand growth was firmly underpinned.

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Make sure to make them pay a sh*tload of money for the extension, see if they still want it.

Shell Seeks 5 More Years for Arctic Oil Drilling Drive (Bloomberg)

Royal Dutch Shell is asking the Obama administration for five more years to explore for oil off Alaska’s coast, saying set backs and legal delays may push the start of drilling past the 2017 expiration of some leases. Shell, which has spent eight years and $6 billion to search for oil in the Arctic’s Beaufort and Chukchi seas, said in letter to the Interior Department that “prudent” exploration before leases expire is now “severely challenged.” “Despite Shell’s best efforts and demonstrated diligence, circumstances beyond Shell’s control have prevented, and are continuing to prevent, Shell from completing even the first exploration well in either area,” Peter Slaiby, vice president of Shell Alaska, wrote to the regional office of the Bureau of Safety and Environmental Enforcement. Shell’s plans to produce oil in the Arctic were set back in late 2012 by mishaps involving a drilling rig and spill containment system, and the company has been sued by environmental groups seeking to block the Arctic exploration.

The Hague-based company halted operations in 2012 to repair equipment and hasn’t resumed its maritime operations off Alaska’s northern coast. The July 10 letter from the company, released yesterday by the environmental group Oceana that got it after a public records request, seeks to pause Shell’s leases for five years. That would, in effect, extend the deadline to drill on its Beaufort and Chukchi leases. Leases issued by the government for the right to drill for oil in the Arctic expire in 10 years unless the holder can show significant progress toward development. Shell has left open the possibility of returning to Arctic drilling as soon as next year. Spokesman Curtis Smith said that timeline remains on the table. “We’re taking a methodical approach to a potential 2015 program,” Smith said in an e-mail. The U.S. has ordered that any drilling in the Arctic end each year before Oct. 1, when ice starts forming.

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Not in centralized grid systems.

Wind Farms Can ‘Never’ Be Relied Upon To Deliver UK Energy Security (Telegraph)

Wind farms can never be relied upon to keep the lights on in Britain because there are long periods each winter in which they produce barely any power, according to a new report by the Adam Smith Institute. The huge variation in wind farms’ power output means they cannot be counted on to produce energy when needed, and an equivalent amount of generation from traditional fossil fuel plants will be needed as back-up, the study finds. Wind farm proponents often claim that the intermittent technology can be relied upon because the wind is always blowing somewhere in the UK. But the report finds that a 10GW fleet of wind farms across the UK could “guarantee” to provide less than two per cent of its maximum output, because “long gaps in significant wind production occur in all seasons”. Modelling the likely output from the 10GW fleet found that for 20 weeks in a typical year the wind farms would generate less than a fifth (2GW) of their maximum power, and for nine weeks it would be less than a tenth (1GW).

Output would exceed 9GW, or 90% of the potential, for just 17 hours. Britain currently has more than 4,500 onshore wind turbines with a maximum power-generating capacity of 7.5GW, and is expected to easily surpass 10 GW by 2020 as part of Government efforts to tackle climate change. It is widely recognised that variable wind speeds result in actual power output significantly below the maximum level – on average between 25 and 30 per cent, according to Government data. However, the report from the Adam Smith Institute found that such average figures were “extremely misleading about the amount of power wind farms can be relied up to provide”, because their output was actually “extremely volatile”. “Each winter has periods where wind generation is negligible for several days,” the report’s author, Capell Aris, said. Periods of calm in winter would require either significant energy storage to be developed – an option not readily available – or an equivalent amount of conventional fossil fuel plants to be built.

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No, really, the World Economic Forum pays people generous salaries to look into their crystal ball and tell us what the world will look like in 80 years time.

Equal Footing For Women At Work? Not Till 2095 (CNBC)

Women may not achieve equal footing in the workplace until 2095, according to the World Economic Forum’s (WEF) new ‘Global Gender Gap’ report. The economic participation and opportunity gap between the sexes stands at 60% worldwide, an improvement of only 4 percentage points since WEF measurements began in 2006. The economic sub-index reflects three measurements: the difference between genders in labor force participation rates; wage equality; and the female-to-male ratio across a range of professions. The organization estimates it will take 81 years for the world to close this gap completely.

Two sub-Saharan African nations took top spots on the economic sub index: Burundi and Malawi ranked first and third respectively. Burundi is one of the few countries in the world to adopt a gender quota for its legislature – an attempt to promote the participation of women in politics. “Much of the progress on gender equality over the last ten years has come from more women entering politics and the workforce. In the case of politics, globally, there are now 26% more female parliamentarians and 50% more female ministers than nine years ago,” said Saadia Zahidi, head of the gender parity program at the World Economic Forum and lead author of the report.

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Recovery.

Lloyds Bank Confirms 9,000 Job Losses And Branch Closures As Profit Rises (BBC)

Lloyds Banking Group has confirmed 9,000 job losses and the closure of 150 branches over the next three years. The group, which operates the Lloyds Bank, Halifax and Bank of Scotland brands, reported pre-tax profits of £1.61bn for the nine months to 30 September. The group is setting aside another £900m to cover possible payouts for the PPI mis-selling scandal. The scandal has cost Lloyds, in total, about £11bn. Fines for the Libor rate-rigging scandal have topped £200m. The government still holds a 25% stake in the bank, but has reduced its holding from about 39% through two separate share sales since September last year.

Earlier this year, Lloyds spun off the TSB bank as a separate business to appease European Union competition authorities. The group also said it would invest £1bn in digital technology as more customers switch to mobile banking. But the banking group has returned to profitability under chief executive Antonio Horta-Osorio. On Monday, shares in Lloyds Banking Group fell 1.8% after the European Banking Authority’s results revealed that the bank only narrowly passed the test.

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Not what the Founding Fathers had in mind for the land of the free.

IRS Seizes 100s Of Perfectly Legal Bank Accounts, Refuses To Return Money (RT)

The Internal Revenue Service has been seizing bank accounts belonging to small businesses and individuals who regularly made deposits of less than $10,000, but broke no laws. And the government is refusing to return all the money taken. The practice, called civil asset forfeiture, allows IRS agents to seize property they suspect of being tied to a crime, even if no charges are filed, and their agency is allowed to keep a share of whatever is forfeited, the New York Times reported. It’s designed to catch drug traffickers, racketeers and terrorists by tracking cash deposits under $10,000, which is the threshold for when banks are federally required to report activity to the IRS under the Bank Secrecy Act. It is not illegal to deposit less than $10,000 in cash, unless it is specifically done to avoid triggering the federal reporting requirement, known as structuring.

Thus, banks are required to report any suspicious transactions to authorities, including patterns of deposits below that threshold.“Of course, these patterns are also exhibited by small businesses like bodegas and family restaurants whose cash-on-hand is only insured up to $10,000, and whose owners are wary of what would be lost in the case of a robbery or a fire,” the Examiner noted. Carole Hinders, a victim of civil asset forfeiture, owns a cash-only Mexican restaurant in Iowa. Last year, the IRS seized her checking account and the nearly $33,000 in it. She told the Times she did not know of the federal reporting requirement for suspicious transactions, and that she thought she was doing everyone a favor by reducing their paperwork.

“My mom had told me if you keep your deposits under $10,000, the bank avoids paperwork,” she said.“I didn’t actually think it had anything to do with the I.R.S.” And her bank wasn’t allowed to tell her that her habits could be reported to the government. If customers ask about structuring their deposits, banks are allowed to give them a federal pamphlet.“We’re not allowed to tell them anything,” JoLynn Van Steenwyk, the fraud and security manager for Hinders’ bank, told the Times. Last year, banks filed more than 700,000 suspicious activity reports, according to the Times. The median amount seized by the IRS. was $34,000, according to an analysis by the Institute for Justice, while legal costs can easily mount to $20,000 or more, meaning most account owners can’t afford to fight the government for their money.

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Is it any wonder? This may be the only way to get rid of the IRS.

Bulk Of Americans Abroad Want To Give Up Citizenship (CNBC)

A staggering number of Americans residing abroad are tempted to give up their U.S. passports in the wake of tougher asset-disclosure rules under the Foreign Account Tax Compliance Act (FATCA), according to a new survey. The survey by financial consultancy deVere Group asked expatriate Americans around the world “Would you consider voluntarily relinquishing your U.S. citizenship due to the impact of FATCA?” 73% of respondents answered that they had “actively considered it”, “are thinking about it” or “have explored the options of it.” On the other hand, 16% said they would not consider relinquishing their U.S. citizenship, and 11% did not know. The survey carried out in September 2014 polled almost 420 Americans living in Hong Kong, China, Indonesia, Thailand, Philippines, Japan, India, UK, UAE and South Africa. FATCA, which came into effect on July 1, requires foreign banks, investment funds and insurers to hand over information to the IRS about accounts with more than $50,000 held by Americans.

The controversial tax law is intended to detect tax evasion by U.S. citizens via assets and accounts held offshore. “For long-term retired U.S. expats, of which I am one, who are paying significant U.S. taxes, the value of U.S. citizenship often comes to mind,” a U.S. citizen residing in Bangkok told CNBC. “What do we get in return for our U.S. passport? Only three things in my opinion,” said the 69-year-old, who requested to remain anonymous. “First of all, a passport that is extremely convenient for worldwide travel, second we can vote in U.S state and national elections and third we can pay taxes on both our U.S. and foreign income. That’s it. When you add the new FATCA policies, it obviously adds more thought to the question: Is it worth keeping?” It’s alarming that nearly three quarters of Americans abroad said that they are going to or have thought about giving up their U.S. citizenship, said Nigel Green, founder and chief executive of deVere Group.

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” … what happens now to the regularly issued treasury bonds and bills? Do they just sit in an accordian file on Jack Lew’s desk next to his Barack Obama bobblehead?”

Tapering, Exiting, or Just Punting? (Jim Kunstler)

Oh, that sound you hear this morning is the distant roar of European equity markets puking after the latest round of phony bank “stress tests” — another exercise in pretend by financial authorities who understand, at least, the bottomless credulity of the news media and the complete mystification of the general public in monetary matters. I rather expect that roar to grow Niagara-like as US markets catch the urge to upchuck violently. Problem is, unlike Ebola victims, they can’t be quarantined. The end of the “taper” is upon us like the night of the hunter, conveniently just a week before the US election. If the Federal Reserve is politicized, the indoctrination must have been conducted by the Three Stooges. America’s central bank never did explain the difference between tapering and exiting their purchases of US treasury paper. I guess that’s because it has other interventionary tricks up its sleeves.

Three-card Monte with reverse repos… ventures into direct stock purchases… the setting up of new Maiden Lane type companies for scarfing up securities with that piquant dead carp aroma. Who knows what’s next? It’s amazing what you can do with money in a desperate polity with a few dozen lawyers. Of course, there is the solemn matter as to what happens now to the regularly issued treasury bonds and bills? Do they just sit in an accordian file on Jack Lew’s desk next to his Barack Obama bobblehead? The Russians don’t want them. The Chinese are already stuck with trillions they would like to unload for more gold. Frightened European one-percenters may want to park some cash in American paper to avoid bail-ins and other confiscations already rehearsed over there — but could that amount to more than a paltry few billion a month at the most?

What do the stock markets do without up to $85 billion a month (peak QE) sloshing around looking for dark pools to settle in? Can US companies keep the markets levitated by buying back their own shares like snakes eating their tails? Isn’t that basically over and done? And exactly how do interest rates stay suppressed when only a few French tax refugees want to buy American debt? I don’t think anybody knows the answer to these questions and the scenarios are too abstruse for the people who get paid for supposedly writing learned commentary in the sclerotic remnants of the press.

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The chief investogator can’t get his hands on the evidence?!

MH17 Might Have Been Shot Down From Air – Chief Dutch Investigator (RT)

The chief Dutch prosecutor investigating the MH17 downing in eastern Ukraine does not exclude the possibility that the aircraft might have been shot down from air, Der Spiegel reported. Intelligence to support this was presented by Moscow in July. The chief investigator with the Dutch National Prosecutors’ Office Fred Westerbeke said in an interview with the German magazine Der Spiegel published on Monday that his team is open to the theory that another plane shot down the Malaysian airliner. Following the downing of the Malaysian Airlines MH17 flight in July that killed almost 300 people, Russia’s Defense Ministry released military monitoring data, which showed a Kiev military jet tracking the MH17 plane shortly before the crash. No explanation was given by Kiev as to why the military plane was flying so close to a passenger aircraft. Neither Ukraine, nor Western states have officially accepted such a possibility.

Westerbeke said that the Dutch investigators are preparing an official request for Moscow’s assistance since Russia is not part of the international investigation team. Westerbeke added that the investigators will specifically ask for the radar data suggesting that a Kiev military jet was flying near the passenger plane right before the catastrophe. “Going by the intelligence available, it is my opinion that a shooting down by a surface to air missile remains the most likely scenario. But we are not closing our eyes to the possibility that things might have happened differently,” he elaborated. In his interview to the German media, Westerbeke also called on the US to release proof that supports its claims.

“We remain in contact with the United States in order to receive satellite photos,” he said. German’s foreign intelligence agency reportedly also believes that local militia shot down Malaysia Airlines flight MH17, according to Der Spiegel. The media report claimed the Bundesnachrichtendienst (BND) president Gerhard Schindler provided “ample evidence to back up his case, including satellite images and diverse photo evidence,” to the Bundestag in early October. However, the Dutch prosecutor stated that he is “not aware of the specific images in question”. “The problem is that there are many different satellite images. Some can be found on the Internet, whereas others originate from foreign intelligence services.”

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MH17 Chief Investigator: No Actionable Evidence Yet In Probe (Spiegel)

SPIEGEL: Germany’s foreign intelligence agency, the Bundesnachrichtendienst (BND), believes that pro-Russian separatists shot down the aircraft with surface-to-air missiles. A short time ago, several members of the German parliament were presented with relevant satellite images. Are you familiar with these photos?

Westerbeke: Unfortunately we are not aware of the specific images in question. The problem is that there are many different satellite images. Some can be found on the Internet, whereas others originate from foreign intelligence services.

SPIEGEL: High-resolution images – those from US spy satellites, for example – could play a decisive role in the investigation. Have the Americans provided you with those images?

Westerbeke: We are not certain whether we already have everything or if there are more — information that is possibly even more specific. In any case, what we do have is insufficient for drawing any conclusions. We remain in contact with the United States in order to receive satellite photos.

SPIEGEL: So you’re saying there hasn’t been any watertight evidence so far?

Westerbeke: No. If you read the newspapers, though, they suggest it has always been obvious what happened to the airplane and who is responsible. But if we in fact do want to try the perpetrators in court, then we will need evidence and more than a recorded phone call from the Internet or photos from the crash site. That’s why we are considering several scenarios and not just one.

SPIEGEL: Moscow has been spreading its own version for some time now, namely that the passenger jet was shot down by a Ukrainian fighter jet. Do you believe such a scenario is possible?

Westerbeke: Going by the intelligence available, it is my opinion that a shooting down by a surface to air missile remains the most likely scenario. But we are not closing our eyes to the possibility that things might have happened differently.

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It gets serious: “20% of men and 12% of women who want to have children cannot”.

Having Babies New Sex Ed Goal as Danes Face Infertility Epidemic (Bloomberg)

Sex education in Denmark is about to shift focus after fertility rates dropped to the lowest in almost three decades. After years of teaching kids how to use contraceptives, Sex and Society, the Nordic country’s biggest provider of sex education materials for schools, has changed its curriculum to encourage having babies under the rubric: “This is how you have children!” Infertility is considered “an epidemic” in Denmark, said Bjarne Christensen, secretary general of the Copenhagen-based organization. “We see more and more couples needing to get assisted fertility treatment. We see a lot of people who don’t succeed in having children.” Denmark’s fertility rate is at its lowest in more than a quarter of a century, with one in 10 children conceived only after treatment. Health professionals are urging the government to do more to address the declining birth rate and prevent it becoming a bigger demographic problem. Declining fertility is affecting demographics across Europe, where the birthrate has hardly grown for two decades.

The trend has profound effects not only on individuals but also on the economy and the outlook for standards of life, with fewer young people supporting older, retired populations. The European Commission says it considers the growing gap between the number of young and old citizens one of the region’s biggest challenges. According to Christensen at Sex and Society, the issue needs to be addressed at the school level if there is to be change. “We hope to raise a discussion in society about how to advise young people,” said Christensen, whose group helps organize an annual Sex Week to focus schools’ attention on the subject. “It’s a problem that fertility in Denmark is reduced.” Sex and Society’s new focus, unveiled on Sunday, includes information for school children explaining what fertility is, when the best times to have children may be, and what the effects of aging are. [..] 20% of men and 12% of women who want to have children cannot, according to Dansk Fertilitetsselskab, a professional organization for health providers and researchers.

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Stunning. You’d think there are contingency plans, but they seem to make it all up one step at a time.

Medical Journal To Governors: You’re Wrong About Ebola Quarantine (NPR)

The usually staid New England Journal of Medicine is blasting the decision of some states to quarantine returning Ebola health care workers. In an editorial the NEJM describes the quarantines as unfair, unwise and “more destructive than beneficial.” In their words, “We think the governors have it wrong.” The editors say the policy could undermine efforts to contain the international outbreak by discouraging American medical professionals from volunteering in West Africa. “The way we are going to control this epidemic is with source control and that’s going to happen in West Africa, we hope. In order to do that we need people on the ground in West Africa,” says Dr. Jeffrey Drazen, editor-in-chief of the journal. Speaking to Goats and Soda, he says it doesn’t make any sense to “imprison” healthcare workers for three weeks after they’ve been treating Ebola patients. The editorial explains his rationale, arguing that healthcare workers who monitor their own temperatures daily would be able to detect the onset of Ebola before they become contagious and thus before they pose any public health threat to their home communities:

“The sensitive blood polymerase-chain-reaction (PCR) test for Ebola is often negative on the day when fever or other symptoms begin and only becomes reliably positive 2 to 3 days after symptom onset. This point is supported by the fact that of the nurses caring for Thomas Eric Duncan, the man who died from Ebola virus disease in Texas in October, only those who cared for him at the end of his life, when the number of virions he was shedding was likely to be very high, became infected. Notably, Duncan’s family members who were living in the same household for days as he was at the start of his illness did not become infected.”

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Oct 272014
 
 October 27, 2014  Posted by at 11:38 am Finance Tagged with: , , , , , , , ,  1 Response »


Unknown California State Automobile Association signage 1925

Stock Markets Threatened By Collapse In Chinese Consumer Demand (Questor)
Scariest Day For Market Looms, And It’s Not Halloween (CNBC)
What Next After China’s Foreign Reserves Fall? (MarketWatch)
15 Big Oil Sell Signals That Warn Of A 50% Stock Crash (Paul B. Farrell)
Oil Speculators Bet Wrong as Rebound Proves Fleeting (Bloomberg)
Goldman Cuts Oil Forecasts as US Market Clout Increases (Bloomberg)
A Scary Story for Emerging Markets (Worth Wray)
Fed-Driven ‘Locomotive USA’ (Ivanovitch)
U.S. Gains From ‘Good’ Deflation as Europe Faces the Bad and Ugly (Bloomberg)
Spain’s Export-Led Recovery Comes At Price Of EU-Wide Deflationary Vortex (AEP)
Europe’s Bank Test Celebrations Mask Mounting Challenges (Reuters)
Europe Must Act Now To Avoid ‘Lost Decade (FT)
Italy Under Pressure As Nine Banks Fail Stress Tests (FT)
Italy’s Stress Test Fail: Attack Of The ‘Drones’ (CNBC)
Italy Market Watchdog Bans Short Selling On Monte Paschi Bank Shares (Reuters)
Europe’s Banks Are Still a Threat (Bloomberg)
Draghi Sets Stimulus Pace as ECB Reveals Covered-Bond Purchases (Bloomberg)
German Business Confidence Drops For 6th Straight Month (AP)
Hundreds Give Up US Passports After New Tax Rules Start (Bloomberg)
Arctic Ice Melt Seen Doubling Risk of Harsh Winters in Europe, Asia (Bloomberg)
Nurse’s Lawyers Promise Legal Challenge to Ebola Quarantine (NBC)

I can repeat this every single day: China is in much worse shape than we know from official numbers.

Stock Markets Threatened By Collapse In Chinese Consumer Demand (Questor)

The capitulation of the Chinese consumer threatens to drag stock markets around the world into a death spiral as one of the pillars of global growth is undermined. Figures from the world’s largest consumer goods groups last week laid bare the shocking weakness of consumer demand in China, which threatens to pull down global stock markets that have been priced to perfection by more than five years of extraordinary monetary policy and asset price inflation. For China to avoid a hard landing it was essential for consumer spending to pick up from where centrally planned infrastructure spending left off, but there are signs this simply isn’t happening. Unilever, the world’s third largest consumer goods company, said they were surprised by the “unusually rapid” slowdown in Chinese consumer demand. The company said that sales growth had slumped to about 2pc during the nine months ended September, down from about 8pc growth last year. The slowdown in Chinese sales growth to about 2pc is also an average – there are pockets where trading is far worse.

The company added that sales to the big hypermarkets in the country are less than 2pc or even negative in some cases. Nestle, the worlds largest food company, recently reported falling sales for the first nine months of the year and also warned of “challenging” Chinese trading conditions. The fear of China going backwards is now becoming a reality, as the Chinese consumer is not picking up from where capital investment left off. Immediately after the 2008 banking crisis China launched the largest stimulus package and infrastructure investment program the world has ever seen. China has used 6.6 gigatons of cement in the last three years compared to 4.5 gigatons the USA has used in 100 years. The stimulus package increased fixed capital investment to 50pc of GDP, while domestic consumption withered to only 35pc. The lopsided economy led Hu Jintao, the President of China until 2012, to call the period of growth “unstable, unbalanced, uncoordinated and unsustainable.” The hope was it would eventually kick start consumer spending.

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What Next After China’s Foreign Reserves Fall? (MarketWatch)

Should we be worried that China’s prodigious foreign-exchange accumulation has gone into reverse? Last week, China’s forex regulator reassured markets that there was no need to worry about a $100 billion fall in reserves in the third quarter — the largest such drop since 1996. China’s foreign reserve pile fell to $3.89 trillion from $3.99 trillion at the end of June. Guan Tao, head of China’s State Administration of Foreign Exchange’s balance-of-payments department, cited the end of the Federal Reserve’s quantitative easing policy as a main factor contributing to the decline, adding there were no risks or problems. But some analysts are less sanguine, especially when this rare dwindling of China’s cash pile coincides with the economy growing at its slowest pace in five years, according to third-quarter data.

Société Générale strategist Albert Edwards writes that a reserve decline of this magnitude reflects deteriorating Chinese competitiveness from its excessively strong real foreign-exchange rate. Daiwa Research, meanwhile, highlights the significance of these outflows in undermining the ability of the People’s Bank of China (PBOC) to expand its balance sheet. In recent decades, China’s reserve accumulation has been the fuel for its massive money-supply growth. Thanks to twin capital and trade surpluses, the PBOC was able to behave like a massive money-printing machine. Now, as reserve accumulation goes into reverse, so too does the money supply. M2 – which includes currency, checking deposits and some time deposits — grew at just at 12.9% year-on-year for September, versus 14.7% year-on-year for June. SocGen’s Edwards warns that China faces a looming credit crunch and is already on a deflationary precipice. China’s consumer inflation rate slowed to 1.6% in September, down from 2% previously.

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Fed meeting to announce end of QE on Wednesday.

Scariest Day For Market Looms, And It’s Not Halloween (CNBC)

The Federal Reserve in the coming week is expected to end its quantitative easing program – the much-anticipated action that’s been at the very heart of the market’s fears. After a two-day meeting, the Fed Wednesday is expected to announce the completion of its bond purchases, based on improvements in the economy. Markets will now look forward to the time – expected at some point next year—when the Fed believes the economy is strong enough for it to raise short-term interest rates from zero. The economic calendar also heats up in the week ahead, with durable goods Tuesday; third-quarter GDP Thursday, and income and spending and employment costs data Friday. All of the data becomes even more important as the markets attempt to interpret the Fed’s process of normalizing rates.

The Fed “tries to reinvigorate corporate risk taking, and finally we get to the point where corporate risk taking picks up again, and they’re supposed to remove the accommodation. That was just a bridge,” said Tobias Levkovich, chief equity strategist at Citigroup. While recent market volatility has been blamed on everything from Ebola to a global growth scare, one common thread going through all markets is the underlying concern that the Fed’s removal of its easing program will be the financial equivalent of taking off the training wheels. Markets already have stumbled, and analysts expect more volatility ahead as they continue to move closer to a world with more normal interest rate levels.

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“Graham says the next bear will hit around election time 2016. The third $10 trillion stock crash early in this new 21st century.”

15 Big Oil Sell Signals That Warn Of A 50% Stock Crash (Paul B. Farrell)

Big Oil investors beware: “The day of the huge international oil company is drawing to a close,” warned the Economist last year. Since then, Big Oil sell signals have gotten louder, more frequent, confirming fears of a crash in Big Oil, in the entire energy industry, rippling through Wall Street stocks, the global economy. When? Before the new president is elected, in 2016. Scenario like 2008, when McCain lost. Yes, the overhyped shale boom was supposed to make America energy independent, investors happy. Wrong. Risks are rocketing, volatility increasing. Why? Big Oil is vulnerable, they’re running scared, making bigger, costlier, deadlier and dumber bets that threaten the global economy. Worse, Big Oil is in denial about their high-risk, self-destructive gambles.

Main Street’s also in denial. Yes, we’re in a rare historical event now. Two bulls back-to-back, with no bear market in between. Makes investors feel it’ll go forever, like 1999. True, stocks have been roaring since March 2009 when the bottom hit at 6,547 on the Dow after a 54% drop from the October 2007 high of 14,164. Since, a steady climb to a recent DJIA record at 17,279, with gains over 250%. But now our Double Bull has stopped roaring. But market giants are warning, bye-bye bull. Jeremy Grantham, founder of the $117 billion GMO money-management firm, predicts another megatrillion dollar crash, repeating the bears of 2000 and again in 2008. Wall Street lost roughly $10 trillion each time. Graham says the next bear will hit around election time 2016. The third $10 trillion stock crash early in this new 21st century.

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“People came in and tried to pick the bottom, and they picked wrong.”

Oil Speculators Bet Wrong as Rebound Proves Fleeting (Bloomberg)

Hedge funds rushed back into oil too quickly, boosting bullish bets amid a rebound last week, only to then watch surging U.S. crude supplies push prices right back down to a two-year low. The net-long positions in West Texas Intermediate futures rose 5.7% in the seven days ended Oct. 21, U.S. Commodity Futures Trading Commission data show. Short bets shrank 20%, the most in three months, while longs dropped 2.8%. After rising as analysts speculated prices had reached a floor, WTI sank again after stockpiles climbed nationally and at Cushing, Oklahoma, the delivery point for New York Mercantile Exchange futures. It fell to $80.52 on Oct. 22, the lowest settlement since June 2012, and ended the week down 24% from the year’s high.

The U.S. benchmark, which slipped into a bear market Oct. 9, may dip to $75 by the end of year, Bank of America Corp. said Oct. 23. The “swiftness of the selloff” attracted bargain hunters, John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, said by phone Oct. 24. “People came in and tried to pick the bottom, and they picked wrong.” U.S. oil inventories increased 7.11 million barrels in the seven days ended Oct. 17 to 377.7 million, the Energy Information Administration said Oct. 22. Supply has grown by about 21 million in three weeks.

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A good call for once?

Goldman Cuts Oil Forecasts as US Market Clout Increases (Bloomberg)

Goldman Sachs cut its forecasts for Brent and WTI crude prices next year on rising global supplies, predicting OPEC will lose influence over the oil market amid the U.S. shale boom. The bank is becoming more confident in the scale and sustainability of U.S. shale oil production and said U.S. benchmark prices need to decline to $75 a barrel for a slowdown in output growth. Brent will average $85 a barrel in the first quarter, down from a previous forecast of $100, and West Texas Intermediate will sell for $75 a barrel in the period, from an earlier estimate of $90, analysts including Jeffrey Currie wrote in a report. The biggest members of the Organization of Petroleum Exporting Countries are discounting supplies to defend market share rather than cutting production to boost prices that have collapsed into a bear market.

The highest U.S. output in almost 30 years is helping increase stockpiles as exporters including Saudi Arabia reduce prices to stimulate demand. “We believe that OPEC will no longer act as the first-mover swing producer and that U.S. shale oil output will be called upon to fill this role,” Goldman said in the report. “Our forecast also reflects the realization of a loss of pricing power by core-OPEC.” Any near-term OPEC production cut will be modest until there is sufficient evidence of a slowdown in U.S. shale oil production growth, according to the report. Global producers may need to cut almost 800,000 barrels a day of output next year to limit a build in inventories and ultimately balance the global oil market in 2016, Goldman said.

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“the global debt drama would end with an epic US dollar rally, a dramatic reversal in capital flows, and an absolute bloodbath for emerging markets … ”

A Scary Story for Emerging Markets (Worth Wray)

In the autumn of 2009, Kyle Bass told me a scary story that I did not understand until the first “taper tantrum” in May 2013. He said that – in additon to a likely string of sovereign defaults in Europe and an outright currency collapse in Japan – the global debt drama would end with an epic US dollar rally, a dramatic reversal in capital flows, and an absolute bloodbath for emerging markets. Extending that outlook, my friends Mark Hart and Raoul Pal warned that China – seen then by many as the world’s rising power and the most resilient economy in the wake of the global crisis – would face an outright economic collapse, an epic currency crisis, or both. All that seemed almost counterintuitive five years ago when the United States appeared to be the biggest basket case among the major economies and emerging markets seemed far more resilient than their “submerging” advanced-economy peers.

But Kyle Bass, Mark Hart, and Raoul Pal are not your typical “macro tourists” who pile into common-knowledge trades and react with the herd. They are exceptionally talented macroeconomic thinkers with an eye for developing trends and the second- and third-order consequences of major policy shifts. On top of their wildly successful bets against the US subprime debacle and the European sovereign debt crisis, it’s now clear that they saw an even bigger macro trend that the whole world (and most of the macro community) missed until very recently: policy divergence. Their shared macro vision looks not only likely, not only probable, but IMMINENT today as the widening gap in economic activity among the United States, Europe, and Japan is beginning to force a dangerous divergence in monetary policy.

In a CNBC interview earlier this week from his Barefoot Economic Summit (“Fed Tapers to Zero Next Week”), Kyle Bass explained that this divergence is set to accelerate in the next couple of weeks, as the Fed will likely taper its QE3 purchases to zero. Two days later, Kyle notes, the odds are high that the Bank of Japan will make a Halloween Day announcement that it is expanding its own asset purchases. Such moves only increase the pressure on Mario Draghi and the ECB to pursue “overt QE” of their own.
Such a tectonic shift, if it continues, is capable of fueling a 1990s-style US dollar rally with very scary results for emerging markets and dangerous implications for our highly levered, highly integrated global financial system.

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“No other country buys more than it sells to the rest of the world”. The curse of the reserve currency.

Fed-Driven ‘Locomotive USA’ (Ivanovitch)

No other country buys more than it sells to the rest of the world: America’s net contribution to the growth of the world economy in the first eight months of this year amounted to $480.8 billion, or about 3% of its GDP. And here is a striking contrast: Germany, the world’s fourth-largest economy, is currently getting a net contribution from the rest of the world to the tune of $280 billion – nearly 7% of its GDP. Not even China is sucking so much demand out of the world economy. In the year to the second quarter, China’s trade surplus is estimated at about 2% of its GDP. Those taking potshots at the U.S. government’s foreign policy have a point here that could strongly resonate with the American public, because exports directly or indirectly support more than 11 million American jobs, or close to one-tenth of the country’s latest employment numbers.

It might, therefore, be a good idea to help the Fed’s efforts to steady the economy by getting Germany, China and other large surplus countries to generate more growth from their domestic demand. We may then be able to sell them something instead of being their dumping ground: In the first eight months of this year, our trade deficits with Germany and China were up 14% and 4%, respectively, from the year earlier. But don’t hold your breath for such actions by Washington, or by multilateral agencies whose job it is to ensure balanced trade relationships in the world economy. Nothing of the sort will happen. As in the past, large trade surplus countries won’t budge. They know that during the forthcoming elections – starting with the mid-term Congressional elections next month and culminating with the U.S. presidential contest in 2016 – the Fed will do everything possible to keep economy and employment in a reasonably good shape.

That, of course, means that the locomotive USA will be an increasingly steady pillar of global output, and an expanding market for export-led economies. Germany’s sinking economy, for example, will continue to force local companies to seek salvation on external markets. An apparently rising political hostility with Russia seems to be turning German businesses toward an open, properly regulated and welcoming American market. Problems with China will also cause Germany to lower its formidable export boom on the U.S. That is a conclusion one may draw from the analysis of Sebastian Heilemann, a prominent German sinologist and a director of the Mercator Institute for China Studies (MERICS) in Berlin. Ominously, he is talking about the “dark clouds” in Chinese-German relations, saying that German companies are suffering from Chinese (get the euphemism) “reverse engineering,” and from increasing administrative difficulties of doing business in the Middle Kingdom.

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There’s no such thing as good deflation.

U.S. Gains From ‘Good’ Deflation as Europe Faces the Bad and Ugly (Bloomberg)

When it comes to deflation there’s the good – and there’s the bad and ugly. Europe faces the risk of the latter as it teeters on the edge of a recession that could trigger a debilitating dive in prices and wages. The U.S., meanwhile, may end up with the more benign version as surging oil and gas supplies push energy costs down and the economy ahead. “Bad deflation weakens growth,” Nancy Lazar, co-founder and a partner at Cornerstone Macro LP in New York, wrote in a report to clients this month. “Good deflation lifts growth.” Lazar also co-founded International Strategy & Investment Group LLC more than 20 years ago. That’s welcome news for U.S. investors. Billionaire Paul Tudor Jones, one of the most successful hedge-fund managers, said on Oct. 20 that U.S. stocks will outperform other equity markets for the rest of the year, according to two people who heard him speak at the closed-door Robin Hood Investors conference in New York.

Hedge fund manager David Tepper, who runs the $20 billion Appaloosa Management LP, told the same conference the following day that investors should bet against the euro, two people familiar with his remarks said. The Standard & Poor’s 500 Index has risen 6.3% so far this year, while the Stoxx Europe 600 Index has fallen 0.3%. The euro is down 7.8% against the dollar since the start of 2014. Treasuries have returned 5.3% this year, compared with 7.6% for German bunds and 15% for Greek debt, according to Bloomberg World Bond Indexes. The U.S. has the “best hand” among nations, while Europe is “the sick one,” Jamie Dimon, chief executive officer of JPMorgan Chase & Co. in New York, said at an Oct. 21 event held by the Urban Land Institute in New York.

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Pushing wages down with unemployment at 27.5% is the easy part. In a currency union, you’re going to export those low wages too, though. And that will implode the EU.

Spain’s Export-Led Recovery Comes At Price Of EU-Wide Deflationary Vortex (AEP)

[..] A deal reached with Renault after much soul-searching in 2012 cuts entry pay for new workers by 27.5pc, to roughly €17,000 a year (£13,400). Older workers keep their jobs at frozen pay, but with fewer holidays and tougher conditions. Joaquin Arias from the trade union federation CCOO said the terms amounted to blackmail. “The alternative was slow death. We would never have accepted such a plan if the crisis hadn’t been so bad.” Wage costs are now 40pc below levels in comparable French plants in France, the chief reason why Renault and Peugeot have cut their output of vehicles in their home country by half over the last decade. French unions may rage against “social dumping”, but they now face the asphyxiation of their industry unless they too knuckle under. “The French factories are going through exactly what we faced five years ago. It is very hard for everybody, but they too are having to follow the Spanish model,” said Mr Estevez. [..]

Fernando de Acuña, head of Spain’s top property consultancy RR de Acuña, warns that the country is going through an illusionary mini-bubble, with people betting on a fresh cycle in the housing market when the crippling effects of the last boom-bust cycle have yet to be cleared. “We think prices will fall by another 20pc over the next three years. There is still an overhang of 1.7m unsold homes in an annual market of around 230,000. The developers have 467,000 units on their books, and half of these are indirectly controlled by the banks. It is extend and pretend. There are another 150,000 in foreclosure proceedings that are backed up because the courts are saturated,” he said. “People don’t want to hear any of this. We were called criminals and terrorists when we warned in 2007 the country was going to Hell, but we were right, because we base our analysis on the facts and not on wishful thinking,” he said.

It has always been debatable whether Spain can hope to pull itself out of a low-growth trap by relying on exports alone, given that it still has a relatively closed economy with a trade gearing of just 34pc of GDP, far lower than Ireland at 108pc. The current account is already slipping back into deficit in any case as imports surge, suggesting that Spain is still nowhere near a competitive equilibrium within the eurozone. It is already “overheating” in a sense even with 5.6m people unemployed. The International Monetary Fund says Spain’s exchange rate is up to 15pc overvalued. Ominously, the export boom has been fading despite the success of the car industry. Total shipments rose just 1pc in the year to August compared with the same period in 2013, with falls of 11pc to Latin America, and of 13pc to the Middle East. Exports actually contracted by 5pc in August from a year earlier.

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“One-fifth of European banks are at risk of insolvency … ”

Europe’s Bank Test Celebrations Mask Mounting Challenges (Reuters)

Investors were spared immediate pain on Sunday after the European Central Bank’s landmark banking health check did not force massive capital hikes amongst the euro zone’s top lenders. But the sector’s long-term attractiveness has been damaged by revelations of extra non-performing loans and hidden losses that will dent future profits. The ECB said on Sunday the region’s 130 most important lenders were just €25 billion ($31.69 billion) short of capital at the end of last year, based on an assessment of how accurately they had valued their assets and whether they could withstand another three years of crisis. The amount of new money needed falls to less than €7 billion after factoring in developments in 2014, well shy of the €50 billion of extra cash investors surveyed by Goldman Sachs in August were expecting.

That means existing investors will only be asked for a fraction of the demand they expected in order to maintain their shareholdings. But, those who read the details of the ECB’s proclamation on the health of the euro zone banking sector would have seen more ominous signs too, as the ECB pointed to the amount of work that remains to be done to restore the region’s lenders. The review said an extra €136 billion of loans should be classed as non-performing – increasing the tally of non-performing loans by 18% – and that an extra €47.5 billion of losses should be taken to reflect assets’ true value. “Banks face a significant challenge as the sector remains chronically unprofitable and must address their €879 billion exposure to non-performing loans as this will tie-up significant amounts of capital,” accountancy firm KPMG noted.

Others took a bleaker view. “One-fifth of European banks are at risk of insolvency,” said Jan Dehn, head of research at Ashmore, referencing the fact that one-fifth of banks fell shy of the ECB’s pass mark at the end of last year. He added that the ECB’s efforts to boost the euro zone’s sluggish growth through pumping money into the economy would not work if banks were too poorly capitalised to lend. After the ECB adjusted banks’ capital ratios to reflect supervisors’ assessments of banks’ asset values, 31 had core capital below the 10% mark viewed by investors as a safety threshold, while a further 28 had ratios just 1 percentage point above.

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That headline could just as well be 5 years old. Nothing changed. Just new shades of porcine lipstick.

Europe Must Act Now To Avoid ‘Lost Decade (FT)

The bottom line is that none of the tools currently on the table will get the job done. There are not enough assets to purchase or finance and the timetable to get anything done is too long. Policy makers do not have the luxury of a year or two to figure this out. The ECB balance sheet shrinks virtually daily and as it shrinks, the monetary base of Europe is contracting and putting downward pressure on prices. Europe is clearly in danger of falling into the liquidity trap, if it is not already there. The likelihood of a “lost decade” like that experienced in Japan is rapidly increasing. The ECB must act and act quickly. How is this affecting the markets? The recent rally in US fixed income is materially different than when rates last approached 2%. Previously, the Federal Reserve was actively managing the yield curve to reduce long-term borrowing costs in order to stimulate the economy. The current rally is caused by a massive deflationary wave unleashed upon the US by beggar-thy-neighbour policies in Europe and Asia.

The precipitous decline in energy and commodity prices and competitive pressures on prices for traded goods will probably push inflation, as measured by the Fed’s favoured personal consumption expenditures index, back down toward 1%. This raises the likelihood that any increase in the policy rate by the Fed will be pushed into 2016 or later. With inflationary expectations falling and the relative attractiveness of US Treasury yields over German Bunds and Japanese government bonds, US long-term rates are likely to continue to be well supported with limited room to rise and a dynamic that could push them lower from here. In the real economy, the decline in energy prices should offset the effect of reduced exports, which is supportive of US growth in the near term. This will help equities recover from the recent storm of volatility as we move deeper into the fourth quarter, which is a time of seasonal strength for the stock market. However, this may prove to be the rally to sell. Results from currency translations for large, multinational companies will weigh heavily on S&P 500 earnings in the first half of 2015.

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Leave the euro, and restructure all bank debt. It’s the only thing that makes any sense at all. But it’s not even considered.

Italy Under Pressure As Nine Banks Fail Stress Tests (FT)

Italy’s central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area’s financial sector. Officials at the Bank of Italy criticised parameters in regulatory stress tests as unrealistically harsh on Italian banks and disputed the exact number of failures, after nine Italian lenders fell short in a comprehensive review unveiled by the European Central Bank. Across the euro area, some 25 banks emerged with capital shortfalls following an unprecedented regulatory effort aimed at dispelling the cloud of uncertainty surrounding the European banking sector’s health.

The announcement represents the culmination of more than a year of intensive work costing hundreds of millions of euros and involving thousands of officials and accountants – all aimed at restoring investor faith in European banks ahead of the launch of a unified banking supervisor in Frankfurt. The biggest failure was Banca Monte dei Paschi di Siena, which has already hired bankers at Citigroup and UBS to advise on its options after it received takeover approaches. German banks emerged largely unscathed, with only one technical failure, while Spain clawed its way through with no shortfalls.

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Italy’s “public debt-to-GDP ratio was 134% in the second quarter of 2014, compared to 94% for the euro zone as a whole”.

Italy’s Stress Test Fail: Attack Of The ‘Drones’ (CNBC)

Italy’s report card was by far the worst from this weekend’s European bank stress tests, with nine of its 15 banks tested failing to reach the levels of capital required. The country’s relationship with European authorities could get increasingly fractious, with the European Commission yet to approve its 2015 budget. And tensions are set to continue as its banks look to raise more capital than any other country to reach ECB requirements at a time when the Italian economy is back in recession. There was a “surgical targeting of Italian banks with asset quality review (AQR) drones (by the ECB),” according to Carlo Alberto Carnevale-Maffe, professor of strategy at Italy’s Bocconi University. “The ECB targeted the banks with the lowest level of transparency and governance, and the highest links with the political system,” he told CNBC.

Unicredit and Intesa Sanpaolo, the country’s two biggest lenders, both passed the tests, but some of their smaller counterparts are struggling as the economy stagnates, and the level of sovereign debt on their balance sheets starts to look more worrying. While household debt levels in Italy are relatively low, its public debt-to-GDP ratio was 134% in the second quarter of 2014, compared to 94% for the euro zone as a whole. Federico Ghizzoni, chief executive of UniCredit, told CNBC he was “very satisfied” with his bank’s result and added: “For the system in general, the results including what has been done in 2014 is OK.” Ghizzoni predicted there will be an increase in mergers and acquisitions in the Italian banking sector as a result of the tests.

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World’s oldest bank turns into merger target.

Italy Market Watchdog Bans Short Selling On Monte Paschi Bank Shares (Reuters)

Italy’s Consob has banned short selling on Monte dei Paschi’s shares on Monday and Tuesday, the Italian market regulator said in a statement. Shares in Italy’s third biggest bank lost more than 17% on Monday after results from a pan-European health check of lenders showed on Sunday that Monte dei Paschi faced a capital shortfall of €2.1 billion – the biggest gap among the 130 lenders under scrutiny.

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“In one way, the ECB had good reason to be strict.” Question is then, why didn’t it?

Europe’s Banks Are Still a Threat (Bloomberg)

The European Central Bank has just published the results of new “stress tests” on European Union banks, hoping to convince financial markets that the banking system is now strong enough to weather another crisis. This latest exercise is a big improvement over previous efforts, which were widely derided as too soft – but it’s still not good enough. The test had two parts. The first was a detailed examination of loans, to see whether they were worth what the banks said. This found that most of 130 banks under review had overvalued their assets – by a total of €47.5 billion ($60 billion) at the end of last year. The second part asked, with assets correctly valued, whether the banks had enough capital to safely endure another recession and financial-market shock. It found that 25 did not, and 13 of those need to raise €9.5 billion in capital, over and above what they’ve added so far this year.

This closer scrutiny has helped. Deutsche Bank AG raised €8.5 billion in equity this year to boost its chances of passing. Weak institutions, such as Portugal’s Banco Espirito Santo and Austria’s Volksbanken network, are restructuring or shutting down. By strengthening the system and increasing confidence in it, the ECB’s tests might reverse a two-year slump in private-sector lending. That’s the hope, anyway. Trouble is, even the new tests were pretty soft. Economists at Switzerland’s Center for Risk Management at Lausanne, for example, have put the capital shortfall for just 37 banks at almost €500 billion – as opposed to the roughly €10 billion reported by the ECB for its sample of 130. This more stringent test used a method that mimics how the market value of equity actually behaves under stress.

In one way, the ECB had good reason to be strict. It had to contend with doubts aroused by the previous unpersuasive tests. Also, it takes over as the euro area’s supranational bank supervisor on Nov. 4, so any lingering issues will be its responsibility. But it knew that if it were too tough, the blow to confidence could have plunged the EU back into crisis. The euro area already has a stalled recovery and stands on the brink of deflation; an alarming report on the banks might have done more harm than good. So the design of the exercise was compromised. It used a measure of capital that relies on banks to weight assets by risk — an opportunity to fudge the numbers. It ignored the credit freezes, forced asset sales and contagion that can cause huge losses in bad times. The worst-case scenario projected a fall in euro-area output of just 1.4%in 2015 (in 2009, it dropped 4.5%). And no governments default.

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It’s already crystal clear that there’s not enough to purchase: “In reality, it is what follows that will be important, or maybe more importantly, what doesn’t follow.”

Draghi Sets Stimulus Pace as ECB Reveals Covered-Bond Purchases (Bloomberg)

Investors will be handed a clue today in to just how aggressive Mario Draghi is willing to be. At 3:30 p.m. in Frankfurt, the European Central Bank will reveal how much it spent on covered bonds last week after returning to that market for a third time as part of a renewed bid to stave off deflation. The central bank bought at least €800 million ($1 billion) of assets from Portugal to Germany in the three days since the program began on Oct. 20, traders said last week. Formal details will help them divine how quickly the ECB president can reach his target of expanding the institution’s balance sheet by as much as €1 trillion. “In terms of the ECB’s aspiration to expand its balance sheet, the market wants it all now,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London.

“There’s scope for immediate disappointment to the scale of the purchases we see today.” With the economy stuttering and inflation forecast to have stayed below 1% for a 13th month in October, Draghi is under pressure to do more. While central banks from the U.S. to Japan used large-scale asset purchases to bolster their balance sheets and kick-start lending, the ECB has so far refrained from such a step. German opposition to sovereign-bond purchases means officials have chosen covered bonds and asset-backed securities as the latest tools to help expand the balance sheet. While policy makers say their plans will spark new issuance, economists at firms including Morgan Stanley and Commerzbank say the central bank will probably need to buy other assets to reach the target.

Of the region’s €2.6 trillion covered-bond market, the ECB will only buy assets eligible under its collateral framework for refinancing loans, denominated in euros and issued by credit institutions in the euro area. Purchases will be announced weekly, starting today, and the pool of bonds eligible is about €600 billion, ECB Vice President Vitor Constancio said this month. ABS buying is scheduled to begin later this quarter and there are about €400 billion of such assets eligible to buy, according to Constancio. “Covered bond and ABS purchases appear to be the line of least resistance for the ECB,” said Jon Mawby, a London-based fund manager at GLG Partners LP, which manages $32 billion. “In reality, it is what follows that will be important, or maybe more importantly, what doesn’t follow.”

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Lowest in 22 months.

German Business Confidence Drops For 6th Straight Month (AP)

Business confidence in Germany, Europe’s largest economy, has dropped for a sixth consecutive month as concerns over the turmoil in Ukraine and elsewhere continue to take their toll. The Ifo institute said Monday that its confidence index dropped to 103.2 points in October from 104.7 in September, as business leaders’ assessments of their current situation and their expectations for the next six months both fell. The government and independent economists have cut their growth forecasts for Germany after a string of disappointing industrial data for August. Economists warn if international crises escalate or Africa’s Ebola outbreak spreads the impact could become greater. Ifo’s survey is based on responses from about 7,000 companies in various sectors.

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All your bucks are belong to us.

Hundreds Give Up US Passports After New Tax Rules Start (Bloomberg)

The number of Americans renouncing U.S. citizenship increased 39% in the three months through September after rules that make it harder to hide assets from tax authorities came into force. People giving up their nationality at U.S. embassies increased to 776 in the third quarter, from 560 in the year-earlier period, according to Federal Register data published yesterday. Tougher asset-disclosure rules that started July 1 under the Foreign Account Tax Compliance Act, or Fatca, prompted more of the estimated 6 million Americans living overseas to give up their passports. The appeal of U.S. citizenship for expatriates faded further as more than 100 Swiss banks began to turn over data on American clients to avoid prosecution for helping tax evaders.

The U.S., the only Organization for Economic Cooperation and Development nation that taxes citizens wherever they reside, stepped up the search for tax dodgers after UBS paid a $780 million penalty in 2009 and handed over data on about 4,700 accounts. Shunned by Swiss and German banks and with Fatca starting, more than 9,000 Americans living overseas gave up their passports over the past five years. Fatca requires U.S. financial institutions to impose a 30% withholding tax on payments made to foreign banks that don’t agree to identify and provide information on U.S. account holders. It allows the U.S. to scoop up data from more than 77,000 institutions and 80 governments about its citizens’ overseas financial activities..

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Winter time.

Arctic Ice Melt Seen Doubling Risk of Harsh Winters in Europe, Asia (Bloomberg)

The decline in Arctic sea ice has doubled the chance of severe winters in Europe and Asia in the past decade, according to researchers in Japan. Sea-ice melt in the Arctic, Barents and Kara seas since 2004 has made more than twice as likely atmospheric circulations that suck cold Arctic air to Europe and Asia, a group of Japanese researchers led by the University of Tokyo’s Masato Mori said in a study published yesterday in Nature Geoscience. “This counterintuitive effect of the global warming that led to the sea ice decline in the first place makes some people think that global warming has stopped. It has not,” Colin Summerhayes, emeritus associate of the Scott Polar Research Institute, said in a statement provided by the journal Nature Geoscience, where the study is published.

The findings back up the view of United Nations climate scientists that a warmer average temperature for the world will make storms more severe in some places and change the character of seasons in many others. It also helps debunk the suggestion that slower pace of global warming in the past decade may suggest the issue is less of a problem. “Although average surface warming has been slower since 2000, the Arctic has gone on warming rapidly throughout this time,” he said.

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The mess the US makes of its ebola response reaches staggering proportions. How is it possible that it has been so hugely unprepared?

Breaking: 5-year old boy monitired for ebola in NY.

Nurse’s Lawyers Promise Legal Challenge to Ebola Quarantine (NBC)

Lawyers for a nurse quarantined in a New Jersey hospital say they’ll sue to have her released in a constitutional challenge to state restrictions for health care workers returning to New Jersey after treating Ebola patients in West Africa. Civil liberties attorney Norman Siegel said Kaci Hickox, who was quarantined after arriving Friday at the Newark airport, shows no symptoms of being infected and should be released immediately. He and attorney Steven Hyman said the state attorney general’s office had cooperated in getting them access to Hickox. Late Sunday, a spokesman for New Jersey Gov. Chris Christie issued a statement saying that people who had come into contact with someone with Ebola overseas would be subject to a mandatory quarantine at home. It did not explain why Hickox was being held at the hospital, though it did say, “Non-residents would be transported to their homes if feasible and, if not, quarantined in New Jersey.”

Hyman told NBC News he wasn’t sure what the statement meant for Hickox’s release. “I think we’re getting closer to it,” he said. He and Siegel, speaking earlier outside Newark University Hospital, where she is quarantined, said they spent 75 minutes with her on Sunday. They said she was being kept in a tented area on the hospital’s first floor with a bed, folding table and little else — they said she was able to get a laptop computer with wi-fi access only Sunday. But they said she is not being treated. “She is fine. She is not sick,” Hyman said. Photos they released showed her in hospital garb peering through a plastic window of the tented-off area.

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Oct 262014
 
 October 26, 2014  Posted by at 12:12 pm Finance Tagged with: , , , , , , , ,  6 Responses »


John Vachon Beer signs on truck, Little Falls, Minnesota Oct 1940

25 European Banks Fail Stress Test (NY Times)
Testing Europe’s Stress Tests (Bloomberg)
Europe Stess Tests Tests Could Trigger A Near-Term Crisis (MarketWatch)
America Stems Flow Of Funds As China Stalls And Eurozone Retreats (Observer)
Don’t Buy A Home (MarketWatch)
Brazilians Vote for Leader as Polls Show Nation Divided (Bloomberg)
Ukraine Votes in Wartime Ballot Set to Back Pro-EU Forces (Bloomberg)
Stagnant Paychecks for US Workers Underlies Voter Discontent (Bloomberg)
Record Number Of Britons In Low-Paid Jobs (Guardian)
Nearly A Third Of British Voters Prepared To Support Ukip (Observer)
1 Million Italians Rally in Rome to Protest Labor Rules Change (Bloomberg)
IMF Sets 0.05% Floor on Interest Rate on Special Drawing Right (Bloomberg)
China State Economist Sees 2015 Growth Slowest in Over 2 Decades (Bloomberg)
MH-17: The Untold Story (RT)
You’re Powered By Quantum Mechanics. No, Really… (Observer)
Nurse Held at N.J. Airport Calls US Reaction to Ebola ‘Disorganized’ (Bloomberg)

As expected. 9 banks in Italy alone is a big number.

25 European Banks Fail Stress Test (NY Times)

Banks in Europe are €25 billion, or about $31.7 billion, short of the money they would need to survive a financial or economic crisis, the European Central Bank said on Sunday. That conclusion was a result of a yearlong audit of eurozone lenders that is potentially a turning point for the region’s battered economy. The E.C.B. said that 25 banks in the eurozone showed shortfalls in their own money, or capital, after a review devised to uncover hidden problems and to test their ability to withstand a sharp recession or other crisis. The review looked at banks’ books through the end of 2013. Of the 25 banks, 13 have still not raised enough capital to make up the shortfall, the central bank said. The highly anticipated assessment of European banks was intended to remove a cloud of mistrust that has impeded lending in countries like Italy and Greece and left the eurozone struggling to avoid lapsing back into recession. By exposing a relatively small number of sick banks — of the 130 under review — the central bank aims to make it easier for the healthier ones to raise money that they can lend to customers.

Italy had by far the largest number of banks that failed the review, with nine, of which four must raise more capital. Monte dei Paschi di Siena, whose troubles were well known, must raise €2.1 billion, the central bank said, the largest of any individual bank covered by the review. Greece’s banking system was also hard hit, with three banks found short of capital. One, Piraeus Bank, has since raised enough capital to satisfy regulators. The other two are Eurobank, which must raise €1.76 billion, and National Bank of Greece, which must raise €930 million. The overall capital shortfall for the banks under review was in the middle of analyst estimates. However, the review also uncovered €136 billion in troubled loans that banks had not previously reported. In addition, banks had overvalued their other holdings by €48 billion, the E.C.B. said.

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Stress tests may have failed 25 banks, but they’re not nearly strict enough.

Testing Europe’s Stress Tests (Bloomberg)

On Sunday, the European Central Bank will publish the results of stress tests designed to restore much-needed confidence in the euro area’s financial system. To succeed, the ECB must convince investors that it has truly forced banks to recognize their losses and raise enough capital to be healthy. What would a really tough stress test look like? Research by economists at Switzerland’s Center for Risk Management at Lausanne offers an indication. By simulating the way the market value of banks’ equity tends to behave in times of stress, they estimate how much capital banks would need to raise in a severe crisis. The answer, as of Oct. 17, for just 37 of the roughly 130 banks included in the ECB’s exercise: €487 billion ($616 billion). Deutsche Bank, three big French banks and ING Groep NV of the Netherlands are among those with the largest estimated shortfalls. Here’s a breakdown by bank:

And here’s a breakdown by country, as a percentage of gross domestic product:

The economists’ approach, based on a model developed at New York University, isn’t perfect. It could, for example, overestimate capital needs if the quality of banks’ management and assets has improved in ways that the market has yet to recognize. And, because crises are rare, the modelers had scant historical data with which to build estimates of how banks might fare in future disasters. That said, this relatively simple model has some important advantages over the ECB’s much more labor-intensive stress tests. The Swiss group’s approach is free of the political considerations that constrain the ECB, which can’t be too harsh for fear of reigniting the European financial crisis. In addition, the model implicitly includes crucial contagion effects, such as forced asset sales and credit freezes, that the ECB’s exercise ignores.

A bit of back-testing suggests that the economists’ approach works relatively well. The NYU model’s projection for the largest U.S. banks’ stressed capital needs before the 2008 crisis, for example, comes pretty close to the roughly $400 billion that the banks actually had to raise. If the ECB’s number is a lot smaller than the figure the model comes up with — as early indications suggest it will be — that won’t be a good sign.

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If only these tests were credible.

Europe Stess Tests Tests Could Trigger A Near-Term Crisis (MarketWatch)

The European Central Bank is preparing a diagnosis of the eurozone’s banking. woes. Unfortunately, it has no power to write a prescription. In fact, the Sunday release of the results of new stress tests and the ECB’s Asset Quality Review could do more near-term harm than good, says Carl Weinberg, chief economist at High Frequency Economics. ECB President Mario Draghi’s 2012 pledge to do “whatever it takes” to preserve the euro and the ECB’s subsequent creation of a never-yet-utilized emergency bond-buying program put the debt crisis on the back burner. European stocks outperformed in the second half of last year as investors and commentators cheered a temporary pickup in growth. But the crucial area of lending across the eurozone remains lackluster. Many banks are nursing bruised balance sheets, and the degree to which lenders are hurting is likely to become more evident with this latest batch of tests.

Overall industrial and economic output remain below pre-crisis levels and unemployment across much of southern Europe remains at levels, unfathomable in the U.S., even during the worst of the Great Recession. The region is stumbling back toward recession, led by a German slowdown. Now, discussions of Europe’s long-running economic woes regularly use the term “depression,” Weinberg has been using the dreaded D-word for years. There isn’t a single accepted definition of a depression, but economists have usually described the phenomenon as one in that lasts several years and is characterized by a large rise in unemployment, falling credit and a big drop in economic output. The eurozone’s current woes appear to tick all those boxes. When it comes to the stress tests, the hope is that a more rigorous review led by the ECB will reassure investors that the region’s banking sector is in relatively solid shape. Of course, to be credible, some banks will have to fail, which will require them to scramble to shore up capital.

Bloomberg, citing a draft communique on Friday, reported that the ECB was set to fail 25 lenders. Weinberg worries that the tests could trigger a near-term crisis. The problem isn’t that the banks are being scrutinized, it’s that there’s no credible plan to fill in capital shortfalls and allow the banks to repair themselves via retained earnings. There is, for example, no equivalent to the controversial but successful Troubled Asset Relief Program, or TARP, that saw U.S. taxpayers effectively take temporary stakes in crippled banks that were eventually bought back from the Treasury. “If the AQR would get banks recapitalized and make them better able to lend, I would be delighted and that would be the end of this six-year-going-on-seven-year depression,” Weinberg said in an interview. Instead, the exercise is “nothing more than an evaluation.”

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Emerging markets set to stop emerging.

America Stems Flow Of Funds As China Stalls And Eurozone Retreats (Observer)

There is growing unease as the US central bank prepares to turn off its printing presses. Over five years the Federal Reserve has pumped almost $4.5 trillion into the US economy, in a desperate effort to counter the effects of recession and the collapse of hundreds of banks following the financial crash. Next week the Federal Reserve chief Janet Yellen will allocate the last tranche of new money, having wound down from a regular $85bn of quantitative easing (QE) a month to a final $15bn. Some analysts believe the decision to stop the extra spending is a reflection of the US economy’s robust recovery. Falling unemployment, a return to health across the banking sector and consistently strong manufacturing growth all conjure thoughts of a return to pre-recession normality. Given the huge amounts of money that poured into the US stock market last year, triggering a rise in the S&P 500 of almost 30%, most investors thought the same. But they have proved more cautious in 2014, restricting the S&P 500 to a 6% increase so far.

Disturbed by the lack of similar action in Brussels and in Frankfurt – home of the European Central Bank – investors fear that the eurozone is sliding ever closer to recession. They are also worried about a sharp slowdown in China, following moves by the ruling People’s party to tackle escalating state sector debts. Wild price swings in global stock markets earlier this month were a signal that investors remain ready to pull their funds at a moment’s notice. In this febrile atmosphere, the Fed’s next move could be crucial. Yellen appears ready to maintain the $4.5tn cache of bonds and mortgage-backed securities that make up the bulk of the Fed’s balance sheet. As the bonds mature, she will buy new ones to keep the balance steady. But she may be edging away from raising interest rates from 0.25%, a move pencilled in by many economists for February.

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Best advice there is.

Don’t Buy A Home (MarketWatch)

After an extended drought of credit available to consumers, it’s going to get easier to buy a home. The Federal Housing Finance Agency this week polished off a new set of guidelines that will allow government backing of loans that it had shunned since the mortgage crisis. And in a surprise move, the guidelines include a provision to consider some mortgages without down payments. And Mel Watt, the FHFA director, said earlier this week that Fannie Mae and Freddie Mac are planning to guarantee some loans with down payments of as little as 3%. That should help underwater homeowners. Let’s begin by saying that’s not necessarily a bad thing. There are instances where loans should be available to borrowers without the means to place a down payment. It’s just that I can’t think of any.

The FHFA and the Obama administration are both worried about the amount of credit available to the average American. It’s an epidemic problem. About a third of housing sales were to cash buyers in the first quarter, according to the National Association of Realtors. As I’ve written before, this is extraordinarily high, indicative of a housing market that favors the wealthy. So by lowering the standards of what types of loans are acceptable to the big mortgage giants, it’s obvious that the FHFA’s effort is about encouraging banks to provide more loans. The government is essentially saying: “Go ahead and lend; we’ll hold the paper.” But in trying to ease credit and turn a mythic housing recovery into a real one, the FHFA may be overreaching. That’s because you know exactly who’s going to be taking out those loans: people who can’t afford them. And because there will always be some people who believe that because they can borrow, they can afford these loans, you know how this new policy is going to play out.

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Dark economic days ahead in Brazil no matter who wins. A stronger dollar and higher rates will hit it like a sledgehammer.

Brazilians Vote for Leader as Polls Show Nation Divided (Bloomberg)

Brazilians vote today in a national election that pits President Dilma Rousseff, who says she wants to protect social gains achieved during 12 years of her Workers’ Party rule, against challenger Aecio Neves, who says the incumbent has driven the economy into recession. Voting stations open at 8 a.m. today and close at 5 p.m. in each of Brazil’s three time zones. Some opinion polls published yesterday showed Rousseff statically tied with Neves of the Brazilian Social Democracy Party, while others indicated either the incumbent or challenger with the lead.

Neves proposes to cut spending, slow inflation to target and attract more private investment, while keeping social welfare programs such as cash transfers to the poor and low-cost housing. While the economy in 2014 slipped into recession for the first time since 2009, Rousseff has gone on the attack, saying Neves’s policies jeopardize record-low unemployment and programs that lifted 35 million people out of poverty. “Brazil’s consumer-led consumption model has run its course and needs to be replaced with one based on investment and quality public services,” said Paulo Sotero, director of the Brazil Institute at the Washington-based Woodrow Wilson International Center for Scholars. “Those who benefited from that model, and they weren’t few, feel that change could put at risk those advances.”

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If Ukraine if serious about not letting Luhansk and Donetsk secede, how can it hold elections that do not include the regions, and still pretend to derive legitimacy from them?

Ukraine Votes in Wartime Ballot Set to Back Pro-EU Forces (Bloomberg)

Ukrainians voted today in an election that’s being shaped by their nation’s conflict with pro-Russian insurgents and Vladimir Putin’s land grab in Crimea. Polling stations opened at 8 a.m. and will close at 8 p.m., after which exit polls are due. Backing for billionaire President Petro Poroshenko’s party and the Popular Front of his Prime Minister Arseniy Yatsenyuk tops 40%, while the Regions Party of deposed leader Viktor Yanukovych isn’t running. Poroshenko wants to build a coalition with other pro-European parties. “We’re likely to see a fairly stable majority” in an alliance led by Poroshenko’s bloc, Yuriy Yakymenko, an analyst at the Kiev-based Razumkov Center for Economic and Political Studies, which has tracked Ukrainian elections for two decades, said last week by phone. “

Lawmakers will unite behind plans for Ukraine’s future accession to the European Union.” The snap vote will vanquish the legislature elected under Russian-backed Yanukovych as Poroshenko seeks support to end the war, tackle the deepest recession in five years and revive the world’s worst-performing currency. Ukraine’s crisis has fixed the nation on a pro-EU trajectory and driven a wedge between Russia and its former Cold War foes.

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It’s not as if they have any real alternatives to vote for. Both parties will squeeze them dry.

Stagnant Paychecks for US Workers Underlies Voter Discontent (Bloomberg)

Eleven days before midterm elections comes fresh evidence of why voters are unhappy: even those with a full-time job are probably making less than they did before the recession. The typical American worker’s weekly earnings, adjusted for inflation, were lower during the July through September quarter than in the third quarter of 2007, the last such measurement before the recession started, Labor Department data released yesterday showed. Even as the unemployment rate dropped to 5.9% in September from a peak of 10% and a soaring stock market brought financial gains for the wealthy, there has been only sluggish improvement in the living standards of middle-class Americans during President Barack Obama’s administration.

The Labor Department said median usual pay for Americans employed full-time was $790 per week in the third quarter. That’s about a dollar less per week than in the third quarter of 2007, using the department’s adjustment for inflation. There’s been no net gain for those workers since 1999. The Labor Department pay data captures the experience of ordinary American full-time workers. Unlike some other income data reported by the government, it excludes the impact of joblessness, public assistance, investment income and workers forced to take part-time jobs because they cannot find full-time employment. In September, 7.1 million Americans worked part-time for economic reasons, down from a peak of 9.2 million in March 2010, though still higher than the 4.5 million who did so in November 2007, on the eve of the recession.

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Combine this with the next article.

Record Number Of Britons In Low-Paid Jobs (Guardian)

A record 5 million workers are now in low-paid jobs, according to a new report, sparking calls for government action to help tackle the problem. The Resolution Foundation said the numbers earning less than two thirds of median hourly pay – equivalent to £7.69 an hour – increased by 250,000 last year to reach 5.2 million. The increase partly reflected growth in employment, but there was also a reverse in the previous year’s slight fall in low-paid work, said the thinktank. The report said there was a serious problem of people being stuck in low-paid jobs, with almost one in four minimum wage employees still on that rate for the last five years. Workers in Britain are more likely to be low paid than those in comparable economies such as Germany and Australia, said the Resolution Foundation.

The thinktank’s chief economist, Matthew Whittaker, said: “While recent months have brought much welcome news on the number of people moving into employment, the squeeze on real earnings continues. While low pay is likely to be better than no pay at all, it’s troubling that the number of low-paid workers across Britain reached a record high last year. “Being low paid – and getting stuck there for years on end – creates not only immediate financial pressures, but can permanently affect people’s career prospects. A growing rump of low-paid jobs also presents a financial headache for the government because it fails to boost the tax take and raises the benefits bill for working people.

“All political parties have expressed an ambition to tackle low pay. Yet the proportion of low-paid workers has barely moved in the last 20 years. A focus on raising the minimum wage can certainly help the very lowest paid workers in Britain, but we need a broader low-pay strategy in order to lift larger numbers out of working poverty. “Economic growth alone won’t solve our low-pay problem. We need to look more closely at the kind of jobs being created, the industries that are growing and the ability of people to move from one job or sector to the other, if we’re really going to get to grips with low pay in Britain today.”

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Combine his with the preceeding article.

Nearly A Third Of British Voters Prepared To Support Ukip (Observer)

The phenomenal rise in support for Ukip is underlined by a new Opinium/Observer poll which shows almost one-third of voters would be prepared to back Nigel Farage’s party if they believed it could win in their own constituency. While the survey, which puts the Conservatives and Labour neck-and-neck on 33%, shows a substantial boost for the Tories (up five points on a fortnight ago), the rise of Ukip will be deeply alarming to the main parties. With just over three weeks to go before a crucial byelection in the normally safe Tory seat of Rochester and Strood, which Ukip threatens to seize, the poll puts Ukip on 18% of the national vote, with the Lib Dems on 6% and the Greens on 4%.

If the Ukip candidate Mark Reckless, who defected from the Tories last month, wins the byelection, the Conservatives fear there could be a rush of defections as MPs conclude that their chances of re-election are higher under Ukip colours. When asked to respond to the statement “I would vote for Ukip if I thought they could win in the constituency I live in”, 31% of voters said they agreed. This includes 33% of Tory voters, 25% of Liberal Democrats and 18% of Labour supporters. Voters were equally divided on whether a vote for Ukip was a wasted one, with 40% saying it was, and 37% saying it was not.

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Renzi wants IMF-style reforms.

1 Million Italians Rally in Rome to Protest Labor Rules Change (Bloomberg)

Italians staged a massive rally in Rome to protest Prime Minister Matteo Renzi’s proposed overhaul of labor market rules. Italian television RAI said several hundred thousand people took part in the demonstration, while news agency Ansa cited CGIL union organizers as saying the number was closer to 1 million. Many of the protesters carried red balloons and waved red union banners under bright sunny skies. CGIL chief Susanna Camusso told the demonstrators the union is ready to continue its protest “with all necessary means” including a general strike. She shouted to the cheering crowd at the end of her speech in Piazza San Giovanni “onward to work, to the struggle!”

CGIL called the rally to protest Renzi’s Jobs Act, which includes measures to ease firing rules and make the labor market more flexible. Renzi has said that the plan is a way to attract investments at a time when youth unemployment was at a record high 44.2% in August. His proposals, which were approved by the Senate in a confidence vote this month, will have to be passed by the Chamber of Deputies. The Rome demonstration follows a separate 24-hour strike that disrupted air and ground transport in the country’s biggest cities yesterday. More disruptions are expected Nov. 14, when Alitalia’s staff and Easyjet’s flight attendants will go on strike, according to a statement posted on the Italian Transport Ministry’s website.

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Special Drawing Rights should be abolished. So should the IMF itself.

IMF Sets 0.05% Floor on Interest Rate on Special Drawing Right (Bloomberg)

The International Monetary Fund is setting a 0.05% floor on the interest rate used to determine borrowing costs for some of its loans. The executive board modified rules today to make the change, according to a statement today in Washington. The IMF’s Special Drawing Right, based on a basket of the dollar, yen, euro and pound, is the fund’s unit of account that serves as a supplemental reserve asset and was designed to improve global liquidity. The SDR interest rate was quoted on the IMF website at 0.03% today compared with 0.13% in April and more than 3% in August 2008, before central banks slashed borrowing costs to zero to boost growth in the aftermath of the financial crisis. The rate will be 0.05% on Oct. 27, the IMF said.

The board also approved changing the rounding convention for calculating the SDR rate to three decimal points from two, the statement said. The SDR interest rate is used to calculate interest charged to member nations for non-concessional loans and SDR allocations, and the rate paid to members for SDR holdings. It is calculated from a weighted average of the short-term money market rates of the SDR basket currencies. A floor will prevent the SDR rate from going negative, in the event that money market interest rates on some of the currencies in the underlying basket themselves go negative, an IMF official told reporters on condition of anonymity. The fund has no legal basis for charging a negative rate on SDRs.

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China is not growing anywhere near 7% anymore, but it may take years before that is admitted.

China State Economist Sees 2015 Growth Slowest in Over 2 Decades (Bloomberg)

China’s economic growth is expected to be at 7% in 2015 unless the central government imposes stronger-than-expected stimulus measures, according to Fan Jianping, chief economist at a state research institute. A decrease in exports and property development, two “engines” fueling China to be the world’s second-largest economy, will be the main cause of a slowing of growth, Fan, who works at the State Information Center under the National Development and Reform Commission, told an industry conference today. Fan’s forecast is in line with a median estimate of 51 analysts in a Bloomberg News survey as Chinese leaders have signaled they will tolerate a weaker expansion, leaving the economy heading for the slowest full-year growth since 1990. Chinese leaders will set a gross domestic product growth target of about 7% for 2015, according to 13 of 22 analysts polled by Bloomberg.

“I don’t rule out that we will see on-year expansion lower than 7% in some single quarters next year,” Fan said. He said his forecast was based on his agency’s research, which uses China’s industrial production as a key indicator to the economic growth. Fan’s remarks may cool down an improved sentiment in Chinese economy as GDP expanded by a better-than-forecast 7.3% in the third quarter from a year earlier. While the government has relaxed home-purchase controls and pumped liquidity to lenders, the economy also got support from a pickup in exports in September. “In at least six months, economic growth is unlikely to pick up remarkably,” Fan said in Shanghai. GDP expansion in three months from October is seen at 7.2 to 7.3%, which will lead the full-year growth to about 7.3% as reading in the fourth quarter has bigger weighting, he said. China set 2014 GDP growth target at 7.5%.

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RT video seeking to make the case for a second plane – a Ukraine figher jet – near MH17.

MH-17: The Untold Story (RT)

Three months after Malaysia Airlines Flight MH17 was violently brought down from the skies over Ukraine, there are still no definitive answers to what caused the tragedy. Civil conflict in the area prevented international experts from conducting a full and thorough investigation. The wreckage should have been collected and scrupulously re-assembled to identify all the damage, but this standard investigative procedure was never carried out. Until that’s done, evidence can only be gleaned from pictures of the debris, the flight recorders or black boxes and eye-witnesses’ testimonies. This may be enough to help build a picture of what really happened to the aircraft, whether a rocket fired from the ground or gunfire from a military jet.

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As we’ve known for 100 years.

You’re Powered By Quantum Mechanics. No, Really… (Observer)

Every year, around about this time, thousands of European robins escape the oncoming harsh Scandinavian winter and head south to the warmer Mediterranean coasts. How they find their way unerringly on this 2,000-mile journey is one of the true wonders of the natural world. For unlike many other species of migratory birds, marine animals and even insects, they do not rely on landmarks, ocean currents, the position of the sun or a built-in star map. Instead, they are among a select group of animals that use a remarkable navigation sense – remarkable for two reasons. The first is that they are able to detect tiny variations in the direction of the Earth’s magnetic field – astonishing in itself, given that this magnetic field is 100 times weaker than even that of a measly fridge magnet. The second is that robins seem to be able to “see” the Earth’s magnetic field via a process that even Albert Einstein referred to as “spooky”. The birds’ in-built compass appears to make use of one of the strangest features of quantum mechanics.

Over the past few years, the European robin, and its quantum “sixth sense”, has emerged as the pin-up for a new field of research, one that brings together the wonderfully complex and messy living world and the counterintuitive, ethereal but strangely orderly world of atoms and elementary particles in a collision of disciplines that is as astonishing and unexpected as it is exciting. Welcome to the new science of quantum biology. Most people have probably heard of quantum mechanics, even if they don’t really know what it is about. Certainly, the idea that it is a baffling and difficult scientific theory understood by just a tiny minority of smart physicists and chemists has become part of popular culture. Quantum mechanics describes a reality on the tiniest scales that is, famously, very weird indeed; a world in which particles can exist in two or more places at once, spread themselves out like ghostly waves, tunnel through impenetrable barriers and even possess instantaneous connections that stretch across vast distances.

But despite this bizarre description of the basic building blocks of the universe, quantum mechanics has been part of all our lives for a century. Its mathematical formulation was completed in the mid-1920s and has given us a remarkably complete account of the world of atoms and their even smaller constituents, the fundamental particles that make up our physical reality. For example, the ability of quantum mechanics to describe the way that electrons arrange themselves within atoms underpins the whole of chemistry, material science and electronics; and is at the very heart of most of the technological advances of the past half-century. Without the success of the equations of quantum mechanics in describing how electrons move through materials such as semiconductors we would not have developed the silicon transistor and, later, the microchip and the modern computer.

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Every single step takes in the US with regards to ebola seems ‘confused’. Or should that read ‘complacent’?

Nurse Held at N.J. Airport Calls US Reaction to Ebola ‘Disorganized’ (Bloomberg)

A nurse who tested negative for Ebola said officials at Newark Airport in New Jersey appeared confused and disorganized, and gave her only a granola bar to eat while she was detained for more than six hours after arriving from Sierra Leone. In a first-person account in the Dallas Morning News, Kaci Hickox criticized the treatment she received after returning from a monthlong assignment with Doctors Without Borders in the country, one of three West African nations at the center of the current outbreak. “No one seemed to be in charge,” Hickox wrote in the account yesterday. “No one would tell me what was going on or what would happen to me.” Hickox said she was detained at the airport upon her arrival at 1 p.m. on Oct 24. At the time, her temperature was recorded at 98 degrees. Three hours later, after a confusing series of interactions with officials, her temperature was recorded at 101 degrees using a forehead scanner.

Hickox said she told officials that her skin temperature could have been elevated because her face was flushed with anxiety and asked them to test again using a more accurate oral thermometer. She was left alone for another three hours without her temperature being taken again before being transported with a police escort to a hospital. At the hospital, after being placed in an isolation tent, an oral thermometer recorded her temperature at a normal 98.6 degrees. Her blood was tested for Ebola, and came back negative. All the same, Hickox remains in quarantine for 21 days under rules imposed this week by New York and New Jersey officials. “I am scared about how health-care workers will be treated at airports when they declare that they have been fighting Ebola in West Africa,” Hickox wrote. “I am scared that, like me, they will arrive and see a frenzy of disorganization, fear and, most frightening, quarantine.”

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Oct 252014
 
 October 25, 2014  Posted by at 12:12 pm Finance Tagged with: , , , , , , , , , , , ,  7 Responses »


DPC Luna Park, Coney Island 1905

An Economy Based On Property Has Much To Fear (Independent)
Lenders Facing Soaring Costs Shutting Out U.S. Homebuyers (Bloomberg)
It Shouldn’t Hurt This Much to Get a Mortgage (Ritholtz)
Paying For Bad Habits: Hookers And Drugs Lift UK’s EU Bill (Guardian)
UK Chancellor Osborne’s Choice Of Words Is Sounding Alarm Bells (Guardian)
A Mystery Bidder Offers $3 Million for 6,000 of Detroit’s Worst Homes (BW)
Spanish Accuse Goldman, Blackstone Of Hiking Rent For Poor (Independent)
EU Bank Breakup Plan Hits More Hurdles as Danes Reject Idea (Bloomberg)
Citigroup Bets ECB Will Do QE as Morgan Stanley Sees Odds at 40% (Bloomberg)
50% Of American Workers Make Less Than $28,031 A Year (Snyder)
The American Dream Is Still Possible, Just Not in the US (Daily Bell)
Rosenberg Says No Recession Until At Least 2016 (MarketWatch)
China Auto Market Growth To Shrink by 50% This Year: Industry Head (Reuters)
Blood In The Water As Amazon Magic Fades (Reuters)
Putin Accuses U.S of Blackmail, Weakening Global Order (Bloomberg)
NPR Slashes Number Of Environment Reporters To One Part-Timer (HuffPo)
Ebola Epidemic In Africa To Explode Without Rapid, Substantial Aid (Lancet)
‘Official’ Number of Ebola Cases Passes 10,000, With 5,000 Deaths (BBC)

A very smart way to look at it.

An Economy Based On Property Has Much To Fear (Independent)

Believe it or not, the Bank of England isn’t just a bunch of bowler-hatted types stuck behind desks in Threadneedle Street. It has agents up and down the country interviewing business people on how their companies are faring: what goods are selling well, whether they’re hiring or firing, that sort of thing. The monthly bulletins that result rarely get reported, but are useful because they layer anecdotal evidence on top of the regular run of dry economic stats. Superficially, October’s feedback had much to cheer – order books are swelling in most sectors, employment is expected to increase, and access to credit has improved. But it is striking how much of this positive stuff is related, directly or indirectly, to the property market.

Business services firms – accountants, lawyers and the like – are growing because of an increase in construction deals; manufacturing and retail sales are being kept afloat by sales of kitchens, bathrooms and furniture thanks to people moving house; business investment is growing as firms spend more on doing up their premises or moving to new sites. Property, property, property. Exporters, meanwhile, were gloomy, with all, from farmers to manufacturers, complaining of eurozone weakness, Russian belligerence and war in the Middle East. That means we will be reliant on the domestic economy for years to come. With this still clearly so dominated by the world of bricks and mortar, one has to wonder, what would happen if interest rates start to rise? Disaster, that’s what. The Bank’s other document release yesterday – the minutes to the Monetary Policy Committee’s last meeting on rates – show a continuing doveish slant. Good job, too.

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No, prices vs income shuts out potential buyers. So either significantly raise wages or drop prices, and stop whining.

Lenders Facing Soaring Costs Shutting Out U.S. Homebuyers (Bloomberg)

Clem Ziroli Jr.’s mortgage firm, which has seen its costs soar to comply with new regulations, used to make about three loans a day. This year Ziroli said he’s lucky if one gets done. His First Mortgage Corp., which mostly loans to borrowers with lower FICO credit scores and thick, complicated files, must devote triple the time to ensure paperwork conforms to rules created after the housing crash. To ease the burden, Ziroli hired three executives a few months ago to also focus on lending to safe borrowers with simpler applications. “The biggest thing people are suffering from is the cost to manufacture a loan,” said Ziroli, president of the Ontario, California-based firm and a 22-year industry veteran. “If you have a high credit score, it’s easier. For deserving borrowers with lower scores, the cost for mistakes is prohibitive and is causing lenders to not want to make those loans.”

Federal regulations, enacted after the collapse of the subprime market spurred the financial crisis, are boosting mortgage costs this year. Most lenders are responding by providing home loans only to borrowers with near perfect credit, shutting out creditworthy Americans whose loan files are too expensive to review and complete. If banks commit compliance errors in issuing a loan that goes bad, they have to buy it back at a loss from Fannie Mae or Freddie Mac. During the housing boom between 2004 and 2007, lenders provided about $2 trillion in subprime loans, many to unqualified borrowers. So-called liar loans didn’t require borrowers to provide pay stubs or tax returns to document earnings. Teaser rates as low as 1% offered on mortgages soared when they reset a few years later.

The share of subprime mortgages for which borrowers either provided little documentation of their assets or none at all rose to 38% in 2007 from 32% in 2003, according to a paper published by the Federal Reserve. Almost one in four of those mortgages defaulted by 2008 compared with one in five of fully documented subprime loans. Wall Street firms securitized pools of the loans called collateralized debt obligations and sold them to investors. They also created so-called synthetic CDOs that were derivative instruments designed to mirror the performance of the loan pools. “What started the crisis were these loans that were designed to fail, loans that weren’t underwritten at all,” said Julia Gordon, director of housing finance and policy at the Washington-based Center for American Progress, which has ties to the Democratic Party. “No one quite realized that these loans were then at the bottom of this giant pyramid scheme, where the Wall Street derivative products that were based off of them would just come crashing down and take the whole economy with them.”

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Sorry, Barry, but that’s as wrong as can be. It should very much be this hard, or prices will never find their ‘natural’ floor.

It Shouldn’t Hurt This Much to Get a Mortgage (Barry Ritholtz)

Under normal circumstances, approving my mortgage application should be a no-brainer: High income, no debt, good credit score. The missus also makes a good income, has an almost-perfect credit score and has been working for the same business for 28 years. But these are not normal circumstances. Let me jump to the end: Yes, we got our mortgage. We put 20% down, bought a house that appraised for more than the purchase price and got a 3.25% rate on a mortgage that resets after seven years. We moved in last month.

But the process was surreal. Indeed, it was such a bizarre experience that I started hunting for explanations from people in the industry about why mortgage lending has gone astray. I spoke to numerous experts, many of whom spoke only on background. Today’s column is about what I learned. By just about any measure, credit is tighter today than it has been in decades. Although former Federal Reserve Chairman Ben Bernanke’s inability to refinance a mortgage is merely anecdotal, consider instead the gauge CoreLogic developed. It used 1998 as a baseline and considered six quantitative measurements to evaluate how loose or easy mortgage lending is. By those metrics, this is the tightest credit market for mortgage lending in at least 16 years.

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I like my take from yesterday better: French hookers are cheaper than British ones.

Paying For Bad Habits: Hookers And Drugs Lift UK’s EU Bill (Guardian)

Listening to EU officials describe how Britain pays its annual EU contribution brings to mind George W Bush being questioned about one of his administration’s budgets. Flicking the pages before assembled journalists he said: “There’s a lot of pages, a lot of lines and a lot of numbers.” To all but a few, the addings up and subtractings that go on in Brussels make little more sense. One of the few things that does seem clear is that Britain is paying for its bad habits. Brussels needs more cash this year to cope with overspent budgets. And while it might seem unfair to tax a country for needing a bigger crutch than others in the EU club, relatively speaking, the UK’s GDP has jumped courtesy of new estimates of the nation’s consumption of drugs and use of prostitutes. The EU applies its complex calculation of how much member states should pay into its coffers largely on GDP levels. The bigger the national income, the bigger the contribution. So far, so simple.

However, earlier this year the UK’s GDP was given a £10bn boost after officials calculated that sex work generated £5.3bn for the economy in 2013, with another £4.4bn coming from the sale of cannabis, heroin, powder cocaine, crack cocaine, ecstasy and amphetamines. Other countries have been affected too after the EU calculated how much of their hidden economies should be brought on the books. Greece faces a larger contribution despite losing a fifth of is national income since 2009. Italy is another victim, though arguably it has only included a fraction of the mafia’s business in its GDP calculations. More importantly, Britain is paying more because this year it is simply bigger than 18 months ago while other countries have stood still or contracted. Like soldiers in a lineup who find themselves volunteering for toilet duty after everyone else has taken a step back, the UK Treasury is paying for being one of the few among the EU’s 27 economies to strengthen this year.

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A glitch in the posturing process?!

UK Chancellor Osborne’s Choice Of Words Is Sounding Alarm Bells (Guardian)

George Osborne is clearly worried. Going into a pre-election war-gaming huddle with his advisers, the economic numbers that once sang a happy tune and are so crucial to victory, now sound a little discordant. It seems churlish to strain for the bum notes in the latest GDP figures. All parts of the economy are growing, with the exception of agriculture. And growing more strongly than they are in any of the major European economies. But it is the chancellor’s words that set off the alarm bells. He said: “If we want to avoid a return to the chaos and instability of the past, then we need to carry on working through our economic plan that is delivering stability and security.” Adopting the word “chaos” is at once interesting and alarming. He seems to be saying that any other path than the one he has chosen will bring with it a swirling storm of instability. Billing himself as Lord Protector, Osborne risks overstating his case, especially when the GDP numbers are so strong.

Growth is moderating, but most surveys report that businesses remain confident about the recovery and continue to hire more staff. As a result, unemployment continues to fall. So what can he be worried about? There is the three months of restrained housing market activity. If it’s true, and we don’t fully understand the link, that much of the recovery is connected to the increase in property buying, then any slowdown is a cause for concern. Except the chancellor wanted the housing market to cool. And his policies are largely the reason banks are refusing to dole out loans after he gave regulators instructions in April to clampdown on risky mortgage lending. A slowdown in housebuilding was also a logical knock-on effect, given that a majority of homes are constructed by a private building sector keen to maintain its extraordinary profit levels.

We know he is worried about the slowdown in exports, which didn’t take off four years ago, as he had expected. The eurozone’s impending recession is largely to blame, but a lack of support to exporters, particularly multimillion-pound credit insurance, has also proved a barrier. However, the crucial issue is the government’s finances, which have worsened this year despite the strong recovery. For a man with the electoral cycle stamped on his DNA, it is tragic that businesses and workers are not paying much extra tax.

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What do Detroiters think of this?

A Mystery Bidder Offers $3 Million for 6,000 of Detroit’s Worst Homes (BW)

Three million dollars can barely buy a new townhouse in Brooklyn these days, but it could be enough to purchase a bundle of more than 6,000 foreclosures up for auction in Detroit. The cost of dealing with the many blighted buildings included in the Detroit mega-auction means a $3.2 million bid received last week—roughly the minimum allowable bid of $500 per property—will likely prove too high to turn a profit. “I can’t imagine that you are going to make money on this,” says David Szymanski, chief deputy treasurer of Wayne County, which is selling the properties. So it’s all the more mysterious that the auction, opened with little fanfare earlier this month, has attracted any bidder at all. Still, at least one unidentified party is willing to pay $3.2 million to take control—and responsibility—for scores of dilapidated homes. In fact, winning the bid could cost the lucky winner a small fortune beyond the auction price.

Finding a way to deal with Detroit’s blight is critical for the city’s future. A task force has already called for immediately tearing down 10% of all structures. The group surveyed the condition of every Detroit property and identified neighborhoods at a tipping point at which stripping them of blight could keep certain areas from slipping away entirely. “I had cancer 12 years ago, and this is exactly like cancer,” Szymanski says. “If you don’t get it all, it’s going to come back.” Wayne County has become a major owner of blighted properties, which it can seize when owners fall behind on taxes. The scale of its distressed holdings is unprecedented. When Szymanski joined the treasurer’s office four years ago, he called the treasurer of Cuyahoga County in Ohio to compare notes. His counterpart, whose domain includes Cleveland and was a bellwether during the housing crisis, asked: “Are you sitting down? We are foreclosing on 4,500 properties.” Szymanski says he replied: “I hope you’re laying down.” At the time, Wayne County had 42,000 properties in foreclosure.

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Throw ’em out!

Spanish Accuse Goldman, Blackstone Of Hiking Rent For Poor (Independent)

The London investment arms of Goldman Sachs and Blackstone were accused last night of jacking up the rents of Madrid’s poorest people after they bought thousands of the city’s council flats. Many, unable to afford their new terms, have now been threatened with eviction or moved out. During the financial crisis, the city was advised by the accountants PwC to sell off swathes of its social housing in order to raise desperately needed funds. It sold 5,000 flats to investors including Goldman and Blackstone. Nothing changed in the tenants’ rents until their leases ran out, when, in many cases, the charges shot up dramatically. Reuters interviewed over 40 households who have been thrown into difficulties by the rent rises. They include Jamila Bouzelmat, a mother of six who lives in a four-bed flat now owned by Goldman and a Spanish property firm. She said her family had been paying €58 (£46) a month rent from her husband’s €500 unemployment benefit. But in April, her new landlords suddenly took €436 from her account.

Ms Bouzelmat said she only discovered the problem when she tried to pay an electricity bill: “We went to take money out and there wasn’t a cent left in the bank,” she explained. 1 in 5 adults in Madrid are unemployed. Goldman and Blackstone are entirely within their rights to charge market-price rents. However, a number of lawsuits have now been launched by local politicians against the councils that sold the homes. The problem is particularly bad in Spain because it already had one of the smallest stocks of social housing in Europe. Now 15 per cent of it has been sold off to London banks and private equity firms, there is even less. Goldman’s properties had about 400 households on reduced rents, often negotiated individually with the council and set for up to two years. Goldman referred inquiries to Encasa Cibeles, the local firm set up to manage the flats. A spokesperson said: “Evictions occur in an extremely small number of cases.”

Blackstone’s tenants have been on longer leases but most have been paying below-market rents. As leases approach expiry, rates have risen 40%. Blackstone referred inquiries to Fidere, the local estate management company, which said “some people have lost the public subsidy they received from the council”. It is negotiating with the 2% of its tenants in that situation.

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There’s always another politician to put on the payroll.

Bank Breakup Plan Hits More EU Hurdles as Danes Reject Idea (Bloomberg)

Denmark won’t back a proposal to split Europe’s biggest banks as the region’s first country to enforce bail-in rules questions the value of more regulation. “With all the legislation now in place there really shouldn’t be more worries,” Business Minister Henrik Sass Larsen said in an interview yesterday at the parliament in Copenhagen. A proposal by Michel Barnier, the European Union’s financial services chief, to break up systemically important banks has resurfaced with local regulators trying to defend national interests, according to a document obtained by Bloomberg News. Italy, which holds the EU’s rotating presidency, said it was looking for “concrete options for the way forward” after registering “strong concerns” among member states, the document showed. “With the regulation we’ve put in place, we’re fully covered,” Larsen said, characterizing the notion that more may be needed as obsolete. The proposal for reforming bank structures has come under attack on multiple fronts since Barnier presented it in January.

In addition to a narrowly defined proprietary-trading ban, Barnier set out EU-wide standards for splitting up the most systemically important banks that would push certain kinds of derivatives and other trading activities into separately capitalized units. Barnier’s plans require approval from national governments and the European Parliament to take effect, with talks set to continue into next year. Britain’s Jonathan Hill, who will replace Barnier as financial services commissioner on Nov. 1, has said he will “take forward work” on the proposal. Larsen’s position shows some EU nations back industry efforts to block further regulation. Christian Clausen, the president of the European Banking Federation and the chief executive of Nordea Bank AB, said this week plans to add rules to the existing framework are “going beyond reason.” Clausen said he plans to have a “serious talk” with the European Commission and parliament to prevent further regulatory tightening.

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Think Berlin.

Citigroup Bets ECB Will Do QE as Morgan Stanley Sees Odds at 40% (Bloomberg)

Economists are at odds over whether the European Central Bank will do “whatever it takes” to revive inflation in the euro area. More than two years after President Mario Draghi promised to pull out all the stops to protect the euro from a swirling debt crisis, ECB-watchers are split over whether the central bank will buy government bonds to aid the struggling economy. In making forecasts for the possible deployment of full-blown quantitative easing, the pressures of weak growth and sliding inflation are being balanced against Germany’s aversion to purchasing sovereign debt and practical considerations such as how and whether it would work. Draghi said earlier this month that the ECB will use further unconventional monetary policy instruments if needed to support recovery. Goldman Sachs sees one-in-three odds of QE, Morgan Stanley views the chances at 40% and JPMorgan is at 50-50. By contrast, HSBC, Barclays and Bank of Americahave sovereign QE as part of their central scenarios. Citigroup even says it could happen before the end of this year.

Here then is a handy round-up, gleaned from reports and interviews, of where economists at major banks stand. Huw Pill, Goldman Sachs: “Sovereign QE is not part of our baseline scenario, which is for economic activity to go sideways and inflation to remain low. We think the current gloom and doom about the euro area outlook is overdone.” Joerg Kraemer, Commerzbank: “We were one of the first banks to predict at the end of August that the ECB would buy government bonds on a generous scale, envisaging this happening at the start of next year rather than this year.” “It has become far more likely that the bank will act before the end of this year. Concerns about the economy that have triggered the drop in equity prices make it ever more likely that the ECB will have to lower its optimistic growth forecast for 2015 of 1.6%.” “This fact plays into the hands of those on the ECB Council in favour of relaxing the reins, as does our expectation that the end of the bank stress test will not in fact sound the all-clear for weak lending. Long-term inflation expectations have dropped sharply.”

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Gutted like a fish.

50% Of American Workers Make Less Than $28,031 A Year (Snyder)

The Social Security Administration has just released wage statistics for 2013, and the numbers are startling. Last year, 50% of all American workers made less than $28,031, and 39% of all American workers made less than $20,000. If you worked a full-time job at $10 an hour all year long with two weeks off, you would make $20,000. So the fact that 39% of all workers made less than that amount is rather telling. This is more evidence of the declining quality of the jobs in this country. In many homes in America today, both parents are working multiple jobs in a desperate attempt to make ends meet. Our paychecks are stagnant while the cost of living just continues to soar.

And the jobs that are being added to the economy pay a lot less than the jobs lost in the last recession. In fact, it has been estimated that the jobs that have been created since the last recession pay an average of 23% less than the jobs that were lost. We are witnessing the slow-motion destruction of the middle class, and very few of our leaders seem to care. The “average” yearly wage in America last year was just $43,041. But after accounting for inflation, that was actually worse than the year before… American paychecks shrank last year, just-released data show, further eroding the public’s purchasing power, which is so vital to economic growth.

Average pay for 2013 was $43,041 — down $79 from the previous year when measured in 2013 dollars. Worse, average pay fell $508 below the 2007 level, my analysis of the new Social Security Administration data shows. Flat or declining average pay is a major reason so many Americans feel that the Great Recession never ended for them. A severe job shortage compounds that misery not just for workers but also for businesses trying to profit from selling goods and services. Average pay declined in 59 of the 60 levels of worker pay the government reports each October.

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In Canada? Really? What part of the dream is that?

The American Dream Is Still Possible, Just Not in the US (Daily Bell)

Although there are no firm statistics on the number of Americans living outside the US, the US State Department estimates that somewhere between 3 and 6 million Americans now live offshore. I think this is a low estimate and the number is clearly growing. I now live in Canada but often travel back to the United States. Driving through Customs near Buffalo is usually not a big ordeal but it does involve a time-wasting delay much like visiting the post office or any other US government bureaucracy. But governments should police their borders, as this is one of the few legitimate functions of a central government. Still, whenever I’m there I do notice the America I grew up in and once knew has really changed since 9/11. The trend toward a more militarized and aggressive police force continues to quicken. I know most Americans accept this as part of the consequences of the War on Terror just as they do the loss of financial privacy, increased fines and asset seizures.

The Canadian government recently warned citizens to be careful when taking cash to the US because of the risk of police taking their cash for hyped-up offenses. Did you know that in the last 13 years, over $2.5 billion has been stolen by law enforcement in almost 62,000 cash seizures? I have to say that as an American, I’m outraged at the situation and always on guard when in the USSA. I fear many Americans who don’t travel internationally might have become somewhat immune to the intrusive, arbitrary nature of today’s American government and its institutions. Here in Canada, law enforcement is almost always professional and courteous and even the bureaucrats are friendly and helpful, which simply amazes me. So to my American family, friends and business associates, I want you to know it is still possible to achieve the American Dream of a simple life with opportunity for wealth creation, fun, freedom and good times without an overly intrusive, threatening government … just not in the United States.

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Rosy’s started living up to his nickname.

Rosenberg Says No Recession Until At Least 2016 (MarketWatch)

It’s going to take a little bit more than Ebola, eurozone pessimism and a rising U.S. dollar to turn David Rosenberg into a bear. The chief economist and strategist at Gluskin Sheff, in his economic commentary, points out the leading economic indicator released Thursday showed a 0.8% monthly advance and a 6.3% year-over-year gain in September. This rate, he says, is consistent with annual real GDP just under 4.5%. Plus, the one-month diffusion index jumped to a four-year high of 90%. Usually, within six months of a recession, the year-over-year trend turns negative while the diffusion index falls below 30%.

“Looking at the situation another way, based on where both the YoY LEI trend and the diffusion indices are now, and tracing them through the classic business cycle, we are at least two years away from the next recession,” he says. What does that mean for stocks? “The reality is that bear markets do not just pop out of the air,” he said. “They are caused by tight money, recessions, or both. These conditions do not apply, nor will they until 2016 at the earliest.”

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That’s a lot of cars planned for and produced, that are not going to be sold.

China Auto Market Growth To Shrink by 50% This Year: Industry Head (Reuters)

Growth in China’s auto market, the world’s biggest, will halve to 7% this year weighed down by a slowing economy, the head of an industry body said on Saturday. “Personally, I think growth this year can reach 7%,” Dong Yang, secretary general of the China Association of Automobile Manufacturers (CAAM), told reporters on the sidelines of an industry conference in Shanghai. “The economy is slowing. The auto industry would reflect that but typically lags the economic cycle by a bit.” CAAM had forecast China’s auto market, which grew by 13.9% last year, to expand at 8.3% in 2014. Dong said CAAM will not make any official revisions to its forecast. [..] Nissan has said its China sales fell by 20% in September from a year earlier, the third straight month of decline, due to sluggish sales of light commercial vehicles and increased competition in the passenger car segment. During the first nine months of the year, overall vehicle sales in China rose 7% from the same period a year earlier, according to CAAM data.

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Jeff Bezos has issues.

Blood In The Water As Amazon Magic Fades (Reuters)

Amazon.com’s once fairy-tale ride on Wall Street has hit its most jarring bump yet. The company that for years enthralled investors with improbable growth and earned one of the technology sector’s highest valuations drew widespread ire after a spectacular results letdown on Thursday. Amazon missed expectations across the board – on margins, on its net loss and on revenue. An unaccountably poor 7% to 18% revenue growth forecast for the typically strongest holiday quarter was the final straw for some. Coming just three months after a big letdown in July, the warning may represent a tipping point for investors who are already wary of a triple-digit price-earnings ratio and a persistent unwillingness to throttle back spending.

“They’re becoming much too distracted in all these other efforts” outside core businesses like online retailing and web services, said Matthew Benkendorf, portfolio manager at Vontobel Asset Management. Benkendorf unloaded his Amazon holdings a year ago and said he would be skeptical of future involvement even if the stock falls further. “They are their own worst enemy to success,” he said. “They really need to do some soul searching and get focused.”

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Not a bad analysis.

Putin Accuses U.S of Blackmail, Weakening Global Order (Bloomberg)

The U.S. is behaving like “Big Brother” and blackmailing world leaders, while making imbalances in global relations worse, Russia’s president said. Current conflicts risk bringing world order to collapse, Vladimir Putin told the annual Valdai Club in the Black Sea resort of Sochi. The Cold War’s “victors” are dismantling established international laws and relations, while the global security system has become weak and deformed, with the U.S. acting like the “nouveau riche” as global leader, he said. “The Cold War has ended,” Putin said. “But it ended without peace being achieved, without clear and transparent agreements on the new rules and standards.” Russia has clashed with the U.S. over conflicts from Syria to Ukraine, sending relations between the two countries to levels not seen since Soviet times. Putin, whose nation is on the brink of recession because of U.S. and European sanctions over Ukraine, also offered asylum to fugitive American government intelligence contractor Edward Snowden in 2013.

“Global anarchy” will grow unless clear mechanisms are established for resolving crises, Putin told the invited group of foreign and Russian academics and analysts. The U.S.’s “self-appointed” leadership has brought no good for other nations and a unipolar world amounts to a dictatorship, he said. “The United States does not seek confrontation with Russia, but we cannot and will not compromise on the principles on which security in Europe and North America rests,” State Department spokeswoman Jen Psaki said in response today in Washington. Psaki said the U.S. was committed to upholding Ukraine’s sovereignty and territorial integrity while continuing to cooperate with Russia on other issues, including destroying nuclear stockpiles and Syria’s chemical weapons cache.

“Our focus is on continuing to engage with Russia on areas of mutual concern, and we’re hopeful that we’ll be able to continue to do that,” Psaki said, “while we still certainly have disagreements on some issues.” Putin also attacked globalization, which he said has “disillusioned” many countries and risks hurting trust in the U.S. and its allies. More nations are trying to escape dependence on the dollar as a reserve currency by forming alternative financial systems, according to the Russian leader. Russia doesn’t want to restore its empire or have a special place in the world, Putin said. While it’s not seeking superpower status in international relations, it wants its interests to be respected, he said.

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Progress!

NPR Slashes Number Of Environment Reporters To One Part-Timer (HuffPo)

National Public Radio is down to just one environment reporter, and he’s only covering the beat part time, InsideClimate News reported Friday. As of early 2014, NPR had three reporters and an editor on the environment beat. Now they have one person, science reporter Christopher Joyce, holding down coverage of the issue, and his stories span a broad range of issues beyond the environment. The other three environment staffers have left NPR or moved to other beats. While other reporters could, of course, fill in with environment coverage, as needed, InsideClimate’s analysis of NPR’s archives finds that the number of environment stories has declined:

The number of content pieces tagged “environment” that NPR publishes (which include things like Q&As and breaking news snippets) has declined since January, according to an analysis by InsideClimate News, dropping from the low 60s to mid-40s every month. A year-to-year comparison shows that the outlet published 68 environment stories in September 2013 and 43 in September 2014. Last month, about 40% of that content was climate-related due to NPR’s cities project, as well as the media-intensive People’s Climate March and the UN climate summit in New York City. The rest was a mix of stories on agriculture and food, land conservation, wildlife, pollution and global health.

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Key line: “90,122 deaths in Montserrado alone by Dec. 15. Of these, the authors estimate 42,669 cases and 27,175 deaths will have been reported by that time.” Less than a third of deaths to be reported.

Ebola Epidemic In Africa To Explode Without Rapid, Substantial Aid (Lancet)

The Ebola virus disease epidemic already devastating swaths of West Africa will likely get far worse in the coming weeks and months unless international commitments are significantly and immediately increased, new research led by Yale researchers predicts. The findings are published in the Oct. 24 issue of The Lancet Infectious Diseases. A team of seven scientists from Yale’s Schools of Public Health and Medicine and the Ministry of Health and Social Welfare in Liberia developed a mathematical transmission model of the viral disease and applied it to Liberia’s most populous county, Montserrado, an area already hard hit. The researchers determined that tens of thousands of new Ebola cases — and deaths — are likely by Dec. 15 if the epidemic continues on its present course. “Our predictions highlight the rapidly closing window of opportunity for controlling the outbreak and averting a catastrophic toll of new Ebola cases and deaths in the coming months,” said Alison Galvani, professor of epidemiology at the School of Public Health and the paper’s senior author.

“Although we might still be within the midst of what will ultimately be viewed as the early phase of the current outbreak, the possibility of averting calamitous repercussions from an initially delayed and insufficient response is quickly eroding.” The model developed by Galvani and colleagues projects as many as 170,996 total reported and unreported cases of the disease, representing 12% of the overall population of some 1.38 million people, and 90,122 deaths in Montserrado alone by Dec. 15. Of these, the authors estimate 42,669 cases and 27,175 deaths will have been reported by that time.

Much of this suffering — some 97,940 cases of the disease — could be averted if the international community steps up control measures immediately, starting Oct. 31, the model predicts. This would require additional Ebola treatment center beds, a fivefold increase in the speed with which cases are detected, and allocation of protective kits to households of patients awaiting treatment center admission. The study predicts that, at best, just over half as many cases (53,957) can be averted if the interventions are delayed to Nov. 15. Had all of these measures been in place by Oct. 15, the model calculates that 137,432 cases in Montserrado could have been avoided. There have been approximately 9,000 reported cases and 4,500 deaths from the disease in Liberia, Sierra Leone, and Guinea since the latest outbreak began with a case in a toddler in rural Guinea in December 2013.

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Reality is likely three times worse here as well.

‘Official’ Number of Ebola Cases Passes 10,000, With 5,000 Deaths (BBC)

The number of cases in the Ebola outbreak has exceeded 10,000, with 4,922 deaths, the World Health Organization says in its latest report. Only 27 of the cases have occurred outside the three worst-hit countries, Sierra Leone, Liberia and Guinea. Those three countries account for all but 10 of the fatalities. Mali became the latest nation to record a death, a two-year-old girl. More than 40 people known to have come into contact with her have been quarantined. The latest WHO situation report says that Liberia remains the worst affected country, with 2,705 deaths. Sierra Leone has had 1,281 fatalities and there have been 926 in Guinea.

Nigeria has recorded eight deaths and there has been one in Mali and one in the United States. The WHO said the number of cases was now 10,141 but that the figure could be much higher, as many families were keeping relatives at home rather than taking them to treatment centres. It said many of the centres were overcrowded. And the latest report also shows no change in the number of cases and deaths in Liberia from the WHO’s previous report, three days ago.

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Oct 242014
 
 October 24, 2014  Posted by at 12:52 pm Finance Tagged with: , , , , , , , , , ,  4 Responses »


Jack Delano Family of Dennis Decosta, Portuguese Farm Security Administration client Dec 1940

The Zombie System: How Capitalism Has Gone Off the Rails (Spiegel)
Fed’s $4 Trillion Holdings Keep Boosting Growth Beyond End of QE (Bloomberg)
EU Tells Britain To Pay Extra €2.1 Billion Because It Does Well (FT)
EU Agrees To Budget Talks After £1.7 Billion Cash Demand On UK (BBC)
Renzi Vs Barroso Over EU’s Budget Letter (FT)
EU Agrees Target To Cut Greenhouse Gas Emissions by 40% in 2030 (FT)
German Lawmakers Rip ECB Over Corporate Bonds Report (Reuters)
ECB Tries for Third Time Lucky in European Stress Tests (Bloomberg)
World Faces $650 Billion Housing Problem (CNBC)
China’s Economic Growth May Slow Further, Data Show (MarketWatch)
China Local Debt Fix Hangs On Beijing’s Wishful Thinking (Reuters)
China Home-Price Drop Spreads as Easing Fails to Halt Slide (Bloomberg)
China Scores Cheap Oil 14,000 Miles Away as Glut Deepens (Bloomberg)
Saudi Arabia’s Risky Oil-Price Play (BW)
Eastern Europe Shivers Thinking About Winter Without Gas (Bloomberg)
Germany Inc. Scrutinized for Using Labor Like Paper Clips (Bloomberg)
Alabama Man Gets $1,000 In Police Settlement, His Lawyers Get $459,000 (Reuters)
Doctor With Ebola In Manhattan Hospital After Return From Guinea (Reuters)
Mali Becomes Sixth African Country To Report Ebola Case (Bloomberg)

Great, long, 4-part series from German Der Spiegel magazine.

The Zombie System: How Capitalism Has Gone Off the Rails (Spiegel)

Six years after the Lehman disaster, the industrialized world is suffering from Japan Syndrome. Growth is minimal, another crash may be brewing and the gulf between rich and poor continues to widen. Can the global economy reinvent itself?

[..] Politicians and business leaders everywhere are now calling for new growth initiatives, but the governments’ arsenals are empty. The billions spent on economic stimulus packages following the financial crisis have created mountains of debt in most industrialized countries and they now lack funds for new spending programs. Central banks are also running out of ammunition. They have pushed interest rates close to zero and have spent hundreds of billions to buy government bonds. Yet the vast amounts of money they are pumping into the financial sector isn’t making its way into the economy. Be it in Japan, Europe or the United States, companies are hardly investing in new machinery or factories anymore. Instead, prices are exploding on the global stock, real estate and bond markets, a dangerous boom driven by cheap money, not by sustainable growth. Experts with the Bank for International Settlements have already identified “worrisome signs” of an impending crash in many areas.

In addition to creating new risks, the West’s crisis policy is also exacerbating conflicts in the industrialized nations themselves. While workers’ wages are stagnating and traditional savings accounts are yielding almost nothing, the wealthier classes — those that derive most of their income by allowing their money to work for them — are profiting handsomely. According to the latest Global Wealth Report by the Boston Consulting Group, worldwide private wealth grew by about 15% last year, almost twice as fast as in the 12 months previous. The data expose a dangerous malfunction in capitalism’s engine room. Banks, mutual funds and investment firms used to ensure that citizens’ savings were transformed into technical advances, growth and new jobs. Today they organize the redistribution of social wealth from the bottom to the top. The middle class has also been negatively affected: For years, many average earners have seen their prosperity shrinking instead of growing.

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“Boosting growth”. Are we ever going to get real?

Fed’s $4 Trillion Holdings Keep Boosting Growth Beyond End of QE (Bloomberg)

Quantitative easing may turn out to be a gift that keeps on giving for the U.S. economy. As the Federal Reserve prepares to end its third round of bond buying next week, the central bank plans to hang on to the record $4.48 trillion balance sheet it has accumulated since announcing the first round of purchases in November 2008. That will continue to keep a lid on borrowing costs, helping the Fed lift inflation closer to its target and providing support to a five-year expansion facing headwinds abroad, from war in the Mideast to slowing growth in Europe and China. Holding bonds on the Fed’s balance sheet limits the supply of securities trading on the public markets, which helps keep prices up and yields lower than they otherwise would be. That provides stimulus to the economy just as a cut in the Fed’s benchmark interest rate would, according to Michael Gapen, a senior U.S. economist for Barclays in New York and former Fed Board section chief.

“Preserving it will continue to support the economy,” Gapen said. “The Fed message is we think we’ve done enough to generate momentum and keep the economy on the right track. Now we’re going to wait and see how things go.” The Federal Open Market Committee plans to end its purchases of Treasuries and mortgage bonds at the next meeting Oct. 28-29, according to minutes of the last gathering. Chair Janet Yellen opened the door to keeping a multi-trillion-dollar portfolio for years, saying a decision on when to stop reinvesting maturing bonds depends on financial conditions and the economic outlook. Shrinking the balance sheet to normal historical levels “could take to the end of the decade,” Yellen said at her press conference last month. Fed quantitative easing has provided the Treasury market with a steady and consistent buyer, helping to keep yields lower than they otherwise would be. The central bank is now the largest holder of U.S. government securities.

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Don’t even try to tell me you could have made this up: “The surcharge stems from the EU changing the way it calculates gross national income to include more hidden elements such as prostitution and illegal drugs.”

EU Tells Britain To Pay Extra €2.1 Billion Because It Does Well (FT)

Britain has been told to pay an extra €2.1 billion to the EU budget within weeks on account of its relative prosperity, a hefty surcharge that will further add to David Cameron’s domestic woes over Europe. To compensate for its economy performing better than other EU countries since 1995, the UK will have to make a top-up payment on December 1 representing almost a fifth of the country’s net contribution last year. France, meanwhile, will receive a €1 billion rebate, according to Brussels calculations seen by the Financial Times. The one-off bill will infuriate eurosceptic MPs at an awkward moment for the prime minister, who is wrestling with strong anti-EU currents in British politics that are buffeting his party and prompting a rethink of the UK’s place in Europe. Mr Cameron is determined to challenge the additional fee and last night met with Mark Rutte, the Netherlands premier, to discuss the issue. His country is also being required to make a top-up payment, though it is smaller than the UK’s.

A Downing Street source said: “It’s not acceptable to just change the fees for previous years and demand them back at a moment’s notice.” The source added: “The European Commission was not expecting this money and does not need this money and we will work with other countries similarly affected to do all we can to challenge this.” The surcharge stems from the EU changing the way it calculates gross national income to include more hidden elements such as prostitution and illegal drugs. [..] The surcharge comes on top of the net UK contribution to the EU budget, which was £8.6 billion in 2013. Britain faces by far the biggest top-up payment: the preliminary figures show that the Netherlands pays an extra €642 million, while Germany receives a rebate of €779 million, France €1 billion and Poland €316 million.

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It’s a shame the Anglo press make this about Britain. Holland pays far more extra per capita (more expensive hookers?), but what’s really fun is that Greece has to pay more too, and Italy. Let’s give the EU all the room they need to majestically screw this up.

EU Agrees To Budget Talks After £1.7 Billion Cash Demand On UK (BBC)

EU finance finance ministers have agreed to David Cameron’s call for emergency talks after the UK was told it must pay an extra £1.7bn. Mr Cameron interrupted a meeting of EU leaders in Brussels to express dismay at the demand for the UK to pay more into the EU’s coffers on 1 December. He told Commission boss Jose Manuel Barroso he had no idea of the impact it would have, Downing Street said. It will add about a fifth to the UK’s annual net EU contribution of £8.6bn. There has been anger across the political spectrum in the UK at the EU’s demand for additional money, which comes just weeks before the vital Rochester and Strood by-election, where UKIP is trying to take the seat from the Conservatives. EU leaders discussed the issue for an hour in Brussels on Friday, with Mr Cameron due to give a press conference later. Mr Cameron told Mr Barroso, who steps down next month, that the problem was not just press or public opinion but was about the amount of money being demanded.

The surcharge follows an annual review of the economic performance of EU member states since 1995, which showed Britain has done better than previously thought. Elements of the black economy – such as drugs and prostitution – have also been included in the calculations for the first time. The prime minister will do everything he can to show he’s coming out fighting over the EU budget demand. He has buttonholed Commission President Barroso. He has called for an emergency meeting. EU leaders have pondered the problem for a full hour in their meeting. The PM is proud of getting down the EU budget limit in 2013. He says it proves he can get his way in Brussels. Handing over £1.7bn to the EU would sting at any time. Doing it a few days after a crunch by-election scrap with UKIP would be agony. This could still go David Cameron’s way. If he can persuade the EU to tear up the bill, he can come out smiling. If he fails it will hurt the Conservatives badly.

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Nice side fight.

Renzi Vs Barroso Over EU’s Budget Letter (FT)

If you read the EU’s budget rules, it appears to be a cut and dried affair: if the European Commission has concerns that a eurozone country’s budget is in “particularly serious non-compliance” with deficit or debt limits, it has to inform the government of its concerns within one week of the budget’s submission. Such contact is the first step towards sending the budget back entirely for revision. As the FT was the first to report this week, the Commission decided to notify five countries – Italy, France, Austria, Slovenia and Malta – that their budgets may be problematic on Wednesday. Helpfully, the Italian government posted the “strictly confidential” letter it received from the Commission’s economic chief, Jyrki Katainen, on its website today.

But at day one of the EU summit in Brussels, the letter – and Italy’s decision to post it – suddenly became the subject of a very public tit-for-tat between José Manuel Barroso, the outgoing Commission president, and Matteo Renzi, the Italian prime minster. Barroso fired the first shot at a pre-summit news conference, expressing surprise and annoyance that Renzi’s government had decided to make the letter public. For good measure, he took a pop at the Italian press, which in recent days has been reporting that Barroso was the one pushing for a hard line against Rome, and implying he was motivated by his desire to score political points back home in Portugal, where he has long been rumoured as a potential presidential candidate after leaving the Commission:

The first thing I will say is this: If you look at the Italian press, if you look at most of what is reported about what I’ve said or what the Commission has said, most of this news is absolutely false, surreal, having nothing to do with reality. And if they coincide with reality, I think it’s by chance.

Aside from his swipe at Italian newspapers, Barroso was clearly annoyed at the Italian government, saying Katainen’s letter was intended to be private correspondence to begin talks over trying to get Italy’s budget back in line with EU rules:

Regarding the letter from vice-president Katainen yesterday, sent to his Italian colleague, the decision to publish it on the website of the ministry of finance is a unilateral decision by the Italian government. The Commission was not in favour of the publication because we are continuing consultations with various governments. These are informal consultations and in some cases they are quite technical, and we think it’s better to have this kind of consultations in an atmosphere of trust. But the Italian government contacted the Vice President Katainen telling him that he would publish the letter and of course we do not object to the publication, it is their right, but again, this is not true it is the Commission which pressed the government to publish the letter. If we wanted to publish it, the Commission could publish the letter itself.

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Hot air in every sense of the word.

EU Agrees Target To Cut Greenhouse Gas Emissions by 40% in 2030 (FT)

The EU has set the pace for a global climate agreement in Paris next year by overcoming resistance from eastern member states and agreeing a landmark target to cut greenhouse gas emissions. The 28-member bloc has been so riven by divisions over environmental policy in recent months that Brussels risked losing its status as the global leader in the fight against climate change. In the days before an EU summit on Thursday, countries as diverse as Portugal and Poland appeared liable to veto a deal on setting a new target for reducing emissions by 2030. Talks dragged on into the early hours of Friday morning before European leaders finally agreed to a cut of at least 40% from 1990 levels. Environmentalists have slammed this goal as the bare minimum required for the EU to play its role in containing global warming, but diplomats argue that it was the toughest target that could win broad political support across Europe.

“We have sent a strong signal to other big economies and all other countries: we have done our homework, now we urge you to follow Europe’s example,” said Connie Hedegaard, the EU’s climate commissioner. Green groups condemned the deal as a political fudge. Greenpeace had pushed for a cut of 55%. “It’s a deal that puts dirty industry interests ahead of citizens and the planet,” said Brook Riley of Friends of the Earth. The EU said that its 40% target would be reviewed after the UN’s Paris conference next year where a global deal on cutting emissions is expected. Some European countries had been fearful that the EU would set itself too high a target, which the U.S. and China would not follow.

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This fight ain’t over.

German Lawmakers Rip ECB Over Corporate Bonds Report (Reuters)

Senior lawmakers from Chancellor Angela Merkel’s conservative party heaped criticism on the European Central Bank on Wednesday following a Reuters report that it was considering the purchase of corporate bonds to spur growth. The report on Tuesday, citing several sources familiar with the central bank’s thinking, said the ECB could decide as soon as December to go ahead with corporate bond buys on the secondary market, with a view to starting the purchases early next year. ECB officials confirmed on Wednesday that buying corporate bonds was an option for the bank but said no final decision had been taken on whether to go ahead. “The Governing Council has taken no such decision,” an ECB spokesman said. The move would widen out the private-sector asset-buying program that it began on Monday in the hopes of encouraging more lending to businesses in the faltering euro zone economy.

“With its purchase programs, the ECB is taking unforeseeable risks onto its balance sheet,” said Norbert Barthle, a veteran lawmaker for Merkel’s Christian Democrats (CDU) who sits on the Bundestag’s budget committee. The ECB should focus on its main target of price stability and refrain from more “dubious measures” to boost the economy, Barthle warned. Hans Michelbach of the Christian Social Union (CSU), the Bavarian sister party of the CDU, said Draghi was endangering the stability of financial markets with his moves. “The ECB is turning itself into a bad bank for the euro zone’s crisis countries at an increasingly rapid pace,” said the senior conservative member of the finance committee. “The ECB needs a clear change of course.”

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It’ll be fun Sunday at noon EU time. Draft was just leaked that says 25 banks will fail. Numbers get bigger.

ECB Tries for Third Time Lucky in European Stress Tests (Bloomberg)

For the European Central Bank, success as the euro area’s financial supervisor may begin this weekend with a few failures. At noon in Frankfurt on Oct. 26, investors will learn which of the currency bloc’s 130 biggest banks fell short in the ECB’s year-long examination of their asset strength and ability to withstand economic turbulence. After two previous stress tests run by the European Banking Authority didn’t reveal problems at lenders that later failed, the ECB has staked its reputation on getting this exercise right. The two-part audit known as the Comprehensive Assessment forms one pillar of the ECB’s effort to move the euro zone forward after half a decade of financial turmoil by disclosing the extent of the damage. Since the beginning, ECB President Mario Draghi has said banks need to fail to prove the losses of the past have been dealt with.

“There will be enough for policy makers to declare victory, but the full picture will take longer to emerge because this thing is so complicated,” said Nicolas Veron, a fellow at the Bruegel research group in Brussels. “What you don’t want is to sound the all clear and then three to six months later, there’s an unpleasant surprise.” Bank-level data and an aggregate report on the Asset-Quality Review and stress test will be released on the ECB’s website at 12 p.m. Frankfurt time. The ECB stress test was conducted in tandem with the London-based EBA, which will release its results at the same time. The EBA’s sample largely overlaps the ECB’s, though it also contains banks from outside the euro area.

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The $650 billion is what people can’t afford to pay, but have to anyway.

World Faces $650 Billion Housing Problem (CNBC)

A staggering 330 million urban households around the world live in substandard housing or are so financially stretched by housing costs they forgo other basic needs like food and health care, according to McKinsey. Urban dwellers globally fork out $650 billion more per year on housing than they can afford, or around 1% of world gross domestic product (GDP), McKinsey estimated in a new report, highlighting the enormity of the affordability gap. More than two-thirds of the gap is concentrated in 100 large cities. In several low-income cities such as Lagos and Mumbai, the affordable housing gap can amount to as much as 10% of area GDP. McKinsey’s study looked at the cost of housing as a portion of household income in cities around the world to determine where urban residents were most under financial pressure For this study, it defined affordability as housing costs that consume no more than 30% of household income.

Based on current trends in urban migration and income growth, the affordable housing gap would grow to 440 million, or 1.6 billion people, within a decade. This trend will exact an enormous toll on society, the report warned. “For families lacking decent affordable housing, health outcomes are poorer, children do less well in school and tend to drop out earlier, unemployment and under-employment rates are higher, and financial inclusion is lower,” it said. McKinsey estimates that an investment of $9-$11 trillion would be required to replace today’s substandard housing and build additional units needed by 2025. Including land, the total cost could be $16 trillion. The belief that major cities no longer have land for affordable housing is a myth, it added. Even in cities such as New York there are many parcels of under-utilized or idle land—including government-owned land—that could support successful housing development, the report said.

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Bet you it’s already much lower than reported.

China’s Economic Growth May Slow Further, Data Show (MarketWatch)

September data suggest China’s economic growth may well slow further, the Conference Board said late Thursday, citing its Leading Economic Index. The index rose 0.9% in September, after a 0.7% gain in August, but a 1.3% rise in July, the association said. “The six-month growth rate of the Leading Economic Index has eased steadily throughout the third quarter, indicating increased downside risks to economic growth in the months ahead,” Conference Board China Center resident economist Andrew Polk said. “While activity in the property sector stabilized a bit, sharp weakening in demand for both bank credit and real estate point to sluggish private investment in the last quarter of 2014. Recent developments, therefore, confirm our long-term view of a soft fall of the economy,” Polk said.

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It’s the amounts of debt that are the problem, but Beijing wants to solve it by changing the kinds of debt.

China Local Debt Fix Hangs On Beijing’s Wishful Thinking (Reuters)

China is asserting control over once-chaotic local government financing by banning the use of opaque funding vehicles, but filling the gap with a huge expansion of the fledgling municipal bond market will raise a whole new set of problems. Chastened by promiscuous local investment in response to the 2008 global financial crisis, Beijing wants to restore discipline as part of its wider economic reforms, but the muni bond market, be deviled by price distortions and inadequate disclosure standards, is no quick fix. China’s State Council, the country’s cabinet-level political institution, prohibited local government financial vehicles (LGFVs) from raising funds on behalf of local authorities in a decree issued earlier this month. On Tuesday sources told Reuters the Ministry of Finance had circulated a draft document saying localities would be allowed to issue new muni bonds to pay off old debt.

“It’s not an isolated move – rather it’s part of a systematic approach to tackle the local debt issue,” said Bank of America-Merrill Lynch China strategist Tracy Tian. If the draft becomes law and localities are allowed to roll over a substantial portion of their estimated 18 trillion yuan ($3 trillion) of outstanding debt, the muni bond market would have to expand dramatically from the quota of just 109.2 billion yuan that Beijing has set for 2014. “We estimate that as much as 1 trillion yuan of new bonds may be issued to fill the financing gap in 2015,” wrote UBS economist Tao Wang in a research note this month. The market appears ill-equipped for such explosive growth. It got off to a dubious start in 2014, with impoverished and debt-ridden local governments able to issue bonds at yields below even the central government’s sovereign yield.

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It’ll be fine till panic selling starts. Then it will no longer be so fine.

China Home-Price Drop Spreads as Easing Fails to Halt Slide (Bloomberg)

China’s new-home prices fell in all but one city monitored by the government last month as the easing of property curbs failed to stem a market downturn amid tight credit. Prices dropped in 69 of the 70 cities in September from August, the National Bureau of Statistics said in a statement today, the most since January 2011 when the government changed the way it compiles the data. They fell in 68 cities in August. The central bank on Sept. 30 eased mortgage rules for homebuyers that have paid off existing loans, reversing course after a four-year campaign to contain home prices as Premier Li Keqiang seeks to prevent economic growth from drifting too far below the government’s 7.5% annual target. Home sales slumped 11% in the first nine months of this year.

“Prices will continue the downtrend for the rest of the year,” said Donald Yu, Shenzhen-based analyst at Guotai Junan Securities Co. “If sales in the fourth quarter fail to clear inventories as developers want, more price cuts are still likely in the first quarter of next year.” All but five of the 46 cities that imposed limits on home ownership since 2010 have removed or relaxed such restrictions amid the property downturn that has dented local revenues from land sales.

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Bit of ISIS oil with that, perhaps?

China Scores Cheap Oil 14,000 Miles Away as Glut Deepens (Bloomberg)

China is finding oil supplies 14,000 miles away, aided by the global rout in prices that’s left producers vying for new markets. PetroChina Co. said it bought Colombian crude for a northern refinery for the first time because it was good value. The transaction underscores how the world’s second-biggest oil consumer is benefiting as producers from the Middle East to Latin America vie for customers in Asia. Brent oil futures tumbled to the lowest level since 2010 as the highest U.S. output in almost 30 years cuts its consumption of foreign crude. OPEC’s biggest producers are reducing prices to defend their market share. China consumed the second-biggest amount of crude on record in September and imported the largest volume ever for that time of year, customs data show.

“China will just look to get the cheapest crude possible from whatever source it can,” Virendra Chauhan, a London-based analyst at Energy Aspects Ltd., said by phone Oct. 21. “I expect a lot more volumes flowing to China in particular.” The country’s crude imports rose 7.8 percent to 27.6 million tons, or 6.74 million barrels a day, in September from last year, the data show. The number of supertankers sailing toward China’s ports surged to a nine-month high last week, according to IHS Fairplay vessel-tracking signals compiled by Bloomberg as of Oct. 17.

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Lots of curious views and opinions on Saudi oil policy.

Saudi Arabia’s Risky Oil-Price Play (BW)

With the U.S. on track to become the world’s largest oil producer by next year, it’s become popular in Washington and on Wall Street to call America the new Saudi Arabia. Yet the real Saudi Arabia hasn’t relinquished its role as the producer with the most influence over oil prices. Its reserves of 266 billion barrels, ability to pump as many as 12.5 million barrels a day, and, most important, its low cost of extracting crude still make it a formidable rival to the U.S., whose shale wells are hard to exploit. “Saudi Arabia is the only one in the position of putting more oil on the market when they want to and cutting production when they want to,” says Edward Chow, a senior fellow at the Center for Strategic and International Studies in Washington. The Saudis are also the most powerful member of OPEC, the 12-member group that’s increasingly facing off against Russian, U.S., and Canadian production.

In September, despite a global oil glut developing largely because of China’s slowdown and the rapid increase in U.S. production, the Saudis boosted production half a percent, to 9.6 million barrels a day, lifting OPEC’s combined production to an 11-month high of almost 31 million barrels a day. Then, on Oct. 1, Saudi Arabia lowered prices by increasing the discount it offered its major Asian customers. The kingdom might just as easily have cut production to defend higher prices. Instead, the Saudis sent a strong signal that they were determined to protect their market share, especially in India and China, against Russian, Latin American, and African rivals. Iraq and Iran followed Saudi Arabia’s example. The news set off a bear market in oil: Brent crude, the international benchmark, fell from $115.71 a barrel on June 19 to $82.60 a barrel on Oct. 16, the lowest price in almost four years, as investors realized that the big oil states were not going to cut production.

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Better get ready to make that deal.

Eastern Europe Shivers Thinking About Winter Without Gas (Bloomberg)

As winter approaches, former Soviet satellite nations from Poland to Bulgaria are watching Russia and Ukraine’s stalled gas negotiations with growing trepidation. The lack of discernible progress is sending a collective shiver down the spine of Eastern Europe, which retains vivid memories of Russian energy cuts during unusually cold winters in 2006 and 2009. The ensuing shortages led to shuttered factories and a return to wood for heating and cooking in rural areas. Despite the two episodes, little has been done to diversify supplies within a region that remains highly dependent on energy delivery systems dating back to the Soviet era. “Parts of eastern Europe are still quite vulnerable this winter,” said Emily Stromquist, a Eurasia analyst in London. “The problem is that until recently the relations with Russia have generally been good, so perhaps there was no feeling of urgency to build quickly.”

If Moscow and Kiev don’t reach a compromise before winter and OAO Gazprom fails to restart supplies to its western neighbor, Ukraine may resort to siphoning off gas carried through its territory. As in 2009, that could prompt Russia to cut transit through Ukraine altogether, leaving parts of eastern Europe exposed to severe shortages. Poland, Hungary and especially the Balkan peninsula would be most affected. Connected to the old Soviet pipeline system that runs through Ukraine and Moldova, the Balkan countries rely on Russia for close to 100% of their needs. Moreover, they’re poorly connected with their neighbors and their underground storage isn’t sufficient to cover demand for the entire winter.

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German salaries: €48.40 ($61.27) per hour on average. This compares to €4.81 in Romania and €25.63 in the U.S.

Germany Inc. Scrutinized for Using Labor Like Paper Clips (Bloomberg)

Daimler AG is among German companies that have found a way to cut personnel costs in the high-wage country: buy labor like it’s paper clips. By purchasing certain tasks such as logistics services from subcontractors, businesses can legally keep these workers off the payroll and outside of wage agreements with unions. That’s led to growing ranks of contract workers who help boost profit at German companies by lowering labor costs. The downside is abuse of the system, which leaves some workers unprotected and even unpaid. That’s caught the attention of Labor Minister Andrea Nahles, who’s promising a crackdown, and forcing Germany Inc. to defend the practice. “We can’t pay everyone the high wage” in union deals, Wilfried Porth, Daimler’s personnel chief, said in an e-mail to Bloomberg News. “Our cost situation has deteriorated compared to the competition. We can’t afford that.”

Proponents argue hiring subcontractors to provide services keeps Germany, where labor costs in the auto industry are the highest in the world, competitive. Opponents say the widespread practice in industries that include shipbuilding, retail, logistics and construction undermines the German labor model of a partnership between employers and workers. Every third employee in the German auto industry is working either for a subcontractor or as a temporary laborer, according to a poll by IG Metall union published last November. Doing so has helped keep in check already high personnel costs, which amount to €48.40 ($61.27) per hour on average, according to the Berlin-based VDA auto industry group. This compares to €4.81 in Romania and €25.63 in the U.S.

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What a lovely example of a screwed up society. For all sorts of reasons.

Alabama Man Gets $1,000 In Police Settlement, His Lawyers Get $459,000 (Reuters)

An Alabama man who sued over being hit and kicked by police after leading them on a high-speed chase will get $1,000 in a settlement with the city of Birmingham, while his attorneys will take in $459,000, officials said Wednesday. The incident gained public attention with the release of a 2008 video of police officers punching and kicking Anthony Warren as he lay on the ground after leading them on a roughly 20-minute high-speed chase. Warren is serving a 20-year sentence for attempted murder stemming from his running over a police officer during the chase, in which he also hit a school bus and a patrol car before crashing and being ejected from his vehicle.

Under the terms of the settlement of Warren’s 2009 federal suit, in which he accused five Birmingham police officers of excessive force, his attorneys will receive $100,000 for expenses and $359,000 in fees, said Michael Choy, an attorney representing the officers on behalf of the city. The agreement was reached last month and approved on Tuesday by the Birmingham City Council. The city settled to avoid further litigation and the risk of a higher payout, Choy said.

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Riding the subway?!

Doctor With Ebola In Manhattan Hospital After Return From Guinea (Reuters)

A doctor who worked in West Africa with Ebola patients was in an isolation unit in New York on Friday after testing positive for the deadly virus, becoming the fourth person diagnosed with the disease in the United States and the first in its largest city. The worst Ebola outbreak on record has killed at least 4,900 people and perhaps as many as 15,000, mostly in Liberia, Sierra Leone and Guinea, according to World Health Organization figures. Only four Ebola cases have been diagnosed so far in the United States: Thomas Eric Duncan, who died on Oct. 8 at Texas Health Presbyterian Hospital in Dallas, two nurses who treated him there and the latest case, Dr. Craig Spencer. Spencer, 33, who worked for Doctors Without Borders, was taken to Bellevue Hospital on Thursday, six days after returning from Guinea, renewing public jitters about transmission of the disease in the United States and rattling financial markets. Three people who had close contact with Spencer were quarantined for observation – one of them, his fiancée, at the same hospital – but all were still healthy, officials said.

Mayor Bill de Blasio and Governor Andrew Cuomo sought to reassure New Yorkers they were safe, even though Spencer had ridden subways, taken a taxi and visited a bowling alley between his return from Guinea and the onset of his symptoms. “There is no reason for New Yorkers to be alarmed,” de Blasio said at a news conference at Bellevue. “Being on the same subway car or living near someone with Ebola does not in itself put someone at risk.” Health officials emphasized that the virus is not airborne but is spread only through direct contact with bodily fluids from an infected person who is showing symptoms. After taking his own temperature twice daily since his return, Spencer reported running a fever and experiencing gastrointestinal symptoms for the first time early on Thursday. He was then taken from his Manhattan apartment to Bellevue by a special team wearing protective gear, city officials said. He was not feeling sick and would not have been contagious before Thursday morning, city Health Commissioner Mary Travis Bassett said.

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“Others at risk are Benin, Cameroon, Central African Republic, Democratic Republic of Congo, Gambia, Ghana, Mauritania, Nigeria, South Sudan, and Togo.” Add Kenya.

Mali Becomes Sixth African Country To Report Ebola Case (Bloomberg)

Mali became the sixth West African country to report a case of Ebola, opening a new front in the international effort to prevent the outbreak of the deadly viral infection from spreading further. A 2-year-old girl who traveled from Kissidougou, Guinea, with her family to Mali was admitted to a hospital in Kayes yesterday, Malian President Ibrahim Boubacar Keita’s office said in a statement. Test results confirmed she had Ebola. Ebola has infected almost 10,000 people this year, mostly in Sierra Leone, Guinea and Liberia, killing about 4,900. Senegal and Nigeria, which also had cases, are now free of the virus. Disease trackers now must trace everyone the girl came in contact with and monitor them for signs of infection. Mali was one of four countries the World Health Organization said this month was at highest risk of Ebola among a group of African nations the agency said needed to be prepared for cases.

A WHO-led team has been in Mali this week helping to identify gaps in the country’s defenses. “The big issue is getting the response up in those countries so that you can prevent a travel-related case from becoming an outbreak,” Keiji Fukuda, the WHO’s assistant director-general for health security, said in a phone interview today. “We’re working with Mali to try to contain it in the same way that it was contained in Senegal and in Nigeria.” Mali, a nation of about 16.5 million people to the northeast of Guinea, is Africa’s third-largest gold producer. Ivory Coast, Senegal and Guinea Bissau also are at the top of the list of countries that need to be prepared for Ebola cases, the WHO said Oct. 10. Others at risk are Benin, Cameroon, Central African Republic, Democratic Republic of Congo, Gambia, Ghana, Mauritania, Nigeria, South Sudan, and Togo.

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 October 23, 2014  Posted by at 10:38 am Finance Tagged with: , , , , , , , , , , ,  6 Responses »


DPC Bromfield Street in Boston 1908

Bond Funds Stock Up On Treasuries In Prep For Market Shock (Reuters)
Investors Pull Shale Money, Put Brakes on Wall Street-Funded Boom (Bloomberg)
Solid Majority In US Says Country ‘Out Of Control’ (CNBC)
It Will Take 398,879,561 Years To Pay Off The US Government Debt (Black)
Don’t Be Distracted by the Pass Rate in ECB’s Bank Exams (Bloomberg)
Why It’s Now Too Late For Germany To Rescue The Eurozone Alone (Telegraph)
Why ‘Italy Doesn’t Need Germany’s Help’ (CNBC)
Europe Can Learn From US And Make Each State Liable For Its Own Debt (Sinn)
‘Poets and Alchemists’: Berlin and Paris Undermine Euro Stability (Spiegel)
S&P Warns Crisis Not Over As France Output Tumbles (CNBC)
Central Banker Admits QE Leads To Wealth Inequality (Zero Hedge)
French Envoy To US Says ‘Poker Player’ Putin Bluffed and Won (Bloomberg)
Canada’s Biggest Banks Say Worst to Come for Loonie (Bloomberg)
The Financialization of Life (Real News Network)
Oil Slump Leaves Russia Even Weaker Than Decaying Soviet Union (AEP)
Big Tobacco Puts Countries On Trial As Concerns Over TTIP Mount (Independent)
Tesco’s Profits Black Hole Bigger Than Expected (Guardian)
EU Braces for Battle to Set Energy, CO2 Goals for Next Decade (Bloomberg)
Several Factors Conspire To Increase Fossil Fuel Use (FT)
Water Crisis Seen Worsening as Sao Paulo Nears ‘Collapse’ (Bloomberg)
Some US Hospitals Weigh Withholding Care To Ebola Patients (Reuters)

Too many kinds of bonds carry too much risk going forward.

Bond Funds Stock Up On Treasuries In Prep For Market Shock (Reuters)

U.S. corporate bond funds this year are adding Treasuries to their holdings at more than twice the rate of corporate debt amid concern that the struggling European economy and potential changes in Federal Reserve policy will drag down profits at U.S. corporations. Through September, corporate bond portfolios boosted their holdings of U.S. government debt by 15%, compared with a 6.5% increase in corporate bonds during the same period, according to Lipper Inc data. The funds now hold about $13 billion in Treasuries, 15% more than the $11.3 billion they held at the end of 2013. Corporate bond funds typically invest in a range of debt that includes mortgage-backed securities, U.S. Treasuries and bonds backed by student loans, credit cards and auto loans. Some corporate junk bond funds have guidelines that allow them to buy individual stocks. The move to buy Treasuries, which are more easily traded than most corporate bonds, show that managers anticipate market turmoil that could lead to redemption demands from investors.

Matt Toms, head of fixed income at New York-based Voya Investment Management, said he has cut exposure to corporate bonds in favor of mortgage-backed securities, for example. In particular, he has reduced corporate debt issued by U.S. financial companies because of their exposure to the weak European economy. He sees mortgage-backed bonds as more U.S.-centric because they are backed by the ability of American homeowners to make good on their monthly mortgage payments. “The volatility in Europe could translate more quickly through the corporate debt issued by U.S. banks,” Toms said. A year ago, the Voya Intermediate Bond Fund’s top 10 holdings included debt issued by Morgan Stanley, JPMorgan and Goldman Sachs. But more recently, none of those banks’ debt cracked the top 10 holdings of the fund, disclosures show. Toms, who runs the $1.9 billion Voya Intermediate Bond Fund, said nearly two-thirds of the portfolio’s assets are in government bonds or government-related securities. “That’s a highly liquid pool,” he said.

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“The drop wiped $158.6 billion off the market value of 75 shale producers since the end of August.” Most of it borrowed money. That’s a lot of mullah.

Investors Pull Shale Money, Put Brakes on Wall Street-Funded Boom (Bloomberg)

Falling oil prices are testing investors’ commitment to the Wall Street-funded shale boom. Energy stocks led the plunge earlier this month in U.S. equities and the cost of borrowing rose. The Energy Select Sector Index is down 14% since the end of August, compared with 3.8% for the Standard & Poor’s 500 Index. The yield for 190 bonds issued by U.S. shale companies increased by an average of 1.16 percentage points. Investors’ sentiment toward the oil and gas industry has “certainly changed in the last 30 days,” said Ron Ormand, managing director of investment banking for New York-based MLV & Co. with more than 30 years of experience in energy. “I don’t think the boom is over but I do think we’re in a period now where people are going to start evaluating their budgets.” What distinguishes this U.S. energy boom from the way the industry operated in the past is the involvement of outside investors. In 1994, drillers funded 42% of their own capital spending, according to an Independent Petroleum Association of America member survey.

Today, shale companies are outspending their cash flow by 50% thanks to borrowed money, according to the IPAA. They’re selling more than twice as much equity to the public as they did 10 years ago, according to Tudor Pickering Holt, a Houston investment bank. “After the tech bubble and then the real estate bubble, Wall Street had to put its money somewhere, and it looks like they put a lot of it into domestic onshore oil and gas production,” said Michael Webber, the deputy director of the Energy Institute at the University of Texas at Austin, who advises private investors. West Texas Intermediate, the benchmark U.S. oil price, has fallen 25% since its recent peak on June 20. Between the S&P 500’s record high on Sept. 18 and its five-month low on Oct. 15, energy companies led the index down 14%, more than any other industry, data compiled by Bloomberg show. When the market rebounded on Oct. 16, energy again took the lead, gaining 1.7%. The drop wiped $158.6 billion off the market value of 75 shale producers since the end of August.

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“Such an environment would tend to favor Republicans, but their advantage is limited by the fact that people don’t like them, either.”

Solid Majority In US Says Country ‘Out Of Control’ (CNBC)

With just two weeks to go until Election Day, a clear picture of the American electorate is emerging, and it is not pretty, for either party. The country is anxious about the economy, Ebola and Islamic extremists, and does not really feel Republicans or Democrats have solutions to any of these vexing problems. The latest Politico Battleground Poll of likely voters in key House and Senate races finds that 50% say the nation is “off on the wrong track” while just 20% say things are “generally headed in the right direction.” A remarkable 64% say things in the U.S. are “out of control” while just 36% say the U.S. is in “good position to meet its economic and national security challenges.” The economy continues to dominant the issue landscape with 40% rating it the top issue, to 20% for national security. President Barack Obama remains mired in negative territory, with 47% approving of his job performance and 53% disapproving.

Such an environment would tend to favor Republicans, but their advantage is limited by the fact that people don’t like them, either. In total, 38% approve of Democrats in Congress, while just 30% approve of Republicans. On the generic ballot questions, Democrats enjoy 41% support (including the independent Senate candidate in Kansas) while Republicans get 36%. That’s hardly the backdrop for a massive GOP wave, though the polls suggest Republicans are still significant favorites to pick up the six seats they need to control the Senate next year. The Ebola outbreak has clearly helped shape the final weeks in several Senate races, emerging as a significant wild card issue. In the Politico poll, only 22% of respondents said they had “a lot of confidence” that the federal government is doing all it can to contain the deadly disease. And the poll finished on Oct. 11, before the hospitalization of a second Dallas nurse.

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Work-years, that is. Not a bad concept.

It Will Take 398,879,561 Years To Pay Off The US Government Debt (Black)

The US government’s debt is getting close to reaching another round number – $18 trillion. It currently stands at more than $17.9 trillion. But what does that really mean? It’s such an abstract number that it’s hard to imagine it. Can you genuinely understand it beyond just being a ridiculously large number? Just like humans find it really hard to comprehend the vastness of the universe. We know it’s huge, but what does that mean? It’s so many times greater than anything we know or have experienced. German astronomer and mathematician Friedrich Bessel managed to successfully measure the distance from Earth to a star other than our sun in the 19th century. But he realized that his measurements meant nothing to people as they were. They were too abstract. So he came up with the idea of a “light-year” to help people get a better understanding of just how far it really is. And rather than using a measurement of distance, he chose to use one of time.

The idea was that since we—or at least scientists—know what the speed of light is, by representing the distance in terms of how long it would take for light to travel that distance, we might be able to comprehend that distance. Ultimately using a metric we are familiar with to understand one with which we aren’t. Why don’t we try to do the same with another thing in the universe that’s incomprehensibly large today—the debt of the US government? Even more incredible than the debt owed right now is what’s owed down the line from all the promises politicians have been making decade after decade. These unfunded liabilities come to an astonishing $116.2 trillion. These numbers are so big in fact, I think we might need to follow Bessel’s lead and come up with an entire new measurement to grasp them. Like light-years, we could try to understand these amounts in terms of how long it would take to pay them off. We can even call them “work-years”.

So let’s see—the Social Security Administration just released data for the average yearly salary in the US in fiscal year that just ended. It stands at $44,888.16. The current debt level of over $17.9 trillion would thus take more than 398 million years of working at the average wage to pay off. This means that even if every man, woman and child in the United States would work for one year just to help pay off the debt the government has piled on in their name, it still wouldn’t be enough. Mind you that this means contributing everything you earn, without taking anything for your basic needs—which equates to slavery.

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The numbers get scary.

Don’t Be Distracted by the Pass Rate in ECB’s Bank Exams (Bloomberg)

For investors, the European Central Bank’s yearlong evaluation of the region’s banks isn’t just about who passes and who fails. The bigger question will be how much the ECB marks down lenders’ capital during its balance sheet inspection known as the asset quality review. The central bank and national regulators will publish their findings on Oct. 26. “The focus will be on how the asset quality review influences the development of capital ratios and non-performing loans,” said Michael Huenseler at Assenagon Asset Management SA in Munich. The largest impact may be on Italian lenders led by Banca Monte dei Paschi di Siena, Unione di Banche Italiane and Banco Popolare, according to a report last month from Mediobanca analysts. They foresee a gap of more than 3 percentage points between the capital ratios published by the companies and the results of the ECB’s asset quality review. Deutsche Bankmay see its capital fall by €6.7 billion, cutting its ratio by 1.9 percentage points, the analysts said.

The biggest lenders may see their combined capital eroded by about €85 billion in the asset quality review because of extra provisioning requirements, according to the Mediobanca analysts, led by Antonio Guglielmi. That’s equivalent to a reduction of 1.05 percentage points in their average common equity Tier 1 ratio, the capital measure the ECB is using to gauge the health of the banks under study, the analysts said. The AQR evaluates lenders’ health by scrutinizing the value of their loan books, provisioning and collateral, using standardized definitions set by European regulators. To pass, a bank must have capital amounting to at least 8% of its assets, when weighted by risk. The bigger the hit to their capital, the more likely lenders will need to take steps to increase it. Banks the ECB will supervise directly already bolstered their balance sheets by almost €203 billion since mid-2013, ECB President Mario Draghi said this month, by selling stock, holding onto earnings, disposing of assets, and issuing bonds that turn into equity when capital falls too low, among other measures.

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It was always just a mirage.

Why It’s Now Too Late For Germany To Rescue The Eurozone Alone (Telegraph)

The eurozone is yet again in a nasty state. As it suffers from low growth and low inflation, the two combine to make a nasty cocktail. Without much of either, unemployment remains stuck at an eye wateringly high 11.5pc, and government debt burdens are likely to feel increasingly heavy. The European Central Bank (ECB) has announced a variety of acronyms – CBPP3, TLTROs, and an ABS purchase scheme – all stimulus measures designed to combat the euro area’s low inflation crisis. Yet so far, they’ve been insufficient to raise expectations of future inflation, implying that the firepower just isn’t strong enough. Economists are hoping that the ECB will deploy outright quantitative easing, and start buying up the sovereign bonds of eurozone governments. Without it, analysts have warned that both the eurozone as a whole, and even Germany – its former powerhouse economy – could now enter their third technical recession since 2008. Yet hopes of a monetary bazooka have so far been quashed by political concerns.

Some corners are hoping for Germany to launch its own form of stimulus. But a new report from ratings agency Standard & Poor’s suggests that such a move would be too little, too late, and “alone would have little effect on the rest of the eurozone”. “On the fiscal side … the margin for manoeuvre available to most eurozone members is still very limited”, the report states. “This is why the focus has unavoidably turned to Germany, the only large eurozone country with both a current surplus and a balanced budget”. According to S&P’s analysis, a stimulus package worth as much as 1pc of German GDP would provide just a 0.3pc boost to eurozone GDP, while creating 210,000 new jobs. The report states that the numbers: “put Germany’s potential contribution to higher growth in the eurozone into perspective, with the conclusion being that a stimulus package in that country alone would have a modest effect on its neighbours”.

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In any case, it shouldn’t. But Italy’s debt is so high (133% of GDP) that the only way out leads out of the EU.

Why ‘Italy Doesn’t Need Germany’s Help’ (CNBC)

Despite Italy slipping back into recession amid a stagnant economic environment, the president of one of the country’s richest regions said the country doesn’t need Germany — or anybody else’s — help to recover. “I don’t want to be helped by the Germans or by anybody else, I want to be strong enough to grow and to sort my own problems. Can we do this as Italians? Yes, we can. We just have to work harder and do the right things,” Roberto Maroni, the President of the Lombardy region in northern Italy, told CNBC on Tuesday. “In Italy, it’s more difficult than elsewhere in the world because we are Italians. It’s a good thing to be Italian but it’s more difficult to do the same thing in Italy than in Germany or in France. But I think that we will have to do it.” Maroni’s comments come at a time of economic woe for Italy. The country slipped back into recession in the second quarter of 2014, according to data released by Italy’s statistics agency ISTAT, in August.

In an attempt to boost growth, Prime Minister Matteo Renzi unveiled a budget-busting program of tax cuts and additional borrowing in order to resuscitate the economy. He has also proposed sweeping reforms to the labor market to encourage hiring as the unemployment rate topped 12.3% in August. The 2015 budget has put Italy on a collision course with Europe, however, as it pushes the country’s public deficit right up to the 3% limit set by the European Commission. Maroni, a senior member and former leader of the opposition right-wing party Northern League, said the proposals were not enough on their own. “I think that he is doing maybe the right things but in the wrong way. He wants to reform the labor market but…it only works if you have economic growth. That is the way you can create new jobs, not simply changing the laws.” “We’re in a moment when economic growth is far away from coming to Italy,” he added. “Before making these reforms you need to boost economic growth and that’s not what Matteo Renzi is doing now.”

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Perhaps true, but certainly too late.

Europe Can Learn From US And Make Each State Liable For Its Own Debt (Sinn)

The French prime minister, Manuel Valls, and his Italian counterpart, Matteo Renzi, have declared – or at least insinuated – that they will not comply with the fiscal compact to which all of the eurozone’s member countries agreed in 2012; instead, they intend to run up fresh debts. Their stance highlights a fundamental flaw in the structure of the European Monetary Union – one that Europe’s leaders must recognise and address before it is too late. The fiscal compact – formally the Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union [PDF] – was the quid pro quo for Germany to approve the European Stability Mechanism (ESM), which was essentially a collective bailout package. The compact sets a strict ceiling for a country’s structural budget deficit and stipulates that public-debt ratios in excess of 60% of GDP must be reduced yearly by one-twentieth of the difference between the current ratio and the target.

Yet France’s debt/GDP ratio will rise to 96% by the end of this year, from 91% in 2012, while Italy’s will reach 135%, up from 127% in 2012. The effective renunciation of the fiscal compact by Valls and Renzi suggests that these ratios will rise even further in the coming years. In this context, eurozone leaders must ask themselves tough questions about the sustainability of the current system for managing debt in the EMU. They should begin by considering the two possible models for ensuring stability and debt sustainability in a monetary union: the mutualization model and the liability model.

Europe has so far stuck to the mutualisation model, in which individual states’ debts are underwritten by a common central bank or fiscal bailout system, ensuring security for investors and largely eliminating interest-rate spreads among countries, regardless of their level of indebtedness. In order to prevent the artificial reduction of interest rates from encouraging countries to borrow excessively, political debt brakes are instituted. In the eurozone, mutualisation was realised through generous ESM bailouts and €1tn ($1.27tn) worth of TARGET2 credit from national printing presses for the crisis-stricken countries. Moreover, the European Central Bank pledged to protect these countries from default free of charge through its “outright monetary transactions” (OMT) scheme – that is, by promising to purchase their sovereign debt on secondary markets – which functions roughly as Eurobonds would. The supposed hardening of the debt ceiling in 2012 adhered to this model.

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” … as German Chancellor Angela Merkel herself has told confidants, the real test will come when a major member state is forced to submit to the EU corset. That time is now.”

‘Poets and Alchemists’: Berlin and Paris Undermine Euro Stability (Spiegel)

Market uncertainty over the future of the euro has returned, but that hasn’t stopped France from flouting European Union deficit rules. Berlin is already busy hashing out a dubious compromise. Following three hours of questioning at European Parliament, a visibly exhausted Pierre Moscovici switched to German in a final effort to assuage skepticism from certain members of European Parliament. “As commisioner, I will fully respect the pact,” he said. Moscovici was French finance minister from 2012 until this April and will become European commissioner for economic and financial affairs when the new Commission takes office next month. But can he be taken at his word? There is room for doubt. In response to the unprecedented euro-zone debt crisis, the European Union agreed to strengthen its Stability and Growth Pact in recent years. Member states gave the European Commission in Brussels greater leeway to monitor national budgets and also bestowed it with rights to levy stiffer fines for countries that violate those rules.

Smaller member states have already been forced to comply. Still, as German Chancellor Angela Merkel herself has told confidants, the real test will come when a major member state is forced to submit to the EU corset. That time is now. And the big EU member state in question is France. The development is creating a dilemma for Merkel. The issue is far greater than a few tenths of a percentage point in the French budget deficit. At stake are France’s national pride and sovereignty — and the question as to whether the lessons of the crisis can actually be applied in practice. Also at stake is the euro-zone’s trustworthiness, and whether member states will once again fritter away global faith in the common currency by not abiding by their own internal rules. “The markets are watching us,” says one member of the German government — and he doesn’t sound particularly confident that the world will be impressed.

The markets are indeed jittery. The German economy is growing more sluggishly than expected and is no longer strong enough to buoy the rest of the euro zone. Interest rates for Greek government bonds have suddenly surged, likely because of domestic political instability, rising close to the levels that threatened to push the country into bankruptcy in early 2010. Meanwhile, the European Central Bank has already used up a good deal of the instruments it might have used to combat a new crisis.

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What, did anyone suggest the crisis was over?

S&P Warns Crisis Not Over As France Output Tumbles (CNBC)

Ratings agency Standard & Poor’s warned on Thursday that the euro zone crisis was entering a “stubborn phase of subdued growth” in what it says is a new stage in the region’s economic crisis. The warning comes as new data showed a deepening downturn in France’s private sector economy during October. Markit’s Flash Composite Output Index (PMI) for France slipped to 48.0, from 48.4 in September. That was its lowest reading since February. A reading below 50 marks a contraction in private sector activity. “We believe that the euro zone’s problems are still unresolved,” said Standard & Poor’s credit analyst Moritz Kraemer in a statement. Further data released by Markit showed the private sector in Germany grew, offering some hope after a series of disappointing data for the euro zone’s largest economy. The flash composite PMI for October climbed to 54.3 from 54.1 last month.

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Well, obviously. That’s the whole idea.

Central Banker Admits QE Leads To Wealth Inequality (Zero Hedge)

Six years after QE started, and just about the time when we for the first time said that the primary consequence of QE would be unprecedented wealth and class inequality (in addition to fiat collapse, even if that particular bridge has not yet been crossed), even the central banks themselves – the very institutions that unleashed QE – are now admitting that the record wealth disparity in the world – surpassing that of the Great Depression and even pre-French revolution France – is caused by “monetary policy”, i.e., QE. Case in point, during the Keynote speech by Yves Mersch, ECB executive board member, in Zurich on 17 October 2014 titled “Monetary policy and economic inequality” he said:

More generally, inequality is of interest to central banking discussions because monetary policy itself has distributional consequences which in turn influence the monetary transmission mechanism. For example, the impact of changes in interest rates on the consumer spending of an individual household depend crucially on that household’s overall financial position – whether it is a net debtor or a net creditor; and whether the interest rates on its assets and liabilities are fixed or variable.

Such differences have macroeconomic implications, as the economy’s overall response to policy changes will depend on the distribution of assets, debt and income across households – especially in times of crisis, when economic shocks are large and unevenly distributed. For example, by boosting – first – aggregate demand and – second – employment, monetary easing could reduce economic disparities; at the same time, if low interest rates boost the prices of financial assets while punishing savings deposits, they could lead to widening inequality.

Alas, in the past 6 years, low interest rates have not only boosted financial asset prices but have resulted in the biggest artificial asset bubble ever conceived. As for reducing unemployment, don’t ask Europe – and its unprecedented record unemployment, especially among the youth – how that is going. As for the US where unemployment is “dropping”, ask the 93.5 million Americans who have dropped out of the labor force, those whose real wages haven’t risen in the past 20 years, or the soaring part-time workers just how effective monetary policy has been in the US.

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Weird ideas some people have. But I’m sure they go down well at a Bloomberg Government breakfast in Washington.

French Envoy To US Says ‘Poker Player’ Putin Bluffed and Won (Bloomberg)

Vladimir Putin has outmaneuvered his opponents and humiliated Ukraine by continuing to back pro-Russian separatists and flouting a cease-fire, making it crucial that sanctions on Russia remain firm, France’s ambassador to the U.S. said. The Russian president “has won because we were not ready to die for Ukraine, while apparently he was,” Ambassador Gerard Araud said yesterday at a Bloomberg Government breakfast in Washington, in remarks he said represented his personal opinion. Echoing the view of other European envoys in Washington, Araud expressed concern that the Ukraine conflict has hit an impasse, leaving Putin the winner by default.

While many observers have called Putin a geopolitical chess player, he said, the Russian leader is more a “poker player really, putting all the money on the table, saying, ‘Do the same,’ and of course we blink. We don’t do the same.” The economic sanctions against Russia must stay in place to prevent Putin from going further, said Araud, who moved to Washington in September after serving as the French ambassador to the United Nations. “The question is there on the table: When is Putin going to stop?” Araud said. “That’s the reason that we need to keep the sanctions” because, “let’s be frank, it’s more or less the only weapon that we have. We are not going to send our soldiers in Ukraine. It does not make sense to send weapons to the Ukrainians, because the Ukrainians would be defeated real easily, so it will only prolong the war” and lead to a “still bigger Russian victory.”

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And for them. And for Canadians.

Canada’s Biggest Banks Say Worst to Come for Loonie (Bloomberg)

The oil boom that powered Canada’s recovery from its 2009 recession is turning into a bust for the nation’s dollar. Canada’s currency tumbled this month to a five-year low of C$1.1385 per U.S. dollar as the price of oil, the country’s biggest export, fell 30% from a June peak. Without a sustained increase in crude, the local dollar will weaken at least another 4% to C$1.18, according to Toronto-Dominion Bank and Royal Bank of Canada, the nation’s two biggest lenders. “The risk is, a sustained push lower in oil prices cuts Canadian growth,” Shaun Osborne, the chief currency strategist at Toronto-Dominion, Canada’s largest bank, said by phone on Oct. 15. “Any sort of setback for growth and investment in the energy sector is likely to have a fairly significant knock-on effect for the rest of the economy.”

The slide in oil, caused by a combination of oversupply and falling global demand, is a setback for Canada. Since the recession, most new business investment and jobs have come from the oil-rich province of Alberta. The nation’s trade surplus turned into a deficit in August, and economic growth stalled the previous month. Money managers are boosting bets the Canadian dollar will keep weakening. Hedge funds and other large speculators pushed net-bearish wagers on the currency to 16,167 contracts in the week ending Oct. 17, the most since June, according to the Commodity Futures Trading Commission in Washington. Investors held net-long positions as recently as Sept. 26.

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Interesting view.

The Financialization of Life (Real News Network)

Costas Lapavitsas, Economics Professor, Univ. of London: I will present to you some ideas that I have dealt with in my new book, Profiting without Producing, which has just come out, which discuss finance and the rise of finance. I can’t tell you very much about Baltimore because I don’t know about it, but I will tell you quite a few things about what I call the financialization of capitalism, which impacts on Baltimore and on many other places. So, getting on with it, and very quickly because time is short, I think it’s fair to say and all of us would agree that finance has an extraordinary presence in contemporary mature economies. It’s very clear in the case of the U.S., but equally clear in the case of the United Kingdom, where I live, Japan, about which I know quite a bit, Germany, and so on. There’s no question at all about it.

Finance is a sector of the economy in mature countries which has grown enormously in terms of size relative to the rest of the economy, in terms of penetration into everyday lives of ordinary people, but also small and medium businesses and just about everybody. And in terms of policy influence, finance clearly influences economic policy on a national level in country after country. The interests of finance are paramount in forming economic policy. So that is clear. Finance has become extraordinarily powerful. And that, in a sense, is the first immediate way in which we can understand financialization. Something has happened there, and modern mature capitalism appears to have financialized. Now, what is this financialization? The best I can do right now is to give you the gist of this argument of mine in my book. And I will come clean immediately and tell you that I think financialization is basically a profound historical transformation of modern capitalism.

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Ambrose has it in for Russia.

Oil Slump Leaves Russia Even Weaker Than Decaying Soviet Union (AEP)

It took two years for crumbling oil prices to bring the Soviet Union to its knees in the mid-1980s, and another two years of stagnation to break the Bolshevik empire altogether. Russian ex-premier Yegor Gaidar famously dated the moment to September 1985, when Saudi Arabia stopped trying to defend the crude market, cranking up output instead. “The Soviet Union lost $20bn per year, money without which the country simply could not survive,” he wrote. The Soviet economy had run out of cash for food imports. Unwilling to impose war-time rationing, its leaders sold gold, down to the pre-1917 imperial bars in the vaults. They then had to beg for “political credits” from the West. That made it unthinkable for Moscow to hold down eastern Europe’s captive nations by force, and the Poles, Czechs and Hungarians knew it. “The collapse of the USSR should serve as a lesson to those who construct policy based on the assumption that oil prices will remain perpetually high. A seemingly stable superpower disintegrated in only a few short years,” he wrote.

Lest we engage in false historicism, it is worth remembering just how strong the USSR still seemed. It knew how to make things. It had an industrial core, with formidable scientists and engineers. Vladimir Putin’s Russia is a weaker animal in key respects, a remarkable indictment of his 15-year reign. He presides over a rentier economy, addicted to oil, gas and metals, a textbook case of the Dutch Disease. The IMF says the real effective exchange rate (REER) rose 130pc from 2000 to 2013 during the commodity super-cycle, smothering everything else. Non-oil exports fell from 21pc to 8pc of GDP. “Russia is already in a perfect storm,” said Lubomir Mitov, Moscow chief for the Institute of International Finance. “Rich Russians are converting as many roubles as they can into foreign currencies and storing the money in vaults. There is chronic capital flight of 4pc to 5pc of GDP each year but this is no longer covered by the current account surplus, and now sanctions have caused foreign capital to turn negative, too.”

“The financing gap has reached 3pc of GDP, and they have to repay $150bn in principal to foreign creditors over the next 12 months. It will be very dangerous if reserves fall below $330bn,” he said. “The benign outcome is a return to the stagnation of the Brezhnev era in the early 1980s, without a financial collapse. The bad outcome could be a lot worse,” he said. Mr Mitov said Russia is fundamentally crippled. “They have outsourced their brains and lost their technology. The best Russian engineers go to work for Boeing. The Russian railways are run on German technology. It looked as if Russia was strong during the oil boom but it was an illusion and now they are in an even worse position than the Soviet Union,” he said.

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The TTIP is a real evil, that’s why it’s being discussed in secret.

Big Tobacco Puts Countries On Trial As Concerns Over TTIP Mount (Independent)

Tiny Uruguay may not seem a likely front line in the war of the quit smoking brigade against Big Tobacco. But the Latin American country has unwittingly found itself not just in the thick of that battle, but in the middle of an even bigger fight – that of the rising opposition to international free trade deals. Philip Morris is suing Uruguay for increasing the size of the health warnings on cigarette packs, and for clamping down on tobacco companies’ use of sub-brands like Malboro Red, Gold, Blue or Green which could give the impression some cigarettes are safe to smoke. The tobacco behemoth is taking its legal action under the terms of a bilateral trade agreement between Switzerland – where it relatively recently moved from the US – and Uruguay. The trade deal has at its heart a provision allowing Swiss multinationals the right to sue the Uruguayan people if they bring in legislation that will damage their profits.

The litigation is allowed to be done in tribunals known as international-state dispute settlements (ISDS), ruled upon by lawyers under the auspices of the World Trade Organisation. Such an ISDS agreement is also core to the EU’s planned Transatlantic Trade and Investment Partnership (TTIP) treaty being negotiated with the US. The critics of TTIP fear the tribunals will see US multinationals sue European governments in such areas as regulating tobacco, health and safety, and quality controls. In the UK, critics have been particularly vocal about fears US healthcare companies now running parts of the NHS might use ISDS tribunals to sue future British governments wanting to reverse the accelerating privatisation of parts of the health service. The British Government argues that such worries are “misguided” and says TTIP will create jobs and be good for the economy. ISDS agreements are necessary to give companies the confidence to invest, it says, particularly in more politically unstable countries.

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Getting worse all the time.

Tesco’s Profits Black Hole Bigger Than Expected (Guardian)

Tesco has revealed that the hole in its first half profits is bigger than previously thought and runs back into previous financial years, plunging the embattled supermarket into fresh turmoil. Confidence in what was once one of the most respected companies in the FTSE 100 was also dealt a fresh blow by the admission that it was unable to provide any guidance on full-year profits because of a number of uncertainties, sending its shares down 6% to 170p.25p when the stock market opened. The company’s shares have almost halved in value since the start of this year. It also revealed that its under fire chairman Sir Richard Broadbent is to be replaced, after a disastrous three year tenure. Tesco said the month-long investigation by forensic accountants from Deloitte had established that its first half profits had been artificially inflated by £263m rather than the £250m the company had originally estimated.

The problem relates to when the retailer books payments received from suppliers who pay the big grocery chains to run in-store promotions on their behalf. Deloitte said £118m of the figure related to the first six months of the current financial year but that £145m related to previous years. Chief executive Dave Lewis said the Deloitte report would be passed to the FCA and that from the company’s perspective this “drew a line” under the issue. With that out of the way he outlined three immediate priorities: to restore the competitiveness of the core UK business, to protect and strengthen its balance sheet and to begin “the long journey of rebuilding trust and transparency in the business and the brand”. The investigation, prompted by information from a whistleblower, has resulted in the suspension of eight senior executives, including Chris Bush, the head of the UK food business.

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The costs of cleaner energy, or the cost of political incompetence?

EU Braces for Battle to Set Energy, CO2 Goals for Next Decade (Bloomberg)

European Union leaders face heated negotiations today on a deal to toughen emission-reduction policies in the next decade and boost the security of energy supplies amid a natural-gas dispute between Russia and Ukraine. The main challenge for the 28 heads of government will be to iron out differences on a strategy that ensures cheaper and safer energy while stepping up climate-protection measures. The agenda of the two-day Brussels summit, the final one to be chaired by EU President Herman Van Rompuy, also features a debate on the European economy and on measures to prevent the spread of the Ebola virus. Countries including Poland, Portugal, Spain, France and the U.K. have signaled that the outstanding issues that leaders will need to resolve at the gathering include sharing the burden of carbon cuts, the nature of energy targets and plans for power and gas interconnectors.

“It will not be easy to reach an accord, many countries have energy problems, and some have re-opened coal mines,” French energy minister Segolene Royale told lawmakers in Paris yesterday. “But I think we will have the wisdom, the strength, and the sense of responsibility to reach an accord.” EU leaders plan to back a binding target to cut greenhouse gases by 40% by 2030 from 1990 levels, accelerating the pace of reduction from 20% set for 2020, according to draft conclusions for the meeting obtained by Bloomberg News. An agreement would ensure the bloc remains the leader in the fight against global warming before a United Nations climate summit in Lima in December and a worldwide deal expected to be clinched in 2015 in Paris, according to the European Commission, the EU’s executive arm. While differences among member states on the carbon target are narrowing down, leaders still need to resolve issues including emissions burden-sharing, which pits richer countries in western Europe against mostly ex-communist east and central European nations led by Poland.

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“Coal is at a crossroads in Europe. For some, the fuel is too polluting to keep burning in such high quantities. But for others, it is too cheap, too abundant and too politically strategic to abandon.” Germany invests heavily in brown coal.

Several Factors Conspire To Increase Fossil Fuel Use (FT)

Under slate-grey skies one chilly October morning in Warsaw, Ewa Kopacz, Poland’s new prime minister, saw first-hand the front line in Europe’s high-stakes battle over the future of coal. Outside parliament, where she was to make her maiden speech as the country’s leader, hundreds of helmeted miners sounded foghorns, chanted slogans and waved banners in a protest calling for action to save their industry. Coal is at a crossroads in Europe. For some, the fuel is too polluting to keep burning in such high quantities. But for others, it is too cheap, too abundant and too politically strategic to abandon. The midterm future of Europe’s energy mix, and that of coal, may well be decided in Poland, the EU’s second-largest producer and consumer of the black stuff. Coal is the dirtiest of all fossil fuels. Historically, its use in environmentally aware Europe has been falling. But consumption has ticked up since the US shale gas boom sent coal prices tumbling, and countries such as Poland are resisting calls to switch to lower-emission alternatives.

“It will be extremely difficult politically and economically for us just to end our dependence on coal,” says Oktawian Zajac, head of the coal practice at Boston Consulting Group in Warsaw. “In the medium term, the top priority is not to switch away from coal, but to produce coal that is economically justifiable.” That is not the view in Brussels, where diplomats are trying to hammer out an EU deal to curb the bloc’s carbon emissions by 2030. That deal is likely to revolve around whether countries are willing to pay for the environmental benefits of reducing their fossil fuel usage given the costlier alternatives. The biggest impediment to agreement is coal-hungry Poland, and the angry miners who won support in Ms Kopacz’s speech. “I realise how important environmental concerns are … but my government will not accept increases in the costs of energy in Poland and the impact on the economy,” the prime minister said, adding that the fuel was of strategic national importance.

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Sao Paulois sinking into disaster.

Water Crisis Seen Worsening as Sao Paulo Nears ‘Collapse’ (Bloomberg)

Sao Paulo residents were warned by a top government regulator today to brace for more severe water shortages as President Dilma Rousseff makes the crisis a key campaign issue ahead of this weekend’s runoff vote. “If the drought continues, residents will face more dramatic water shortages in the short term,” Vicente Andreu, president of Brazil’s National Water Agency and a member of Rousseff’s Workers’ Party, told reporters in Sao Paulo. “If it doesn’t rain, we run the risk that the region will have a collapse like we’ve never seen before,” he later told state lawmakers. The worst drought in eight decades is threatening drinking supplies in South America’s biggest metropolis, with 60% of respondents in a Datafolha poll published yesterday saying their water supplies were restricted at least once in the past 30 days. Three-quarters of those people said the cut lasted at least six hours.

Rousseff, who is seeking re-election in the Oct. 26 election against opposition candidate Aecio Neves, is stepping up her attacks of Sao Paulo state’s handling of the water crisis, saying in a radio campaign ad yesterday that Governor Geraldo Alckmin was offered federal support and refused. Neves, who polls show is statistically tied with Rousseff, and Alckmin are both members of the Social Democracy Party, known as PSDB. Neves said yesterday on his website that ANA is being used by the PT for it’s own purposes. “The agency could have been a much better partner to Governor Alckmin,” he said.

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How about some solid policies?

Some US Hospitals Weigh Withholding Care To Ebola Patients (Reuters)

The Ebola crisis is forcing the American healthcare system to consider the previously unthinkable: withholding some medical interventions because they are too dangerous to doctors and nurses and unlikely to help a patient. U.S. hospitals have over the years come under criticism for undertaking measures that prolong dying rather than improve patients’ quality of life. But the care of the first Ebola patient diagnosed in the United States, who received dialysis and intubation and infected two nurses caring for him, is spurring hospitals and medical associations to develop the first guidelines for what can reasonably be done and what should be withheld. Officials from at least three hospital systems interviewed by Reuters said they were considering whether to withhold individual procedures or leave it up to individual doctors to determine whether an intervention would be performed. Ethics experts say they are also fielding more calls from doctors asking what their professional obligations are to patients if healthcare workers could be at risk.

U.S. health officials meanwhile are trying to establish a network of about 20 hospitals nationwide that would be fully equipped to handle all aspects of Ebola care. Their concern is that poorly trained or poorly equipped hospitals that perform invasive procedures will expose staff to bodily fluids of a patient when they are most infectious. The U.S. Centers for Disease Control and Prevention is working with kidney specialists on clinical guidelines for delivering dialysis to Ebola patients. The recommendations could come as early as this week. The possibility of withholding care represents a departure from the “do everything” philosophy in most American hospitals and a return to a view that held sway a century ago, when doctors were at greater risk of becoming infected by treating dying patients. “This is another example of how this 21st century viral threat has pulled us back into the 19th century,” said medical historian Dr. Howard Markel of the University of Michigan.

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