Sep 092015
 
 September 9, 2015  Posted by at 9:00 am Finance Tagged with: , , , , , , , , , ,  


DPC St. Catherine Street, Montréal, Québec 1916

Japan Shares Jump Most in Seven Years (WSJ)
Bond Market Sends Fed All-Clear to Raise Interest Rates (Bloomberg)
World Bank Economist Warns Fed Hike Could Harm Emerging Economies (WSJ)
Deutsche Bank: The U.S. Dollar Rally Is “Rotating, not Ending” (Bloomberg)
Market Volatility Has Changed Immensely (Tracy Alloway)
China Just Killed the World’s Biggest Stock-Index Futures Market (Bloomberg)
Perfect Storm Continues To Hammer EM Currencies (BNE)
China Slowdown Hits Major African Economies Hard (WSJ)
Boom, Bust And Broken Trust Mark The Ages Of Finance (John Kay)
Germany To Receive More Than 800,000 Refugees This Year (Reuters)
Europe’s Alarming Lack Of Unity Over Refugees Could Break Up The EU (Ind.)
Concern Over Burgeoning Trade In Fake And Stolen Syrian Passports (Guardian)
Citi: Capital Markets Now Control Oil Prices (Tracy Alloway)
China Intends To Oust Dollar From Oil Trade (RT)
Obscure Hedge Fund Is Buying Tens of Billions of Dollars of US Treasurys (WSJ)
Yet Another Measure Of Risk In Junk-Bond Market Flashing Red (MarketWatch)
The City’s Stranglehold Makes Britain An Oh-So-Civilised Mafia State (Monbiot)
Majority of Greeks Say Adopting Euro Has Harmed Country (Gallup)
EU Nations Must Support UN Sovereign Debt Restructuring Proposals (19 Economists)
Russia Demands Answers As Bulgaria, Greece Deny Syria Flights (AFP)
How Europe Crushed Greece (Yanis Varoufakis)
Can Hobbits Save New Zealand? (CNBC)

With a graph that offers perspective.

Japan Shares Jump Most in Seven Years (WSJ)

Stocks in Japan jumped the most in more than seven years on Wednesday, shaking off unease about slowing growth in China amid a tentative rebound in Chinese stocks. The Nikkei Stock Average jumped 7.7%, or 1343.43, to 18770.51, marking the benchmark’s biggest daily percentage gain since October 2008. In point terms, it was the biggest gain since January 1994. A broad rally for shares and currencies comes after markets in the region fell Tuesday on weak Chinese trade data that had stoked concerns about a further slowdown in the world’s second-largest economy. Japanese stocks hit a seven-month low Tuesday. But on Wednesday, investor sentiment toward China took a positive turn.

China’s finance ministry said Tuesday evening that the country would roll out a “more forceful” fiscal policy to stimulate economic growth, which it said faced downward pressure. The Ministry of Finance said in a statement that it would allocate more funds to support some infrastructure projects and implement tax cuts for small businesses. It also said it would accelerate the approval process for duty-free stores to boost construction. “Authorities [have] released a slew of policies aimed at rebuilding investor confidence by introducing mid-to-long term market-regulating measures,” said Jacky Zhang, an analyst at BOC International.

Optimism that China was taking steps to help its economy gave the Shanghai Composite Index a 1.7% boost and sent the Hang Seng Index 3% higher. “Any signal that [China’s] government is going to do more to support growth is going to help sentiment,” especially measures on top of monetary easing, added Bernard Aw, market analyst at IG. Beijing has approved nearly 200 billion yuan of infrastructure projects since July, according to an article by state-owned Securities Daily Wednesday.

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The Fed is in a bind. Not hiking rates would mean losing credibility after all the talk about it, and it would signal they don’t think the US economy is all that strong, after all the talk about that. Mind you, if it does raise rates, it will be on the back of made-up numbers, but that’s all we have left for the US, as for China.

Bond Market Sends Fed All-Clear to Raise Interest Rates (Bloomberg)

Janet Yellen has the fixed-income market just where she wants it: ripe for the first increase in U.S. interest rates since 2006. Just about every indicator is telling the Federal Reserve Chair a move at next week’s policy meeting would cause government bonds little disruption. Her guidance has money markets pricing an extraordinarily slow pace of tightening, volatility metrics show no signs of panic, and forwards indicate benchmark rates will remain contained. Differences between shorter- and longer-term yields are flashing a positive signal for the economy. A green light from Treasuries is vital to avoid derailing the recovery that Yellen has nurtured because they help determine borrowing costs for businesses and consumers. Acting decisively now may even lend investors greater confidence in the outlook for growth.

“The debt markets have priced in a lot and it’s now time for the Fed to take advantage of that,” said Peter Tchir at Brean Capital, which has clients ranging from hedge funds and pension funds to money managers specializing in fixed-income markets. “The 10-year Treasury is at a very comfortable point, with forwards showing even a Fed hike won’t move yields much higher,” Tchir said. “Once we get through the first increase, and see the economy can do fine, it will remove the looming worry.” Bond investors have had plenty of time to get comfortable with the idea that interest rates are going to rise from near zero. As long ago as March, the Fed introduced the possibility of a move in 2015.

Policy makers said more recently they intended to act before year-end, assuming continued improvement in the labor market, as they were confident inflation would move back toward their 2% goal. With the unemployment rate at a seven-year low, futures trades are pricing in a 30% likelihood of an increase this month and 59% odds of a tightening before Dec. 31. The Fed will announce its next policy decision on Sept. 17. Even when the Fed does move, communication tools such as officials’ estimates for the future evolution of interest rates and Yellen’s own press conference may help assuage market nerves. “It’s not only about the move itself, it’s also about the statement,” said Christoph Kind at Frankfurt Trust. If “the Fed makes clear that there is a lot of time until the next hike, then there might be some relief and that could be good news.”

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But does the Fed care? Surely emerging markets are not part of its mandate?!

World Bank Economist Warns Fed Hike Could Harm Emerging Economies (WSJ)

The Federal Reserve should hold off raising rates at its policy-setting meeting later this month until global economies are stronger, Kaushik Basu, chief economist at the World Bank, said in a newspaper interview published Tuesday. An increase in rates at the Fed’s meeting next week would risk creating “panic and turmoil” in emerging markets, and would lead to “fear capital” leaving those nations along with swings in their currencies, Mr. Basu told the Financial Times. “I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence,” he told the newspaper. With the world economies “looking so troubled,” he said, “if the U.S. goes in for a very quick move in the middle of this, I feel it is going to affect countries quite badly.”

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Where the Fed can find fodder to raise rates despite all predictions that it won’t.

Deutsche Bank: The U.S. Dollar Rally Is “Rotating, not Ending” (Bloomberg)

Depending on which index you look at, King Dollar either gave back ground in August’s market turmoil or continued to grind higher. The most commonly cited U.S. dollar index, the DXY, retreated over the course of the month, while the Federal Reserve’s broad trade-weighted dollar index rose to its highest level since September 2003. The euro and the yen account for more than a 70% weighting in the DXY, while the broad trade-weighted dollar index, as the name suggests, tracks the greenback’s value relative to a greater array of foreign currencies. The yen and euro both gained, while stock markets tumbled, as investors unwound the popular bets made against these currencies, which also benefited from safe-haven flows.

“Fed rate expectations adjusted more than [European Central Bank] and [Bank of Japan] QE expectations (markets delayed Fed hikes but didn’t price-in more ECB/BoJ easing),” wrote researchers at Deutsche Bank, who expect the U.S. dollar to recoup its recent losses against those currencies over the next six months. The Chinese yuan, which is included in the trade-weighted dollar index but not the DXY, was devalued during the month. These two factors are at the heart of the gap between the two dollar indexes in August. And this divergence, according to Deutsche, reinforces that the U.S. dollar “upcycle” that began in 2011 is “rotating, not ending: from developed markets, to commodity foreign exchange, and now to China and Asia foreign exchange.”

Meanwhile, Goldman Sachs’s Aleksandar Timcenko and Kamakshya Trivedi have pointed out that the broad gains made by the U.S. dollar were much more a function of weakness in the other part of the currency pairs. They looked at emerging market currencies more generally, seeking to isolate how much of those foreign exchange moves over the past month could be attributed only to a U.S. dollar factor. They found that “the degree of focus on the USD factor in emerging market foreign exchange markets has waned substantially over the past month, and is near the lowest levels of the year.” Issues specific to emerging markets, they concluded, have been in the driving seat for the past month.

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“..the explosion in the popularity of volatility trading is now feeding on itself..”

Market Volatility Has Changed Immensely (Tracy Alloway)

On Aug. 24, as global markets fell precipitously, one thing was shooting up. The Chicago Board Options Exchange’s Volatility Index, the VIX, briefly jumped to a level not seen since the depths of the financial crisis. Behind the scenes, however, its esoteric cousin, the VVIX, did one better. For years, the VIX has been Wall Street’s go-to measure for expected stock market volatility. Derived from the price of options on the S&P 500, the volatility index has evolved into an asset class of its own and now acts as a benchmark for a host of futures, derivatives and exchange-traded products to be enjoyed by both big, professional fund managers and ‘mom and pop’ retail investors.

The dramatic events of last month underscore the degree to which the explosion in the popularity of volatility trading is now feeding on itself, creating booms and busts in implied volatility. Even as the VIX reached a post-crisis intraday high, the VVIX, which looks at the price of options on the VIX to gauge the implied volatility of the index itself, easily surpassed the levels it reached in 2008. Analysts, investors and traders point to two market developments that have arguably increased volatility in the world’s most famous volatility index, beginning with the rise of systematic strategies.

Such strategies fall under a host of names including commodity trading advisers (CTAs), volatility overlays, dynamic hedging and risk parity*, though it’s worth noting that many types of buy-side players have been dabbling in such techniques as they seek to boost returns in an era of historically low interest rates and suppressed market moves. When there’s a sudden spike in volatility, as there was last month, the price of near-term VIX futures rises. Meanwhile, volatility players – notably hedge funds and CTAs – scramble to buy protection as they either seek to hedge or cover short positions, causing a feedback loop that encourages near-term futures to rise even more.

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A biggie.

China Just Killed the World’s Biggest Stock-Index Futures Market (Bloomberg)

Add the world’s biggest stock-index futures market to the list of casualties from China’s interventionist campaign to stop a $5 trillion equity rout. Volumes in the country’s CSI 300 Index and CSI 500 Index futures sank to record lows on Tuesday after falling 99% from their June highs. Ranked by the World Federation of Exchanges as the most active market for index futures as recently as July, liquidity in China has dried up as authorities raised margin requirements, tightened position limits and started a police probe into bearish wagers. While trading in Chinese equities has also slumped amid curbs on short sales and an investigation into computer-driven orders, the tumble in futures volumes may cause even greater damage because of their central role in the investment strategies of domestic hedge funds and other institutional money managers.

A failure to revive the market would undercut the government’s own efforts to attract professional investors to local stock exchanges, where individuals still account for more than 80% of trades. “It is further evidence that the Chinese authorities are not yet ready to commit to freely trading markets,” said Tony Hann at Blackfriars Asset Management. “Fully functioning developed financial markets in China will take many years.” Chinese policy makers, intent on ending a selloff that has eroded confidence in their management of the economy, are targeting the futures market because selling the contracts is one of the easiest ways for investors to make large wagers against stocks.

It’s also a favored product for short-term speculators because the exchange allows participants to buy and sell the same contract in a single day. In the cash equities market, there’s a ban on same-day trading. Yet futures are also a popular tool among sophisticated investors with longer-term horizons. For hedge funds, they provide an easy way to adjust exposure to market swings. And large institutions use them to make cost-effective asset-allocation changes. As an example, selling index futures might be cheaper than unloading a large block of shares – an order that could put downward pressure on prices. A sustained slump in liquidity may spur some institutional investors to “give up hedging in futures, unwind futures positions and reduce their stock positions,” said Dai Shenshen at SWS Futures in Shanghai.

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There are lots of them.

Perfect Storm Continues To Hammer EM Currencies (BNE)

The Belarusian ruble was the world’s worst performing currency last week, hitting a record low against the dollar on August 28. A combination of market jitters over China’s economy and rising geopolitical tensions has had damaging consequences for many emerging market (EM) currencies, with the Turkish lira also hitting historic lows against the dollar. The Belarusian currency has been following the Russian ruble’s downward spiral, hit by a slump in oil prices and emerging market sell-offs. The Turkish lira also weakened to an all-time low and Turkish stocks fell on September 7 after the Kurdistan Workers’ Party (PKK) killed 16 soldiers in a single attack on September 6 in the conflict-riven southeast of the country.

The teetering Turkish currency combined with the unrest has rattled investors, causing more concerns over security ahead of the November snap election. The political uncertainty emerged after June’s inconclusive parliamentary elections kept the local currency under pressure. Falling as much as 1.29% in early trading following news of the attack on September 7, the lira weakened beyond the psychological barrier of TRY3 to the dollar. Shares dropped 1.28% on the back of the sharp decline in the lira. The lira has tumbled more than 20% this year against the dollar, making it one of the worst performing currencies on the EM landscape.

Concerns about the local currency are amplified by the prospects of a US interest rate increase later this year. Investors are also unnerved by the Turkish central bank’s reluctance to raise interest rates to defend the currency. Falling commodity prices and economic slowdowns in trading partner nations mean that Belarus and Turkey are not alone in their currency crises, with nearly all currencies in the former Soviet space taking a hit over the last month. China’s renminbi devaluation and the resultant crash in commodity prices have had a huge impact in emerging market sentiment across the globe, breeding anxiety in investors and hitting currency markets hard.

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“The country hasn’t prepared itself by developing in other areas.” Channel New Zealand, Australia et al.

China Slowdown Hits Major African Economies Hard (WSJ)

As the global oil-price slump passed its one-year anniversary in June, Angola’s President José Eduardo dos Santos booked a trip to Beijing. The long-serving autocrat hoped fresh loans and investment from China, Angola’s top trading partner, would buoy his country’s oil-dependent economy through choppy waters, according to financiers who do business with his government. On a weeklong visit, he signed a deal for China to build a $4.5 billion hydroelectric dam and a series of other projects. “China and Angola are good brothers and long-lasting strategic partners,” China’s President Xi Jinping said during meetings with Mr. dos Santos at the Chinese capital’s Great Hall of the People.

Now, Angola’s economic links to Beijing illustrate a broader problem across Africa: Nations that tied their fortunes to China find themselves hostage to its economy’s turbulence. President Xi is straining to arrest an economic slowdown in China, and that is aggravating a painful correction for oil-rich Angola, Beijing’s top African trading partner. Angolan importers are struggling to pay for critical items like medicine and grain. Moody’s Investors Service last week said rising government debt has put Angola at risk of a rating downgrade. Since January, the country’s kwanza currency has shed a quarter of its value against the U.S. dollar.

“Without the Chinese, there’s no money,” said one Angola-based financier, who said he feared retribution from Mr. dos Santos, whose family controls much of the economy. “The country hasn’t prepared itself by developing in other areas.” While forging closer economic ties with China, Angola and others also sought to consolidate their political power and aspire to Beijing’s state-led growth model. But those that bet on China’s demand for their oil and iron ore are realizing Beijing might not always be buying—and might not be able to teach them how to hang on to power indefinitely, either.

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History rhymes.

Boom, Bust And Broken Trust Mark The Ages Of Finance (John Kay)

In 1776, Adam Smith warned of the dangers of limited liability. Company directors were “the managers of other people’s money”. They could not be expected to watch over it with the “anxious vigilance” that partners would apply to their own cash. “Negligence and profusion,” Smith concluded, “must always prevail.” The South Sea bubble and other scandals of the early 18th century provided the background to Smith’s observation. For the next 150 years, corporate organisation was viewed with deep suspicion. But the huge capital requirements of rail transport paved the way for the extension of the limited liability model, which capped shareholders’ losses when their companies could not pay their debts. Still, partnership (which offers no such protection) remained the norm in finance.

The failure in 1866 of Overend Gurney, the iconic British banking collapse of the 19th century, happened just a year after its incorporation. When the House of Baring faced collapse in 1890, the Bank of England co-ordinated a rescue, but the partners were ruined. Louis Brandeis, a progressive lawyer who became a distinguished Supreme Court Justice, borrowed Smith’s “other people’s money” as the title of his excoriation of American finance sector at the beginning of the 20th century. Brandeis’s concern was the intermingling of industry and finance that was characteristic of America’s “gilded age”. It had allowed JP Morgan and Andrew Carnegie, Henry Clay Frick and John D Rockefeller to create a self-reinforcing cycle of economic and political power.

That power, Brandeis stressed, was acquired with the savings of the American public. The progressive backlash led by Brandeis and hostile journalists — the “muckrakers”, such as Ida Tarbell and Upton Sinclair — enjoyed some success in exposing the excesses of capitalism. The great industrialists of the interwar era, such as Alfred Sloan and Henry Ford, treated finance with disdain. Smith was not alone in warning that those who staked other people’s money would not treat it as carefully as their own: “When I speak of high finance as a harmful factor in recent years, I am speaking about a minority which includes the type of individual who speculates with other people’s money.” This was President Franklin Roosevelt in 1936.

The Wall Street crash and the introduction of securities regulation imposed new discipline on finance and its relationship to business. That worked for 50 years. But when Barings failed again in 1995, the organisation had become a limited company. The wealth of managers who supervised “rogue trader” Nick Leeson survived the crash; their business did not.

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“I think it’s clear to all of us that the number won’t stay at 800,000..”

Germany To Receive More Than 800,000 Refugees This Year (Reuters)

More than 800,000 refugees will come to Germany this year, the state premier of Germany’s biggest state, North Rhine-Westphalia, said on Tuesday. “I think it’s clear to all of us that the number won’t stay at 800,000,” Hannelore Kraft said, adding that this government forecast was three weeks old. She also pointed to an influx of 20,000 over the weekend. “So that the number will need to be revised upwards,” she said.

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Germany says it can take in 500,000 refugees per year for years (and it will have taken closer to a million by the end of this year – 100,000 in August alone). On the other hand, France has announced it will take 24,000 refugees, and Britain 20,000 over five years (20,000 arrived in Europe just over the weekend). Other European nations refuse any refugees, and Finland, just to name an example, has so far put its quota at 800. Meanwhile, EC president Juncker prepares a grand plan to ‘resettle’ 160,000 refugees, which can’t be far from the number that arrive in one single month.

How long do you think the EU will continue to exist?

Europe’s Alarming Lack Of Unity Over Refugees Could Break Up The EU (Ind.)

A three-year-old refugee child drowns while trying to reach the safety of a muddled and largely unwelcoming EU. Syrian refugee families are herded on and off trains in Budapest. Other refugees have their arms marked with identity numbers by Czech police. Razor-wire fences are built in Hungary – and in Calais. Germany (stiff, unyielding Germany) says: “Never mind the rules. Let them all come in.” So does Sweden. Some East European countries say: “Only Christian refugees are welcome; and not too many of those please.” Italy and Greece, swamped by refugees, demand more help from their partners. France and Austria vacillate. Spain says that it has problems enough. Britain tries, as usual, to make and play by its own rules. North vs south; east vs west; Britain vs the rest; German leadership or German dominance.

The refugee crisis is like a diabolical stress test devised to expose simultaneously all the moral and political fault lines of the European Union. The EU was born out of calamity. Over the last six decades, its policies have often been forged by resolving conflicts between member states. And yet this crisis seems more profound, more acute, more tangled, more poisonous, than any that has gone before. It is not about currencies or net contributions or farm subsidies but about the core issues of common humanity and solidarity that the EU claims to epitomise. The refugee crisis coincides with, and threatens to complicate, other existential challenges: Greek debt and the survival of the eurozone; EU reform and Britain’s in/out referendum next year. “The world is watching us,” the German Chancellor Angela Merkel said last week.

“If Europe fails on the refugee question, its close bond with universal human rights will be destroyed, and it will no longer be the Europe we dreamed of.” Open continental borders, one of the greatest of EU achievements, may be destroyed, Chancellor Merkel warned, unless the crisis is rapidly resolved. It is absurd to blame the EU for being “divided”. All the countries in Europe, and many political parties and many families, are split on how we should respond to the greatest refugee crisis on our continent for 70 years. There are no easy answers. The problem will grow even larger in the months and maybe years ahead. How could the EU not also be divided? Some of the divisions reflect genuine and honourable divergences in analysis and strategy, in geography or economic strength. Other statements hint at darker forces of extreme nationalism and racial intolerance. Disagreement is one thing. Irreconcilable differences are another.

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Brilliant side effect.

Concern Over Burgeoning Trade In Fake And Stolen Syrian Passports (Guardian)

When Mohamed paid an Afghan smuggler several hundred euros to drive him and his friends from Thessaloniki to the Greek-Macedonian border in July, he thought the money was all the smuggler would want. Instead, once on road the driver feigned a problem with the engine and persuaded the Syrians to leave the car on the pretext of avoiding detection by the police. “And then he stole our passports,” said Mohamed. Mohamed and his friends are the latest victims of a burgeoning trade in Syrian identity documents. Though most European nations have been slow to welcome more than a few Syrian refugees, the well-known preferential treatment Syrians receive within the German and Swedish asylum system has turned their passports into desired accessories for other immigrants who otherwise would not be likely qualify as refugees.

The head of the European border agency, Frontex, said this week that Arabs from outside Syria were buying counterfeit Syrian passports. Fabrice Leggeri told a French television channel that the appeal to buyers lay in how “they know Syrians get the right to asylum in all the member states of the European Union”. It’s a trade that is concerning not just Frontex, but Syrian refugees themselves, who feel that it may harm their own chances of asylum or at least slow their applications down. Hashem Alsouki, whose quest for refuge in Sweden was profiled by the Guardian earlier this year, said: “The situation with the passports is very worrying, and it might be the reason why my application for asylum is taking a long time. The officials have to spend more time working out if someone is a genuinely a Syrian citizen.”

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Shale can only survive on credit.

Citi: Capital Markets Now Control Oil Prices (Tracy Alloway)

From the concrete canyons of Lower Manhattan to the shale basins of West Texas, a new report from Citigroup underscores the degree to which Wall Street has financed the U.S. oil boom, with analysts warning that the slow grind of lower oil prices could spell tough times ahead for shale producers and their creditors. Cash-hungry shale producers have relied on a mix of bond sales and loans to finance capital-intensive gas explorations, with the interplay between the two types of financings now under the spotlight as oil companies face an intensifying credit crunch. “The shale sector is now being financially stress-tested by low prices, exposing shale’s dirty secret: many shale producers outspend cash flow and thus depend on capital market injections to fund ongoing activity,” Citi analysts wrote in research published on Tuesday.

Shale financing has zoomed into focus as U.S. oil companies embark on the latest round of semiannual discussions with lenders, known as the “redetermination of the borrowing base.” The discussions take place twice a year, in April and October, and involve shale producers and banks renegotiating the worth of oil assets securing credit facilities. With the price of crude now down 59% from its 2013 peak of $110 a barrel, October redeterminations are likely to crimp the amount of funding available to shale companies. The Citi analysts expect this year’s redeterminations to result in a 5% to 15% reduction in the borrowing base, which could in theory help spur the long-awaited shakeout in U.S. shale as producers either have to find fresh capital, merge with competitors, or simply shutter their businesses.

When it comes to the latter option, Citi argues that capital markets now wield unrivaled influence on who lives and who dies as investors choose how and at what price to fund shale producers. The wrinkle, however, is that shale companies may hang on for dear life as long as possible, thanks to perverse incentives in their corporate structure. “In an additional twist of capital markets’ influence on supply, incentives created by the capital markets may actually slow the supply rationalization for some producers in a classic case of ‘risk shifting,'” said the Citi analysts.

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Brent is grossly overrated as a benchmark.

China Intends To Oust Dollar From Oil Trade (RT)

China is planning to launch its own oil benchmark in October, similar to Brent and WTI, striving for a more important role in establishing crude prices. Unlike the Western benchmarks, the Chinese contracts will be nominated in the yuan, not the US dollar. Shanghai International Energy Exchange sent a draft futures contract to market players in August, Reuters reported quoting sources. Oil futures will be the first Chinese contract to permit direct participation of foreign investors. However, this is not the first step for greater oil market openness in China. In July, Beijing allowed private companies to import crude.

Previously importing was only done by state-run majors such as Sinopec, China National Petroleum Corporation and China National Offshore Oil Corporation, the Xinhua news agency reported. A Shanghai-based contract will compete in the crude futures market, which is worth of trillions of dollars and is dominated by two contracts, London’s Brent, seen as the global benchmark, and WTI, the key U.S. price. North Sea, Brent oil was first developed in the 1970s. The ICE Brent futures contract was developed in 1988. With an approximate output of only 1 million barrels per day, this blend is considered a benchmark and its contracts are now used to set prices for roughly 2/3 of the world’s oil. China is one of the world’s largest oil buyers. Nearly 60% of its oil consumption comes from imports.

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Casino.

Obscure Hedge Fund Is Buying Tens of Billions of Dollars of US Treasurys (WSJ)

A little-known New York hedge fund run by a former Yale University math whiz has been buying tens of billions of dollars of U.S. Treasury debt at recent auctions, drawing attention from the Treasury Department and Wall Street. Element Capital Management, led by trader Jeffrey Talpins, has been the largest purchaser in dozens of government-bond auctions over the past 10 months, people familiar with the matter said. The buying is part of an apparent effort by the fund to use borrowed money to exploit small inefficiencies in the world’s most liquid securities market, a strategy that is delivering sizable profits, said people close to the matter. Mr. Talpins is an intense and reserved trader formerly at Citigroup and Goldman Sachs.

He is known for a tenacious style that can grate on rivals and once tested the patience of former Federal Reserve Chairman Ben Bernanke. Element has been the largest bidder in many of the 62 Treasury note and bond auctions between last November and July, these people said. At many recent auctions, some of which involved sales of more than $30 billion of debt, Element purchased about 10% of the issue, these people said. That is an unusually large figure, analysts said. Element’s activity has raised questions because the cumulative purchases far exceed the hedge fund’s $6 billion in assets under management.

Treasury officials, who frequently meet with large auction participants, have asked Element about its activity, said someone close to the matter. “Their buying is eyebrow-raising,” said a trader who once worked for a firm that deals in government securities and witnessed Element’s bidding. These primary dealers often know the identity of other auction bidders. Element “never shared its strategy, but we often asked,” the trader said.

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More casino.

Yet Another Measure Of Risk In Junk-Bond Market Flashing Red (MarketWatch)

Yet another measure of risk in the U.S. junk-bond market is flashing an alarming signal. Moody’s Investors Service said its Covenant Quality Index deteriorated to its worst level on record in August from July, blowing past the previous record low set in November 2014. The index measures the degree of protection afforded to holders of junk, or high-yield, bonds sold by North American issuers. Covenants are provisions that aim to protect the credit quality of an issuer over time as a way to safeguard the bondholder’s investment. For the issuer, they are the strings attached to a deal that regulate its behavior and prevent it from further increasing its risk profile.

The Moody’s index uses a three-month rolling average covenant quality score that is weighted by each month’s total bond issuance. The scale runs from 1.0 to 5.0, where a lower score is a sign of stronger covenant quality, and a higher score is the opposite. The index rose to 4.53 in August from 4.37 in July and 4.42 in November 2014. It is now a full 116 basis points weaker than its best-ever score of 3.37 set in April 2011. “Single-month record weak scores in June and July drove the CQI to 4.53 in August for its worst score to date,” Moody’s analysts wrote in a report.

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No doubt about it.

The City’s Stranglehold Makes Britain An Oh-So-Civilised Mafia State (Monbiot)

It is not just that the very rich no longer fall while the very poor no longer rise. It’s that the system itself is protected from risk. Through bailouts, quantitative easing and delays in interest-rate rises, speculative investment has been so well cushioned that – as the Guardian economics editor, Larry Elliott, puts it – financial markets are “one of the last bastions of socialism left on Earth”. Public services, infrastructure, the very fabric of the nation: these too are being converted into risk-free investments. Social cleansing is transforming central London into an exclusive economic zone for property speculation. From a dozen directions, government policy converges on this objective. The benefits cap and the bedroom tax drive the poor out of their homes.

The forced sale of high-value council houses creates a new asset pool. An uncapped and scarcely regulated private rental market turns these assets into gold. The freeze on council-tax banding since 1991, the lifting of the inheritance tax threshold, and £14bn a year in tax breaks for private landlords all help to guarantee stupendous returns. And for those who wish simply to sit on their assets, the government can help here too, by ensuring there are no penalties for leaving buildings empty. As a result, great tracts of housing are removed from occupation. Agricultural land has proved an even better punt for City money: with the help of capital gains, inheritance and income tax exemptions, as well as farm subsidies, its price has quadrupled in 12 years.

Property in this country is a haven for the proceeds of international crime. The head of the National Crime Agency, Donald Toon, notes that “the London property market has been skewed by laundered money. Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK.” It’s hardly surprising, given the degree of oversight. Private Eye has produced a map of British land owned by companies registered in offshore tax havens. The holdings amount to 1.2m acres, including much of the country’s prime real estate. Among those it names as beneficiaries are a cast of Russian oligarchs, oil sheikhs, British aristocrats and newspaper proprietors. These are the people for whom government policy works – and the less regulated the system that enriches them, the happier they are.

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Offer Greece a safe way out and people will vote for it.

Majority of Greeks Say Adopting Euro Has Harmed Country (Gallup)

As the Greek debt crisis came to a head again earlier this summer, it’s no surprise that leaders in more solvent eurozone countries expressed doubts about Greece’s participation in the monetary union — but these doubts are also widespread among Greeks themselves. A majority of adults in the country -55%- said in a poll conducted May 14-June 16 that they think converting from the Greek drachma to the euro in 2001 has harmed Greece, while one-third (34%) said the common currency has benefited the country. The situation in Greece reached a critical point on June 30 -shortly after the survey was completed- when Greece became the first developed country to default on a loan payment to the IMF. In a July 5 referendum, Greeks resolutely voted against an extension of the country’s second eurozone bailout, in protest against the new austerity measures it would have carried.

Greeks’ doubts about the euro reflect the effects of austerity measures over the past five years, including higher taxes and deep cuts in public spending, that many economists say have contributed to the country’s sharp economic contraction and soaring unemployment. Whether Greece would have been better off had it never joined the euro remains a matter of debate, however, as the country saw increased economic growth and a much-improved inflation rate through most of the 2000s. Greeks are less likely to harbor doubts about their country’s membership in the European Union. In fact, responses to this question are essentially the inverse of those regarding eurozone participation: 54% of Greeks say EU membership benefits the country, while 35% believe the opposite.

The EU has a much longer history than the euro, and Greece has been a member since 1981; thus, a much larger proportion of the Greek population is too young to remember a time when the country wasn’t an EU member. That generational difference may be reflected in the finding that the Greeks aged 60 and older are somewhat less likely to feel EU membership is a benefit (48%) than those younger than 60 (56%). While Greeks are less likely to say EU membership harms the country than they are to say the same about participation in the euro, the finding that about one-third overall feel this way is remarkable in light of the fervor with which many southern and eastern European countries have pursued membership over the past 20 years.

Read more …

Piketty, Varoufakis, Steve Keen etc. And yes, the world is in dire need of international restructuring laws. They could protect Greece from Brussels, for one thing.

EU Nations Must Support UN Sovereign Debt Restructuring Proposals (19 Economists)

On September 10, the United Nations General Assembly will vote on nine principles concerning the restructuring of sovereign debts. Abiding by such principles would have avoided the pitfalls of the Greek crisis, in which political representatives gave in to creditor demands despite their lack of economic sense and their disastrous social impact. This public interest resolution must be supported by all European states and brought into the public debate. The Greek crisis has made clear that individual states acting alone cannot negotiate reasonable conditions for the restructuring of their debt within the current political framework, even though these debts are often unsustainable over the long term.

Throughout its negotiations with creditor institutions, Greece faced a stubborn refusal to consider any debt restructuring, even though this refusal stood in contradiction to the IMF’s own recommendations. At the UN in New York exactly one year ago, Argentina, with the support of the 134 countries of the G77, proposed creating a committee aimed at establishing an international legal framework for the restructuring of sovereign debts. This committee, backed up by experts of the UNCTAD, today submits to vote nine principles that should be respected when restructuring sovereign debt: sovereignty, good faith, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy, sustainability and majority restructuring.

In recent decades, a debt market has emerged that states are constrained to submit to. Argentina, standing at the forefront of these efforts, has been fending off “vulture funds” ever since it restructured its debt. These funds recently succeeded in freezing Argentina’s assets in the United States through the intervention of the American courts. Yesterday Argentina, today Greece, and tomorrow perhaps France as well: any indebted country can be blocked from restructuring its debt in spite of all common sense. Establishing a legal framework for debt restructuring, allowing each state to solve its debt problems without risking financial collapse or the loss of its sovereignty, is a matter of great urgency in promoting financial stability.

Read more …

Key qeustion: could Russia mess up Syria even worse than “we” have done?

Russia Demands Answers As Bulgaria, Greece Deny Syria Flights (AFP)

Moscow on Tuesday demanded answers from Greece and Bulgaria after Sofia banned Russian supply flights to Syria from its airspace and Athens said it had been asked by Washington to do the same. “If anyone – in this case our Greek and Bulgarian partners – has any doubts, then they, of course, should explain what the problem is,” deputy foreign minister Mikhail Bogdanov told the Interfax news agency. “If we are talking about them taking some sort of restrictive or prohibitive measures on the Americans’ request, then this raises questions about their sovereign right to take decisions about planes from other countries – Russia in particular – crossing their air space,” he said. “We explain where our planes are flying to, and what their purpose and their cargo is,” he added.

He said that ferrying cargo, which included humanitarian and military aid, through the airspace of a third party – as well as obtaining permission to do so – should be a routine procedure. “We’ve never had any problems before,” he said. Washington has expressed concern following reports suggesting Moscow may be boosting military support to Syrian President Bashar al-Assad and had sent a military advance team to the war-torn country. Earlier on Tuesday, NATO member Bulgaria confirmed it had refused permission late last night for an unspecified number of Russian aircraft to cross its airspace. Greece said on Monday that Washington had asked it to ban Russian supply flights to Syria from its airspace. It said it was examining the US request but gave no further details. Moscow has dismissed US concerns about its alleged Syria buildup, saying its military aid to the Assad regime was nothing out of the ordinary.

Read more …

Advice from Larry Summers? C’mon, Yanis…

How Europe Crushed Greece (Yanis Varoufakis)

[..] Mr. Schäuble felt that accepting an alternative plan for Greece’s recovery, in place of the troika’s program, would weaken Germany’s hand vis-à-vis the French. Thus little Greece was crushed while the elephants tussled. We had such a plan. In March, I undertook the task of compiling an alternative program for Greece’s recovery, with advice from the economist Jeffrey Sachs and input from a host of experts, including the former American Treasury Secretary Larry Summers, and the former British chancellor of the Exchequer Norman Lamont. Our proposals began with a strategy for debt swaps to reduce the public debt’s burden on state finances. This measure would allow for sustainable budget surpluses (net of debt and interest repayments) from 2018 onward.

We set a target for those surpluses of no more than 2% of national income (the troika program’s target is 3.5%). With less pressure on the government to depress demand in the economy by cutting public spending, the Greek economy would attract investors of productive capital. As well as making this possible, the debt swaps would also render Greek sovereign debt eligible for the European Central Bank’s quantitative easing program. This in turn would speed up Greece’s return to the money markets, reducing its reliance on loans from European institutions. To generate homegrown investment, we proposed a development bank to take over public assets from the state, collateralize them and so create an income stream for reinvestment.

We also planned to set up a “bad bank” that would use financial engineering techniques to clear the Greek commercial banks’ mountain of nonperforming loans. A series of other reforms, including a new, independent I.R.S.-like tax authority, rounded out our proposals. The document was ready on May 11. Although I presented it to key European finance ministers, including Mr. Schäuble, as the Greek Finance Ministry’s official plan, it never received the endorsement of our own prime minister. The reason? Because the troika made it abundantly clear to Mr. Tsipras that any such document would be seen as a hostile attempt to backtrack from the conditions of the troika’s existing program. That program, of course, had made no provision for debt restructuring and therefore demanded cripplingly high budget surpluses.

Read more …

No. Sorry.

Can Hobbits Save New Zealand? (CNBC)

As New Zealand’s dairy industry – a key pillar of the economy – crumbles under the pressure of a supply glut and slowing demand out of China, tourism in the land of hobbits is picking up some of the slack. But, this won’t be sufficient to reverse the slowdown in growth in the once “rock star” economy, say analysts, flagging the likelihood of further monetary easing as soon as this week. “With very low dairy prices and confidence falling sharply, New Zealand’s economy is slowing from the rapid pace of growth recorded in 2014,” said Paul Bloxham and Daniel Smith, economists at HSBC. Dairy products are the country’s biggest export earner, totaling 12 billion New Zealand dollars ($7.5 billion) in the year to June 30. However, this was down almost a quarter compared to the same period a year earlier, reflecting the slump in global diary prices.

Dairy prices sank to a 12-1/2-year low in August as the slowdown in China, the Middle East and other emerging markets damped on demand for protein and other producers stepped up production. [..] Weakness in the dairy sector not only hurts farm incomes, it has implications for the broader economy, say economists. “Low prices will reduce farm incomes, with many farmers facing negative cash-flow for the second season in a row. More worryingly, the malaise in the dairy sector appears to be spreading to other sectors,” said Bloxham and Smith. “Confidence has fallen sharply in the agricultural sector, but has also declined to varying degrees across all other business sectors.”

Lucky for New Zealand, as demand for its milk product cools, it is enjoying an uptick in inbound tourists, many of them inspired by the highly successful The Lord of Rings films trilogy shot in the country. Arrivals have also flocked from China – the country’s second largest visitor market after Australia. Over 315,000 mainland tourists traveled to the country between August 2014 and July 2015, up 30% on year, according to Tourism New Zealand. [..] tourism is set to overtake dairy as New Zealand’s biggest export earner as visitor arrivals continue to set new records, according to analysts.

Read more …

Jan 092015
 
 January 9, 2015  Posted by at 10:48 pm Finance Tagged with: , , , , , ,  


DPC Boston and Maine Railroad depot, Riley Plaza, Salem, MA 1910

I got to admit, Paris and Charlie have thrown me off a bit. Can’t be just me who noticed how well the French CAC 40 was doing since Charlie Hebdo got shot, can it? Up some 2%, I don’t quite recall, Wednesday, the day of the attack, and 3.59% yesterday. Doesn’t that strike you as odd? It did me. It’s maybe the perfect example of how alienated the financial world has become from the real world, from you and me. And it doesn’t even surprise us anymore, it doesn’t hardly seem worth mentioning anymore. But I thought I’d do just that: mention it. The CAC 40 lost 1.9% today, but still.

“Fed bullish” said yesterday’s headlines. Of course they did. But France? What have traders in Paris seen in the killings and blood stains that made them so jubilant they got all the way to +3.59%? And where are the ethics hiding in that number? I see no ethics. Should we accept that the financial part of our world has none? That it’s a kind of a parallel universe? That it doesn’t reflect anything that happens to us, and ours?

Today the equally jubilant US jobs report has the Dow down almost a full 1%. Maybe nobody believes anything anymore, any more than the financial world reflects the real one. And maybe nobody cares anymore either. We just go about our days knowing that jobs reports are nonsense, that price discovery has been put six feet under, and that if we’re really smart, we can still make money off of other people’s misery. And isn’t that what Darwin said the purpose of life is? Or was that Ayn Rand? I’m sorry, Charlie threw me off a bit.

Still, we did rediscover price discovery, to an extent, didn’t we? We found out what oil is worth, and even more what it’s not. And I have a hunch that that will lead to more ‘discoveries’. And that they will come from emerging markets – since we can’t seem to be able to be honest about our own, they will have to do it for us. They will, in spectacular fashion. As I wrote 3 weeks ago:

The Biggest Economic Story Going Into 2015 Is Not Oil

.. in the wake of the oil tsunami, which is a long way away from having finished washing down our shores, there’s the demise of emerging markets. And I’m not talking Putin, he’ll be fine. It’s the other, smaller, emerging countries that will blow up in spectacular fashion, and then spread their mayhem around. The US dollar will keep rising more or less in and of itself, simply because the Fed has ‘tapered QE’, and much of what happened in global credit markets, especially in emerging markets, was based on cheap and easily available dollars. There’s now $85 billion less of that each month than before the taper took it away in $10 billion monthly increments. The core is simple.

This is not primarily government debt, it’s corporate debt. But it’s still huge, and it has not just kept emerging economies alive since 2008, it’s given them the aura of growth. Which was temporary, and illusionary, all along. Just like in the rest of the world, Japan, EU, US. And, since countries can’t – or won’t – let their major companies fail, down the line it becomes public debt.

One major difference from the last emerging markets blow-up, in the late 20th century, is size: emerging markets today are half the world economy. And we can all imagine what happens when you blow up half the global economy … [..]

This is the lead story as we go into 2015 two weeks from today. Oil will help it along, and complicate as well as deepen the whole thing to a huge degree, but the essence is what it is: the punchbowl that has kept world economies in a zombie state of virtual health and growth has been taken away on the premise of US recovery as Janet Yellen has declared it.

It doesn’t even matter whether this is a preconceived plan or not, as some people allege, it still works the same way. The US gets to be in control, for a while, until it realizes, Wile E. shuffle style, that you shouldn’t do unto others what you don’t want to be done unto you. But by then it’ll be too late. Way too late.

As I wrote just a few days ago in We’re Not In Kansas Anymore , there’s a major reset underway. We’re watching, in real time, the end of the fake reality created by the central banks. And it’s not going to be nice or feel nice. It’s going to hurt, and the lower you are on the ladder, the more painful it will be.

But that’s just me. The revered Jim O’Neill has his own take on the issue:

BRICs Will Be Cut to ICs if Brazil and Russia Don’t Shape Up

Brazil and Russia’s membership of the BRICs may expire by the end of this decade if they fail to revive their flagging economies, according to Jim O’Neill, the former Goldman Sachs chief economist who coined the acronym. Asked if he would still group Brazil, Russia, India and China together as emerging market powerhouses as he did in 2001, O’Neill said in an e-mail “I might be tempted to call it just ’IC’ or if the next three years are the same as the last for Brazil and Russia I might in 2019!!”

The BRICs were still booming as recently as 2007 with Russia expanding 8.5% and Brazil in excess of 6% that year. The bull market in commodities that helped propel growth in those nations has since ended[..] China growing at 7% will add about $1 trillion nominally to global output every year, O’Neill said. When measured by purchasing power parity, China’s growth adds twice as much as the U.S.’s, he said. India expanding at 6% will add twice as much as the U.K. in those terms, he said.

“Their consumption is increasingly key for global consumption and which markets were amongst the world’s strongest in 2014? China and India both were up significantly,” he said. “So many investors are herd like, they probably have already forgotten the BRIC’s but it is silly. They are the most important influence in the world.”

Hmm. Sure, Russia and Brazil are already tanking, but China is in a much less comfy spot than Jim seems to believe. That’s not just me, the analyst team at Bank of America think so too:

Analysts Fear China Financial Crisis

A credit crunch in China is “highly probable” this year as slowing economic growth prompts a surge in bad debts, Bank of America Merrill Lynch predicts. Chinese president Xi Jinping this week trumpeted the “new normal” referring to slower growth as the government tries to rein in the credit boom – which has led to a debt pile of $26 trillion [..] BoAML: “Few countries that had grown debt relative to GDP as fast as China did over the past few years escaped from a financial crisis in the form of significant currency devaluation, major banking sector recap, credit crunch and/or sovereign debt default (often a combination of these).”

The analysts believe that the government has unlimited resources to bail out banks and other organisations as the debts are mostly in renminbi, and the country’s central bank can always print more money. They argue: “We suspect that the most likely scenario for China is a bad debt surge as growth slows, followed by a credit crunch in the shadow banking sector as investors become risk averse, and followed by a major financial system recap engineered by the government [..]

The US investment bank’s research report– “To focus on the three Ds: Deflation, Devaluation and Default” – notes that China had to pump money into the banking sector to the tune of 15% of GDP in the mid 2000s after a smaller debt surge in the late 1990s. [..] China will publish 2014 growth figures on 20 January that are set to miss the government’s economic target for the first time since 1998. Economists forecast the country grew 7.3%, below the target of 7.5%, with growth likely to slow further this year.

The central bank can ‘always print more money’? Is that so? And if it is, what would the effect be? What has money printing done in the west, other than paint an illusion? And what else could it possibly achieve in China? Shouldn’t Beijing simply adapt to the fact that as world markets shrink, so does its domestic and international growth potential? For that matter, how far removed from its published growth numbers are the data Xi and Li find on their breakfast plate every morning? If consumer inflation numbers – as silly a parameter as it is – prints 1.5%, how can GDP still grow by 7%? And how can it when producer prices are actually deflating? How does that work, and how does it rhyme? It’s perhaps not impossible in theory, but come on…

China Factory-Gate Deflation Deepens on Commodity Price Fall

China’s factory-gate prices extended a record stretch of declines, with the sharpest drop in two years in December, suggesting room for further monetary easing. The producer-price index slumped 3.3% from a year earlier[..] The slide has yet to be fully reflected in consumer prices, which rose 1.5%, matching the median estimate. Tumbling oil and metal prices have extended the run of producer-price declines to a record 34 months, adding to deflationary pressures worldwide as China’s export prices drop.

“The oil price drop is one factor, but the more important factor of the PPI decline is the weakness of the global economy – look at Europe and Japan,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “With trade and other inflation transmission methods, the whole world is facing disinflation pressure.” Factory-gate prices of oil and gas slumped 19.7% from a year earlier in December, while coal tumbled 12.2% and ferrous metals 19%, according to a statement on the NBS website.

What is supposed to have China grow at 7% or more today? It can’t be the west, Europe is shrinking, Japan is suffocating and America is fooling itself. It can’t be other emerging economies, they’re all in various stages of trouble. So it would have to be domestic. But have you seen Chinese housing numbers and other data recently? No 7% growth there.

China’s Deflation Risks May Be Rising

China’s consumer inflation ticked up slightly in December, keeping price increases for the year well below the government ceiling, but a further slide in factory prices raised new concerns over weak demand in the world’s second-largest economy. [..] The consumer-price index gained 1.5% year-over-year in December compared with a 1.4% increase in November [..]

In December, the producer-price index, which measures prices at the factory gate, slipped 3.3% from a year ago for its 34th month in a row of declines, with the fall accelerating from the 2.7% drop in November. For 2014 as a whole, the producer-price index fell 1.9%. Excess capacity, particularly in heavy industry, has been blamed for much of the drop. [..] Economic growth in the third quarter of last year was 7.3%, the poorest showing in over five years.

Emerging economies are no longer emerging. Vanishing would be a better term. And it’s going to get worse, fast. Because of the Fed, and the dollar. And interest rates on at least $1 trillion in bonds.

$6 Trillion Of EM Dollar Bonds Pummeled By Rising $, Falling Commodities

The soaring U.S. dollar is squeezing companies in emerging markets from Brazil to Thailand that now face higher costs on roughly $1 trillion in bonds sold to investors before the greenback’s surge. For 2014, the dollar is on track to gain more than 7% compared with a group of emerging-market currencies [..] it is causing particular pain at firms in emerging markets that issued bonds in dollars instead of local currency. The dollar’s rise means it costs more to make regular bond payments and pay off outstanding bonds as they mature. “The investor community is becoming very much one-way or crowded toward retrenching to the U.S.,” says Nikolaos Panigirtzoglou, global markets strategist at JP Morgan.

In 2014, companies in emerging markets issued a record-high $276 billion of dollar-denominated bonds [..] Such sales soared after the financial crisis as borrowers took advantage of rock-bottom interest rates set by the Federal Reserve and other central banks. Countries also have flocked to dollar-denominated bonds, saddling those governments with higher debt-service costs as the dollar rises.

Overall, companies and sovereign-debt issuers have $6.04 trillion in outstanding bonds, up nearly fourfold since the 2008 financial crisis [..] Many emerging markets also are being pummeled by falling prices for commodities such as oil and slower economic growth. Bond markets in emerging-market countries recently suffered one of their worst selloffs since the financial crisis [..]

The Indonesian rupiah, Chilean peso, Brazilian real and Turkish lira are near multiyear lows. Mexico’s central bank bought pesos earlier this month to keep the depreciating currency from pushing the economy into a funk. [..] More pressure will come if the Fed raises interest rates next year for the first time since 2006.

The stronger dollar also pushes the cost of new borrowing higher. Prices for bonds issued by Russia’s TMK, one of the world’s largest pipe makers, that are due in 2018 are down by more than 30% since late October. [..] Top officials at the IMF and the BIS have warned that the exchange-rate turmoil could lead to corporate defaults and asset-price busts around the globe. [..] overall investments in emerging markets by outsiders have grown so huge that it would be hard during a jolt for investors to sell without pushing those markets sharply lower [..].

Just you wait till the Fed hikes rates. There’ll be mayhem in the streets, all around the globe. And Wall Street banks are going to make a killing. Which is why the Fed WILL raise rates. From Fed oracle/media whisperer/bullhorn Jon Hilsenrath:

Could Lower 10 Year Yields Spark A More Aggressive Fed?

If lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner or more aggressively than planned. The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made at length in a speech in December. He argued the Fed had the wrong reaction to lower long rates in the 2000s, a mistake that might have contributed to the housing boom that ended disastrously.

Here is a key passage: During the 2004-07 period, the (Fed) tightened monetary policy nearly continuously, raising the federal funds rate from 1% to 5.25% in 17 steps. However, during this period, 10-year Treasury note yields did not rise much, credit spreads generally narrowed and U.S. equity price indices moved higher. Moreover, the availability of mortgage credit eased, rather than tightened.

As a result, financial market conditions did not tighten. As a result, financial conditions remained quite loose, despite the large increase in the federal funds rate. With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector.

Mr. Dudley’s conclusion was that the pace of the Fed’s short-term interest rate moves this time around ought to be dictated in part by whether the rest of the financial system is moving with or against the Fed’s intentions when it decides it ought to start restraining credit creation:

When lift-off occurs, the pace of monetary policy normalization will depend, in part, on how financial market conditions react to the initial and subsequent tightening moves. If the reaction is relatively large—think of the response of financial market conditions during the so-called “taper tantrum” during the spring and summer of 2013—then this would likely prompt a slower and more cautious approach. In contrast, if the reaction were relatively small or even in the wrong direction, with financial market conditions easing—think of the response of long-term bond yields and the equity market as the asset purchase program was gradually phased out over the past year—then this would imply a more aggressive approach.

…a stronger dollar and rising – albeit volatile – stock prices suggest the U.S. is attracting foreign capital which could charge up U.S. financial conditions and prompt an early or more aggressive Fed move.

The Fed – and its media handlers – are setting up the case for rate hikes. As everyone claims they wpouldn’t dare. A 5% GDP growth print makes little sense at best when Japan is sinking and Europe is rudderless, but it’s accepted as gospel. So is today’s jobs report, which is as flimsy as its predecessors once you lift the veil. There is no critical journalism left in the US, and the rest of the world isn’t doing much better in that regard.

But then things like a 50%+ drop in oil prices happen. Which at some point will lead more people to wonder what the real numbers are. For emerging nations, those numbers will not be pretty for 2015. They’re going to feel like they’re being thrown right back into the Stone Age. And they’re not going to like that one bit, and look for ways to express their frustration. Volatility is not just on the rise in the world of finance. It also is in the real world that finance fails to reflect. At some point, the two will meet again, and Wall Street will mirror Main Street. It will make neither any happier. But it’ll be honest.

Jul 302014
 
 July 30, 2014  Posted by at 5:01 pm Finance Tagged with: , , , , ,  


Arnold Genthe Long Beach, New York Summer 1927

Oh yay, US Q2 GDP supposedly rose by 4%. Aw, come on. That’s only 7% more than in Q1 (or 6.1% in the once again revised Q1 number). Wonder what made that happen? Don’t bother. It’s complete nonsense. New home sales and lending home sales went down – again – recently, wages are not going anywhere, the ADP jobs report was – again – low today. There’s nothing that adds up to a 6% or 7% difference between Q1 and Q2.

The real story of the American economy lies elsewhere. The economy is sinking away in a debt quagmire. If it were a body, the economy would be in up to its neck in debt by now, with the head tilted backwards so it can still breathe. Barely. But your government doesn’t want you to know. There are a lot of things that illustrate this.

First , let’s go back a few days to the Russell Sage Foundation report, Wealth Levels, Wealth Inequality And The Great Recession, that I mentioned in Washington Thinks Americans Are Fools. I posted a pic from the report and said it “makes clear ‘recovery’ is about the worst possible and least applicable term to use to describe what is happening in the US economy”:

Households at the “median point in the wealth distribution – the level at which there are an equal number of households whose worth is higher and lower”, saw their wealth plummet -36% from 2003 to 2013. From the highest point, in 2007, to 2013 the number is -43%. Five years after 2008 and Lehman, five years into the alleged recovery, which raised US federal, Federal Reserve, and hence taxpayer, obligations by $10-$15 trillion or more, US median household wealth was down -36% from 2003. And that’s by no means the worst of it:

If you look at the 5th and 25th percentile ‘wealth’ numbers (much of it negative), you see that they went down from 2003 to 2007, while the median was still rising. For both, wealth in the 2003-2013 timeframe deteriorated by some -200% (or two-thirds, if you will). -$9,479 to -$27,416 for the poorest 5%, $10.219 to $3,2000 for the lowest 25%.

What I didn’t do was add up the numbers, and though when you’re using ‘median’ or ‘typical’, it’s hard to be sure about those numbers, we can derive some things from it that won’t be too far off. The -36% loss suffered between 2003 and 2013 by the ‘typical household’, which lowered the inflation-adjusted net worth from $87,992 to $56,335 (a loss of $31,657 per household), meant, assuming 120 million US households, that some $3.8 trillion in wealth went up in air. Because wealth (though partially virtual) went up from 2003 to 2007, the loss between 2007 and 2013 was larger: at $42.537 per household, the total loss came to $5.1 trillion. And don’t forget, that happened during the so-called ‘recovery’.

It should surprise no-one, therefore, that a report issued by the Urban Institute and the Consumer Credit Research Institute states that over a third of Americans in 2013 had debt in collection (i.e. reported to a major credit bureau). WaPo’s take:

A Third Of Americans With Credit Files Had Debts In Collections in 2013

About 77 million Americans have a debt in collections, a new report finds. That amounts to 35% of consumers with credit files or data reported to a major credit bureau, according to the study released Tuesday by the Urban Institute and Encore Capital Group’s Consumer Credit Research Institute. “It’s a stunning number,” said Caroline Ratcliffe, senior fellow at the Urban Institute and author of the report. “And it threads through nearly all communities.” The report analyzed 2013 credit data from TransUnion to calculate how many Americans were falling behind on their bills. It looked at how many people had non-mortgage bills, such as credit card bills, child support payments and medical bills, that are so past due that the account has since been closed and placed in collections.

Researchers relied on a random sample of 7 million people with data reported to the credit bureaus in 2013 to estimate what share of the 220 million Americans with credit files have debts in collection. About 22 million low-income adults who did not have credit files were not represented in the study. This is the first time the Urban Institute calculated the collection figure, but Americans may have been struggling with debt for a while: Researchers noted that the 35% is basically unchanged from when the Federal Reserve studied the issue in 2004 and found that 36.5% of people with credit reports had debt in collections. The debts sent to collections ranged from $25 on the low end and to more than $125,000 on the high end. [..]

… not all consumers get hassled: some people may not even learn they’ve been sent to collections until they check their credit reports, the study noted. That doesn’t mean the debts didn’t cause any setbacks. Bills that are sent to collections can stay on a person’s credit report for up to seven years, hurting a consumer’s credit score and in turn hindering their chances of accessing loans, credit cards and other forms of borrowing. A bad credit score can also hurt a person’s ability to land a job or their odds of getting approved for an apartment [..]

Note that not all debt is included, and perhaps quite a lot is not: in the gutters of America, there are for instance 22 million low-income Americans who don’t even have a credit file. They are most likely to use things like payday loans, which are also not included. But there is more slipping through the reporting cracks, as I noticed the end of the WaPo piece unveils, just like Tyler Durden did:

Deadbeat Nation: A Shocking 77 Million Americans Face Debt Collectors

But how is it possible that tens of millions of Americans are in such dire straits? After all, banks have been reporting better delinquency data for years. The answer: the study found that the share of people with debt past due, meaning they are at least 30 days late with payment on a non-mortgage debt, was much smaller: 1 in 20 people. That includes people who are late with credit card bills, student loan payments and auto loans. The majority of those people, 79%, also had debt in collections. However, because certain bills, such as medical bills and parking tickets, may not show up on a person’s credit score until they are sent to collections, the total share of people falling behind on their bills may actually be much higher.

… the stunner is that the share of Americans with debt in collections is 7 times greater than those with merely debt past due …

I’ll add something else: since only 220 million of the 320 million Americans have a credit file, it’s safe to assume that if you add dependents, children, close to 120 million Americans, perhaps even more (an average of one for every household), live in a household that has debt so far past due that debt collectors have been notified. In other words, not just debt, but bad debt.

AP points out the link to the jobs market and wages:

The Urban Institute’s Ratcliffe said that stagnant incomes are key to why some parts of the country are struggling to repay their debt. Wages have barely kept up with [rising prices] during the five-year recovery, according to Labor Department figures. And a separate measure by Wells Fargo found that after-tax income fell for the bottom 20% of earners during the same period.

But what I find more interesting is the positive twist USA Today manages to give to the story (just when you thought all was lost, here comes the cavalry):

A Third Of Americans Delinquent On Debt

When it comes to overall debt levels, most comes from mortgages, which make up 70%, on average, of Americans’ debt load. Wealthier states tend to have the highest amount of debt and percentage of debt held in mortgages, but the researchers point out that Americans with higher debt may also have higher incomes and better access to credit.

Isn’t that just a swell trick? The report the paper comments on is about the 77 million Americans who have debt in collection, but before you know it they switch to overall debt, and insinuate that because a lot of it is in mortgages, things are not that bad. And the trick gets better, even one of the report’s authors gets sucked in:

“Total debt really mimics mortgage debt,” says Caroline Ratcliffe, a senior fellow at the Urban Institute and one of the authors of the report. Ratcliffe classifies mortgage debt as what’s generally considered “productive debt.” “We talk about credit and access to credit as a good thing, but debt as a bad thing,” she says. “Access to credit can result in productive debt that moves us forward.”

I read somewhere the past week that credit is, in principal, good, and it’s the American way etc. And as we see here, mortgage debt is seen as productive, even by the report’s authors. But that’s not what the report was about!! (picture me shouting here).

I think that in today’s economy it’s a grave mistake to classify all mortgage debt as productive. I definitely see that as an idea of long lost times. After all, the same classification must have been used in 2007, but then right after a lot of that mortgage debt turned sour. It wasn’t so productive after all.

To see debt as productive, you have to have the expectation that it’s going to make money for the debtor. Or better yet, actually produce something of value. And to think that today’s mortgage debt will produce profits, you need the idea that home prices will rise.

But when you look at the wealth loss suffered by Americans as seen above, and you combine that with the huge rise in bad debt, where would you want to get that rise in home prices from? There’s only one place, isn’t there: more debt. And that trick won’t wash ad infinitum.

Classifying all of today’s mortgage debt as productive, de facto seeks not just to redefine the word productive, but to turn it on its head.

There’s one sector of the US economy that is going kind of strong: car sales. But why do you think that is? That’s right: debt. Is car debt classified as productive too, perhaps? Bloomberg:

Is Your Car an Underwater Time Bomb?

Even as job and wage growth have stagnated, auto sales have uncoupled themselves from those traditional economic drivers to become one of the few sources of strength in the macroeconomic picture. As the economists Amir Sufi and Atif Mian point out in their new book “House of Debt,” one of the big factors supporting overall retail spending in the U.S. since 2008 has been the expansion of auto credit. Sufi and Mian don’t celebrate this fact – they rightly see it as a symptom of broader secular stagnation in the U.S. economy. Indeed, a few recent statistics demonstrate the very precarious underpinnings of the auto industry’s prosperity:

  • The average auto-loan term has increased every year since 2010, reaching 66 months in the first quarter of this year, according to Experian Automotive. In the same period, loans with terms of 73 to 84 months grew 28%, while loans with terms from 25 to 72 months actually fell.
  • Equifax reports that U.S. auto loan volumes are at an all-time high, with some $902.2 billion outstanding at the end of the first half of 2014, up 10% year-over-year.
  • The New York Times reports that subprime auto loans have grown by 130% in the last five years, with subprime lending penetration reaching 25% last year.
  • Leases make up another quarter or so of auto “retail sales” according to Experian, another metric that is currently at all-time highs.
  • 27% of trade-ins on new vehicle purchases in Q1 2014 had negative equity, according to the Power Information Network, another troubling indicator on the rise in recent years.

With half of new car sales supported either by leases or subprime credit, and ballooning loan terms leaving an increasing number of new car buyers underwater on their trade-ins, it’s clear that auto demand is hardly at a sustainable, organic level. Last year, 38.8% of dealer profits came from financing operations, according to the National Automobile Dealers Association, and General Motors has relied on some $30 billion in largely subprime receivables held by its GM Financial unit to show an increase in revenue in the first two quarters of this year.

The only thing that keeps the American economy from collapsing outright and face first in this debt crisis is more debt. And it’s not just America: China, Japan, UK, they’re all on the same path, while Europe, once deflation sets in, will have to follow suit or break into smithereens.

And what should make me believe that Putin has not already had his economic team figure out a sweet spot for gas delivery to Europe, where he can reduce volume and let the Europeans fight amongst themselves over what’s left, and at the same time still keep his profits rising?

With a 4% official GDP number, the Fed has no choice but to keep up the taper. And I don’t think it would even want to have that choice. In the current geopolitical environment, which the US has largely created all by itself, making fewer dollars available in global markets can work wonders for the American dreams of empire.

The amount of dollar-denominated debt emerging economies have ‘engaged’ in will in short order devastate many of them, Europe will have a very hard time, and Japan will sink into oblivion (and perhaps try to shoot its way out). The BRICS’ plans to start their own bank will only hasten US determination.

Yellen doesn’t have to make a decision to raise rates, all she has to do is taper and rates will rise by themselves. If she raises rates on top of that, it’ll be a matter of weeks or months for many nations, companies and individuals.

Higher rates will stab the global economy in the heart, including US citizens, but they will boost the – dreams of – empire. For a while. But then, as the sanctions on Russia, based on at best paper thin and at worst entirely fabricated allegations, make abundantly clear, we’ve entered a new age. The pie is shrinking, and ever more people are clamoring for the ever fewer pieces of that pie.

Debt can only carry us so far, and that’s not a huge distance either; the game stops when the combination of principal and interest payments grows over debtors’ heads, as many of you can attest to. The taper alone will cause many to reach that point of no return; it will push a billion people, or two, over the brink. Argentina’s default is but the first of many.

What’s more important now is that fossil fuels, too, have a limited ‘carrying capacity’. And the planet. It’s going to be all cats in a sack from here on in, with everyone jockeying for a handful of rotting, dwindling and crumbling musical chairs. A 4% US GDP print is but a sidenote in that; it merely serves to avert people’s eyes away from their real futures. But then, Americans are no longer used to looking at those anyway. They’re not exactly a people with a strong link to reality.

A Third Of Americans With Credit Files Had Debts In Collections in 2013 (WaPo)

About 77 million Americans have a debt in collections, a new report finds. That amounts to 35% of consumers with credit files or data reported to a major credit bureau, according to the study released Tuesday by the Urban Institute and Encore Capital Group’s Consumer Credit Research Institute. “It’s a stunning number,” said Caroline Ratcliffe, senior fellow at the Urban Institute and author of the report. “And it threads through nearly all communities.” The report analyzed 2013 credit data from TransUnion to calculate how many Americans were falling behind on their bills. It looked at how many people had non-mortgage bills, such as credit card bills, child support payments and medical bills, that are so past due that the account has since been closed and placed in collections.

Researchers relied on a random sample of 7 million people with data reported to the credit bureaus in 2013 to estimate what share of the 220 million Americans with credit files have debts in collection. About 22 million low-income adults who did not have credit files were not represented in the study. This is the first time the Urban Institute calculated the collection figure, but Americans may have been struggling with debt for a while: Researchers noted that the 35% is basically unchanged from when the Federal Reserve studied the issue in 2004 and found that 36.5% of people with credit reports had debt in collections. The debts sent to collections ranged from $25 on the low end and to more than $125,000 on the high end. Many consumers were burned for relatively small amounts – about 10% of the debts were smaller than $125, Ratcliffe says. But the median debt, $1,350, is still pretty substantial, she adds.

The phrase “debt collection” normally brings to mind dealing with harassing phone calls, repeated letters and other efforts from third parties attempting to collect the payment. But not all consumers get hassled: some people may not even learn they’ve been sent to collections until they check their credit reports, the study noted. That doesn’t mean the debts didn’t cause any setbacks. Bills that are sent to collections can stay on a person’s credit report for up to seven years, hurting a consumer’s credit score and in turn hindering their chances of accessing loans, credit cards and other forms of borrowing. A bad credit score can also hurt a person’s ability to land a job or their odds of getting approved for an apartment, Ratcliffe says. “This could impact you in multiple ways,” she adds.

The study found that the share of people with debt past due, meaning they are at least 30 days late with payment on a non-mortgage debt, was much smaller: 1 in 20 people. That includes people who are late with credit card bills, student loan payments and auto loans. The majority of those people, 79%, also had debt in collections. However, because certain bills, such as medical bills and parking tickets, may not show up on a person’s credit score until they are sent to collections, the total share of people falling behind on their bills may actually be much higher. The report did not break down which types of bills were most likely to be sent to collections and researchers could not distinguish between debts that were sent to collection years ago and those that were added more recently.

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Is Your Car an Underwater Time Bomb? (Bloomberg)

America has had a rocky recovery from the 2007-08 financial crisis, but one group of Americans has done quite well: car dealers. Even as job and wage growth have stagnated, auto sales have uncoupled themselves from those traditional economic drivers to become one of the few sources of strength in the macroeconomic picture. As the economists Amir Sufi and Atif Mian point out in their new book “House of Debt,” one of the big factors supporting overall retail spending in the U.S. since 2008 has been the expansion of auto credit. Sufi and Mian don’t celebrate this fact – they rightly see it as a symptom of broader secular stagnation in the U.S. economy. Indeed, a few recent statistics demonstrate the very precarious underpinnings of the auto industry’s prosperity:

• The average auto-loan term has increased every year since 2010, reaching 66 months in the first quarter of this year, according to Experian Automotive. In the same period, loans with terms of 73 to 84 months grew 28%, while loans with terms from 25 to 72 months actually fell.
• Equifax reports that U.S. auto loan volumes are at an all-time high, with some $902.2 billion outstanding at the end of the first half of 2014, up 10% year-over-year.
• The New York Times reports that subprime auto loans have grown by 130% in the last five years, with subprime lending penetration reaching 25% last year.
• Leases make up another quarter or so of auto “retail sales” according to Experian, another metric that is currently at all-time highs.
• 27% of trade-ins on new vehicle purchases in Q1 2014 had negative equity, according to the Power Information Network, another troubling indicator on the rise in recent years.

With half of new car sales supported either by leases or subprime credit, and ballooning loan terms leaving an increasing number of new car buyers underwater on their trade-ins, it’s clear that auto demand is hardly at a sustainable, organic level. Last year, 38.8% of dealer profits came from financing operations, according to the National Automobile Dealers Association, and General Motors has relied on some $30 billion in largely subprime receivables held by its GM Financial unit to show an increase in revenue in the first two quarters of this year.

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From before Columbus: “Yields fell this low in Genoa in the 15th century but there has been nothing like this in Europe in modern times..”

Europe’s Bond Yields Lowest Since 15th Century Genoa (AEP)

Bond yields have fallen to the lowest level in modern history in Germany, France and the eurozone’s core states, signalling a high risk of deflation and mounting concerns about sanctions against Russia. The yield on German 10-year bonds fell to a record low of 1.11pc in intra-day trading, partly on safe-haven flows. French yields dropped in tandem to 1.5pc. These levels are far below rates hit during the 1930s or even during the deflationary episodes of the 19th Century. “Yields fell this low in Genoa in the 15th century but there has been nothing like this in Europe in modern times,” said professor Richard Werner, from Southampton University. “This reflects the weakness in nominal GDP and a slow economic implosion caused by credit contraction. The European Central Bank is at last starting to act but it is only scratching the surface.”

German, French and Dutch yields have been sliding for months as the eurozone recovery wilts and several countries flirt with recession, but the latest plunge reflects a confluence of forces. “Investors may fear that the worsening tensions with Russia could be the external shock that finally pushes the eurozone into a deflation trap,” said Simon Tilford, from the Centre for European Reform. Bond yields have also fallen to all-time lows in Spain and Italy but the “risk-spread” over German Bunds has been widening over recent weeks. The cost of insuring Italy’s debt through credit default swaps has risen by a third since June.

European diplomats reached a deal on Tuesday on “tier 3” sanctions aimed at shutting Russian banks out of global capital markets and slowly suffocating the Russian economy, though the original plan to limit technology for oil and gas exploration has been diluted. Creditors have already frozen a $1.5bn loan for VTB bank due to be agreed last week. The European Commission said the measures are likely to cut 0.3pc of GDP off EU economic growth this year, and 0.4pc next year, even if the crisis is contained without a serious disruption of energy supplies. “This is a significant hit to growth. It implies such low growth in parts of southern Europe that it makes it almost impossible to arrest the rise in debt ratios,” said Mr Tilford.

The Moscow newspaper Izvestia said Russia’s parliament is already drawing up legislation to blacklist “aggressor countries”, specifically targeting auditors and consultants. These include Deloitte, KPMG, EY (formerly known as Ernst & Young), Boston Consulting and McKinsey. Tim Ash, from Standard Bank, said this would trigger clauses on bond covenants that rely on external audits. “If they go down this path they could provoke a brutal market reaction,” he said. David Owen, from Jefferies, said a lack of genuine economic recovery is what lies behind Europe’s falling yields, already replicating the pattern seen in Japan in the 1990s. “A third of all countries in the eurozone are already in deflation once you strip away taxes, and another four have no inflation, including France and Spain,” he said.

“Corporate profits fell in the first quarter, and so did household disposable income, if you exclude Germany. We are seeing no growth at all in world trade, which is highly unusual. The CPB trade index rolled over in May and fell 0.6pc,” he said. Mr Owen said investors are starting to price in quantitative easing by the ECB, which would entail sovereign bond purchases and potentially push yields lower. The Bundesbank would be the biggest buyer on a pro-rata basis under the ECB’s “key”, but German debt is relatively scarce. “Investors know this and it is driving Bund yields even lower,” he said. For Russia, deep recession looks inevitable. The commission said sanctions will cut Russia’s growth by 1.5pc in 2014, and by 4.8pc in 2015. A return to the Soviet stagnation of the early 1980s is becoming all too likely.

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No ZIRP here?!

US Credit Card Variable Interest Rates Highest Since July 2001 (Zero Hedge)

With 77 million Americans having debt past due and the average household owing more than $15,000 in credit card debt, it appears the Fed’s supposed plan to ‘help Main Street’ is not working so well. As the following chart from NewEdge’s Brad Wishak shows, despite Fed Funds at practically zero, US credit card variable interest rates continue to rise – now at their highest since July 2001.

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Interest rates.

UK Personal Insolvency Storm Could Be Gathering (Guardian)

A big increase in the number of people becoming insolvent in England and Wales has prompted fresh warnings about the fate of financially stretched households when interest rates start to rise. There were 27,029 personal insolvencies in England and Wales in the second quarter, a 5.1% rise on a year earlier. The increase was driven by a 20% jump in the number of people entering into individual voluntary arrangements (IVAs) to a record high of 14,571, the Insolvency Service, which published the figures, said. Some experts said it was evidence that creditors were more confident about recovering debts in an improving economy. But others insisted it showed more families were on a financial knife-edge after years of falling real wages and government cuts. “Aside from all the talk of economic recovery, it’s clear that people are really struggling,” said Bev Budsworth, the managing director of The Debt Advisor.

She said hundreds of thousands of people were only just about making their monthly debt repayments because interest rates are still at a record low of 0.5%. But financial markets are pricing in a rate hike by the end of the year against a backdrop of stronger economic growth. “The acid test will be when the Bank of England starts to raise its base rate and people’s mortgage payments follow suit.” Brian Johnson, insolvency partner at the chartered accountants, HW Fisher & Company, said the figures showed Britons were shrugging off austerity and had been tempted to overextend. “With as many as a quarter of mortgage holders facing unaffordable payments if interest rates rise to a more normal level of 3%, a personal insolvency storm could be gathering,” he said.

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Time for Abe to leave. But he won’t.

Japan’s Output Drops Most Since 2011 as Consumers Spend Less (Bloomberg)

Japanese industrial output fell the most since the March 2011 earthquake, highlighting the widening impact to the economy of April’s sales-tax increase. Industrial output dropped 3.3% in June from May, the trade ministry said today in Tokyo, more than twice the median forecast for a 1.2% contraction in a Bloomberg News survey of 31 economists. The manufacturing sector has cut back in response to a slump in consumer spending and a failure of exports to pick up even after an 18% drop in the yen last year. Honda Motor and Nissan Motor this week reported jumps in profit, showing how the weaker currency is contributing to earnings gains without bolstering the economy. “Today’s data are very ugly – companies are becoming even more cautious on the outlook for the economy after the sales-tax hike,” said Taro Saito, director of economic research at NLI Research Institute in Tokyo.

“Japan’s economy doesn’t have a driving force, with consumer spending and exports having stalled.” [..] Japanese production fell across most sectors, with transport equipment, which includes automobiles, dropping 3.4% from the previous month, and output of desktop computers, mobile phones and other communications equipment sliding 9%. Domestic demand, which had compensated for weak exports, fell off from April, and inventories rose in May as companies didn’t slow production much, contributing to the June output cut, according to Yasushi Ishizuka, a director in the trade ministry statistics department.

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US Regulator Wants Monitors in Deutsche Bank, Barclays US Offices (WSJ)

New York’s banking regulator is pushing to install government monitors inside the U.S. offices of Deutsche Bank and Barclays as part of an intensifying investigation into possible manipulation in the foreign-exchange market, according to people familiar with the probe. The state’s Department of Financial Services notified lawyers for the two European banks earlier this month that it wanted to install a monitor inside each firm, based on preliminary findings in the agency’s six-month currencies-market probe, these people said. Negotiations are continuing over the details of the monitors’ appointments, but New York investigators expect to reach an agreement soon. The regulatory agency has selected Deutsche Bank and Barclays for extra scrutiny partly because the records it has collected so far from more than a dozen banks under its supervision point to the greatest potential problems at those two banks, the people said.

Plus, Deutsche Bank and Barclays are among the dominant players in the vast foreign-exchange market, so investigators hope a close-up view into their businesses will help them observe other players and trading patterns, the people said. A Barclays spokesman declined to comment; the U.K. bank previously has said it is cooperating with authorities. A Deutsche Bank spokesman said it is cooperating with investigators “and will take disciplinary action with regards to individuals if merited.” The New York regulator’s concerns about Deutsche Bank and Barclays are becoming the latest U.S. headaches for both banks. Barclays in 2012 settled U.S. interest-rate-rigging allegations, while an investigation into Deutsche Bank’s activities is continuing. Both banks have said they are cooperating with regulators looking into their so-called dark pools, or private stock-trading venues, including relationships with high-frequency trading firms. Barclays has settled charges that it violated U.S. sanctions, while Deutsche Bank still faces an investigation in that area.

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Why Can’t the Banking Industry Solve Its Ethics Problems? (NY Times)

The financial crisis that nearly brought down the global economy was triggered in no small part by the aggressive culture and spotty ethics within the world’s biggest banks. But after six years and countless efforts to reform finance, the banking scandals never seem to end. The important question that doesn’t yet have a satisfying answer is why. Why are the ethical breaches at megabanks so routine that it is hard to keep them straight? Why do banks seem to have so many scandals — and ensuing multimillion dollar legal settlements — compared with other large companies like retailers, airlines or manufacturers? Some of the world’s leading bank regulators are trying to figure that out. And they have taken to sounding like parents who have grown increasingly exasperated at teenage children who keep wrecking the family car. This week, it was the turn of Mark Carney, the governor of the Bank of England. The latest British banking scandal was enough to make Mr. Carney, a former Goldman Sachs investment banker, sound like an Occupy Wall Street populist.

Lloyd’s Banking Group stands accused of manipulating a key interest rate to reduce what it would owe the Bank of England in a program meant to spur lending in Britain. “Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved,” Mr. Carney wrote to the head of the bank. (Pro-tip: If you are going to manipulate interest rates to squeeze an extra few million bucks out of somebody, don’t make that somebody the entity that regulates you). Mr. Carney has company among top bank regulators. Bill Dudley, the president of the Federal Reserve Bank of New York, said in a speech last November that “there is evidence of deep-seated cultural and ethical failures at many large financial institutions.” The Financial Times reported this week that New York Fed officials were putting the screws to major banks in private meetings, insisting they strengthen their ethical standards and culture.

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What sort of country is it becoming?

Australia Blindfolds Citizens With ‘Unprecedented’ Media Gag Order (RT)

WikiLeaks has accused the Australian government of blindfolding the public with the worst suppression order in “living memory.” The media gag bans Australian news outlets from reporting on a multinational corruption case for reasons of national security. The whistleblowing organization published the details of the “unprecedented” gag order issued by the Australian government on Wednesday. The super injunction passed by the Supreme Court of the state of Victoria prohibits Australian media organizations from publishing material on a multi-million-dollar graft case involving high-ranking officials from Malaysia, Indonesia, Vietnam and the Reserve Bank of Australia (RBA). “The gag order effectively blacks out the largest high-level corruption case in Australia and the region,” said a statement published on WikiLeaks’ website.

The case pertains to RBA subsidiaries Securency and Note Printing who bribed the officials to secure lucrative contracts to supply bank notes to their governments. The gag order was issued after the secret indictment of seven senior executives from the RBA subsidiaries on June 19, writes WikiLeaks. The Australian government justifies the order as being in the interests of national security and prevention of “damage to Australia’s international relations.” However, WikiLeaks founder Julian Assange argues such an act of “unprecedented censorship” is unjustifiable. “With this order, the worst in living memory, the Australian government is not just gagging the Australian press, it is blindfolding the Australian public,” said Assange in a statement published on the WikiLeaks website. He called on Australia’s Foreign Minister Julie Bishop to explain “why she is threatening every Australian with imprisonment in an attempt to cover up an embarrassing corruption scandal involving the Australian government.”

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Outsmarting the west?!

Ukraine Pipelines To Lose 50% Of Value When South Stream Line Starts (RT)

The South Stream gas pipeline, which bypasses Ukraine, may halve the value of Ukraine’s gas transportation system (GTS), according to Andrey Kobolev, head of Ukraine’s national oil and gas company Naftogaz. After the Russian–led South Stream project is complete and working at full capacity, the value of Ukraine’s GTS may fall as much 50% from the present estimate of $25-$35 billion, RIA Novosti quotes the head of the company. “We have no wish to lose it, and it’s unreasonable,” Kobolev said on a Ukrainian local TV channel.

Construction of the South Stream pipeline in Bulgaria and Serbia was suspended following pressure from the EU to comply with competition law. After a while construction resumed. “They [Gazprom] are ready to invest their own 15 billion euro in South Stream construction … This gas pipeline will take away from the Ukrainian transit potentially up to 60 billion cubic meters. Currently the transit carries 86 billion cubic meters,” Kobolev said. Previously 110-120 billion cubic meters were fed through Ukraine, but now the Nord Stream pipeline has taken a share of it, Kobolev explained, and concluded that once South Stream is operational Ukraine could be in a very difficult situation.

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Ouch.

Housing Market in France in ‘Total Meltdown’ (Bloomberg)

French President Francois Hollande’s government may have made a housing slump worse, pushing the construction market to its lowest in more than 15 years. Housing starts fell 19% in the second quarter from a year earlier, and permits — a gauge of future construction — dropped 13%, the French Housing Ministry said yesterday. The rout stems from a law this year that seeks to make housing more affordable by capping rents in expensive neighborhoods. To protect home buyers, the law also boosted the number of documents that must be provided by sellers, leading to a decline in home sales and longer transaction times. While the government is now adjusting the rules, the damage is done, threatening France’s anemic recovery that’s already lagging behind those of the U.K. and Germany.

“Construction is in total meltdown,” said Dominique Barbet, an economist at BNP Paribas in Paris. “It’s difficult to see how the new housing law is not to blame.” Barbet says the drop in home building lopped 0.4 points off France’s gross domestic product growth last year and cut the pace of expansion by a third in the first quarter. Expenditure in the sector was at its lowest level ever as a portion of total real GDP in the first quarter at 4.7%, down from 6.3% in the first three months of 2007, he estimates. Sales of new-build homes fell 5% in the first quarter from a year earlier and are down by about a third compared with their level in 2007, according to Credit Agricole.

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Best-Paid Finns Seek Jobless Aid as Recession Pain Widens (Bloomberg)

Finns once employed in the country’s highest paying jobs are now joining the ranks of the unemployed and asking the state for financial aid. “The crisis in the Finnish economy has hit especially high-productivity industries,” Juhana Brotherus, an economist at Danske Bank in Helsinki, said by phone. That means “the impact is harsher on gross domestic product than on unemployment.” The Nordic nation is reeling from body blows to its two biggest employers — the forest and technology industries. Its erstwhile largest company, Nokia, has sought to control debt growth by selling its mobile phone business to Microsoft Corp.

The U.S. company said this month the takeover will result in the loss of 1,100 Finnish jobs, or 20% of its workforce there, putting some of Finland’s best-qualified people out of work. Jobless claims soared 17.5% to €4.15 billion ($5.6 billion) last year, the Social Insurance Institution of Finland estimates. That’s the highest level since the 1990s, the last time Finland was dragged into a prolonged period of economic decline. Unemployment was 9.2% in June, not adjusting for seasonal swings, compared with 7.8% a year earlier, according to the statistics agency.

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That’s going to speed things up!

Sixteen-Foot Swells Reported In Once Frozen Region Of Arctic Ocean (WaPo)

Big waves like those fit for surfing are not what we think of when contemplating the Arctic Ocean. The water is ice-covered most of the time — and it takes large expanses of open sea plus wind to produce mighty surf. So the fact that researchers have now measured swells of more than 16 feet in the Arctic’s Beaufort Sea, just north of Alaska, is a bit of a stunner. Swells of that size, researchers say, have the potential to break up Arctic ice even faster than than the melt underway there for decades thanks to rapid global warming. The wave measurements, using sensors beneath the surface communicating via satellite, were recorded by Jim Thomson of the University of Washington and W. Erick Rogers of the Naval Research Laboratory in 2012 and reported in an article in Geophysical Research Letters this year. “The observations reported here are the only known wave measurements in the central Beaufort Sea,” they wrote, “because until recently the region remained ice covered throughout the summer and there were no waves to measure.”

Sixteen feet was the average during a peak period, Thomson said in an email. “The largest single wave was probably” 9 meters, or about 29 feet, he said. The average over the entire 2012 season was 3 to 6 feet. The distances of open water change “dramatically throughout the summer season, from essentially zero in April to well over 1000 km in September,” they reported. “In recent years, the seasonal ice retreat has expanded dramatically, leaving much of the Beaufort Sea ice free at the end of the summer.” Because swells carry more energy, they reported, they will likely increase the pace of ice breakup in the region, eventually producing an “ice-free summer, a remarkable departure from from historical conditions in the Arctic, with potentially wide-ranging implications for the air-water-ice system and the humans attempting to operate there.”

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Redefining derivatives’ terms would make banks “less too big”. That means they acknowledge derivatives still are their main risk.

Ending ‘Too Big to Fail’ Could Rest on Obscure Contract Language (Bloomberg)

Wall Street and global financial regulators, trying to squash the lingering perception that banks remain “too big to fail,” are looking to an obscure change in derivatives contracts to solve the problem. The main industry group for the $700 trillion global swaps market is rewriting international protocols to impose a “stay” or pause designed to prevent trading partners from calling in collateral all at once when a bank nears failure. U.S. and international banking regulators are considering making use of the new protocols mandatory, according to two people who spoke on condition of anonymity to discuss private meetings. The International Swaps and Derivatives Association is aiming to release the revised contract guidelines by November, the people said. The change is designed to prevent a recurrence of one of the most vexing problems revealed by the 2008 financial crisis: When Lehman Brothers Holdings Inc. failed, counterparties trying to unwind derivatives contracts touched off a panic that triggered a worldwide credit crisis.

The new protocol “puts another nail in the coffin of ‘too big to fail,’” Wilson Ervin, a senior adviser at Credit Suisse and the bank’s chief risk officer during the 2008 crisis, said in an e-mail. “Most banks want to get this done and are working hard for a good solution.” [..] U.S., U.K. and European regulators, still wrestling with the aftermath of the financial crisis, have held months of discussions aimed at buttressing the new and untested system for dismantling failing banks that was built by the Dodd-Frank Act and similar efforts in other countries. Some lawmakers and many participants in the market remain skeptical that regulators are really prepared to let a systemically large firm fail. In addition to the regular bankruptcy process, Dodd-Frank created a separate “liquidation” authority that the FDIC could use to seize and take apart a firm if a bankruptcy would shake the wider financial system.

However, as a U.S.-focused law, Dodd-Frank didn’t have the authority to solve the question of how to treat derivatives contracts as part of that process, in part because so many of them are international. Derivatives were already exempt from the stay that normally applies during bankruptcy; financial firms had successfully argued for decades that the financial system would be more stable and risks would be contained if traders could immediately end deals with a failing institution. Lehman’s failure exposed that argument as flawed. When it filed for bankruptcy, Lehman had more than 900,000 derivatives positions and its counterparties moved immediately to terminate trades and demand collateral. The new terms for the ISDA contracts would bar a firm from ending swap trades with a bank being put into liquidation for 24 or 48 hours, depending on which country’s laws apply. That would give regulators time to move the contracts to a new company, limiting contagion to the larger financial system.

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There are some brave people out there.

Canadian Ebola Doctor (Not?!) In Self-imposed Quarantine (CTV)

A spokesperson for the Christian relief organization Samaritan’s Purse says a Canadian doctor is not in self-imposed quarantine after treating patients in West Africa for Ebola. The group earlier said Dr. Azaria Marthyman of Victoria, B.C., had voluntarily quarantined himself after spending nearly a month treating patients for the deadly disease. “Dr. Marthyman has assured us that (‘self-imposed quarantine’) is not a correct term to be applied to this situation,” spokesperson Jeff Adams told CTV News on Tuesday. Marthyman was among a handful of Canadian health-care workers who travelled to Liberia, one of three countries hit by the outbreak. He was part of a North American team from Samaritan’s Purse.

He worked at the agency’s facility in Liberia’s capital, Monrovia, before returning to Canada last Saturday. He has not tested positive for the disease. “Azaria is symptom-free right now and there is no chance of being contagious with Ebola if you are not exhibiting symptoms,” Melissa Strickland, a spokesperson for Samaritan’s Purse, had earlier told CTV Vancouver Island. Two Americans working in Liberia have come down with the disease, including one of Marthyman’s colleagues with Samaritan’s Purse, Dr. Kent Brantly. The 33-year-old married father of two children is undergoing intensive treatment for the disease, but has been able to speak with doctors and work on his computer.

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Sierra Leone’s Top Ebola Doctor Dead After Contracting Virus (TIME)

Sierra Leone’s top Ebola doctor, Sheikh Umar Khan on Tuesday died from complications of the disease. His death came just days after three nurses who worked with him perished. Khan served on the front lines of what is now considered the worst Ebola outbreak in history, with 670 dead, primarily in West Africa. He is credited with treating more than 100 victims and has previously been hailed as a national hero. Now, hundreds of condolences are pouring in on Twitter, praising his courage and altruism. “Khan’s death is yet another recognition that health workers is the group most at risk,” Tarik Jasarevic, a spokesman with World Health Organization, tells TIME. More than 100 health workers have contracted the virus since the beginning of the outbreak and around half of them have died. “This is the first time most of these workers face such an outbreak. We have to equip them with protective gear and train them on how to use it.

We also need to make sure there are enough workers. If they work reasonable shifts they can focus not only on the patients, but also on themselves.” Sierra Leone is the country that has been worst hit by the latest outbreak, but neighboring Liberia is also struggling since the contagion breached its borders. The country’s overland border crossings have been closed since Sunday, and Doctors Without Borders reports that they are only able to provide limited technical support to Liberia’s Ministry of Health and Social Welfare. The fear is now that the deadly disease could also spread far beyond West Africa, possibly via air travelers. Medical services across Europe are on high alert because of the outbreak, and U.K. Foreign Secretary Philip Hammond told the BBC that the disease is a “threat” to his country. “There is a risk that the epidemic will spread, but first of all we need to stop it on the ground,” says Jasarevic. “We know exactly what needs to be done, but it requires a lot of resources.”

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