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Caesar, Turkey and the Ides of March

Mar 132017
 
 March 13, 2017  Posted by at 5:41 pm Finance Tagged with: , , , , , , , , ,  2 Responses »


Vincenzo Camuccini La Morte Di Cesare 1804

 

I don’t think Holland realized they planned their election on the Ides of March, don’t remember the date or event ever being mentioned when I lived there as a child. That Washington knew what it was doing when back in 2013 it set the end of the latest debt ceiling compromise to March 15 is not likely either. Nor is Janet Yellen deliberately setting the Fed’s ‘next’ rate hike on the date. They may all, in hindsight, wish they had possessed a little more historical knowledge.

When Shakespeare (and Plutarch before him) wrote ‘Beware the Ides of March’, he was talking about the murder of Julius Ceasar in 44 BC, by a group of senators, which included Brutus. But the incident can also be more broadly seen as the separation line between the Roman Republic and the Roman Empire. And now we’re getting somewhere interesting when looking at present day events. Democracy under threat of absolutism.

Leafing through the Dutch press, opinions differ on which politicians will profit most from the sudden row with Turkey that flared up over the weekend. Is it far right Wilders, who can now claim that he always foresaw things like this? Or is it “just a little less right” PM Rutte, who gets to look like a statesman and a decision maker? None of the other parties, there are 31 in total, look positioned to reap any gains from the bewildering developments.

The Netherlands is the ‘capital of fascism’, said Turkish foreign minister Cavusoglu on Sunday in France, where he ended up after being refused landing rights on Saturday. I know I’m biased, but no matter how you twist and turn it, that’s quite a statement about the country of Anne Frank, which lost most of its extensive Jewish population, and it was only a follow-up to Turkish president Erdogan earlier calling the Dutch ‘nazi’s and ‘remnants of fascists’.

Erdogan later managed ‘banana republic’. And declared that no-one can treat ‘his citizens’ the way a photograph taken Saturday night seemed to depict, in which a Turkish protester was attacked by a police dog. Apart from the question whether dogs should ever be used in quelling protests, this raises another issue crucial to the whole story. That is, Turkey insists that people who’ve lived in other countries for decades are nevertheless ‘its citizens’ (and not of their adopted countries).

As an aside, that story and photo of the dog – a German shepherd- reminds me of ‘When We Were Kings’, the movie about the Rumble in the Jungle fight in Kinshasa between Muhammad Ali and George Foreman, in which the latter emerges, upon arrival, from his plane with a huge German shepherd and thereby loses the sympthy of the local people, and some say the whole fight, people had very bad memories about such dogs.

 

So what happened in Holland? About 10 days ago, someone announced there would be a meeting (a rally) on Saturday March 11 in a ‘party hall’ in Rotterdam, that would be attended by Turkish foreign minister Cavusoglu. This set off an alert inside the Dutch government, because in Germany similar meetings had been cancelled in the preceding days. The reason for the cancellations is that these are political rallies to gain support from Turks living abroad for an April 16 referendum designed to give Erdogan very far-reaching powers.

Turkey claims the right to freedom of speech and political gathering. And they would perhaps have been granted this, if not for the July 15 2016 coup in the country, and especially its aftermath. Both Germany and Holland have been aware of Erdogan and his people putting pressure on their ‘citizens’ living abroad to for instance report ‘hidden’ Gülen supporters to embassies and consulates and mosques. In other words, to create divisions between one group of (Dutch or German) Turks and another.

Needless to say, neither Berlin not The Hague wants anything to do with that. But they want to reach some sort of compromise. No matter how they may feel about the country post-coup, Turkey is a NATO partner and the EU has an all-important deal with Ankara to keep refugees away from Europe. Even though it was obvious from the start that this was the dumbest deal with the devil anyone since Faust has ever signed, elections trump common sense and principles.

Over the next days, the Dutch tell Ankara they consider foreign minister Cavusoglu’s planned rally ‘undesirable’. Rotterdam mayor Aboutaleb, a Dutch-Morrocan muslim, bans the planned meeting. But the Turks respond that Cavusoglu will come no matter what, and for Holland to arrange an alternative venue. The Dutch don’t like this at all, but try to compromise with a meeting with a small group of invitees. On Friday, Turkey suggests the Rotterdam residence of the Turkish consul. Aboutaleb is not amused: the location of the home ‘invites’ the gathering of a large number of people outside.

Saturday morning comes with a lot of discussion. The consulate is suggested as a venue. Then, Turkey sends a message to a large group of Dutch Turks to come to the consulate. And while talks are ongoing, Cavusoglu tells CNNTürk TV that if Holland revokes his plane’s landing rights, something that has been mentioned in negotiations only as a last resort, there will be ‘economic and political sanctions’.

 

Rutte and his crew see no other choice than to do just that: revoke the landing rights. To which the response is to drive the -female- Turkish Minister of Family Affairs, Kaya, who’s in Germany, to Rotterdam. There were allegedly even multiple convoys, with decoys and all, so Holland wouldn’t know what car she was in. Meanwhile, the allegations of nazism and fascism had started to be unloaded on The Hague.

As someone remarked: all Erdogan wanted was a photo-op, a picture with 10,000 Turks waving their flags in the streets of Holland. Things turned out different. Minister Kaya made it to Rotterdam, but was refused entry into the consulate, declared an undesirable alien and told she must return to Germany. It took many hours, but finally she was put into a different car than the one she came in and driven back across the border.

From where she took a private plane to Istanbul. Turkey apparently was not clear on the difference between someone having a diplomatic passport and having diplomatic immunity. These things are regulated in the Vienna Convention, and Turkey wants Holland to be found in violation of it. But it doesn’t look like they are. And there are a few other things as well:

 

 

What I don’t get: where in the world does it say that you are free to hold political campaign events in any country you choose? Can you see Guatemalan rallies in the streets of LA? With the risk of clashes between rival groups? And what would Turkey say if an anti-Erdogan protest were held in Berlin tomorrow? You think political rallies by foreigners are allowed in Turkey?

And then the rioting started late Saturday night in Rotterdam. What struck me in the pictures of the riots, and in other footage, is how many times they contain men making hand-signs of either the Muslim Brotherhood or the Grey Wolves, an ultra right wing Turkish group. I don’t get how that fits in the streets of countries like Germany and Holland, and I don’t get how it fits in with the man who’s seen as a demi-god in Turkey, founder in 1923 of the secular country of Turhey, Kemal Atatürk.

It looks like Erdogan is trying to idolize Atatürk, as any Turkish leader would have to do to get votes, and at the same time make the country an islamic state, something Atatürk definitely did not want, but which could Erdogan hand a majority for the referendum next month. Why else does he accuse western Europe of being Islamophobic?

Oh, and how does Michael Flynn fit into this picture? Trump’s former security adviser worked for Erdogan -indirectly- while sitting in on security meetings, and pushed the US to extradite Erdogan’s no. 1 enemy, Fethullah Gülen. If Washington had had proof that Gülen was behind the coup last year, one would think he’d already have been extradited. Flynn’s role gets curiouser by the day. Is this why he was cast out of the Trump team? For being a foreign agent?

 

Also curious is the fact that Erdogan on Friday, the day before the Holland situation played out, was visiting Russia to meet with Putin. He arrived back home to say something about an anti-missile defense system they could build together, and suggested that Putin agreed with him on the danger of the Kurdish fighters in Syria and beyond. Only, Putin never acknowledged such a thing, and Putin has never forgiven Erdogan for downing a Russian jet in November 2015. He just waits for the right payback time. But Turkey is a NATO country.

The EU should never have kept the Union membership carrot dangling in front of Erdogan’s face, knowing full well Turkey would never be accepted as a member, zero chance. It should not have signed the refugee deal either; that could only ever have blown up into its face. The first and major victim of that will once again be Greece. Another country that Erdogan has been trying to bully.

Turkish jets violating Greek airspace are so common people tend to ignore them. Recently, army ships have been sailing into Greek waters too. The idea seems to be some sort of preparation for contesting the 1923 Lausanne Treaty , which settled ownership disputes post-Ottoman Empire. There are so many islands and islets and rocks, anyone who wants to can always find something to fight over. And then of course there’s still Cyprus; negotiations are ongoing, but so are efforts to frustrate them.

And it’s not that the Turkish economy is doing so well, the lira lost 30% in 2016 and another 10% so far this year. But unlike Greece, Turkey still has its own currency, and therefore the ability to devaluate it and absorb financial shocks. Still, 40% in 15 months is a lot. Imports are getting very expensive. Maybe that’s what Erdogan is trying to drown out with his fighting words.

 

This afternoon, Turkey’s Parliament Speaker compared Dutch PM Rutte to Hitler, Franco AND Mussolini. Pol Pot must have slipped his mind for a moment. Denmark, France, Angela Merkel and Brussels have all told Turkey to tone down. But at the same time, German TV network ZDF reports there are 30 more Erdogan rallies and meetings planned in the country in the next month.

Erdogan is trying to let his people see him as a strongman, not afraid of anyone. He only has to paint this picture for another month, through his state owned TV channels, and he’ll get his near absolute powers. Meanwhile, the US and all of the EU are too busy trying to manage their own election issues. But that may not be such a wise choice. On April 17, they may be faced with a near dictator as member of NATO, and with a pro-Islam and anti-EU agenda.

Erdogan is done winning in Europe, and it was even only ever for his home audience to begin with. His biggest gains in votes -and he looks to be 48%-52% behind right now- will have to come from the war theater, where he pretends to fight ISIS only to send his army to kill the Kurds. It would be a good thing if besides Putin there were a few other powers to tell him that’s a no-go. Donald?! Turkey will never beat the Kurds, it’s just an endless bloody battle. Time to make Kurdistan a nation, one way or the other.

It all sort of fits in with the whole political picture these days, doesn’t it? And with Ceasar and the Ides of March.

 

 

Outrageous Malevolence

Feb 112017
 
 February 11, 2017  Posted by at 4:28 pm Finance Tagged with: , , , , , , , , ,  Comments Off on Outrageous Malevolence


Henri Cartier Bresson Salamanca 1963

 

Earlier this week I was talking in Athens to a guy from Holland, who incidentally with a group of friends runs a great project on Lesbos taking care of some 1000 refugees in one of the camps there. But that’s another topic for another day. I was wondering in our conversation how it is possible that, as we both painfully acknowledged, people in Holland and Germany don’t know what has really happened in the Greek debt crisis. Or, rather, don’t know how it started.

That certainly is a big ugly stain on their media. And it threatens to lead to things even uglier than what we’ve seen so far. People there in Northern Europe really think the Greeks are taking them for a ride, that the hard-working and saving Dutch and Germans pay through the teeth for Greek extravaganza. It’s all one big lie, but one that suits the local politicians just fine.

By accident(?!), I saw two different references to what really happened, both yesterday in the UK press. So let’s reiterate this one more time, and hope that perhaps this time someone in Berlin or Amsterdam picks it up and does something with it. There must be a few actual journalists left?! Or just ‘ordinary’ people curious enough, and with some intact active neurons, to go check if their politicians are not perhaps lying to them as much as their peers are all over the planet.

What I’m talking about in this instance is the first Greek bailout in 2010. While there are still discussions about the question whether the Greek deficit was artificially inflated by the country’s own statisticians, in order to force the bailout down the throats of the then government led by George Papandreou, there are far fewer doubts that the EU set up Greece for a major league fall just because it could, and because Dutch, French, German politicians could use that fall for their own benefit.

The reason to do all this would have been -should we say ostensibly or allegedly?-, to get Greece in a situation where the Germans and the French could abuse the emergency they themselves thus created, to transfer the Greece-related bad debts of their banks to the EU public at large, and subsequently to the Greek public, instead of forcing the banks to write these debts down. That is still the core of the Greek problem to this day. It’s also the core problem with the IMF’s involvement: the fund’s statutes prescribe it should have insisted on writedowns long ago, from the very first moment it got involved.

The bailout, as Yanis Varoufakis repeats below, was not -and never- meant to help Greece. Instead, it was meant to do the exact opposite, to enable Europe’s richer countries -and their banks- to escape the only just punishment for reckless lending practices, by unloading their debt onto the Greek people.

Varoufakis Accuses Creditors Of Going After Greece’s ‘Little People’

Former Greek finance minister Yanis Varoufakis [..] said that the country has been put on a fiscal path which makes everyday life “unsustainable” in Greece. “The German finance minister agrees that no Greek government, however reformist it might be, can sustain the current debt obligations of Greece,” he said. Earlier in the day, Wolfgang Schäuble told German broadcaster ARD that Greece must reform or quit the euro. “A country in desperate need of reform has been made unreformable by unsustainable macroeconomic policies,” Mr Varoufakis said.

He said that “instead of attacking the worst cases of corruption, for six years now the creditors have been after the little people, the small pharmacists, the very poor pensioners instead of going for the oligarchies”. Greece in 2010 was given a huge loan that Mr Varoufakis said was not designed to save the bankrupt country but to “cynically transfer huge banking losses from the books of the Franco German banks onto the shoulders of the weakest taxpayers in Europe”.

The Financial Times, in a rare moment of lucidity, and with an unintentionally hilarious headline, puts its fingers on that same issue, as well as a few additional sore spots, and with admirable vengeance and clarity:

Conflict Over Athens’ Surplus Needles The IMF

This week the enduring problem of Greece took a new and disturbing turn. It was revealed that the executive board of the IMF is split on the question of what fiscal surplus Greece should be required to hit — which in itself will affect whether it needs official debt relief to reach sustainable growth.

[..] the fact that the fund admitted a division between its member countries is significant. European nations are over-represented on the board relative to their size in the global economy. Wielding that power to dissuade the fund from demanding debt relief from eurozone governments is a clear conflict of interest and poses a threat to the fund’s credibility and independence.

[..] The fund, which over the years has come to take a more realistic view of Greece’s debt sustainability, has dug its heels in and said it will not continue to participate without further reductions in the burden. This leaves eurozone countries, particularly Germany, in a quandary. Berlin insists it will not continue with the rescue without the involvement of the IMF but it fiercely opposes the debt writedown that the fund is demanding.

The point at issue is the fiscal surplus Greece is required to hit. The IMF says that reaching and maintaining a primary surplus of 1.5% of gross domestic product is sufficient; the eurozone wants an improbable 3.5%. [..] The European directors on the board, who want the IMF to agree to the higher fiscal surplus number, are undoubtedly conflicted by having an eye on the effect on their own governments having to write down debt.

Forthcoming elections in the eurozone, including Germany and France, mean that the political as well as economic cost of being seen to give in to Greece is considerable.

Greece’s own government has also been shaken by the conflict, and through its intransigence, the eurozone may force yet another change of administration, with the Syriza government being replaced by the centre-right opposition. At the margin, that may result in Greece being offered a slightly better deal than under the current administration. But short-term political manoeuvring is a terrible way to try to set Greece on a path to long-term debt sustainability and economic stability.

Right from the beginning of the Greek crisis in 2010, the political need to shield first their banks and investors, and then their taxpayers, has warped the response of eurozone governments. They have consistently signed up to hugely over-optimistic growth and surplus targets rather than accepting the need for more external finance and, if required, debt writedowns.

The rest of the IMF’s membership should be prepared to overrule the recalcitrant Europeans. The complaints of a self-interested cabal cannot be allowed to get in the way of Greece’s best interests. Eurozone governments have behaved poorly on this issue. They deserve to be defeated.

First of all, to put Greece and ‘sustainable growth’ together in one sentence is as preposterous as it is to do the same with Greece and ‘surplus’. But more importantly, the FT is right in just about every word here. Europe de facto decides what the IMF does. So despite all the recent conflicts between the Troika members (though they reportedly just announced they agreed on what to dictate to Greece over the weekend), it’s really all EU (i.e. Germany, France) all the time. Greece never stood a chance, and neither did justice.

The point about upcoming elections in Holland, France and Germany gets more important by the day. Since former EU parliament chief Martin Schulz left that post to head the ‘socialist’ SPD in Germany’s elections, he’s seen his poll numbers soar so much that Merkel and Schaeuble are getting seriously nervous about their chances of re-election. Like in all countries these days, certainly also in Europe, their knee-jerk reaction is to pull further to the right. Which is the opposite of setting the record straight with regards to.

As for Dijsselbloem, Schaeuble’s counterpart as finance minister for Holland, his Labor Party (PVDA) -yes, that twit claims to be a leftie- is down so much in the polls that you have to wonder where he gets the guts -let alone the authority- to even open his mouth. PVDA has 38 seats in the Dutch parliament right now and are predicted to lose 27 of them and have just 11 left after the March 15 vote, taking them from 2nd largest party to 7th largest. And out of power.

And he still heads the eurogroup, including in the negotiations with Greece and the IMF?! It’s a strange world. Dijsselbloem proudly proclaimed this week that without the IMF being involved in the next bailout, Holland wouldn’t ‘give’ Greece another penny anymore. Think Dijsselbloem and Schaeuble don’t know what happened in 2010? Of course they do. They know better than anyone.

It’s simply better for their careers -or so they think- to further impoverish the entire Greek nation and the poorest of its citizens than it is to come clean, to tell their people the whole story has been based on dirty tricks from the start. And since their media refuse to tell the truth, too, the story will last until at least after their respective elections. Thing is, Dijsselbloem will be out of a political job by March 16, so what’s he doing, setting himself up for a juicy job at one of the banks whose debts were transferred to Greek pensioners in 2010? No conscience?

 

Perhaps Greece’s best hope is, of all people, Donald Trump. Yeah, a long shot if ever you saw one. But Trump can overrule the IMF board simply because the US is the biggest party involved in the fund. He can tell that divided board to get its act together and stop harassing a valuable NATO member. At least he has the business sense to understand that a country with 23% unemployment -and that’s just the official number- and 50-60% youth unemployment cannot recover no matter what happens, and that sustainable growth, any kind of growth, is an impossibility once you take people’s spending power away.

Meanwhile, elite and incumbent Europe seems to think that publicly agitating against Trump is the way to go (they may come to regret that stance, and a stance it all it is). Trump’s apparent choice for EU ambassador, economist Ted Malloch, was accused by European Parliament hotshots Weber and Verhofstadt -in a letter, no less- of “outrageous malevolence” towards “the values that define this European Union”, for saying the Union needs ‘a little taming’. For some reason, they don’t seem to like that kind of thing. “Outrageous malevolence”, we’re talking Nobel literature material here.

Malloch also said EU president Juncker was a “very adequate mayor, I think, of some city in Luxembourg.” And that he “should go back and do that again.” And Malloch said on Greek TV this week that Greece should have left the eurozone four years ago. “Why is Greece again on the brink? It seems like a deja vu. Will it ever end? I think this time I would have to say that the odds are higher that Greece itself will break out of the euro.”

Why would he say that? How about because of the numbers in this by now infamous graph, straight out of the IMF itself, which shows EU countries have conspired to plunge one of their fellow “Union” member states into a situation far worse than the US was in during the Great Depression? Would that do it?

 

 

And we haven’t even touched on the role that Goldman Sachs plays in the entire kerfuffle, with its fake loans and derivatives, yet another sordid tale in this Cruella De Vil web of power plays spun by incompetent petty men. And Americans think they got it bad… Guess that Goldman role makes it less likely for Trump to interfere in Greece’s favor. Which would seem a bad idea, for everyone involved, not least of all because of rising tensions with Turkey over islands and islets and rocks (I kid you not) in the Aegean Sea.

It would be much better and safer for Trump, and for all of Europe, to make sure Greece is a strong nation, not a depressed and demoralized penal colony for homeless and refugees. That is asking for even more trouble. But nary a soul seems to be tuned in to that, it’s all narrow windows, short term concerns and upcoming elections. No vision.

Or perhaps Merkel will do something unexpected. Word has it that Greek finance minister Tsakalotos is meeting with Angela this weekend, a move that would seem to bypass Schaeuble, who once again said yesterday that Greece can only get a debt writedown if it leaves the eurozone. And that’s something Merkel is not exactly keen on. If only because it means unpredictability, volatility, not a great thing if your popularity as leader is already on shaky ground.

But to summarize, the Greek people didn’t do this. Of course plenty of Greek citizens borrowed more money than they should have in the first decade of the millenium, stories about credit cards in people’s mailboxes with a ‘free’ €5000 credit on them are well known in Athens. But they were by no means the ones who profited most. And the country has a long history of corruption and tax evasion. Which is what the French and German banks ‘cleverly’ played into as their politicians acted like they had no idea. Still, none of that comes even close to a reason or an excuse for completely eviscerating a fellow member of both the EU and NATO.

And it makes little sense. Do these people really want to risk peace in the eastern Mediterranean, or inside Greece itself (which will inevitably explode if this continues), just in order to keep Commerzbank or BNP Paribas out of the trouble they rightfully deserve to be in?

No, it’s not Tim Malloch’s ‘statements that reveal’ “outrageous malevolence” towards “the values that define this European Union”. It’s the actions of the European Union itself that do.

Debt Rattle May 5 2015

May 052015
 
 May 5, 2015  Posted by at 10:39 am Finance Tagged with: , , , , , , , ,  8 Responses »


Jack Delano Row houses, Baltimore 1940

• Liquidity Drought Could Spark Market Bloodbath, Warns IIF (Telegraph)
• “Nor Any Drop To Drink,” Citi Maps The Liquidity Paradox (Zero Hedge)
• Economic Policy Turned Inside Out (Stephen Roach)
• Most Greeks Want Euro Even With New Bailout Deal (Kathimerini)
• Deal Or No Deal, Greece Still Faces Bankruptcy (CNBC)
• France’s Far-Right Leader: EU Is Mocking Greece (CNBC)
• IMF Takes Hard Line On Aid As Greek Surplus Turns To Deficit (FT)
• Pension, Labor Disputes Dog Greek Talks As Cash Dwindles (Reuters)
• Greece Vows To Pay Debts As It Awaits Handout From Creditors (Guardian)
• Pressure Grows In Greek Talks (Kathimerini)
• Greek Talks Drag On as New EU Data Set to Underscore Crisis (Bloomberg)
• Juncker: If Greece Leaves, Anglo-Saxons Will Try To Break Up Eurozone (EurActiv)
• Greece Plan Health Booklets For The Uninsured (Kathimerini)
• China’s Crazy Stock Market, Charted (Bloomberg)
• ECB Said to Consider Delegating Powers to Ease Oversight Burden (Bloomberg)
• Australia Cuts Benchmark Interest Rate to Record Low 2% (AP)
• All The British Parties Are Eurosceptic Now (Münchau)
• Russell Brand Has Endorsed Labour – And The Tories Should Be Worried (Guardian)
• Intelligence Scandal Puts Merkel in a Tight Place (Spiegel)
• Frankly My Dear, I Don’t Give a Damn (Thad Beversdorf)
• Fukushima’s “Caldrons of Hell”: 300 Tons of Highly Radioactive Water Daily (GR)
• The Other Royal Baby Was Born on the High Seas (Daily Beast)

“Once you bring the rapid change in major benchmark prices and a change in the architecture of the global financial system together, you could end up with outcomes that are pretty painful, and certainly unknowable.”

• Liquidity Drought Could Spark Market Bloodbath, Warns IIF (Telegraph)

Investors face a “painful” adjustment in a world of evaporating liquidity and higher US interest rates that will trigger huge market swings with potentially catastrophic consequences, the Institute of International Finance has warned. Timothy Adams, the chief executive of the IIF, which represents the world’s biggest banks, described liquidity as the “top issue” at high level meetings of central bankers, chief executives and other financial institutions. He warned that the raft of regulation introduced in the wake of the 2008 crisis could potentially cause market gyrations larger than last October’s “flash crash” in US Treasuries. While Mr Adams supports tougher rules that have made the banks more resilient, he said a complex web of regulatory reform may have left banks less able to respond to the next crisis.

“There’s just less capacity for making markets,” he said. “Officials will say: we expect some volatility and this was part of this broader scheme of regulatory reform. But for the private sector there is this issue of: is the total effect of all of these various regulatory changes likely to produce outcomes larger than each individual regulatory reform and its consequences? “The cumulative unintended could end up being much larger than the one-off intended – we just don’t know.” Market liquidity, or the ease with which an investor can quickly buy or sell a security without moving its price, has evolved since the financial crisis. Investment banks, which traditionally supported liquidity in times of stress, have been shrinking their activities. Corporate bond inventories have fallen by 75pc in the US and 50pc in Europe since 2007, according to IIF data.

While much of this has been driven by banks unwinding large credit books, regulation has also discouraged them from holding large quantities of bonds that could help cushion violent swings in prices. Mr Adams said a “dramatic revolution” of the players and risks of market making had also pushed risk “out into the shadows” of non-bank lending. “We’ve rewired and re-engineered the global financial regulatory system and as a result we’re having profound impacts on institutional arrangements. At the same time we’ve had this rapid change in benchmark prices such as a 50pc drop in the price of oil, a rapid change in the dollar and other exchange rates and another drop in commodity prices,” he said. “Once you bring the rapid change in major benchmark prices and a change in the architecture of the global financial system together, you could end up with outcomes that are pretty painful, and certainly unknowable.”

Read more …

“..the very same investors who are buying today seem deeply concerned about their ability to get out tomorrow”

• “Nor Any Drop To Drink,” Citi Maps The Liquidity Paradox (Zero Hedge)

The lack of liquidity in corporate credit markets couldn’t come at a worse time. Yield-starved investors have been herded into corporate debt after central banks drove yields on risk-free assets into the ground, leaving market participants with little choice but to venture into IG and then into HY. Corporations have been more than happy to oblige by issuing record amounts of debt (the proceeds from which are plowed into buybacks) at what, to management teams, seem like bargain-basement borrowing costs, but what to investors look like great income-generating opportunities compared to the growing number of government bonds that actually have a negative carry. And so, with the entire financial universe suddenly fixated on liquidity (or a lack thereof), we bring you the following from Citi’s Matt King:

From the BIS to BlackRock, and Jamie Dimon to Jose Vinals, everyone seems to be talking about market liquidity. Chiefly they seem to be fretting about a lack of it. Primary markets might be wide open, thanks in large part to the largesse of central banks, but the very same investors who are buying today seem deeply concerned about their ability to get out tomorrow… We take issue with the widespread notion that the problem is solely due to regulators having raised the cost of dealer balance sheet, and could be ameliorated if only there were greater investment in e-trading or a rise in non-dealer-to-non-dealer activity.

To be sure, we see the growth in regulation – leverage ratio and net stable funding ratio (NSFR) in particular – as one of the main reasons why rates markets are now starting to be afflicted, and indeed we expect further declines in repo volumes to add to such pressures. But illiquidity is a growing concern even in markets like equities and FX, which use barely any balance sheet at all, and where e-trading is the already the norm rather than the exception. Instead, we argue that in addition to bank regulations, there is a broad-based problem insofar as the investor base across markets has developed a greater tendency to crowd into the same trades, to be the same way round at the same time.

This “herding” effect leads to markets which trend strongly, often with low day-to-day volatility, but are prone to air pockets, and ultimately to abrupt corrections. E-trading if anything reinforces this tendency, by creating the illusion of lliquidity which evaporates under stress. To date, the air pockets and flash crashes represent little more than a curiosity, having mostly been resolved very quickly, and having had little or no obvious feed-through to longer-term market dynamics, never mind to the real economy.

But we think ignoring them would be a mistake. Each has occurred against a largely benign economic backdrop, with little by way of a fundamental driver. And yet with each one, investors’ nervousness about the risk of illiquidity is likely to have been reinforced. When the time comes that investors do see a fundamental reason all to sell – most obviously because they start to doubt the extent of central banks’ support – their desire to be first through the exit is liable to be even greater.

Read more …

“Despite the abject failure of Japan’s approach, the rest of the world remains committed to using monetary policy to cure structural ailments.”

• Economic Policy Turned Inside Out (Stephen Roach)

The world economy is in the grips of a dangerous delusion. As the great boom that began in the 1990s gave way to an even greater bust, policymakers resorted to the timeworn tricks of financial engineering in an effort to recapture the magic. In doing so, they turned an unbalanced global economy into the Petri dish of the greatest experiment in the modern history of economic policy. They were convinced that it was a controlled experiment. Nothing could be further from the truth. The rise and fall of post-World War II Japan heralded what was to come. The growth miracle of an ascendant Japanese economy was premised on an unsustainable suppression of the yen. When Europe and the United States challenged this mercantilist approach with the 1985 Plaza Accord, the Bank of Japan countered with aggressive monetary easing that fueled massive asset and credit bubbles.

The rest is history. The bubbles burst, quickly bringing down Japan’s unbalanced economy. With productivity having deteriorated considerably – a symptom that had been obscured by the bubbles – Japan was unable to engineer a meaningful recovery. In fact, it still struggles with imbalances today, owing to its inability or unwillingness to embrace badly needed structural reforms – the so-called “third arrow” of Prime Minister Shinzo Abe’s economic recovery strategy, known as “Abenomics.” Despite the abject failure of Japan’s approach, the rest of the world remains committed to using monetary policy to cure structural ailments. The die was cast in the form of a seminal 2002 paper by US Federal Reserve staff economists, which became the blueprint for America’s macroeconomic stabilization policy under Fed Chairs Alan Greenspan and Ben Bernanke.

The paper’s central premise was that Japan’s monetary and fiscal authorities had erred mainly by acting too timidly. Bubbles and structural imbalances were not seen as the problem. Instead, the paper’s authors argued that Japan’s “lost decades” of anemic growth and deflation could have been avoided had policymakers shifted to stimulus more quickly and with far greater force.

Read more …

They’ve voted without realizing the consequences.

• Most Greeks Want Euro Even With New Bailout Deal (Kathimerini)

The majority of Greeks want the country to stay in the eurozone should ongoing negotiations with foreign creditors fail, even if that means signing a new bailout deal, a new survey has found. Asked whether they want to keep the euro or return to the drachma, 66.5% said they preferred the common currency over 27% who would prefer a return to the nation’s old currency. A smaller majority, 55.5% over 35%, were in favor of euro membership if that entailed signing up to a new memorandum. The opinion poll by the research institute of the University of Macedonia was commissioned by Skai TV.

The survey also featured a breakdown by political party of those in favor of euro membership: 53.5% of SYRIZA voters want in, compared to 92.5 of New Democracy, 100% of To Potami and PASOK, 36.5 of Independent Greeks and 27.5% of Communist Party (KKE). Golden Dawn voters were evenly split, the poll said. On the prospect of a new memorandum as a prerequisite for euro membership, support among SYRIZA voters fell to 34 voters compared to 58% who would rather return to the drachma. Backing was at 95.5 among ND voters, 90 for PASOK, 83.5 for To Potami, 37.5 for Independent Greeks, 6 for KKE and 58.5 for GD.

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“I might not be right this year, but ultimately Greece will have to default..”

• Deal Or No Deal, Greece Still Faces Bankruptcy (CNBC)

Despite hopes that Greece and its lenders will come to some agreement in May, not everyone is convinced that a deal – which could unleash a last tranche of much-needed bailout aid – can resolve the country’s looming debt problem. Talks over reforms Greece has to make in return for aid continued this weekend after months of wrangling which have led to growing fears that the country could default, or even exit the euro zone – a scenario dubbed a “Grexit.” “I think the end of the road is still bankruptcy for Greece,” Steen Jakobsen, chief economist at Saxo Bank, told CNBC Monday. “Whether it becomes a Grexit is a different story but I think they’re just playing for time.” He added that the Greek problem likely had two solutions.

“(Firstly) by defaulting, which I think will happen in the bankruptcy case. Or you can grow yourself out of it,” Jakobsen said. “But in no shape or form is Greece willing or able to enact a program that is going to set growth in motion.” The comments come after several days of technical talks between Greece and the so-called Brussels Group, made up of the bodies overseeing Greece’s bailout program, the IMF, ECB and European Commission. On Monday, Greece’s Labour Minister Panos Skourletis told Mega TV that the country had chosen to meet its debt payments and reach an agreement with its lenders, Reuters reported. An agreement with lenders on reforms could see Greece receive a vital last tranche of bailout aid worth €7.2 billion that it desperately needs to make loan repayments to the IMF and ECB in the next few months.

The next key date for Greece and its lenders is the Eurogroup meeting of euro zone finance ministers on May 11, and Greece’s Prime Minister Alexis Tsipas hopes a deal can be reached by then. But comments by Labour Minister Skourletis reflected the stumbling blocks between Greece and its lenders over reforms. He said the IMF was unyielding on its demands for labour reforms, including pensions cuts, mass layoffs and resisting a plan by the leftist-led government to raise the minimum wage, Reuters reported. The Greek government, led by the leftist Syriza party, wants to relax austerity measures to ease financial pressure on the public, but its lenders insist that it must cut spending and adhere to austerity measures.

As discussions drag on, time is running out. Greece has a loan repayment of €744 million due to the IMF on May 12 and more repayments totaling over €1 billion in June. Against this backdrop of pressing repayments, Jakobsen said he believed that Greece would still have to default. “I might not be right this year, but ultimately Greece will have to default because the burden on the economy and corporations in Greece is so large that it’s impossible to sustain without deep-rooted reform, which certainly Syriza is not standing for,” he said.

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“..the euro and austerity are indissolubly linked..”

• France’s Far-Right Leader: EU Is Mocking Greece (CNBC)

France’s far-right Front National party leader, Marine Le Pen, has said that the tense talks over the debt deal with Greece has revealed the “real face” of European Union which has “brushed aside” the wishes of the Greek people. Le Pen, who described herself as a “ferocious” opponent to the EU, described the group as a “Euro dictatorship” and insisted that it was up to the Greek government to take responsibility of its future. “I think that Greece, by saying that it will not quit the euro, in reality it’s making promises that it cannot keep. For the simple reason that the euro and austerity are indissolubly linked,” Le Pen told CNBC.

Greece has been in talks with its euro zone creditors for months, as the country is running out of cash and needs a last tranche of bailout aid in order to meet debt repayments and to pay its domestic wages and pension bill this month. Greek Prime Minister Alexis Tsipras has reshuffled the team which is handling its fraught bailout negotiations, widely seen as a way to push outspoken Greek Finance Minister Yanis Varoufakis to the sidelines. “It (the EU) mocks and brushes aside the popular wish expressed in the Greek elections and it seeks to impose a policy of austerity, the continuity of policy of austerity which the Greek people no longer want. And confronted with the choice, who will win? Democracy or Euro-Dictatorship? It’s up to the Greek government to take up its responsibilities,” she said.

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Just two weeks ago, the IMF was playing the good cop part.

• IMF Takes Hard Line On Aid As Greek Surplus Turns To Deficit (FT)

Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors. The warning, delivered to eurozone finance ministers by Poul Thomsen, head of the IMF’s European department, raises the prospect that it may hold back its portion of a €7.2bn tranche of bailout aid that Greece is desperately attempting to secure to avoid bankruptcy. Half of the €7.2bn, which is the subject of intense negotiations between Athens and its creditors in Brussels-based talks that resumed on Monday, is due to come from the IMF. Without the funds, Greece is expected to run out of cash this month.

Eurozone creditors, who hold the vast bulk of Greek debt, are adamantly opposed to debt relief. But IMF support is crucial both for its funds and to sustain political backing for the Greece bailout, particularly in Germany. According to two officials present at a contentious meeting of eurozone finance ministers in Riga last month, Mr Thomsen said initial data the IMF had received from Greek authorities showed Athens was on track to run a primary budget deficit of as much as 1.5% of gross domestic product this year.
Under existing bailout targets, Athens was supposed to run a primary surplus — government receipts net of spending, excluding interest payments on sovereign debt — of 3% of GDP in 2015.

With the large surplus now turning into a sizeable deficit, Greece’s debt levels would begin to spike again. This would force either Athens to take drastic austerity measures or eurozone bailout lenders to agree to debt write-offs to get Athens’ debt back on a sustainable path, the IMF believes. Officials said Mr Thomsen specifically mentioned the need for debt relief during the three-hour meeting. “The IMF thinks the gap between the two realities is very large right now,” said one senior official involved in the talks. He noted that both Athens, which was resisting new economic reforms, and eurozone creditors would probably fight the IMF on the issue.

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“The IMF is the most inflexible side … the most extreme voices of the Brussels Group..”

• Pension, Labor Disputes Dog Greek Talks As Cash Dwindles (Reuters)

Wide differences over pension and labor reforms continued to dog intensive negotiations between Greece’s leftist government and its international creditors despite progress in other areas as the country’s cash position becomes increasingly critical. Government spokesman Gabriel Sakellaridis sounded the alarm on Monday, saying that while Athens intended to meet all its payment obligations, including nearly 1 billion euros to the IMF in May, it needed fresh funds before the end of the month. “Liquidity is a pressing issue,” Sakellaridis told a news conference. “The Greek government is not waiting until the end of May for a liquidity injection. It expects this liquidity to be offered to the Greek economy as soon as possible.”

Labor Minister Panos Skourletis said the IMF, Greece’s second biggest creditor after euro zone governments, was insisting on tough policy conditions for an interim deal to unlock frozen bailout aid. The global lender was unyielding in demands for pensions cuts, rules to ease mass layoffs of private sector workers and opposition to a government plan to raise the minimum wage, Skourletis told Mega TV. “They are asking us to not touch anything (of the austerity measures) that have ruined Greek people’s lives in the last five years,” he said. “The IMF is the most inflexible side … the most extreme voices of the Brussels Group,” the minister said. “But there are also calmer voices.” Greece faces repayments to the IMF totaling 970 million euros by May 12. It has been borrowing from municipalities and government entities to meet obligations.

Intensive talks on an interim deal between a reshuffled Greek negotiating team and representatives of the European Commission, the European Central Bank and the IMF, renamed the “Brussels Group”, have been under way since last Thursday. A European Commission spokesman said the negotiators worked through the weekend. Talks were “constructive” but work remains, he said, declining to give details. The aim is to achieve a technical-level accord that would enable euro zone finance ministers to declare when they meet on May 11 that there is a prospect of concluding the bailout review successfully. That could give the ECB grounds to permit Greek banks to buy more short-term treasury bills, easing the government’s cash crunch.

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A very suggestive headline from the Guardian.

• Greece Vows To Pay Debts As It Awaits Handout From Creditors (Guardian)

Greece has vowed to honour heavy debt repayments over the coming weeks but says it is counting on international creditors to release billions of euros in rescue funds before the end of the month as crisis talks between the two sides grind on. But as the European commission described discussions over the long weekend as constructive, albeit with more work to be done, one Greek minister criticised the International Monetary Fund’s “extreme” demands for austerity cuts. Greece’s creditors are demanding reforms in exchange for bailout money, but the government of the prime minister, Alexis Tsipras, recently elected on an anti-austerity ticket, has said it will resist significant changes to pensions or the labour market.

On Monday, the Greek labour minister, Panos Skourletis, singled out the IMF as “inflexible” and “extreme”, saying the creditor was demanding pension cuts and opposing a government plan to raise the minimum wage. “They are asking us to not touch anything [of the austerity measures] that have ruined Greek people’s lives in the last five years,” Skourletis told Mega TV. “The IMF is the most inflexible side … the most extreme voices of the Brussels group” of creditors, he said. “But there are also calmer voices.” Greece owes money to the Brussels Group – the IMF, European commission and ECB – following its two bailouts in 2010 and 2012.

A further €7.2bn (£5.3bn) in bailout money is still to be paid out and fears are growing that without it Greece will default on its debts, potentially precipitating the country’s exit from the euro. The most pressing of its obligations are payments to the IMF totalling almost €1bn by 12 May. But Skourletis tried to sound a note of reassurance that payments would be met. “The country has chosen to pay its obligations and reach an agreement [with lenders]. We are trying to have the money,” he said.

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The IMF wants Europe to provide debt relief. And get paid in full itself.

• Pressure Grows In Greek Talks (Kathimerini)

As negotiations continue at the technical level in Brussels, Greek government officials have significant meetings planned on Tuesday in European capitals in a bid to tackle the country’s looming cash crunch even as the IMF raises the pressure. The IMF reportedly suggested that it would pull out of Greece’s loan program if steps are not taken to lighten the country’s huge debt burden. Of the €7.2 billion installment in pending aid that Greece has been seeking to secure from creditors, €3.5 billion is an IMF tranche. A report in Monday’s Financial Times said that IMF official Poul Thomsen warned eurozone finance ministers at a summit in Riga last month that Greece would post a primary deficit of up to 1.5% of gross domestic product.

This contrasts sharply with a target set by creditors of 3% of GDP which Greece wants to reduce to 1.5% of GDP. Billions of euros in measures would be required to plug the gap. But, according to the report, Thomsen underlined the need for debt relief. Shortly after reports that the IMF has upped the pressure in debt talks, Tsipras “discussed matters relating to the current negotiations” with the Fund’s chief Christine Lagarde, his office said. The development comes as Greece aims to seek a liquidity boost from another of its creditors, the European Central Bank. Deputy Prime Minister Yiannis Dragasakis is to meet with ECB President Mario Draghi in Frankfurt on Tuesday afternoon along with Euclid Tsakalotos, the alternate foreign minister who has been tasked with “coordinating” Greece’s negotiating team.

The visit comes just a day before the ECB’s governing council is to decide on whether to extend more emergency liquidity to Greece even as speculation mounts that the ECB will up pressure on Greece by increasing the haircut on collateral that is accepted in exchange for funding. Athens has a much more optimistic plan in mind: It aims to push the ECB to raise the ceiling on the amount of treasury bills Greece is allowed to issue. As Dragasakis and Tsakalotos meet with Draghi in Frankfurt, Greece’s Finance Minister Yanis Varoufakis is due in Paris Tuesday morning for talks with his French counterpart Michel Sapin. He is then to fly to Brussels for talks with European Economic and Monetary Affairs Commissioner Pierre Moscovici.

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“.. it also provides Greece with some bargaining power when they negotiate the primary surplus for this year and next.”

• Greek Talks Drag On as New EU Data Set to Underscore Crisis (Bloomberg)

Greece’s talks with international creditors dragged on as the European Commission prepares new forecasts that are expected to underscore the scale of the crisis facing the country’s government. While officials on all sides have reported progress, six days of talks have yet to provide the breakthrough Greece needs to guarantee the flow of liquidity to its banks. The prolonged cash squeeze is threatening the country’s fragile recovery, with a person familiar with the talks saying that the Commission is likely to slash its growth and budget estimates when it releases new figures on Tuesday. The fiscal noose is tightening after weeks of brinkmanship and Prime Minister Alexis Tsipras needs to show European officials that he’s willing to find a compromise if he’s to head off the risk of capital controls.

At the same time, the weakening economic outlook may give his negotiating team more leeway to argue that Greece can’t meet the budget targets demanded by its creditors. “Greek economic conditions are deteriorating quite fast,” said Frederik Ducrozet at Credit Agricole in Paris. “It’s negative in terms of the fiscal revenues and the backdrop for the negotiations. But it also provides Greece with some bargaining power when they negotiate the primary surplus for this year and next.” In a sign that leaders are stepping up the drive for an agreement, Greek Deputy Prime Minister Yannis Dragasakis will meet ECB President Mario Draghi in Frankfurt on Tuesday. In Paris, Finance Minister Yanis Varoufakis will have a meeting with his French counterpart Michel Sapin.

European Commission President Jean-Claude Juncker dismissed the notion of a Greek exit from the euro and said Tsipras had to take into account the other countries in the currency. “Grexit isn’t an option,” Juncker said in a televised speech in Leuven, Belgium. In February, the Commission forecast economic growth of 2.5% this year and a primary budget surplus at 4.8% of gross domestic product. Greece argues that such a surplus target is unachievable and says a goal of 1.5% is more realistic. Greece’s banks need some signs of progress in the Brussels talks, as the ECB keeps the liquidity they need for survival on a tight leash. A breakdown could prompt the ECB to raise the haircut it demands on Greek collateral as soon as May 6, a decision which would risk pushing the country further toward financial chaos.

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What a douche: “..the government of Mr. Samaras was doing the right things, [and] those who were contesting these right things won the elections..” ‘Right things’=misery.

• Juncker: If Greece Leaves, Anglo-Saxons Will Try To Break Up Eurozone (EurActiv)

European Commission President Jean Claude Juncker said that if Greece left the single currency area, the “Anglo-Saxon world” would try everything to break it up. Speaking at the Catholic University of Leuven on May 4, Juncker made it clear that a ‘Grexit’ was not an option, because it would be an existential threat to the 19-member economic and monetary union. Juncker, who chose French to deliver his 40-minute speech at the Flemish university, said: “The world wants to know which way we are going. We should make sure that everyone understands that the economic and monetary union is irreversible, that the euro is a currency that is here to stay, which is not going to be abolished or suspended. “

Juncker added that he had discussed the issue the same day with former Greek Prime Minister Antonis Samaras, who was also present at the event. “Grexit is not an option. If Greece would accept it, if the others would accept it, that the country would exit the zone of security and prosperity constituted by the eurozone, we would be exposed to huge danger, because the Anglo-Saxon world would do everything to try to decompose, at a regular rhythm, by (the) sale, apartment by apartment, of the eurozone,” he said. Later, in the Q&A session, Juncker returned to the issue, speaking this time in English.

“We have to know that Greece was misbehaving in the past, that the government of Mr. Samaras was doing the right things, that those who were contesting these right things won the elections. Now they are confronted with their election promises, and we have to deal with that,” he said, referring of the leftist government of Alexis Tsipras. “My concern is not the Greek government. My concern is the Greek people. We don’t have the right to deal with the Greek people as if they were the neglected part of Europe. The Greek people have great dignity. This is a great nation, although being from time to time a weak state, and we have to show solidarity with the Greeks. And the [present] Greek government has to know that at the level of the eurozone, we have to deal with 19 democracies, not only with one, not only with Greek democracy,” he said.

One of the questions referred to the UK, and the push of the present government to renegotiate its status in the EU. “I want a fair deal with Britain, but Britain is not in a situation to impose its exclusive agenda to all the other member states of Europe”, Juncker said. “I’m a strong defender of the freedom of movement of workers”, he continued, alluding to the rhetoric against workers from the Eastern European countries in the UK . He added: “This is a basic principle of the EU laid down in the Treaty of Rome. So the British are kindly invited to present a list of their requests, we’ll take this under exam, with friendly attention, and then we will see. I don’t want Britain to leave the EU, but I don’t want the EU to follow an exclusive British commandership.”

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Hunger and healthcare. That’s the real Greek crisis.

• Greece Plan Health Booklets For The Uninsured (Kathimerini)

Health Minister Panayiotis Kouroublis on Monday unveiled a plan aimed at helping some 2.5 million uninsured citizens gain access to free healthcare. Under Kouroublis’s plan, which is expected to be enforced by next month, millions of uninsured citizens will be able to apply for health booklets at Citizens’ Information Centers (KEPs). Greeks and immigrants who are legally resident in Greece will be eligible, as will children and pregnant women irrespective of their legal status. Apart from free access to medical assistance and drugs, uninsured patients will also be able to undergo health tests at state hospitals.

Alternate Administrative Reform Minister Giorgos Katrougalos, who also attended Monday’s press conference, said the new reform was a crucial one “that we have to do, whatever the cost.” Kouroublis said Greece’s crisis had created deep inequalities in society which a leftist government cannot accept. The government’s plan is to be put up for public consultation until May 11. Then, once the best of the proposed improvements have been applied, a biministerial decision will be signed, paving the way for the legislation to be implemented. Although existing Greek law allows uninsured citizens access to health services free of charge, many hospital units and public services interpret the legislation in varying ways and so the law is not always enforced.

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The bankrupt casino that buys the west.

• China’s Crazy Stock Market, Charted (Bloomberg)

The Financial Times reports that every one of the 29 IPOs that took place in Shanghai and Shenzhen last month have risen by the daily limit each day since. Meanwhile, the Shanghai Composite Index is up a delirious 39% so far this year, while the CSI 300 Index has gained 35%. For many Chinese investors, that is some tantalizing price action. Openings of Chinese brokerage accounts have surged in recent months as has the take-up of margin accounts which offer investors the ability to borrow against their stock portfolios.

How high could the whole thing go, you ask? The Macquarie analysts estimate that, at an extreme, investors could borrow RMB 85.7 for every RMB 100 of collateral in their portfolios. That suggests the theoretical ability to increase margin finance loans from the current 1.7 trillion yuan to as much as 9.4 trillion yuan, or 461% higher than the current level. While it’s doubtful that would ever happen (banks, after all, do not have unlimited lending capacity and the government has already instituted some curbs on margin lending) even a moderate increase in margin borrowings could be meaningful. At 3.2% of total market cap, China’s margin debt has already eclipsed bubble-era Japan as well as pre-Asian Financial Crisis Korea.

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“The central bank nominally has a “strict separation” between supervisory and monetary-policy operations.”

• ECB Said to Consider Delegating Powers to Ease Oversight Burden (Bloomberg)

The ECB is considering delegating more power to its supervisory arm to avoid monetary-policy makers becoming entangled in low-level details, said people familiar with the matter. Since assuming oversight of the euro area’s largest lenders in November, ECB officials have come to the conclusion that the legal requirement for each decision to be seen by the 25-member Governing Council isn’t sustainable, the people said, asking not to be named as the deliberations aren’t public. An ECB spokesman declined to comment. The discussions highlight the Frankfurt-based institution’s struggle to incorporate fresh responsibilities after 16 years of focusing on price stability. They may also provide ammunition to critics of the current set-up who want the Single Supervisory Mechanism to be split off entirely.

The SSM expects to take around 6,000 decisions a year across 19 countries on topics including capital plans and approval of bank management – all of which must pass through the Governing Council. One option being considered is ‘umbrella decisions’ that can cover multiple cases, two of the people said. Officials may make adjustments after a planned review of procedures due by the end of this year. The ECB was given responsibility for banking supervision by European Union leaders in 2012, as the first pillar of a Banking Union to mitigate future financial crises. Under the leadership of France’s Daniele Nouy, the SSM has aggressively pursued its mandate, scrutinizing bank balance sheets in an unprecedented review last year and pushing for higher capital levels.

Even so, the watchdog’s powers are effectively limited by the EU regulation written as the SSM was hastily constructed. That document must comply with Article 129 of the EU’s basic treaty, which states that the decision-making bodies of the ECB are the Governing Council and the Executive Board. It’s unlikely that the ECB will seek to change the treaty or even amend the SSM regulation, two of the people said. Instead, lawyers are examining how the rules can be adjusted to fit with existing laws, they said. SSM officials are anxious to avoid conflicts with the monetary-policy side of the ECB and have erred on the side of legal prudence with regard to the running of the institution, one of the people said. The central bank nominally has a “strict separation” between supervisory and monetary-policy operations.

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Not chasing the bottom is so yesterday.

• Australia Cuts Benchmark Interest Rate to Record Low 2% (AP)

Australia’s central bank on Tuesday cut its benchmark interest rate to a record low of 2% in a bid to jolt the nation’s economy which is weighed by falling commodity prices and weakening demand from China. The Reserve Bank of Australia’s quarter percentage point rate cut was the first in three months. Before the last cut in February, the interest rate had been steady at 2.5% since August 2013. Economists largely anticipated the move, although some thought the bank would hold off until after the government released its budget next week for the fiscal year beginning July 1. Resource-rich Australia managed to avoid a recession during the global financial crisis thanks to a decade-long mining boom.

But with the economy weakening in China, which is Australia’s largest export market, prices for commodities such as iron ore and coal have dropped. RBA Governor Glenn Stevens said in a statement the global economy was expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply. “Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year,” Stevens said. Public spending is also expected to be subdued. The economy was therefore likely to be operating with a degree of spare capacity for some time yet.

The central bank forecast inflation to remain within the target range of between 2 and 3% over the next one to two years, even with a lower exchange rate. “Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late,” Stevens said. The Australian dollar has declined sharply against a rising U.S. dollar over the past year, though less so against a basket of currencies. “Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices,” Stevens said.

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Good!

• All The British Parties Are Eurosceptic Now (Münchau)

The aftermath of the British elections is one of the most pressing issues on the minds of EU policy makers. It ranks some distance behind a breakdown of the Minsk II ceasefire agreement in Ukraine, but some way ahead of a sudden Greek exit from the eurozone. Yet British voters do not return these attentions. Astonishingly, given the importance of this Thursday’s elections for Britain’s future in the EU, Europe has played hardly any role in the debate. What I can predict with some degree of confidence is that the outcome of these elections will have a profound effect on Britain’s future membership of the EU. The trouble is that the effect is hard to calculate – no matter who wins. A British exit from the EU is possible under virtually any election outcome.

David Cameron has promised an in-out referendum in 2017 if the Conservative party wins. If, instead, the Tories form a coalition with the more pro-European Liberal Democrats, the odds of a referendum are less clear. It would depend on the outcome of coalition negotiations that have yet to take place. The Labour party is viewed as, on the whole, more pro-EU than the Conservatives. That is true, but misleading. Labour has not chosen to raise the EU as a central election issue either. Of the 83 pages of the Labour party’s manifesto, the EU occupies little more than a single page – on page 76. That section consists of a very odd compilation of statements and proposals. I get the sense that I am spending more time summarising them than they spent writing them.

The short passage asks for less austerity and more budget discipline at the same time. It wants a “red card mechanism” to allow national parliaments to veto EU legislation. The overarching goal is “to change the EU in the best interests of Britain” and “to protect our national interest”. There is no mention of the EU’s interest, something that the social democratic parties of continental Europe nowadays commit to as well. Naturally, Labour rules out joining the euro. If you were reading this without knowing anything about the party and its history, you might conclude that there was a greater degree of overlap between Labour’s manifesto and that of the National Front in France, than with centre-left parties elsewhere in the EU.

To a continental European, this reads like a profoundly eurosceptic programme. If you ask people in Britain and the rest of the EU whether they support reform of the EU, the majority would say yes. But they mean opposite things by these assertions. What Labour has in common with the Conservatives, but not with social democrats and socialists in continental Europe, is support for returning certain EU powers to national parliaments.

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Brand doesn’t remember Tony Blair.

• Russell Brand Has Endorsed Labour – And The Tories Should Be Worried (Guardian)

He has nearly 10 million Twitter followers; his YouTube interview with Ed Miliband received well over a million hits and counting; he is listened to by hundreds of thousands of disillusioned Britons, particularly young people who have been repeatedly kicked over the last few years. Russell Brand matters. And however much bluff and bluster the Tories now pull – maybe more playground abuse from David Cameron, who called Brand a “joke” – his endorsement of Labour in England and Wales will worry them. More people have registered to vote than ever before: between the middle of March and the deadline to register, nearly 2.3 million registered, over 700,000 of them 24 years old or younger. In countless marginal seats, disillusioned voters who were either going to plump for a protest party or not vote at all could well decide whether we are ruled by David Cameron, George Osborne and Iain Duncan Smith for another half a decade.

Naturally, Brand’s endorsement is being portrayed as a giant U-turn, and sure enough, he has abandoned his “no vote” stance. But Brand has been on a very public political journey, previously indicating his support for voting for Scottish independence and Syriza in Greece. He has been supportive of the Greens, and still calls on the people of Brighton Pavilion to return Caroline Lucas to parliament. And it isn’t quite as big a U-turn as you might think. Brand has thrown his support behind grassroots struggles, particularly over housing. He believes that change “comes from below, movements putting pressure on governments”, but if those in power are resolutely hostile, then there are limitations to what such pressure can achieve.

He’s not advocating a vote for Labour because he’s become a born-again Milibandite, but because he believes Labour are far more amenable to pressure than Tories who will happily shred the welfare state, the NHS, social housing and workers’ rights. When Ed Miliband met Brand, the comedian-cum-activist explained, he made it clear he “welcomes and wants pressure from below”. Brand is sometimes bizarrely portrayed as the cause of voter disengagement: obviously, it’s our political and media elites who are responsible for that. But actually he is a symptom. He achieved such traction because he summed up how millions of people already felt. He has won the ear of a section of the population that practically no other public figure has.

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She should resign over this.

• Intelligence Scandal Puts Merkel in a Tight Place (Spiegel)

July 14, 2013 was an overcast day. The German chancellor was reclining in a red armchair across from two television hosts with the country’s primary public broadcaster. With Berlin’s Spree River flowing behind her, Angela Merkel gave her traditional summer television interview. The discussion focused in part on the unbridled drive of America’s NSA intelligence service to collect as much information as possible. Edward Snowden’s initial revelations had been published just one month earlier, but by the time of the interview, the chancellor had already dispatched her interior minister to Washington. Having taken action to confront the issue, Merkel was in high spirits. Merkel’s interviewers wanted to know exactly what data had been targeted in Germany.

Reports had been making the rounds, they reminded her, of “economic espionage.” Merkel sat quietly. “So, on that,” she said, “the German interior minister was clearly told that there is no industrial espionage against German companies.” Only a few hundred meters away from the red armchair, though, more was known. In Merkel’s Chancellery, staff had long been aware that the information provided by the United States wasn’t true. By 2010 at the latest, the Chancellery had received indications that the NSA had attempted to spy on European firms, including EADS, the European aerospace and defense company that is partly owned by German shareholders. They also knew that the Americans were seeking to join forces with Germany’s foreign intelligence agency, the Bundesnachrichtendienst (BND), in their spying efforts.

It would be astonishing if Merkel herself had not known about these occurrences long before she sat down for the interview. Indeed, she would look even worse had she not known. Officially, the chancellor is in charge of oversight of foreign intelligence and Merkel has an entire department in the Chancellery responsible for formulating the BND’s assignments, managing them and, most importantly, keeping an eye on the agency. But the Chancellery wasn’t just sloppy in exercising this oversight. It failed completely. As such, the scandal surrounding NSA spying, and the evident cooperation between the BND and the NSA, is an affair for Chancellor Merkel, as well. An online report by SPIEGEL triggered the latest intelligence service scandal a week ago Thursday.

SPIEGEL reported that the NSA had made massive efforts to target and spy on German and European targets using BND facilities. Despite having had indications for years, the Chancellery had essentially done nothing to stop it. The scope of the affair became increasingly apparent over the past week. It now appears that the NSA, via its cooperation with the BND, didn’t just spy on companies, but also on politicians and institutions in Europe. The conclusion can be drawn from search criteria the Americans supplied to their German partners. The German Federal Prosecutor’s Office is now reviewing whether there is “initial evidence for a criminal offense that would fall under our jurisdiction.” Within the federal public prosecutor’s jurisdiction is the prosecution of crimes relating to espionage and treason.

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Thad can be wonderfully angry.

• Frankly My Dear, I Don’t Give a Damn (Thad Beversdorf)

I find it shocking how often I have people tell me the Constitution is out of date and is no longer relevant or necessary. Then there are the vast majority of people that think about the Constitution the same way they think about religion; it makes us feel good to believe in it and we’ll even worship it on a holiday or two. The reality is that those who seem to get very worked up to the point that they are willing to act in defense of the Constitution even against the highest levels of government make up a very small minority of Americans. This is a real problem. You see if people gave a damn the government couldn’t get away with negating the Constitution.

But the vast majority of people just don’t give a damn and so the government very easily provides ridiculous and false legal sounding arguments to explain away why they have become a higher law than the Constitution. Now I’ve tried to understand why it is that we Americans are so damn apathetic about everything the government and government officials do. Let me give a couple examples for which our apathy just boggles my mind. We know they took us into wars on false pretenses resulting in the wrongful deaths of thousands of American soldiers and hundreds of thousands of innocent civilians and yet we’ve prosecuted no one.

Hell they’ve admitted to hacking into millions of our home webcams and downloading videos and pictures of us in our most private moments and maintaining those downloads on government servers and then sharing these files with foreign governments. But because today’s American is simply a shell of a citizen none of the criminal atrocities creates even a stir from us. Sure we all read about these atrocities and we are angered in the moment but it passes rather quickly and we fall back into our self induced ignorant bliss. Only two things can get Americans to formidably rise up. The first is a very direct and immediate impediment to our comfort. For example try cutting back on the monthly social welfare checks. You’ll have riots. The second way is if the mainstream media relentlessly instructs us to be upset about a particular issue. Outside of that there is absolutely nothing the new American won’t move past like water off a duck’s back.

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“The first thing I would do as Prime Minister is evacuate all the children that are in the contaminated areas.”

• Fukushima’s “Caldrons of Hell”: 300 Tons of Highly Radioactive Water Daily (GR)

Yauemon Sato, the ninth-generation chief of a sake brewery operating here since 1790 [and president of electric power company Aizu Denryoku] likens the crippled reactors at the Fukushima No. 1 nuclear power plant to “caldrons of hell.” In a recent interview with The Asahi Shimbun, Sato said the nuclear disaster “continues to recur every day”… Excerpts from the interview follow: Question: What drives you to be so active, including in the use of renewable energy?

Sato: You know the caldron of hell? You will be sent to hell and will be boiled in that caldron if you do evil. And there are four such caldrons in Fukushima… And the disaster has yet to end. It continues to recur every day. More than 300 tons of water, contaminated with intense levels of radioactive substances, are being generated every day… Hiroaki Koide, professor at Kyoto Univ. Research Reactor Institute (retired), Apr 24, 2015:

11:30 – The Prime Minister [said Fukushima] had been brought to a close. My reaction on hearing his words was, ‘Stop kidding.’ Reality is, though 4 years have passed, the accident has not yet been brought to a close at all.
15:15 – What is the situation within the core? How much has melted? Where is the fuel exactly? We do not know… This is an accident of a severity that cannot be imagined anywhere else… As you can see, we are facing a very, very difficult situation. The only choice that we have open to us is to somehow keep the situation from getting worse.
30:30 – We are in a very terrible situation, I would even call it a crisis.
55:30 – The Japanese government has issued a declaration that this is an emergency situation. As a result, normal laws do not have to be followed. What they are saying is that, in these very high radiation exposure level areas, they have basically abandoned people to live there. They’ve actually thrown them away to live there… The Cs-137 that’s fallen onto Japanese land in the Tohoku and Kanto regions, so much so that this area should all be put under the radiation control area designation [the Kanto region includes Tokyo and is home to over 40 million people].
1:01:00 – I really do want to impress upon you that the accident effects are continuing.
1:02:00 – Bahrain’s Ambassador to Japan: If you were the Prime Minister of Japan, what are you going to do with this very complicated situation?… Koide: When you have an emergency legally declared, regular laws are put on hold. What that means is people can be thrown away into areas where normally people should not be… The first thing I would do as Prime Minister is evacuate all the children that are in the contaminated areas.

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It would be good if the Windsors adopt that baby, set up a college fund etc. Who am I kidding?

• The Other Royal Baby Was Born on the High Seas (Daily Beast)

She’s not a princess. We don’t even know her name. But the image of this child swaddled in a hazmat suit has brought tears of joy and pain to millions of Italians. Around the time Prince William and the Duchess of Cambridge, then in the early stages of labor, hopped into their armored Land Rover and headed to the Lindo Wing of St. Mary’s Hospital in London on Saturday morning, another pregnant woman started her own journey towards motherhood. We know well the minute details of the royal princess’s birth; but we believe the second baby girl born over the weekend has a story worth telling, too. She was delivered onboard the Italian Navy’s patrol boat Bettica after her mother was rescued from a rubber dinghy with hundreds of other migrants several hours after they left the Libyan coastline.

The Italian Navy says the young mother was already in labor when smugglers forced her onto the rubber boat on the Libyan coast. In the absence of an easel or trumpet like the ones brought out for the royal princess, after the migrant baby girl was born the Italian Navy doctors swaddled her in a disposable hazmat suit (used to try to protect the wearer from dangerous chemicals and infections) and tweeted her picture as a sign of hope. The Italian press have dubbed her “rose petal.” We don’t yet know the migrant mother’s name, her nationality or why she felt that crossing the perilous Mediterranean Sea to Europe was worth such a risk for her and her unborn child. She arrived in Pozzallo, Sicily, on the Bettica on Monday along with 654 people who were saved from four sinking vessels over the weekend.

The mother will be processed and questioned, and both she and her infant daughter will be given basic medical care and a checkup before being moved to a refugee camp somewhere in Italy. If they are lucky, they will get to spend a few nights in a hospital. Unlike the Duchess of Cambridge who left St. Mary’s ten hours after giving birth, a hospital stay probably sounds like a luxury for the migrant mother after all she has been through. We don’t know if the baby’s father was with her, or if he was one of the ten men who died over the weekend during which 6,771 migrants were saved from the sea.

The migrant baby doesn’t have a name yet, either. But the Italian press have dubbed her “rose petal.” She is one of now thousands of babies and children who survived the crossing this year so far. Italy’s branch of Save The Children says there has been a 60% increase in minors and pregnant women arriving by sea over last year. Of course that means that of the estimated 1,750 people who have died making the deadly crossing since the beginning of the year, many are likely to be children and hopeful mothers, too.

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Debt Rattle November 5 2014

Nov 052014
 
 November 5, 2014  Posted by at 2:34 pm Finance Tagged with: , , , , , , , , , , ,  5 Responses »


Mathew Brady Units of XX Army Corps, Army of Georgia on Pennsylvania Avenue, Washington DC May 24 1865

• Ayn Rand vs Adam Smith: The Only Midterm Election That Counts (Paul B. Farrell)
• Singer’s Elliott: U.S. Growth Optimism Unwarranted as Data ‘Cooked’ (Bloomberg)
• This Stock Market Rally Is For Suckers (MarketWatch)
• BOJ’s Kuroda Vows To Hit Price Goal, Stands Ready To Do More (Reuters)
• US Will Benefit Most From Japan’s Pension Fund Reform (CNBC)
• Draghi To Face Challenge On ECB Leadership Style (Reuters)
• EU Cuts Growth Outlook as Inflation Seen Below ECB Forecast (Bloomberg)
• Euro Area Limping Toward Deflation Fuels QE Calls as ECB Meets (Bloomberg)
• ECB Needs Japanese Lessons (Bloomberg)
• Look Out Below! Oil Is Not Done Falling (CNBC)
• Oil Continues To Slide, With Brent At Lowest In Over Four Years (MarketWatch)
• T. Boone Pickens: The Real Problem With Oil (CNBC)
• Russia-Ukraine Crisis Shields EU Gas From Oil Price Rout (Bloomberg)
• New Junk-Bond Derivatives Are Hot as Traders Get Creative (Bloomberg)
• IMF Gave Richer Countries Wrong Austerity Advice: Internal Auditor (Reuters)
• China Home Buyers Rushing Online to Finance Downpayments (Bloomberg)
• 25 Years Since The Wall Fell, Germany’s Best Days Are Behind It (MarketWatch)
• A Crazy Idea About Italy (Jim O’Neill)
• Signs, Wonders and QE Heroics (James Howard Kunstler)

To the extent there’s any actual choices to be made in these kinds of elections. Why waste your time?

• Ayn Rand vs Adam Smith: The Only Midterm Election That Counts (Paul B. Farrell)

Forget who controls the Senate. There is one and only one election that matters, an election that will decide the global balance of power this century. Specific candidates on any other ballot are irrelevant. The one race will be decided by the only two real candidates that count. All other candidates, regardless of political party, are merely pawns, surrogates, proxies for the two real candidates in this grand battle. And the winner not only wins for their party,but also gets to promote their brand of capitalism. They win the future. Get it? The winner between these two key candidates gets more than domination of the American political system. These two candidates are in a battle to dominate the world, gain control of the world’s natural resources in a totally unrestricted free market—to drill with Russia in the Arctic Ocean, drill for oil on America’s public lands and national forests, to export domestic oil, to build pipelines, haul oil in rail tankers across state lines, to frack for oil under public rivers, risk fresh water supplies, and so much more.

Yes, the only two candidates in the only election that counts today and in every other election this century are: Adam Smith, a moral philosopher and father of American capitalism thanks to the publication of his classics on economics, “The Wealth of Nations,” and its companion “The Theory of Moral Sentiments.” Adam Smith’s opponent on the ballot is his archrival, Ayn Rand, author of several 20th century works on capitalism, including “Atlas Shrugged” and “The Fountainhead.” But remember: all other candidates, on every ballot, are just proxy votes for these two candidates who will decide the balance of power in the world and the survival of the planet. Yes, it’s that simple. These two icons face off in a brutal battle for the soul of capitalism and control of the collective conscience of America.

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Not a fan of the man, but he’s dead on here.

• Singer’s Elliott: U.S. Growth Optimism Unwarranted as Data ‘Cooked’ (Bloomberg)

Paul Singer’s Elliott Management Corp. said optimism on U.S. growth is misguided as economic data understate inflation and overstate growth, and central bank policies of the past six years aren’t sustainable. The market turmoil in the first half of October may be a “coming attractions” for the next real crash that could turn into a “deep financial crisis” if investors lose confidence in the effectiveness of monetary stimulus, Elliott wrote in a third-quarter letter to investors, a copy of which was obtained by Bloomberg News. “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,” New York-based Elliott wrote. “When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.” Six years of near-zero interest rates and three rounds of asset purchases by the Federal Reserve have fueled economic growth and helped U.S. stocks more than triple from their 2009 low when including dividends.

The stock market has rebounded 8.3% through yesterday from a six-month low on Oct. 15, fueled by better-than-forecast economic data and improving earnings reports. The 70-year-old Singer, one of the biggest backers of Republican politicians, reiterated criticism that monetary policies won’t create lasting growth. While the U.S. is doing better than the rest of the world, the acceleration in the second quarter only reversed a “terrible” first quarter and has yet to be sustained in the remainder of the year, Elliott wrote. “We do not think this optimism is warranted, and we think a lot of the data is cooked or misleading,” Elliott, which manages $25.4 billion and was founded by Singer in 1977, wrote. “A good deal of the economic and jobs growth since the crisis has been fake growth, with very little chance of being self-reinforcing and sustainable.” Elliott said that the reported growth numbers are too high because the official inflation number is understating actual inflation by as much as 1% a year.

That’s because economists focus on measures such as core inflation or make “hedonic adjustments” for improvements in the quality of consumer goods. Inflation is also distorted “by the increasing gap between the spending basket of the well-off and that of the middle class,” the firm said. “The inflation that has infected asset prices is not to be ignored just because the middle-class spending bucket is not rising in price at the same rates as high-end real estate, stocks, bonds, art and other things that benefit from” quantitative easing, Elliott wrote. The unemployment rate, at 5.9% in September, doesn’t reflect that the workforce participation rate is at a 35-year low, according to Elliott, and that full-time jobs have been replaced by part-time jobs, and high-paying jobs by relatively low-paying jobs. Real wages, the firm said, have been stagnant since the financial crisis.

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And it’s a very well executed set-up too.

• This Stock Market Rally Is For Suckers (MarketWatch)

After last week’s remarkable U.S. stock market rally, a lot of investors are cheering. After all, the Dow made an all-time high, won back the lost 1,000 points, and ignored the 8% pullback. I hate to be a party-pooper, but this is not a time to celebrate, but rather to be cautious. What could go wrong? Let’s begin by analyzing last week’s hollow Halloween rally:

1. On Friday, Oct. 31, five stocks were primarily responsible for Dow’s advance. The previous day, Visa had accounted for around 123 points of the 221-point rally. Take away Visa and the rally was a lot less impressive.

2. Friday’s surge was prompted by the Bank of Japan, which promised more stimuli (I’m guessing they are on QE 35, but who’s counting?) Since March 2000, the Nikkei 225 has tumbled from 20,000 to 16,000, so maybe more stimuli from the BOJ is needed (just kidding).

3. On Friday, there were no plus-1000 ticks on the NYSE Tick, which tells you that the rally was another head-fake without institutional involvement. Typically, you will see at least four or five plus-1000 ticks on bullish days.

4. In addition, volume was low, especially for the last day of the month.

5. Moreover, the S&P 500 that day did not rise above its overnight high, which is generally a sign of domestic weakness. During the day, it did not take out the previous all-time high. If this were a true bull market, breadth, volume, and institutional presence would have been a lot stronger.

6. Only five out of 20 stocks led the transports. If this were a broad-based rally, more of the transports would have participated.

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You would expect falling oil prices to provide the Japanese, like Americans, with some very welcome, even necessary, financial breathing room. But PM Abe and BoJ’s Kuroda will have none of it. And no matter how you look at it, there’s something at best curious about a central bank that decides to throw ‘free money’ at an economy BECAUSE it sees falling resource prices, which would supposedly make money available already.

• BOJ’s Kuroda Vows To Hit Price Goal, Stands Ready To Do More (Reuters)

Bank of Japan Governor Haruhiko Kuroda, who last week stunned global financial markets by expanding a massive monetary stimulus program, said the central bank is ready to do more to hit its 2% price goal and recharge a tottering economy. Kuroda stressed the BOJ is determined to do whatever it takes to hit the inflation target in two years and vanquish nearly two decades of grinding deflation. “There’s no change to our policy of trying to achieve 2% inflation at the earliest date possible, with a roughly two-year time horizon in mind,” the central bank chief said in a speech at a seminar on Wednesday. “There are no limits to our policy tools, including purchases of Japanese government bonds,” he said in response to a question from a private analyst after the speech. The BOJ shocked global financial markets last week by expanding its massive stimulus spending in a stark admission that economic growth and inflation have not picked up as much as expected after a sales tax hike in April.

Kuroda said while inflation expectations have been rising as a trend, the BOJ decided to ease to pre-empt risks that slumping oil prices will slow consumer inflation and delay progress in shaking off the public’s deflationary mind-set. “In order to completely overcome the chronic disease of deflation, you need to take all your medicine. Half-baked medical treatment will only worsen the symptoms,” he said. Kuroda repeated the BOJ’s projection that Japan will likely hit the bank’s price target sometime in the next fiscal year beginning in April 2015, supported by the expanded quantitative and qualitative easing (QQE) program. While he stressed that Japan’s economy continued to recover moderately, Kuroda said falling commodity prices could be risks to the outlook if they reflected weakness in global growth.

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See The Revenge Of A Government On Its People

• US Will Benefit Most From Japan’s Pension Fund Reform (CNBC)

U.S. assets will be the biggest benefactor of the Japanese Government Investment Pension Fund’s (GPIF) decision to more than double its target allocation of foreign stocks to 25%, analysts say. The changes to the $1.1 trillion pension fund coincided with the Bank of Japan’s shocking decision to ramp up stimulus on Friday, which sent global equity markets soaring. “The shift for international equities going to 25% of pension fund holdings is fairly big news,” said Tobias Levkovich, chief equities strategist at Citigroup in a note published on Friday. “It establishes a new incremental buyer of shares and the U.S. should be a significant beneficiary,” he said. The overall contribution to non-Japanese stocks could approach $60 billion of new purchases, half of which could go to the U.S. by the end of 2015, said Citigroup’s Levkovich, noting that stocks on Wall Street should start to feel the benefit this year.

“Foreign investors typically buy large cap stocks which have greater index impact,” he said. “Thus, one cannot ignore the possibility that stock prices jump above our year-end 2014 S&P 500 target on this news.” Other analysts agree. “It’s pretty realistic [that the U.S. will receive most of the benefit] if you look at where the Japanese feel comfortable investing their money,” Uwe Parpart, managing director and head of research at Reorient Financial Markets told CNBC. “This is a pension fund making the investment they are not going to punt into small caps or anything of that sort they need large, liquid stocks that over decades have had a reliable return,” he said. But Parpart is not convinced the inflows would make a huge difference to stock market performance. “$30 billion sounds like a lot of money, but stretched over a period of time it’s not going to move markets,” he said. “But obviously it’s a nice shot in the arm.”

Furthermore, an increase in the pension fund’s international bond allocation to 15% from 11% should boost demand for Treasurys, driving further inflows into the U.S., analysts at HSBC said in a note published Tuesday. Meanwhile, the GPIF will reduce is domestic bond allocation to 35% from 60%. “The BoJ’s increase in asset purchases should be more than enough to cover the aggressive reduction in Japanese Government Bond (JGB) holdings planned by the GPIF, allowing JGB yields to stay pinned down,” said Andre de Silva, head of global emerging market rates research at HSBC. “Ultra-low JGB yields imply that the relative valuations for other core rates ie. U.S. Treasuries and other bond substitutes have been further enhanced,” he said. “Demand for yield-grabbing would intensify amongst Japanese investors, boosting overseas investments.”

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“… the Italian ECB chief has acted increasingly on his own or with just a handful of trusted aides, sidelining even key heads of department.” Hey, you wanted a Goldman guy, now sit on it!

• Draghi To Face Challenge On ECB Leadership Style (Reuters)

National central bankers in the euro area plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources said. The bankers are particularly angered that Draghi effectively set a target for increasing the ECB’s balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public, the sources said. “This created exactly the expectations we wanted to avoid,” an ECB insider said. “Now everything we do is measured against the aim of increasing the balance sheet by a trillion (euros)… He created a rod for our own backs.” Irritation among national governors who hold a majority on the 24-member council could limit Draghi’s space for bolder policy action in the coming months as the bank faces crucial choices about whether to buy sovereign bonds to combat falling inflation and economic stagnation.

Some members intend to raise their concerns with Draghi at the governors’ traditional informal working dinner on Wednesday before their formal monthly rate-setting meeting on Thursday, the sources interviewed by Reuters said. Many people at the central bank, which manages a single currency for 18 European Union member states, welcomed Draghi’s greater informality when he took over from Jean-Claude Trichet of France in 2011. His efforts to keep meetings short, delegate and brainstorm more, were received as a breath of fresh air. However, as decisions to loosen monetary policy and resort to further unconventional measures have become more contentious, insiders say the Italian ECB chief has acted increasingly on his own or with just a handful of trusted aides, sidelining even key heads of department. “Mario is more secretive… and less collegial. The national governors sometimes feel kept in the dark, out of the loop,” said one veteran ECB insider. “Jean-Claude used to consult and communicate more,” another ECB source said. “He worked a lot to build consensus.”

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So what? Every forecast everywhere gets revised downwards all the time. It’s simply the way things work.

• EU Cuts Growth Outlook as Inflation Seen Below ECB Forecast (Bloomberg)

The European Commission cut its growth forecasts for the euro area as the bloc’s largest economies struggle to put the ravages of the debt crisis behind them after two recessions in six years. Gross domestic product in the 18-nation region will rise by 0.8% this year and 1.1% in 2015, down from projections for 1.2 and 1.7% in May, the Brussels-based commission said today. It lowered its projections for Germany, Europe’s largest economy, and said inflation in the euro area will be even weaker than the European Central Bank predicts. “The legacy of the global financial and economic crisis lingers on,” said Marco Buti, the head of the commission’s economics department. “Slack in the EU economy remains large and is weighing on inflation, which is also being dragged down by tumbling energy and food prices.”

The bleaker outlook highlights the fledgling nature of the euro area’s recovery and the deflation threat that has compelled the ECB to take unprecedented stimulus measures. While unemployment is beginning to decline from a record high, core economies such as Germany and France are facing some of the growth challenges that afflicted the periphery at the start of the debt crisis. Today’s report forecasts inflation at 0.8% in 2015, less than half the ECB goal of just under 2%. That’s more pessimistic than the central bank’s own projection of 1.1%. The commission sees inflation quickening to 1.5% in 2016, compared with the ECB outlook for 1.4%.

European stocks declined for a second day and German, French and Italian bonds rose. The yield on the German 10-year bund fell 4 basis points to 0.81% at 11:17 a.m. London time. The Italian yield dropped 5 basis points to 2.37%. The Stoxx Europe 600 Index slipped 0.1%. The grim assessment for the euro region comes just days before the ECB Governing Council led by President Mario Draghi gathers in Frankfurt for its monthly policy meeting. The ECB has cut its benchmark rate to a record-low 0.05% and began buying covered bonds to boost inflation and rekindle growth. “Country-specific factors are contributing to the weaknesses of economic activity in the EU and the euro area in particular,” Jyrki Katainen, commission vice president for competitiveness, told reporters in Brussels. These include “deep-seated structural problems” and “public and private debt overhang,” he said.

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The never ending Bloomberg promo.

• Euro Area Limping Toward Deflation Fuels QE Calls as ECB Meets (Bloomberg)

The euro area is edging closer to the moment that deflation risks become reality. Companies cut selling prices by the most since 2010 as they attempted to boost sales in the face of a flagging economy and slowing new orders, Markit Economics said today. This in turn is squeezing profit margins and reducing resources for hiring and investing, damping chances of an economic rebound, the London-based company said. The European Central Bank is pumping money into the banking system to fuel inflation that hasn’t met policy makers’ goal since early last year.

With a gauge of manufacturing and services activity pointing to sluggish growth at best, it is under pressure to add to long-term loans and already announced asset-purchase plans to prevent a spiral of price declines in the 18-nation currency bloc. “This month’s data make for grim reading, painting a picture of an economy that is limping along and more likely to take a turn for the worse than spring back into life,” said Chris Williamson, Markit’s chief economist. “The combined threat of economic stagnation and growing deflationary risks will add to pressure on the ECB to do more to stimulate demand in the euro area, strengthening calls for full-scale quantitative easing.”[..] While Markit said the data are in line with gross domestic product expanding 0.2% in the fourth quarter, new orders slowed to the weakest level in 15 months and employment declined for the first time in almost a year. That “suggests that the pace of growth may deteriorate in coming months,” said Williamson.

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Sometimes I wonder what the job requirements are for Bloomberg staff. Like now. Europe should do what Japan does? That highly successful role model?

• ECB Needs Japanese Lessons (Bloomberg)

Economists like to warn about Japanification, the risk that a country will follow the desultory experience of Japan, which slumped into deflation in 1999 and for all intents never climbed out. As Europe slides closer to deflation, the European Central Bank should heed the historical experience and the current efforts by the Bank of Japan to resuscitate growth. The euro area is perilously close to deflation. The ECB target – consumer price inflation of just under 2% – grows more distant. The European Commission said yesterday it sees euro-area inflation running at just 0.8% in 2015, as it cut its prediction for the region’s growth this year to 0.8% from the 1.2% it anticipated in May. And yet, the ECB’s balance sheet has been shrinking as the BoJ’s has swollen.

The Bank of Japan announced last week that it’s boosting purchases of Japanese government bonds to a record annual amount of 80 trillion yen, or more than $700 billion. My colleague William Pesek points out that the Japanese central bank has now effectively cornered the domestic market in government debt, creating a bubble in the bond market. He’d prefer more economic reforms than increased quantitative easing. Europe would also benefit from more labor-market changes and fiscal stimulus. But neither the ECB nor the Bank of Japan has a mandate to overhaul fiscal policy or employment practices. In the absence of government action, central banks can only fill the void. The shock-and-awe that BoJ Governor Haruhiko Kuroda sprang on investors isn’t likely to be repeated at tomorrow’s ECB meeting, even though there is scant prospect that the central bank’s inflation target will be met anytime soon.

Two weeks into the covered-bond purchase program designed to flood cash into the economy, the ECB has purchased just 4.8 billion euros ($6 billion) so far. Draghi said earlier this week that the scope for buying asset-backed securities is “rather large,” yet I can’t find a single market participant who expects the plan to succeed in swelling the ECB balance sheet by enough to do the job – unless it repeats the government bond purchases it made between 2010 and 2012, and on a much grander scale:

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Huh? “What the Saudis are doing is business as usual. They change the price formula each month. The problem is there’s an implication that it’s business as usual in terms of production. The problem is if they continue to produce what they’ve been producing in the last two months, the market is headed for trouble”

• Look Out Below! Oil Is Not Done Falling (CNBC)

Oil prices could have a hard time finding a floor after Saudi Arabia trimmed prices in the face of growing North American oil production. The market took the price cut this week as another sign the kingdom is willing to use pricing as a lever to preserve its market share, rather than cut production in what is now an oversupplied market. Even if it was not the intention, some traders took the Saudi move as a sign the kingdom would like falling prices to slow U.S. shale production. U.S. West Texas Intermediate fell sharply on Tuesday, dipping close to the psychologically key $75-a-barrel level, before closing at a three-year low of $77.19, off $1.59 per barrel. Brent fell along with it to $82.82 a barrel, the lowest settle since October 2010, after Saudi Arabia set a new price in the U.S. 45 cents lower than November’s level. “The managed money longs still outnumber shorts 3.5-to-1. If this isn’t a heavy exodus of the money manager longs, we could still have a significant drop, especially if all these factors that are driving us lower continue to weigh on the markets,” he said.

“The dollar strength and also fears of slowing economic conditions in Europe and China are still continuing to play a role.” There was initially a muted reaction to the Saudi announcement Tuesday as the market focused on dollar strength and other factors. “I don’t think the probability is we’re looking at a meltdown or collapse. If there was a global price war, it could go between $30 and $50 a barrel but more realistically, we’re within 10% of the bottom,” said Tom Kloza, senior oil analyst at Gasbuddy.com. “What the Saudis are doing is business as usual. They change the price formula each month. The problem is there’s an implication that it’s business as usual in terms of production. The problem is if they continue to produce what they’ve been producing in the last two months, the market is headed for trouble, and downward pressure will be more significant than upward pressure,” said Kloza.

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Nobody loves you when you’re down and out.

• Oil Continues To Slide, With Brent At Lowest In Over Four Years (MarketWatch)

Crude-oil futures extended losses in Asian trade Wednesday, with the U.S. oil benchmark at its lowest in more than three years and Brent at its lowest in over four years. On the New York Mercantile Exchange, light, sweet crude futures for delivery in December traded at $76.81 a barrel, down $0.38 in the Globex electronic session. December Brent crude on London’s ICE Futures exchange fell $0.60 to $82.22 a barrel. Crude oil finished at a 3-year low on Tuesday. A steady stream of weak economic data from Europe is weighing on Brent crude oil prices, pushing it lower along with the drop in U.S. oil prices, analyst Tim Evans at Citi Futures said.

“The downward revision in the eurozone macroeconomic outlook and the further decline in prices were both more of a confirmation that a bearish trend remains than any stunning new development,” he said. Mr. Evans said a psychological limit of $80 a barrel may help limit the drop in Brent crude prices. Financial markets are looking to Thursday’s European Central Bank meeting for a boost. Meanwhile, oil markets are still pressured by a strong U.S. dollar, weak demand projections and oversupply concerns. “Yesterday’s support levels were shattered likely due to markets anticipating further cuts from other OPEC countries,” analyst Daniel Ang at Phillip Futures said. He pegged support for Brent crude at $82 a barrel and that for WTI at $75.84 a barrel.

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“Domestic oil companies need to stop drilling for oil … ” Why not tell the Saudis that? How about we discuss: The Real Problem With T. Boone Pickens instead?

• T. Boone Pickens: The Real Problem With Oil (CNBC)

Many energy investors think there’s a powerful force working against them in the market. Investor T. Boone Pickens thinks they’re right, but the problem isn’t what they think. Pickens says that the big issue in the energy market isn’t OPEC or the strong dollar; he says it’s supply and he also says domestic drillers are to blame. “Domestic oil companies need to stop drilling for oil,” Pickens insisted on CNBC’s “Street Signs.” “We’ve overdrilled oil (in the U.S). Now we’ve gotten ourselves in a spot. We need to slow down.” In other words, the abundance of oil that’s now accessible in North America because of improved technology has generated a supply imbalance. However, Pickens does not expect that dynamic to last; ultimately he expects markets to balance out, with drillers reducing supply.

“Of course nobody wants to be the first to blink,” Pickens added. “But, when the domestic drillers start feeling real pain (from low prices), they will blink.” In fact, Pickens thinks the dynamics are shifting, already. Not only does he anticipate a reduction in domestic supply but he said markets are moving into a bullish time of year. “November and December are good months,” he said. Therefore, Pickens believes supply will decrease, at a time when demand increases. Given the potential catalysts, Pickens isn’t looking for oil to sit at historic lows for long. “I can see this lasting through year end. But in the first quarter of next year I think we hit the low and then I expect prices to recover.”

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‘Shields’? Curious choice of words.

• Russia-Ukraine Crisis Shields EU Gas From Oil Price Rout (Bloomberg)

The risk of disruptions to Russian natural gas flows through Ukraine this winter is protecting European prices from the rout that sent oil to a four-year low. U.K. gas for next quarter fell 13% since mid-June, less than half the 29% plunge in Brent crude over that time. While Brent is typically the benchmark used to set the price on almost half the gas supply in Europe, the Russia-Ukraine conflict and demand fundamentals in the market are having a bigger impact on prices than the decline in oil. First-quarter supply interruptions are still possible as Ukraine may struggle to pay Russia the full $3.1 billion by year-end under an agreement brokered by the European Union last week for gas already consumed, according to Societe Generale SA.

Gazprom said it received the first tranche of payments today. The EU, which gets 15% of its fuel from Russia via Ukraine, sought to avoid repeats of 2006 and 2009, when supplies to the bloc were disrupted amid freezing weather. “Right now, gas prices in Europe are really linked to the Russian-Ukrainian crisis, so I don’t think the impact from oil is as big as it could be,” Edouard Neviaski, chief executive officer of GDF Suez Trading, a unit of France’s biggest utility, said in an interview in London. “Gas prices have gone down a little bit, but nothing of the same magnitude.”

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Whenever the financial world gets ‘creative’, things blow up and we pay.

• New Junk-Bond Derivatives Are Hot as Traders Get Creative (Bloomberg)

When it gets tough to maneuver in the junk-bond market, traders can either give up or get creative. Many of them are opting for creativity these days. There’s been a surge in demand for a relatively new index of derivatives that aims to replicate the risk and return of high-yield bonds. As volatility soars to the most in more than a year, trading in a total-return swaps index reached a record $4 billion in September from almost nothing in May, according to data compiled by Morgan Stanley. The demand is in part coming from fund managers who are looking for ways to be agile as individual investors become more fickle, pulling money out and then putting it back in, said Sivan Mahadevan, a credit strategist at Morgan Stanley. For example, investors have yanked $24 billion from high-yield bond mutual funds this year, with sentiment turning particularly sour in the three months ended Sept. 30, data compiled by Wells Fargo show. Yet they poured $2.5 billion into the funds in the week ended Oct. 29.

Investors also face a harder environment to maneuver in. The volume of dollar-denominated junk bonds outstanding has swelled 81% since 2008, but the market’s structure hasn’t evolved much. It still consists of thousands of individual bonds governed by unique documents, traded much the way they were a decade ago. “Market fragmentation and liquidity constraints in a large part of the bond market make managing fund-flow volatility particularly challenging,” Mahadevan wrote in a report. The concern is that after six years of near-zero interest rates from the Federal Reserve and a largely one-way trade into bonds, a reversal of that demand will cause debt values to plunge as there won’t be many willing and available buyers on the other side. So it’s no wonder investors are turning to derivatives to quickly adjust their holdings in a market that policy makers have said looks like a bubble.

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Sure, Lagarde, why not simply make your own auditing office look like a bunch of inept fools?

• IMF Gave Richer Countries Wrong Austerity Advice: Internal Auditor (Reuters)

The International Monetary Fund ignored its own research and pushed too early for richer countries to trim budgets after the global financial crisis, the IMF’s internal auditor said on Tuesday. The Washington-based multilateral lender, concerned about high debt levels and large fiscal deficits, urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis. At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries, the Independent Evaluation Office, or IEO, said in a report that analyzed the IMF’s crisis response. “This policy mix was less than fully effective in promoting recovery and exacerbated adverse spillovers,” the IEO wrote. The IMF advises its 188 member countries on economic policy, and provides emergency financial assistance to its members on the condition they get their economies back on track.

The internal auditor said the IMF should have known that the combination of tight fiscal policy and expansionary monetary policy would be less effective in boosting growth after a crisis. Evidence showed that the private sector’s focus on reducing debt made it less susceptible to monetary stimulus. In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis. IMF Managing Director Christine Lagarde said the IMF’s advice was reasonable, given the information and economic growth forecasts it had in 2010. “I strongly believe that advising economies with rapidly rising debt burdens to move toward measured consolidation was the right call to make,” Lagarde said in a statement.

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So much for the Chinese having no housing debt.

• China Home Buyers Rushing Online to Finance Downpayments (Bloomberg)

Qian Kaishen and his wife almost gave up in August on buying a bigger home. As apartments at Shanghai Villa, a project they liked near the city’s Hongqiao Airport, started selling, the money they had saved for the deposit was tied up in a 5%-return investment. Then property agency E-House China Holdings Ltd. offered the couple a 280,000 yuan ($45,546) one-year bridge loan at zero interest. The loan came from online investors through E-House’s Internet finance website. It covered about half the down payment and was just enough to make up the shortfall. “Now we’re good both on our investment and home purchase plan,” Qian, 31, who works for a local logistics company, said by phone from Shanghai.

“We would’ve given up if it weren’t for the loan. I don’t like borrowing from my parents or relatives, especially because we have the money.” E-House is joining peer-to-peer lenders to finance down payments for buyers struggling to scrape together a deposit after home prices had tripled since 2000. Mortgage lending remains tight, even after the central bank eased its policy in September, as banks anticipate an extended property market decline because of a high supply of housing, according to Standard Chartered.Home prices in China are now equivalent to 40 years’ average income for a 100-square-meter (1,076-square-foot) apartment. That compares with 26 years’ median income in New York for an apartment of the same size. The average price of a typical 900-square-foot home in Singapore is 11 times the median household income, while that for a 50-square-meter flat in Hong Kong is 14 times, according to local official data.

In China, homebuyers need to pay a minimum down payment of 30% of the purchase price for a first home, and at least 60% for a second before they can take out a mortgage. The limits are the result of a four-year campaign to stem property speculation. Those restrictions have helped drive demand for the down payment loans. “The phenomenon emerged in the past year or two largely because of mortgage restrictions and high down-payment requirements,” said Zhang Haiqing, a Shanghai-based research director at Centaline Group, China’s biggest property agency. The central bank on Sept. 30 eased some mortgage rules to make it easier to purchase second properties in a bid to revive the market. “We can’t exclude the possibility that as the market recovers, more people will want to buy and some of them will still have to use this channel because they don’t have the money,” Zhang said.

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Every nation’s best days are behind it. That is, if you focus on economic growth. As they all do.

• 25 Years Since The Wall Fell, Germany’s Best Days Are Behind It (MarketWatch)

On Sunday, Nov. 9, it will be a quarter of a century since the Berlin Wall came down. The reunification that followed was a triumph for the German nation. The scars of World War Two were finally healed, and Germany became one of the richest and most successful countries in the world. Certainly compared to much of its history, there was never a better time to be a German. And yet, as that anniversary is rightly celebrated, it is possible that the next quarter century will not be nearly as good. In fact, Germany faces a series of daunting problems. Its population is about to shrink sharply, threatening its prosperity. Its export-driven economic model look increasingly dated, based on huge trade surpluses, and driving down real wages. Education is poor, there is little investment, and no signs that it can compete in new technologies the way it did in industries such as automobile and chemicals.

Worse, it is threatened by a belligerent Russia on one side, and a resentful, impoverished, resentful eurozone periphery on the other, which is likely to increasingly blame Germany for its economic troubles. The European Union, the linchpin of its security and foreign policy, is under huge pressure as a result of the eurozone crisis, which the German elite has terribly mismanaged. The chances are that the next quarter of a century will not be nearly as good for Germany as the last 25 years were. When David Hasselhoff — of Knight Rider fame, and for some mysterious reason a huge star in Germany — performed at the Berlin Wall on New Year’s Eve in 1989, he was presiding over a moment when two halves of a divided nation came together. There were plenty of doubts at the time, both about whether West Germany could cope with a bankrupt East, and about whether the rest of Europe could cope with a reunited Germany.

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Interesting views from ‘former’ Goldmanite O’Neill. Have Italy impose punitive taxes on the Germans.

• A Crazy Idea About Italy (Jim O’Neill)

I’ve spent a good deal of my 35 years as an economic and financial analyst puzzling over Italy. Studying its economy was my first assignment in this business – as a matter of fact, Italy was the first foreign country I ever flew to. I’m just back from a vacation in Puglia and Basilicata. Over the decades, the question has never really changed: How can such a wonderful country find it such a perpetual struggle to succeed? All the while, Italy has pitted weak government against a remarkably adaptable private sector and a particular prowess in small-scale manufacturing. An optimist by nature, I’ve generally believed these strengths would prevail and Italy would prosper regardless. In the days before Europe’s economic and monetary union, though, it had one kind of flexibility it now lacks: a currency, which it could occasionally devalue. These periodic injections of stronger competitiveness were a great help to Fiat and other big exporters, and to smaller companies too. The rest of Europe had mixed feelings about this readiness to restore competitiveness through devaluation – meaning at their expense.

When discussions began about locking Europe’s exchange rates and moving to a single currency, opinions divided among the other partners, notably Germany and France, on what would be in their own best interests. Many German conservatives, including some at the Bundesbank, doubted Italy’s commitment to low inflation, which they wanted to enshrine as Europe’s chief monetary goal. On the other hand, leaving Italy outside the euro would leave their own competitiveness vulnerable to occasional lira devaluations. In the end, of course, the decision was made to bring Italy in. The fiscal rules that were adopted at the same time – including the promise to keep the budget deficit below 3 percent of gross domestic product — can be seen as an effort to force Italy to behave itself. Now and then I wondered if some saw them as a way to make it impossible for Italy to join at all. In any event, Italy found itself doubly hemmed in, with no currency to adjust and severely limited fiscal room for maneuver.

The results haven’t been good. It’s ironic that between 2007 and 2014 Italy has done better than most in keeping its cyclically adjusted deficit under control – yet its debt-to-GDP ratio has risen sharply. The reason is persistent lack of growth in nominal GDP, itself partly due to an overvalued currency and tight budgetary restraint. Italy is the euro area’s third-largest economy and its third-most populous country. Given this, the scale of its debts and everything we’ve learned about Europe’s priorities during the creation of the euro and since, I’ve always presumed that, in the end, Germany would do whatever was necessary to protect Italy from the kind of financial blow-up that hit Greece in 2010. Now I am starting to wonder.

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” .. the Potemkin stock market, a fragile, one-dimensional edifice concealing the post-industrial slum that the on-the-ground economy has become behind it.”

• Signs, Wonders and QE Heroics (James Howard Kunstler)

“Holy smokes,” Janet Yellen must have barked last week when Japan stepped up to plug the liquidity hole left by the US Federal Reserve’s final taper trot to the zero finish line of Quantitative Easing 3. The gallant samurai Haruhiko Kuroda of Japan’s central bank announced that his grateful nation had accepted the gift of inflation from the generous American people, which will allow the island nation to fall on its wakizashi and exit the dream-world of industrial modernity it has struggled through for a scant 200 years.

Money-printing turns out to be the grift that keeps on giving. The US stock markets retraced all their October jitter lines, and bonds plumped up nicely in anticipation of hot so-called “money” wending its digital way from other lands to American banks. Euroland, too, accepted some gift inflation as its currency weakened. The world seems to have forgotten for a long moment that all this was rather the opposite of what America’s central bank has been purported to seek lo these several years of QE heroics — namely, a little domestic inflation of its own to simulate if not stimulate the holy grail of economic growth. Of course all that has gotten is the Potemkin stock market, a fragile, one-dimensional edifice concealing the post-industrial slum that the on-the-ground economy has become behind it.

Then, as if cued by some Satanic invocation, who marched onstage but the old Maestro himself, Alan Greenspan, Fed chief from 1987 to 2007, who had seen many a sign and wonder himself during that hectic tenure, and he just flat-out called QE a flop. He stuck a cherry on top by adding that the current Fed couldn’t possibly end its ZIRP policy, either. All of which rather left America’s central bank in a black box wrapped in an enigma, shrouded by a conundrum, off-gassing hydrogen sulfide like a roadkill ‘possum. Incidentally, Greenspan told everybody to go out and buy gold — which naturally sent the price of gold spiraling down through its previous bottom into the uncharted territory of worthlessness. Gold is now the most unloved substance in the history of trade, made even uglier by the overtures of Mr. Greenspan.

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Debt Rattle May 26 2014: The Absurd Bizarro That is Europe

May 262014
 
 May 26, 2014  Posted by at 3:29 pm Finance Tagged with: , ,  3 Responses »


Arthur Rothstein Texas Panhandle dust bowl Summer 1936

The headlines speak of an earthquake. But just about absolutely everyone who’s been shaken manages to declare victory, including incumbents who have lost, which is the majority of them, in some cases painfully. And European stocks are rising too, in some cases to all time highs. It all adds up to a perfect illustration of the absurd bizarro Europe has become.

Despite the huge surge in anti-EU sentiments, Brussels claims that because pro-EU parties still have a majority in the European parliament, the people of Europe have voted for the EU. There are a few problems with that claim that they would rather not discuss. Almost two thirds of eligible voters did not vote, attendance was as low as 18% in Czech and 13%(!) in Slovakia. It’s safe to assume a larger number of non-voters are not pro-EU (there’s a difference between anti and not-pro) than the number who are. Not pro-EU voters often have the problem that there are no parties to vote for that they like in other issues than being euroskeptic. In a democratic system, that’s a dangerous gap and a big political deficit.

The picture painted by the establishment is that only “extreme” (i.e. nazi) elements oppose what the EU has become. This is what you might call ‘useful nonsense’. As is the claim that “you can’t be against Europe, because you are Europe”. As if Europeans have no right not to like what the EU has become. Still, many people would rather stay home than vote for a Farage or a Le Pen, even though they’re the only voice in their countries that share their opinion on Europe. When you add it all up, it’s safe to assume there are many more euroskeptics than the elections appear to show.

There are also big differences between the euroskeptics, who therefore don’t – and can’t – form a “block” in the parliament the way the established parties do (for some reason, you need parties from 7 different countries to cooperate to be recognized as a block). For instance, Farage refuses to discuss forming a block that Le Pen is part of. What all of this means is that the center-right EPP block is still the biggest, which is readily spun into a positive development, even though it lost 62 of its seats, plummeting from 274 to 212:

With partial results and exit polls suggesting that the centre-right EPP had claimed 212 seats in the European Parliament to 185 Socialists, Jean-CLaude Juncker, the former prime minister of Luxembourg, was presented as the next president of the EU executive by jubilant party supporters. “As lead candidate of the largest party, I have won the election,” he told reporters in the Parliament hemicycle. “The EPP has got a clear lead, a clear victory.”

You lose 22% of your seats and declare victory. It fits perfectly into the overall messages emanating from the parties, and it would be funny if it had no consequences. Both the French and Greek winners (right wing Le Pen and left wing Tsipras) have urged for early elections to be held in their respective countries. Don’t count on it. Le Pen called for the French parliament to be dissolved, and PM Manuel Valls described his country’s vote as very serious, before, about two seconds later, announcing tax breaks, presumably in an attempt to stem the bleeding.

French President Hollande’s Socialist party suffered a huge and bitter defeat, and there are crisis talks in Paris today, undoubtedly in a room so full of spin doctors cabinet ministers will have a hard time finding a seat. How legitimate and credible is a President with only 14% of the vote, with Le Pen getting 25%? Nevertheless, Valls said Hollande and the Socialist government were elected for a five-year term with a specific “road map”, and they’re not going to change that. Not even if 6 out of every 7 French(wo)men who did bother to vote are against them. You got to love democracy. It’s as if ‘democracy’ means everyone is free to make up their own definition of the term, and all definitions are equally valid.

In fact, most incumbent governments have lost, and, spinning aside, need to address the issue of their legitimacy in a serious fashion, but are for now mostly stuck in “well, we’re still sitting here and what are you gonna do about it?” mode. That is as curious as it is dangerous, but the how and why may not be apparent if and when an economic recovery is plucked out of the hat. It’s when that doesn’t happen that the dangerous part begins. With distortions such as Italian and Spanish bonds selling at about the prices as US Treasuries, things may seem to be picking up, but that won’t last.

And the autostrada may now seem free and open for Mario Draghi to come with stimulus measures, but not so fast. The big winners of these elections are, with perhaps one or two exceptions, not in favor of going about things the ECB way. Nigel Farage’s victory puts more pressure on Cameron’s Conservatives to finally get serious about renegotiating the terms under which the UK is part of the EU. Tsipras’ victory means that Greek eurozone membership is by no means assured, and may only be salvable through monetary policies which other EU nations cannot accept. Or another coup.

The best hope for Brussels’ bureaucrats may be to hope that everything will disappear from people’s minds and attention spans, but without substantial economic improvements that is not likely. Why would the people in Greece, Italy and Spain keep on believing that staying in the EU is a better option than leaving, if that leaves them with sky high unemployment numbers and crumbling health care systems? Moreover, what exactly do the Greeks have to say in Brussels? Not much. And that is a problem that many EU nations have: who defends their specific needs and wishes if and when these don’t sync with those of larger nations?

Because the appropriation of seats in the European parliament has been set up with a system of “degressive proportionality”, which means the larger the state, the more citizens are represented per MEP, It’s not even as bad for the Greeks as it could have been. Degressive proportionality means Malta with 400,000 people has 6 seats, or one seat per 67,000, while Germany with 82.5 million citizens has 99 seats, i.e. one seat per 859,000. That’s nice, but in the end Germany wins. the Greeks may look “proportionally advantaged”, but their 21 seats are less the 26 Marina le Pen picked up last night, and much less than Angela Merkel’s 30.

Germany has a total of 96 seats in the 766 total parliament, France has 74, and Greece their 21. And the “membership will make us rich” story Greece was fed has already lost most of its luster lately, while the Germans and French who outnumber the Greeks by more than 8 to 1 in the EU have done very little to lift the unemployment burden in Athens. Instead, the troika continues to force them to sell their assets, like for instance 110 of their best beaches, to the world’s elite in the name of “development”.

If Greece leaves the eurozone, returns to the drachma – and devaluates it – and negotiates, or simply declares, inevitable defaults on parts of its debt, does anyone believe it could possibly fare worse than it does now? Athens can’t get out of where it is today because it has no say in how that could be achieved. The ultimate insult added to the grave injury the EU has turned out to be for the Greeks is that they’re not even their own boss anymore. Instead, they’re mere servants to a bunch of autocrats and bureaucrats who are selling off their land and their treasures from under their feet. I don’t know about you, but I’d rather be poor and independent.

Perhaps Greece can adopt some elements of the election program of the German satire party simple named ‘Die Partei’, which even won a seat (yeah, that’s what it’s come to). They intend to rotate that one seat between members, a new one every month, who will then be eligible to be placed on a 6-month retainer. “We’ll ‘squeeze the EU the way a small Mediterranean nation does'”. Other points from Die Partei’s campaign: build a wall around Switzerland, abolish Daylight Savings Time, and maximize personal wealth at $1 million, the rest to be divided amongst the poor. They now have a seat in the European Parliament. How fitting is that?

• Eurosceptic ‘Earthquake’ Rocks EU Elections (BBC)

Eurosceptic and far-right parties have seized ground in elections to the European parliament, in what France’s PM called a “political earthquake”. The French National Front and UK Independence Party both performed strongly, while the three big centrist blocs in parliament all lost seats. The outcome means a greater say for those who want to cut back the EU’s powers, or abolish it completely. But EU supporters will be pleased that election turnout was slightly higher. It was 43.1%, according to provisional European Parliament figures. That would be the first time turnout had not fallen since the previous election – but would only be an improvement of 0.1%.

“The people have spoken loud and clear,” a triumphant Marine Le Pen told cheering supporters at National Front (FN) party headquarters in Paris. “They no longer want to be led by those outside our borders, by EU commissioners and technocrats who are unelected. They want to be protected from globalisation and take back the reins of their destiny.” Provisional results suggested the FN could win 25 European Parliament seats – a stunning increase on its three in 2009. The party also issued an extraordinary statement accusing the government of vote-rigging.

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• EU Protest Parties’ Surge Posing Threat From U.K. to Greece (Bloomberg)

Protest parties racked up gains across the 28-nation European Union in elections to the bloc’s Parliament, turning the assembly designed to unite Europe into an echo chamber for politicians who want to tear it apart. The anti-establishment wave hit hardest in France, Greece and the U.K., undermining the leaders of those countries and making it more difficult to steer the EU as a whole. In all, anti-establishment parties won 30% of the Europe-wide vote, up from 20% in the current Parliament, according to official EU projections late yesterday. Political forces suspicious of the U.S. made inroads across the continent, threatening to snag trans-Atlantic trade talks the EU hopes will spur an economy struggling with the after-effects of the euro debt crisis.

The U.K. Independence Party, which wants to yank Britain out of the EU, won the election in Britain, beating Prime Minister David Cameron’s Conservatives into third place. The protest vote “will have a huge impact on the parties and policies back home,” said Pieter Cleppe, head of the Brussels office of U.K.-based think tank Open Europe. “They will make it harder to centralize powers in the EU, especially when it comes to managing the euro crisis.” National winners included Marine Le Pen, head of France’s anti-immigration National Front; Alexis Tsipras, head of Greece’s anti-austerity Syriza party; and Nigel Farage, UKIP leader. With most of the seats declared in Britain, UKIP had 27.5% of the vote, the main opposition Labour Party 25%, the Conservatives 24%, the Greens 8% and Deputy Prime Minister Nick Clegg’s Liberal Democrats 7%.

United mainly by opposition to European unity, the motley collection of protest movements shows no signs of agreeing on a policy program. Instead, their aim was to make life harder for people who weren’t on the ballot: leaders of national governments. European Central Bank President Mario Draghi said the election showed that voters were looking for answers to the “thorny questions” of economic growth and employment. “Sustainable growth and jobs are vital to continue European integration, which is, let’s never forget, the best guarantor of peace,” Draghi said at an event yesterday in Sintra, Portugal. In France, the National Front picked up 25%, estimates by TNS Sofres, Ipsos and Ifop showed. The breakthrough dealt a further blow to President Francois Hollande, the least popular leader in France’s modern history. Le Pen’s party has cashed in on discontent with an economy that has barely grown in two years.

Proclaiming “politics of the French, for the French, with the French,” Le Pen said the election was a “humiliation” for Hollande. She called on him to dissolve the French parliament and submit to new national elections — an appeal that was dismissed by Hollande’s camp. Jean-Luc Melenchon, leader of France’s Left Front, said the result was a “volcanic eruption” accompanied by “lots of acid rain.” “It’s a disaster,” he said on France 2 television. “I feel sorry for my country tonight.” Voters in Greece, the first debt-crisis victim, handed first place to Syriza, a party which chafed at the budget cuts demanded by German-led creditors in exchange for international financial aid. Preliminary results gave it 26.5%. Prime Minister Antonis Samaras’s New Democracy party trailed with 23.3%.

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What can he do, even if we’d want to?

• Poroshenko Wins Ukraine Vote With Russia Ready for Talks (BW)

Billionaire Petro Poroshenko won Ukraine’s presidential election, handing him the task of stemming deadly separatist violence that’s threatened to rip the former Soviet republic apart. Poroshenko got 53.8% of yesterday’s vote with 63.6% of ballots counted, according to the Election Commission in Kiev. Ex-Prime Minister Yulia Tymoshenko was second of the 21 candidates with 13.1%. Russia said it’s ready for talks with Poroshenko, though warned him against renewing a push against rebels who curbed voting in the easternmost regions. Poroshenko is faced with a shrinking economy and a pro-Russian separatist movement that’s captured large swathes of the Donetsk and Luhansk regions. President Vladimir Putin, who doesn’t recognize the government in Kiev, has pledged to work with the winner. The U.S and its allies said they’d tighten sanctions against Russia if voting was disrupted.

Poroshenko’s victory “marks an important step forward in resolving the political crisis that’s gripped the country,” Neil Shearing, chief emerging-markets economist at London-based Capital Economics Ltd., said today in an e-mailed note. “However, the challenges remain daunting.” Poroshenko’s win is “strongly” positive for bond markets in Ukraine and Russia, Vladimir Miklashevsky, a strategist at Danske Bank, said by phone. The yield on Ukraine’s dollar debt due 2023 fell for a ninth session, dropping one basis point, or 0.01 percentage point, to a seven-week low of 9.02%. It’s returned 7.8% this month, the most among 56 nations Bloomberg tracks.

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Scary.

• Ukraine: From Tragedy To Farce (RT)

Petro Poroshenko, the Ukrainian oligarch known as the Chocolate King, is the presidential candidate who is expected to save Ukraine from the abyss and deliver his country to Washington, Brussels, and the IMF. Judging by polling numbers, he is quite likely to be elected by those who plan to vote (and millions in the east and south say they won’t). Legally speaking, this election has no legitimacy. Ukraine’s constitutional order was destroyed on the night of the coup. Since then the country has been governed by a rump parliament, political parties not supporting the undemocratic government physically attacked, and presidential candidates intimidated. Poroshenko is set to be president, but this will hardly address Ukraine’s daunting problems.

Poroshenko’s biggest political problems will not be the protesters in the east and south, nor will it be Russia. Ukraine’s next president will have to immediately deal with what western governments and media are reluctant to talk about: the nature of the political forces currently running Ukraine. Poroshenko did back the protests on the Maidan, but not all protesters on the Maidan supported Poroshenko. It is doubtful groups like Right Sector and Svoboda will simply change or drop their ultranationalist and racist views to please an opportunist oligarch like Poroshenko. The most likely outcome is probably the following: either Poroshenko attempts to appease their leaders with the trappings of power and wealth (and dilute whatever power he will have as president), or he will have to guard against still another Maidan uprising backed by the likes of Right Sector and Svoboda. Neither outcome bodes well for Ukraine.

If Poroshenko continues the violent assault on the east and south he will demonstrate he is not president of all Ukrainians. But if he does reach out to the east and south, the radicals of the coup will be watching closely. Again, this is a lose-lose outcome for Ukraine. This is probably most tragic outcome of the forced collapse of the constitutional order – unelected radicals, racists, and ordinary thugs have been allowed to become important elements of the Ukrainian political landscape. Ukraine and the rest of the world have Washington to thank for this sad state of affairs. Let us now turn to Russia and the Kremlin’s view of Ukraine. Putin is not backing down or looking for a way out. Far from it. Ever since this artificial crisis began, Russia has been watching – and it continues to watch. Putin’s attitude regarding the May 25 presidential vote is one of indifference at best. Russia cannot stop the vote. But if Poroshenko can, somehow and in some way, prove himself as a leader of all the people, then Moscow has every interest in engaging the next Ukrainian president. But for reasons expressed above, this is hardly going to be the case.

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But what can he do?

• Mario Draghi Warns of Euro Zone Deflation (NY Times)

The president of the European Central Bank acknowledged on Monday that there is a risk that the euro zone could become caught in a downward spiral of falling prices, a “classic deflationary cycle” that would require large-scale purchases of bonds or other assets to reverse. Mario Draghi, the central bank’s president, stopped short of specifying what action the bank might take in response to such a risk when it meets on June 5. Expectations that the bank will do something are high following a flurry of statements in recent weeks by Mr. Draghi and by other members of the E.C.B.’s governing council indicating that they are prepared to take further steps to stimulate the struggling euro zone economy.

Mr. Draghi said that members of the governing council, many of whom are gathered here for a conference, are still debating what would be the right response to a combination of falling prices, tight bank credit, and uneven growth. All agree that the central bank must try to push inflation, currently at an annual rate of 0.7%, back toward the official target of just below 2%. But Mr. Draghi also spoke in unusually direct language about the risk that the euro zone could sink into deflation, when expectations of falling prices cause people to delay purchases, which in turn undercuts corporate profits and makes businesses reluctant to hire. Deflation, which has afflicted Japan for years, is considered particularly pernicious because it is very difficult for policy makers to reverse.

“What we need to be particularly watchful for at the moment is the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries,” Mr. Draghi said, according to a text of his remarks. A “too prolonged” period of inflation below current expectations, Mr. Draghi said, “would call for a more expansionary stance, which would be the context for a broad-based asset purchase program.” Many economists have urged the central bank to emulate the United States Federal Reserve and buy large quantities of government bonds and other assets to pump money into the economy. But most analysts do not expect the European Central Bank to begin an asset program when it meets next week. More likely, analysts say, would be a cut of the benchmark interest rate to 0.15% from 0.25%, coupled with a so-called negative deposit rate which would charge lenders for parking money at the central bank.

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Yay! Get a mortgage!

• UK Interest Rates Could Rise Sooner Than Spring 2015: BOE Deputy (Guardian)

UK interest rates could start rising sooner than next spring, but “in baby steps”, and are likely to settle at about 3% in a few years’ time, the Bank of England’s outgoing deputy governor predicted. It will take three to five years for borrowing costs to rise to about 3%, Charles Bean said, but below the average of 5% seen in the decade before the financial crisis. The main UK interest rate has been held at 0.5%, a historic low, since March 2009, and the central bank’s governor, Mark Carney, has indicated that rates will not rise until next year. Carney surprised the City when he played down calls for an early increase to rein in the booming housing market when the Bank released its quarterly inflation report in mid-May. “We should remember the economy has only just begun to head back to normal,” he cautioned then.

Financial markets have priced in a rate rise in March or April 2015, although a move seems more likely in an inflation report month – February or May – when the Bank can use its latest economic forecasts to explain the rationale for an increase. Bean, who is leaving the Bank at the end of June after 14 years, told BBC Radio 4’s The World This Weekend programme that raising borrowing costs “a bit earlier” than expected would enable the Bank to do it more gradually to minimise the economic pain. He said: “There’s a case for moving gradually because we won’t be quite certain about the impact of tightening the bank rate given everything that has happened to the economy. “It might not operate in quite the same way as it did before the crisis. So that’s an argument if you like for being a little bit cautious, moving in baby steps to avoid making mistakes. If you want to pursue that strategy you need to start taking those baby steps a bit earlier, otherwise you end up being behind the curve.”

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Once more.

• US April New Home Sales Up 2K From March, But Down 5% Y/Y (Stockman)

Undoubtedly the Cool-Aid drinkers on Wall Street and at the Fed were encouraged that good weather has got everything back on track. The morning headline from Census was that new home sales were up 6.4% from March. Let’s see. There are about 130 million housing units in the USA and in good years we used to build about 1.5-2.0 million new units. But thanks to the long Greenspan housing boom from 1994-2007, the nation is now saddled with massive excess supply and has nearly 20 million vacant units. So home builders have been slow to translate the Fed’s cheap money into new starts because the demand just isn’t there to absorb the existing enormous surplus.

Compounding the slump is the fact that new household formation rates have dropped into the sub-basement of historical experience—coming in at about 500K annually in recent years compared to 1.5-2.0 million in pre-crisis times. The reason the data is in the sub-basement, of course, is that the kids are still in mom and dad’s basement, surviving on student loans and hamburger flipping gigs a few hours per week. So it is not surprising that new housing starts and new home sales have the trend profiles shown below. Needless, to say these graphs do depict a “new normal”, not the same old same old business cycle recovery that the Fed and its acolytes keep espying just around the corner.

So that gets us to the April new home sales numbers that got the algos all jiggy, including carbon-unit type algos like Joe LaVorgna, Deutschebank’s chief economist and stock tout, who mustered the following:

“Apr new home sales rebounded strongly (433k vs. 407k), providing further evidence that housing is recovering from Q1 weather-related weakness”.

Yes, Joe, actual monthly sales in April came in at 41,000 compared to 39,000 in March. That’s a gain of 2K that requires a Wall Street microscope to ascertain, but then it was also a 2K drop from the 43K new homes sold last year. Might the more relevant point here be that new homes sales are still bumping along a mighty historic bottom; that the beginning of interest rate normalization has already put the kibosh on the tepid recovery that had been underway; and that $3.5 trillion of Fed money printing since September 2008 has done far more for the Wall Street gamblers who speculate in homebuilder stocks than for the Main Street homebuilders and tradesman who actually build them. Never have the 19 unelected bureaucrats who inhabit the Eccles Building wreaked more havoc with what used to be a prosperous American economy. And then they have the audacity to proclaim progress in making everything better!

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• Everything You Think About The Housing Market Is Wrong (Salon)

(Excerpted from “Other People’s Houses: How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business”)

The news cameras kept recording after the power failed. Complete darkness. Then a heavy red curtain was swept aside, allowing a bit of sunlight to stream into the woodpaneled hearing room. This natural illumination had a strange effect on Alan Greenspan, the day’s first witness. He was seated before the Financial Crisis Inquiry Commission (FCIC), a ten-member panel of private citizens appointed by Congress to examine the causes of the financial and economic crisis. By that day, in April 2010, the FCIC had already conducted several hearings and public meetings. Greenspan had spent much of the morning before the power outage in a defensive mode, denying that, as chairman of the Fed for nearly two decades, he had the tools to predict or prevent the subprime mortgage meltdown and the connected global financial crisis.

Yet he had admitted to the panel: “I was right 70% of the time, but I was wrong 30% of the time. And there are an awful lot of mistakes” over the years. Now, in the semidarkness, Greenspan retreated a bit. He responded to a question about whether he believed there still was excessive debt in the banking system with a nod, a gesture not captured on the official record. The commissioner who posed the question remarked that he saw Greenspan nod. An audience member said he had not nodded. Greenspan sat silently, not offering to clarify. Minutes later, the hearing adjourned and the witness departed.

That was classic Greenspan: bright moments of clarity followed by obfuscation and retreat. Eighteen months earlier in October 2008, in his most candid moment, he told a congressional subcommittee that he had found “a flaw” in his entire system of thought. He had adhered for decades to a particular view of how markets operated, only to discover several decades later he’d been very wrong. Yet the question for the panel that April morning was whether the crisis could have been avoided. At the hearing, Greenspan explained that the origination of subprime mortgages had posed no problems between 1990 and 2002. In that early era, he said, it was a contained market, but then things changed. It was the expansive sale of adjustable rate subprime mortgages, followed by the securitization of these mortgages, and the transformation of those securities into collateralized debt obligations (CDOs) that caused problems.

There was a huge demand from Europe for CDOs backed by such mortgages, thus fueling increasingly higher-risk originations. Greenspan also made it clear that without “adequate capital and liquidity,” the “system will fail to function.” He called for additional equity capital (less borrowing relative to assets held). He said he now realized that our banking system had been undercapitalized for forty to fifty years. But in 2011, when it came time to require banks to have greater equity capital, he publicly denounced “an excess of buffers” in an op-ed in the Financial Times. Seeming to forget the savings and loan (S&L) crisis of just twenty years earlier, he asked: “How much of its ongoing output should a society wish to devote to fending off once-in-50 or 100-year crises?” This was Greenspan, light and dark.

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The less fear in the markets, the more there is to be afraid of.

• Low VIX Sparks Volatile Debate (WSJ)

Many market watchers have been scratching their heads over low readings in the CBOE Volatility Index. The VIX, often called the market’s “fear index,” continued to slide ahead of the holiday weekend, briefly touching 11.46 in recent trading, its lowest intraday level since March 2013. Investors and market watchers are at odds over what factors are driving ultra-low volatility and what it might portend for the markets. Optimists point out that the VIX is rightly at a multi-year low given that the S&P 500 is repeatedly carving out fresh all-time highs. The VIX measures the prices investors pay for options as insurance on S&P 500 stock portfolios. Short term, some point to lighter stock-trading volumes and the predictable lull in risk-taking that occurs before holiday weekends. People have less risk, so there’s little need to hedge that risk, they say.

Pessimists contend that a low VIX reading demonstrates that investors have let their guard down, dropping demand for S&P 500 stock-portfolio insurance just when they may need it. “The low VIX says to me that people are kind of complacent,” says Brian Overby, options analyst at brokerage TradeKing. “I find that odd considering that over the last couple months we’ve been trading sideways.” Most ominously, some say that the VIX isn’t the best place to look for fear right now since its tie to the S&P means it doesn’t capture recent declines in faster-moving corners of the stock market, or the rush into Treasury bonds in 2014. Take the Russell 2000 Index of small-cap stocks: While the S&P 500 is sitting near its all-time high, the Russell 2000 has dropped 7.6% from its own record high in March. An options-based volatility reading on the iShares Russell 2000 IndexIWM shows considerably more alarm than for the S&P 500, according to data from LiveVol.

Jonathan Krinsky, MKM Parners’ chief market technician, noted on Thursday that cases when small-caps plunge while large caps remain unstressed are exceedingly rare. He found just two instances over the past 20 years when the VIX marked fresh 52-week lows at the same time that the Russell 2000 traded below its so-called 200-day moving average—a long-term pivot point watched by market technicians. On Thursday, the signals aligned for a third time, but the Russell 2000 broke back above that threshold on Friday. Both previous times it’s happened—in 2000 and 2004—the VIX shot sharply higher over the following three months.

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Let’s hope this gets real.

• Explosive Claims On JP Morgan Conduct (SMH)

A technical support person who worked for JP Morgan in Australia claims the bank regularly misled its New York parent and the US Federal Reserve by failing to report losing trades. The explosive allegations are contained in a submission by the person to the Senate inquiry into the performance of the Australian Securities and Investments Commission. BusinessDay has met the person and agreed to allow him to remain anonymous. He appears to be credible. The person complained to ASIC and later went to work for the regulator, but he said the regulator failed to investigate his claims. A spokesman for JP Morgan denied the allegations. “The claims are false and misleading,” he said.

In his submission, published by the inquiry, the person said he was employed at the Sydney office of JP Morgan between 2004 and 2007. He worked for a team involved in the post-trade management of the bank’s OTC (over the counter) equity derivative business for the Asia-Pacific region. In 2007, before the global financial crisis, he became increasingly concerned by “certain practices that appeared to circumvent regulatory commitments and risk management expectations,” he said. These included:

• Misleading reports being provided to head office and the Federal Reserve Bank of New York on the number of outstanding trades.

• Trades not being booked into the system until they were ”in-the-money”.

• Trades not booked into systems and only being tracked by paper-based legal agreements, which would be ”torn up” if required, thereby leaving no trace.

• Bypassing or attempting to bypass the opinions of in-house lawyers to complete work faster, even if this resulted in incorrect legal agreements being signed by the traders and sent to other major banks as final confirmation of the terms of the trade.

The person said he sought to discuss his concerns with lower and middle management but was warned that “front office would get rid of me if I persisted”. JP Morgan’s ‘Worldwide Rules of Conduct’ state: ‘The most important rule is also the most general: never sacrifice integrity, or give the impression you have, even if you think that it would help JP Morgan Chase’s business’. “In support of this policy, I lodged a complaint with senior management fully expecting to be able to discuss all my concerns and receive guidance from the relevant departments, including legal and compliance. This did not occur and instead I immediately stopped being paid.”

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• Remember (Zero Hedge)

On a weekend so full of memories, we thought it appropriate to remember what was promised so many years ago from our central-planning overlords. All that printed money, all those bailouts, all those promises and Bernanke’s statement that “Fed actions did not favor Wall Street over Main Street…” and this is what we end up with… “not” all time highs in what really matters… Remember – Bernanke told us “The US economy is heading back to a full recovery” – then a few months later explained that interest rates would not normalize in his lifetime…

Just don’t tell Obama (or the Democrats who have been told not to mention the ‘recovery’), or the record number of middle-aged people living with their parents, or the almost imperceptible rise in the employed population since QE began…

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Bill Black all the way!

• Bill Black: “The Bank Robbers’ Weapon Of Choice Is Accounting” (Zero Hedge)

William Black’s no-nonsense simplification of the fraud that we call a financial system is both addictive in its clarity and stunningly concerning in its scale. Having exposed Tim Geithner as perhaps the worst Treasury secretary ever, and that “banks have blood on their hands,” the following brief discussion of ‘how to rob a bank – from the inside’ is crucial to comprehend that nothing has changed and to make matters worse, after 2009’s ‘reforms’, “the weapon of choice remains accounting” as no one knows what it occurring behind the scenes of the banks…

In the US, our regulators have publicly embraced a “too big to prosecute” doctrine. We are restraining, underfunding and dismantling regulatory oversight in the interests of short-term stability for the status quo. Which as a criminologist, Black knows with certainty creates an environment where bad actors will act in their self-interest with assumed (and likely real, at this point) impunity.

If you can steal with impunity, as soon as you devastate regulation, you devastate the ability to prosecute. And as soon as that happens, in our jargon, in criminology, you make it a criminogenic environment. It just means an environment where the incentives are so perverse that they are going to produce widespread crime. In this context, it is going to be widespread accounting control fraud. And we see how few ethical restraints remain in the most elite banks. You are looking at an underlying economic dynamic where fraud is a sure thing that will make people fabulously wealthy and where you select by your hiring, by your promotion, and by your firing for the ethically worst people at these firms that are committing the frauds.

And so you have one of the largest banks in the world, HSBC, being the key ally to the most violent Mexican drug cartel, where they actually did so much business together that the drug cartel designed special boxes to put the cash in that they were laundering that fit exactly into the teller windows so that there would be no delay. This is the efficiency principle of drug laundering. So these banks figuratively have the blood of over a thousand people on their hands. They are willing to fund people that murder and torture and behead folks. And they are willing to do that year after year, despite warnings from the regulators that they are doing this. And the regulators are not willing to actually take serious action until there has been “true devastation.”

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Fear! Fear!

• UK Finance Ministry Warns On Scottish Independence Costs (Reuters)

Britain’s finance ministry stepped up its attack on the Scottish government’s independence plans on Monday, saying it had not fully budgeted for setting up a new administration that could cost Scottish taxpayers over 1.5 billion pounds ($2.5 billion). People in Scotland vote on September 18 on whether to end a 307-year union with England and split from the rest of the United Kingdom. Britain’s finance ministry has repeatedly argued that Scots would be financially worse off after independence.

On Monday, it said setting up the new public bodies such as a Scottish tax authority, financial regulator and benefits system would cost each Scottish household a minimum of 600 pounds, and potentially much more. “The Scottish government is trying to leave the UK, but it won’t tell anyone how much the set-up surcharge is for an independent Scotland,” deputy finance minister Danny Alexander said. He is due to present a more detailed breakdown of the Westminster government’s estimates of the costs of Scottish independence and Scotland’s budget deficit on Wednesday. The Scottish government dismissed the report as “deeply flawed”.

The British finance ministry said new institutions would cost Scotland at least 1% of its annual economic output – or 1.5 billion pounds – based on estimates made when the Canadian province of Quebec voted on independence. The actual cost could be far higher. New Zealand, which has a similarly sized population and economy to Scotland, was currently spending 750 million pounds on a new tax system alone, while a new Scottish benefits system would cost 400 million pounds, the finance ministry said. A bill of 2.7 billion pounds was possible if the Scottish government pressed ahead with plans for 180 new public bodies, the finance ministry said, based on a cost of 15 million pounds for each new policy department. But the Scottish government said in a statement many of the public bodies which would be needed by an independent Scotland already existed and would be able to take on new functions.

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• Piketty Rejects ‘Ridiculous’ Allegations of Data Flaws (Bloomberg)

Thomas Piketty rejected allegations that data behind his best-selling book on inequality are flawed as fellow economists spoke up in his defense. Piketty, the French economist whose book “Capital in the Twenty-First Century” has transformed the debate on the causes and consequences of disparities in income and wealth, called a Financial Times analysis of his statistics “just ridiculous.” He added in an e-mail to Bloomberg News that “there’s no mistake or error” in his work. The newspaper’s economics editor, Chris Giles, wrote last week that figures underpinning the 696-page book contain unexplained statistical modifications, “cherry picking” of sources and transcription errors. He said the mistakes undermine Piketty’s conclusion that wealth inequality in Europe and the U.S. is moving back toward levels last seen before World War I.

After correcting for the alleged errors, two of the book’s “central findings — that wealth inequality has begun to rise over the past 30 years and that the U.S. obviously has a more unequal distribution of wealth than Europe — no longer seem to hold,” according to Giles. Economists disputed that assertion. Scott Winship, a fellow at the New York-based Manhattan Institute for Policy Research, said the newspaper’s allegations aren’t “significant for the fundamental question of whether Piketty’s thesis is right or not.” James Hamilton, an economics professor at the University of California, San Diego, said there’s “abundant evidence” of widening inequality “from a good many sources besides Piketty.”

Piketty, a 43-year-old professor at the Paris School of Economics, examined centuries of data on countries including the U.S., Sweden, France and the U.K. to show that returns on capital in excess of economic growth lead to widening disparities in wealth. One “serious discrepancy” Giles said he found was in Piketty’s data on the U.K. While Piketty cited a figure showing the top 10% of its population held 71% of national wealth, a survey by the country’s Office for National Statistics put the figure at 44%.

The survey cited by Giles “is based upon self-reported data and is very low quality,” Piketty said in his e-mail. Other economists agreed. “The FT seems to take that survey as gospel, and I think that’s a mistake,” said Gabriel Zucman, an assistant professor at the London School of Economics whose research focuses on global wealth, inequalities and tax havens. “Anybody involved in this literature knows that survey data can massively underestimate wealth inequality. In this case, that is exactly what is happening.”

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