EM Archives - Page 2 of 4 - The Automatic Earth

World trade in merchandise is a reflection of the global goods-producing economy. And it just can’t catch a break. The CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, just released the preliminary data of its Merchandise World Trade Monitor for July. The index fell 1.1% from June to 113.4, the lowest since May 2015 – a level it had first reached on the way up it in September 2014. The chart shows that merchandise world trade isn’t falling off a cliff, as it had done during the financial crisis, when global supply chains suddenly froze up. But it’s on a slow volatile grind lower. And compared to the fanciful growth after the Financial Crisis, it looks outright dismal:

This time – after the big adjustment in values months ago – we have another statistical note. In this data release, the CPB shifted the base year of the series from 2005 to 2010, so the values of the entire index shifted down. Hopefully, the change made the series more representative of reality – because getting a good grip on reality these days is really hard, when entire data systems are carefully designed to conceal more than they reveal (such as the official inflation data). The decline in trade was sharper in the emerging economies than the advanced economies. That makes sense: The US, on whose demand the health of the entire world economy seems to depend, experienced falling imports in July, according to the data.

Data point after data point document that the goods-based economy in the US is in trouble – manufacturing, wholesale, retail… nothing is firing on all or even most cylinders. But the service-based economy is not doing all that badly. Its biggest sector – and the biggest sector overall in the US – healthcare, is doing quite well, actually. Among the health-care companies in the S&P 500, revenues rose 5.2% in the second quarter, year over year, when revenues for all S&P 500 companies fell 3.1%. Revenues rose not because people are getting more health care; they rose because health care has been getting more expensive at a breath-taking pace for many years as the industry has been consolidating into oligopolies and as outrageous prices increases on pharmaceutical products regularly grace the headlines.

“They were trying to mix all kinds of powders and chemicals to produce essentially gold. And they all failed..”

• ‘When I Think Of Central Banks, I Think Of Alchemists’: Marc Faber (CNBC)

Central bankers trying to spur growth are like alchemists trying to make gold and they’re just as likely to fail, said Marc Faber, the publisher of the Gloom, Boom & Doom report. “When I think of central banks, I think of alchemists,” Faber, also known as Dr. Doom for his pessimistic views, told CNBC’s “Squawk Box” on Thursday. “They were trying to mix all kinds of powders and chemicals to produce essentially gold. And they all failed,” he said, although he noted that some alchemists did produce other useful chemicals during their ill-fated search for the precious metal. “But the central banks are just mixing water, in other words, paper money, and the results cannot be a favourable outcome in the long run.”

Faber noted that from the 1970s to the mid-1980s, people believed inflation was “forever,” but now the same central banks that were fighting inflation were now fighting deflation. This fight was a mistake, he said, claiming that across Asia, price rises were exceeding income gains. “It’s possible that suddenly inflationary pressures will be there, that central banks should then act but they cannot because the system is so overleveraged,” he said. At the same time, Faber noted that the low and negative interest rates globally were hurting pension funds. “Pension funds, even in these beautiful years of returns, 2009 to today, they have become less funded, they have become more underfunded,” he said. “With interest rates at zero and this low, their portion that’s in bonds is never going to meet the expected returns of 7.5%. It’s physically not possible.”

Alchemists and arsonists.

• Central Bankers Are The Arsonists That Create The Fire: Bill Fleckenstein (ZH)

Having been invited on to CNBC to discuss his views of the market, famous short-seller Bill Fleckenstein explained rather eloquently that QE4 is coming and people will wake up to the fact that central bankers “are the arsonists that create the fire, not the firemen that put it out.” This non-mainstream view was treated with disdain by CNBC host Tim Seymour who slammed Fleckenstein for “missing out” on the “artificial market’s” (because even CNBC now admits that’s what it is) gains. The response was epic. “Don’t be such a jerk… I don’t ask to come on this show, you invited me… and don’t get in my face because I won’t join your party…”

A $2 trillion black hole.

• Bad Debts In Chinese Banking System 10 Times Higher Than Admitted: Fitch (AEP)

Bad debts in the Chinese banking system are ten times higher than officially admitted, and rescue costs could reach a third of GDP within two years if the authorities let the crisis fester, Fitch Ratings has warned. The agency said the rate of non-performing loans (NPLs) has reached between 15pc and 21pc and is rising fast as the country delays serious reform, relying instead on a fresh burst of credit to put off the day of reckoning. It would cost up to $2.1 trillion to clean up this toxic legacy even if the state acted today, and much of this would inevitably land in the lap of the government. “There are already signs of stress that point to NPLs being much higher than official estimates (1.8pc), most obviously the increased frequency with which the banks are writing off or offloading loans,” it said.

The banks have been shuffling losses off their balance sheets through wealth management vehicles or by classifying them as interbank credit, seemingly with the collusion of the regulators. Loans are past 90 days overdue are not always deemed bad debts. “The longer debt grows, the greater the risk of asset quality and liquidity shocks to the banking system,” said Fitch. Capital shortfalls are currently 11pc to 20pc of GDP, but this threatens to hit 33pc in a worst case scenario by the end of 2018. “Defaults in China could lead to mutual credit guarantees in the background pulling other firms into distress. A large increase in real defaults risks triggering a chain of bankruptcies that magnifies the potential for financial instability,” it said.

“Mid-tier banks have the weakest buffers, and are the most vulnerable to funding stress,” said the report, by Jonathan Cornish and Grace Wu. The damage eclipses losses during the global financial crisis in Britain and the US, where the direct costs of bank rescues were roughly 8pc of GDP. It would be closer to the trauma suffered by Ireland, Greece, and Cyprus when their banking systems collapsed, but on a vastly greater scale. The Chinese state has deep pockets but strains are mounting. Public debt has reached 55pc of GDP following the bail-out of local governments. This is now higher than among ‘A’ rated peers, mostly in the developing world. “Pressure on China’s sovereign rating could emerge if general government indebtedness were to rise significantly,” said the Fitch report.

China let rip with a fresh burst of credit growth from the middle of last year after a series of policy errors triggered a recession – with ‘Chinese characteristics’ – in early 2015. It ditched any serious effort to reform the economy and opted for stimulus as usual, cutting interest rates and the reserve requirement ratio. Credit reached 243pc of GDP by the end on last year, double the level in 2008. Banking system assets have grown by $21 trillion over that time, 1.3 times greater than the entire US commercial banking nexus.

“Defaults mean loans and bonds won’t be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.”

• The Coming Wave of Defaults Will Be Devastating (CH Smith)

In an economy based on borrowing, i.e. credit a.k.a. debt, loan defaults and deleveraging (reducing leverage and debt loads) matter. Consider this chart of total credit in the U.S. Note that the relatively tiny decline in total credit in 2008 caused by subprime mortgage defaults (a.k.a. deleveraging) very nearly collapsed not just the U.S. financial system but the entire global financial system. Every credit boom is followed by a credit bust, as uncreditworthy borrowers and highly leveraged speculators inevitably default. Homeowners with 3% down payment mortgages default when one wage earner loses their job, companies that are sliding into bankruptcy default on their bonds, and so on. This is the normal healthy credit cycle.

Bad debt is like dead wood piling up in the forest. Eventually it starts choking off new growth, and Nature’s solution is a conflagration–a raging forest fire that turns all the dead wood into ash. The fire of defaults and deleveraging is the only way to open up new areas for future growth. Unfortunately, central banks have attempted to outlaw the healthy credit cycle. In effect, central banks have piled up dead wood (debt that will never be paid back) to the tops of the trees, and this is one fundamental reason why global growth is stagnant. The central banks put out the default/deleveraging forest fire in 2008 with a tsunami of cheap new credit. Central banks created trillions of dollars, euros, yen and yuan and flooded the major economies with this cheap credit.

They also lowered yields on savings to zero so banks could pocket profits rather than pay depositors interest. This enabled the banks to rebuild their cash and balance sheets – at the expense of everyone with cash, of course. Having unleashed tens of trillions of dollars in new credit since 2008, the central banks have simply increased the likelihood and scale of the coming default conflagration. Now the amount of deadwood that’s piled up is many times greater than it was in 2008. Very few observers explore what happens after defaults start cascading through the system. Defaults mean loans and bonds won’t be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.

We’ve been alarmed about it for years.

• Time to ‘Be Alarmed’ about Emerging Market Debt: UN (DQ)

[..] It was the peak of the emerging market bubble, when the amount of debt that low-income developing economies could have sold to eager investors seemed almost limitless. The main reason for this unprecedented surge in appetite for EM debt was the huge monetary expansion unleashed in many of the world’s major economies, led by the Fed’s QE program. The result was the now-all-too-familiar reality of anemic (at best) yield opportunities in developed markets, prompting investors to seek out much riskier emerging market assets. The moment the Fed turned off the spigot, in mid-2014, the flow of funds began to reverse, according to the report, creating ripe conditions for a “prolonged commodity price shock, steep currency depreciations and worsening growth prospects,” which have “quickly driven up borrowing costs and debt-to-GDP ratios.”

For the first time since the Latin American debt crisis in the second half of the 1980s, aggregate net capital flows entered negative territory. Aggregate outflows reached $656 billion in 2015 and $185 billion in the first quarter of 2016. The capital flight was particularly pronounced in China and other parts of Asia. Note how capital flight heated up in 2014 toward the end of the Fed’s “QE Infinity”.

More consequences of unbridled manipulation of financial markets.

• The Ted Spread Is Dead, Baby. The Ted Spread Is Dead (WSJ)

A measure of stress in financial markets, whose alarm bells heralded the 2008 financial crisis, just hit its highest level in over seven years. But don’t worry. It turns out the so-called Ted Spread might be dead, an unlikely casualty of the recent changes in U.S. money-market regulation. This spread charts the difference between the London interbank offered rate and the yield on three-month U.S. Treasury bills. Libor is a dollar-denominated global gauge of private-sector credit strength, particularly that of banks, and three-month bills measure an ultrasafe bet—the U.S. government’s creditworthiness. Ted stands for Treasury-Eurodollar rate, the Eurodollar being the greenback denominated lending reflected in the Libor rate.

If the difference, or spread, between what banks charge each other increases compared with yields on safe government debt, that reflects an elevated risk of defaults in the private sector that the banking sector lends to. For the past year and a half the spread has been creeping higher, rising from 0.2 of a percentage point at the turn of 2015, to 0.653 of a percentage point on Wednesday. That is the highest it has been since May 2009, in the aftermath of the global financial crisis, surpassing other moments of extreme stress, like the euro sovereign-debt crisis around 2011. But there is a problem with that. Looming U.S. regulation of money-market funds has driven Libor higher, meaning that it isn’t quite the indicator that it once was.

Blair and Cameron’s scorched earth.

• UK Councils ‘Building Up Dangerous Levels Of Debt And Risk’ (Ind.)

Cash-strapped local councils are building up dangerous levels of risk and debt as they turn to commercial ventures in a bid to raise funds, credit agencies and campaigners have warned. Moody’s, the credit agency, warned that a series of ambitious plans to boost revenue by setting up businesses could put council tax payers at risk should they run into difficulties. The warning, in a report into local government finance, comes amid mounting evidence that local authorities are increasingly turning to borrowing after a run of tough settlements with central Government. Roshana Arasaratnam, a senior credit officer at Moody’s, said in the wake of the report’s publication:

“Borrowing to invest in commercial projects exposes local authorities to additional credit risk, as the revenues that flow from these projects are inherently uncertain. “Those adopting this strategy also face increased project execution risk, and greater competition from the private sector.” Ms Arasaratnam said such borrowing contrasted sharply with local authorities’ traditional investments in schools, housing and transport which are underpinned by government grants and do not depend on generating revenues from commercial activities. The report highlights a series of business ventures set up by councils, some of which are now on negative credit watch. They include Warrington Borough Council, which in 2015 issued £150m of bonds to support an economic development plan aimed at increasing business rate revenues.

Paper wealth is not wealth.

• You’re Not as Rich as You Think (Satyajit Das)

The idea that the world is awash in savings – one factor driving the theory of secular stagnation – is, on the surface, a persuasive one. Too bad it may not be true. Yes, the postwar generation is wealthier than any before it. But the ultimate value of any investment depends upon being able to convert it into cash and thus generate purchasing power. In fact, the world’s accumulated wealth – around $250 trillion, according to Credit Suisse’s Global Wealth Report – is almost certainly incapable of realization at its paper value. The headline number thus vastly overstates the supposed savings glut. Most of these savings are held in two forms: real estate, primarily principal residences, and retirement portfolios that are invested in stocks and bonds.

Both are rising in value. A combination of population growth, higher incomes, increased access to credit, lower rates and, in some cases, limited housing stock have driven up home prices; those who got in early have done especially well. Meanwhile, increased earnings and dividends, driven by economic growth and inflation, have boosted equity values. So have loose monetary policies designed to counteract the Great Recession since 2009. Yet the appreciating value of one’s own home doesn’t automatically translate into purchasing power. A primary residence produces no income. Indeed, maintenance costs, utility bills and property taxes – which often rise along with home prices – mean that houses are cash-flow negative.

As soon as they understand the magnitude of the numbers, they’ll look the other way.

• Deutsche Bank Woes Sparks Concern Among German Lawmakers (BBG)

Deutsche Bank’s finances, weakened by low profitability and mounting legal costs, are raising concern among German politicians after the U.S. sought $14 billion to settle claims related to the sale of mortgage-backed securities. At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter. Participants discussed the U.S. fine and the financial reserves at Deutsche Bank’s disposal if it had to cover the full amount, according to the people, who asked not to be identified because the meeting on Tuesday was private. While the participants – members of the junior party in Angela Merkel’s government – didn’t reach any conclusions on the likely outcome, the discussion signals that the risks have the attention of Germany’s political establishment.

The German Finance Ministry last week called on the U.S. to ensure a “fair outcome” for Deutsche Bank, citing cases against other banks where the government settled for reduced fines. Pressure on Germany’s biggest lender has increased since German Finance Minister Wolfgang Schaeuble told Bloomberg Television on Feb. 9 that he has “no concerns about Deutsche Bank.” Germany’s biggest bank was already ranked among the worst-capitalized lenders in European stress tests before U.S. authorities demanded $14 billion during initial talks to settle a probe into how it handled mortgage securities during the 2008 financial crisis. The announcement led Deutsche Bank’s riskiest bonds to plunge.

Never ending story. Because it can’t end well.

• Regulators Expect Monte Dei Paschi To Ask Italy For Help (R.)

European regulators expect Italian bank Monte dei Paschi di Siena will have to turn to the government for support, three euro zone officials with knowledge of the matter said, although Rome would strongly resist such a move if bondholders suffered losses. Less than two months after the Tuscan lender announced an emergency plan to raise €5 billion of fresh capital, having come last in a health check of 51 European banks, there is growing concern among European regulators that the cash bid will fall short. While the bank is determined to see through the capital raising, if it were to disappoint, it would be left with a capital hole. Now euro zone authorities are considering whether state support would have to be tapped after what bankers have described as slack interest in the bank’s share offer.

“There is clearly an execution risk to the capital raising,” said one official with knowledge of the rescue attempt, adding that the bank’s value, about one ninth the size of the planned €5 billion cash call, would be a turn-off for investors. That person said a “precautionary recapitalization by the Italian state” could be used to make up any shortfall once attempts to raise fresh cash from investors had concluded in the coming months. [..] Monte dei Paschi faces a considerable challenge in convincing investors to back its third recapitalisation in as many years. Further complicating the picture, a constitutional referendum, expected to be held by early December that could decide the future of Renzi, is likely to push the bank’s fund-raising into next year, the officials say. The bank’s fragile state poses a threat to confidence in other Italian lenders and even to heavily-indebted Italy, the euro zone’s third-largest economy.

There’s 24/7 propaganda and then there’s reality. It’s about air time more than anything else.

• How Does A 60% Increase In NYC Homelessness Constitute A Recovery? (ZH)

[..] ..courtesy of data from the New York City Department of Homeless Services, we have a couple of additional charts to add to the list like the one below that shows a ~60% increase in the number of NYC families living in homeless shelters over the past five years. Aside from an increse during the “great recession”, the number of New York City families living in homeless shelter remained fairly constant at around 8,000 from July 2008 through July 2011. That said, over the following 5 years beginning in August 2011 through today, NYC has experienced a nearly 60% increase in the number of families living in homeless shelters to nearly 13,000. Ironically, the increase in homelessness experienced during the “great recession” was just a blip on the radar compared to the past five years as residential rental rates in NYC have soared.

Alternatively, we offer up the following statistics from Mayor Bill De Blasio’s Fiscal 2016 “Mayor’s Management Report” highlighting a 42% increase in applications for “Emergency Rent Assistance” from New York City families at risk of losing their housing. If this is what a “recovery” looks like to Obama we would certainly like to better understand how he would define a recession.

“..journalism should not be used as a “weapon of destruction against persons and even entire peoples..“

• Pope Francis: Journalism Based On Gossip And Lies Is A Form Of Terrorism (G.)

Journalism based on gossip or rumours is a form of “terrorism” and media that stereotype entire populations or foment fear of migrants are acting destructively, Pope Francis has said . The pope, who made his comments in an address to leaders of Italy’s national journalists’ guild, said reporters had to go the extra mile to seek the truth, particularly in an age of round-the-clock news coverage. Spreading rumours is an example of “terrorism, of how you can kill a person with your tongue“, he said. “This is even more true for journalists because their voice can reach everyone and this is a very powerful weapon.“ In Italy, a number of newspapers are highly politicised and are regularly used to discredit those with differing political views, sometimes reporting unsubstantiated rumours about their private lives.

In 2009 several media outlets owned by the family of then-prime minister Silvio Berlusconi came under fire from the journalists’ guild over stories questioning the trustworthiness of a magistrate who had ruled against a company owned by the Berlusconi family. The stories were filled with insinuations about the way he dressed, including the colour of his socks, and the way he took walks in the park. The pope, who has often strongly defended the rights of refugees and migrants, said journalism should not be used as a “weapon of destruction against persons and even entire peoples“. “Neither should it foment fear before events like forced migration from war or from hunger,” he added.

A highly developed culture 10s of 1000s of years before anywhere else on the planet. Ignored as such by Europe and North American bias.

• Indigenous Australians The Oldest Living Culture; It’s In Our Dreamtime (G.)

Australia’s Aboriginal people have already been using the tag of “world’s oldest living culture” before given scientific confirmation in a recent study of the DNA of Australia’s Indigenous people. One likely response to the finding from the subjects of the research is a satisfied, “I told you so”. Scientific research often reaffirms what is in an oral history. This has been particularly so in Australia where cultural stories – often referred to as Dreamtime stories – that describe land movements and floods fit in with what later becomes known about seismic and glacial shifts from the geological record. For example, Associate Professor Nick Reid and Professor Patrick D. Nunn have analysed stories from Indigenous coastal communities and have seen a thread of discussions about the rise of tidal waters that occurred between 6,000 and 7,000 years ago.

And these are the newer stories. Other stories collected from around Cairns showed that stories recalled a time when the land covered the area that is now the Great Barrier Reef and stories from the Yorke Peninsula reference a time when there was no Spencer Gulf (it is now 50m below sea level). Reid and Nunn hypothesise that this could make these stories over 12,000 years old. So oral history and observation can reinforce what the science says. Or science can confirm what we’ve been saying all along. For many older Indigenous people, the cultural stories will seem the more trustworthy. There are historic reasons why Indigenous people remain suspicious of science practiced by Europeans, who have not yet countered the legacy of their obsessions with head measuring and blood quantum.

Aboriginal culture and traditions have been often viewed through a Eurocentric gaze that has failed to see the wisdom contained within its values and teachings. Cultural stories were often illustrated for children without looking for deeper meanings and codes. These stories didn’t just tell a tale of how the echidna got its spikes, they contained – like parables in the bible – a set of messages about the importance of sharing resources in a hunter-gatherer society and the consequences of selfishness.

Debt Rattle September 2 2016

Sep 022016

September 2, 2016 Posted by Raúl Ilargi Meijer at 8:55 am Finance Tagged with: Apple, Aylan, bonds, central banks, EM, Italy, liabilities, NIRP, Putin, refugees, shipping 3 Responses »

John Collier Grandfather Romero, 99 years old. Trampas, New Mexico 1943

• August US Auto Sales Fall 4.2%; Carmakers Say Industry Has Peaked (R.)

• Bill Gross Says Negative Interest Rates Are Nothing But Liabilities (MW)

• Goldman: The Fed Might Have a New, Big Idea (BBG)

• BOJ Must ‘Do Something Meaningful,’ Former Official Says (BBG)

• Is the ECB Buying Bonds From Itself? (WSJ)

• Bond Buyers Leave Europe to the ECB, Head to US (WSJ)

• The Fed Poses a Big Risk to the Emerging Market Inflow Party (BBG)

• Hanjin Shipping Bankruptcy Causes Turmoil In Global Sea Freight (G.)

• Don’t Criticize Europeans For Standing Up To Apple – Thank Them (Robert Reich)

• Apple Boss Tim Cook Should Stop Whinging And Pay Up (Ind.)

• US Imposes Sanctions On ‘Putin’s Bridge’ To Crimea (R.)

• Putin Says DNC Hack Was a Public Service, Russia Didn’t Do It (BBG)

• The Italian Referendum Could Result In The Death Of The Euro (Andrews/Capacci)

• France Vows To Dismantle ‘Jungle’ Refugee Camp In Calais (G.)

• Greece On Edge, As Turkish Coup Prompts Surge In New Arrivals (Omaira Gill)

• The Death Of Aylan Kurdi: One Year On, Compassion Towards Refugees Fades (G.)

It’s funny to see how fast the subprime car loan schemes are falling apart.

• August US Auto Sales Fall 4.2%; Carmakers Say Industry Has Peaked (R.)

U.S. auto sales fell 4.2% in August as some major automakers said a long-expected decline due to softer consumer demand had begun, possibly sparking a shift to juicer customer incentives and slower production. The top three sellers, General Motors, Ford and Toyota on Thursday reported declines of at least 5%. Of the seven top manufacturers by sales, only Fiat Chrysler reported a gain versus a year ago, when sales were restated to about 11,000 fewer than originally reported. Monthly spending on new cars and trucks is closely watched as the U.S. auto industry accounts for about one-fifth of U.S. retail sales. August sales, said Autodata, totaled 1.51 million vehicles, or 16.98 million vehicles at a seasonally adjusted annualized rate, versus a surprisingly strong 17.88 million vehicles in July.

Ford Chief Economist Bryan Bezold said sales had hit a plateau after steadily rising following the 2008-2009 recession. The auto industry outperformed the overall U.S. economy in those years largely due to pent-up demand that has now played out, he said. Wall Street has pressured automaker shares all year amid expectations of falling sales at some point. [..] Ford, whose sales tumbled 8.4%, said its U.S. inventory was at 81 days of supply versus 61 days a year earlier, suggesting Ford may have to cut production, increase profit-eroding incentives, or boost fleet sales.

“This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies.”

• Bill Gross Says Negative Interest Rates Are Nothing But Liabilities (MW)

Call bond-market veteran Bill Gross a “broken watch.” He doesn’t care. His gripe about negative interest rates and a flood of debt, which he considers a risk, not a fix, for a global economy that’s still limping out of the financial crisis, is challenged daily by resilient demand for the bonds he’s bearish on. But even if being “right” eventually is a hard sell right now, he’s not backing down, Gross said in his latest monthly commentary. “The problem with Cassandras, such as Gross and Jim Grant and Stanley Druckenmiller, among a host of others, is that we/they can be compared to a broken watch that is right twice a day but wrong for the other 1,438 minutes,” Gross wrote. “But believe me: This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies.”

Germany, Switzerland, France, Spain and Japan are among countries that have negative yields on government-issued debt. Their hope is that cheap, even free, borrowing raises inflation and revives asset prices that can filter through economies; they argue extreme policies have been needed. Gross and others have argued that rates, including those at the Federal Reserve, at near zero or below won’t create sustainable economic growth and actually undermine capitalism. The U.S. has not tipped rates quite as low as other central banks and the Federal Reserve weaned markets off its quantitative-easing program well ahead of its big-economy brethren. Still, Federal Reserve Chairwoman Janet Yellen said last week at the Fed’s Jackson Hole retreat that she wants her policy kit to include all tools, including further asset purchases if necessary.

Divergence with the rest of the world only complicates the debate over when and how aggressively the Fed should dial back accommodative policy. Was that enough to scare off most bond investors? Apparently not. Treasury yields logged their largest daily drop in nearly two months to kick off this week, taking back their Fed-spooked gain from hawkish comments at Jackson Hole. Yields, of course, fall when prices rise, and vice versa. At that mountain gathering, Fed second-in-command Stanley Fischer opened the door to more than one rate increase this year, depending on economic data. And Fischer himself said Fed Chairwoman Janet Yellen’s stance appears in line with that mind-set.

But Gross questions the long-term effects of the world’s unprecedented yield conditions and central banker reluctance to let them go. “Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield,” wrote Gross, who manages the Janus Global Unconstrained Bond Fund, up just over 4% year to date. “$11 trillion of negative yielding bonds are not assets — they are liabilities. Factor that, Ms. Yellen, into your asset price objective.”

Well, that makes us feel much better…

• Goldman: The Fed Might Have a New, Big Idea (BBG)

The Death Star is a fictional space station popularized by the Star Wars franchise. The r-star (r*) is the natural rate of interest that sometimes crops up in economics texts. It also might be the Federal Reserve’s newest, biggest idea, according to strategists at Goldman Sachs. The notion that the natural or neutral rate of interest has been stuck at ultra-low levels might help the U.S. central bank square a dilemma between hiking interest rates and strengthening the U.S. dollar, they said.

“For the FOMC, this is a genuine conundrum, because it means that too hawkish a message could send the Dollar sky-rocketing, a deflationary shock that would also weigh on growth, thereby – in a way – undermining the very rationale for shifting hawkish in the first place,” write Goldman strategists led by Robin Brooks. “To deal with this conundrum, the framework that many at the Fed seem to be converging around is that ‘r-star’ is low, so that the degree of monetary policy accommodation is only moderate, despite policy rates being so low.” Such a stance could allow the central bank to justify keeping benchmark interest rates lower for longer. While the strategists don’t judge the notion on its merits, they do compare it to some previous big ideas that have been discussed at the central bank in recent years.

Among these is the concept that the effects of the U.S. housing crisis would not be material – a theme that dominated in the two years before the 2008 financial crisis (and shown in the pink line below). That idea soon gave rise to concerns that the bursting of the housing bubble would have a negative impact on the U.S. economy (shown in blue). Subsequently, policymakers’ collective imaginations were captured by the notion that quantitative easing would prove positive for economic growth (in red), while the notion that forward guidance (in yellow) is a useful policy tool soon gained in popularity.

Yeah, dismantle itself.

• BOJ Must ‘Do Something Meaningful,’ Former Official Says (BBG)

The Bank of Japan should abandon the monetary base target that’s driving its unsustainable bond purchases while pursuing a negative-rate loan program to help companies and consumers, said a former BOJ executive director. “The BOJ can’t get out of this struggle as long it has this cursed monetary base target,” Hideo Hayakawa, who retired from the central bank in 2013, said in an interview on Thursday. “Once they drop it, they can take a variety of other easing measures.” Hayakawa, 61, contends that there is no evidence that the monetary base target championed by Governor Haruhiko Kuroda is effective in spurring inflation. It should be dropped, and bond purchases scaled back and managed via a range rather than aiming for a specific number, he said.

“As long as they make it very clear that their goal is to keep a lid on bond yields, and the yields stay low, they can gradually lower the range of bond purchases,” said Hayakawa, who also served as the central bank’s chief economist. At the same time, he said Kuroda ought to avoid taking a deeper dive on the existing negative interest rate charged on some funds commercial banks park at the BOJ. It should simultaneously take rates on its lending facilities from zero into negative territory, which would effectively pay some borrowers who take out loans. People familiar with talks at the BOJ said in April that the central bank may consider minus rates on the Stimulating Bank Lending Facility.

Can it still get crazier than this?

• Is the ECB Buying Bonds From Itself? (WSJ)

The European Central Bank may be buying bonds from itself as it runs out of debt to sate its massive quantitative easing program. That’s according to economists at Jefferies. The ECB’s bond-buying program has been running for nearly 18 months, and investors and analysts have often asked whether the central bank is running out of debt to buy. Now, the ECB may be indirectly buying bonds from itself, according to Marchel Alexandrovich and David Owen at Jefferies, in a research note published Thursday. But here’s how Jefferies thinks it may work. The ECB’s QE program is implemented through several national central banks, like Germany’s Bundesbank and Spain’s Banco de Espana. National central banks buy bonds according to rules set by the ECB.

The problem is that these constraints narrow the stock of debt the banks can buy from. These rules prevent the purchase of too much debt from any one country and stop central banks from buying debt with steeply negative yields. Portuguese and Irish debt, for instance, is now becoming scarce. But the national central banks also sell sovereign bonds. They sometimes reduce their holdings as a part of their reserve management activities, which aim to ensure that banks, state institutions and other organizations “manage their euro-denominated reserve assets comprehensively, efficiently, and in a safe, confidential and reliable environment,” according to the ECB’s website. That means, for example, that while the German Bundesbank bought €209 billion in sovereign bonds between March and July, they also sold off €43 billion of such debt, according to Jefferies.

Because why would they invest in liabilities?

• Bond Buyers Leave Europe to the ECB, Head to US (WSJ)

The ECB recently started buying corporate bonds to boost the eurozone economy. One of the big beneficiaries so far: U.S. credit markets. Faced with dwindling returns in Europe, a growing number of investors are selling their corporate bonds to the ECB and heading across the Atlantic where yields are higher and they aren’t so vulnerable to changes in expectations around central bank buying habits. The extra yield investors demand to hold corporate bonds over safe government debt—or credit spread—has declined more rapidly in Europe than the U.S. since the ECB announced its buying plans in March. But that trend has reversed in recent weeks, with U.S. credit markets outperforming the eurozone in August, according to Bloomberg Barclays bond indexes.

That comes as investors have sold European corporate bonds and shifted funds into the U.S. as they fan out in search of returns. Net inflows into U.S. corporate bond funds have outpaced inflows to similar European funds by almost $2 billion since the start of the ECB’s program in early June, according to the latest available data from EPFR Global. As a result, borrowing costs for large U.S. companies have remained near record lows even as expectations have mounted that the Federal Reserve will soon resume raising interest rates. Mark Kiesel at PIMCO said he had been buying euro and sterling corporate bonds in anticipation of the ECB and, more recently, the Bank of England entering these markets. Now, he’s selling and moving more into U.S. credit markets.

Modern colonialism.

• The Fed Poses a Big Risk to the Emerging Market Inflow Party (BBG)

Battle-hardened emerging-market investors have seen this movie before: A U.S. Federal Reserve interest-rate hike triggers a jump in nominal local rates in emerging markets, especially those with fixed or semi-fixed exchange rate regimes. Hot money flows out of developing nations, across FX, equity and fixed-income markets. Local currencies weaken against the dollar. And the ensuing jump in the cost of dollar liquidity, and declining portfolio flows, spark fears over the debt-servicing capacity of emerging-market borrowers. In short, the boom-and-bust capital-flow cycles in emerging markets over the past three-decades have roughly followed this script.

Fast-forward to September 2016: markets are raising their bets that the Fed will hike rates this year – raising fears the post-Brexit-vote inflow party in emerging markets might ease, while international financial conditions, more generally, might tighten. Now, analysts say that the outlook for EM asset classes hinges on how the U.S. yield curve reprices in the coming months. In short, the shape of the Treasury yield curve and the level of long-term U.S. real rates, in particular – rather than the absolute level of U.S. short-end rates – will be crucial in driving capital flows into emerging markets, analysts say. Sebastian Raedler, equity strategist at Deutsche Bank, is one analyst who urges caution, citing EMs’ dependence on U.S. monetary policy.

EM portfolio flows tend to follow developments in the U.S. yield curve with a two-year lag, he says, suggesting financial conditions could tighten significantly in emerging markets if the Fed becomes notably more hawkish. “It’s very clearly the case that low U.S. rates are historically a push factor for foreign capital flows into emerging markets,” Raedler says. “The best scenario to support continued inflows into emerging markets is that financial conditions remain benign. But, thinking about the 30-year history, investors tend to love EM the most when the party in U.S. monetary policy — low rates — is in full swing.”

I’m waiting for the next domino to fall. Only then will people recognize what’s going on.

• Hanjin Shipping Bankruptcy Causes Turmoil In Global Sea Freight (G.)

[..] Hanjin’s banks decided to end financial support for the shipper this week and many of its vessels were denied entry to ports or left unable to dock as container lashing providers worried they would not be paid. This included the port of Busan, South Korea’s largest. The Korea International Trade Association said on Thursday that about 10 Hanjin vessels in China have been either seized or were expected to seized by charterers, port authorities or other parties. That adds to one other ship seized in Singapore by a creditor earlier in the week. The collapse comes at a time of high seasonal demand for the shipping industry ahead of the year-end holidays. In the US, at the ports of Los Angeles and Long Beach, the nation’s busiest port complex, three Hanjin container ships, ranging from about 700 feet to 1,100 feet long, were either sitting offshore or anchored away from terminals on Thursday.

A fourth vessel that was supposed to leave Long Beach on Thursday morning remained anchored inside the breakwater. The National Retail Federation, the world’s largest retail trade association, wrote to the US secretary of commerce, Penny Pritzker, and the Federal Maritime Commission chairman, Mario Cordero, on Thursday, urging them to work with the South Korean government, ports and others to prevent disruption. Hanjin represents nearly 8% of the trans-Pacific trade volume for the US market and the bankruptcy was having “a ripple effect throughout the global supply chain” that could cause significant harm to both consumers and the US economy, the association wrote.

[..] Other shipping lines were moving to take over some of the Hanjin traffic but at a price, with vessels already are operating at high capacity because of the season. The price of shipping a 40ft container from China to the US jumped by up to 50% in a single day, said Nerijus Poskus, director of pricing and procurement for Flexport, a licensed freight forwarder and customs broker based in San Francisco, who predicted the higher prices would last a month or two. The price from China to west coast ports rose from $1,100 per container to as much as $1,700 on Thursday, while the cost from China to the East Coast jumped from $1,700 to $2,400, he said.

There is no one answer here. Applying tax laws retroactively is thin ice. But so is allowing companies to pay 0.005% in taxes

• Don’t Criticize Europeans For Standing Up To Apple – Thank Them (Robert Reich)

For years, Washington lawmakers on both sides of the aisle have attacked big corporations for avoiding taxes by parking their profits overseas. Last week the European Union did something about it. The EU’s executive commission ordered Ireland to collect $14.5 billion in back taxes from Apple. But rather than congratulate Europe for standing up to Apple, official Washington is outraged. Republican House Speaker Paul Ryan calls it an “awful” decision. Democratic Senator Charles Schumer, who’s likely to become Senate majority leader next year, says it’s “a cheap money grab by the European Commission.” Republican Orrin Hatch, chairman of the Senate Finance Committee, accuses Europe of “targeting” American businesses. Democratic Senator Ron Wyden says it “undermines our tax treaties and paints a target on American firms in the eyes of foreign governments.”

P-l-e-a-s-e. These are taxes America should have required Apple to pay to the U.S. Treasury. But we didn’t – because Ryan, Schumer, Hatch, Wyden and other inhabitants of Capitol Hill haven’t been able to agree on how to close the loophole that has allowed Apple, and many other global American corporations, to avoid paying the corporate income taxes they owe. Let’s be clear. The products Apple sells abroad are designed and developed in the United States. So the foreign royalties Apple collects on them logically should be treated as corporate income to Apple here in America. But Apple and other Big Tech corporations like Google and Amazon – along with much of Big Pharma, and even Starbucks – have avoided paying hundreds of billions of dollars in taxes on their worldwide earnings because they don’t really sell things like cars or refrigerators or television sets that they make here and ship abroad.

[..] over the last decade alone Apple has amassed a stunning $231.5 billion cash pile abroad, subjected to little or no taxes. This hasn’t stopped Apple from richly rewarding its American shareholders with fat dividends and stock buybacks that raise share prices. But rather than use its overseas cash to fund these, Apple has taken on billions of dollars of additional debt. It’s a scam, at the expense of American taxpayers. Add in the worldwide sales of America’s Big Tech, Big Pharma and Big Franchise operations, and the scam is sizable. Over €2 trillion of U.S. corporate profits are now parked abroad – all of it escaping the U.S. corporate income tax. To make up the difference, you and I and millions of other Americans have to pay more in income taxes and payroll taxes to finance the U.S. government.

Meanwhile, the opinions are fun to read.

• Apple Boss Tim Cook Should Stop Whinging And Pay Up (Ind.)

Having been handed a €13bn bill for back taxes – it is not a fine as some would have you believe – Apple boss Tim Cook has gone on the offensive. The under fire tech giant’s chief executive chose Ireland’s state broadcaster RTE as the venue for a broadside against the European Commission in the wake of its ruling that the tax deal arranged between Apple and Ireland amounted to illegal state aid. What he said was, well, hard for me to read without inflicting damage on my, erm, Apple Mac. So read on at your own computer’s risk: “When you’re accused of doing something that is so foreign to your values, it brings out an outrage in you, and that’s how we feel. Apple has always been about doing the right thing.”

Oh Mr Cook. It’s not you who should be feeling outraged. It’s us. Even if you think that what the EC did was pushing it, this is is still a company that has cynically gamed the international tax system with the aim of depriving nation states from whose citizens Apple makes its living, the tax they are due. Taking advantage of loopholes, employing accountants to manipulate the rules; Apple’s defenders might call that pragmatic. But it’s hard to see how anyone not in the business of creating propaganda for Apple could describe its behaviour as “doing the right thing”. Mr Cook, it appears, has no shame. “Total political crap,” he ranted. “Maddening.”

What’s maddening is the way multinational companies like Apple utilise their resources to avoid paying their share at a time of austerity. What’s maddening is the way tax authorities bring the hammer down on individual citizens for making honest mistakes while shrugging their shoulders when it comes to policing wealthy corporations. As for “political crap”? This is a man who has hosted fundraisers for Hilary Clinton. If that’s not political crap, I’d really like to know what is.

Victoria Nuland is still around. In fact, under a potential Hillary presidency, she’s set to acquire a whole lot more power (Secretary of State?). That’s very scary.

• US Imposes Sanctions On ‘Putin’s Bridge’ To Crimea (R.)

Companies building a multi-billion dollar bridge to link the Russian mainland with annexed Crimea, a project close to the heart President Vladimir Putin, were targeted by the United States in an updated sanctions blacklist on Thursday. The U.S. Department of the Treasury added dozens of people and companies to the list, first introduced after Russia annexed the Crimean peninsula from Ukraine in 2014 and expanded over its support for separatist rebels in the east of the country. As well as multiple subsidiaries of Russian gas giant Gazprom and 11 Crimean officials, the Treasury named seven companies directly involved in the construction of the 19 km (11.8 miles) road-and-rail connection across the Kerch Strait, dubbed “Putin’s bridge” by some Russians.

Chief among those were SGM-Most, a subsidiary of lead contractor Stroygazmontazh which is already under U.S. sanctions, and sub-contractor Mostotrest, one of Russia’s biggest bridge builders. “Treasury stands with our partners in condemning Russia’s violation of international law, and we will continue to sanction those who threaten Ukraine’s peace, security and sovereignty,” said John Smith, acting director of the Treasury’s Office of Foreign Assets Control, which levies sanctions.

The Russian Foreign Ministry was not immediately available for comment, but Moscow has previously said sanctions levied over its actions in Ukraine undermine efforts to resolve the conflict. Set to be the longest dual-purpose span in Europe when completed, the Kremlin sees its 212-billion rouble ($3.2 billion) bridge as vital to integrating Crimea into Russia, both symbolically and as an economic lifeline for the region. Putin has called the undertaking an historic mission.

Note: all of the Hillary campaign’s allegations about Russia hacking the DNC remain wholly unsubstantiated. That’s some flimsy ground to stand on, if that’s all you got. Innuendo can’t carry you all the way.

• Putin Says DNC Hack Was a Public Service, Russia Didn’t Do It (BBG)

Vladimir Putin said the hacking of thousands of Democratic National Committee emails and documents was a service to the public, but denied U.S. accusations that Russia’s government had anything to do with it. “Listen, does it even matter who hacked this data?’’ Putin said in an interview at the Pacific port city of Vladivostok on Thursday. “The important thing is the content that was given to the public.’’ U.S. officials blame hackers working for the Russian government for the attacks on DNC servers earlier this year that resulted in WikiLeaks publishing about 20,000 private emails just before Hillary Clinton’s nominating convention in July.

The documents showed attempts by party officials to undermine her chief Democratic rival, Bernie Sanders, and led to the resignation of the head of the DNC, Representative Debbie Wasserman Schultz of Florida. Putin, in power since 2000 and facing re-election in 18 months, and Clinton have had an acrimonious relationship since her failed attempt to “reset” relations as secretary of state in 2009. Putin in 2011 blamed her personally for stoking the biggest protests of his rule by sending an activation “signal” to “some actors” inside Russia. Clinton has compared his annexation of Crimea in 2014 to actions taken by Adolf Hitler before World War II.

No doubt about it. The euro makes no more sense for Italy than it does for Greece.

• The Italian Referendum Could Result In The Death Of The Euro (Andrews/Capacci)

Prime ministers come and go in Italy—four since the financial crisis—but precious little seems to change. The latest incumbent, Matteo Renzi, has pursued structural reform more energetically than his predecessors. But for all the progress he has made, he might as well have been wading through molasses. Now, in a bid to secure a popular mandate for his restructuring program, Renzi has bet his premiership on a referendum over badly-needed constitutional reforms. It is a high stakes gamble. If Renzi wins the vote, which is due in either October or November, his proposed measures will streamline Italy’s legislative process, breaking the parliamentary gridlock which has crippled successive governments, and opening the way to far-reaching economic reforms.

If he loses, Renzi has promised to step down—a pledge that has turned the referendum into a popular vote of confidence in the unelected prime minister, his Europhile policies, and—by extension—Italy’s membership of the eurozone itself. As a result, a “no” vote in October will not just precipitate the fall of Renzi’s government; it could throw Italy’s long-term membership of the eurozone into doubt, plunging the single currency area once again into crisis. Italy’s fundamental problem is that it’s stuck in a policy no man’s land. Its old economic model, in place for much of the last three decades of the 20th century, relied on a combination of currency devaluation to maintain international competitiveness together with fiscal spending to support the poorer regions of the country’s south.

Signing up to the euro put an end to all that, preventing devaluations and prohibiting budget deficits at 10% of gross domestic product. However, the design of Italy’s bicameral parliamentary system, in which the upper and lower house—the Senate and the Chamber of Deputies—wield equal legislative power, made it almost impossible for any government to push through the structural reforms necessary for Italy to compete and prosper within the eurozone. The result has not just been depressed growth and relative impoverishment, but an outright decline in living standards as Italy’s real GDP per capita has slumped to a 20-year low.

Problem is, the refugees don’t want to say in France.

• France Vows To Dismantle ‘Jungle’ Refugee Camp In Calais (G.)

France is to gradually dismantle the “Jungle” refugee camp in Calais, the interior minister, Bernard Cazeneuve, has vowed. Cazeneuve told regional newspaper the Nord Littoral he would press ahead with the closure of the camp “with the greatest determination”, dismantling the site in stages, clearing the former wasteland where record numbers of refugees and migrants are sleeping rough in dire sanitary conditions as many hope to reach Britain. He said France would create accommodation for thousands elsewhere in the country “to unblock Calais”.

French authorities have made repeated efforts to shut down the camp, which the state was responsible for creating in April 2015 when authorities evicted migrants and refugees from squats and outdoor camps across the Calais area and concentrated them into one patch of wasteland without shelter. Less than six months ago, the authorities demolished a large area of the southern part of the camp, saying the aim was to radically reduce numbers. But this month the number of people in the camp reached an all-time high of almost 10,000 people, aid organisations estimate. The French authorities put the official number of people in the camp at almost 7,000. Authorities have said over the past year more than 5,000 asylum seekers have left the northern French town for 161 special centres set up around France.

Beware the numbers. The relocation scheme has been one big EU failure, one among far too many.

• Greece On Edge, As Turkish Coup Prompts Surge In New Arrivals (Omaira Gill)

After dropping for several months, the numbers of refugees pouring through Greece have started to increase again in recent weeks. When an EU-Turkey deal was hacked out in March 2016, it was hailed by EU governments as a success. The massive numbers that had transited through Greece in 2015 and early 2016 quickly whittled down to almost nothing. But people have not stopped coming, and the failed coup in Turkey on 15 July seems to have had consequences. The EU-Turkey deal came into effect on 20 March 2016. In February, UNHCR data showed 55,222 arrivals in Greece. This had fallen to 26,623 in March and 3,419 in April. The numbers for May and June were more or less steady at 1,465 and 1,489, respectively. But in July, the pattern began to change.

There were 1,855 arrivals recorded for the month of July. This could be written off as part of the settling down period for the deal, until the numbers are broken down and matched with events which took place that month. On 15 July, an attempted putsch took place in Turkey. The number of arrivals from 1 July to 14 July came to 560. But that number jumped to 1,295 for the period 15 July to 31 July – an increase of 131%. Taking a step further back, between 15 June and 14 July, 1,438 arrivals were registered in Greece. But from 15 July to 14 August, the number was 2,675, representing an 86% increase in arrivals. In the face of this data, it is hard to ignore Turkey’s current instability as a driving factor behind refugee flows. Between 1 and 28 August, the latest available date for arrivals by the UNHCR, 2,810 refugees and migrants arrived on Greek shores.

We will be judged on this.

• The Death Of Alan Kurdi: One Year On, Compassion Towards Refugees Fades (G.)

Sitting in a refugee camp in northern Greece, Mohammad Mohammad, a Syrian taxi driver, holds up a picture of three-year-old Alan Kurdi. It is nearly a year since the same photograph of the dead toddler sparked a wave of outrage across Europe, and heightened calls for the west to do more for refugees. Twelve months later, Mohammad uses it to highlight how little has changed. Alan may have died at sea, he says, “but really there is no difference between him and the thousands of children now dying [metaphorically] here in Greece”. Tens of thousands have been stranded in squalid conditions in Greece since March, when Balkan leaders shut their borders. “It is,” says Mohammad, “a human disaster.” A year ago, Alan’s tragic death seemed to have shifted the political discourse on refugees.

European leaders appeared to have been shocked into forming more compassionate policies, while previously hostile media outlets took a more conciliatory tone. Two days after Alan’s death, Germany agreed to admit thousands of refugees who had been stranded in Hungary. The move encouraged the leaders of central and eastern Europe to create a humanitarian corridor from northern Greece to southern Bavaria, while Canada promised to resettle 25,000 Syrians. In the UK David Cameron agreed to accept 4,000 refugees a year until 2020. It was less than the number landing each day on the Greek islands at that point, but far more than Cameron had previously dared to offer. He was cheered on by the Sun, whose opinion pages had previously described migrants as cockroaches, but now mounted a front-page campaign in Kurdi’s name: “For Aylan [sic]”.

Debt Rattle May 19 2016

May 192016

May 19, 2016 Posted by Raúl Ilargi Meijer at 9:13 am Finance Tagged with: Clinton, Death Cross, debt, Deutsche, EM, euro, Fed, Ganges, housing bubble Comments Off

Harris&Ewing Streamlined street car passing Washington Monument 1938

• Not All Death Crosses Are Created Equal (BBG)

• China’s Communist Party Goes Way Of Qing Dynasty As Debt Hits Limit (AEP)

• China’s Housing Bubble Is So Big, Goldman Will “Need A Bigger Chart” (ZH)

• Emerging-Market Assets Under Pressure as Fed Minutes Lift Dollar (BBG)

• The Case For Germany Leaving The Euro #Gexit (Bibow)

• Europe’s Troubled Push For Bank Bail-Ins (FT)

• Euro Area Shifts Greek Focus to Debt Relief to Win IMF Support (BBG)

• All Economics Is Political (WSJ)

• 5 Banks Sued In US For Rigging $9 Trillion Agency Bond Market (R.)

• Another Year of Anger for Deutsche Bank’s Investors (BBG)

• First Look At Explosive Hillary Documentary, ‘Clinton Cash’ (NY Post)

• Earth Breaks 12th Straight Monthly Heat Record (AP)

• India To Start Massive Project To Divert Ganges And Brahmaputra Rivers (G.)

Difference is in 2001, 2008 there were no people as nuts as Draghi, Kuroda and Yellen. Or, if there were, they were not in charge.

• Not All Death Crosses Are Created Equal (BBG)

In a note to clients, Intermarket Strategy Chief Executive and Strategist Ashraf Laidi points out that the S&P 500’s 50-week moving average is falling below its 100-week moving average. This “statistically significant” death cross has only happened twice is the past two decades, Laidi points out. The first took place in 2001 and was followed by a 37% decline in the index, while the second pattern occurred in 2008 and preceded a 48% drop. With investors already growing increasingly nervous about prospects for equities, a death cross of grave proportions could give extra reason for caution.

“With luck, the rest of us outside China will have three or four more months to order our own affairs before the storm gathers.”

• China’s Communist Party Goes Way Of Qing Dynasty As Debt Hits Limit (AEP)

[..] The latest stop-go credit cycle began in mid-2015 and has since accelerated to an epic blow-off, with the M1 money supply now growing at 22.9pc, by the fastest pace since the post-Lehman blitz. Wei Yao from Societe Generale estimates that total loans rose by $1.15 trillion in the first quarter, equivalent to 46pc of quarterly GDP. “This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the ‘four trillion stimulus’ package in 2009. The consequence of that stimulus was inflation, asset bubbles and excess capacity,” she said. House sales rose 60pc in April, despite curbs to cool the bubble. New starts were up 26pc. Prices jumped 63pc in Shenzhen, 34pc in Shanghai, 20pc in Beijing, and 18pc in Hefei. Panic buying is spreading to the smaller Tier 3 and 4 cities with the greatest glut.

It all has echoes of the stockmarket boom and bust last year. “Investors are convinced that the government will guarantee that housing prices won’t fall,” said Professor Zhu Ning from the Shanghai Advanced Institute of Finance, speaking to the South China Morning Post. It also sounds like Britain. There was a slight cooling in April but less than headlines suggested. The old measure of total social financing (TSF) slipped but this was more than offset by record bond issuance of $180bn. Together they reached a 26-month high. Capital Economics says budgeted funds must be disbursed by the end of this quarter under new finance ministry rules, implying another $310bn of bonds by late June. The fiscal boost will be ‘front-loaded’. The money will pile up in accounts and flood the economy over the late summer. If the usual time-lags hold, the mini-boom will last for a few more months. Then the trouble will start. Needless to say, markets may roll over long before the economy itself.

[..] .. this year the China bears may get their revenge, if they have any money left to play with. The rot in the country’s $7.7 trillion bond markets is metastasizing. Bo Zhuang from Trusted Sources said more than 100 firms cancelled or delayed bond issues in April due to widening credit spreads. Ten companies have defaulted this year, with the shipbuilder Evergreen, Nanjing Yurun Foods, and the solar group Yingli Green Energy all in trouble this month. But what has really spooked markets is the suspension of nine bonds issued by the AA+ rated China Railways Materials, the first of the big central SOE’s to signal default. “This has greatly weakened investors’ long-standing expectation of implicit government support,” he said.

Bo Zhuang said investors have poured money into bonds in the latest frenzy. The stock of corporate bonds has jumped by 78pc to $2.3 trillion over the last year. It is the epicentre of leverage through short-term ‘repo’ transactions, and it is now coming unstuck. “The experience with the stock market shows how difficult it can be to contain a reversal in leveraged bets. In our view, a bond market crisis would be much more destructive,” he said. With luck, the rest of us outside China will have three or four more months to order our own affairs before the storm gathers. Whether it is bumpy landing, a hard landing, or a crash landing, depends on who the “authoritative person” in Beijing turn out to be.

“..year-over-year price growth in tier-1 cities [..] 28.3%..”

• China’s Housing Bubble Is So Big, Goldman Will “Need A Bigger Chart” (ZH)

One of the stated reasons for the Shanghai Composite’s 1.3% drop (and it would have been worse had the PPT not launched its infamous last minute buying blitz) was also the most amusing one: the stock market bubble is in danger of popping even more as a result of a housing bubble that is now raging at a pace not seen since the last Chinese housing bubble, and thus threatens to soak up even more cash from China’s chronic gamblers-cum-speculators.

So just how high of a housing number did the NBS report that spooked stocks so much? Well, as Goldman summarizes, housing prices in the primary market increased 1.1% month-over-month after seasonal adjustment in April, higher than the growth rate in March. Out of 70 cities monitored by China’s National Bureau of Statistics (NBS), 63 saw housing prices increase from the previous month. On a year-over-year, population-weighted basis, housing prices in the 70 cities were up 6.9% (vs. 5.5% yoy in March). According to an alterantive set of calculations by MarketNews, aggregate home prices rose 12.4% Y/Y in April after rising 10.4% in March. Since both numbers are ridiculously high, we’ll just leave them at that.

However, it was not the overall market bubble that is troubling, but that focused on the most desired, top – or Tier 1 – cities. Here, April price growth was 2.6% month-over-month after seasonal adjustment, vs. 3.0% in March.

But the real shocker was that on a year-over-year price growth in tier-1 cities continue to rise however, reaching 28.3% vs. 26.0% yoy in March. In fact it is so bad that Goldman, which tried to show the surge in the second chart below, clearly needs a bigger chart. Incidentally, total property sales in tier-1 cities accounted for around 5% of nationwide property sales in volume terms, and around 15% in value terms (2015 data).

And the stunning charts: Home price inflation month over month

And year over year: to show the Tier 1 housing bubble, Goldman will need a bigger chart.

Can’t keep the dollar down forever.

• Emerging-Market Assets Under Pressure as Fed Minutes Lift Dollar (BBG)

Emerging-market stocks and currencies fell to two-month lows as the dollar got a boost from minutes of the Federal Reserve’s last meeting that showed officials want to raise interest rates in June. The MSCI Emerging Markets Index headed for its biggest two-day drop in two weeks after minutes of the April 26-27 meeting released Wednesday in Washington showed most officials judged it “likely would be appropriate” to hike next month provided incoming data are in line with a second-quarter pickup. China’s yuan, South Korea’s won, Malaysia’s ringgit and Taiwan’s dollar fell to the weakest levels since March, while Indonesia’s rupiah and Thailand’s baht reached February lows.

The release of the minutes and speeches by regional Fed bank presidents warning investors not to dismiss the chance of a June increase have seen the chance of such a move increasing to 32% from 4% at the beginning of the week, Fed Funds futures show. Developing-nation stocks have now wiped out all of their gains this year and there’s a risk of outflows accelerating if the dollar keeps strengthening. “Investors should avoid any additional investments in emerging markets because their currencies and stocks will be under huge pressure from the strong dollar,” said Komsorn Prakobphol at Tisco Financial in Bangkok. Energy stocks will probably be resilient as the oil price is being driven more by supply and demand dynamics, he said.

A gauge of the greenback against 10 peers was steady after jumping 0.8% overnight, the most since November. The Bloomberg Dollar Index has rallied 3.1% in May, on track for its best month since January 2015. Overseas investors have pulled $2.9 billion from Taiwanese stocks this month and close to a combined $1 billion from Indian, Indonesian and Thai bonds, exchange data show. “Asian currency weakness has been exacerbated by portfolio outflows from the region and we see little respite in the weeks and months ahead,” said Mitul Kotecha at Barclays in Singapore. The ringgit, baht, rupiah and, to an extent, the Taiwan dollar are the most vulnerable Asian currencies to a Fed rate increase, while India’s rupee and the Korean won are better placed, he said.

“It is undeniable that the euro has turned out to be an instrument of widespread impoverishment rather than shared prosperity.”

• The Case For Germany Leaving The Euro #Gexit (Bibow)

The case for or against a British exit from the EU – #Brexit – is headline news. For the moment the earlier quarrel about a possible Greek exit from the Eurozone – #Grexit – seems to have taken the back seat – with one or two exceptions such as Christian Lindner, leader of Germany’s liberal FDP. Most EU proponents are deeply concerned about these prospects and the repercussions either might have on European unity. Yet, while highly important, neither of them should distract Europe from zooming in on the real issue: the dominant and altogether destructive role of Germany in European affairs today. There can be no doubt that the German “stability-oriented” approach to European unity has failed dismally. It is high time for Europe to contemplate the option of a German exit from the Eurozone – #Gexit – since this might be the least damaging scenario for Europe to emerge from its euro trap and start afresh.

Germany’s membership of the Eurozone and its adamant refusal to play by the rules of currency union is indeed at the heart of the matter. Of course, it was never meant to be this way. And it was not inevitable for Europe to end up in today’s state of never-ending crisis that impoverishes and disunites its peoples. I have always supported the idea of a common European currency as I believed that it could potentially provide a monetary order that is far superior to the status quo ante of deutschmark hegemony: the Bundesbank – in pursuit of its German price stability mandate – pulling the monetary strings across the continent. While I have also always held that the euro – the peculiar regime of Economic and Monetary Union agreed at Maastricht – was deeply flawed, I kept up my hopes that the political authorities would reform that regime along the way to make the euro viable.

In this spirit I proposed my “Euro Treasury” plan that would, among other things, fix the Maastricht regime’s most serious flaw: the divorce between the monetary and fiscal authorities that is leaving all key players vulnerable and short of the powers required to steer a large economy like the Eurozone through anything but fair weather conditions, at best. Watching developments over in Europe from afar my hopes are dwindling by the day that the failed euro experiment will usher in reforms that could save it. Instead, the likelihood of some form of eventual euro breakup seems to be rising constantly. It is undeniable that the euro has turned out to be an instrument of widespread impoverishment rather than shared prosperity.

“For US investors it will become very different to follow.”

• Europe’s Troubled Push For Bank Bail-Ins (FT)

When Ignazio Visco, governor of the Bank of Italy, spoke in Florence this month, his focus turned to regulation. At a sensitive moment for Italian lenders, whose shares had collapsed over recent months, the governor chose to address what he called “regulatory uncertainty” in the wake of new European-wide rules for failing banks. “We must strike the right balance,” he said. “We should not rule out the possibility of temporary public support in the event of systemic bank crises, when the use of a bail-in is not sufficient”. Taxpayer support for banks, however, was precisely what the new European rules introduced at the start of this year aimed to avoid. To protect taxpayers, investors in banks bonds – mostly untouched during the bailouts of the last crisis – now face losses, or “bail-ins”.

The tension between the Italian central bank and European regulations is related to who owns this debt. In Italy, many retail investors hold exposed bank bonds, and a “bail-in” of small Italian banks in November last year was politically sensitive for this reason. But Mr Visco’s comments also reflect the challenges of implementing continent-wide rules in very different individual countries, with contrasting banking systems. So how else might this regulatory uncertainty, and the role of national governments, complicate a European vision for dealing with bank failure? Under the Bank Recovery and Resolution Directive (BRRD), European banks are now required to have a certain amount of bonds that are exposed to losses. The key issue is who suffers losses first. Whereas senior bank bonds ranked alongside depositors during the crisis, new bonds need to be subordinated to take losses.

But the actual instruments that count towards this measure are determined by national legislation. As a result, different countries have taken different approaches. Italy has raised corporate depositors above bondholders. France is currently legislating for a new class of bank debt, which will sit below depositors and existing senior bonds. In Germany, the law has been changed to subordinate outstanding senior bonds. In the UK, banks sell bonds from their holding companies, which will rank below other senior bank bonds. In the Netherlands, it is unclear how the rules will work. Robert Muller, treasurer at Rabobank, says the bank is strongly leaning towards the French approach, rather than the German. For investors, this represents a challenge. “At this point in time it’s very difficult for investors to see how this pans out,” says Mr Muller. “For US investors it will become very different to follow.”

Why am I thinking deck chairs? Anyway, can’t see Germany agree to spend its money on buying up loans.

• Euro Area Shifts Greek Focus to Debt Relief to Win IMF Support (BBG)

Euro-area officials are weighing a proposal to purchase loans that member states made to Greece in a move that would ease the nation’s debt burden, a precondition for the IMF’s involvement in a bailout program. Senior finance ministry officials held a conference call on Wednesday night to discuss ways to make Greece’s €321 billion of obligations sustainable, according to two people with knowledge of the talks. One option would be for the European Stability Mechanism, the euro-area’s financial backstop, to purchase loans individual euro nations made to Greece and reduce the interest payments, said the people, who asked not to be named because the discussions are private. About €52.9 billion of bilateral loans were made in 2010 and 2011.

Greece’s creditors are struggling to complete a review of the nation’s third bailout, which would pave the way for the disbursal of much-needed aid. The IMF has made its participation in the program contingent upon debt relief, a prospect euro-area finance ministers began discussing last week during an emergency meeting meant to resolve the impasse in unlocking the funds. Nations including Germany have said that the IMF needs to be involved in any future bailout program. The ESM is also considering purchasing the IMF’s loans as a way to give Greece a financial boost since its debt terms are more lenient than those of the Washington-based fund, according to a sustainability report prepared by the European institutions.

Buying back the IMF loans “amounts to debt relief,” European Commission Vice President Valdis Dombrovskis said in remarks in Brussels on Wednesday at a Politico conference. The officials mulled three debt-relief options during the call: have the ESM purchase bilateral loans made to Greece from individual countries; have the ESM purchase the IMF’s obligations; and extending the maturities of Greece’s debt and reducing the interest rates, one of the people said.

Economics is politics in disguise.

• All Economics Is Political (WSJ)

The models have been run and the numbers crunched: Bernie Sanders’s presidential platform, if enacted, would create 26 million jobs and 5.3% growth. An economist has done the calculating, and there’s no use arguing with mathematics. CNN’s headline reads: “Under Sanders, income and jobs would soar, economist says.” When I run that line by Russ Roberts, he replies with a joke: “How do you know macroeconomists have a sense of humor? They use decimal points.” Mr. Roberts is a fellow at the Hoover Institution, a University of Chicago Ph.D., and the gregarious host of EconTalk, a weekly podcast that celebrated its 10th anniversary in March. He is also an evangelist for humility in economics. “The world’s a complicated place,” he says. “We demand things from economics that it can’t provide, and we should be honest about that.”

What’s striking is Mr. Roberts isn’t talking only about politically contrived agitprop. Nobody believes that stuff: One of President Obama’s former economic advisers stirred ire from Sandernistas earlier this year when he said that getting Bernie’s agenda to add up requires assuming “magic flying puppies with winning Lotto tickets tied to their collars.” The deeper question is: How much better—more credible, or reliable, or falsifiable—are the economic forecasts pouring out of respectable think tanks, the White House and Congress? Mr. Roberts’s answer: not all that much. He cites the Congressional Budget Office reports calculating the effect of the stimulus package—for instance, one in late 2009 suggesting it had increased employment by between 600,000 and 1.6 million.

Leaving aside the incredible range of the estimate, how did the CBO come up with those numbers? Did it somehow measure employment in the real world? Nope: The CBO gnomes simply went back to their earlier stimulus prediction and plugged the latest figures into the model. “They had of course forecast the number of jobs that the stimulus would create based on the amount of spending,” Mr. Roberts says. “They just redid the estimate. They just redid the forecast. And you’re thinking, that can’t be what they really did.”

Definitely the new normal.

• 5 Banks Sued In US For Rigging $9 Trillion Agency Bond Market (R.)

Five major banks and four traders were sued on Wednesday in a private U.S. lawsuit claiming they conspired to rig prices worldwide in a more than $9 trillion market for bonds issued by government-linked organizations and agencies. Bank of America, Credit Agricole, Credit Suisse, Deutsche Bank and Nomura were accused of secretly agreeing to widen the “bid-ask” spreads they quoted customers of supranational, sub-sovereign and agency (SSA) bonds. The lawsuit filed in Manhattan federal court by the Boston Retirement System said the collusion dates to at least 2005, was conducted through chatrooms and instant messaging, and caused investors to overpay for bonds they bought or accept low prices for bonds they sold.

“Only through collusion could a dealer quote a wider spread than market conditions otherwise dictate without losing market share and profits,” the complaint said. “Defendants reaped millions of dollar(s) in profits at the expense of plaintiff and members of the class as result of their misconduct.” The proposed class-action lawsuit seeks triple damages, and follows probes by U.S. and European Union antitrust regulators into possible SSA bond price rigging.

[..] The lawsuit is one of many in the Manhattan federal court seeking to hold banks liable for alleged price-fixing in bond, commodity, currency, derivatives, interest rate and other financial markets. One such lawsuit, concerning competition in the credit default swaps market, led last September to a $1.86 billion settlement with a dozen banks. SSA bonds are sold in various currencies by issuers such as regional development banks, infrastructure borrowers including highway and bridge authorities, and social security funds. Many carry explicit or implicit backing from governments, and thus enjoy high investment-grade ratings.

Will Deutsche self-destruct?

• Another Year of Anger for Deutsche Bank’s Investors (BBG)

Deutsche Bank investors expressed their frustration with management at the company’s annual meeting a year ago. Weeks later, co-Chief Executive Officer Anshu Jain was gone. Now it’s Chairman Paul Achleitner and Jain’s replacement, John Cryan, who are set to feel the displeasure of shareholders when they gather in Frankfurt on Thursday. With revenue plunging and the need for capital mounting, some investors worry it may be just a matter of time before they’re asked to stump up and buy new stock. “The mood’s going to be bad, maybe even worse than at last year’s meeting,” said Klaus Nieding, vice president of DSW, a German firm that advises shareholders on company proposals.

Deutsche Bank shares dropped by more than half in the past year – erasing about $22.6 billion in market value – as plans to bolster capital and slash costs failed to revive confidence and profits shriveled across the industry. For Achleitner, a supervisory board dispute in April raised questions about his commitment to rooting out misconduct at Germany’s largest bank. Jain, 53, resigned in June after he and co-CEO Juergen Fitschen received the lowest approval rating in at least a decade in a vote at last year’s annual meeting. Fitschen, 67, will stand down on Thursday, leaving Cryan as sole CEO. Cryan, a British citizen who chaired the audit committee of the supervisory board before becoming co-CEO, has been outspoken about the company’s shortcomings, criticizing excessive pay, spiraling legal costs and outdated technology.

He suspended the dividend to bolster capital and pledged to shed about 9,000 jobs, or almost 10% of the workforce, and shrink the investment bank by scaling back the debt-trading empire built by Jain. While some investors applauded the cost reductions as long overdue, others expressed concern the cutting would eat too deeply into sales, especially during a trading slump. Debt-trading revenue, Deutsche Bank’s largest source of income, fell 29% in the first quarter from a year before, while net income dropped 61%. Cryan told analysts last month that his efforts to overhaul the company and settle outstanding legal matters may lead to a second straight annual loss. “The issue that we have is that we want to get an awful lot done this year,” he said.

Sorry for doing politics, but this is going to be a really big item. Question’s going to be: who can fill in for Hillary once she’s behind bars?

• First Look At Explosive Hillary Documentary, ‘Clinton Cash’ (NY Post)

Hillary Clinton says that when she and her husband moved out of the White House 15 years ago, they were “dead broke.” Today, they’re worth more than $150 million. In the new documentary “Clinton Cash,” it becomes all too clear how the former first couple went from rags to filthy rich — with the emphasis on filthy. As the movie shows, the Clintons are political Teflon dons compared with another Beltway power couple, former Virginia Gov. Bob McDonnell and his wife, Maureen. The McDonnells were convicted of accepting more than $150,000 in gifts from a businessman while the governor was in office. Meanwhile, the Clintons raked in 700 times that amount – $105 million – under the pretext of speaking fees while Hillary was in public office.

Yet while the McDonnells face time in the Big House, the Clintons are once again aiming for the White House. The documentary is based on a book by former Hoover Institution fellow Peter Schweizer and was just screened during the Cannes Film Festival. It is set to be shown in major US cities, including Philadelphia during the Democratic National Convention there in July. Schweizer’s research has withstood a year of intense scrutiny from critics because it is fact, not fiction. And the facts are compelling. The film whisks you around the globe, retracing how the Clintons personally pocketed six-figure speaking fees and collected billions of dollars for their family foundation. How? By trading on Hillary’s position as secretary of state and possible future president.

She and her ex-president husband sold out to titans, dictators and shady characters in Nigeria, Congo, Kazakhstan and the United Arab Emirates, not to mention at Goldman Sachs and TD Bank. Along the way, the Clintons betrayed the values they profess on the campaign trail: human rights, environmentalism and democracy. That’s why Schweizer is bringing the documentary to the Democratic convention — to show the party faithful how the Clintons used and abused their liberal principles to amass a fortune. The Clintons earned the bulk of their money from speaking fees. It was simple: Bill’s fees skyrocketed when Hillary became secretary of state in 2009, suggesting that countries and companies hiring him counted on getting more than just Bill — they also expected to land what his wife had to offer.

“The last month that wasn’t record hot was April 2015. ”

• Earth Breaks 12th Straight Monthly Heat Record (AP)

Earth’s heat is stuck on high. Thanks to a combination of global warming and an El Nino, the planet shattered monthly heat records for an unprecedented 12th straight month, as April smashed the old record by half a degree, according to federal scientists. The National Oceanic and Atmospheric Administration’s monthly climate calculation said Earth’s average temperature in April was 58.7 degrees (14.8 degrees Celsius). That’s 2 degrees (1. 1 degrees Celsius) warmer than the 20th century average and well past the old record set in 2010. The Southern Hemisphere led the way, with Africa, South America and Asia all having their warmest Aprils on record, NOAA climate scientist Ahira Sanchez-Lugo said. NASA was among other organizations that said April was the hottest on record. The last month that wasn’t record hot was April 2015.

The last month Earth wasn’t hotter than the 20th-century average was December 1984, and the last time Earth set a monthly cold record was almost a hundred years ago, in December 1916, according to NOAA records. “These kinds of records may not be that interesting, but so many in a row that break the previous records by so much indicates that we’re entering uncharted climatic territory (for modern human society),” Texas A&M University climate scientist Andrew Dessler said in an email. At NOAA’s climate monitoring headquarters in Asheville, North Carolina, “we are feeling like broken records stating the same thing” each month, Sanchez-Lugo said. And more heat meant record low snow for the Northern Hemisphere in April, according to NOAA and the Rutgers Global Snow Lab.

Snow coverage in April was 890,000 square miles below the 30-year average. Sanchez-Lugo and other scientists say ever-increasing man-made global warming is pushing temperatures higher, and the weather oscillation El Nino — a warming of parts of the Pacific Ocean that changes weather worldwide — makes it even hotter. The current El Nino, which is fading, is one of the strongest on records and is about as strong as the 1997-1998 El Nino. But 2016 so far is 0.81 degrees (0.45 degrees Celsius) warmer than 1998 so “you can definitely see that climate change has an impact,” Sanchez-Lugo said. Given that each month this year has been record hot, it is not surprising that the average of the first four months of 2016 were 2.05 degrees (1.14 degrees Celsius) higher than the 20th-century average and beat last year’s record by 0.54 degrees (0.3 degrees Celsius).

Complete and utter idiots. Everything that can go wrong, will. And then some.

• India To Start Massive Project To Divert Ganges And Brahmaputra Rivers (G.)

India is set to start work on a massive, unprecedented river diversion programme, which will channel water away from the north and west of the country to drought-prone areas in the east and south. The plan could be disastrous for the local ecology, environmental activists warn. The project involves rerouting water from major rivers including the Ganges and Brahmaputra and creating canals to interlink the Ken and Batwa rivers in central India and Damanganga-Pinjal in the west. The minister of water resources, Uma Bharti, said this week that work could start in a few days. A spokesperson from her department told the Guardian that the government is still waiting for clearance from the environment ministry. The project will cost an estimated 20 lakh crore rupees (£207bn) and take 20-30 years to complete.

The government of Narendra Modi, the prime minister, is presenting the project as the solution to India’s endemic water problems. For years, parts of India have suffered from devastating spells of drought. As average temperatures in India rise, and the growing population puts increasing demands on water resources, millions of people are without a reliable water supply. This year, 330 million Indians have been affected by drought. State governments used emergency measures to deliver water by train in the western state of Maharashtra; in other areas, schools and hospitals were forced to close, and hundreds of families were forced to migrate from villages to nearby cities where water is more easily accessible.

According to the National Water Development Agency, which will oversee the rivers project, “the water availability even for drinking purposes becomes critical, particularly in the summer months … On the other hand excess rainfall occurring in some parts of the country create[s] havoc due to floods.” The scheme is a pet project of Modi, who has made several promises to end India’s long-term water problems. In the first few months of his premiership, Modi’s cabinet revived the idea of linking 30 rivers across India. The water resources ministry spokesperson said: “The idea is old, but the Modi government has done all the work on it.” Plans to interlink rivers were drawn up in the 1980s by Indira Gandhi’s government, and were gathering dust as central governments repeatedly failed to win the approval of states. Now, with a supreme court mandate, and government backing, save the rubber stamp of the environment ministry, the project could get under way in a matter of days.

Debt Rattle April 18 2016

Apr 182016

April 18, 2016 Posted by Raúl Ilargi Meijer at 9:40 am Finance Tagged with: Brazil, Brexit, China, debt, default, Doha, earthquake, EM, freeze, oil, OPEC, selloff 2 Responses »

DPC Coaches at Holland House Hotel on Fifth Avenue, NY 1905

• Oil Prices Plunge After Doha Output Talks Fail (AFP)

• Oil Producers Get Worst Possible Outcome, Destroy Remaining Credibility (R.)

• Failure To Reach Oil Output Deal Sparks Selloff Across Emerging Markets (BBG)

• Loonie, Aussie Drop After Doha Failure; Yen Near 1 1/2-Year High (BBG)

• The Bad Smell Hovering Over The Global Economy (G.)

• Untried, Untested, Ready: Remedies for the Global Economy (BBG Ed.)

• China’s QoQ and YoY GDP Data Don’t Add Up (BBG)

• Is China Ready To Let More State-Owned Enterprises Default? (BBG)

• China Makes Plans for 1.8 Million Workers Facing Unemployment (WSJ)

• The Trucker’s Nightmare That Could Flatten Europe’s Economy (BBG)

• George Osborne: Brexit Would Leave UK ‘Permanently Poorer’ (G.)

• Brazilian Congress Votes To Impeach President Dilma Rousseff (G.)

• Australia’s Debt Dilemma Raises Downgrade Fears (BBG)

• Peter Schiff: ‘Trump’s Right, America Is Broke’ (ZH)

• Make America Solvent Again (Jim Grant)

• Is Capitalism Entering A New Era? (Kaletsky)

• Fears Of ‘The Big One’ As 7 Major Earthquakes Strike Pacific In 96 Hours (E.)

A curious piece of two-bit theater. It failed before it started. Why do it then? The west trying to pit Saudi vs Iran/Russia?

• Oil Prices Plunge After Doha Output Talks Fail (AFP)

Oil prices plunged on Monday after the world’s top producers failed to reach an agreement on capping output aimed at easing a global supply glut during a meeting in Doha. Hopes the world’s main producer cartel, OPEC, and other major exporters like Russia would agree to freeze output has helped scrape oil prices off the 13-year lows they touched in February. But crude tanked after top producer Saudi Arabia walked away from the talks, which many hoped would ease a huge surplus in world supplies, because of a boycott by its rival Iran. Oil tumbled in early Asian trade after the collapse of Sunday’s talks, with prices dropping as much as seven% in opening deals.

At around 0100 GMT, US benchmark West Texas Intermediate for May delivery was down $2.11, or 5.23%, from Friday’s close at $38.25 a barrel. Global benchmark Brent crude for June lost 4.71%, or $2.03, to $41.07. “Despite many of the 18 oil producers believing the meeting in Doha was merely a rubber stamp affair for an oil production freeze, Saudi Arabia managed to throw a spanner in the works,” said Angus Nicholson at IG Markets. “With Saudi Arabia fighting proxy wars with Iran in Yemen and Syria/Iraq, it is understandable that they had little inclination to freeze their own production and make way for newly sanctions-free Iran to increase their market share.”

It’s impossible for a reporter to see that no output freeze was ever in the works, simply because no producer can afford a freeze.

• Oil Producers Get Worst Possible Outcome, Destroy Remaining Credibility (R.)

It was the worst possible outcome for oil producers at their weekend meeting in Doha, with their failure to reach even a weak agreement showing very publicly their divisions and inability to act in their own interests. Expectations for the meeting had been modest at best, with sources in the producer group predicting an agreement to freeze output. But even this meagre hope was dashed by Saudi Arabia’s insistence Iran join any deal, something the newly sanctions-free Islamic republic wouldn’t countenance. From a producer point of view, an agreement including Iran that shifted market perceptions on the amount of oil supply available would have been the best outcome.

The acceptable result would have been an agreement that froze production at already near record levels, with an accord that Iran would join in once it had reached its pre-sanctions level of exports. What was delivered instead was confirmation that the Saudis are prepared to take more pain in order not to deliver their regional rivals Iran any windfall gains from higher prices and exports. The meeting in Qatar on Sunday effectively pushed a reset button on the crude markets, putting the situation back to where the market was before hopes of producer discipline were first raised. What happens now is that the market will have to continue along its previous path of re-balancing, without any assistance from the OPEC or erstwhile ally Russia. Brent crude fell nearly 7% in early trade in Asia on Monday, before partly recovering to be down around 4%.

The potential is for crude to fall further in coming sessions as long positions built up in the expectation of some sort of producer agreement are liquidated in the face of the reality of no deal. It’s likely that recriminations will follow for some time among the oil producers, with the Russians and Venezuelans said to be annoyed at what they see as the Saudi scuppering of a deal that had almost been locked in. This will make it harder for any future agreement, with the OPEC meeting on June 2 the next chance for the grouping to reach some sort of agreement. For the time being, OPEC’s credibility is shot, and won’t be restored by even a future agreement as it will take actual, verifiable action to convince a now sceptical market. However, as the events in Doha showed, the Saudis are unlikely to agree to anything in the absence of Iranian participation, and that is also equally unlikely.

Naturally. Sell-off is waning already, by the way. But the trend is clear.

• Failure To Reach Oil Output Deal Sparks Selloff Across Emerging Markets (BBG)

The failure by the world’s biggest oil producers to agree on an output freeze spurred a selloff across emerging markets, with stocks halting a seven-day rally as Brent crude plunged as much as 7%. The ringgit led declines in developing-nation currencies as the disappointment stemming from the weekend meeting in Doha disrupted a recovery in commodity prices, putting pressure on Malaysian finances as a net oil exporter. Hopes an agreement would be reached had pushed Brent above $44 a barrel for the first time since December and spurred gains across asset classes in recent days. It’s now headed back toward $41 as the discussions to address a global oil glut stalled after Saudi Arabia and other Gulf nations wouldn’t commit to any deal unless all OPEC members joined, including Iran.

“We have seen a high correlation between oil, commodity prices and emerging assets this year and we have seen a strong run up, so the latest development on the failure to agree on an oil output freeze should spark profit-taking among investors,” said Miles Remington, head of equities at BNP Paribas Securities Indonesia. Energy-related companies fell the most among the 10 industry groups of the MSCI Emerging Markets Index, which dropped 0.7% and retreated from last week’s highest level since November. While that was the biggest decline since April 5, the energy component slid 1.4% and industrial stocks 1%.

Japan can’t keep this up much longer.

• Loonie, Aussie Drop After Doha Failure; Yen Near 1 1/2-Year High (BBG)

The Canadian and Australian dollars dropped as crude tumbled after oil-producing nations failed to reach an accord to freeze output. The yen, used by investors as a haven, rose toward a 17-month high. The currencies of Australia, Canada, Malaysia and Norway all retreated at least 0.7% after negotiations in Doha ended without an agreement from OPEC and other oil producers to freeze supplies. Foreign-exchange traders sought the safety of Japan’s currency as the diplomatic failure threatens to send crude back toward the more than 13-year lows reached in February. World leaders at the end of last week signaled opposition to any efforts from Japan to directly halt the yen’s 11% climb this year.

“Lack of agreement from Doha has hit commodity currencies lower,” said Robert Rennie at Westpac Banking in Sydney. “The prospects of another near-term round of talks appear limited ahead of the June OPEC meeting.” The Aussie dropped 0.8% to 76.65 U.S. cents as of 7:01 a.m. London time, set for the largest decline since April 7. Canada’s loonie tumbled 1.1% to C$1.2962 against the greenback. Crude is the nation’s second-largest export. Malaysia’s ringgit slid 0.8% to 3.9348 per dollar. Oil futures fell as much as 6.8%, the biggest intraday drop since Feb. 1. “The oil price will reset lower and could even retest $30 over the next three months,”said James Purcell at UBS’s wealth-management business in Hong Kong.

“Short term, that will dampen enthusiasm for risk assets. However, markets are being slightly myopic. Economic data have improved in both China and the U.S. of late.” The lack of agreement at Doha highlights the deep divisions between OPEC members, and importantly, within Saudi Arabia, Westpac’s Rennie said. The Aussie should hold support from about 75.75 cents to 76 cents at least through the next day or so, he said. The yen jumped 0.7% to 107.96 per dollar, and touched 107.77. It reached 107.63 on April 11, the strongest since October 2014. Hedge funds and other large speculators pushed wagers on yen strength to a record last week as Japanese authorities appeared reluctant to intervene to reverse the strengthening currency.

Price discovery is the economy’s biggest enemy.

• The Bad Smell Hovering Over The Global Economy (G.)

All is calm. All is still. Share prices are going up. Oil prices are rising. China has stabilised. The eurozone is over the worst. After a panicky start to 2016, investors have decided that things aren’t so bad after all. Put your ear to the ground though, and it is possible to hear the blades whirring. Far away, preparations are being made for helicopter drops of money onto the global economy. With due honour to one of Humphrey Bogart’s many great lines from Casablanca: “Maybe not today, maybe not tomorrow but soon.” But isn’t it true that action by Beijing has boosted activity in China, helping to push oil prices back above $40 a barrel? Has Mario Draghi not announced a fresh stimulus package from the European Central Bank designed to remove the threat of deflation? Are hundreds of thousands of jobs not being created in the US each month?

In each case, the answer is yes. China’s economy appears to have bottomed out. Fears of a $20 oil price have receded. Prices have stopped falling in the eurozone. Employment growth has continued in the US. The International Monetary Fund is forecasting growth in the global economy of just over 3% this year – nothing spectacular, but not a disaster either. Don’t be fooled. China’s growth is the result of a surge in investment and the strongest credit growth in almost two years. There has been a return to a model that burdened the country with excess manufacturing capacity, a property bubble and a rising number of non-performing loans. The economy has been stabilised, but at a cost. The upward trend in oil prices also looks brittle. The fundamentals of the market – supply continues to exceed demand – have not changed.

Then there’s the US. Here there are two problems – one glaringly apparent, the other lurking in the shadows. The overt weakness is that real incomes continue to be squeezed, despite the fall in unemployment. Americans are finding that wages are barely keeping pace with prices, and that the amount left over for discretionary spending is being eaten into by higher rents and medical bills. For a while, consumer spending was kept going because rock-bottom interest rates allowed auto dealers to offer tempting terms to those of limited means wanting to buy a new car or truck. In an echo of the subprime real estate crisis, vehicle sales are now falling. The hidden problem has been highlighted by Andrew Lapthorne of the French bank Société Générale. Companies have exploited the Federal Reserve’s low interest-rate regime to load up on debt they don’t actually need.

“The proceeds of this debt raising are then largely reinvested back into the equity market via M&A or share buybacks in an attempt to boost share prices in the absence of actual demand,” Lapthorne says. “The effect on US non-financial balance sheets is now starting to look devastating.” He adds that the trigger for a US corporate debt crisis would be falling share prices, something that might easily be caused by the Fed increasing interest rates.

BBG senior editor David Shipley displays the general fallacy: all that’s there are desperate attempts to go back to something that once was, only in a more centralized fashion. But there’s no going back.

• Untried, Untested, Ready: Remedies for the Global Economy (BBG Ed.)

The deeper the slump, economists used to say, the stronger the recovery. They don’t say that anymore. The effects of the crash of 2008 still reverberate, with the latest forecasts for global growth even more dismal than the last. The persistently stagnant world economy is more than just a rebuke to economic theory, of course; it exacts a human toll. And while politicians and central bankers – or economists, for that matter – can’t be faulted for their creativity, their remedies might have more impact if they were bolder and better-coordinated. By ordinary standards, to be sure, governments haven’t been timid. Without fiscal stimulus and aggressive monetary easing in the U.S. and other countries, things would look even worse. And yet, worldwide output is predicted to rise only 3.2% this year, falling still further below the pre-crash trend.

Simply doubling down on current strategies is unlikely to work. Large-scale bond-buying, or so-called quantitative easing, has run into diminishing returns. Negative interest rates, where they’ve been tried, haven’t revived lending, and central banks are unable or unwilling to cut further. What about new fiscal stimulus? Where possible, that would be good – but it’s hardest to do in the very countries that need it most, because that’s where public debt is already dangerously high. True, as the IMF’s new fiscal report says, almost all countries could become more growth-friendly by combining measures to curb public spending in the longer term (for instance, raising the retirement age) with steps to increase demand in the short term (cutting payroll taxes, raising employment subsidies and building infrastructure).

Getting fiscal policy right country by country would surely help – yet probably wouldn’t be enough: No single country can adequately deal with a global shortfall of demand. A finance ministry for the world isn’t happening any time soon. Still, it’s a pity that governments aren’t trying harder to coordinate their fiscal policies more intelligently, or indeed at all. The global slump persists partly because of international spillovers. Better coordination would take these into account: Countries that could safely deploy fiscal stimulus would give some weight to global as well as national conditions, and fiscal policy would be formed interactively. Even within the EU, where you’d expect economic coordination to be the norm, and where the single currency makes it essential, there’s no sign of it.

At the global level, in forums such as the IMF, you might expect the U.S. to take the lead in any such effort. So it should – but it will need to mend its shattered policy-making machinery first. If Washington can’t come to a decision on its own on taxes or spending, the question of coordination doesn’t arise. The last resort, if the slump goes on and governments can’t coordinate better, might be to combine monetary and fiscal policy in a hybrid known (unfortunately) as helicopter money. Governments would cut taxes and/or spend more, but meet the cost by printing money rather than by borrowing. In one variant, central banks might simply send out checks to taxpayers. That’s a startling idea, no doubt – but so was quantitative easing not long ago.

Quarter-on-quarter annualized growth rate is 4.5%..

• China’s QoQ and YoY GDP Data Don’t Add Up (BBG)

China’s growth rates for quarter-on-quarter and year-on-year GDP for the past year don’t match. That, combined with confirmation that 1Q output was underpinned by an unsustainable resurgence in real estate, tarnishes the newly acquired shine on the country’s economic prospects. The initial reaction to the 1Q GDP data, published Friday, was a sigh of relief. Growth at 6.7% year on year was in line with expectations and comfortably inside the government’s 6.5-7% target range. If anyone noticed that the normal quarter-on- quarter data was missing from the National Bureau of Statistics release, few thought anything of it. Then, on Saturday, the quarter-on-quarter data was published, and some of the relief turned to consternation.

Quarter-on-quarter growth in 1Q was just 1.1% – an annualized growth rate of 4.5%, and the lowest print since the data series became available in 2011. Worse, based on the accumulated quarter-on-quarter data over the last year, annual growth in 1Q was just 6.3% – substantially below the NBS’s 6.7% reading for year-on-year growth. Explaining the inconsistency between the two data points is tough to do. Accumulated quarter-on-quarter growth over four quarters should add up to year-on-year growth. In the past, it has. The divergence in the 1Q readings might reflect something as simple as difficulties with seasonal adjustment. Even so, against a backdrop of concerns about data reliability, it can only add to skepticism about China’s true growth rate.

Xi’s dilemma.

• Is China Ready To Let More State-Owned Enterprises Default? (BBG)

China’s state-owned enterprises are likely to suffer more defaults over the next year as the government shows its readiness to shut companies in industries struggling with overcapacity, according to Standard & Poor’s. “In a major policy shift, the central government appears willing to close and liquidate struggling enterprises in the steel, mining, building materials, and shipbuilding industries,” S&P analyst Christopher Lee wrote in a report Monday. “We believe this stance will exacerbate the problems of companies in these cyclical and capital-intensive sectors, which are facing sluggish demand amid slowing investment growth.”

The warning follows S&P’s decision earlier this month to cut China’s sovereign rating outlook to negative from stable because economic rebalancing is likely to proceed more slowly than it had expected. Moody’s Investors Service also downgraded the outlook to negative in March, highlighting surging debt and the government’s ability to enact reforms. The revisions were biased, Finance Minister Lou Jiwei said in Washington on Friday. Premier Li Keqiang has pledged to withdraw support from so-called zombie firms that have wasted financial resources and dragged on economic growth, which is at the slowest in a quarter century. China’s central bank has lowered benchmark interest rates six times since 2014, underpinning a jump in debt to 247% of GDP.

China Railway Materials, a state-backed commodities trader, is seeking to reorganize debt and halted trading on 16.8 billion yuan ($2.6 billion) of bonds this month. Baoding Tianwei last year became the first government-backed company to renege on onshore bonds. Sinosteel defaulted on onshore debt in October. Leverage among the largest state-owned enterprises has reached a “critical” level, according to Lee. It is likely to worsen in 2016 as a weak top line is not fully offset by cost cuts and capital expenditure reductions, he wrote in the report.

1.8 million is a rounding error in China.

• China Makes Plans for 1.8 Million Workers Facing Unemployment (WSJ)

China etched in details of plans to help workers laid off from the bloated coal and steel industries, saying assistance would include career counseling, early retirement and help in starting businesses, among other measures. New guidelines released by seven Chinese ministries over the weekend build on previously announced commitments to restructure the coal and steel industries, whose excess production is dragging on the economy, and to take care of an estimated 1.8 million workers who will be displaced. The new measures place priority on finding jobs and cushioning the transition to reduce the unemployment that the authoritarian government sees as a threat to social stability.

“Proper placement of workers is the key to working to resolve excess capacity,” said the document issued by the labor ministry, the top economic planning agency and others. It urged local governments to “take timely measures to resolve conflicts” and to “avoid ignoring the issue.” Unlike a far-reaching restructuring of state industries two decades ago, Beijing is taking a cautious approach this time around, prompting some economists to caution that the protracted pace may make the situation worse. Government data released Friday showed economic growth slowing slightly in the first quarter, buoyed by new loans, debt and investment in real estate and factories—methods that are likely to lengthen the transition to a more consumer-driven society from one driven by investment and manufacturing.

Western-style “restructuring is not on the horizon here,” said ING economist Tim Condon. “Rebalancing, forget that. That’s for another day.” Government plans call for reducing some 10% to 15% of the excess capacity in the steel and coal sectors over the next several years. That is less than half the portion analysts say is needed to bring supply closer in line with demand. And steel and coal are only two of numerous other industries plagued by overcapacity that haven’t been addressed. The large number of ministries that have signed off on the plan dated April 7 but released more than a week later underscore the sensitivity, importance and breadth of resources China is devoting to the unemployment problem.

Europe goes blindly into the night.

• The Trucker’s Nightmare That Could Flatten Europe’s Economy (BBG)

[..] Germany, Austria, France and Sweden, among others, have reintroduced border checkpoints in some places. They are pressured by Europe’s biggest refugee crisis since World War II – about 1 million migrants arrived in Greece and Italy in 2015 – terrorist attacks, and the growth of anti-immigration movements. But the economic cost of dumping Schengen, at a time when growth across the continent is still weak, would be massive. A permanent return to border controls could lop €470 billion of GDP growth from the European economy over the next 10 years, based on a relatively conservative assumption of costs, according to research published by Germany’s Bertelsmann Foundation. That’s like losing a company almost the size of BMW AG every year for a decade.

The open borders power an economy of more than 400 million people, with 24 million business trips and 57 million cross-border freight transfers happening every year, the European Parliament says. Firms in Germany’s industrial heartland rely on elaborate, just-in-time supply chains that take advantage of lower costs in Hungary and Poland. French supermarket chains are supplied with fresh produce that speeds north from Spain and Portugal. And trans-national commutes have become commonplace since Europeans can easily choose to, say, live in Belgium and work in France. For many Europeans, passport-free travel is part of being, simply, European. For the company hiring driver Unczorg, the security checks increase costs in terms of delays, storage and inventory.

Permanent controls would destroy the business model of German industry, says Rainer Hundsdoerfer, chairman of EBM-Papst. “You get the products you need for assembly here in Germany just in time,” he said by phone. “That’s why the trucks go nonstop. They come here, they unload, they load, and off they go. The cost isn’t the only prime issue” in reinstating border checks. “It’s that we couldn’t even do it.” Nor could anyone else, he adds: “Nothing in German industry, regardless of whether it’s automotives or appliances or ventilators, could exist without the extended workbenches in eastern Europe.”

This sort of over the top comment could be the biggest gift to the Leave side. Then again, they have Boris Johnson and Nigel Farage as their figureheads. Not going to work.

• George Osborne: Brexit Would Leave UK ‘Permanently Poorer’ (G.)

Britain would be “permanently poorer” if voters choose to leave the EU, George Osborne has warned, as a Treasury study claimed the economy would shrink by 6% by 2030, costing every household the equivalent of £4,300 a year. In the starkest warning so far by the government in the referendum campaign, the chancellor describes Brexit as the “most extraordinary self-inflicted wound”. Osborne will embark on one of the government’s most significant moves in the referendum campaign on Monday when he publishes a 200-page Treasury report which sets out the costs and benefits of EU membership. In a Times article the chancellor wrote: “The conclusion is clear for Britain’s economy and for families – leaving the EU would be the most extraordinary self-inflicted wound.”

Osborne warned that the option favoured by Boris Johnson – a deal along the lines of the EU-Canada arrangement – would lead to an economic contraction of 6% by 2030. Supporters of Britain’s EU membership say the EU-Canadian deal would be a disaster for the UK because it excludes financial services, a crucial part of the British economy. The chancellor asked whether this was a “price worth paying” as he said there was no other model for the UK that gave it access to the single market without quotas and tariffs while retaining a say over the rules. Osborne continued: “Put simply : over many years, are you better off or worse off if we leave the EU? The answer is: Britain would be worse off, permanently so, and to the tune of £4,300 a year for every household.”

“It is a well-established doctrine of economic thought that greater openness and interconnectedness boosts the productive potential of our economy. That’s because being an open economy increases competition between our companies, making them more efficient in the face of consumer choice, and creates incentives for business to innovate and to adopt new technologies.”

One corrupt clan fights the other. Rousseff may well be the cleanest of the bunch.

• Brazilian Congress Votes To Impeach President Dilma Rousseff (G.)

Brazilian president Dilma Rousseff suffered a crushing defeat on Sunday as a hostile and corruption-tainted congress voted to impeach her. In a rowdy session of the lower house presided over by the president’s nemesis, house speaker Eduardo Cunha, voting ended late on Sunday evening with 367 of the 513 deputies backing impeachment – comfortably beyond the two-thirds majority of 342 needed to advance the case to the upper house. As the outcome became clear, Jose Guimarães, the leader of the Workers party in the lower house, conceded defeat with more than 80 votes still to be counted. “The fight is now in the courts, the street and the senate,” he said. As the crucial 342nd vote was cast for impeachment, the chamber erupted into cheers and Eu sou Brasileiro, the football chant that has become the anthem of the anti-government protest.

Opposition cries of “coup, coup,coup” were drowned out. In the midst of the raucous scenes the most impassive figure in the chamber was the architect of the political demolition, Cunha. Watched by tens of millions at home and in the streets, the vote – which was announced deputy by deputy – saw the conservative opposition comfortably secure its motion to remove the elected head of state less than halfway through her mandate. There were seven abstentions and two absences, and 137 deputies voted against the move. Once the senate agrees to consider the motion, which is likely within weeks, Rousseff will have to step aside for 180 days and the Workers party government, which has ruled Brazil since 2002, will be at least temporarily replaced by a centre-right administration led by vice-president Michel Temer.

On a dark night, arguably the lowest point was when Jair Bolsonaro, the far-right deputy from Rio de Janeiro, dedicated his yes vote to Carlos Brilhante Ustra, the colonel who headed the Doi-Codi torture unit during the dictatorship era. Rousseff, a former guerrilla, was among those tortured. Bolsonaro’s move prompted left-wing deputy Jean Wyllys to spit towards him. Eduardo Bolsonaro, his son and also a deputy, used his time at the microphone to honour the general responsible for the military coup in 1964. Deputies were called one by one to the microphone by the instigator of the impeachment process, Cunha – an evangelical conservative who is himself accused of perjury and corruption – and one by one they condemned the president. Yes, voted Paulo Maluf, who is on Interpol’s red list for conspiracy. Yes, voted Nilton Capixiba, who is accused of money laundering. “For the love of God, yes!” declared Silas Camara, who is under investigation for forging documents and misappropriating public funds.

Australia played all on red. Which can you take to mean either China, for exports, or debt, for housing. Realizing that in the ned the house always wins, it’s a suicide strategy.

• Australia’s Debt Dilemma Raises Downgrade Fears (BBG)

1986 may seem like a long time ago, but for Australian Treasurer Scott Morrison some of the parallels with his current budget balancing act are getting too close for comfort. Back then, Moody’s and Standard & Poor’s pulled their AAA ratings as weak commodity prices wrecked government income and external finances. With resources again in a funk and a widening funding gap, National Australia Bank and JPMorgan said last week Morrison needs to undertake repairs in his May 3 budget to safeguard the country’s top rankings. Moody’s warned Thursday that debt will grow without revenue-boosting measures. “Moody’s are understandably getting impatient,” said Shane Oliver at Sydney-based AMP Capital Investors.

“We’ve seen each successive budget update push out the return to surplus. This time around – like back in the middle of the ’80s when we did suffer downgrades – we again have a twin deficit problem.” Thirty years ago, then-Treasurer Paul Keating warned the country risked becoming a “banana republic” because of its reliance on resources and it took nearly 17 years to regain the two top credit scores. While Morrison’s language hasn’t been as strident, he has said Australia must live within its means and indicated a focus on reduced spending. The government expects Australia’s budget position to improve in coming years despite the environment for commodity prices as it controls expenditure growth, Finance Minister Mathias Cormann said Thursday in an e-mailed response to questions.

“The Government is committed to responsible budget management which protects our AAA credit rating,” he said. “Our public debt remains low internationally and consistent with our plan, the government is committed to stabilizing and reducing our debt over time.” Australia’s general government net debt is projected to peak at 19.9% in 2017, lower than any Group of Seven economy, according to the IMF’s fiscal monitor. That number has climbed from minus 0.6% in 2009. “One differentiating feature between Australia and other Aaa rated sovereigns is that, while government debt has increased markedly in Australia, it has been more stable for other Aaa sovereigns,” Marie Diron at Moody’s in Singapore wrote. “We expect a further increase in debt and will look at policy measures and the economic environment to review our analysis on this.”

Japan and Europe are in a much better position than the US? Really?

• Peter Schiff: ‘Trump’s Right, America Is Broke’ (ZH)

Euro Pacific Capital’s Peter Schiff sat down with Alex Jones last week to discuss the state of the economy, and where he sees everything going from here. Here are some notable moments from the interview. Regarding how bad things are, and what’s really going on in the economy, Schiff lays out all of the horrible economic data that has come out recently, as well as making sure to take away the crutch everyone uses to explain any and all data misses, which is weather.

“It’s no way to know exactly the timetable, but obviously this economy is already back in recession, and if it’s not in a recession it’s certainly on the cusp of one” “We could be in a negative GDP quarter right now, and I think that if the first quarter is bad the second quarter is going to be worse” “The last couple years we had a rebound in the second quarter because we’ve had very cold winters. Well this winter was the warmest in 120 years so there is nothing to rebound from.”

On the Fed, and current policies, he very bluntly points out that nothing is working, nor has it worked, but of course the central planners will try it all anyway. He also takes a moment to agree with Donald Trump regarding the fact that the U.S. is flat out, undeniably broke.

“The problem for the Fed is how do they launch a new round of stimulus and still pretend the economy is in good shape.” “Negative interest rates are a disaster. It’s not working in Japan, it’s not working in Europe, it’s not going to work here. Just because it doesn’t work doesn’t mean we’re not going to do it, because everything we do doesn’t work and we do it anyway. It shows desperation, that you’ve had all these central bankers lowering interest rates and expecting it to revive the economy. And then when they get down to zero, rather than admit that it didn’t work, because clearly if you go to zero and you still haven’t achieved your objective, maybe it doesn’t work. Instead of admitting that they were wrong, they’re now going negative.”

“The United States, no matter how high inflation gets, we’ll do our best to pretend it doesn’t exist or rationalize it away because we have a lot more debt. America is broke, if you look at Europe and Japan even though there is some debt there, overall those are still creditor nations. The world still owes Europe money, the world still owes Japan money, but America owes more money than all of the other debtor nations combined. Trump is right about that, we are broke, we’re flat broke, and we’re living off this credit bubble and we can’t prick it. Other central banks may be able to raise their rates, but the Fed can’t.”

On how he sees everything unfolding from this point, Peter again points out that the economy is weak and it’s only a matter of time before this entire centrally planned manipulation is exposed for what it is, and becomes a disaster for the Federal Reserve. He likens how investors are behaving today to the dot-com bubble, and the beginning of the global financial crisis.

“Let each wage-earning citizen hold the whole of his or her untaxed earnings–actually touch them. Then let the government pluck its taxes.” “..in six months we would have either a tax revolution or a startling contraction of the budget!”

• Make America Solvent Again (Jim Grant)

[..] The public debt will fall due someday. It will have to be repaid or refinanced. If repaid, where would the money come from? It would come from you, naturally. The debt is ultimately a deferred tax. You can calculate your pro rata obligation on your smartphone. Just visit the Treasury website, which posts the debt to the penny, then the Census Bureau’s website, which reports the up-to-the-minute size of the population. Divide the latter by the former and you have the scary truth: $42,998.12 for every man, woman and child, as I write this. In the short term, the debt would no doubt be refinanced, but at which interest rate? At 4.8%, the rate prevailing as recently as 2007, the government would pay more in interest expense –$654 billion– than it does for national defense.

At a blended rate of 6.7%, the average prevailing in the 1990s, the net federal-interest bill would reach $913 billion, which very nearly equals this year’s projected outlay on Social Security. We always need protection against cockeyed economic experimentation. Once a national consensus on money and debt furnished this protective armor. Money was gold and debt was bad, Americans assumed. Most credentialed economists today will smile at these ancient prejudices. Allow me to suggest that our forebears knew something. Keynes himself would recoil at 0% bank-deposit rates, chronically low economic growth and the towering trillions that we have so generously pledged to one another. (All we have to do now is earn the money to pay them.) How do we escape from our self-constructed fiscal jail? According to the Government Accountability Office, unpaid taxes add up to more than $450 billion a year.

Even so, according to the Tax Foundation, Americans spend 6.1 billion hours and $233.8 billion each tax season complying with a federal tax code that runs to 10 million words. Are we quite sure we want no part of the flat-tax idea? An identical low rate on most incomes. No deductions, no H&R Block. Impractical? So is the debt. So is the spending (and the promises to spend more down the road). We need to stop the squandermania. How? By resuming the principled fight that Vivien Kellems waged against the IRS during the Truman Administration. It enraged Kellems, a doughty Connecticut entrepreneur, that she was forced to withhold federal taxes from her employees’ wages. She called it involuntary servitude, and she itched to make her constitutional argument in court. She never got that chance, but she published her plan for a peaceful revolution.

She asked her readers –I ask mine– to really examine the stub of their paycheck. Observe how much your employer pays you and how much less you take home. Notice the dollars withheld for Medicare, Social Security and so forth. If you are like most of us, you stopped looking long ago. You don’t miss the income that you never get to touch. Picking up where Kellems left off, I propose a slight alteration in payday policy. Let each wage-earning citizen hold the whole of his or her untaxed earnings–actually touch them. Then let the government pluck its taxes. “Such a payroll policy,” wrote Kellems in her memoir, Taxes, Toil and Trouble, “is entirely legal and if it were universally adopted, in six months we would have either a tax revolution or a startling contraction of the budget!” Black ink, sound money and the spirit of Vivien Kellems are the way forward. “Make America solvent again” is my credo and battle cry. You can fit it on a cap.

“The message of today’s populist revolts is that politicians must tear up their pre-crisis rulebooks and encourage a revolution in economic thinking.” No, it’s that today’s politicians must go.

• Is Capitalism Entering A New Era? (Kaletsky)

The defining feature of each successive stage of global capitalism has been a shift in the boundary between economics and politics. In classical nineteenth-century capitalism, politics and economics were idealized as distinct spheres, with interactions between government and business confined to the (necessary) raising of taxes for military adventures and the (harmful) protection of powerful vested interests. In the second, Keynesian version of capitalism, markets were viewed with suspicion, while government intervention was assumed to be correct. In the third phase, dominated by Thatcher and Reagan, these assumptions were reversed: government was usually wrong and the market always right. The fourth phase may come to be defined by the recognition that governments and markets can both be catastrophically wrong.

Acknowledging such thoroughgoing fallibility may seem paralyzing – and the current political mood certainly seems to reflect this. But recognizing fallibility can actually be empowering, because it implies the possibility of improvement in both economics and politics. If the world is too complex and unpredictable for either markets or governments to achieve social objectives, then new systems of checks and balances must be designed so that political decision-making can constrain economic incentives and vice versa. If the world is characterized by ambiguity and unpredictability, then the economic theories of the pre-crisis period – rational expectations, efficient markets, and the neutrality of money – must be revised. Moreover, politicians must reconsider much of the ideological super-structure erected on market fundamentalist assumptions.

This includes not only financial deregulation, but also central bank independence, the separation of monetary and fiscal policies, and the assumption that competitive markets require no government intervention to produce an acceptable income distribution, drive innovation, provide necessary infrastructure, and deliver public goods. It is obvious that new technology and the integration of billions of additional workers into global markets have created opportunities that should mean greater prosperity in the decades ahead than before the crisis. Yet “responsible” politicians everywhere warn citizens about a “new normal” of stagnant growth. No wonder voters are up in arms. People sense that their leaders have powerful economic tools that could boost living standards.

Money could be printed and distributed directly to citizens. Minimum wages could be raised to reduce inequality. Governments could invest much more in infrastructure and innovation at zero cost. Bank regulation could encourage lending, instead of restricting it. But deploying such radical policies would mean rejecting the theories that have dominated economics since the 1980s, together with the institutional arrangements based upon them, such as Europe’s Maastricht Treaty. Few “responsible” people are yet willing to challenge pre-crisis economic orthodoxy. The message of today’s populist revolts is that politicians must tear up their pre-crisis rulebooks and encourage a revolution in economic thinking. If responsible politicians refuse, “some rough beast, its hour come at last” will do it for them.

Japan, Philippines, Tonga, Vanuatu, Ecuador and more

• Fears Of ‘The Big One’ As 7 Major Earthquakes Strike Pacific In 96 Hours (E.)

Japan has been worst hit by the tremors. The latest quake to hit the country yesterday, measuring 7.3 on the Richter scale, injured more than 1,000 and trapped people in collapsed buildings, only a day after a quake killed nine people in the same region. Rescue crews searched for survivors of a magnitude 7.3 earthquake that struck Japan’s Kyushu Island, the same region rattled by a 6.2 quake two days earlier. Around 20,000 troops have had to be deployed following the latest 7.3 earthquake at 1.25am local time on Saturday. Roads have also been damaged and big landslides have been reported, there are also 200,000 households without power. The death toll in the latest Kyushu earthquake is 16 people and a previous earthquake that struck the area on Thursday had killed nine people.

There have been other large earthquakes recorded in recent days, including a major one in southern Japan which destroyed buildings and left at least 45 people injured, after Myanmar was rocked on Wednesday. Japan’s Fire and Disaster Management Agency said 7,262 people have sought shelter at 375 centers since Friday in Kumamoto Prefecture. Prime Minister Shinzo Abe vowed to do everything he could to save lives following the disaster. He said: “Nothing is more important than human life and it’s a race against time.” On Thursday, The Japanese Red Cross Kumamoto Hospital confirmed 45 were injured, including five with serious injuries after a quake of magnitude 6.2 to 6.5 and a series of strong aftershocks ripped through Kumamoto city.

Several buildings were damaged or destroyed and at least six people are believed to be trapped under homes in Mashiki. Local reports said one woman was rescued in a critical condition Scientists say there has been an above average number of significant earthquakes across south Asia and the Pacific since the start of the year. The increased frequency has sparked fears of a repeat of the Nepal quake of 2015, where 8,000 people died, or even worse. Roger Bilham, seismologist of University of Colorado, said: “The current conditions might trigger at least four earthquakes greater than 8.0 in magnitude. “And if they delay, the strain accumulated during the centuries provokes more catastrophic mega earthquakes.”

Debt Rattle March 21 2016

Mar 212016

March 21, 2016 Posted by Raúl Ilargi Meijer at 9:36 am Finance Tagged with: China, class warfare, coral reef, debt, drowning, EM, Greece, refugees, slavery, yuan 1 Response »

DPC Grace Church, New York 1905

• Majority Fears Future Generations ‘Will Never Be Able To Buy A Home’ (G.)

• When Older People Do Better Than Those of Working Age (WSJ)

• ECB Doing Whatever It Takes Can’t Push Euro-Area Banks to Lend (BBG)

• Emerging-Market Currencies Fall Back to Earth After Fed Euphoria (BBG)

• China Central Bank Governor Warns Over Corporate Debt (FT)

• PBOC See-Saws -Again- On Yuan Rate Guidance (CNBC)

• China Has a $590 Billion Problem With Unpaid Bills (BBG)

• TTIP: Fake Freedom Moves Closer To Open Slavery (Gerrans)

• The New Class Warfare In America (Luce)

• Great Barrier Reef Coral Bleaching Threat Raised To Highest Level (G.)

• Greece Struggles To Enforce Migrant Accord On First Day (NY Times)

• The EU Sells Its Soul To Strike A Deal With Turkey (Münchau)

• More Than 50,000 Refugees Now Stranded In Greece (Kath.)

• Nine Refugees Trying To Reach Europe Drown Off Libya (AFP)

• Two Refugees Die On Arrival On Greek Island (AP)

• Three Baby Syrian Refugee Girls Drown Between Turkey, Greece (AFP)

How QE will tear societies apart.

• Majority Fears Future Generations ‘Will Never Be Able To Buy A Home’ (G.)

A large majority of people in Britain fears that future generations will never be able to buy or rent a home to settle down in. Research published on Monday shows three-quarters of people worry that long-term homes are out of reach, with the level of concern highest among members of generation X, now aged between 37 and 50, and generation Y, aged between 15 and 36. The poll by Ipsos/ Mori for the housing charity Shelter also found that 25- to 34-year-olds have moved more than twice as frequently per year of their lifetime as pensioners. Shelter said the findings were “alarming” and warned the country was at the “mercy of the housing crisis”, which has left millions facing a “lifetime of instability”.

The survey came as the average house price in England passed the £300,000 mark for the first time, increasing from £299,287 in February to £303,190, according to the property website Rightmove. Asking prices have jumped by more than £100,000 typically over the last decade, it said. In March 2006, the average price was £200,980. Average prices hit new heights across six regions. A typical home now costs £644,045 to buy in London; £399,680 in the south-east; £326,836 in east England; £292,251 in the south-west; £204,140 in the West Midlands; and £177,437 in the north-west. Rents rose on average by 4.8% last year across the UK, according to data from Homelet, an insurance company. They rose 7.7% in London, 6.7% in the east Midlands and 6.5% in the south-east.

Campbell Robb, chief executive of Shelter, said the nation’s housing system was broken. “The fact that vast numbers of people fear their grandchildren will never have a home to put down roots highlights the sad truth that this country is once again at the mercy of a housing crisis. Our current housing shortage means millions are facing a lifetime of instability and, understandably, people are giving up hope. But if our history tells us anything, it’s that together we can make things change. For the sake of future generations we cannot make this crisis someone else’s problem.” He added: “You have graduates starting on £40,000 to £45,000 in London, and they don’t take the jobs because they can’t afford to live in London or can’t afford to buy because it is so expensive. We are seeing a generation of people now in their 50s or 60s who are looking at their children, and their children will be worse off than they are. That is the first generation since WWII that we are seeing that happen to, and that is primarily because of the housing market.”

More of the above.

• When Older People Do Better Than Those of Working Age (WSJ)

In deciphering the many forces behind income inequality, economists are flagging a widening shift in the economic fortunes of the old and everyone else. Older people typically have lower incomes than the general population because many of them have stopped working. But the gap between the incomes of those 65 and older and the rest of the population has narrowed significantly in Europe and the U.S. since the recession. The divergence is exacerbating generational imbalances in government pension systems while highlighting the wage struggles of younger workers. Seniors in the U.S. have recently enjoyed healthier income gains—from government and private pensions, investments and, for those still working, salaries—than their younger counterparts, census data shows.

In some countries, France and Spain among them, people 65 and older now earn more on average than younger people do. The average person 65 and older in the U.S. earns 77% of the income of the average citizen, up from 69% in 2008, at the start of the recession. In the U.K. the figure is 89%, up from 78%. In Spain and France, seniors now earn about 103% and 102% of the average worker’s income, respectively, according to an analysis of data from the EU’s official statistics agency. That’s up from 86% in Spain and 96% in France in 2008. This divergence between generations is in part a reflection of demographic shifts that have been brewing for years, as populations grow older and the wealthy postwar baby boomers in particular reach their golden years.

But it is also widening as a consequence of forces bearing down on the earnings of the young, creating a growing imbalance that threatens to undermine the promise that market economies will deliver rising living standards for successive generations. Younger workers are grappling with flat or falling pay, decreased job security and less-affordable housing, sapping the spending power that helps fuel the economy. As the elderly population increases, younger workers also face a rising bill for the extra tax dollars needed to fulfill past governments’ promises to retirees. In parts of Europe, especially, older generations’ incomes are growing in excess of their children’s, often as a direct result of postcrisis government policy, economists say. Consider the U.K. Between 2008 and 2014, the average annual income of seniors in Britain rose 7.3%, or £1,400. Over the same period, the average annual income of working households fell by 5.5%, or £1,600.

ECB buys €60 billion (now $80 billion) per month, but: “..Lending to nonfinancial companies and consumers, excluding mortgages, has been stuck at about €6.8 trillion since June 2014..”

• ECB Doing Whatever It Takes Can’t Push Euro-Area Banks to Lend (BBG)

The European Central Bank began charging banks interest on deposits in June 2014 to encourage them to lend more to companies and consumers. It hasn’t worked. Deposits at the ECB by euro-area banks in excess of required reserves have jumped sixfold since the introduction of negative interest rates, while lending within the currency bloc has barely budged. Of the €646 billion that banks added in assets during the period, about 85% has ended up as deposits at the central bank.

One reason banks are paying to keep money idle is a lack of demand for loans in an economy still recovering from a double-dip recession and a sovereign-debt crisis. Another is that banks saddled with bad loans or low capital levels and those in the midst of restructuring are reluctant to increase lending. Even the ECB’s latest offer to pay banks interest on money they borrow from the central bank may not do the trick. “They’re not profitable enough to substantially increase lending, so even the negative rate for lending by the ECB to the banks probably won’t help much,” said Jan Schildbach at Deutsche Bank in Frankfurt. “It’s not lack of liquidity or its price that’s the problem.”

Lending to nonfinancial companies and consumers, excluding mortgages, has been stuck at about €6.8 trillion since June 2014, ECB data show, despite the central bank’s liquidity programs to encourage more of those loans. Policy makers have looked at those figures when determining how much cheap money to provide lenders. Banks that increase such loans qualify for more funds. When it went deeper into minus territory on March 10, the ECB said it would use similar criteria to determine if a bank qualifies for negative rates on money it borrows from the central bank. That means the ECB is now willing to pay banks to borrow at the same rate it charges for excess deposits they hold there. And it’s willing to do so even if a bank isn’t increasing lending, as long as the firm is reducing lending at a slower rate than in the previous 12 months.

Bubble.

• Emerging-Market Currencies Fall Back to Earth After Fed Euphoria (BBG)

Emerging-market currencies retreated from multi-month highs as commodity prices fell and the dollar reasserted itself after the Federal Reserve’s dovish turn pushed it down last week. Malaysia’s ringgit led declines, falling from a seven-month high as a drop in Brent crude worsened the outlook for the oil exporter. Currencies from nations dependent on raw materials weakened, including South Africa’s rand and Mexico’s peso. China cut the yuan fixing by the most in three months, while South Korea’s won retreated from the strongest level since December as a technical indicator suggested it’s been overbought against the dollar. The MSCI Emerging Markets Index of stocks declined after entering a bull market Friday.

A gauge of the greenback against its major peers extended its rebound into a second day after slumping to a five-month low last week as the Federal Reserve pared its interest-rate outlook for 2016. That spurred a retreat in the prices of raw materials that have tracked gains in oil this month, damping the export outlook for many developing nations. While China’s economy has stabilized, the longer-term story of slowing growth remains unchanged, according to Bank of Singapore. “The market is making sense of the dovish Fed surprise and thinking that perhaps data in the U.S. will eventually force the Fed’s hand to raise rates more and faster,” said Sim Moh Siong at Bank of Singapore. “I don’t think emerging-market fundamentals have changed all that much.”

Ouch!: “About one-third of listed Chinese companies owe at least three times as much in debt as they own in assets..”

• China Central Bank Governor Warns Over Corporate Debt (FT)

China’s central bank governor has warned that the country’s corporate debt levels are too high and are stoking risks for the economy, just as highly-leveraged Chinese companies have gone on an overseas takeover binge. Adding his voice to a recent chorus of concern by senior Chinese officials, Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), told global business leaders meeting in Beijing that the ratio of lending to gross domestic product was becoming excessive. “Lending and other debt as a share of GDP, especially corporate lending and other debt as a share of GDP, is on the high side,” he said, adding that a highly leveraged economy was more prone to macroeconomic risk. Corporate debt in China has risen to about 160% of GDP, while total debt is about 230%.

The Bank for International Settlements warned this month that a steep rise in private and corporate debt in emerging market economies -“including the largest”- was “eerily reminiscent” of the pre-crisis financial boom in advanced economies. Mr Zhou’s comments came at the end of a week of extraordinary dealmaking by Chinese companies overseas, with Anbang, the Chinese insurance company, bidding nearly $20bn for Starwood Hotels & Resorts and Strategic Hotels & Resorts. Total outbound Chinese merger and acquisitions spending since January is over $100bn, according to figures from Dealogic. Data from 54 Chinese companies that did overseas deals last year show that many are “highly leveraged”, according to S&P.

Chinese officials are concerned that the stability of China’s financial system could be threatened if Chinese companies are unable to repay a large amount of debt, which in turn can threaten economic growth. And as recent months have shown, instability in Chinese financial markets and risks to mainland economic growth rapidly feed through into global markets. [..] Last week China’s chief banking regulator announced a move to try to tackle the country’s bad debt problem by opening the way for the country’s lenders to use debt-for-equity swaps to rid themselves of some of the $200bn of bad bank loans on their balance sheets. Shang Fulin, chairman of the China Banking Regulatory Commission, raised the idea at the closing session of the annual meeting of parliament in Beijing.

The plan has been put forward as a way of tackling the trillions of renminbi of debt that have built up in the Chinese economy as a result of decades of debt-fuelled stimulus and easy credit. Chinese banks’ bad debts stand at Rmb1.27tn, according to official figures, although some analysts believe the real number is many times higher. About one-third of listed Chinese companies owe at least three times as much in debt as they own in assets, according to figures from Wind.

Pushed it up to the highest this year on Friday, takes it down again today. Yeah, credibility…

• PBOC See-Saws -Again- On Yuan Rate Guidance (CNBC)

Strategists are back to debating the direction of China’s currency after the central bank guided the yuan lower on Monday, having let it rise to its highest level of the year against the dollar on Friday. Jan Lambregts, Rabobank’s global head of financial markets research, told CNBC on Monday that he’s anticipating a ten to fifteen% depreciation over the next twelve months. The world’s second-largest economy is facing an unprecedented set of economic and policy challenges and in order to overcome them, the government will have to start making more bold moves in the currency, he explained. “We feel that [yuan depreciation] is a relatively easy step for China compared to the hard, structural reforms they need to do.”

Beijing is expected play down the significance of currency weakness but the country’s rising economic challenges, including a long-awaited restructuring of state-owned enterprises, leave policymakers with little choice, he continued. Following a volatile start to the year, the yuan hit a 2016 high last week following dovish remarks from the U.S. Federal Reserve but recent fixings by the People’s Bank of China revived speculation that authorities may prefer a weaker currency. Monday’s mid-point level was 6.4824 per dollar, 0.3% weaker than the Friday’s mid-point rate of 6.4628. China’s central bank lets the yuan spot rate rise or fall a maximum of 2% against the dollar, relative to the official fixing rate.

Like Lambregts, Michael Heise, chief economist at Allianz, said the yuan could drop to around 7 per dollar as soon as this year. In a recent CNBC editorial, he explained that would bode well with the government’s objective of a market-driven exchange rate.
Should these predictions come true however, it would further damage Beijing’s credibility in the eyes of global markets. Ever since the yuan’s landmark devaluation last August, speculation for further weakness was rife but Beijing has repeatedly shut down those assumptions, warning that it was not targeting more depreciation.

Look, this is simply an economy in deep trouble.

• China Has a $590 Billion Problem With Unpaid Bills (BBG)

Not since 1999 have China’s companies had so much trouble getting customers to actually pay for what they’ve bought. It now takes about 83 days for the typical Chinese firm to collect cash for completed sales, almost twice as long as emerging-market peers. As payment delays spread from the industrial sector to technology and consumer companies, accounts receivable at the nation’s public firms have swelled by 23% over the past two years to about $590 billion, exceeding the annual economic output of Taiwan. The raft of unpaid bills – bigger than at any time since former Premier Zhu Rongji shuttered thousands of state-run companies at the turn of the century – shows how cash shortages at the weakest firms threaten not only banks and bondholders, but also China’s vast web of interconnected supply chains.

With corporate bankruptcies projected to climb 20% this year, more Chinese businesses may be forced to choose between two unpleasant options: keep extending credit to potentially insolvent customers, or cut off the taps and watch sales sink. “There is a knock-on effect through the economy,” said Fraser Howie, the Singapore-based co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” who has followed the nation’s markets for more than two decades. “Part of the end game is default and closure.” It’s easy to see why collecting payments is getting harder in China. Businesses and consumers have been squeezed by the deepest economic slowdown since 1990, while overcapacity has fueled an unprecedented stretch of declines in producer prices. Record corporate debt levels have left many firms struggling to meet their liabilities, with corporate insolvencies jumping by 25% in 2015, according to Euler Hermes.

The world’s largest trade credit insurer sees another 20% increase in Chinese bankruptcies this year, the most among 43 major markets. “It’s a big problem when you have rising insolvencies, a bad economic environment and less liquidity for small companies,” said Mahamoud Islam, the firm’s senior Asia economist in Hong Kong. Those headwinds are increasingly visible in Chinese financial statements, where the accounts receivable and sales entries allow analysts to calculate “days sales outstanding,” or how long it takes a firm to get paid. The median collection time of 83 days has climbed from 79 days in 2014 and 55 days in 2010. It’s higher than in any of the world’s 20 biggest economies except Italy, and compares with the 44-day median for companies in the MSCI EM Index. Chinese industrial firms take longest to convert sales into cash, at 131 days, followed by 120 days for technology companies and 118 days for telecommunications firms.

“The reality is that TTIP is being pushed through in the EU by US authorities and we have no choice in the matter.”

• TTIP: Fake Freedom Moves Closer To Open Slavery (Gerrans)

The new trade negotiations – TTIP – sound dull. It combines the US and EU markets to make the process of fleecing the sheep simpler and cheaper for the wolves. Standard procedure, you may say – and you would be right. But what is interesting is that any pretense at democracy has been dropped from the propaganda song sheet. The Telegraph summarized TTIP thus: “The Transatlantic Trade and Investment Partnership is a series of trade negotiations being carried out mostly in secret between the EU and US. As a bi-lateral trade agreement, TTIP is about reducing the regulatory barriers to trade for big business, things like food safety law, environmental legislation, banking regulations and the sovereign powers of individual nations. It is, as John Hilary, Executive Director of campaign group War on Want, said: “An assault on European and US societies by transnational corporations.”

The advantage of TTIP branding from a population-management point of view is that it sounds so boring; a bit like a truncated version of Tippex as envisaged by someone with dyslexia – how evil can it be? The answer is: more evil than drinking noxious white fluid designed to correct typing errors. Under TTIP, public services, education and health services will be open for tender. EU food and cosmetics standards will be brought in line with the much lower standards in operation in the US. What banking protections exist after the last collapse will likely be removed. The walls in data privacy will become porous between the two blocs. And since the US is party to NAFTA, it will mean that EU workers will be in competition with Mexico. Nothing will be allowed to stand in the way of making a buck.

As the Telegraph puts it: “One of the main aims of TTIP is the introduction of Investor-State Dispute Settlements (ISDS), which allow companies to sue governments if those governments’ policies cause a loss of profits. In effect it means unelected transnational corporations can dictate the policies of democratically elected governments.” Put nicely, then, TTIP is a drive to the lowest common denominator between the laws which currently exist in the EU and the US combined with the creation of an unaccountable executive branch committed only to the interests of corporations. This means the workers in both areas will be on an accelerated race to the bottom, able only to compete on the basis of slave wages.

Put more generally, it is the creation of a mega-bloc designed to subsume the EU by stealth and place it in the thrall of the powers which control the US. Of course, those tasked with selling TTIP to the people it is going to fleece, claim nothing but upside. They cite the usual carrots: more jobs, higher wages, lower prices. But then they would say that, wouldn’t they? The reality is that TTIP is being pushed through in the EU by US authorities and we have no choice in the matter. This is where a modern commentator is supposed to be outraged: corporations and government cabals are in collusion – how could they! But I don’t see it that way. This isn’t a freak occurrence. Socrates placed democracy one step away from tyranny. What’s happening now isn’t democracy warping into something fiendish and weird. This is democracy’s natural pathway; where it was always going.

The classes themselves are being redefined.

• The New Class Warfare In America (Luce)

Say what you like about Donald Trump, he knows his market. “I love the poorly educated,” he said recently to cheers from those he loves. The rest of America inhaled sharply. Welcome to a very un-American debate. Once redundant, the term “working class” is now part of everyday conversation. In an age of stifling political correctness, the only people who are fair game in polite society are blue-collar whites. How absurd these people are, we tell each other, and how ignorant. Don’t they know Mr Trump was born rich? Can they really be so stupid as to fall for his con trick? The derision is not limited to liberal elites. Educated conservatives are just as scathing. Take the National Review, a flagship of thinking conservatives, that described Mr Trump as a “ridiculous buffoon with the worst taste since Caligula”.

In January it pulled together 22 intellectuals to condemn Mr Trump’s candidacy as an existential threat to conservatism. Their efforts had no impact on Mr Trump’s fan base. Now the magazine has switched to damning his supporters. By declaring open season on blue-collar whites, Kevin Williamson’s widely read essay on “white working class dysfunction” marks a turning point. Yet he is only putting into writing what many conservatives say. “The truth about these dysfunctional, downscale communities is that they deserve to die,” Mr Williamson writes. “Economically, they are negative assets. Morally, they are indefensible . . . the white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles. Donald Trump’s speeches make them feel good. So does OxyContin.”

Margaret Thatcher’s acolyte, Norman Tebbit, once sparked fury by implying the jobless should get on their bikes to find work. Mr Williamson says America’s benighted working classes should hire a U-Haul and move on. As an exercise in condescension, Mr Williamson’s words rival the most inbred hereditary peer. As an economic prescription, it is wide of the mark. Millions of Americans are anchored to blighted neighbourhoods by negative equity, or other ties that bind. Their life expectancy is falling. Their participation in the labour market is dropping. The numbers signing up to disability benefits is rising. Opioid prescription drugs are rife. Those that are white tend to vote for Mr Trump. On Super Tuesday this month, the counties with the highest rates of white mortality – whether to overdoses, suicide or other symptoms of community breakdown – came out heavily for Mr Trump. The correlation was almost exact, according to a Wonkblog study.

“..corals in the remote far north of the reef, where surface sea temperatures reached 33C in February..”

• Great Barrier Reef Coral Bleaching Threat Raised To Highest Level (G.)

Australian environment minister Greg Hunt has been accused of going silent on climate change as the cause of dying coral in the Great Barrier Reef after a bleaching alert was raised to its highest level. Hunt, who surveyed the widespread death of coral in the far north of the reef by plane on Sunday, announced plans for more monitoring and programs to tackle run-off pollution and crown-of-thorns starfish outbreaks. But critics including conservationists and the Queensland environment minister, Steven Miles, said Hunt’s response sidestepped the central role of climate change and heat stress as the cause of the bleaching. Miles said Hunt’s announcements were “window dressing” that duplicated state efforts and ignored the need for a “credible federal government climate policy to address the cause”.

The Great Barrier Reef marine park authority raised the threat level of coral bleaching to a peak of three on Sunday, triggering its highest level of response to “severe regional bleaching” in the northernmost quarter of the 344,400 sq km marine park. The authority’s chairman, Russell Reichelt, said corals in the remote far north of the reef, where surface sea temperatures reached 33C in February, were “effectively bathed in warm water for months, creating heat stress that they could no longer cope with”. “We still have many more reefs to survey to gauge the full impact of bleaching, however, unfortunately, the further north we go from Cooktown the more coral mortality we’re finding,” he said.

Hey, it’s simple, you just redefine anything you don’t like: “..several European countries recently began screening Syrians to determine whether the cities they came from were buffeted by conflict or considered “safe,” meaning that not all Syrians will be eligible for asylum.”

• Greece Struggles To Enforce Migrant Accord On First Day (NY Times)

Greece and the EU scrambled on Sunday to put in place the people and the facilities needed to carry out a new deal intended to address the refugee crisis that is roiling Europe, as hundreds of migrants in rubber dinghies continued to land on the Greek islands from Turkey. The accord, struck between the union and Turkey on Friday, set a 12:01 a.m. Sunday deadline for Turkey to stem the flow of people making clandestine journeys across the Aegean Sea to Greece in an attempt to enter Europe, and required Greece to begin sending back migrants who are not eligible for asylum. Yet processing centers on the Greek island of Lesbos and on several other Greek islands were not adequately staffed to comply immediately with the new measures, and officials said they were waiting for the EU to follow through on a pledge to send at least 2,300 European police and asylum experts to help.

By Sunday afternoon, around 875 migrants in rubber boats had reached the Greek islands since midnight, the government said, despite an operation in Turkey that began Friday to detain migrants and the smugglers who make their journeys possible. Many migrants landing in Lesbos on Sunday appeared to be unaware of the new policies and were reeling from their harrowing journey. Greek television showed black and gray rafts arriving at the island laden with people, some sobbing with relief at having reached Europe, and others nearly unconscious. Two little girls were found drowned, and two Syrian refugees died in the crossings over the weekend. On Sunday, the Greek government began clearing out more than 6,000 migrants who had been waiting at processing centers and camps on several Greek islands, and transporting them on large ferries to Piraeus, the port of Athens, and to Kavala, a port in northern Greece.

From there, they are to be sent to refugee camps recently set up around the country. Nearly 50,000 migrants are stuck on the Greek mainland at camps, in Piraeus and on Greece’s northern border with Macedonia. More than 10,000 people have been living in miserable conditions in the Idomeni camp, on the Macedonian border, after west Balkan countries sealed their borders last month to cut the flow of migrants making their way to Germany and northern Europe. Once emptied of their previous occupants, the migrant centers on the Greek islands are to be used only to process those who make it across the Aegean Sea through a phalanx of patrols run by Frontex, Europe’s border agency, as well as NATO and the Greek and Turkish Coast Guards The Greek authorities will register the migrants and process asylum applications.

Migrants who do not apply for asylum or whose applications are rejected are to be returned to Turkey within two weeks. Under the accord, for every Syrian refugee returned to Turkey, the European Union will resettle one refugee directly from Turkey. For the 10s of 1000s of other migrants stuck in camps around Greece, the situation is less clear. Many of them are Syrian and Iraqi nationals who, for the most part, are considered eligible for political asylum and a program that would relocate them across Europe. Yet governments in several European countries recently began screening Syrians to determine whether the cities they came from were buffeted by conflict or considered “safe,” meaning that not all Syrians will be eligible for asylum. In addition, around one-third of migrants in Greece are from Afghanistan. After several European countries last month abruptly reclassified them as “economic migrants,” most were disqualified from political asylum, and will most likely be repatriated. That process could be lengthy, even after help from other EU countries arrives in Greece.

Sorry, Wolfgang, way ahead of you on this one.

• The EU Sells Its Soul To Strike A Deal With Turkey (Münchau)

The EU had two assets I have always considered un≠assailable, however much I may have questioned various decisions. The first is a lack of alternatives. How else can Europeans confront climate change, a refugee crisis or an over-assertive Russian president if not through the EU? The second is the moral high ground. Compared with the majority of its member states, the EU is less corrupt, more principled and rules-driven. Whereas the world of national politics is full of tacticians out to seek short-term gain, the bloc manages a better mix of politics and policies. It builds broad coalitions and formulates strategic policy objectives. Its horizon extends beyond the life of a parliament. Within a few years those assets have been demolished. The mismanagement of the eurozone crisis made it possible to formulate a rational economic argument for an exit.

Then, on Friday the EU lost its other key asset. The deal with Turkey is as sordid as anything I have seen in modern European politics. On the day that EU leaders signed the deal, Recep Tayyip Erdogan, the Turkish president, gave the game away: Democracy, freedom and the rule of law … For us, these words have absolutely no value any longer. At that point, the European Council should have ended the conversation with Ahmet Davutoglu, the Turkish prime minister, and sent him home. But instead they made a deal with him money and a lot more in return for help with the refugee crisis. Turkey will relocate some 72,000 refugees to the EU a one-for-one swap for every illegal immigrant whom the Turks pick up on smuggler boats in the Aegean Sea. In return, the EU is paying Turkey €6bn and opening up a new chapter in EU accession negotiations -this with a country whose leadership has just abrogated democracy.

The EU is further set to allow visa-free travel to 75m inhabitants of Turkey. The EU not only sold its soul that day, it actually negotiated a pretty lousy deal. I am not in a position to judge whether this deal complies with the Geneva Convention and other parts of international law. I assume that the European Council has made sure it would stand up in court. But even if it is judged to be legal, I have doubts whether it can be implemented. It will be interesting to watch whether the EU will renege on its promises to Turkey if Ankara fails to deliver. Even if the deal is implemented in full, it will not lighten the pressure much. The expected number of refugees making their way into the EU will be a large multiple of the 72,000 agreed with Turkey. A German think-tank has done the maths on refugee flows for this year and has come up with an estimated range of 1.8m-6.4m. The latter figure is a worst-case scenario that would include large numbers from Northern Africa.

And counting fast.

• More Than 50,000 Refugees Now Stranded In Greece (Kath.)

A total of 50,411 migrants and asylum-seekers are currently in Greece according to fresh data provided by the government. According to the data, which were made public Monday, 28,593 migrants and refugees are currently in northern Greece, 13,711 in Attica (Athens), 5,538 on the islands and the rest scattered around the country.

The Libya route is (re-)opening for real. Terribly predictably. Even more drownings, it’s much longer.

• Nine Refugees Trying To Reach Europe Drown Off Libya (AFP)

Nine migrants trying to reach Europe have drowned off Libya and hundreds more been rescued, the Red Crescent said on Sunday amid fears of an increase in crossing attempts as the route from Turkey closes. Leaders from six EU nations led by Britain held talks in Brussels on Friday on how to tackle the flow of migrants across the Mediterranean from Libya after a European naval task force plucked more than 3,100 from the water in just three days. The nine who died were among several hundred migrants who were discovered aboard dilapidated boats off the port of Zawiya, west of Tripoli, on Saturday, Libyan Red Crescent spokesman Malek Mersit said.

A total of 586 migrants were rescued, said Colonel Ayoub Qassem, spokesman for the navy of a Tripoli administration that has disputed power with Libya’s internationally recognised government since 2014. They included 11 children and 60 women, and were mainly Bangladeshis and Sudanese, he said. The drownings came just days after four migrants were killed in a boat fire off Libya and another 187 rescued. European leaders fear that a deal with Turkey to tackle the EU’s worst ever migrant crisis will spark an acceleration in the already large number of crossing attempts from Libya. Around 330,000 have landed in Italy from Libya since the start of 2014. The lawlessness that has reigned in the North African nation since the Nato-backed overthrow of veteran dictator Moamer Qadhafi in 2011 has made it a favoured jumping-off point.

Saw some BBC coverage of this. Looked like heart attacks perhaps.

• Two Refugees Die On Arrival On Greek Island (AP)

Two migrants have been found dead on a boat that arrived on the Greek island of Lesvos, on the first day of the implementation of an agreement between the EU and Turkey on handling the new arrivals. Medical personnel performed CPR on the two men but failed to revive them. The overcrowded boat was carrying dozens of migrants from nearby Turkey on Sunday, the first day for the implementation of the migration agreement between the EU and Turkey. It stipulates how the new arrivals from Turkey will be processed and returned. Some 2,500 migrants currently on Lesvos and other islands are being taken to mainland Greece where they are placed in shelters before EU-wide relocation.

First thing that happened when the deal came into force. Lovely. Thanks, Europe, you make us proud.

• Three Baby Syrian Refugee Girls Drown Between Turkey, Greece (AFP)

A 4-month-old baby girl drowned off the southwestern coast of Turkey when a vessel carrying refugees sank early on March 19, while two other girls, aged between 1 and 2 years-old, were found drowned by Greek Coast Guards off the tiny island of Ro. According to the Turkish Coast Guard, 21 refugees were rescued, but the infant was found dead. The refugee boat reportedly was en route to the Greek island of Chios when it sank off the coast of the Cesme district. Cesme is just 7 kilometers from the island of Chios, providing a tempting target for refugees mostly Syrians fleeing their country s civil war.

Two little girls were found drowned off Ro, while two Syrians suffered heart attacks on arrival at the island of Lesbos, Boris Cheshirkov, a spokesman for the U.N. refugee agency, told AFP. Of the more than 1 million refugees who arrived in the EU last year, more than 850,000 arrived by sea in Greece from Turkey, according to the International Organization for Migration (IOM). Up until mid-March, more than 144,000 arrivals to Greece by sea were reported by the UNHCR, while more than 400 people were reported either dead or missing perilous journey.

Debt Rattle February 8 2016

Feb 082016

February 8, 2016 Posted by Raúl Ilargi Meijer at 9:41 am Finance Tagged with: Australia, Deutsche, Dotcom2.0, EM, oil, selloff, shorts, tech bubble, VW 3 Responses »

DPC City Hall subway station, New York 1904

• Deutsche Bank Is Shaking To Its Foundations (SI)

• Why A Selloff In European Banks Is So Ominous (MW)

• Lending To Emerging Markets Comes To A Halt (FT)

• What the Heck is Going On in the Stock Market? (WS)

• Dot Com 2.0 – The Sequel Unfolds (St.Cyr)

• CEOs, Venture Backers Lose Big As Linkedin, Tableau Shares Tumble (Reuters)

• Record Numbers Of Longs And Shorts Are Piling Into Oil (BBG)

• Prolonged Slump Sparks 2nd Wave Of Cuts To 2016 Oil Company Budgets (Reuters)

• World’s Largest Energy Trader Sees a Decade of Low Oil Prices (BBG)

• 150 North Sea Oil Rigs Could Be Scrapped In 10 Years (Scotsman)

• Iran Wants Euro Payment For New And Outstanding Oil Sales (Reuters)

• Fining Bankers, Not Shareholders, for Banks’ Misconduct (Morgenson)

• Volkswagen’s Emissions Lies Are Coming Back To Haunt It (BBG)

• Moody’s Cuts Rating On Western Australia Iron Ore (WSJ)

• British Expat Workers Flood Home As Australia Mining Boom Turns To Dust (Tel.)

• Ukraine: A USA-Installed Nazi-Infested Failed State (Lendman)

• Through The Past, Darkly, For Europe’s Central Bankers (Münchau)

• German, French Central Bankers Call For Eurozone Finance Ministry (Reuters)

Arguably world’s biggest bank. “Deutsche Bank is now trading at less than 50% of the share price it was trading at in July last year. And no, the market isn’t wrong about this one. ..” The market will be going after Deutsche. Which is too vulnerable to save.

• Deutsche Bank Is Shaking To Its Foundations (SI)

The earnings season has started, and several major banks in the Eurozone have already reported on how they performed in the fourth quarter of 2015, and the entire financial year. Most results were quite boring, but unfortunately Deutsche Bank once again had some bad news. Just one week before it wanted to release its financial results, it already issued a profit warning to the markets, and the company’s market capitalization has lost in excess of 5B EUR since the profit warning, on top of seeing an additional 18B EUR evaporate since last summer. Deutsche Bank is now trading at less than 50% of the share price it was trading at in July last year. And no, the market isn’t wrong about this one.

The shit is now really hitting the fan at Deutsche Bank after having to confess another multi-billion euro loss in 2015 on the back of some hefty litigation charges (which are expected to persist in the future). And to add to all the gloom and doom, even Deutsche Bank’s CEO said he didn’t really want to be there . Talk about being pessimistic! Right after Germany’s largest bank (and one of the banks that are deemed too big to fail in the Eurozone system) surprised the market with these huge write-downs and high losses, the CDS spread started to increase quite sharply. Back in July of last year, when Deutsche Bank’s share price reached quite a high level, the cost to insure yourself reached a level of approximately 100, but the CDS spread started to increase sharply since the beginning of this year.

It reached a level of approximately 200 in just the past three weeks, indicating the market is becoming increasingly nervous about Deutsche’s chances to weather the current storm. Let’s now take a step back and explain why the problems at Deutsche Bank could have a huge negative impact on the world economy. Deutsche has a huge exposure to the derivatives market, and it’s impossible, and then we mean LITERALLY impossible for any government to bail out Deutsche Bank should things go terribly wrong. Keep in mind the exposure of Deutsche Bank to its derivatives portfolio is a stunning 55T EUR, which is almost 20 times (yes, twenty times) the GDP of Germany and roughly 5 times the GDP of the entire Eurozone! And to put things in perspective, the TOTAL government debt of the US government is less than 1/3rd of Deutsche Bank’s exposure.

Because it will pop the European finance bubble.

• Why A Selloff In European Banks Is So Ominous (MW)

European banks have been caught in a perfect storm of market turmoil, lately. Lackluster profits and negative interest rates, have prompted investors to dump shares in the sector that was touted as one of the best investment ideas just a few months ago. The region’s banking gauge, the Stoxx Europe 600, has logged six straight weeks of declines, its longest weekly losing stretch since 2008, when banks booked 10 weeks of losses, beginning in May, according to FactSet data. “The current environment for European banks is very, very bad. Over a full business cycle, I think it’s very questionable whether banks on average are able to cover their cost of equity. And as a result that makes it an unattractive investment for long-term investors,” warned Peter Garnry at Saxo Bank. The doom-and-gloom outlook for banks comes as the stock market has had an ominous start to the year.

East or west, investors ran for the exit in a market marred by panic over tumbling oil prices and signs of sluggishness in China. But for Europe’s banking sector, the new year has started even worse, sending the bank index down 20% year-to-date, compared with 11% for the broader Stoxx Europe 600 index. So what happened? At the end of last year, banks were singled out as one of the most popular sectors for 2016 because of expected benefits from higher bond yields, rising inflation expectations and improved economic growth. That outlook, however, was before the one-two punch of plunging oil and a slowdown in China sapped investor confidence world-wide. Garnry said the slump in bank shares is “a little bit odd” given the recent growth in the European economy and aggressive easing from the ECB.

Normally, banks benefit from measures such as quantitative easing, but it’s just not doing the trick in Europe. “And its worrisome, because banks are much more important for the credit mechanism in the economy here in Europe than it is in the U.S. There, you have a capital market where it’s easier to issue corporate bonds and get funding outside the commercial banking system. We don’t have that to the same extent in Europe, and therefore [the current weakness] is a little bit scary,” he said. Some of the sector’s collective underperformance comes down to exceptionally bad performances for a number of the bigger banks. Deutsche Bank, for example, has tumbled 32% year to date, amid a painful restructuring. And Credit Suisse is down 31% for the year as it posted a massive fourth-quarter loss.

Has long since reversed.

• Lending To Emerging Markets Comes To A Halt (FT)

The surge in lending to emerging markets that helped fuel their own — and much of the world’s — growth over the past 15 years has come to a halt, and may now give way to a “vicious circle” of deleveraging, financial market turmoil and a global economic downturn, the Bank for International Settlements has warned. “In the risk-on phase [of the global economic cycle], lending sets off a virtuous circle in financial conditions in which things can look better than they really are,” said Hyun Song Shin, head of research at the BIS, known as the central bank of central banks. “But flows can quickly go into reverse and then it becomes a vicious circle, especially if there is leverage,” he told the FT. That reversal has already taken place, according to BIS data released on Friday.

The total stock of dollar-denominated credit in bonds and bank loans to emerging markets — including that to governments, companies and households but excluding that to banks — was $3.33tn at the end of September 2015, down from $3.36tn at the end of June. It marks the first decline in such lending since the first quarter of 2009, during the global financial crisis, according to the BIS. The BIS data add to a growing pile of evidence pointing to tightening credit conditions in emerging markets and a sharp reversal of international capital flows. On Thursday, The IMF’s Christine Lagarde warned of the threat to global growth of an impending crisis in emerging markets. The Institute of International Finance, an industry body, said last month that emerging markets had seen net capital outflows of an estimated $735bn during 2015, the first year of net outflows since 1988.

In November, the IIF warned of an approaching credit crunch in EMs as bank lending conditions deteriorated sharply. This month, it said a contraction over the past year in the liquidity made available to the world’s financial system by central banks, primarily those in developed markets, now presented more of a threat to global growth than the slowdown in China and falling oil prices. Jaime Caruana, general manager of the BIS, said that recent turmoil on equity markets, disappointing economic growth, large movements in exchange rates and falling commodity prices were not unconnected, exogenous shocks but indicative of maturing financial cycles, particularly in emerging economies, and of shifts in global financial conditions. He noted that, while some advanced economies had reduced leverage after the crisis, debt had continued to build up in many emerging economies.

“Recent events are manifestations of maturing financial cycles in some emerging economies,” he said. The problem was aggravated, Mr Shin added, by the deteriorating quality of the assets financed by the lending boom. He noted that the indebtedness of companies in emerging markets as a%age of GDP had overtaken that of those in developed markets in 2013, just as the profitability of EM companies had fallen below that of DM ones for the first time. Since then, leverage in emerging economies had increased further as profitability had decreased, with exchange rates playing an important role. “Stronger EM currencies fed into more debt and more risk taking. Now that the dollar is strengthening, we have turned into a deleveraging cycle in EMs. So there is a sudden surge in measurable risk; all the weaknesses are suddenly being uncovered.”

Wolf has another nice list of plunging stocks. Tech bubble.

• What the Heck is Going On in the Stock Market? (WS)

Even Moody’s which is always late to the party with its warnings – but when it does warn, it’s a good idea to pay attention – finally warned: “Don’t fall into the trap of believing all is well outside of oil & gas.” What happened on Friday was the culmination of another dreary week in the stock markets, with the Dow down 1.3% for the day and 1.6% for the week, the S&P 500 down 1.8% and 3.1% respectively, and the Nasdaq down 3.2% and 5.4%. The S&P 500 is now nearly 12% off its record close in May, 2015; the Nasdaq nearly 17%. So on the surface, given that the Nasdaq likes to plunge over 70% before crying uncle, not much has happened yet. But beneath the surface, there have been some spectacular fireworks.

Not too long ago, during the bull market many folks still fondly remember and some think is still with us, a company could announce an earnings or revenue debacle but throw in a big share-buyback announcement, and its shares might not drop that much as dip buyers would jump in along with the company that was buying back its own shares, and they’d pump up the price again. Those were the good times, the times of “consensual hallucination,” as we’ve come to call it, because all players tried so hard to be deluded. It was the big strategy that worked. But not anymore. And that’s the sea change. Reality is returning, often suddenly, and in the most painful manner.

“Don’t wait too long on that “right price.” For if the current value of Alibaba™ is any indication – “right” is becoming more inline with “any” much faster than anyone dared think just a year prior..”

• Dot Com 2.0 – The Sequel Unfolds (St.Cyr)

Once high flyers such as the aforementioned Twitter and others are crashing to Earth like the proverbial canary. Companies like Square™, Box™, GoPro™, Pandora™, and now far too many others have watched their stock prices hammered ever lower. Yes, hammered, as in representing one selling round after another with almost no respite. Some have lost 90% of their once lofty high share prices. What’s further disheartening to those still clinging (or praying) to the “meme-dream” is the ever-increasing reputation of the old “Great companies on sale!” chortles from many a next in rotation fund manager on TV, radio, or print. For it seems every round of selling is being met with ever more selling – no buying. And the lower they go with an ever intensifying pressure, so too does the value of the debutantes in waiting: The yet to be IPO’d unicorns.

Valuation after unicorn valuation are getting marked down in one fell swoops such as that from Fidelity™ and others. However, there probably wasn’t a better representation on how little was left to the unicorn myth (and yes I believed/believe all these valuation metrics were myth and fairy-tales) than the very public meme shattering experienced in both the IPO, as well as the subsequent price action of Square. Here it was touted the IPO price was less than the unicorn implied valuation. This was supposedly done as to show “value” for those coming in to be next in line to pin their tails on the newest unicorn of riches. The problem? It sold, and sold, and is still selling – and not in a good way. It seems much like the other company Mr. Dorsey is CEO of (and how anyone with any business acumen argued that was a good idea is still beyond me. But I digress.) this unicorn also can’t fly. And; is in a perilous downward spiral of meeting the ground of reality.

It seems the only interest in buying these once high flyers can garner is wrapped up into any rumor (usually via a Tweet!) that they are to be sold – as in acquired by someone else who might be able to make money with them. Well, at least that would free up the ole CEO dilemma, no? And speaking of CEO dilemma and acquiring – how’s Yahoo!™ doing? Remember when the strategy for success for Yahoo as posited by the very public adoration styled magazine cover girl articles of its current CEO Marisa Mayer was an acquisition spree? This was all but unquestionable (and much digital ink spilled) in its brilliance and vision inspired forward thinking. Well, it seems all that “brilliance” has been eviscerated much like how the workforce still employed there is yet to be.

Let me be blunt: All you needed to know things were amiss both at Yahoo as well as “the Valley” itself was to look at the most recent decision of Ms. Mayer to throw a lavish multi-million dollar costumed theme party mere months ago. As unquestionably foolish as this was – the rationale given by many a Silicon Valley aficionado that it was nothing, after all, “it’s common in the Valley” was ever the more stupefying! Now it seems Yahoo is “cutting its workforce by double-digit%ages.” And: open to the possibility of selling off core assets of its business. Of course – at the right price. However, I’d just offer this advice: Don’t wait too long on that “right price.” For if the current value of Alibaba™ is any indication – “right” is becoming more inline with “any” much faster than anyone dared think just a year prior.

DotCom 2.0 revisited.

• CEOs, Venture Backers Lose Big As Linkedin, Tableau Shares Tumble (Reuters)

LinkedIn Executive Chairman Reid Hoffman lost almost half his $2.8 billion fortune on paper Friday as shares of his social media company suffered their largest drop on record. He was not alone in taking heavy losses. Other executives at LinkedIn, some at business analytics company Tableau Software, and a number of the companies’ venture capital backers also took losses running into tens of millions of dollars as both stocks tumbled on dismal financial outlooks. It was a humbling moment highlighting the personal exposure many technology leaders and venture capitalists face as Wall Street reassesses their value at an uncertain time for the sector. Silicon Valley-based LinkedIn’s shares closed down 43.6% at $108.38 on Friday, after hitting a three-year low, following a sales forecast well short of analysts’ expectations. Shares of Seattle-based Tableau Software, a business analytics tools company, fell 49.4% to $41.33 after cutting its full-year profit outlook.

As a result, LinkedIn’s Hoffman lost $1.2 billion from his value on paper on Friday, slashing his stake to $1.6 billion, based on his holdings detailed in a filing with securities regulators from March, which the company said was the most up-to-date. LinkedIn’s Chief Executive Jeff Weiner saw the value of his stake fall by $70.9 million to $91.5 million. At Tableau, the value of CEO Christian Chabot’s stake was slashed nearly in half to $268 million, based on his holdings in a filing with securities regulators in March. Besides Hoffman and Weiner, several venture capitalists who sit on LinkedIn’s board and own stakes in the company suffered substantial losses. Michael Moritz, the chairman of Sequoia Capital who owns more shares than any individual investor besides Hoffman and Weiner, lost $56 million as his stake’s value shrank to $72.8 million. David Sze at Greylock Partners saw the value of his stake slide to $5 million after losing $3.9 million on Friday.

“Any commodity market where inventories are at the highest level in more than 85 years is going to be bearish.”

• Record Numbers Of Longs And Shorts Are Piling Into Oil (BBG)

Money managers may not agree where oil prices are headed, but they are increasingly eager to place their bets. Total wagers on the price of crude climbed to the highest since the U.S. Commodity Futures Trading Commission began tracking the data in 2006. Speculators’ combined short and long positions in West Texas Intermediate crude, the U.S. benchmark, rose to 497,280 futures and options contracts in the week ended Feb. 2. WTI moved more than 1% each day in the past three weeks. U.S. crude stockpiles climbed to the highest level in more than 85 years and Venezuela called for cooperation between OPEC and other oil-exporting countries to stem the drop in prices. The slump has slashed earnings from Royal Dutch Shell to Chevron, while Exxon Mobil reduced its drilling budget to a 10-year low.

“This is a reflection of a lot of conviction on both sides,” said John Kilduff at Again Capital, a hedge fund that focuses on energy. “We’re seeing a battle royal between those who think a bottom has been put in and those who think we have lower to go.” WTI slumped 5% to $29.88 a barrel in the report week on the New York Mercantile Exchange. The March contract added 10 cents, or 0.3%, to $30.99 at 12:18 p.m. Singapore time on Monday. [..] “There’s a difference of opinion about the direction of the market,” said Tim Evans at Citi Futures Perspective in New York. “It looks like some of the high price levels offered an opening for shorts to get back into the market. The shorts were the winners on a net basis.”

In other markets, net bearish wagers on U.S. ultra low sulfur diesel increased 11% to 23,765 contracts. Diesel futures advanced 4.5% in the period. Net bullish bets on Nymex gasoline slipped 18% to 14,328 contracts as futures dropped 4.4%. The risks are weighted to the downside because of the global glut, Citi’s Evans said. U.S. crude stockpiles climbed 7.79 million barrels to 502.7 million in the week ended Jan. 29, the highest since 1930, according to Energy Information Administration. Gasoline supplies climbed 5.94 million barrels to 254.4 million, the highest in weekly records going back to 1990. “The rise in U.S. inventories is confirmation of a larger physical supply surplus,” Evans said. “Any commodity market where inventories are at the highest level in more than 85 years is going to be bearish.”

Time for the big margin calls?!

• Prolonged Slump Sparks 2nd Wave Of Cuts To 2016 Oil Company Budgets (Reuters)

Less than two months into the year, the top U.S. shale oil companies have already cut their budget for 2016 a second time as the relentless drop in oil prices continues to erode their cash flow. With oil prices firmly wedged in the low $30-per-barrel range, oil producers are deferring spending on new wells and projects. “Companies’ language has shifted towards preserving balance sheets and cash, and keeping expenditure within cash-flows, which means that budgets are going to fall further,” said Topeka Capital Markets analyst Gabriele Sorbara. 18 of the top 30 U.S. oil companies by output have so far outlined their spending plans for 2016. They have reduced their budget by 40% on average, steeper than most analysts’ expectations, according to a Reuters analysis. These 30 companies had, on average, lowered their spending plans for 2016 by more than 70% last year.

Some such as Hess Corp and ConocoPhillips, who had already planned to spend less this year than in 2015, have now further cut their capital expenditure targets. Others are expected to follow suit. But, is there room for further cuts? While reduced prices for oilfield services and increased efficiencies have helped companies scale back spending, many industry experts say there may not be room for further cuts. “It’s almost like a 80/20 rule – 80% of the cost reduction has already occurred, another 20% remains,” said Rob Thummel at Tortoise Capital Advisors. Although the reduced spending has not yet impacted shale output, production is expected to start falling by the end of the year. “The capital cuts that the industry is making should result in … a supply shock to the downside,” ConocoPhillips’ chief executive, Ryan Lance, said on Thursday.

Looking 10 years ahead? Sure.

• World’s Largest Energy Trader Sees a Decade of Low Oil Prices (BBG)

Oil prices will stay low for as long as 10 years as Chinese economic growth slows and the U.S. shale industry acts as a cap on any rally, according to the world’s largest independent oil-trading house. “It’s hard to see a dramatic price increase,” Vitol CEO Ian Taylor told Bloomberg in an interview, saying prices were likely to bounce around a band with a mid-point of $50 a barrel for the next decade. “We really do imagine a band, and that band would probably naturally see a $40 to $60 type of band,” he said. “I can see that band lasting for five to ten years. I think it’s fundamentally different.” The lower boundary would imply little price recovery from where Brent crude, the global price benchmark, trades at about $35 a barrel.

The upper limit would put prices back to the level of July 2015, when the oil industry was already taking measures to weather the crisis. The forecast, made as the oil trading community’s annual IP Week gathering starts in London on Monday, would mean oil-rich countries and the energy industry would face the longest stretch of low prices since the the 1986-1999 period, when crude mostly traded between $10 and $20 a barrel. Vitol trades more than five million barrels a day of crude and refined products – enough to cover the needs of Germany, France and Spain together – and its views are closely followed in the oil industry.

Taylor, a 59-year-old trader-cum-executive who started his career at Royal Dutch Shell in the late 1970s, said he was unsure whether prices have already bottomed out, as supply continued to out-pace demand, leading to ever higher global stockpiles. However, he said that prices were likely to recover somewhat in the second half of the year, toward $45 to $50 a barrel. For the foreseeable future, Taylor doubts the oil market would ever see the triple-digit prices that fattened the sovereign wealth funds of Middle East countries and propelled the valuations of companies such as Exxon Mobil and BP. “You have to believe that there is a possibility that you will not necessarily go back above $100, you know, ever,” he said.

How many will be capped in for good?

• 150 North Sea Oil Rigs Could Be Scrapped In 10 Years (Scotsman)

Almost 150 oil rigs in UK waters could be scrapped within the next 10 years, according to industry analysts Douglas Westwood, which carries out market research and consultancy work for the energy industry worldwide, said it anticipated that “146 platforms will be removed from the UK during 2019-2026”. The North Sea has been hit hard by plummeting oil prices, with the industry body Oil and Gas UK estimating 65,000 jobs have been lost in the sector since 2014. But Douglas Westwood said that decommissioning could provide an opportunity for the specialist firms involved in the work. Later this month it will publish its decommissioning market forecast for the North Sea – covering Denmark, Germany, Norway and the UK – over the period 2016 to 2040.

Ahead of that a paper on its website predicted that the “UK will dominate decommissioning expenditure”. This is down to the “high number of ageing platforms in the UK, which have an average age of over 20 years and are uneconomic at current commodity prices, as a result of high maintenance costs and the expensive production techniques required for mature fields”. Douglas Westwood said: “The oil price collapse has been bad news for nearly every company involved in the industry, but one group that could actually benefit from it are specialist decommissioning companies. “For these companies there is an opportunity to be part of removing the huge tonnage of infrastructure that exists in the North Sea. With oil prices forecast to remain low, life extension work that has kept many North Sea platforms producing long past their design life no longer makes commercial sense.”

Some people will try and make a big deal out of this.

• Iran Wants Euro Payment For New And Outstanding Oil Sales (Reuters)

Iran wants to recover tens of billions of dollars it is owed by India and other buyers of its oil in euros and is billing new crude sales in euros, too, looking to reduce its dependence on the U.S. dollar following last month’s sanctions relief. A source at state-owned National Iranian Oil told Reuters that Iran will charge in euros for its recently signed oil contracts with firms including French oil and gas major Total, Spanish refiner Cepsa and Litasco, the trading arm of Russia’s Lukoil. “In our invoices we mention a clause that buyers of our oil will have to pay in euros, considering the exchange rate versus the dollar around the time of delivery,” the NIOC source said. Iran has also told its trading partners who owe it billions of dollars that it wants to be paid in euros rather than U.S. dollars.

Iran was allowed to recover some of the funds frozen under U.S.-led sanctions in currencies other than dollars, such as the Omani rial and UAE dhiram. Switching oil sales to euros makes sense as Europe is now one of Iran’s biggest trading partners. “Many European companies are rushing to Iran for business opportunities, so it makes sense to have revenue in euros,” said Robin Mills, CEO of Dubai-based Qamar Energy. Iran has pushed for years to have the euro replace the dollar as the currency for international oil trade. In 2007, Tehran failed to persuade OPEC members to switch away from the dollar, which its then President Mahmoud Ahmadinejad called a “worthless piece of paper”.

What are the odds? If not done retroactively, how would it work out?

• Fining Bankers, Not Shareholders, for Banks’ Misconduct (Morgenson)

Ho-hum, another week, another multimillion-dollar settlement between regulators and a behemoth bank acting badly. The most recent version involves two such financial institutions, Barclays and Credit Suisse. They agreed last Sunday to pay $154.3 million after regulators contended that their stock trading platforms, advertised as places where investors would not be preyed on by high-frequency traders, were actually precisely the opposite. On both banks’ systems, investors trying to execute their transactions fairly were harmed. As has become all too common in these cases, not one individual was identified as being responsible for the activities. Once again, shareholders are shouldering the costs of unethical behavior they had nothing to do with.

It could not be clearer: Years of tighter rules from legislators and bank regulators have done nothing to fix the toxic, me-first cultures that afflict big financial firms. Regulators are at last awakening to this reality. On Jan. 5, for example, the Financial Industry Regulatory Authority, a top Wall Street cop, announced its regulatory priorities for 2016. Among the main issues in its sights, the regulator said, was the culture at these companies. “Nearly a decade after the financial crisis, some firms continue to experience systemic breakdowns manifested through significant violations due to poor cultures of compliance,” said Richard Ketchum, Finra’s chairman.

“Firms with a strong ethical culture and senior leaders who set the right tone, lead by example and impose consequences on anyone who violates the firm’s cultural norms are essential to restoring investor confidence and trust in the securities industry.” But changing behavior — as opposed, say, to imposing higher capital requirements — is a complex task. And regulators must do more than talk about what banks have to do to address their deficiencies. Andreas Dombret is a member of the executive board of the Deutsche Bundesbank, Germany’s central bank, and head of its department of banking and financial supervision. In an interview late last year, he said he was determined to tackle the problem of ethically challenged bankers.

“If behavior doesn’t change, banks will not be trusted and they won’t be efficient in their financing of the real economy,” he said. “A functioning banking system must be based on trust.” Mr. Dombret is a regulator who knows banking from the inside, having held executive positions at J.P. Morgan and Bank of America. Most companies have codes of ethics, Mr. Dombret said, but they often exist only on paper. Regulators could help encourage a more ethical approach by routinely monitoring how a bank cooperates with its overseers, Mr. Dombret said. “How often is the bank the whistle-blower?” he asked. “Not only to get a lesser penalty but also to show that it won’t accept that kind of behavior. We are seeing more of that.”

What VW didn’t get: the key player is the California Air Resources Board. You don’t want to piss them off. “Use of defeat devices is a civil violation” of the Clean Air Act, Uhlmann said. “Lying about CAA compliance is a criminal violation.”

• Volkswagen’s Emissions Lies Are Coming Back To Haunt It (BBG)

No one has died from the emissions-cheating software Volkswagen has admitted it installed in some of its cars, yet the U.S. Justice Department may treat it more harshly than two automakers whose vehicles have killed people. General Motors vehicles were fitted with faulty ignition switches linked to at least 124 deaths. Toyota cars were involved in unintended acceleration responsible for at least four deaths. Neither had to plead guilty in settling criminal allegations, but Volkswagen may be forced to if it’s charged with criminal conduct and also wants to settle, according to attorneys who specialize in environmental law. The German automaker lied to the Environmental Protection Agency and California regulators for almost a year before admitting it created a device to fool emissions tests, Mary D. Nichols, chair of the California Air Resources Board, said in September.

Now the company faces a Justice Department that’s become more willing to push businesses across industries into guilty pleas tied to multibillion-dollar penalties. The U.S. attorney general also made it a priority last year to pursue criminal convictions against corporate executives. “We’ve had difficulty in controlling the automobile industry,” said Daniel Riesel at Sive, Paget & Riesel, a law firm that isn’t involved in the case. “Clearly the government regards this as a very serious environmental dereliction and is making a big deal of it.” [..] The U.S. civil complaint against Volkswagen alleges four violations of the Clean Air Act and cites potential civil fines that could be in the billions of dollars, according to Justice Department officials. If the BP case is a guide, criminal penalties could be less costly.

A criminal claim probably would be based on allegations that Volkswagen lied to government officials, said David Uhlmann, a law professor at the University of Michigan in Ann Arbor and former head of the environmental-crimes section of the Justice Department’s Environment and Natural Resources Division. When confronted about excess emissions by EPA and California regulators in meetings over several months, Volkswagen engineers cited technical issues rather than admitting the engines contained the defeat devices, according to the Justice Department. The company also initially denied in November that it installed software in larger engines to alter emissions, the department said. “Use of defeat devices is a civil violation” of the Clean Air Act, Uhlmann said. “Lying about CAA compliance is a criminal violation.”

Just getting started.

• Moody’s Cuts Rating On Western Australia Iron Ore (WSJ)

Moody’s Investors Service cut its rating on Western Australia, one of the world’s major iron-ore hubs, as a sharp downturn in prices for the steelmaking commodity puts increasing strain on the state’s finances. The ratings agency said on Monday it had downgraded the long-term issuer and senior unsecured debt ratings of the Western Australian Treasury, which issues debt on behalf of the state of Western Australia and state-owned corporations, to Aa2 from Aa1, citing “the ongoing deterioration in Western Australia’s financial and debt metrics and an increasing risk that the state’s debt burden will be higher than indicated.”

Ratings agencies have put many resources-focused companies and countries on watch amid a deep fall in world commodity prices. Last week, Standard & Poor’s Ratings Services said it has lowered BHP Billiton credit rating and cautioned it could cut again as early as this month. It also downgraded Glencore’s rating to just one notch above junk status. Moody’s said Western Australia’s reliance on royalty income from miners meant sharp falls in commodity prices, particularly iron-ore prices, was creating considerable pressure on its budget.

Gives ‘down under’ a new meaning. Watch Perth housing market.

• British Expat Workers Flood Home As Australia Mining Boom Turns To Dust (Tel.)

Mining has been the driving force of Australia’s economic growth for longer than anyone cares to remember – helping GDP growth average 3.6pc a year for most of this century – but the global collapse in commodity prices has led to a painful readjustment Australians have heard the warnings before – but this time, it seems, the boom is truly over. The country is repointing its economy for a new reality, and renegotiating its trading partnership with China and the wider Asia-Pacific. Australia’s mining titans – the likes of BHP Billiton and Rio Tinto, whose shares have led the FTSE 100 lower in the recent market turmoil – have a huge fight on their hands. Meanwhile the migrants who answered their call for workers are considering their options. Will the mining downturn see Britons packing their bags for home?

“There is no doubt that current operating conditions in the mining sector are tough and companies are taking steps to ensure their long-term survival,” says Dr Gavin Lind, of the Minerals Council of Australia. Slowing demand in China – the world’s largest consumer of raw materials, and the buyer of 54pc of Australia’s resources exports in 2015 – has led to dizzying price falls in coal, iron ore, zinc, nickel, copper and bauxite, all minerals mined Down Under. Instead of cutting production and shoring up the price of their product, miners are taking a counter-intuitive tack, and boosting their output. Closing down mines is an expensive business and companies would rather cling on to their market share than cede ground to their rivals. Yet “the increase in volumes is unlikely to be sufficient to offset the effect of lower commodity prices”, Mark Cully, chief economist at the Department of Industry, Innovation and Science, warned in December.

He calculates that Australia’s earnings from mining and energy exports will fall by 4pc to A$166bn (£81bn) this year as lower prices bite. Giant miners such as Rio and BHP believe their low-cost models will enable them to survive while higher-cost competitors go to the wall. However, in common with their peers in the FTSE 100, they have been punished by investors, with their shares tumbling 44pc and 52pc respectively in the last year. While Rio’s balance sheet is regarded as the stronger of the two, both are under pressure to cut their dividends. Analysts expect Rio to unveil a 37pc slump in operating profits when it reports its full-year results this week. BHP, which announces its half-year results on February 23, is facing a 56pc tumble in profits for the year.

Call a spade a spade.

• Ukraine: A USA-Installed Nazi-Infested Failed State (Lendman)

In February 2014, Washington replaced Ukrainian democracy with fascism in Europe’s heartland – illegitimately installed officials waging war on their own people. Fundamental human and civil rights were abolished. Police state viciousness replaced them. Regime critics risk prosecution, sentencing, imprisonment or assassination. Two years after fascists seized power, conditions for ordinary Ukrainians are deplorable. According to Germany’s daily broadsheet Junge Welt, they’re “staggering.” “Since the end of the Yanukovych era, the average income has decreased by 50%,” it reported – on top of 2015’s 44% inflation, nearly reducing purchasing power by half, making it impossible for most Ukrainians to get by. They’re suffering hugely, deeply impoverished, denied fundamental social services, abolished or greatly reduced en route to eliminating them altogether.

Ukraine’s economy is bankrupt, teetering on collapse, sustained by US-controlled IMF loans, violating its longstanding rules, a special dispensation for Ukraine. It loaned billions of dollars to a deadbeat borrower unable to repay them, an unprecedented act, funding its war machine, turning a blind eye to a hugely corrupt regime persecuting its own people. Ukraine’s GDP is in near free-fall, contracting by 12% last year, projected to continue declining sharply this year and beyond. The average pension was cut to €80 monthly, an impossible amount to live on, forcing pensioners to try getting by any way they can, including growing some of their own food in season. US anointed illegitimate oligarch president Petro Poroshenko is widely despised. So are other key regime officials.

They blame dismal economic conditions mainly on ongoing civil war – US-orchestrated and backed naked aggression against Donbass freedom fighters, rejecting fascist rule, wanting fundamental democratic rights, deserving universal praise and support. According to Junge Welt, regime critics call Kiev claims lame excuses. “What matters is (it’s) done little or nothing to prevent corruption and insider trading,” elite interests benefitting at the expense of everyone else, stealing the country blind, grabbing all they can. Complicit regime-connected oligarchs profit hugely in Ukraine, benefitting from grand theft, super-rich Dmitry Firtash apparently not one of them, calling Kiev “politically bankrupt.”

Days earlier, Ukrainian Economy Minister Aivaras Abromavicius resigned, followed the next day by his first deputy, Yulia Kovaliv, his remaining team, two deputy ministers and Kiev’s trade representative. Parliament speaker Volodymyr Groysman warned of Ukraine “entering a serious political crisis.” Resignations followed nothing done to address vital reforms needed. In his resignation letter, Abromavicius said corrupt officials blocked them, wanting control over state enterprises for their own self-interest, including natural gas company NAK Naftogaz. “Neither I nor my team have any desire to serve as a cover-up for the covert corruption, or become puppets for” regime officials “trying to exercise control over the flow of public funds,” he explained.

Not a bad thought experiment. But having ‘populist’ Beppe Grillo as an example shows how clueless Münchau is about reality. That sort of talk itself is populist. David Cameron in a much more valid example, for one.

• Through The Past, Darkly, For Europe’s Central Bankers (Münchau)

Re-reading John Weitz’s biography of Hjalmar Schacht, Hitler’s Banker , I noted some interesting parallels between the 1930s and now that I had not considered before. It is well known that Hitler relied on Schacht, his central banker, to help fund his rearmament plans. But Weitz also pointed out — and this is potentially relevant to the situation in the eurozone today – that Schacht was only able to pursue his unorthodox policies at the Reichsbank because he had the backing of a dictator. If an extremist leader came to power in a large eurozone country – France or Italy, say – what would happen if they were to appoint a central banker with the acumen of Schacht? And what would be the chances that such a team could succeed in increasing economic growth in the short term? Let me say straightaway that I am not comparing anyone to Hitler – or indeed to Schacht.

My point concerns what an unorthodox central banker can do if he or she has the political support to break with the prevailing orthodoxy. Schacht had two stints as president of the Reichsbank — in the 1920s, when he brought an end to the hyperinflation then crippling Germany, and again from 1933 to 1939. It is hard to identify him with a single economic outlook: in the 1920s he was in favour of the gold standard but then, in the early 1930s, he opposed the consensus that promoted the policies of austerity and deflation. Schacht argued, rightly, that Germany was unable to meet the reparation payments specified in the Young Plan, which was adopted in 1929. On returning to the Reichsbank, Schacht organised a unilateral restructuring of private debt owed by German companies to foreigners.

The German economy had already benefited from withdrawal from the gold standard in 1931, and Schacht piled stimulus upon stimulus. One reason for Hitler’s initial popularity in Germany was the speedy recovery from the depression, which was no doubt helped by a loose fiscal and monetary policy mix. The current policy orthodoxy in Brussels and Frankfurt, which is shared across northern Europe, has some parallels to the deflationary mindset that prevailed in the 1930s. Today’s politicians and central bankers are fixated with fiscal targets and debt reduction. As in the early 1930s, policy orthodoxy has pathological qualities. Whenever they run out of things to say, today’s central bankers refer to “structural reforms”, although they never say what precisely such reforms would achieve.

In principle, the eurozone’s economic problems are not hard to solve: the ECB could hand each citizen a cheque for €10,000. The inflation problem would be solved within days. Or the ECB could issue its own IOUs — which is what Schacht did. Or else the EU could issue debt and the ECB would buy it up. There are lots of ways to print money. They are all magnificent — and illegal.

“..communal solidarity..” That says it all. More Europe! Not. Going. To. Happen.

• German, French Central Bankers Call For Eurozone Finance Ministry (Reuters)

The euro zone needs to press ahead with structural reforms and closer integration, including an euro zone finance ministry, to deliver sustainable growth, the heads of the French and German central banks wrote in a German newspaper on Monday. In a guest article for the Sueddeutsche Zeitung entitled “Europe at a crossroads”, they said the European Central Bank (ECB) was not in a position to create sustainable long-term growth for the 19-country single currency bloc. The ECB has undershot its 2% inflation target for three straight years and is unlikely to return to it to for years to come given low oil prices, lackluster economic growth, weak lending and only modest wage rises in the euro zone.

“Although monetary policy has done a lot for the euro zone economy, it can’t create sustainable economic growth,” Bundesbank President Jens Weidmann and Bank of France Chief Francois Villeroy de Galhau wrote. Instead the euro zone needs a decisive program for structural reforms, an ambitious financing and investment union as well as better economic policy framework, Weidmann and Villeroy de Galhau said. The idea of such a ministry was floated in 2011 to tighten coordination of national policy after the economic crisis had forced the European Union to fund bailouts worth hundreds of billions of euros for Greece, Ireland and Portugal. “The current asymmetry between national sovereignty and communal solidarity is posing a danger for the stability of our currency union,” they wrote.

“Stronger integration appears to be the obvious way to restore trust in the euro zone, for this would favor the development of joint strategies for state finances and reforms so as to promote growth,” they said. Specifically, they called for the creation of a common finance ministry in connection with an independent fiscal council as well as the formation of a stronger political body that can take decisions.

Debt Rattle January 22 2016

Jan 222016

January 22, 2016 Posted by Raúl Ilargi Meijer at 9:46 am Finance Tagged with: China, death, Draghi, EM, Greece, Japan, oil, refugees, short squeeze, steel, Treasuries Comments Off

DPC The steamer Cincinnati off Manhattan 1900

• Two Refugee Boats Sink off Greek Islands; At Least 21 Dead (GR)

• At Least 12 Refugees Killed In New Tragedy Off Turkey (AFP)

• Japanese Stocks Surge by Most in 4 Months In ‘Short Squeeze Galore’ (BBG)

• Japan Must Let Zombie Companies Die (BBG)

• China Shares Struggle Higher On Global Stimulus Hopes (Reuters)

• Draghi’s Groundhog Day Heralds Seven Weeks of ECB Market Dialog (BBG)

• A Scared World Is Taking Its Money And Running Back Home – and to the US (BBG)

• Battered Emerging Markets Race to Stem Outflows (WSJ)

• US Is Hiding -Saudi- Treasury Bond Data That’s Suddenly Become Crucial (BBG)

• Is Something Blowing Up In OIL? (ZH)

• Trillions Could Be Lost In British Housing Bubble Collapse (WMN)

• Hundreds Of Mountain Tops Leveled To Make Way For The New Silk Road (Forbers)

• Glory Days Of Chinese Steel Leave Behind Abandoned Mills And Broken Lives (G.)

• Italy Could Trigger Europe’s Next Financial Crisis (Stratfor)

• IMF Demands EU Debt Relief For Greece Before New Bailout (Guardian)

• Capital Controls Cut Greek Exports By €3.5 Billion In 6 Months (Kath.)

• Over 120,000 Greek Homes Close To Repossession (Kath.)

• One Third of Greeks Cannot Afford Heating Or Hot Water (KTG)

• Greece Demands That Refugees Declare Final EU Destination (Reuters)

• Germany Takes Refugees’ Valuables ‘To Pay For Their Stay’ (Local)

And these f**king clowns are partying in Davos?

• Two Refugee Boats Sink off Greek Islands; At Least 21 Dead (GR)

Two boats carrying refugees and migrants from Turkey to Greece have sunk in the Aegean, leaving 21 dead with six children among them. In two separate incidents off the Greek islands of Kalolymnos and Farmakonisi, at least 21 people lost their lives dead, while dozens were saved by the Hellenic Coast Guard. In the Kalolymnos island area, a boat carrying an unknown number of refugees and migrants sank, despite the good weather conditions. The coast guard rescue boats pulled 14 dead out of the water and managed to rescue 26 people so far.

According to survivors, more than 50 people were aboard the vessel. Rescue efforts continue. Earlier, on another similar incident off Farmakonisi island, seven refugees drowned with six of them being children. According to the coast guard, the refugees were aboard a wooden boat that crashed on rocks. As a result a woman and six children lost their lives. A Frontex boat and a Hellenic Coast Guard boat rushed on the spot and managed to rescue an underage girl. The remaining passengers had managed to reach the coast safely.

That’s a total of at least 33 deaths overnight.

• At Least 12 Refugees Killed In New Tragedy Off Turkey (AFP)

At least 12 migrants were killed and several more went missing Thursday when their boat sank while trying to cross the Aegean Sea from Turkey to EU member Greece, Turkish media reports said. The boat, carrying some 50 migrants, struck trouble after leaving the western Turkish resort of Foca in the Izmir region for the Greek island of Lesvos. Twenty-eight people were saved while up to dozen more are still feared missing, NTV television said.

Turkey, which is home to some 2.2 million refugees from Syria’s civil war, has become a hub for migrants seeking to reach Europe, many of whom pay people smugglers thousands of dollars for the risky crossing. Ankara reached an agreement with the EU in November to stem the flow of refugees heading to Europe, in return for financial assistance. Brussels vowed to provide €3 billion as well as political concessions to Ankara in return for its cooperation in tackling Europe’s worst migrant crisis since World War II. But onset of winter and rougher sea conditions do not appear to have deterred the migrants, with boats still arriving on the Greek islands daily.

Yeah, central banks offered some ‘hope’ too, but that‘s not it: some ‘barrier’ in the markets got triggered big time. Is it that Japan fell into bear territory yesterday?

• Japanese Stocks Surge by Most in 4 Months In ‘Short Squeeze Galore’ (BBG)

Japanese stocks surged by the most in four months as investors weighed prospects for central bank stimulus and bought back into a bear market to cover short positions. The Topix index jumped 5.6% to 1,374.19 at the close in Tokyo, the most since Sept. 9 and paring its worst monthly loss since October 2008. The Nikkei 225 Stock Average soared 5.9% to 16,958.53, also supported by a report the Bank of Japan is considering extra monetary easing. Global equities halted losses on the brink of a bear market as oil rallied and the ECB signaled it may boost stimulus. “We’re seeing short squeeze galore,” said Mikey Hsia at Sunrise Brokers. “Much of this is technical. Japan has had big moves for three days in a row now – it’s becoming common.”

All of the 33 Topix industry groups rose, led by developers, oil explorers and harbor transporters. Volume was 21% above the 30-day average. The index still closed down 2% for the week. [..] The Topix’s 14-day relative strength index closed at 21.29 Thursday, below the level of 30 that some traders say indicates shares will rise. When the measure slid to 24.4 on Jan. 12, the Topix jumped 2.9% the next day. Bearish bets on Tokyo’s stock exchange accounted for more than 40% of total trading value on Thursday. [..] The Japanese gauges fell into a bear a bear market on Wednesday. The Nikkei 225 previously entered a bear market in June 2013, after plunging 20% in less than a month. The gauge soon rebounded, rallying 31% from its low on June 13, 2013, through the end of that year.

FoxConn is reportedly preparing a bid for Sharp.

• Japan Must Let Zombie Companies Die (BBG)

[..] one day, in May 2015, you open your newspaper and see that Sharp has been bailed out by two of Japan’s largest banks, Mizuho Bank and Bank of Tokyo-Mitsubishi. These banks are themselves backed by government bailout guarantees, meaning that Sharp has been indirectly rescued by the government – a prime example of the zombie-firm phenomenon that economists have been complaining about for decades. With those cheap bank loans, the ailing Japanese giant can afford to keep putting out TVs at fire sale prices, making no profit but squeezing your own margins. But you soldier on. The bank bailout does nothing to improve Sharp’s corporate strategy — the company’s managers are content to drag out the status quo for as long as possible.

Eventually, you think, Sharp will quit, the market will become less crowded, and your innovative products and manufacturing processes will be rewarded with bigger profit margins. Then, in January 2016, the Japanese government steps directly into the fray. The Innovation Network Corp. of Japan offers to bail out Sharp with an injection of 200 billion yen (about $1.7 billion). INCJ, which is funded by industrial giants but backed by government guarantees, will keep Sharp’s struggling LCD division alive and merge it with a rival, Japan Display Inc., itself a consortium of large corporations. Faced with this kind of firepower, there is no way you can stay in the market. Nor can you expect a similar bailout – you employ only 100 people, while Sharp employs 50,000.

You fold your startup and move across the Pacific to Silicon Valley, following in the footsteps of other Japanese entrepreneurs. The story of this young Japanese entrepreneur is fictitious, though there are some real-world parallels. But the part about the Sharp bailouts – first by the banks and now by the government – is all too true. Japan Inc. looks dead set on keeping the flailing electronics giant alive. That will keep the market flooded with artificially cheap Sharp products – mobile phones, solar panels, air conditioners, printers, microwave ovens and a host of other items. Entrepreneurs looking to use the Japanese market as a launching pad for innovative products and processes will find themselves blocked by zombies.

Beijing needs to get cautious about its reassuring statements. It’s about credibility.

• China Shares Struggle Higher On Global Stimulus Hopes (Reuters)

China’s fragile shares rose modestly on Friday, showing only a muted response to hints of more policy stimulus in Europe and Japan, which prompted a rally in battered oil prices and global equities. The benchmark Shanghai Composite Index was up 0.6% in the early afternoon, recovering a little of Thursday’s sharp losses. The CSI300 index of the largest listed companies in Shanghai and Shenzhen was also up 0.6%. The indexes veered between positive and negative territory in the morning, with little volume behind the trading. Investors appear increasingly reluctant to risk their money on China’s fickle markets, which have slumped about 17-18% so far this year, and morning gains have often turned to losses by close of day as traders quickly take profits.

Highlighting the lack of faith in the markets, trading volumes in January have been about a third of typical levels last year, which only exaggerates price movements. On Thursday, Vice President Li Yuanchao sought to reassure investors that Beijing would use regulations to prevent volatility in a market that was “not yet mature”. “An excessively fluctuating market is a market of speculation where only the few will gain the most benefit when most people suffer,” Li, who is attending the World Economic Forum in Davos, said in an interview with Bloomberg. Measured by actions rather than words, regulators’ attempts to curb volatility, notably a new circuit breaker mechanism that was ditched after three days of violent falls, have conspicuously failed. The stock markets and China’s yuan currency have come under pressure as a raft of economic indicators have confirmed the country’s declining growth, putting the world’s second-largest economy at the top of global investors’ worry list along with plunging crude oil prices.

That stupid inflation focus is a killer.

• Draghi’s Groundhog Day Heralds Seven Weeks of ECB Market Dialog (BBG)

Once again, Mario Draghi has given himself a month and a half to convince investors he’ll do what’s needed to reignite consumer prices. This time he may hone the message more. The ECB president’s hint that policy makers will bolster stimulus on March 10 raises the prospect of the Governing Council delivering another expansion to its €1.5 trillion bond-buying program, including potentially taking it into new asset classes. Emphasizing the ECB’s ambition to reporters on Thursday, Draghi said that there are “no limits” to how far officials will go to safeguard their inflation goal. “It’s a bit like Groundhog Day,” said Carsten Brzeski at ING-Diba in Frankfurt, reminiscing about the 1993 Bill Murray comedy. “The only question is, will he fulfill the dreams of markets this time around, or will he disappoint again?”

Draghi’s comments herald seven weeks of expectation management as officials hope to better guide some investors stung by the result of the last meeting of 2015, when fresh stimulus fell short of predictions stoked at the previous decision. While the president didn’t elaborate on how he plans to better explain things this time round, he also didn’t exclude that officials had a role in an outcome that sent bond yields and the euro surging. “Communication is a two-way affair,” Draghi said. “It’s very hard to put the blame of some disappointment on one side only.” His challenge has become tougher. With an inflation rate that hasn’t been near the goal of just under 2% in three years, and China’s economic slowdown increasingly dragging on global trade and disrupting markets, the 25-member Governing Council risks being seen as too slow and cumbersome.

Long predicted: the USD is coming home.

• A Scared World Is Taking Its Money And Running Back Home – and to the US (BBG)

A tide of money went out to emerging markets for more than a decade, pushed by accommodative monetary policy in the U.S. and pulled by the promise of robust growth. Now that tide is coming back in as investors seek to repatriate funds or flock to U.S.-dollar denominated assets as a safe haven amid sluggish economic growth and global market turmoil. “There are around $47 trillion in private and official investment abroad and far too many that wish to retreat home or to the U.S.,” writes Deutsche Bank Macro Strategist Sebastien Galy in a report titled “The Retreat of Global Balance Sheets.” “These flows are triggered in good part by a recognition that emerging markets’ potential growth is slowing down structurally without enough compensating growth in developed economies.”

The broad implications of this is that liquidity will be starved in parts of the emerging markets but ample in advanced economies and that the U.S. dollar and euro should benefit, the latter more so from direct investments than from portfolio inflows. In some respects, emerging markets have become victims of their own success, notes Galy, who explains how we reached this point: “Growth is easier initially in an emerging economy as each additional unit of capital and labor offers a high return. As the economy grows their returns diminish as the relatively inefficient services sector grows relative to manufacturing. Intervening against currency appreciation accelerates this transition by importing easier Fed policy. But with a mispricing of capital, it typically leads to an over usage, inefficiencies and in some cases excessive domestic valuations. As growth slows down structurally, the promises of ever stronger growth fades leaving investors potentially with unsustainable debt levels.”

China, which has seen its marginal return on credit growth continue to shrink, is perhaps the poster child for the sequence Galy describes. This course of events has led Beijing to begin drawing down on its foreign reserves, which are primarily composed of U.S. debt, in a move that puts upward pressure on U.S. Treasury yields and has the opposite effect on the value of the dollar. This dynamic, however, is swamped by the appetite for Treasuries from the private sector, says the strategist. [..] Repatriation will be fueled primarily by portfolio outflows from riskier emerging market positions and sovereign wealth fund liquidations. Since U.S. investors have far and away the highest stock of foreign equity ownership, this trend is also conducive to more greenback strength.

In fact, Galy found that “during the rapid rise in the dollar in 2015, the foreign exchange hedging decision had a clear causal and feedback loop on the spot price.” That is, as the dollar rose, more investors chose to use hedged equity exchange-traded funds, which provided an impetus for further gains in the greenback.

But they can’t.

• Battered Emerging Markets Race to Stem Outflows (WSJ)

A number of emerging markets are taking a risky approach to dealing with growing pressure on their currencies: They’re trying to ban it. Oil-dependent Azerbaijan said this week it would slap a 20% tax on any transaction that takes money out of the country. Saudi Arabia told banks with branches there to stop allowing traders to make certain bets on further depreciation of its currency, the riyal. Nigeria recently halted imports of goods including rice and toothpicks and imposed spending limits on credit and debit cards denominated in foreign currency. The capital controls are aimed at deterring or slowing the outflow of money and reducing the downward pressure on currencies that traders are betting have farther to fall.

But they also risk exacerbating the problem by driving away foreign investors who bristle at limitations on the flow of capital and hurting businesses that need to hedge. “It’s a sign of economic weakness and a dramatic shift in terms of trade, and it also increases the risk premium because of the policy uncertainty,” said George Hoguet at State Street Global Advisors. How emerging markets will manage a massive outflow of capital, weakness in their currencies and a swollen debt burden is a major question hanging over the global economy. Trillions of dollars flowed into emerging markets in the years after the financial crisis. But slowing growth in China and a collapse in oil and other commodity prices has reversed the tide.

Emerging markets suffered record net outflows of $732 billion in 2015, with China accounting for the bulk of that, according to the Institute of International Finance. Their currencies, meanwhile, weakened an average 17.6% against the dollar last year, according to money manager Ashmore Group, and the trend has shown no signs of letting up. The Russian ruble, Mexican peso and Colombian peso all hit record lows against the dollar on Wednesday. Emerging-market currencies fell 3% in the first two weeks of 2016.

Bonkers.

• US Is Hiding -Saudi- Treasury Bond Data That’s Suddenly Become Crucial (BBG)

It’s a secret of the vast U.S. Treasury market, a holdover from an age of oil shortages and mighty petrodollars: Just how much of America’s debt does Saudi Arabia own? But now that question – unanswered since the 1970s, under an unusual blackout by the U.S. Treasury Department – has come to the fore as Saudi Arabia is pressured by plunging oil prices and costly wars in the Middle East. In the past year alone, Saudi Arabia burned through about $100 billion of foreign-exchange reserves to plug its biggest budget shortfall in a quarter-century. For the first time, it’s also considering selling a piece of its crown jewel – state oil company Saudi Aramco. The signs of strain are prompting concern over Saudi Arabia’s outsize position in the world’s largest and most important bond market.

A big risk is that the kingdom is selling some of its Treasury holdings, believed to be among the largest in the world, to raise needed dollars. Or could it be buying, looking for a port in the latest financial storm? As a matter of policy, the Treasury has never disclosed the holdings of Saudi Arabia, long a key ally in the volatile Middle East, and instead groups it with 14 other mostly OPEC nations including Kuwait, the United Arab Emirates and Nigeria. For more than a hundred other countries, from China to the Vatican, the Treasury provides a detailed breakdown of how much U.S. debt each holds. “It’s mind-boggling they haven’t undone it,” said Edwin Truman, the former Treasury assistant secretary for international affairs during the late 1990s. Because relations were rocky and the U.S. needed their oil, the Treasury “didn’t want to offend OPEC. It’s hard to justify this special treatment for OPEC at this point.”

For its part, the Treasury “aggregates data where more detailed reporting might disclose the positions of individual holders,” spokeswoman Whitney Smith said. While that position is consistent with the International Investment and Trade in Services Survey Act, which governs disclosures of investments made by foreign persons and governments, and shields individuals in countries where Treasuries are narrowly held, it hasn’t kept the Treasury from disclosing figures for a whole host of other countries – large and small. They range from the $3 million stake held by the Seychelles, to the $69.7 billion investment from the oil-producing economy of Norway, and those of China and Japan, which are both in excess of $1 trillion. Apart from the kingdom itself, only a handful of Treasury officials, and those at the Federal Reserve who compile the data on their behalf, have a clear picture of Saudi Arabia’s U.S. debt holdings and whether they’re rising or falling. For everyone else, it’s a guessing game.

“Even after [yesterday’s] drop, OIL is still at a roughly 20% premium to its underlying index.”

• Is Something Blowing Up In OIL? (ZH)

A week ago we warned of some insane movements and mysterious bid in OIL (the Barclays iPath oil tracking ETN) as it traded a stunning 36% rich to its underlying NAV. Well with oil resurgent today, as contracts roll, something just imploded in OIL…

As Barrons noted, the sharp performance divergence stems from the ETN’s massive price premium over the value of the index it tracks. Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, notes that OIL’s premium rose sharply in recent days and accelerated to 48% by Wednesday’s close. He told Barron’s that institutional traders noticed the extreme premium and are now betting against OIL on the premise that the unusually large premium will revert to normal.

Trading volume in OIL was already more than triple the average over the past month on Thursday with three hours left in the trading day. Even after today’s drop, OIL is still at a roughly 20% premium to its underlying index. Chintawongvanich says that it’s not too late for investors who own OIL to ditch it for USO: “You don’t want to be stuck holding the bag when this drops to NAV.” Simply put – retail moms and pops who piled into OIL without thinking about NAV or technical flows just got f##ked! As we concluded previously, The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.

Not could, will.

• Trillions Could Be Lost In British Housing Bubble Collapse (WMN)

It is interesting how the Brits’ fascination with property has evolved over time. At present prices, UK residential property is now ‘worth’ about £5 trillion (£5,000 billion) and about 65% is owner occupied. Commercial property, all those shops, factories, offices, plant is ‘only’ £400 billion. The London Stock Exchange, which includes multinational giants with most of their assets and income overseas, is only worth £2.25 trillion. British Government Bonds are £1.5 trillion. There is approximately £700 billion of cash on deposits held by individuals.

It is interesting how something in which we live – and costing us considerable upkeep – has become so significant in terms of our societal structure. I am very alarmed at the excessive price levels of the average ‘home’ but our governments must be concerned that so much of our economics are impacted by what is happening in housing – and the confidence of those who own it. We should all never forget that over-reliance upon one economic asset, a simple box in which to live, however pretty or comfortable, does not make it immune from irrational excess and frankly, the figures are all out of kilter regardless of the lack of enough new homes being built and the insatiable demand for them – apparently (but never forget that all the people here at the moment do have somewhere to live).

[..] the order of asset values should perhaps be: stock market (the base of all our commerce), residential property, commercial property, government bonds. You can see the model requires some considerable re-balancing but perhaps a doubling of the stockmarket is more unlikely than a halving of the value of homes (though the latter would still constitute significant ‘value’ though I shouldn’t wish even to countenance what that would mean for the economy and bad debts). Sadly though, this may be the necessary adjustment required to return to ‘normality’ so watch-out as each could indeed arise.

Man’s respect for his planet.

• Hundreds Of Mountain Tops Leveled To Make Way For The New Silk Road (Forbers)

“Four years ago, all mountains,” my local driver Li Wang said as we putted slowly forward in his diminutive, beaten and battered old Japanese car through the newly built-up downtown of Lanzhou New Area (LNA). This is a place where hundreds of mountain tops have been removed to make flat land for development — an initiative which surely ranks among the most extreme undertakings in the history of urbanization. Lanzhou, the 3.6 million person provincial capital of western China’s Gansu province, was once a big market town on the ancient Silk Road, and there is now a major movement underway to revive this historic relevance. Strategically located on the geographic and cultural cusps between the Chinese heartland and Central Asia, Lanzhou is again being utilized as a gateway to the west, and is being primed to be a major hub of the Silk Road Economic Belt.

The Silk Road Economic Belt is the land-based half of China’s One Belt One Road (OBOR) initiative that will facilitate the creation of a colossal network of new highways, rail lines, logistics and industrial zones, pipelines, power plants, sea ports, administrative centers, and new cities that will stretch from East Asia to Western Europe, spanning 60 countries and over half of the world’s GDP. I was on my way out to see where some of this New Silk Road infrastructure was going to be built, riding along the new six lane highway that extended over an expanse of perfectly flat land through the center of LNA. On both sides of the road were arrays of nearly identical 30-story high-rises packed neatly within their respective 500X500 meter plots. Dozens of these complexes were lined up in bunches, amounting to hundreds of towers and tens of thousands of new apartments.

This was a planned city, a giant grid branded onto the parched desert silt, devised by urban designers who seemed to deify the right angle, and built in a singular blast of development. Most of the buildings of this new city were still empty, but it was evident that life here was starting to simmer. Some of the apartment complexes had opened and residents had already moved in; there were people walking on the sidewalks and cars in the streets. Shops were beginning to open. Li Wang took great pride in pointing out the almost ridiculous amount of banks that lined the main drag. Sprinklers showered the bare desert in hopes that something would grow. An excessive amount of gigantic jumbotrons — mainstays in new Chinese cities — were switched on, blasting promotional videos from the development companies and the local government about the great things they were building here. Just a few years ago none of this existed; it was all mountains.

“China is blessed with the strong and long-term focused leadership of President Xi Jinping, the best leader in the world … With his leadership, we can deal with the inevitable risks and volatilities arising out of the transition.”

• Glory Days Of Chinese Steel Leave Behind Abandoned Mills And Broken Lives (G.)

A billboard on the motorway into China’s steel capital evokes the golden era of the country’s blistering economic rise. “Gathering great wealth!” it boasts. “Business wins the future!” But at the Fufeng steel plant on the outskirts of Tangshan, a once booming industrial hub about 200km south-east of Beijing, there is scant sign of those glory days. Since Fufeng’s owners declared bankruptcy early last year – laying off about 2,000 workers and sparking protests in the process – weeds and rust have begun to consume the steel mill’s industrial ruins. “There’s nobody here – just us,” said one of three security guards braving snow and sub-zero temperatures to watch over the dilapidated facility, which, like many others in the region, has been forced out of business by massive over-capacity and plummeting demand.

Tangshan, a city of about seven million inhabitants in Hebei, China’s steel-making heartlands, was levelled by a devastating 1976 earthquake that is said to have claimed 250,000 lives. But it rose from the ashes to become a heavy-industry powerhouse, propping up a massive Chinese construction boom and churning out more steel in 2014 than the United States. Those days now appear over, as concerns mount over the health of China’s economy and its possible impact on the rest of the world, and Beijing fights to reinvent the world’s second-largest economy and clear its smog-choked skies, in turn piling the pressure on heavily polluting steel plants.

Since China began ramping up efforts to slash steel over-capacity and transition to a more sustainable, consumption-led economic model, some corners of Tangshan’s once bustling industrial sprawl have taken on the appearance of ghost towns. [..] “Things are bleak,” said one retired mill worker who lives in Kua Number One village, just beside Fufeng. Another man, who works at the nearby Guofeng mill, which is still operating, but only just, claimed his monthly pay had been cut by 25%. “Life is really hard right now,” he complained. “Everything here is about steel. If it shuts down, it’s over. If our mill closes, we will have no land, no money and no work,” said the 52-year-old father of one, who declined to give his name.

This week, China announced that its economy last year grew at its slowest rate in 25 years, contributing to fears of an accelerated slowdown that could affect financial markets across the world. On Thursday, Fang Xinghai, a Stanford-educated top economic adviser to president Xi Jinping, attempted to reassure the world over his country’s ability to avoid a hard landing that would have severe consequences for the global economy. “China is blessed with the strong and long-term focused leadership of President Xi Jinping, the best leader in the world,” Fang, the former deputy head of the Shanghai Stock Exchange, told the Wall Street Journal. “With his leadership, we can deal with the inevitable risks and volatilities arising out of the transition.”

How will the ECB try to solve this with Hollande stating that France is in an economic emergency?

• Italy Could Trigger Europe’s Next Financial Crisis (Stratfor)

In the current period of uncertainty, Italy – particularly its banks – appears to be the victim of the moment. The Italian banking index is down 18% this year, and Italy’s third-largest and most historically troubled bank, Monte dei Paschi, has lost 50% of its value during the same period. The most dramatic drops have taken place this week. The Italian stock market regulator has deemed it necessary to ban short selling on Monte dei Paschi stock in an attempt to prevent speculators from benefiting by driving it lower, yet it continues to fall. As is so often the case with the markets, these actions are rooted in fact but with a layer of sentiment on top. Italy’s banks are indeed troubled; their non-performing loans amount to more than €200 billion, and Monte dei Paschi had an extremely weak balance sheet long before a 2013 derivatives scandal dealt it another blow.

But those non-performing loans have been growing ever since 2008, and that growth has slowed of late. Italy’s banking crisis has long been brewing, and the markets appear to be taking it seriously for the first time since ECB President Mario Draghi defused the last market panic by promising to do “whatever it takes to save the euro” in mid-2012. Either way, the market sell-off could seriously damage Italy’s economy. New regulations brought in at the start of the year heighten the risk of a bank run because investors and depositors must now bear the pain of an Italian bank going bust. This is a strong incentive for a bank’s depositors and investors to move their funds elsewhere if they believe the bank is in danger (sentiment plays a role again), and there are reports that Monte dei Paschi depositors are doing just that.

Italy and the European institutions must now look for ways to reverse the sentiment that is making Italian banks the victims and reassure the markets of the banks’ safety. The drastic way of achieving this would be a government bailout, but this is unlikely both because of the new rules and because bailouts typically occur when a crisis is in a more developed state. Another way would be persuading another Italian bank to buy Monte dei Paschi and take on its risky assets at a discount, thereby reassuring the market that Italy’s largest problem is now solved. This is possible in theory, though the travails of banks that bought their weaker peers in the crisis of 2008 might make it a hard sell for potential suitors.

And the EU won’t give it.

• IMF Demands EU Debt Relief For Greece Before New Bailout (Guardian)

The EU will need to provide significant debt relief for Greece if it is to persuade the IMF to put its financial clout behind the country’s third bailout package, the Washington-based organisation has said. After what was described as a cordial meeting between the IMF’s managing director, Christine Lagarde, and the Greek prime minister, Alexis Tsipras, on the sidelines of the World Economic Forum in Davos, the fund said it was only prepared to support the recession-ravaged eurozone country on a strings-attached basis. It said Greece had to be prepared to implement a tough package of economic reform and the country’s eurozone partners had to be willing to write down Greece’s debts.

The IMF took part in the first two Greek bailouts but is concerned that, at 175% of GDP, Greece’s debts are too burdensome and will prevent a lasting recovery. Lagarde told Tsipras the IMF regarded reform of Greece’s pension system, which accounts for 10% of GDP, as vital. The IMF said of the talks: “The managing director reiterated that the IMF stands ready to continue to support Greece in achieving robust economic growth and sustainable public finances through a credible and comprehensive medium-term economic programme. “Such a programme would require strong economic policies, not least pension reforms as well as significant debt relief from Greece’s European partners to ensure that debt is on a sustainable downward trajectory.” The Greek government said the talks had been sincere.

Earlier in the day, Tsipras told Davos he was committed to reforming the Greek economy, which lost 25% of its GDP through austerity programmes which sent jobless rates to twice the eurozone average. But he criticised Europe’s insistence on lowering budget deficits, saying: “We must all understand that, next to balanced budgets, we must also have growth … We need to be more realistic, and show more solidarity too.” The German finance minister, Wolfgang Schäuble, appeared unimpressed by Tsipras’s call for greater solidarity, and suggested he needed to deliver on the promises made to creditors. “My advice is, if we want to make Europe stronger we should implement what we agreed to implement. We can simply say, ‘implementation, stupid’,” Schäuble said.

The EU leaves behind only rubble.

• Capital Controls Cut Greek Exports By €3.5 Billion In 6 Months (Kath.)

From end-June to November 2015, the capital controls cost Greek exports, and therefore the economy in general, some €3.5 billion, or 2 %age points of the country’s GDP, according to an analysis of Bank of Greece data by the Panhellenic Exporters Association. In addition to the €1.88 billion net loss in takings in the first 11 months of last year compared with the year before, exports are believed to have missed out on another €1.65 billion as according to the course set in the first half of the year, the momentum would have seen exports swell considerably in 2015.

At the same time, the transactions terms between Greek enterprises and foreign partners (clients or suppliers) remain very tough, according to the exporters. Furthermore, foreign clients of Greek companies are delaying payments as the local firms are at a disadvantage and cannot exert pressure on them. In 2015 foreign companies extended the payment time for Greek exports by an average of 13 days compared to 2014. The ratio of payments to declared exports dropped to 96.27% in 2015, from 98.48% in 2014, the Bank of Greece data showed. The value of exported goods came to €23.6 billion last year while payments came to just €22.7 billion.

Who’s better off when all these people are evicted? BTW, you think Tsipras is going to throw them out on the street?

• Over 120,000 Greek Homes Close To Repossession (Kath.)

An estimated 122,700 households in Greece are facing the threat of losing their homes due to accumulated loan and tax obligations that they cannot pay, a survey by Marc research company for the Hellenic Confederation of Professionals, Craftsmen and Merchants showed on Thursday. Households’ fears are on the rise due to a change in the legislative framework concerning repossessions valid as of January 1 that has made the criteria for acquiring protection status stricter. A great number of households surveyed (36.3%) said that they live on up to €10,000 per year, which is the lowest income bracket. This is up from 34.4% in 2014 and 28.1% in 2013. Of particular concern is the finding that more than half of the households polled (51.8%) have a pension as their main source of income, up from 42.3% in 2012. Just 6.1% of respondents said they have a business activity as the main source of income, less than half of the share recorded in 2012 (12.6%).

Dire straits.

• One Third of Greeks Cannot Afford Heating Or Hot Water (KTG)

Residents in several underprivileged suburbs of Athens and Piraeus have seen their economic situation to have dramatically deteriorate and consequently also their living standards. According to a survey conducted by the Greek Ombudsman: one in five residents seeks soup kitchens and social groceries in order to get food. Three in ten have no heating and hot water. One in four living in apartment buildings have not turn on the radiators since 2010. The survey has been conducted in 2015 and in Kypseli, Ano Patisia and Agios Panteleimonas districts of Athens as well as in Nikaia-Rendis and Perama suburbs of Piraeus. 17% of the residents of these areas have experienced electricity and/or water outage due to unpaid bills. One in four had to make debt arrangements with the Power or Water company in order to gain again access to electricity and/or water.

Almost half (48.5%) said that in the last five years, they have faced difficulties in the repayment of debts to banks, credit cards, taxes, rents, building maintenance cost, tutor schools and schools. One in six (17%) said that they have experienced power/water outage and one in four (23.4%) said that they live in apartment buildings where the central heating does not operate for economic reasons. 80.2% said that their need for heating in winter and cooling in summer is not covered. 29.2% said that their needs for heating/cooling, cooking, hot water, refrigerator and electricity are not covered due to economic reasons. 35.03% use electricity for heating (electric radiator or A/C), 33.09% use heating oil, 9.04% use natural gas, 8.47% use firewood and 7.34% use LPG. 17% said that they had no telephone landline, 23.2 had no personal computer and 27.7% had no internet access.

All I can think is: poor people. Children freezing to death, caught between politicians playing a power game, who care nothing about human lives.

• Greece Demands That Refugees Declare Final EU Destination (Reuters)

Migrants and refugees arriving in Greece must state their final destination to travel further into the European Union, a Greek police source told Reuters on Thursday, following moves by neighbouring states to quell migrant flows. Serbia on Wednesday said it would deny migrants access to its territory unless they planned to seek asylum in Austria or Germany. “As of today, the final destination – as stated by the migrants – will be registered in the official documents,” the official said without disclosing the reason for the decision.

It was not clear whether the refugees would be banned from travelling further depending on their final destination. But most migrants were expected to state Austria or Germany, refugee agency officials said. Greece, a main gateway to Europe for migrants crossing the Aegean sea, has faced criticism from other EU governments who say it has done little to manage the flow of hundreds of thousands of people arriving from Turkey on its shores. Austria wants to cap the number of people it allowed to claim asylum this year at less than half last year’s figure, it said on Wendesday. It has said it would bar all migrants intending to pass through its northern neighbour Germany to other western European countries.

Sure, why not. They haven’t lost enough yet.

• Germany Takes Refugees’ Valuables ‘To Pay For Their Stay’ (Local)

Germany’s southern states are confiscating cash and valuables from refugees after they arrive, authorities in Bavaria confirmed on Thursday. “The practice in Bavaria and the federal rules set out in law correspond in substance with the process in Switzerland,” Bavarian interior minister Joachim Herrmann told Bild on Thursday. “Cash holdings and valuables can be secured [by the authorities] if they are over €750 and if the person has an outstanding bill, or is expected to have one.” Authorities in Baden-Württemberg have a tougher regime, where police confiscate cash and valuables above €350. The average amount per person confiscated by authorities in the southern states was “in the four figures,” Bild reported.

By confiscating valuables, the states are implementing federal laws, which require asylum seekers to use up their own resources before receiving state aid. “If you apply for asylum here, you must use up your income and wealth before receiving aid,” Aydan Özoguz, the federal government’s integration commissioner, told Bild. “That includes, for example, family jewellery. Even if some prejudices persist – you don’t have it any better as an asylum seeker as someone on unemployment benefit,” Özoguz added. [..] Only the Left party (Die Linke) criticized the confiscations, with MP Ulla Jelpke telling Der Tagesspiegel that “those who apply for asylum are exercising their basic rights [under the German Constititution]. “That must not – even if they are rejected – be tied up with costs,” she argued.

Debt Rattle January 21 2016

Jan 212016

January 21, 2016 Posted by Raúl Ilargi Meijer at 9:43 am Finance Tagged with: China, default, derivatives, diabetes, EM, EU, hunger, hypothermia, IMF, oil, refugees 8 Responses »

Harris&Ewing Goodyear Blimp at Washington Air Post ,DC 1938

• Global Shareholders Have $27 Trillion Locked in Bear Markets (BBG)

• US Futures Drop With Asia Stocks as Oil Falls (BBG)

• Emerging Markets Lost $735 Billion in 2015, $2 Trillion in 2016 (BBG)

• US Oil Posts Biggest One-Day Percentage Loss Since September (WSJ)

• Energy Sector’s Default Risk Higher Than In Great Recession (MW)

• Some Bankrupt Oil and Gas Drillers Can’t Give Their Assets Away (BBG)

• PBOC Injects Most Cash in Three Years in Open-Market Operations (BBG)

• China Stock Rout Seen Getting Uglier as Derivative Trigger Looms (BBG)

• China Is Drowning In Private Sector Debt (Ormerod)

• Deutsche Bank Shares Fall 6% On News Of €2.1 Billion Loss (BBG)

• One In 6 Americans Go Hungry, One In 3 Kids Will Develop Diabetes (Ind.)

• For the Sake of Capitalism, Pepper Spray Davos (Yra Harris)

• 6 Years Suffering The Violence Of A 1,000 Economic Cuts (DI)

• We’ve Hugely Underestimated The Overfishing of The Oceans (WaPo)

• Italy’s Blockbuster Quo Vado? Draws On Bitter Economic Reality (Guardian)

• EU Chief Tusk Gives Refugee Plan 2 Months To Work (AP)

• ‘We Will Come To Athens And Burn Them All’: Protest Returns To Greece (Guardian)

• IMF Cancels Systemic Exemption Rule Created In 2010 To Bail Out Greece (AFP)

• Greece Re-Opens Refugee Camp On Border in Sub-Zero Weather (Kath.)

• Two Refugees –One 5-Year Old Child– Die Of Hypothermia Off Lesvos (Kath.)

Losses to date estimated at $15 trillion.

• Global Shareholders Have $27 Trillion Locked in Bear Markets (BBG)

At least 40 stock markets around the world with a total value of $27 trillion are in bear territory, as investors witness the worst start to a year on record. The U.K. was the latest market to fall 20% from its peak, while India is 1% away from crossing the threshold that traders describe as the onset of bear market. Nineteen countries with $30 trillion have declined between 10% and 20%, thereby entering a so-called correction, according to data compiled by Bloomberg from the 63 biggest markets.

“People are just bottom-fishing.”

• US Futures Drop With Asia Stocks as Oil Falls (BBG)

U.S. index futures declined after a rally in Asian stocks reversed, pushing a gauge of global equities back to the brink of a bear market. Oil fell and the yen strengthened. Benchmark share measures in Tokyo, Shanghai and Manila slumped at least 2.8%, while Standard & Poor’s 500 Index contracts erased early gains to trade 0.9% lower. European index futures slid after the region’s stocks plunged the most since August on Wednesday. China’s equitiesfell despite a drop in money-market rates as the People’s Bank of China injected the most cash via open-market operations since 2013. The yen approached a one-year high reached Wednesday. Copper pared an advance.

Volatility has coursed through financial markets in 2016, amid turmoil in Chinesemarkets and the almost uninterrupted selloff in crude oil. The S&P 500’s plunge Wednesday triggered a technical signal indicating U.S. stocks were oversold, spurring a paring of losses that prevented the MSCI All-Country World Index from entering a bear market. The ECB meets Thursday, the first major monetary authority to review interest rates and policy since turmoil gripped markets at the start of the year. “The ground right now is so unstable, and there’s so much anxiety,” said Ayako Sera at Sumitomo Mitsui Trust. “We saw a rally, but I wouldn’t say that we’re in a full rebound yet. People are just bottom-fishing.”

“The 31 biggest developing markets have lost a combined $2 trillion in equity values since the start of 2016.”

• Emerging Markets Lost $735 Billion in 2015, More to Go (BBG)

Global investors and companies pulled $735 billion out of emerging markets in 2015, the worst capital flight in at least 15 years, the Institute of International Finance said. The amount was almost seven times bigger than what was recorded in 2014, the Washington-based think tank said in a report on Wednesday. China was the biggest loser, with $676 billion leaving its markets. The IIF predicted investors may withdraw $348 billion from developing countries this year. Emerging-market stocks are trading at the lowest levels since May 2009 and a gauge of 20 currencies has slumped to a record. A meltdown in commodity prices and concern over the slowdown in China’s growth to the weakest since 1990 are spurring investors to dump assets from China to Russia and Brazil.

The 31 biggest developing markets have lost a combined $2 trillion in equity values since the start of 2016. “We’ve seen massive outflows from emerging markets to the benefit of the euro zone and Japan,” said Ibra Wane at Amundi Asset Management. “Institutional investors have been more attracted by these regions.” Wane said the shift in flows is a result of monetary-policy changes, as the Federal Reserve raised interest rates in December for the first time in almost a decade, which is also partly to blame for the volatility in emerging-market currencies. “I’d rather look first at stabilization of currencies,” Wane said. “If this were to come true, then probably also flows would come on top of it.”

All 24 emerging-market currencies tracked by Bloomberg have depreciated against the dollar in the past year, with the Argentine peso, the Brazilian real and the South African rand getting hit the worst. “Countries with large current-account deficits, high levels of foreign-exchange corporate indebtedness and questionable macro policy frameworks would come under particular pressure in the event of further emerging-market retrenchment,” the IIF report said. “At-risk countries include Brazil, South Africa and Turkey.” The Chinese yuan’s 5.5% drop in the past 12 months was one of the drivers of outflows from the world’s second biggest economy, according to the IIF report. “The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing, as expectations of persistent RMB appreciation were replaced by rising concerns about a weakening currency,” the report said.

If global equities lost $15 trillion so far, what’s the tally for oil?

• US Oil Posts Biggest One-Day Percentage Loss Since September (WSJ)

The selloff in oil prices accelerated Wednesday, intensifying a slide in global financial markets as investors worried that oil’s relentless downdraft signaled global economic gloom. The front-month U.S. oil contract settled down 6.7%, posting the biggest one-day loss since September. Oil prices have dropped more than 25% this year. Much of the 19-month oil-market selloff has been driven by concerns about ample supplies. What’s increasingly weighing on investors is the fear that demand growth is wilting, particularly in China, which could reflect deeper economic woes. “Global economic forces appear to be driving down demand for commodities, ” Citigroup said in a note. “There is no doubt that declining expectations of global growth are exacerbating the results of oversupply across commodity markets.”

Light, sweet crude for February delivery settled down $1.91 to $26.55 a barrel on the New York Mercantile Exchange. The February contract expires at settlement Wednesday. Brent, the global benchmark, fell 82 cents, or 2.9%, to $27.94 a barrel on ICE Futures Europe, also on track for the lowest settlement since 2003. Oil investors fear that demand in China, which consumes about 12% of world’s crude, may falter as the country shifts to a less energy-intensive economic model. On Tuesday, the Chinese authorities announced the country’s gross domestic product rose 6.9% in 2015, its slowest pace in 25 years. ESAI Energy said Wednesday that the pace of demand growth in China from 2015 to 2030 will be 60% slower than the pace of demand growth from 2000 to 2015.

Spring cleaning?!

• Energy Sector’s Default Risk Higher Than In Great Recession (MW)

Markets are pricing in a higher default risk for the energy sector than they did at the peak of the Great Recession, according to data from Schwab and Barclays. As continued concerns about oil’s global supply glut pushed crude futures below $27 a barrel, sparking a global stock selloff, energy spreads surpassed their 2009 peak. A spread is a yield differential between the index and comparable risk-free Treasurys. Widening spreads mean investors are pricing in more risk for the energy sector and require a higher yield as compensation for their risk. As the following chart shows, the spread on the energy sector of the Barclays U.S. Corporate High-Yield Bond Index, a widely followed gauge of market-priced risk, reached 1,530 basis points as of Tuesday’s close, compared with 1,420 basis points reached during the height of the financial crisis seven years ago. One basis point is equivalent to 0.01% or one hundredth of a percentage point.

Credit-market spreads are often viewed as a leading indicator for equity markets. Spreads in the energy sector have been widening since the summer of 2014, and spiked over the past few months amid the recent rout in oil prices. That dynamic has certainly played out lately. Stocks followed oil’s decline, weighed by sinking shares of energy companies. The energy sector was the worst performer on the S&P 500 on Wednesday, and is down nearly 15% since the beginning of the year. Meanwhile, energy companies led decliners among the Dow industrials. Widening credit spreads imply that “the market is clearly expecting the default rate to pick up, as the balance sheets of some of the riskier energy companies won’t be able to sustain this drop in oil prices” said Collin Martin, director of fixed-income strategy for the Schwab Center for Financial Research.

Orderly way down or mayhem?

• Some Bankrupt Oil and Gas Drillers Can’t Give Their Assets Away (BBG)

Oil is in free fall and Terry Clark couldn’t be happier. In mid-2014, when the crude price topped $100 a barrel, Clark made an offer to buy properties from Dune Energy, a small driller with money trouble. Dune turned him down. A year later, as oil plunged to $60 a barrel, Dune filed for bankruptcy and Clark’s White Marlin Oil & Gas picked up the assets at auction at a deep discount. “What we offered versus what we got it for, it’s a great price,” Clark said. “We’re going to continue to play these bankruptcies. We’re participating in two more right now.” Winners and losers are emerging from the energy bust. What’s a meal for Clark is indigestion for banks that financed the boom using oil and gas properties as collateral. The four biggest U.S. banks – Bank of America, Citigroup, JPMorgan and Wells Fargo – have set aside at least $2.5 billion combined to cover souring energy loans and have said they’ll add to that if prices stay low.

There’s plenty to keep Clark bargain-hunting. Last year, 42 U.S. energy companies went bankrupt, owing more than $17 billion, according to a report from law firm Haynes & Boone. Dune went belly up owing $144.2 million. Its assets sold for $20 million. In May, American Eagle filed for bankruptcy with debts of $215 million. Its properties sold for $45 million in October. BPZ Resources owed $275.2 million. Its assets fetched about $9 million. Endeavour went into bankruptcy owing $1.63 billion. The company sold some assets for $9.65 million and handed over the rest to lenders. ERG Resources opened an auction with a minimum bid of $250 million. Response? No takers. “A lot of people got into this business and didn’t really understand the ups and downs of price cycles,” said Becky Roof, a managing director for turnaround and restructuring with the consulting firm AlixPartners. “They’re getting a very bad dose of reality right now.”

It worked for mere hours. Reminiscent of Bernanke’s 2008 moves.

• PBOC Injects Most Cash in Three Years in Open-Market Operations (BBG)

The People’s Bank of China injected the most cash in almost three years in its open-market operations, helping ease a cash squeeze as the coming Chinese New Year holiday spurs demand for funds at a time when capital outflows are mounting. The central bank said it conducted 110 billion yuan ($16.7 billion) of seven-day reverse-repurchase agreements and 290 billion yuan of 28-day contracts. That compares with 160 billion yuan of contracts that matured and resulted in a net cash injection of 315 billion yuan for this week’s two auctions. Other lending tools were used to add about 700 billion yuan this week for terms ranging from three days to a year.

China is trying to hold borrowing costs down to support its economy without spurring an exodus of funds that drove the yuan to a five-year low this month. Gross domestic product rose last year at the slowest pace in a quarter century and intervention to prop up the exchange rate led to a record $513 billion plunge in the nation’s foreign-exchange reserves. The Chinese New Year holiday – a period for feasting and exchanging gifts – will shut China’s financial markets throughout the week starting Feb. 8. “The market is a bit nervous and liquidity is also needed to cover the Chinese New Year,” said Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale.

“The fact that they are going for longer tenors on reverse repos and its MLF does add to market expectations for a delay in a reserve-ratio cut, which in itself could be linked to the currency market performance.” The central bank injected 410 billion yuan into the banking system via three- and 12-month loans under its Medium-Term Lending Facility this week, while Short-term Liquidity Operations were used to add 55 billion yuan of three-day loans on Monday and another 150 billion yuan of six-day funds on Wednesday. The PBOC also auctioned 80 billion yuan of treasury deposits on behalf of the Ministry of Finance this week.

“Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions..”

• China Stock Rout Seen Getting Uglier as Derivative Trigger Looms (BBG)

If Bank of America is right, Chinese stocks in Hong Kong are poised for a fresh wave of selling. That’s because the benchmark Hang Seng China Enterprises Index is approaching a level that forces investment banks to pare back their bullish futures positions, according to William Chan, the head of Asia Pacific equity derivatives research at BofAML in Hong Kong. The trades, tied to banks’ issuance of structured products, are likely to start unwinding when the index falls through 8,000, a level it briefly breached on Wednesday. The gauge dropped 1% to 7,932.24 at 1:05 p.m. local time on Thursday. Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan.

Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said. “As the market goes lower from here, the downward move may accelerate,” he said. “There will be a large amount of hedging in futures which dealers need to unwind.” While the opaque nature of structured products makes it difficult to gauge how much money is riding on any particular level of the Hang Seng China index, Chan came to his conclusion by analyzing regulatory data from South Korea, one of the few countries that publicizes such figures.

The nation is among the region’s biggest markets for structured products and there’s currently a notional value of about $34 billion from Korea linked to the Hang Seng China measure, according to Chan. When banks sell the structured products to investors, they take on an exposure that’s similar to purchasing a put option on the index, Chan said. To hedge against the possibility of a rally, the banks buy Hang Seng China index futures. If the stock gauge falls below knock-in levels for the structured products – the price at which investors begin to lose their principal – the sensitivity of the bank’s position to index swings gets smaller, and banks respond by selling futures to reduce their hedge.

Along with everyone else.

• China Is Drowning In Private Sector Debt (Ormerod)

The eyes of the financial and economic worlds are now fixed on China, with focus predominantly on Chinese stock markets and the country’s GDP figures. A fascinating perspective was provided last week in the leafy borough of Kingston upon Thames. The university there has recruited the Australian Steve Keen as head of its economics department, and it was the occasion of his inaugural lecture. Keen was one of the few economists to highlight the importance of private sector debt before the financial crisis began in 2008. The title of the lecture itself was exciting: “Is capitalism doomed to have crises?” Judging by the beards and dress style of the audience, many may have expected a Corbynesque rant. Instead, we heard an elegant exposition based on a set of non-linear differential equations.

Private sector debt is the sum of the debts held by individuals and companies, excluding financial sector firms like banks. Keen pointed out that, in the decade prior to the massive crash of 1929, the size of private debt relative to the output of the economy as a whole (GDP) rose by well over 50%. The increase from the late 1990s onwards meant that debt once again reached dizzy heights. In ten years, it rose from being around 1.2 times as big as the economy to being 1.7 times larger. This may seem small. But American GDP in 2007 was over $14 trillion. If debt had risen in line with the economy, it would have been about $17 trillion. Instead, it was $24 trillion, an extra $7 trillion of debt to worry about. Japan experienced a huge financial crash at the end of the 1980s.

The Nikkei share index lost no less than 80% of its peak value, and land values in Tokyo fell by 90%. During the 1980s, private sector debt rose from being some 1.4 times as big as the economy to 2.1 times the size. In China, in 2005, the value of private debt was around 1.2 times GDP. It is now around twice the size. Drawing parallels with the previous experiences of America and Japan, a major financial crisis is not only overdue but it is actually happening. And Keen suggests there is still some way to go. So is it all doom and gloom? Up to a point, Lord Copper. High levels of private sector debt relative to the size of the economy do indeed seem to precede crises. But there is no hard and fast rule on the subsequent fall in share prices.

Japanese shares fell 80% and have not yet recovered their late 1980s levels. In the 1930s, US equities fell 75%, and took until 1952 to bounce back. In the latest financial crisis, they fell by 50% but are even now above their 2007 high. Equally, output responds to these falls in completely different ways. In the 1930s, American GDP fell by 25%, compared to just 3% in the late 2000s. Japan has struggled, but never experienced a major recession. Still, Keen’s arguments leave much food for thought.

World’s biggest bank. Huge derivatives holdings.

• Deutsche Bank Shares Fall 6% On News Of €2.1 Billion Loss (BBG)

Deutsche Bank AG, Germany’s biggest lender, expects to post a €2.1 billion loss for the fourth quarter after setting aside more money for legal matters and taking a restructuring charge. The stock is at the lowest since 2009. About €1.2 billion were earmarked for litigation and €800 million for restructuring and severance costs, mainly in the private and business clients division, the Frankfurt-based firm said Wednesday in a statement. “Challenging market conditions” also hurt earnings at the investment bank during the quarter, cutting group revenue to about €6.6 billion, it said. The bank had reported €7.8 billion of net revenue a year earlier. Co-CEO John Cryan has been seeking ways to restore investor confidence and earnings growth battered by costs tied to past misconduct.

Under his overhaul, Deutsche Bank plans to shrink headcount by 26,000, or a quarter of the workforce, by 2018 while planning to suspend the dividend to help shore up capital buffers. “A real fresh start means even lower stated net profits for some time,” Daniele Brupbacher at UBS in Zurich who has a neutral rating on the shares, wrote in a note on Thursday. Conditions for the company will probably “remain challenging” in the first quarter, he wrote. The stock fell as much as 6% and was down 3.5% at 17.10 euros as of 9:16 a.m. in Frankfurt, the biggest decline in the 46-member Stoxx Europe 600 Banks Index. Deutsche Bank’s 24% decline this year means it’s the worst-valued global bank.

“..obesity and poverty “are neighbours”

• One In 6 Americans Go Hungry, One In 3 Kids Will Develop Diabetes (Ind.)

Film director Lori Silverbush has spoken out on hunger in the US and says it is still a massive problem three years after making a documentary on the subject. The US faces staggering statistics on food poverty – the highest under the current government administration since the 1970s when hunger was almost eradicated in the US. One in six Americans are hungry, while 30% of Americans are described as “food insecure” – meaning they can’t guarantee they can always put food on the table. Mrs Silverbush’s film “A Place At The Table”, which she co-directed alongside Kristi Jacobsen, reveals that 44 million Americans rely on food stamps, which are worth around $3 to $4 per day.

Insufficient funds mean that people can’t afford to buy fresh fruit or vegetables, which have gone up in price by 40% since the obesity crisis began, according to author Marion Nestle, and instead they rely on cheap, processed foods. As a result, obesity and poverty “are neighbours”, said End Hunger Network founder Jeff Bridges. Speaking at the Brooklyn Historical Society on Tuesday evening, Mrs Silverbush said her “blood boiled” when she realized that food poverty is a result of politics. The government has spent $0.75 trillion since 1995 on subsidies to wealthy agriculture companies that are responsible for processed foods, a policy that started during the Great Depression of the 1930s.

“We didn’t know there was hunger in every county or that there were millions of working families that were hungry,” she said. “Malnutrition and hunger cause a cascade of terrible, life-long consequences for kids.” The film also revealed that one in three children born in the year 2000 will be diagnosed with type 2 diabetes. Hunger is expensive. It costs the US government $167 billion a year, according to the film. One interviewee, Barbie Izquierdo, lives in Philadelphia with two children, and her food stamps were taken away once she secured full time employment, leaving her without enough money to feed her family. “Define starving,” she said. “Are you starving if you don’t eat for a day?“

Can’t we just ignore it instead?

• For the Sake of Capitalism, Pepper Spray Davos (Yra Harris)

Please, PEPPER SPRAY ALL THE ATTENDEES OF DAVOS in order to halt the rape of taxpayers and consumers across the globe. This annual conclave is responsible for more wealth destruction and the widening disparity in GINI coefficients than any public policy. I believe that the cost of attending Davos is priced at such an extravagant rate because it is a giant insider scam. Hobnob with politicians and policy makers in an effort to be part of the “smart money” crowd. It was the great moral philosopher and economist Adam Smith who so presciently noted: “People of the same trade seldom meet together, even for the merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The conspiracy against the public has been the financial repression of the global middle class in an effort to bail out those who are attached themselves to the public treasury to maintain the “animal spirits” of crony capitalism.

The cost of an entrance pass to this private/public congress of mover and shakers should sound an alarm to all those who desire transparency in financial markets. In contemporizing the words of Adam Smith, Samuel Huntington was credited in the online research cite, Acton Commentary, as creating the phrase DAVOS MAN: “A soulless man, technocratic, nationless and cultureless, severed from reality. The modern economics that undergirded Davos capitalism is equally soulless, a managerial capitalism that reduces economics to mathematics and separates it from human action and human creativity.”

Friday’s release of the 2010 FOMC transcripts reveals that Chair Bernanke raised concerns “… about inappropriate access to information by outsiders other than the media, including consultants, market people and so on.” It was earlier revealed that Bernanke had held discussions with ECB President Trichet about the seriousness of the European sovereign debt crisis. The Reuters story post-transcript release–“Fed Helped ECB With Swaps after Trichet ‘Personal Appeal’”–quotes Chairman Bernanke: “Yesterday [ECB Chief] Jean-Claude Trichet called me and made what I would characterize as a personal appeal to re-open the swaps that we had before,” Bernanke told his colleagues at the UNSCHEDULED meeting.”

In a further analysis by Reuters, the article notes, “The transcripts, which are released after five years, show how closely Bernanke worked with Trichet, who shared ‘highly confidential’ information about the ECB’s part in a trillion-dollar ‘shock and awe’ rescue plan launched by EU leaders to combat an escalating financial crisis in Europe.” Ten months later Chairman Bernanke is openly warning FOMC members about leaks from its meetings. Curious about how much the DAVOS crowd made from the whispers emanating from the Fed Board Room? It costs more than $600,000 to be a strategic partner at Davos and be allowed into the most high-level meetings with the most important CEOs and policy makers. But if the inside scoop is info beyond the ears of mere mortals PRICE IS NO OBJECT BUT INSIDER PROFITS CERTAINLY ARE. More pepper spray to stop the rapes.

H/t Steve Keen.

• 6 Years Suffering The Violence Of A 1,000 Economic Cuts (DI)

“My generation can’t afford houses. My generation can’t afford to have children. My generation are either leaving the country or jumping in rivers. That’s my generation, man,” Blindboy said on RTE’s Late Late Show on 8 January. “My generation is dealing with neoliberalism [sic] economic policies that are similar enough to the economic liberalism at the time of the Famine,” he said. “It’s a laisse-faire system, where our resources of the country are being sold for private interests and our generation, my generation is screwed.” When I saw that, it got me thinking: negative perceptions of the working class are so strong in Irish society that people who use food banks would rather call themselves “poor” than “working class”. This is the result of successful divide-and-conquer tactics.

Because the truth is that these days – the poor, the working poor, the working class, the middle-class – almost all of us are screwed. The wealth is trickling upwards to a very few. You can see it in a survey the Dublin think tank TASC released in December, which laid out the division of wealth in Ireland. The top 20% are the ones squeezing everybody’s middle: they have almost 73% of Ireland’s wealth. So if we look at a financial definition of working class, rather than a cultural one, the majority of us fit right in there together, even those notionally middle-class people who would recoil if you tried to tell them they were working class. Given this situation, I would expect to see howls of protest in the mainstream media, all the time. But I don’t see this kind of media outcry, and I wonder why.

Maybe it’s because the mainstream media usually take the side of the market, seeing issues from a market perspective. And I guess the market doesn’t care if our generation is screwed. It might actually be a good thing, from a market perspective, because it ensures there’s a steady supply of young people desperate for jobs, which keeps demand for wages and benefits to a minimum. And that would be rather attractive to multinationals looking for cheap workers. Meanwhile, journalists are just trying to survive too. Most of them are in precarious positions, and, unless they want a ticket to the hunger games, it’s human nature for them to keep their heads down and go with the status quo.

Eat jellyfish.

• We’ve Hugely Underestimated The Overfishing of The Oceans (WaPo)

The state of the world’s fish stocks may be in worse shape than official reports indicate, according to new data – a possibility with worrying consequences for both international food security and marine ecosystems. A study published Tuesday in the journal Nature Communications suggests that the national data many countries have submitted to the UN’s Food and Agriculture Organization (FAO) has not always accurately reflected the amount of fish actually caught over the past six decades. And the paper indicates that global fishing practices may have been even less sustainable over the past few decades than scientists previously thought. The FAO’s official data report that global marine fisheries catches peaked in 1996 at 86 million metric tons and have since slightly declined.

But a collaborative effort from more than 50 institutions around the world has produced data that tell a different story altogether. The new data suggest that global catches actually peaked at 130 metric tons in 1996 and have declined sharply – on average, by about 1.2 million metric tons every year – ever since. The effort was led by researchers Daniel Pauly and Dirk Zeller of the University of British Columbia’s Sea Around Us project. The two were interested investigating the extent to which data submitted to the FAO was misrepresented or underreported. Scientists had previously noticed, for instance, that when nations recorded “no data” for a given region or fishing sector, that value would be translated into a zero in FAO records – not always an accurate reflection of the actual catches that were made.

Additionally, recreational fishing, discarded bycatch (that is, fish that are caught and then thrown away for various reasons) and illegal fishing have often gone unreported by various nations, said Pauly. “The result of this is that the catch is underestimated,” he said. So the researchers teamed up with partners all over the world to help them examine the official FAO data, identify areas where data might be missing or misrepresented and consult both existing literature and local experts and agencies to compile more accurate data. This is a method known as “catch reconstruction,” and the researchers used it to examine all catches between 1950 and 2010. Ultimately, they estimated that global catches during this time period were 50% higher than the FAO reported, peaking in the mid-1990s at 130 million metric tons, rather than the officially reported 86 million. As of 2010, the reconstructed data suggest that global catches amount to nearly 109 million metric tons, while the official data only report 77 million metric tons.

Bigger than Star Wars.

• Italy’s Blockbuster Quo Vado? Draws On Bitter Economic Reality (Guardian)

A comedy that captures Italians’ love for il posto fisso – a job for life – has become an unlikely blockbuster hit in Italy. Quo Vado? – or Where Am I Going? – is close to overtaking Avatar as the highest-grossing film in Italian box office history, having generated €59m since its opening on New Year’s Day and beaten international rivals such as Star Wars: The Force Awakens. Even Matteo Renzi, the energetic Italian prime minister, is said to have seen the film with his children. He told one newspaper that he laughed “from the beginning to the end”. The success of Quo Vado? reflects a relatively recent change in Italy: the cushy public sector jobs promising steady income and great benefits that were a staple of the country’s economic engine are now considered a thing of the past.

In their place has come high unemployment – which, while improving, is still at 11.3% – and job insecurity, which has hit young workers particularly hard. Alessandro Giuggioli, a film-maker who produced an independent film, In Bici Senza Sella (On a Bike Without a Saddle), about precarious jobs, said the posto fisso was like the holy grail in Italy: “You know it is a possibility and that you are never going to reach it.” While his parents’ generation enjoyed lifelong job security, Giuggioli said young people in Italy today had to make do with rolling short-term contracts, which have become the new normal. He partly blames Italy’s tax system and bureaucracy. “If an employer wants to hire you for €1,000 (£770) a month, they end up paying €2,500 a month. It’s crazy. And so they hire you for three months instead, paying €600,” he said.

Tusk is the bottom of the barrel, he represents the lowest the EU has to offer. Brussels is setting itself up for a world of pain.

• EU Chief Tusk Gives Refugee Plan 2 Months To Work (AP)

The European Union’s top official warned Tuesday the bloc has just two months to get its migration strategy in order amid criticism that its current policies are putting thousands of people in danger and creating more business for smugglers. “We have no more than two months to get things under control,” European Council President Donald Tusk told EU lawmakers, warning that a summit of EU leaders in Brussels on March 17-18 “will be the last moment to see if our strategy works.” The EU spent most of 2015 devising policies to cope with the arrival of more than 1 million people fleeing conflict or poverty but few are having a real impact. A refugee sharing plan launched in September has barely got off the ground and countries are still not sending back people who don’t qualify for asylum.

A package of sweeteners earmarked for Turkey – including €3 billion, easier visa access for Turkish citizens and fast-tracking of the country’s EU membership process – has borne little fruit. The failure has raised tensions between neighbors, particularly along the Balkan route used by migrants arriving in Greece to reach their preferred destinations like Germany or Sweden further north. Tusk warned that if Europe fails to make the strategy work “we will face grave consequences such as the collapse of Schengen,” the 26-nation passport-free travel zone.

2016 can only be a hot year.

• ‘We Will Come To Athens And Burn Them All’: Protest Returns To Greece (Guardian)

Farmers’ roadblocks, ferries immobilised in ports, pensioners taking to the streets: protest has returned to Greece in what many fear could be the beginning of the crisis-plagued country’s most confrontational winter yet. From the Greek-Bulgarian frontier to the southern island of Crete, farmers are up in arms over the spectre of more internationally mandated austerity. “It’s war,” says Dimitris Vergos, a corn grower speaking from the northern town of Naoussa. “If they [politicians] go on pushing us to the edge, if they want to dehumanise us further, we will come to Athens and burn them all.” With the rhetoric at such levels, prime minister Alexis Tsipras’s leftist-led administration has suddenly found itself on the defensive. Faced with a series of demonstrations – fishermen and stockbreeders will join blockades on Thursday when public and private sector workers also take to the streets – analysts say any honeymoon period Tsipras may once have enjoyed is over.

On Wednesday, convoys of tractors in Thessaly, the nation’s breadbasket, blocked the road at Tempi, effectively cutting the country’s main north-south highway. Hundreds more lined the seafront in Thessaloniki while, further north, police were forced to fire rounds of tear gas at protestors barricading Evangelos Apostolou, the agriculture minister, in an administrative building as fierce clashes erupted in Komotini. The focus of their fury was proposed pension and tax measures, the latest in a battery of reforms set as the price of the debt-stricken nation receiving a third, €86bn, bailout last summer. For farmers, the draft policies are tantamount to the kiss of death. “We are going for all out confrontation,” said the prominent unionist Yannis Vangos, warning that by Friday roadblocks would be erected across a large swath of the county.

“It seems we can’t see eye to eye at all. Things are out of control. It’s not just one thing we have to negotiate.” Six years into Athens’ economic crisis, even more Greeks claim they have been pushed to the point where they can no longer survive the rigours of austerity. With an unprecedented 1.2 million people unemployed – more than 25% of the population – many have been pauperised by the biting effects of keeping bankruptcy at bay. Pensioners, whose incomes have been reduced 12 times at the behest of the EU and IMF, this week also upped the ante taking to the streets. Creditors argue that at 17% of GDP, Greece’s pension system is Europe’s costliest and to great degree the generator of its fiscal dysfunction. But those who stand to be affected by the overhaul counter the changes go too far. For farmers, the reforms will not only raise social security contributions from 6.5% to 27%, but double income tax payments from 13% to 26%, eradicating more than three quarters of their annual earnings.

How can AFP write this without questioning what the IMF did to bail out Ukraine?

• IMF Cancels Systemic Exemption Rule Created In 2010 To Bail Out Greece (AFP)

The IMF abolished Wednesday a rule created in 2010 that allowed it to participate in an international bailout of Greece despite doubts about the country’s debt sustainability. “Today the executive board of the IMF approved an important reform to the Fund’s exceptional access lending framework, including the removal of the systemic exemption,” IMF spokesman Gerry Rice said in a brief statement. The “systemic exemption” amounted to a loophole in the IMF’s longstanding policy that required the crisis lender to judge a member country’s public debt to be sustainable with “high probability” before it could provide financial assistance that exceeds a member’s contribution to the institution.

Reeling from budget and banking crises in 2010, deeply indebted Greece did not meet the sustainability condition and the IMF decided that a debt restructuring could pose severe negative spillovers on the rest of the eurozone. The IMF thus created the “systemic exemption” provision which paved the way for it to join the EU and the ECB in the so-called “troika” of international lenders throwing a lifeline to Greece. For the IMF, that amounted to 30 billion euros ($32.7 billion) in May 2010, then an additional 18 billion euros in a second bailout two years later. The systemic exemption was used more than 30 times to permit loan payments to Greece but also for Ireland and Portugal, two other eurozone members receiving assistance from the troika, by end-May 2014.

Its use, nevertheless, has stirred criticism, notably from some emerging-market countries that saw it as giving favorable treatment to European states in response to pressure from Western powers. With the elimination of the loophole, the IMF is seeking to close a controversial chapter in its recent history as it decides whether to join the EU and ECB in a third bailout of Greece launched last August. In a sign that the abolition of this “systemic exemption” was already effectively in place, the IMF is demanding this time, before unblocking any new loans, that the Europeans first agree to ease Greece’s debt burden to ensure its sustainability.

Greece needs to protest much louder in Brussels.

• Greece Re-Opens Refugee Camp On Border in Sub-Zero Weather (Kath.)

Some 350 refugees and migrants, including many children, had gathered by Wednesday night in freezing conditions near Idomeni on Greece’s border with the Former Yugoslav Republic of Macedonia (FYROM) after the latter closed its borders. Greek officials said that the border has been closed since Tuesday night, leaving dozens of people unable to cross into FYROM and continue their journeys to Central and Northern Europe. Seven coaches full of refugees and migrants that had traveled north from Greece’s Aegean islands arrived at the border on Wednesday, prompting the government to allow the camp in Idomeni that had been constructed by nongovernmental organizations during the summer to be used to provide shelter and medical assistance to the migrants. Over the last few weeks, officials had refused to allow the camp to be used due to fears that hundreds of people would start gathering at the border again. The cold weather has also made conditions difficult on the islands.

Neverending?!

• Two Refugees –One 5-Year Old Child– Die Of Hypothermia Off Lesvos (Kath.)

Two refugees – one a 5-year-old child – died from hypothermia on Lesvos on Wednesday. The child died after the dinghy it was traveling in capsized off the island. It was taken to a medical center on Lesvos but doctors were unable to save its life. The coast guard rescued 46 people. The other person who died was a woman who reached the island safely but succumbed to the subzero temperature. Authorities said that despite the worsening weather, about 1,000 people arrived on Lesvos on Tuesday and another 1,000 reached the island on Wednesday.

Debt Rattle January 14 2016

Jan 142016

January 14, 2016 Posted by Raúl Ilargi Meijer at 9:34 am Finance Tagged with: Africa, China, earnings, EM, Monsanto, oil, outflows, refugees, stocks, tankers, Treasuries, yield 3 Responses »

DPC Oyster luggers along Mississippi, New Orleans 1906

• Asia Stocks Extend Losses, Japan’s Nikkei Falls 3.67% (CNBC)

• Oil and US Stocks Tumble Over Fears For Global Economy (Guardian)

• China Bear Market Looms as PBOC Fails to Stop Flight to Safety (BBG)

• Q4 Will Be Worst US Earnings Season Since Third Quarter Of 2009 (ZH)

• The Real Price of Oil Is Far Lower Than You Realize (BBG)

• Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners (BBG)

• Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes (ZH)

• Currency Swings Sap US Corporate Profits by Most in Four Years (BBG)

• African Exports To China Fell By 40% In 2015 (BBC)

• Money Leaving Emerging Markets Faster Than Ever Amid China Slump (BBG)

• China Bond Yield Sinks To Record Low As Central Bank Injects $24 Billion (BBG)

• China’s Better-Than-Expected Trade Numbers Raise Questions (WSJ)

• Surging China-Hong Kong Trade Raises Doubts Over Recovery (BBG)

• The Quiet Side of China’s Market Intervention (WSJ)

• As China Dumps Treasuries, Other Buyers Expected To Step In (BBG)

• Reporting Rule Adds $3 Trillion Of Leases To Balance Sheets Globally (FT)

• EU Scientists In Bitter Row Over Safety Of Monsanto’s Round-Up (Guardian)

• Thousands Of Farmer Suicides Prompt India Crop Insurance Scheme (Guardian)

• Greece Said To Propose Return Trips For Illegal Migrants (AP)

• Tighter Border Checks Leave Migrants Trapped In Greece (AP)

• Refugee Influx To Greece Continues Unabated Through Winter (Reuters)

• Europe Sees No Let Up in Refugee Crisis as January Arrivals Soar (BBG)

“In Japan, core machinery orders in November fell 14.4%..”

• Asia Stocks Extend Losses, Japan’s Nikkei Falls 3.67% (CNBC)

[..] major Asian stock markets continued their downward slide, following a massive sell-off on Wall Street overnight, pressured by concerns over a global economic slowdown and low oil prices. After a late sell-off Wednesday afternoon, the Chinese markets opened in negative territory before trimming losses, with the Shanghai composite down some 1.05%, while the Shenzhen composite was flat. At market open, Shanghai was down 2.73% and Shenzhen saw losses of 3.37%. Hong Kong’s Hang Seng index was down 1.51%. Offering some sign of stability in a generally volatile market, the People’s Bank of China (PBOC) set Thursday’s yuan mid-point rate at 6.5616, compared with Wednesday’s fix of 6.5630. The dollar-yuan pair was nearly flat at 6.5777.

Japan’s Nikkei 225 erased all of Wednesday’s 2.88% gain and plunged 3.95%, weighed by commodities and machinery sectors, which were all down between 3 and 4%. Earlier, it fell as low as 4% before paring back some of the losses. South Korea’s Kospi traded down 1.45%. Down Under, the ASX 200 dropped 1.61%, with energy and financials sectors sharply down. All sectors were in the red except for gold, which saw an uptick of 3.71%. In Japan, core machinery orders in November fell 14.4% from the previous month, according to official data, down for the first time in three months. The data is regarded as an indicator of capital spending and fell more than market expectations for a 7.9% decline.

Or is it just price discovery?

• Oil and US Stocks Tumble Over Fears For Global Economy (Guardian)

US stocks fell heavily on Wednesday, with the Standard & Poor’s 500 falling 2.5% to take the index below 1,900 points for the first time since September, due to growing concerns about the falling oil price, which dipped below $30 a barrel for the first time in nearly 12 years. The S&P 500, which closed at 1,890 points, suffered its worst day since September and has fallen by 10% since its November peak taking it into “correction” territory, something that has not happened since August 2014. The Dow Jones industrial average dropped by 364 points, or 2.2%, to 16,151, and the Nasdaq composite dropped 159 points, or 3.4%, to 4,526. This deepened the New York stock exchange’s already worst start to a year on record.

Wednesday’s stock market declines were triggered by new figures showing US gasoline stockpiles had increased to record high, which caused Brent crude prices to fall as low as $29.96, their lowest level since April 2004, before settling at $30.31, a 1.8% fall. The oil price has fallen by 73% since a peak of $115 reached in the summer of 2014. Industry data showed that US gasoline inventories soared by 8.4m barrels and stocks of diesel and heating oil increased by more than 6m barrels – confirming the forecasts of many analysts that a huge oversupply of oil could keep prices low during most of 2016. Analysts said that growing fears of a weakening outlook for the global economy, made worse by falling oil prices, was behind the steep falls. Some oil analysts this week predicted that the price could fall as low as $10.

In recent days several analysts have warned that the global economy could suffer a repeat of the 2008 crash if the knock-on effects of a contraction in Chinese output pushes down commodity prices further and sparks panic selling on stock and bond markets. [..] Earlier in the day China’s stock market fell more than 2% after officials played down the significance of better-than-expected trade figures for December, saying exports could sink further before they find a floor.

Looms?!

• China Bear Market Looms as PBOC Fails to Stop Flight to Safety (BBG)

Chinese stocks headed for a bear market while government bond yields fell to a record as central bank cash injections and a stable yuan fixing failed to shore up confidence in the world’s second-largest economy. The Shanghai Composite Index sank as much as 2.8%, falling more than 20% from its December high and sinking below its closing low during the depths of a $5 trillion rout in August. Investors poured money into government bonds after the People’s Bank of China added the most cash through open-market operations since February 2015, sending the yield on 10-year notes down to 2.7%. While the central bank kept its yuan reference rate little changed for a fifth day, the currency dropped 0.5% in offshore trading and Hong Kong’s dollar declined to the weakest since March 2015.

The selloff is a setback for Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has undermined confidence in their ability to manage the deepest economic slowdown since 1990 “You can’t really find buyers in this environment,” said Ken Peng, a strategist at Citigroup Inc. in Hong Kong. “It’s a very, very fragile status quo China is trying to maintain.” The government faces a dilemma with the yuan, according to Samuel Chan at GF International.

On one hand, a weakening exchange rate would help boost exports and is arguably justified given declines in other emerging-market currencies against the dollar in recent months. The downside is that a depreciating yuan encourages capital outflows and makes it harder to keep domestic interest rates low. The monetary authority “doesn’t want the yuan to depreciate fast because it will push funds to leave China very quickly,” Chan said. The country saw capital outflows for 10 straight months through November, totaling $843 billion, according to an estimate from Bloomberg Intelligence. Foreign-exchange reserves, meanwhile, sank by a record $513 billion last year to $3.33 trillion, according to the central bank.

Still sinking after all these years.

• Q4 Will Be Worst US Earnings Season Since Third Quarter Of 2009 (ZH)

Couple of things: first of all, any discussion whether the US market is in a profit (or revenue) recession must stop: the US entered a profit recession in Q3 when it posted two consecutive quarters of earnings declines. This was one quarter after the top-line of the S&P dropped for two consecutive quarters, and as of this moment the US is poised to have 4 consecutive quarters with declining revenues as of the end of 2015. Furthermore, as we showed on September 21, when Q4 was still expected to be a far stronger quarter than it ended up being, in the very best case, the US would go for 7 whole quarters without absolute earnings growth (and even longer without top-line growth).

Then, as always happens, optimism about the current quarter was crushed as we entered the current quarter, and whereas on September 30, 2015, Q4 earnings growth was supposed to be just a fraction negative, or -0.6%, as we have crossed the quarter, the full abyss has revealed itself and according to the latest Factset consensus data as of January 8, the current Q4 EPS drop is now expected to be a whopping -5%. And just to shut up the “it’s all energy” crowd, of the 10 industries in the S&P, only 4 are now expected to post earnings growth and even their growth is rapidly sliding and could well go negative over the next few weeks. It gets even worse. According to Bloomberg, on a share-weighted basis, S&P 500 profits are expected to have dropped by 7.2% in 4Q, while revenues are expected to fall by 3.1%.

This would represent the worst U.S. earnings season since 3Q 2009, and a third straight quarter of negative profit growth. It’s no longer simply a recession: as noted above, the Q4 EPS drop follows declines of 3.1% in Q3 and 1.7% in Q2. it is… whatever comes next. As Bloomberg adds, the main driving forces behind drop in U.S. earnings are the rise in the dollar index (thanks Fed) and the drop in average WTI oil prices. However, since more than half of all industries are about to see an EPS decline, one can’t blame either one or the other. So while we know what to expect from Q4, a better question may be what is coming next, and according to the penguin brigade, this time will be different, and the hockey stick which was expected originally to take place in Q4 2015 and then Q1 2016 has been pushed back to Q4 2016, when by some miracle, EPS is now expected to grow by just about 15%.

WTI/Brent prices are just a story.

• The Real Price of Oil Is Far Lower Than You Realize (BBG)

While oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is even deeper. West Texas Intermediate futures, the U.S. benchmark, sank below $30 a barrel on Tuesday for the first time since 2003. Actual barrels of Saudi Arabian crude shipped to Asia are even cheaper, at $26 – the lowest since early 2002 once inflation is factored in and near levels seen before the turn of the millennium. Slumping oil prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said. The nation’s economic expansion faltered last year to the slowest pace in a quarter of a century. “You see a big destruction in the income of the oil and commodity producers,” Turner said. “That is having a major effect on their expenditure across the world.” The benefit for consumers from historically low oil prices is being blunted by changes in fuel taxation and a reduction in subsidies, according to Paul Horsnell at Standard Chartered in London. “But it certainly shows that current prices are very low by any description,” he said.

“..$8.35 on Tuesday, down from as much as $80 less than two years ago.”

• Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners (BBG)

Think oil in the $20s is bad? In Canada they’d be happy to sell it for $10. Canadian oil sands producers are feeling pain as bitumen – the thick, sticky substance at the center of the heated debate over TransCanada’s Keystone XL pipeline – hit a low of $8.35 on Tuesday, down from as much as $80 less than two years ago. Producers are all losing money at current prices, First Energy Capital’s Martin King said Tuesday at a conference in Calgary. Which doesn’t mean they’ll stop. Since most of the spending for bitumen extraction comes upfront, and thus is a sunk cost, production will continue and grow. Canada will need more pipeline capacity to transport bitumen out of Alberta by 2019, King said.

Bitumen is another victim of a global glut of petroleum, which has sunk U.S. benchmark prices into the $20s from more than $100 only 18 months ago. It’s cheaper than most other types of crude, because it has to be diluted with more-expensive lighter petroleum, and then transported thousands of miles from Alberta to refineries in the U.S. For much of the past decade, oil companies fought environmentalists to get the pipeline approved so they could blend more of the tar-like petroleum and feed it to an oil-starved world. TransCanada is mounting a $15 billion appeal against President Barack Obama’s rejection of Keystone XL crossing into the U.S. – while simultaneously planning natural gas pipelines from Alberta to Canada’s east coast to carry diluted bitumen. Environmentalists are hoping oil economics finish off what their pipeline protests started.

Inventories are overflowing. How predictable.

• Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes (ZH)

If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up ‘cheap’ oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China’s record crude imports have ceased). In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…

China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners. China’s crude imports last month was equivalent to 7.85 million barrels a day, 6% higher than the previous record of 7.4 million in April, Bloomberg calculations show.

China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher. But given the crash in tanker rates – and implicitly demand – that “boom” appears to be over.

What neighbors can the US beggar?

• Currency Swings Sap US Corporate Profits by Most in Four Years (BBG)

Volatility in the $5.3-trillion-a-day foreign exchange market is dragging down U.S. corporate earnings by the most since 2011, according to a report from FiREapps. Currency fluctuations eroded earnings for the average North American company by 12 cents per share in the third quarter, according to the Scottsdale, Arizona-based firm, which advises businesses and makes software to help reduce the effect of foreign-exchange swings. That’s the most in data going back at least four years, and is up from an average 3 cents per share in the second quarter. “This is the worst I’ve seen it,” FiREapps chief executive officer Wolfgang Koestersaid in a telephone interview. “Investors and analysts are taking a very close look at corporate results impacted by foreign exchange and recognize how material they are.”

A JPMorgan measure of currency volatility averaged 10.1 % during the third quarter, up from 6.3 % 12 months earlier. Last year, some of the biggest price swings came from unscheduled events, such as China’s August devaluation of the yuan, Switzerland’s decision to scrap its currency cap and plummeting commodity prices. Companies in North America lost at least $19.3 billion to foreign-exchange headwinds in the third quarter of 2015, FiREapps data showed. The losses grew by about 14 % from the second quarter. Of the 850 North American corporations that Fireapps analyzed, 353 cited the negative impact of currencies in their earnings, more than double the previous quarter. “That is the largest number of companies talking about currency impact that we’ve ever seen,” Koester said.

China’s yuan is garnering more attention from corporations amid concern that growth in the world’s second-largest economy is slowing, according to FiREapps. Yet North American firms remain most concerned about the effects of the euro, Brazilian real and Canadian dollar on their results. The currencies have fallen 8.3 %, 34 % and 16 % against the greenback over the past 12 months. The stronger U.S. dollar means higher, less-competitive prices for U.S. businesses seeking to sell their products overseas. Companies also take a hit when they account for revenue denominated in weaker overseas currencies, unless they hedged their exposure.

That is a very big number.

• African Exports To China Fell By 40% In 2015 (BBC)

African exports to China fell by almost 40% in 2015, China’s customs office says. China is Africa’s biggest single trading partner and its demand for African commodities has fuelled the continent’s recent economic growth. The decline in exports reflects the recent slowdown in China’s economy. This has, in turn, put African economies under pressure and in part accounts for the falling value of many African currencies. Presenting China’s trade figures for last year, customs spokesman Huang Songping told journalists that African exports to China totalled $67bn (£46.3bn), which was 38% down on the figure for 2014.

BBC Africa Business Report editor Matthew Davies says that as China’s economy heads for what many analysts say will be a hard landing, its need for African oil, metals and minerals has fallen rapidly, taking commodity prices lower. There is also less money coming from China to Africa, with direct investment from China into the continent falling by 40% in the first six months of 2015, he says. Meanwhile, Africa’s demand for Chinese goods is rising. In 2015 China sent $102bn worth of goods to the continent, an increase of 3.6%. Last year, South Africa hosted a China-Africa summit during which President Xi Jinping announced $60bn of aid and loans, symbolising the country’s growing role on the continent.

And for now that’s still largely due to China.

• Money Leaving Emerging Markets Faster Than Ever Amid China Slump (BBG)

Investors pulled more money from emerging markets in the three months through December than ever before as investors dumped riskier assets in China amid concern the country’s currency will weaken further, according to Capital Economics. Capital outflows from developing nations reached $270 billion last quarter, exceeding withdrawals during the financial crisis of 2008, led by an exodus from China as investors pulled a record $159 billion from the country just in December, Capital Economics’ economist William Jackson said in a report. Excluding outflows from the world’s second-largest economy, emerging markets would have seen inflows in the quarter, he said.

“This appears to reflect a growing skepticism in the markets that the People’s Bank can keep the renminbi steady,” Jackson said in the note, which was published Wednesday. “Given the fresh sell-off in EM financial markets and growing concerns about the level of the renminbi, it seems highly likely that total capital outflows will have increased” in January, he said. Investor skepticism increased last year as a surprise devaluation of China’s yuan roiled global markets and triggered a $5 trillion rout in the nation’s equity markets, casting doubt on the government’s ability to contain the selloff and support growth.

Chinese leaders have since then stepped up efforts to restrict capital outflows and prop up share prices despite pledges to give markets greater sway and allow money to flow freely across the nation’s borders within five years. The yuan traded in the mainland market declined 4.4% in 2015, the most since 1994. Outflows from emerging markets rose to a record $113 billion in December, Capital Economics said. Over 2015, investors pulled $770 billion from developing nations, compared with $230 billion a year earlier.

“For local investors, there’s nothing to buy..”

• China Bond Yield Sinks To Record Low As Central Bank Injects $24 Billion (BBG)

China’s government bonds advanced, pushing the 10-year yield to a record low, as the central bank stepped up cash injections and volatile stock and currency markets drove demand for safety. The offshore yuan traded in Hong Kong declined for the first time in six days on speculation a narrowing gap with the Shanghai rate will dissuade the People’s Bank of China from stepping into the market, while Chinese equities slid below the lowest levels of last year’s market selloff. “For local investors, there’s nothing to buy,” said Li Liuyang at Bank of Tokyo-Mitsubishi. “Equities are not performing well, so bonds become the natural investment target. The PBOC increased reverse repo offerings partly because it may be taking some preemptive measures before next month’s Lunar New Year holidays.”

The yield on debt due October 2025 fell as much as three basis points to 2.70%, the least for a benchmark 10-year note in ChinaBond data going back to September 2007. The previous low was 2.72% in January 2009, during the global financial crisis. The PBOC conducted 160 billion yuan ($24 billion) of seven-day reverse-repo agreements in its open-market operations on Thursday, up from 70 billion yuan a week ago. That’s the biggest one-day reverse repo offerings since February 2015, data compiled by Bloomberg show. The PBOC injected a net 40 billion yuan this week, taking its total additions to 230 billion yuan so far this month. “The PBOC wants to keep liquidity abundant onshore to bolster the economy,” said Nathan Chow at DBS Group. “It’s also trying to calm the currency market as the yuan declined significantly last week and caused high volatility. But in the long run, the yuan will depreciate as the fundamentals are still weak.”

Fake invoices. It’s as simple as that.

• China’s Better-Than-Expected Trade Numbers Raise Questions (WSJ)

China’s better-than-expected trade figures in December have sparked questions over whether trade flows have been inflated by investors evading capital controls and the extent of incentives being offered by government agencies to prop up exports. China reported Wednesday that exports in December declined 1.4% year on year. This was much better than the 8% drop expected by economists in a WSJ survey and compared with a 6.8% decline in November, allowing Beijing to end the trading year on a stronger note. Imports fell by 7.6% last month, better than the expected 11% decline, compared with an 8.7% drop in November. The December trade figures also were helped by favorable comparisons with year-earlier figures, economists said.

Of particular note was a 64.5% jump in China’s imports from Hong Kong, the strongest pace in three years, analysts said. This compared with a 6.2% decline for the January-November period. ”It really looks like capital flight,” said Oliver Barron with investment bank North Square Blue Oak. “This has artificially inflated the total import data.” China in recent months has struggled to adjust to massive capital outflows as Chinese investors seek better returns overseas. China saw its foreign exchange hoard drop 13.3% in 2015, or by $500 billion, to $3.3 trillion by the end of December. Under Beijing’s strict capital controls, consumers are only allowed to purchase $50,000 worth of U.S. dollars each calendar year. But manipulated foreign trade deals offer a way around tightening restrictions, say economists.

In an effort to stem the outflow, Beijing’s foreign exchange regulator announced stricter supervision starting January 1 to screen suspicious individual accounts and crack down on organized capital flight, according to an online statement. Bank customers also have reported more difficulty recently exchanging yuan into dollars, with some forced to wait four days to complete a transaction that normally takes one. And China has cracked down on illegal foreign-exchange networks, including a bust announced in November in Jinhua, a city of five million people in eastern Zhejiang province, allegedly involving eight gangs operating from over two dozen “criminal dens” that reportedly handled up to $64 billion in unauthorized transactions, according to state media and a detailed police report.

The official People’s Daily newspaper said 69 people had been criminally charged and another 203 people had been given administrative sanctions. ”Regulators have been trying really hard to close the loopholes,” said Steve Wang with Reorient Financial, adding that the market seems skeptical of Wednesday’s trade figures. The Shanghai Composite Index fell 2.4%. “I don’t think Hong Kong has been buying or selling any more from China. The December data is a huge question mark,” he added. An example of how a Chinese company might move capital abroad using trade deals would be to import 1 million widgets at $2 apiece from a Hong Kong partner or subsidiary company, paying the $2 million, analysts said. It then exports the same widgets at $1 apiece, receiving $1 million from the Hong Kong entity. The goods are back where they started, but $1 million has now moved offshore.

“..the surprise gains may harken back to past instances of phony invoicing and other rules skirted to escape currency restrictions.”

• Surging China-Hong Kong Trade Raises Doubts Over Recovery (BBG)

China exports to Hong Kong rose 10.8% from a year earlier for the biggest gain in more than a year, making the city the biggest destination for shipments last month and spurring renewed skepticism over data reliability and the broader recovery in the nation’s outbound trade. Exports to Hong Kong rose to $46 billion last month, according to General Administration of Customs data released Wednesday. That was the highest value in almost three years and the biggest amount for any December period in the last 10 years, customs data show. Imports from Hong Kong surged 65%, the most in three years, to $2.16 billion. Economists said the surprise gains may harken back to past instances of phony invoicing and other rules skirted to escape currency restrictions.

China’s government said in 2013 some data on trade with Hong Kong were inflated by arbitrage transactions intended to avoid rules, an acknowledgment that export and import figures were overstated. The increase in exports to Hong Kong and China’s imports from the city probably indicate “fake invoicing,” said Iris Pang at Natixis in Hong Kong. Invoicing of China trade should be larger in December because of the wider gap between the onshore yuan and the offshore yuan traded in Hong Kong, she said. China’s exports to the Special Administrative Region of more than 7 million people eclipsed the $35 billion tallies last month for both the U.S. and the EU, the data show. Exports to Brazil, Canada, Malaysia, Russia all dropped more than 10%.

The imports gain “points to potential renewed fake trade activities,” said Larry Hu at Macquarie. When the yuan rose in 2013, exports to Hong Kong were inflated artificially, he said, and “now it’s just the opposite.” China’s total exports rose 2.3% in yuan terms from a year earlier, the customs said, after a 3.7% drop in November. Imports extended declines to 14 months. The recovery in exports in December may prove to be a temporary one due to a seasonal increase at the end of the year, and it doesn’t represent a trend, a spokesman for customs said after the Wednesday briefing. A weak yuan will help exports, but that effect will gradually fade, the spokesman told reporters in Beijing. Morgan Stanley economists led by Zhang Yin in Hong Kong also said in a note Wednesday that the higher-than-expected trade growth may have been affected by currency arbitrage. Overall external demand remained weak, as shown by anemic export data reported by South Korea and Taiwan, he said.

State firms buying/holding lousy paper.

• The Quiet Side of China’s Market Intervention (WSJ)

As Chinese markets tanked last week, China Inc. appeared to be rallying to their support. At least 75 Chinese companies issued statements during the past week and a half, saying their biggest shareholders would be holding on to their stakes in order to protect investor interests. Officially, the companies were acting spontaneously. But privately, people close to Chinese regulators as well as some of the companies themselves said they were prompted to release the statements by exchange officials, who had called and asked them to issue expressions of support. In many cases, the statements contained similar or nearly identical language. The behind-the-scenes activity reflects the secretive, unofficial side to Chinese regulators’ attempts to bolster the country’s sagging stock markets.

The regulators’ varied arsenal includes tactics such as phone calls from exchange officials to big holders of shares, urging them not to sell, as well as pumping hundreds of billions of yuan into the markets through government-affiliated funds. The hand of the regulators was most apparent over the summer, when a 43% plunge in the Shanghai Composite Index over slightly more than two months was accompanied by dozens of declarations by brokerages and fund managers abjuring stock sales, as well as huge purchases of shares in bellwether Chinese stocks by a shadowy group of firms known as the “national team.” Brokers, company executives and people close to Chinese regulators say tactics have become more subtle during the current market downturn: The national team hasn’t been making the high-profile buys of half a year ago, and regulators have been less overt in their requests for cooperation.

An executive at one environmental technology firm listed on the Shenzhen exchange said that in July, the bourse sent a letter demanding the company release a statement saying its controlling shareholders wouldn’t unload stock. Last week, the exchange was more low key, he said, phoning up and urging the company to release another statement to set an example for other firms. But the flurry of companies declaring their support for the market in recent days shows that Chinese regulators still haven’t given up on behind-the-scenes efforts to guide the direction of stocks. “We issued the statement because the [Shenzhen] exchange encouraged listed firms to maintain shareholdings,” said an executive at LED device-maker Shenzhen Jufei who requested anonymity. “You can think of this as a concerted effort by listed firms to voluntarily stabilize the market.”

The popularity of T-Bills is guaranteed.

• As China Dumps Treasuries, Other Buyers Expected To Step In (BBG)

It might be easy to conclude China’s unprecedented retreat from Treasuries is bad news for America. After all, as the biggest overseas creditor to the U.S., China has bankrolled hundreds of billions of dollars in deficit spending, particularly since the financial crisis. And that voracious appetite for Treasuries in recent years has been key in keeping America’s funding costs in check, even as the market for U.S. government debt ballooned to a record $13.2 trillion. Yet for many debt investors, there’s little reason for alarm. While there’s no denying that China’s selling may dent demand for Treasuries in the near term, the fact the nation is raising hundreds of billions of dollars to support its flagging economy and stem capital flight is raising deeper questions about whether global growth itself is at risk.

That’s likely to bolster the haven appeal of U.S. debt over the long haul, State Street Corp. and BlackRock Inc. say. Any let up in Chinese demand is being met with record buying by domestic mutual funds, which has helped to contain U.S. borrowing costs. “You have China running down reserves and Treasuries are a big portion of reserves, but even with that we still think the weight of support” will boost demand for U.S. debt, said Lee Ferridge, the head of macro strategy for North America at State Street, which oversees $2.4 trillion. The question is “if China slows, where does growth come from. That’s what’s been worrying a lot of people coming into 2016.”

And then the TBTFs will need rescue again?!

• Reporting Rule Adds $3 Trillion Of Leases To Balance Sheets Globally (FT)

Companies around the world will be forced to add close to $3tn of leasing commitments to their balance sheets under new rules from US and international regulators — significantly increasing the debt that must be reported by airlines and retailers. A new financial reporting standard — the culmination of decades of debate over “off-balance sheet” financing — will affect more than one in two public companies globally. Worst hit will be retail, hotel and airline companies that lease property and planes over long periods but, under current accounting standards, do not have to include them in yearly reports of assets and liabilities. In these sectors, future payments of off-balance sheet leases equate to almost 30% of total assets on average, according to the International Accounting Standards Board, which collaborated with the US Financial Accounting Standards Board on the new rule.

Hans Hoogervorst, IASB chairman, said: “The new Standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off-balance-sheet lease financing is no longer lurking in the shadows”. As a result of the accounting change, net debt reported by UK supermarket chain Tesco would increase from £8.6bn at the end of August to £17.6bn, estimated Richard Clarke, an analyst from Bernstein. However, while the new standard would make Tesco look more indebted, Mr Clarke added that the assets associated with the leases would also come on to the company’s balance sheet, so “the net effect would be neutral.” Investors warned that the new standards could affect some groups’ banking covenants and debt-based agreements with lenders, but said they would make it easier to compare companies that uses leases with those that prefer to borrow and buy.

Vincent Papa, director financial reporting policy at the Chartered Financial Analysts Institute, which has been pushing for these changes since the 1970s, said: “Putting obligations on balance sheets enables better risk assessment. It is a big improvement to financial reporting.” For some airlines, the value of off-balance- sheet leases can be more than the value of assets on the balance sheets, the IASB noted. It also pointed out that a number of retailers that had gone into liquidation had lease commitments that were many times their reported balance sheet debt. [..] In 2005, the SEC calculated that US companies had about $1.25 trillion of leasing commitments that were not included in assets or liabilities on balance sheets. Six years later, the Equipment Leasing and Finance Foundation in the US said that “Capitalising operating leases will add an estimated $2 trillion and 11% more reported debt to the balance sheets of US-based corporations…and could result in a permanent reduction of $96bn in equity of US companies. ”

“..used so widely that its residues are commonly found in British bread.”

• EU Scientists In Bitter Row Over Safety Of Monsanto’s Round-Up (Guardian)

A bitter row has broken out over the allegedly carcinogenic qualities of a widely-used weedkiller, ahead of an EU decision on whether to continue to allow its use. At issue is a call by the European Food and Safety Authority (Efsa) to disregard an opinion by the WHO’s International Agency for Research on Cancer (IARC) on the health effects of Glyphosate. Glyphosate was developed by Monsanto for use with its GM crops. The herbicide makes the company $5bn (£3.5bn) a year, and is used so widely that its residues are commonly found in British bread. But while an analysis by the IARC last year found it is probably carcinogenic to humans, Efsa decided last month that it probably was not. That paves the way for the herbicide to be relicensed by an EU working group later this year, potentially in the next few weeks.

Within days of Efsa’s announcement, 96 prominent scientists – including most of the IARC team – had fired off a letter to the EU health commissioner, Vytenis Andriukaitis, warning that the basis of Efsa’s research was “not credible because it is not supported by the evidence”. “Accordingly, we urge you and the European commission to disregard the flawed Efsa finding,” the scientists said. In a reply last month, which the Guardian has seen, Andriukaitis told the scientists that he found their diverging opinions on glyphosate “disconcerting”. But the European Parliament and EU ministers had agreed to give Efsa a pivotal role in assessing pesticide substances, he noted. “These are legal obligations,” the commissioner said. “I am not able to accommodate your request to simply disregard the Efsa conclusion.”

What’s Monsanto’s role in this?

• Thousands Of Farmer Suicides Prompt India Crop Insurance Scheme (Guardian)

India’s government has approved a $1.3bn insurance scheme for farmers to protect against crop failures, saying it was intended to put a halt to a spate of suicides. Two successive years of drought have battered the country’s already struggling rural heartland, with farmer suicides in rural areas regularly hitting the headlines. More than 300,000 farmers have killed themselves in India since 1995. Under the new scheme, farmers will pay premiums of as little as 1.5% of the value of their crops, allowing them to reclaim their full value in case of natural damage, the government said. “The scheme will be a protection shield against instances of farmer suicides because of crop failures or damage because of nature,” home minister Rajnath Singh said on Wednesday after the cabinet approved the scheme.

The Prime Minister Crop Insurance Scheme is also an attempt by Narendra Modi’s government to woo the country’s powerful farming community after being beaten in two recent state elections. “This scheme not just retains the best features of past policies but also rectifies all previous shortcomings… This is a historic day,” Modi said in a tweet. Previous crop insurance schemes have been criticised by the agricultural community as being too complex or for having caps that prevented them from recouping the full commercial value in the case of damage. Take-up of existing schemes by farmers is as low as 23%, the agriculture minister Radha Mohan Singh said, adding that he hoped to increase coverage to 50%. The heavily subsidised scheme will come into effect in April, a major crop-sowing season.

Priorities.

• Greece Said To Propose Return Trips For Illegal Migrants (AP)

A senior Greek official has said the government will ask Europe’s border protection agency Frontex to help set up a sea deportation route to send migrants who reach the country illegally back to Turkey. The official told AP the plan would involve chartering boats on Lesvos and other Greek islands to send back migrants who were not considered eligible for asylum in the EU. The official spoke on condition of anonymity because Athens hasn’t yet formally raised the issue with other European governments. More than 850,000 migrants and refugees reached Greece in 2015 on their route through the Balkans to central Europe. But the EU is seeking to toughen and better organize procedures for asylum placements, while Balkan countries outside the EU have also imposed stricter transit policies.

NIMBY.

• Tighter Border Checks Leave Migrants Trapped In Greece (AP)

As twilight falls outside the Hellenikon shelter – a former Olympic field hockey venue currently housing about 280 people – Iranian men play volleyball, a red line on the ground serving as a notional net. Inside, migrants are coming to terms with their bleak future. “I can’t go back to Somalia,” said English teacher Ali Heydar Aki, who hoped to settle in Europe and then bring his family. “I have sold half my house” to fund the trip. While it’s unclear exactly how many are stuck in Greece, a comparison of arrivals there and in FYROM since late November leaves about 38,000 people unaccounted for. Greek immigration minister Ioannis Mouzalas’ best guess is “a few thousand.” “But (that’s) a calculation based on experience, not something else,” he said.

Syed Mohammad Jamil, head of the Pakistani-Hellenic Cultural Society, says about 4,000 Pakistanis could be stuck in Greece, mostly still on the islands, and about as many Bangladeshis. “Every day we get … phone calls from people in tears asking for help,” he said. “We can’t help – send them where? Germany, Spain, Italy, England? We can’t.” All now face two legal options: To seek asylum in Greece – which has 25% unemployment and a crumbling welfare system – or volunteer for repatriation. Greek authorities have recorded an increase in both since FYROM tightened controls. Karim Benazza, a Moroccan hotel worker in his 20s, has signed up to go home on Jan. 18.

“This is all I do now, smoke and smoke, but no money, no food,” he said, lighting a cigarette outside the International Organization for Migration building. “There is nothing for us in Greece, and the Macedonian border is closed.” Daniel Esdras, IOM office head in Greece, sees a steep increase in voluntary repatriations, which the IOM organizes. About 800 people registered in December and 260 have been sent home. “It’s one thing to return in handcuffs … and quite another to go as a normal passenger with some money in your pocket, because we give them each €400,” Esdras said.

5,700 children in 12 days.

• Refugee Influx To Greece Continues Unabated Through Winter (Reuters)

More than 1,000 migrants and refugees arrived at Greece’s biggest port of Piraeus near Athens on Wednesday as the influx of people fleeing conflict zones for Europe continued unabated into the winter months. More than 1 million refugees and migrants braved the seas in 2015 seeking sanctuary in Europe, nearly five times more than in the previous year, according to the United Nations’ refugee agency. Most entered through Greece’s outlying islands. So far this year, 31% of arrivals to Europe have been children, said medical aid group Medecins Sans Frontieres, which has been treating arrivals to the Greek islands. About 5,700 children crossed the narrow but dangerous sea passage between Greece and Turkey in just 12 days aboard rickety, overcrowded boats, it said.

“I leave my home, my country [because] there was violence, it was not safe,” said 18-year-old Idris, who left his home and family behind in Afghanistan three months ago, traveling alone through Turkey and hoping to reach Germany to study. As others disembarked from the ferry on Wednesday, volunteers passed out hot tea and fruit to help them get through the next leg of their journey, an eight-hour bus ride from Athens to Greece’s northern border with Former Yugoslav Republic of Macedonia [FYROM]. The ferry picked up a total of 1,238 migrants and refugees from the Eastern Aegean islands of Lesvos and Chios. Among those was 25-year-old Salam, from the Syrian city of Homs, who said he had lived in a number of different cities before the fighting led him and his friends to flee. “[They killed] women and children and men,” said Salam, who also hopes to reach Germany. [It was] very very very bad in Syria.”

How blind is this? “Work must also step up on “returning those who have no right to international protection.” There are people who have no right to protection? Who gets to decide?

• Europe Sees No Let Up in Refugee Crisis as January Arrivals Soar (BBG)

The number of refugees entering Europe in the first 10 days of 2016 is already three times the level in all of January 2015, signaling no let up in the pressure facing the region’s leaders amid the biggest wave of migration since World War II. The number of migrants crossing the Mediterranean Sea to the European Union from Turkey, the Middle East and North Africa reached 18,384 through Jan. 10, according to the United Nations Refugee Agency. That compares with 5,550 in January last year. “This year, these weeks, the coming months must be dedicated to delivering clear results in terms of regaining controls of flows and of our borders,” EC Vice President Frans Timmermans told reporters in Brussels on Wednesday after discussing the latest situation with EU commissioners.

Turmoil in Syria and across the Arab world triggered an influx of more than 1 million people arriving in the EU last year. Faced with migration in such unprecedented numbers, governments have reintroduced internal border checks, tried – and failed – to share refugees between one another and have been forced to defend their policies amid anger at violence allegedly perpetrated by the recent arrivals.

The number of refugees entering the EU increased month-on-month from January 2015 until hitting a peak of 221,374 in October, according to the agency. The level fell back to 118,445 last month as bad weather deterred people from making the journey. Almost a third of those arriving are children. So far this year 49 people have either died or are missing having attempted to cross into Europe. EU countries need to work together to tackle the “root causes” of the refugee influx, Timmermans said. Work must also step up on “returning those who have no right to international protection.”

Debt Rattle December 9 2015

Dec 092015

December 9, 2015 Posted by Raúl Ilargi Meijer at 9:38 am Finance Tagged with: China, commodities, EM, IMF, mining, oil, refugees, Russia, Schaeuble 1 Response »

Dorothea Lange Refugees: Drought hit OK farm family on way to CA Aug 1936

• When It Rains It Pours as China Unleashes Commodity Torrent (BBG)

• Oil Producers Prepare For Prices To Halve To $20 A Barrel (Guardian)

• Anglo American To Slash Workforce By 85,000 Amid Commodity Slump (Guardian)

• OPEC Provides Economic Stimulus Central Bankers Can’t or Won’t (BBG)

• Copper Meltdown Burning Miners Is Boon to Builders as Costs Sink (BBG)

• Iron Ore in $30s Seen Near Tipping Point for Largest Miners (BBG)

• Emerging Markets Warned of Capital Drought as Fed Nears Liftoff (BBG)

• China’s Illicit Outflows Estimated at $1.4 Trillion Over Decade (BBG)

• The IMF Forgives Ukraine’s Loan To Russia (Michael Hudson)

• Tension Grows Between Tsipras, Schaeuble Over IMF Role In Greek Program (Kath.)

• Schaeuble Fights EU Deposit Insurance Plan in Clash With ECB (BBG)

• Australian Police Raid Sydney Home Of Reported Bitcoin Creator (Reuters)

• Australian Housing Boom Leaves Swath of Empty Properties (BBG)

• Germany Takes In More Refugees In 2015 Than US Has In Past 10 Years (Quartz)

• How Germany’s Right-Wing Tabloid Bild Learned to Love Refugees (BBG)

• 6 Afghan Migrant Children Drown Off Turkish Coast On Way To Greece (AP)

• 11 Refugees, Including 5 Children, Drown Near Greek Island, 13 Missing (GR)

Note: total Chinese exports have fallen for 5 months now. While commodity exports are rising fast. So outside of commodities, the fall in exports is that much bigger.

• When It Rains It Pours as China Unleashes Commodity Torrent (BBG)

There’s no let-up in the onslaught of commodities from China. While the country’s total exports are slowing in dollar terms, shipments of steel, oil products and aluminum are reaching for new highs, according to trade data from the General Administration of Customs. That’s because mills, smelters and refiners are producing more than they need amid slowing domestic demand, and shipping the excess overseas. The flood is compounding a worldwide surplus of commodities that’s driven returns from raw materials to the lowest since 1999, threatening producers from India to Pennsylvania and aggravating trade disputes. While companies such as India’s JSW Steel decry cheap exports as unfair, China says the overcapacity is a global problem.

“It puts global commodities producers in a bad situation as China struggles with excess supplies of base metals, steel and oil products,” Kang Yoo Jin at NH Investment & Securities said. “The surplus of commodities is becoming a real pain for China and to ease the glut, it’s increasing its shipments overseas.” Net fuel exports surged to an all-time high of 2.22 million metric tons in November, 77% above the previous month, customs data showed. Aluminum shipments jumped 37% to the second-highest level on record while sales of steel products climbed 6.5%, taking annual exports above 100 million tons for the first time. Chinese oil refiners are tapping export markets to reduce swelling fuel stockpiles, particularly diesel. The nation is also encouraging overseas shipments by allowing independent plants to apply for export quotas to sustain refining operation rates and ease an economic slowdown, according to Yuan Jun at oil trader China Zhenhua Oil.

A boon for the economy, you said?

• Oil Producers Prepare For Prices To Halve To $20 A Barrel (Guardian)

The world’s leading oil producers are preparing for the possibility of oil prices halving to $20 a barrel after a second day of financial market turmoil saw a fresh slide in crude, the lowest iron ore prices in a decade, and losses on global stock markets. Benchmark Brent crude briefly dipped below $40 a barrel for the first time since February 2009 before speculators took profits on the 8% drop in the cost of crude since last week’s abortive attempt by the oil cartel Opec to steady the market. But warnings by commodity analysts that the respite could be shortlived were underlined when Russia said it would need to make additional budget cuts if the oil price halved over the coming months.

Alexei Moiseev, Russia’s deputy finance minister, told Reuters: “If oil goes to $20, we will need to do additional [spending] cuts. Clearly we have shown that we are very willing to cut fiscal spending in line with an oil price at $60, for example. In order for us to be long-term sustainable [with the] oil price at $40, we need to do additional cuts, but if the oil price goes to $20 we need to do even more cuts.” Russia and Saudi Arabia – the world’s two biggest oil producers – both increased spending when oil prices rose to well above $100 a barrel. The fall from a recent peak of $115 a barrel in August 2014 has left all Opec members in financial difficulty, but Saudi Arabia has refused to relent on a strategy of using a low crude price to knock out US shale producers.

Hopes that Opec would announce production curbs to push prices up were dashed when the cartel met in Vienna last Friday, triggering the latest downward lurch in the cost of oil. Lord Browne, the former chief executive of BP, refused to rule out the possibility that oil could halve again in price when he was interviewed by Bloomberg TV. Asked if oil could hit $20 a barrel, Browne – who ran BP from 1995 to 2007 during a period when the cost of crude rose from $10 to $100 a barrel, said in the short term nothing was impossible. He added: “In the long run, $20 is probably wrong, but that’s as far as I’d go.”

Some jobs to be transferred to new owners of assets Anglo sells off.

• Anglo American To Slash Workforce By 85,000 Amid Commodity Slump (Guardian)

Anglo American has suspended its dividend and announced plans to cut its workforce by 85,000 and dispose of more than half its mines in response to the plunging price of iron ore and other metals. The UK mining company said it would not pay a dividend for the second half of this year and all of next year. The last time Anglo American cut its dividend was during the worst of the financial crisis in 2009. In a presentation to investors, Anglo American said it would sell or close up to 35 mines, leaving it with about 20 sites and cutting employee and contractor numbers from 135,000 to fewer than 50,000 after 2017. It will halve the number of business units from six to three: the De Beers diamond operation, industrial metals and bulk commodities.

The company, which mines materials such as iron ore, manganese, coal, copper and nickel, said it would cut capital spending by a further $1bn (£670m) to the end of 2016, taking the reduction in capital spending to $2.9bn by the end of 2017. It increased the amount it plans to raise from asset sales to $4bn from $3bn. The plan is the biggest restructuring by a mining company in reaction to the commodities rout. Prices have plunged because of slowing world economic growth and falling demand from China, the world’s biggest consumer of iron ore, copper, nickel and most other commodities. Anglo American’s shares, which have lost almost three-quarters of their value this year, fell more than 12% to a new all-time low of 323p.

Its announcement sent all other mining shares down in London with the sector at a 10-year low. The biggest mining companies are slashing spending and cutting costs to protect their financial strength as metal prices plunge. Glencore, the British miner and commodities trader, has suspended its dividend and is selling assets to cut its debt in an effort to rebuild investor confidence. Anglo American has been affected more severely by the commodities crash than some of its rivals because of its reliance on iron ore, whose value has fallen by almost 40% this year as demand from China has fallen.

The commodities dump puts the entire global economy in jeopardy and Bloomberg says it’s all great. “..the world has enjoyed a windfall equivalent to 2% of GDP it would otherwise have spent on crude..” The crude does come from the world, though, right?

• OPEC Provides Economic Stimulus Central Bankers Can’t or Won’t (BBG)

The world’s central bankers just got a helping hand from the world’s oil ministers. As the ECB delivers less monetary stimulus than investors sought and with the Federal Reserve set to tighten next week, the world economy may find support instead from the weakest oil price in more than six years. West Texas Intermediate is trading at about $40 a barrel four days after OPEC chose not to limit output, extending the commodity’s decline from its June 2014 peak of $107.73 and this year’s high of $62.58 in May. While its earlier slide failed to provide the economic pickup some anticipated, economists at UniCredit, Commerzbank and Societe Generale are still banking on cheaper fuel to spur spending by consumers and companies in 2016.

“On net, central bankers should take this as a positive,” said Peter Dixon, an economist at Commerzbank in London. “This does help to stimulate demand by leaving a little bit of money in the pocket and providing a feel-good factor.” At Societe Generale, Michala Marcussen, global head of economics, reckons every $10 drop in the price of oil lifts global growth by 0.1 percentage point. She estimates that since 2014, the world has enjoyed a windfall equivalent to 2% of GDP it would otherwise have spent on crude. “Our biggest relief last week was that OPEC decided no output cut, promising consumers inexpensive oil for longer,” said Marcussen. Even though falling oil may weaken the inflation rates central bankers are struggling to lift, Erik Nielsen at UniCredit said it was important to recognize that it’s “‘good’ disinflation, because it stems from supply rather than demand and so should raise real income, thereby propelling consumption and the recovery.”

“A drop in energy prices is the equivalent of a tax cut, with no implications for debt,” he said, adding that faster expansions as a result should end up bolstering prices too and so investors should be wary of wagering on a deterioration in inflation.

That sounds very similar to what they said about cheaper oil, and we said from the get-go it wouldn’t work out well. Besides, copper producers? There’s no production, it’s mining. There’s some ‘purification’ involved, but no ‘production’. Like a refinery doesn’t ‘produce’ oil. BTW, that’s one mighty ugly graph.

• Copper Meltdown Burning Miners Is Boon to Builders as Costs Sink (BBG)

Copper producers from Glencore to Freeport-McMoRan spent most of this year getting slammed by the metal’s worst slump since the recession. But there are some folks who are cheering. With prices heading for a third straight annual decline, the rout is a welcome reprieve for metal buyers like electricians and builders who put about 400 pounds (181 kilograms) of copper into the average U.S. home. As recently as 2011, copper traded in New York was at all-time-highs, after more than five-fold gains in the previous decade. Now, with demand growth cooling in China, the biggest user, global surpluses have emerged. “Business has been so much better – the best in about 10 years,” said David Chapin, the president Willmar Electric Service, a Minnesota-based company that spends about $1 million a year on copper wire it installs for clients in several Midwest states.

While that’s only 5% of Willmar’s total costs, cheaper metal is boosting profit on projects that a few years ago were close to being money losers, Chapin said. On the Comex, copper futures fell 28% this year to $2.048 a pound and are heading for the biggest annual retreat since 2008. The metal touched $2.002 on Nov. 23, a six-year low. Prices haven’t traded below $2 since 2009. Copper’s role in construction and architecture dates as far back as ancient Egypt, where temple doors were clad with the metal, according to the Copper Development Association. In modern times, the commodity’s conductive properties and it’s resistance to corrosion have made it sought after for pipes and wires. Globally, construction accounts for about 30% of demand, Bloomberg Intelligence data show. The transportation industry makes up about 13%, including for use in cars and trucks.

Richardson, Texas-based Lennox International Inc., which makes and markets heating and cooling equipment, said on an Oct. 19 earnings call that cheaper metals and commodities provided a benefit of $15 million to earnings in 2015. There’s about 50 pounds of copper in the average air-conditioning unit. “The winner here will be anyone who purchases and uses copper,” Dane Davis, a metals analyst at Barclays Plc in New York, said in a telephone interview. “The construction industry stands to benefit from cheaper copper pipes. On a national scale, automobile producers are also going to be winners because it’s an important part of car production.”

As commodities prices sink, so does the market cap of these huge corporations.

• Iron Ore in $30s Seen Near Tipping Point for Largest Miners (BBG)

Iron ore’s tumble into the $30s threatens the world’s biggest miners as prices approach break-even costs, according to Capital Economics. BHP Billiton shares slumped to the lowest in 10 years and Rio Tinto dropped to the lowest since 2009. The most expensive operations at the four largest suppliers are on the verge of making losses at rates below $40 a metric ton, said John Kovacs at Capital Economics in London, who estimates their break-even levels at $28 to $39, taking into account freight and other costs. While these producers will keep output strong, they’ll be constrained by low prices, he said. Iron ore’s plunge below $40 comes as producers including Vale in Brazil and Rio and BHP in Australia press on with expansions to cut costs and defend market share just as demand from the largest consumer China slows.

They’re the world’s biggest suppliers along with Fortescue. Prices of the raw material have lost 45% this year and have plunged 80% from their peak in 2011. “The big four will find it hard to maintain output at below $40,” Kovacs said in response to questions. “If prices remain weak, output from the highest-cost mines of the big four will be under pressure.” Ore with 62% content delivered to Qingdao sank 1.1% to $38.65 a dry ton on Monday, a record low in daily prices compiled by Metal Bulletin Ltd. dating back to May 2009. The raw material peaked at $191.70 in 2011. Kovacs said that while rates will stay low over the next year, he doesn’t believe they’ll remain below $40 for a significant length of time. He expects prices to recover slowly because demand won’t fall much further and the biggest miners will find it difficult to keep up output at these levels.

Oh, you think they couldn’t figure out that one by themselves?

• Emerging Markets Warned of Capital Drought as Fed Nears Liftoff (BBG)

A sudden capital drought in emerging markets could undermine the fragile global expansion, World Bank economists said in a report Tuesday that questions whether the international lender’s main poverty-reduction target is achievable given the bleaker outlook. Now in its sixth year, the slowdown in developing economies is the broadest since the 1980s, World Bank economists said in a research paper released on Tuesday. While emerging nations are better prepared for shocks than they were in the 1980s and 1990s, the recent “rough patch” could signal a new era of slow growth, according to the Washington-based development bank. Even worse, a surge in financial turbulence could cause capital flows into emerging markets to dry up, the World Bank said.

Net capital flows in emerging markets have been declining since last year and stalled to zero in the first half of 2015. The warning comes a little over a week before what investors expect will be the U.S. Federal Reserve’s first increase in its benchmark borrowing rate since 2006. Tightening financial conditions and a slump in commodity prices have hurt resource-rich emerging markets such as Russia and Brazil, a nation which Goldman Sachs has warned may be on the verge of a depression. “Deteriorating external conditions, perhaps resulting from U.S monetary policy tightening or elevated uncertainty about growth prospects in a major emerging market, could potentially combine with domestic factors into a ‘perfect storm’ by sparking a sudden stop in capital inflows to multiple emerging markets,” the World Bank said in the paper.

World Bank President Jim Yong Kim has made it part of the institution’s mission to reduce extreme poverty – living on less than $1.90 a day – to 3% of the world’s population. That milestone will be a challenge to reach “under most plausible scenarios,” the report stated. “In light of the significant global risks going forward, emerging markets urgently need to put in place an appropriate set of policies to address their cyclical and structural challenges and promote growth,” the authors wrote. The report’s authors cite a number of reasons for the slowdown, including weak global trade, the commodities slump as demand from China has weakened, and slowing productivity growth in emerging economies..

Lowballing.

• China’s Illicit Outflows Estimated at $1.4 Trillion Over Decade (BBG)

China’s illicit financial outflows were estimated at almost $1.4 trillion over a decade, the largest amount for any developing nation, as money exited the country through channels including fake documentation on trade deals. The estimate for the 10 years through 2013 was published Wednesday by Global Financial Integrity, a Washington-based group researching cross-border money transfers. The study is based on data reported to the IMF and covers money which GFI believes to be illegally earned, transferred or utilized. Money flowing out of China this year has helped to pump up property markets from Sydney to Vancouver, while prospects for a weaker yuan may drive more cash abroad.

On Wednesday, China cut the currency’s reference rate to the weakest since 2011. The bulk of $7.8 trillion of illicit money that exited developing nations over the 10-year period was disguised as trade through fake invoicing, the report said. That’s a method that was highlighted in China in 2013 when the government cracked down on false documentation that was hiding money flows and distorting the nation’s trade data. While citizens are officially limited to converting $50,000 per person a year, a range of tools exist for getting around that restriction, from pooling quotas to transactions through so-called underground banks.

“..on Tuesday, the IMF joined the New Cold War..”

• The IMF Forgives Ukraine’s Loan To Russia (Michael Hudson)

On December 8, the IMF’s Chief Spokesman Gerry Rice sent a note saying: “The IMF’s Executive Board met today and agreed to change the current policy on non-toleration of arrears to official creditors. We will provide details on the scope and rationale for this policy change in the next day or so.” Since 1947 when it really started operations, the World Bank has acted as a branch of the U.S. Defense Department, from its first major chairman John J. McCloy through Robert McNamara to Robert Zoellick and neocon Paul Wolfowitz. From the outset, it has promoted U.S. exports – especially farm exports – by steering Third World countries to produce plantation crops rather than feeding their own populations. (They are to import U.S. grain.) But it has felt obliged to wrap its U.S. export promotion and support for the dollar area in an ostensibly internationalist rhetoric, as if what’s good for the United States is good for the world.

The IMF has now been drawn into the U.S. Cold War orbit. On Tuesday it made a radical decision to dismantle the condition that had integrated the global financial system for the past half century. In the past, it has been able to take the lead in organizing bailout packages for governments by getting other creditor nations – headed by the United States, Germany and Japan – to participate. The creditor leverage that the IMF has used is that if a nation is in financial arrears to any government, it cannot qualify for an IMF loan – and hence, for packages involving other governments. This has been the system by which the dollarized global financial system has worked for half a century. The beneficiaries have been creditors in US dollars.

But on Tuesday, the IMF joined the New Cold War. It has been lending money to Ukraine despite the Fund’s rules blocking it from lending to countries with no visible chance of paying (the “No More Argentinas” rule from 2001). With IMF head Christine Lagarde made the last IMF loan to Ukraine in the spring, she expressed the hope that there would be peace. But President Porochenko immediately announced that he would use the proceeds to step up his nation’s civil war with the Russian-speaking population in the East – the Donbass. That is the region where most IMF exports have been made – mainly to Russia. This market is now lost for the foreseeable future. It may be a long break, because the country is run by the U.S.-backed junta put in place after the right-wing coup of winter 2014. Ukraine has refused to pay not only private-sector bondholders, but the Russian Government as well.

This should have blocked Ukraine from receiving further IMF aid. Refusal to pay for Ukrainian military belligerence in its New Cold War against Russia would have been a major step forcing peace, and also forcing a clean-up of the country’s endemic corruption. Instead, the IMF is backing Ukrainian policy, its kleptocracy and its Right Sector leading the attacks that recently cut off Crimea’s electricity. The only condition on which the IMF insists is continued austerity. Ukraine’s currency, the hryvnia, has fallen by a third this years, pensions have been slashed (largely as a result of being inflated away), while corruption continues unabated.

Wolfie’s back…

• Tension Grows Between Tsipras, Schaeuble Over IMF Role In Greek Program (Kath.)

Tension between Greece and its lenders grew on Tuesday when German Finance Minister Wolfgang Schaeuble seized on comments by Greek Prime Minister Alexis Tsipras regarding the involvement of the International Monetary Fund in the Greek bailout program. During a TV interview on Monday night, Tsipras indicated that he is not keen on the IMF joining the program because of the demands it is likely to make. “The Fund must decide if it wants a compromise, if it will remain a part of the program,” said Tsipras. “If it does not want to, it should come out publicly and say so.” Speaking on the sidelines of yesterday’s Ecofin meeting, Schaeuble slammed Tsipras’s stance. “It is not in Greece’s interests for it to question the IMF’s involvement in the bailout program,” he said.

“I believe we negotiated at length with Mr Tsipras in July and August,” added Schaeuble. “I also believe that he signed the agreement and then held elections to get a mandate from the Greek people so he could implement what he signed.” The German finance minister also indicated that he has the impression Tsipras is having second thoughts about adopting some of the measures demanded by Greece’s lenders. “They should focus their attention on doing what they have to do,” he said. “As always, they are behind schedule. Maybe questioning the agreement is necessary for domestic reasons; he has a slim majority I have noticed. This may be the easy route but it is not in Greece’s interests.”

Schaeuble’s comments prompted an immediate response from Athens. “We remind that the Greek government is responsible for deciding what is in the country’s interests,” said government spokeswoman Olga Gerovasili. “We expect the German Finance Ministry to separate its stance from the unacceptably tough stance of the IMF,” she added. “Europe should and is able to solve its problems on its own.” Greek government sources believe that Schaeuble’s comments indicate there is a split within the German government over Greece.

…and he’s picking fights wherever he can see them…

• Schaeuble Fights EU Deposit Insurance Plan in Clash With ECB (BBG)

German Finance Minister Wolfgang Schaeuble lashed out at plans for joint European deposit insurance, saying the proposal threatens central-bank independence and may be illegal under European Union treaties. Schaeuble’s comments on Tuesday pitted him against officials from the ECB, Italy and Ireland during a public discussion that underscored disputes holding up shared deposit backing, including how to address the risks of government bonds on banks’ balance sheets. The ECB “strongly” supports the European Commission’s plan to introduce common deposit insurance over eight years, ECB Vice President Vitor Constancio said. Schaeuble countered that sovereign risk weighs down banks in too many nations, which shouldn’t benefit from more joint insurance until that’s been addressed.

In addition, the ECB is breaching the barrier between monetary policy and its new bank-oversight goals, he said. “There must be a clear Chinese wall or at least a division by primary law between banking supervision and monetary policy,” said Schaeuble, who called for a treaty change on the ECB’s role and questioned whether current treaties allow deposit insurance as envisaged. As European banks are generally allowed to treat sovereign debt on their balance sheets as free of default risk, any move to add risk weighting or limit such holdings could cause shocks.

In Tuesday’s debate, Constancio called for working globally to address the sovereign-risk question to avoid market disruptions. The European Commission’s proposal would apply to euro-area countries and any others that want to join. Schaeuble’s calls for risk reduction won more allies than his legal questions about the EU proposal. Finnish Finance Minister Alexander Stubb said his view of the legal issues was “a little bit softer” than Schaeuble’s, though risks needed to be addressed before deposit insurance moves ahead. Dutch Finance Minister Jeroen Dijsselbloem called for concrete plans on how to limit banking risks.

Hours after his identity is suggested in the press, his home is raided. But that has nothing to do with each other?

• Australian Police Raid Sydney Home Of Reported Bitcoin Creator (Reuters)

Australian Federal Police raided the Sydney home on Wednesday of a man named by Wired magazine as the probable creator of cryptocurrency bitcoin, a Reuters witness said. The property is registered under the Australian electoral role to Craig Steven Wright, whom Wired outed as the likely real identity of Satoshi Nakamoto, the pseudonymous figure that first released bitcoin’s code in 2009. More than a dozen federal police officers entered the house, on Sydney’s north shore, on Wednesday after locksmiths broke open the door. When asked what they were doing, one officer told a Reuters reporter that they were “clearing the house”.

The Australian Federal Police said in a statement that the officers’ “presence at Mr. Wright’s property is not associated with the media reporting overnight about bitcoins”. The AFP referred all inquiries about the raid to the Australian Tax Office, which did not immediately respond to requests for comment. The police raid in Australia came hours after Wired magazine and technology website Gizmodo published articles saying that their investigations showed Wright, who they said was an Australian academic, was probably the secretive bitcoin creator. Their investigations were based on leaked emails, documents and web archives, including what was said to be a transcript of a meeting between Wright and Australian tax officials.

The identity of Satoshi Nakamoto has long been a mystery journalists and bitcoin enthusiasts have tried to unravel. He, she or a group of people is the author of the paper, protocol and software that gave rise to the cryptocurrency. The New York Times, Newsweek and other publications have guessed at Nakamoto’s real identity, but none has proved conclusive. Uncovering the identity would be significant, not just to solving a long-standing riddle, but for the future of the currency. And as an early miner of bitcoins, Nakamoto is also sitting on about 1 million bitcoins, worth more than $400 million at present exchange rates, according to bitcoin expert Sergio Demian Lerner.

Governments should not be allowed to blow these bubbles for short-term popularity. They’re far too disruptive for societies.

• Australian Housing Boom Leaves Swath of Empty Properties (BBG)

Australia’s three-year property boom is leaving Melbourne awash with empty homes. In the country’s second-biggest city, growing numbers of local landlords and absent overseas owners have locked up their properties — forgoing rental income as they focus instead on price gains, a report by Prosper Australia said Wednesday. Some 82,724 properties, or 4.8% of the city’s total housing stock, appear to be unused, said the report, which estimated occupancy rates by gauging water usage. In the worst-hit areas, a quarter of all homes are empty, said Prosper. The research group is lobbying for more affordable housing through tax reform. Driven by a wave of Chinese buyers and record-low interest rates, average home prices have soared to about A$700,000 ($505,000) in Melbourne and around A$1 million in Sydney.

But with prices now cooling, the empty accommodation also masks a hidden glut of supply that could worsen any housing slump. “Those properties need to be utilized,” said Catherine Cashmore, author of the Prosper report, Speculative Vacancies. “Having property sitting vacant has a very high cost on the economy. It’s very destructive to our national prosperity.” The study, now in its eighth year, assessed 1.7 million residential properties in and around Melbourne during 2014. Those using less than 50 liters of water a day – the rough equivalent of one shower and a flush of a toilet – were deemed vacant. Sydney, where high-rise blocks have sprouted in the inner suburbs, is also likely to have a vacancy problem, said Cashmore. Data on water usage at individual apartments isn’t as comprehensive in Sydney as in Melbourne, she said.

Surging home prices triggered a boom in high-rise construction in Melbourne’s inner-city suburbs, squashing rental yields and leaving landlords with little incentive to find a tenant, said Cashmore. Analysts at Credit Suisse estimated this year that Chinese buyers were on course to take out 20% of new homes across Australia in 2020, up from the current 15%. While the Prosper report doesn’t identify overseas-owned properties, it said a “significant proportion” of foreign-owned real estate is empty, inflating prices. “There is a wall of money that is trying to get into Australia,” Cashmore said. “To fight those forces is going to be very difficult.”

But what if next year millions more arrive?

• Germany Takes In More Refugees In 2015 Than US Has In Past 10 Years (Quartz)

Germany is on pace to take in one million asylum-seekers this year. In the last 11 months, the country has taken in 964,574 new migrants, including more than 200,000 just in November. According to Die Welt, more than half of the potential refugees—about 484,000 migrants—came from Syria. Germany has accepted the largest number of asylum-seekers of all European countries, according to the UN High Commissioner for Refugees. “Germany is doing what is morally and legally obliged,” chancellor Angela Merkel said in September. “Not more, and not less.” It’s extraordinary also because it’s larger than the total number of refugees that the US—with a population of 320 million to Germany’s 80 million—has accepted in the last 10 years.

Since 2005, the US has accepted a total of 675,982 refugees from regions all over the world, according to data from the Refugee Processing Center, an arm of the US Department of Justice’s Bureau of Population, Refugees and Migration. President Barack Obama in September announced a plan for the US to resettle 10,000 Syrian refugees over the next year, and has recently called on Americans to welcome Syrian families as modern-day pilgrims. But his campaign to show the US can shoulder more of the weight of Europe’s migrant crisis has faced its own challenges: Obama’s refugees plan has drawn criticism from several, mostly Republican state governors who cite security concerns for US citizens after the Nov. 13 terror attacks in Paris. Just last week, Texas filed a lawsuit against the federal government for moving forward with plans to resettle two Syrian families in the state—although in recent years, the state has taken in more refugees than any other in the US.

Think this is what you call opportunism.

• How Germany’s Right-Wing Tabloid Bild Learned to Love Refugees (BBG)

Bild’s 2015 embrace of refugees was as though Fox News had suddenly endorsed President Obama on climate change. Throughout September, Bild stayed upbeat, dramatizing the journeys of Syrians across the continent, rallying behind Merkel, and shaming European leaders such as David Cameron and Viktor Orbán, who closed their borders. If there were a common thread in Bild’s anti-Greece coverage and its pro-refugee coverage, it was a chest-beating confidence in Germany’s superiority to its European neighbors. Bild was one of the first German newspapers to print a photo of Alan Kurdi, the Syrian boy who drowned on Sept. 2; when some readers criticized the choice, Bild stood its ground, running a subsequent issue without any photos whatsoever.

At the same time, Bild developed “Wir Helfen” into a national campaign. It publicized the volunteer efforts of its readers; teamed with German soccer clubs to promote aid for refugees; and published in Arabic a free welcome guide for refugees in Berlin. “In the past, it was not so often that Germany gave a great example to the world,” Diekmann said. “This is a historic situation, and if we don’t take up this challenge, who else will be able to do so?” Few media critics have accepted Bild’s change of heart at face value. “They are really eager to be positive,” said Mats Schönauer, editor of BildBlog, Germany’s main media criticism outlet, which started in 2004 as a site devoted solely to pointing out Bild’s errors. “The question is first, how long does it last? And second, how honest is it?”

To Schönauer, Bild’s refugee coverage reeks of hypocrisy. “For years, they created this fire, and now they’re playing the role of fireman,” he said. Others attribute the coverage to opportunism. “Bild will never put itself against the mood on the ground of the population,” said Wolfgang Storz, former editor of the Frankfurter Rundschau. “If the mood in Germany swings against refugees, then Bild will undoubtedly campaign against refugees.” Diekmann does not dispute that Bild has largely tracked public opinion rather than shaped it. “No medium is strong enough to create a culture that is not actually there,” he said. “From the beginning, it was clear that this atmosphere would not be there all the time.” In early October, as public support for Merkel dipped, Bild’s tone began to waver.

On Oct. 8, Bild published a poll asking readers whether they supported Merkel or Horst Seehofer, the Bavarian politician who has emerged as the biggest critic of her refugee policy. Ninety% of Bild readers supported Seehofer. A few days later, the tabloid ran a story about a meeting in Sumte, a town of 100 people that was due to house 1,000 refugees in an empty office complex. It quoted one citizen who worried that refugees would rape women on Sumte’s poorly lit streets. “The question that lurks behind every question that is asked this evening: Is one allowed to say that one has fears about the large number of refugees? Or does that make one a Nazi?” the paper asked.

Just another day at the office…

• 6 Afghan Migrant Children Drown Off Turkish Coast On Way To Greece (AP)

Turkey’s state-run news agency says six children have drowned after a rubber dinghy carrying Afghan migrants to Greece sank off Turkey’s Aegean coast. The Anadolu Agency said the coast guard rescued five migrants from the sea on Tuesday and were still looking for two others reported missing. The bodies of the children were recovered. Anadolu didn’t report their ages, but said one of them was a baby. The migrants were apparently hoping to make it to the island of Chios from the resort of Cesme despite bad weather. Turkey has stepped up efforts to stop migrants from leaving to Greece by sea. Last week, authorities rounded up around 3,000 migrants in the town of Ayvacik, north of Cesme, who were believed to be waiting to make the journey to the Greek island of Lesbos.

For letting this happen, Brussels should be dismantled as soon as possible. This is a scar on all Europeans, for the rest of their lives.

• 11 Refugees, Including 5 Children, Drown Near Greek Island, 13 Missing (GR)

Eleven dead, including five children, is the latest toll in the ongoing inflow of refugees on Greek islands near the Turkish coasts. A Frontex boat received a call on Tuesday night about dozens of people in the water northeast of Farmakonisi island. A coast guard rescue boat and a Greek Navy gunboat rushed on the spot and rescued 26 people (17 men, 5 women and 4 children). The rescue team pulled out of the water five children, four men and two women dead, while the survivors said that there are 13 people missing. They said there were 50 passengers on the wooden boat that capsized, despite the fact that the weather conditions were good. A rescue mission is taking place in the area to locate the missing persons.

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