Dec 192014
 
 December 19, 2014  Posted by at 11:21 am Finance Tagged with: , , , , , , , ,  


John Vachon Trucks loaded with mattresses at San Angelo, Texas Nov 1939

Oil Crash Exposes New Risks for U.S. Shale Drillers (Bloomberg)
North Sea Oil Industry ‘Close To Collapse’ (BBC)
North Sea Oilfields ‘Near Collapse’ After Price Nosedive (Telegraph)
Exxon Mobil Shows Why U.S. Oil Output Rises as Prices Plunge (Bloomberg)
Central Banks Are Now Uncorking The Delirium Phase (David Stockman)
Dow’s 421-Point Leap Is Biggest Gain In 3 Years (MarketWatch)
Already Crummy US Economy Takes a Sudden Hit (WolfStreet)
The Fed Delivers the Message that Our Economy is Dead (Beversdorf)
Emerging Markets In Danger (Erico Matias Tavares)
China’s Short-Term Borrowing Costs Surge as Demand for Money Grows (WSJ)
PBOC Offers Loans to Banks as Money Rate Jumps Most in 11 Months (Bloomberg)
Russia May Seek China Help To Deal With Crisis (SCMP)
Draghi Counts Cost of Outflanking Germany in Stimulus Battle (Bloomberg)
Federal Reserve Delays Parts Of Volcker Rule Until 2017 (BBC)
“Neoconica” – America For The New Millennium (Thad Beversdorf)
Bombs Away! Obama Signs Bill For Lethal Aid To Ukraine (Daniel McAdams)
US TV Shows American Torturers, But Not Their Victims (Glenn Greenwald)
Pope Francis Scores on Diplomatic Stage With U.S.-Cuba Agreement (Bloomberg)
Can You Live A Normal Life With Half A Brain? (BBC)

“It’s just the nature of the business. You’re not going to go drill holes in the ground if you think prices are going down.”

Oil Crash Exposes New Risks for U.S. Shale Drillers (Bloomberg)

Tumbling oil prices have exposed a weakness in the insurance that some U.S. shale drillers bought to protect themselves against a crash. At least six companies, including Pioneer Natural Resources and Noble Energy, used a strategy known as a three-way collar that doesn’t guarantee a minimum price if crude falls below a certain level, according to company filings. While three-ways can be cheaper than other hedges, they can leave drillers exposed to steep declines. “Producers are inherently bullish,” said Mike Corley, the founder of Mercatus Energy Advisors, a Houston-based firm that advises companies on hedging strategies. “It’s just the nature of the business. You’re not going to go drill holes in the ground if you think prices are going down.”

The three-way hedges risk exacerbating a cash squeeze for companies trying to cope with the biggest plunge in oil prices this decade. West Texas Intermediate crude, the U.S. benchmark, dropped 50% since June amid a worldwide glut. The Organization of Petroleum Exporting Countries decided Nov. 27 to hold production steady as the 12-member group competes for market share against U.S. shale drillers that have pushed domestic output to the highest since at least 1983. Shares of oil companies are also dropping, with a 49% decline in the 76-member Bloomberg Intelligence North America E&P Valuation Peers index from this year’s peak in June. The drilling had been driven by high oil prices and low-cost financing. Companies spent $1.30 for every dollar earned selling oil and gas in the third quarter, according to data compiled by Bloomberg on 56 of the U.S.-listed companies in the E&P index.

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450,000 people work in Britain’s oil industry.

North Sea Oil Industry ‘Close To Collapse’ (BBC)

The UK’s oil industry is in “crisis” as prices drop, a senior industry leader has told the BBC. Oil companies and service providers are cutting staff and investment to save money. Robin Allan, chairman of the independent explorers’ association Brindex, told the BBC that the industry was “close to collapse”. Almost no new projects in the North Sea are profitable with oil below $60 a barrel, he claims. “It’s almost impossible to make money at these oil prices”, Mr Allan, who is a director of Premier Oil in addition to chairing Brindex, told the BBC. “It’s a huge crisis.” “This has happened before, and the industry adapts, but the adaptation is one of slashing people, slashing projects and reducing costs wherever possible, and that’s painful for our staff, painful for companies and painful for the country. “It’s close to collapse. In terms of new investments – there will be none, everyone is retreating, people are being laid off at most companies this week and in the coming weeks. Budgets for 2015 are being cut by everyone.”

Mr Allan said many of the job cuts across the industry would not have been publicly announced. Oil workers are often employed as contractors, which are easier for employers to cut. His remarks echo comments made by the veteran oil man and government adviser Sir Ian Wood, who last week predicted a wave of job losses in the North Sea over the next 18 months. The US-based oil giant ConocoPhillips is cutting 230 out of 1,650 jobs in the UK. This month it announced a 20% reduction in its worldwide capital expenditure budget, in response to falling oil prices. Other big oil firms are expected to make similar cuts to their drilling and exploration budgets. Research from the investment bank Goldman Sachs predicted that they would need to cut capital expenditure by 30% to restore their profitability at current prices. Service providers to the industry have also been hit. Texas-based oilfield services company Schlumberger cut back its UK-based fleet of geological survey ships in December, taking an $800m loss and cutting an unspecified number of jobs.

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“The prolongation of the downward trend of the oil price in world markets is a political conspiracy going to extremes.”

North Sea Oilfields ‘Near Collapse’ After Price Nosedive (Telegraph)

The North Sea oil industry is “close to collapse”, an expert has warned, as a slump in prices piles pressure on drillers to cut back investing in the region. Robin Allan, chairman of the independent explorers’ association Brindex, told the BBC that it is “almost impossible to make money” with the oil price below $60 per barrel. “It’s a huge crisis. This has happened before, and the industry adapts, but the adaptation is one of slashing people, slashing projects and reducing costs,” he said. Mr Allan’s glum outlook for oil production and exploration in the UK Continental Shelf came on a volatile day of trading for crude. Brent – a global pricing benchmark comprising crude from 15 North Sea fields – ended trading in London down 1% at around $60 per barrel after trading up by as much as 3% earlier in the session. Mr Allan’s warning comes after The Telegraph reported that £55bn worth of oil projects in the North Sea and Europe could be cancelled due to the current slide in prices, according to consultancy Wood Mackenzie.

Concern over the ability of the North Sea to endure the current downturn has increased since OPEC decided to keep pumping at its current rate of 30m barrels per day (bpd) in late November. Opec kingpins Saudi Arabia and Iran were at odds on Thursday over the reason behind falling prices in an indication of the pain being caused to many of the cartel’s 12 members. Iran’s oil minister has said that a “political conspiracy” is to blame for the dramatic slump in remarks which could signal that the Islamic Republic will try to exert pressure on Opec to again consider cutting output. Bijan Zanganeh told the country’s state petroleum news agency: “The prolongation of the downward trend of the oil price in world markets is a political conspiracy going to extremes.”

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“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground ..”

Exxon Mobil Shows Why U.S. Oil Output Rises as Prices Plunge (Bloomberg)

Crude oil production from U.S. wells is poised to approach a 42-year record next year as drillers ignore the recent decline in price pointing them in the opposite direction. U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global owns stakes in more than 260 North Dakota shale wells. Oil companies, while trimming 2015 budgets to cope with the lowest crude prices in five years, are also shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs. Global giant Exxon Mobil, the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010.

So far, OPEC’s month-old bet that American drillers would be crushed by cratering prices has been a bust. “Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.” A U.S. crude bonanza that has handed consumers the cheapest gasoline since 2009 has left oil exporters like Russia and Venezuela flirting with economic chaos. The ruble sank as much as 19% on Dec. 16 to a record low of 80 per dollar before recovering to close at 68; Russian bond and equity markets also crumbled.

In Venezuela, the oil rout is spurring concern the country is running out of dollars needed to pay debt and swaps traders are almost certain default is imminent. U.S. oil production is set to reach 9.42 million barrels a day in May, which would be the highest monthly average since November 1972, according to the Energy Department’s statistical arm. Output from shale formations, deep-water fields, the Alaskan wilderness and land-based wells in pockets of Oklahoma and Pennsylvania that have been trickling out crude for decades already have pushed demand for imported oil to the lowest since at least 1995, according to data compiled by Bloomberg.

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“The essence of its action was that your money is not welcome in Switzerland ..”

Central Banks Are Now Uncorking The Delirium Phase (David Stockman)

Virtually every day there is an eruption of lunacy from one central bank or another somewhere in the world. Today it was the Swiss central bank’s turn, and it didn’t pull any punches with regard to Russian billionaires seeking a safe haven from the ruble-rubble in Moscow or investors from all around its borders fleeing Mario Draghi’s impending euro-trashing campaign. The essence of its action was that your money is not welcome in Switzerland; and if you do bring it, we will extract a rental payment from your deposits. For the time being, that levy amounts to a negative 25 bps on deposits with the Swiss Central bank – a maneuver that is designed to drive Swiss Libor into the realm of negative interest rates as well. But the more significant implication is that the Swiss are prepared to print endless amounts of their own currency to enforce this utterly unnatural edict on savers and depositors within its borders.

Yes, the once and former pillar of monetary rectitude, the SNB, has gone all-in for money printing. Indeed, it now aims to become the BOJ on steroids – a monetary Godzilla. So its current plunge into the netherworld of negative interest rates is nothing new. It’s just the next step in its long-standing campaign to put a floor under the Swiss Franc at 120. That means effectively that it stands ready to print enough francs to purchase any and all euros (and other currencies) on offer without limit. And print it has. During the last 80 months, the SNB’s balance sheet has soared from 100B CHF to 530B CHF – a 5X explosion that would make Bernanke envious. Better still, a balance sheet which stood at 20% of Swiss GDP in early 2008 – now towers at a world record 80% of the alpine nation’s total output. Kuroda-san, with a balance sheet at 50% of Japan’s GDP, can only pine for the efficiency of the SNB’s printing presses.

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Are they all going to sell in January?

Dow’s 421-Point Leap Is Biggest Gain In 3 Years (MarketWatch)

A surging U.S. stock market rallied to its best two-day gains in three years Thursday. The monster rally, which kicked off Wednesday after Federal Reserve Chairwoman Janet Yellen assured the markets that the central bank would be patient about lifting interest rate, burst into an all-out bull run late in Thursday trading. The move caps a two-day charge higher, bringing the Dow back to within shouting distance of 18,0000, after rocky trading days. The Dow Jones Industrial Average soared 421 points, or 2.4%, to 17,778.15, its biggest one-day gain in three years, a day after the Federal Reserve said it “can be patient” about the timing of its first rate hike, signalling increases will be slow and steady. It was the first time in more than six years since the Dow recorded back-to-back days of gains exceeding 200 points.

The S&P 500 jumped 48.34 points, or 2.4%, to 2,061.23, it’s biggest one-day gain in nearly two years. It is also the first time since Aug 2002 that the benchmark index posted two consecutive days of gains greater than 2%, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. The Nasdaq Composite jumped 104 points, or 2.2%, to 4,748, as technology companies recorded big gains. Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, attributed today’s rally to halo effect from the Fed’s announcement on Wednesday. “The Fed told equity investors what we already assumed and believed,” Golub said. “There was fear that if there was going to be any change in the stance, it would be towards hawkishness, but the statement dispelled that, so stock markets rallied,” the RBC strategist added.

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Can we have some polar vortex please?

Already Crummy US Economy Takes a Sudden Hit (WolfStreet)

The Fed yesterday, in a fit of its typical though inexplicable optimism, raised its projection for economic growth. In September, it had projected that the US economy would grow between 2.0% and 2.2% in 2014. Now it raised its “central tendency” to a growth of 2.3% to 2.4%. That type of measly economic growth is far below the ever elusive escape velocity that Wall Street keeps promising without fail every year to justify sky-high stock valuations. But now reality is once again mucking up our already not very rosy scenarios. The service sector, the dominant force in the US economy, has taken another hit. Markit’s Services PMI Business Activity index slumped in December to 53.6, down from 56.2 in November. It’s now nearly 3 percentage points below the average over the last two years (56.4). And it is barely above the terrible growth rate in February (53.3), for which the polar vortex that had covered much of the nation was amply blamed.

Here is a chart of the shrinking services PMI. The peak was in June. From that point of maximum exuberance, it has been one heck of a downhill ride. Note the sudden no-polar-vortex plunge from November to December.

This time, there were no polar vortices to blame. But there were plenty of business reasons. Incoming new work was the lowest in nine months, with some survey respondents indicating that “the economic outlook had weighted on client demand at the end of the year.” The rate of job creation dropped to the lowest since April, with some respondents citing softer new business as reason. The Composite PMI, which combines the Services PMI and the Manufacturing PMI, dropped sharply from 56.1 in November to 53.8 in December. It has been on the same trajectory as the Services PMI, with the peak in June, followed by a downhill ride that culminated in a sudden plunge in December that left it below February’s polar-vortex low!

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“.. if you read some of Stanley Fischer’s early work on the rational expectation model you find that the key to fixing the lack of long term effectiveness to monetary policy is by confusing the working man. The idea being, people will act rationally with the information they are provided and so what typically happens is that people change their behaviour which counters the impact of the policy being implemented.

The Fed Delivers the Message that Our Economy is Dead (Beversdorf)

I used to get a kick out of the cute little children waiting for the Fed Chair to come and deliver presents or coal. So giddy and excited from the anticipation of not knowing who Janet thinks were good boys and girls. Who’s going to be rewarded and who disappointed? And I don’t know how many people asked me today what the Fed will do. My answer was “The same [email protected]#*ing thing they always do, nothing. So stop asking”. You see, if you read some of Stanley Fischer’s early work on the rational expectation model you find that the key to fixing the lack of long term effectiveness to monetary policy is by confusing the working man. The idea being, people will act rationally with the information they are provided and so what typically happens is that people change their behaviour which counters the impact of the policy being implemented.

The solution is to keep us guessing. And so what they have done for essentially every meeting is nothing. However, they use the media to talk about all the things they just might do. And the pundits on television go on and on about all the things that might happen and what the follow on implications will be given those alternatives and then the moment comes and ahhh nothing, damn they fooled me again! I really thought this time was it gosh golly dang it!. I guess it was just that this or that was just slightly out of place otherwise they said they were totally gonna do this or that. So close, but ultimately they are right. Yep they made the right choice based on all the variables. They are just swell. At this point, I just get annoyed with the ridiculous foolishness of people. We’ve got to start using our own brains. The Fed stopped using any benchmarks because while the benchmarks were improving, the economy wasn’t and isn’t.

And so they were being railroaded by the transparency that benchmarks provide. And now it is just a black box of various indicators that will be analyzed in real time to form justifiable actions, far too complex for you and I but trust them that there is a definite method and it’s very quantifiable at that, they just can’t tell us what it is because it would just confuse everyone. Does anyone really not get it?? I mean I was under the impression that the pundits on television were just acting for the sake of good drama. Is that not the case? Are people really still confused by what’s happening in the market and broader economy? It’s been 6 years of the absolute same bullshit. How could anyone not clearly understand exactly what is behind the action or non action of the Fed??? Come on people wake up. Take a deep breath, grab some coffee, do whatever you need to do but please wake the hell up.

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They’re all addicted to Fed QE. But that’s gone, and there’s no alternative available.

Emerging Markets In Danger (Erico Matias Tavares)

There are some signs of trouble in emerging markets. And the money at risk now is bigger than ever. The yield spread between high grade emerging markets and US AAA-rated corporate debt has jumped, almost doubling in less than three weeks to the highest level since mid-2012.


MSCI Emerging Markets Index and Yield Spread between High Grade Emerging Markets and US AAA Corporates: 14 March 2003 – Today. Source: US Federal Reserve.

This means that the best credit names in emerging markets have to pay a bigger premium over their US counterparts to get funding. When this spread spikes up and continues above its 200-day moving average for a sustained period of time, it is typically a bad sign for equity valuations in emerging markets, as shown in the graph above. One swallow does not a summer make, but it is worthwhile keeping an eye on this indicator.

As yields go up the value of these emerging market bonds goes down, resulting in losses for the investors holding them. The surge of the US dollar in recent months could magnify these losses: if the bonds are denominated in local currency they will be worth a lot less to US investors; otherwise, the borrowers will now have to work a lot harder to repay those US dollar debts, increasing their credit risk. Any losses could end up being very significant this time around, as demand for emerging markets bonds has literally exploded in recent years.


Average Annual Gross Debt Issuance ($ billions, percent): 2000 – Today. Source: Dealogic, US Treasury. Note: Data include private placements and publicly-issued bonds. 2014 data are through August 2014 and annualized.

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The craze in China stocks makes money scarce…

China’s Short-Term Borrowing Costs Surge as Demand for Money Grows (WSJ)

Short-term borrowing costs in China soared Thursday as demand for cash surged due to a number of new stock offerings and the year-end shopping spree. A recent ruling that bans the use of lower-grade corporate bonds as collateral for loans, once a key source of funding for many institutional investors, has also intensified the scramble for funds. The cash squeeze is putting the country’s financial system under renewed stress, though so far it hasn’t spread to other sectors such as stocks or the bond markets. The money markets in China have grown dramatically in recent years, with smaller banks especially vulnerable to the higher borrowing costs as they’re most reliant on the interbank market for cash.

The weighted average of seven-day repurchase agreements, or repo, a benchmark for short-term funding costs in China’s money market, rose to 5.27% from 3.89% Wednesday and 3.53% at the beginning of this week. However, the level remains well below the 12% peak that it touched at the height of the unprecedented cash crunch that China suffered in the summer of 2013. “The u%oming IPOs is the most important reason behind today’s funding squeeze. The usual year-end thirst for cash also is also playing a part,” said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co. A dozen companies, including broker Guosen Securities and budget carrier Spring Airlines, are raising a total of $2.2 billion over the next few weeks from domestic stock listings. They are set to take orders for their offerings between Dec. 18 and Dec. 23.

Investors’ enthusiasm about the new IPOs was even more evident in the smaller funding market on the Shanghai Stock Exchange, the bigger of China’s two exchanges. The weighted average of the seven-day repo on the Shanghai market, where investors use exchange-listed bonds as collateral for short-term borrowing, soared to 12.20% from 10.60% Wednesday. It stood at 6.80% Monday. Such one-off factors aside, the recent strong rally in China’s stock market and a fresh move by Beijing to rein in growing risk in the corporate bond market are having a more lasting impact on the supply of funds, Mr. Wang said. China’s securities clearing house last week banned the use of lower-grade bonds, mostly issued by cash-strapped local governments and small firms, as collateral for short-term borrowing between investors.

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And banks feel the pinch.

PBOC Offers Loans to Banks as Money Rate Jumps Most in 11 Months (Bloomberg)

China’s central bank offered short-term loans to commercial lenders as the benchmark money-market rate jumped the most in 11 months. The amount of money made available by the People’s Bank of China wasn’t clear, according to people familiar with the matter. Policy makers are adding funds to the financial system to address a cash crunch as subscriptions for the biggest new share sales of the year lock up funds. Twelve initial public offerings from today through Dec. 25 will draw orders of as much as 3 trillion yuan ($483 billion), Shenyin & Wanguo Securities Co. estimated. The seven-day repurchase rate, a gauge of interbank funding availability in the banking system, surged 139 basis points, or 1.39%age points, to a 10-month high of 5.28% as of 4:39 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. The increase was the biggest since Jan. 20.

“The IPOs are affecting the market, leading to cautious sentiment with fewer institutions willing to lend,” said Li Haitao, a Shanghai-based analyst at China Guangfa Bank Co. “Quite a few traders found it very difficult to meet their funding needs yesterday.” Lenders paid 4.65% for 60 billion yuan of three-month treasury deposits auctioned today by the PBOC, the most they’ve paid since January for such funds. The central bank also rolled over this week at least some of the 500 billion yuan of three-month loans granted to lenders in September, a government official said yesterday, declining to be identified as the details haven’t been made public. “Banks have to prepare for quarter-end regulatory checks, including loan-to-deposit requirements, and hoard cash to meet year-end demand,” said Wang Ming, chief operations officer at Shanghai Yaozhi Asset Management LLP, which oversees 2 billion yuan of fixed-income investments. “With all these factors affecting the market, it’s no surprise it’s suffering more than during previous IPOs.”

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Eastern links will get much stronger as a result of western policies vs Russia.

Russia May Seek China Help To Deal With Crisis (SCMP)

Russia could fall back on its 150 billion yuan (HK$189.8 billion) currency swap agreement with China if the rouble continues to plunge. If the swap deal is activated for this purpose, it would mark the first time China is called upon to use its currency to bail out another currency in crisis. The deal was signed by the two central banks in October, when Premier Li Keqiang visited Russia. “Russia badly needs liquidity support and the swap line could be an ideal tool,” said Bank of Communications chief economist Lian Ping. The swap allows the central banks to directly buy yuan and rouble in the two currencies, rather than via the US dollar. Two bankers close to the People’s Bank of China said it was meant to reduce the role of the US dollar if China and Russia need to help each other overcome a liquidity squeeze.

China has currency swap deals with more than 20 monetary authorities around the world. Swaps are generally used to settle trade. “The yuan-rouble swap deal was not just a financial matter,” said Wang Feng, chairman of Shanghai-based private equity group Yinshu Capital. “It has political implications as it is a sign of mutual trust.” The rouble has lost more than 50% against the US dollar this year, pushing Russia to the brink of a currency crisis, though measures announced by the central bank helped it recover some ground yesterday. Li Lifan, a researcher at the Shanghai Academy of Social Sciences, said the swap would not be enough for Russia even if it is used in its entirety. “The PBOC might agree to extend something like 15 billion yuan initially as a way of showing China’s commitment to Russia.”

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How to blow up the EU.

Draghi Counts Cost of Outflanking Germany in Stimulus Battle (Bloomberg)

As Mario Draghi prepares to push the European Central Bank into quantitative easing, he’s counting the cost of alienating its home nation. With the ECB president signaling that he’ll override German-led concerns on government bond purchases if needed, his institution is under attack in the country whose DNA inspired it. The outrage reflects concern that the Frankfurt-based central bank, which is modeled on the Bundesbank, is taking risks that its forerunner would never tolerate. The Italian is now pursuing a charm offensive in the euro area’s biggest and most populous economy before the Governing Council’s Jan. 22 meeting to soften the blow as he presses on with stimulus. His challenge is to outflank the Bundesbank without risking a spillover into national politics serious enough to threaten German support for the single currency.

“The ECB has built up enough credibility on its own,” said Holger Schmieding, chief economist at Berenberg Bank in London. “That the Bundesbank may object to sovereign-bond purchases is largely taken for granted by markets. Tacit support from Berlin would neutralize Bundesbank objections in the German public debate.” The momentum toward QE is building, with more than 90% of economists in Bloomberg’s monthly survey predicting it’ll start in 2015. Euro-area inflation was 0.3% in November, compared with the ECB’s goal of just under 2%, and is poised to turn negative because of a slump in oil prices.

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“The rule prevents federally-insured banks from using their own money when investing in certain risky assets.”

Federal Reserve Delays Parts Of Volcker Rule Until 2017 (BBC)

The US Federal Reserve has given Wall Street banks even more time to comply with parts of the Volcker Rule, a key provision of the 2010 Dodd-Frank financial reform bill. The rule prevents federally-insured banks from using their own money when investing in certain risky assets. The Fed had already announced banks would have until 2017 to deal with one type of trading product. It will now grant an extension to other types of funds. Initially, the Fed had said banks would have until 21 July 2017 to stop trading in collateralised loan obligations, which essentially move the risk of investments in loans off their balance sheet. The new extension applies to other types of “legacy covered funds”, according to a release on the Fed’s website, which include “having certain relationships with a hedge fund or private equity fund”.

The Volcker rule is named after former Federal Reserve chair Paul Volcker and it limits the ownership stake banks can have in risky funds to a maximum of 3%. Part of the rule, which bans proprietary trading, is still scheduled to go into effect on 1 July 2015. This is the second big victory for banks, who have spent nearly four years arguing that the regulations stipulated in the 1,600-page Dodd-Frank bill are too onerous. Last week, a coalition of big banks, led by Citigroup, succeeding in convincing Congress to repeal a provision that required banks to put their riskier investments into separate holding companies that would not be insured by the US government.

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An exhaustive overview, with tons of graphs, of all aspects of the true state of the union, from obesity to poverty to incarceration rates. Don’t miss it.

“Neoconica” – America For The New Millennium (Thad Beversdorf)

I recently wrote an piece on the comprehensive breakdown of America. In it I laid out, from an analytical perspective, the things that are leading America to an economic collapse. But it might be interesting to take a look at a broader view of American life today. Policy and economic discussions are useful but in them we can lose the tangibility of what it all comes back to, which is the well being of Americans. Whether or not the national budget is 190% of GDP and whether interest rates will rise or not are important issues but only so far as they will impact the quality of life of the people. And so let s have a look at the lives of the American people. Have the policies over the past 15 to 50 years led to substantial improvements in the day to day real lives of Americans? Let’s have a look. And while we ve seen a couple of these more economic charts think about them in context of the other charts or other sides of life.

The above charts inform us that the bottom 80% of income households are making less than they did in the early 1980s, and remember the number of two income households today is far greater than it was in 1980 making this a staggering reality. However the top 20% and especially the top 1% have seen incredible income gains since the early 1980s. Total net worth for the bottom 80% of Americans has also been crushed. Since 2001 median net worth for the bottom 80% is down some 30% and this is during a period where stocks have reached all time highs. How could this be you ask?? Well this is not happenstance or simple unexplainable market forces. Those things do not exist in today s world. These results are by design.

I get frustrated hearing, even from the most intelligent of people that the Fed is doing its best and that given enough time this will work out for everyone. And that everyone is better off today than they used to be because this is America and that s just the way America works. But when we let the empirical data drive our perspective rather than our blind loyalty we see a very different story. The data tells a story of a political class that has been implementing programs and policies that are making the working class sick. We are given all sorts of medicines in the form of social programs and infinite debt to mask the symptoms but when we look at the actual medical test results we are not getting any better. In fact, our condition continues to worsen. Yet so many of us continue to listen to our political and economic shamans. We have such faith. And it is that faith that people like Ayn Rand recognized would be the death of America. So let’s continue on our journey through the life of the working class American today.

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“The solution for these three Members was to ensure that no other Members were present. It would have been difficult for other Members to object anyway, as no one else in the House had even seen the bill!”

Bombs Away! Obama Signs Bill For Lethal Aid To Ukraine (Daniel McAdams)

President Obama made good today on his promise to sign the Ukraine Freedom Support Act of 2014, which had passed Congress last week. Dubbed by former Rep. Dennis Kucinich the bill that “reignited the Cold War while no one was looking,” the Act imposes new sanctions on the Russian defense and energy industries, authorizes $350 million in lethal military assistance to the US-backed government in Kiev, urges that government to resume its deadly military operations against the Russian-speaking areas of east Ukraine seeking to break away from Kiev’s rule, and authorizes millions of dollars to fund increased US government propaganda broadcasts to the countries of the former Soviet Union.

Just days before Christmas, this bill is a massive gift to the US defense industry from which Ukraine will be required to purchase its lethal wish list. Perhaps as disturbing as the bill itself is the shocking process by which it passed the US House of Representatives. Three Members of the House, Foreign Affairs Committee Chairman Ed Royce (R-CA), Eliot Engel (D-NY), and Marcy Kaptur (D-OH), planned to be on the House Floor after the business of the day (passage of the massive omnibus spending bill) was completed and Members had left the Floor. Under a parliamentary move called “unanimous consent” the normal rules of the House can be suspended provided not a single other Member objects. The solution for these three Members was to ensure that no other Members were present. It would have been difficult for other Members to object anyway, as no one else in the House had even seen the bill!

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“Even in the worst of times, ‘we are always Americans, and different, stronger, and better than those who would destroy us.’”

US TV Shows American Torturers, But Not Their Victims (Glenn Greenwald)

Ever since the torture report was released last week, U.S. television outlets have endlessly featured American torturers and torture proponents. But there was one group that was almost never heard from: the victims of their torture, not even the ones recognized by the U.S. Government itself as innocent, not even the family members of the ones they tortured to death. Whether by design (most likely) or effect, this inexcusable omission radically distorts coverage. Whenever America is forced to confront its heinous acts, the central strategy is to disappear the victims, render them invisible. That’s what robs them of their humanity: it’s the process of dehumanization.

That, in turn, is what enables American elites first to support atrocities, and then, when forced to reckon with them, tell themselves that – despite some isolated and well-intentioned bad acts – they are still really good, elevated, noble, admirable people. It’s hardly surprising, then, that a Washington Post/ABC News poll released this morning found that a large majority of Americans believe torture is justified even when you call it “torture.” Not having to think about actual human victims makes it easy to justify any sort of crime. That’s the process by which the reliably repellent Tom Friedman seized on the torture report to celebrate America’s unique greatness.

“We are a beacon of opportunity and freedom, and also [..] these foreigners know in their bones that we do things differently from other big powers in history,” the beloved-by-DC columnist wrote after reading about forced rectal feeding and freezing detainees to death. For the opinion-making class, even America’s savage torture is proof of its superiority and inherent Goodness: “this act of self-examination is not only what keeps our society as a whole healthy, it’s what keeps us a model that others want to emulate, partner with and immigrate to.” Friedman, who himself unleashed one of the most (literally) psychotic defenses of the Iraq War, ended his torture discussion by approvingly quoting John McCain on America’s enduring moral superiority: “Even in the worst of times, ‘we are always Americans, and different, stronger, and better than those who would destroy us.’”

Read more …

“The Vatican is historically a place of politics and not just religion and has been for hundreds of years, with many popes starting their careers as diplomats for the Holy See ..”

Pope Francis Scores on Diplomatic Stage With U.S.-Cuba Agreement (Bloomberg)

After misfires in the Middle East and South Korea, Pope Francis is finding his place on the stage of world diplomacy — by taking the initiative. The pontiff who has made his name mostly by opening up debate in the Catholic Church about divorce and homosexuality yesterday achieved his first geopolitical success: The Argentine-born pope played a key role in brokering the accord between the U.S. and Cuba to move toward normal relations. After Pope Francis and President Barack Obama discussed Cuba during a Vatican meeting in March, the pontiff wrote directly to Obama and Cuban President Raul Castro urging them to conclude a prisoner exchange, according to an Obama administration official. It was the first such letter the president had received from the pope, the official said.

“The role of Pope Francis has been decisive,” said Vatican Secretary of State Pietro Parolin on Vatican Radio today. “He was the one who took the initiative of writing to the two presidents to invite them to overcome the problems between the two countries and find an agreement.” Francis, 78, had greater success with Cuba than in his other political ventures because it was an obsolescent standoff waiting for a solution and because of his Latin American roots, said Philippe Moreau-Defarges, a researcher at the French Institute of International Relations in Paris. “The Cuba situation simply made no sense to anyone anymore,” said Moreau-Defarges.

While the Vatican diplomatic corps exchanges representatives with 179 countries and popes have been sending emissaries since the 4th century, modern-day pontiffs haven’t always been politically involved. Benedict XVI, Francis’ German predecessor, focused more on doctrinal issues. His predecessor, John Paul II, pope from 1978 to 2005, spoke out frequently against military force and dictatorship and is credited with hastening the collapse of communism in his native Poland. “The Vatican is historically a place of politics and not just religion and has been for hundreds of years, with many popes starting their careers as diplomats for the Holy See,” said Federico Niglia, a history professor at Luiss University in Rome. “What’s somewhat unusual is Francis acting in person beyond diplomatic circles, which has close parallels to the style of predecessor John Paul II.”

Read more …

Brain structures are fascinating, with built-in resilience, redundancy.

Can You Live A Normal Life With Half A Brain? (BBC)

How much of our brain do we actually need? A number of stories have appeared in the news in recent months about people with chunks of their brains missing or damaged. These cases tell a story about the mind that goes deeper than their initial shock factor. It isn’t just that we don’t understand how the brain works, but that we may be thinking about it in the entirely wrong way. Earlier this year, a case was reported of a woman who is missing her cerebellum, a distinct structure found at the back of the brain. By some estimates the human cerebellum contains half the brain cells you have. This isn’t just brain damage – the whole structure is absent. Yet this woman lives a normal life; she graduated from school, got married and had a kid following an uneventful pregnancy and birth. A pretty standard biography for a 24-year-old. The woman wasn’t completely unaffected – she had suffered from uncertain, clumsy, movements her whole life.

But the surprise is how she moves at all, missing a part of the brain that is so fundamental it evolved with the first vertebrates. The sharks that swam when dinosaurs walked the Earth had cerebellums. This case points to a sad fact about brain science. We don’t often shout about it, but there are large gaps in even our basic understanding of the brain. We can’t agree on the function of even some of the most important brain regions, such as the cerebellum. Rare cases such as this show up that ignorance. Every so often someone walks into a hospital and their brain scan reveals the startling differences we can have inside our heads. Startling differences which may have only small observable effects on our behaviour. This case points to a sad fact about brain science. We don’t often shout about it, but there are large gaps in even our basic understanding of the brain. We can’t agree on the function of even some of the most important brain regions, such as the cerebellum.

Rare cases such as this show up that ignorance. Every so often someone walks into a hospital and their brain scan reveals the startling differences we can have inside our heads. Startling differences which may have only small observable effects on our behaviour. Part of the problem may be our way of thinking. It is natural to see the brain as a piece of naturally selected technology, and in human technology there is often a one-to-one mapping between structure and function. If I have a toaster, the heat is provided by the heating element, the time is controlled by the timer and the popping up is driven by a spring. The case of the missing cerebellum reveals there is no such simple scheme for the brain. Although we love to talk about the brain region for vision, for hunger or for love, there are no such brain regions, because the brain isn’t technology where any function is governed by just one part.

Read more …

Dec 182014
 
 December 18, 2014  Posted by at 10:07 pm Finance Tagged with: , , , , , ,  


Arthur Rothstein “Quack doctor, Pittsburgh, Pennsylvania” May 1938

Isn’t it fun to just watch the market numbers roll by from time to time as you go about your day, see Europe markets up 3%+, Dubai 13%, US over 2% (biggest two-day rally since 2011!), and you just know oil must get hit again? Well, it did. WTI down another 3%+. I tells ya, no Plunge Protection is going save this sucker.

And oil is not even the biggest story today. It’s plenty big enough by itself to bring down large swaths of the economy, but in the background there’s an even bigger tale a-waiting. Not entirely unconnected, but by no means the exact same story either. It’s like them tsunami waves as they come rolling in. It’s exactly like that.

That is, 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, as he showed again today in his big press-op. It’s the other, smaller, emerging countries that will blow up in spectacular fashion, and then spread their mayhem around. And make no mistake: to be a contender for bigger story than oil going into 2015, you have to be major league large. This one is.

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 they’re about to be blown to smithereens. Sure, oil will play a part. But mostly it will be the greenback. And you know, we can all imagine what happens when you blow up half the global economy …

Erico Matias Tavares at Sinclair has a first set of details:

Emerging Markets In Danger

There are some signs of trouble in emerging markets. And the money at risk now is bigger than ever. The yield spread between high grade emerging markets and US AAA-rated corporate debt has jumped, almost doubling in less than three weeks to the highest level since mid-2012.


MSCI Emerging Markets Index and Yield Spread between High Grade Emerging Markets and US AAA Corporates: 14 March 2003 – Today. Source: US Federal Reserve.

This means that the best credit names in emerging markets have to pay a bigger premium over their US counterparts to get funding. When this spread spikes up and continues above its 200-day moving average for a sustained period of time, it is typically a bad sign for equity valuations in emerging markets, as shown in the graph above. One swallow does not a summer make, but it is worthwhile keeping an eye on this indicator.

As yields go up the value of these emerging market bonds goes down, resulting in losses for the investors holding them. The surge of the US dollar in recent months could magnify these losses: if the bonds are denominated in local currency they will be worth a lot less to US investors; otherwise, the borrowers will now have to work a lot harder to repay those US dollar debts, increasing their credit risk. Any losses could end up being very significant this time around, as demand for emerging markets bonds has literally exploded in recent years.


Average Annual Gross Debt Issuance ($ billions, percent): 2000 – Today. Source: Dealogic, US Treasury. Note: Data include private placements and publicly-issued bonds. 2014 data are through August 2014 and annualized.

As the graph above shows, the issuance of emerging market corporate debt has risen sharply since the depths of the 2008-09 financial crisis.These volumes are very large indeed, and now account for non-trivial portions of investors’ and pension funds’ portfolios worldwide.

As a result, emerging markets corporations are now leveraged to the hilt, easily exceeding the 2008 highs by almost a multiple to EBITDA. And why not? With foreign investors desperate for yield as a result of all the stimulus and money printing by their central banks, they were only too happy to oblige. And they were not alone. Governments in these countries were also busy doing some borrowing of their own, as their domestic capital markets deepened.

[..] foreign investors have also piled into locally denominated bonds of emerging markets governments. Countries like Peru and Latvia now have over 50% foreign ownership of their bonds. [..] But there are big speculative reasons behind the recent money flows going into these countries – which could reverse very quickly should the tide turn. [..]

If investors end up rushing for the emerging markets exit for whatever reason, with this unprecedented level of exposure they might be bringing home much more than a bruised ego and an empty wallet. For one, European banks are hugely exposed to emerging markets. Any impairment to their books would likely make any new lending even more difficult, at a time when there is already a dearth of non-government credit in Europe.

And if emerging economies falter, where will the growth needed to repair Western government and private balance sheets come from? It used to be said that when the US economy sneezes the rest of the world catches a cold. Now it seems all we need is a hiccup in emerging markets.

That’s what you get when emerging markets are both half the global economy AND they’ve accomplished that level off of ultra-low US Fed interest rates and ultra-high US Fed credit ‘accommodation’. All you have to do when you’re the Fed is to take both away at the same time, and you’re the feudal overlord.

Our favorite friend-to-not-like Ambrose Evans-Pritchard does what he does well: provide numbers:

Fed Calls Time On $5.7 Trillion Of Emerging Market Dollar Debt

The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries.

Much of the debt was taken out at real interest rates of 1% on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are “short dollars”, in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots. The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a “considerable time” has gone, and so has the market’s security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates.

Officials from the BIS say privately that developing countries may be just as vulnerable to a dollar shock as they were in the Fed tightening cycle of the late 1990s, which culminated in Russia’s default and the East Asia Crisis. The difference this time is that emerging markets have grown to be half the world economy. Their aggregate debt levels have reached a record 175% of GDP, up 30 percentage points since 2009.

Most have already picked the low-hanging fruit of catch-up growth, and hit structural buffers. The second assumption was that China would continue to drive a commodity supercycle even after Premier Li Keqiang vowed to overthrow his country’s obsolete, 30-year model of industrial hyper-growth, and wean the economy off $26 trillion of credit leverage before it is too late. [..]

Stress is spreading beyond Russia, Nigeria, Venezuela and other petro-states to the rest of the emerging market nexus, as might be expected since this is a story of evaporating dollar liquidity as well as a US shale supply-glut.

[..[ the Turkish lira has fallen 12% since the end of November. The Borsa Istanbul 100 index is down 20% in dollar terms. Indonesia had to intervene on Wednesday to defend the rupiah. Brazil’s real has fallen to a 10-year low against the dollar, as has the index of emerging market currencies. Sao Paolo’s Bovespa index is down 23% in dollars in 3 weeks.

The slide can be self-feeding. Funds are forced to sell holdings if investors take fright and ask for their money back, shedding the good with the bad. Pimco’s Emerging Market Corporate Bond Fund bled $237m in November, and the pain is unlikely to stop as clients discover that 24% of its portfolio is in Russia.

One might rail against the injustice of indiscriminate selling. Such are the intertwined destinies of countries that have nothing in common. The Fed has already slashed its bond purchases to zero, withdrawing $85bn of net stimulus each month. It is clearly itching to raise rates for the first time in seven years. This is the reason why the dollar index has jumped 12% since May, smashing through its 30-year downtrend line, a “seismic change” in the words of HSBC. [..]

World finance is rotating on its axis, says Stephen Jen, from SLJ Macro Partners. The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar.

“Emerging market currencies could melt down. There have been way too many cumulative capital flows into these markets in the past decade. Nothing they can do will stop potential outflows, as long as the US economy recovers.

Hold it there for a moment. I don’t think it’s the US economy (its recovery is fake), it’s the US dollar.

Will this trend lead to a 1997-1998-like crisis? I am starting to think that this is extremely probable for 2015,” he said.

This time the threat does not come from insolvent states. They have learned the lesson of the late 1990s. Few have dollar debts. But their companies and banks most certainly do, some 70% of GDP in Russia, for example. This amounts to much the same thing in macro-economic terms. Private debt morphs into state debt since governments cannot allow key pillars of their economies to collapse.

These countries have, of course, built $9 trillion of foreign reserves, often the side-effect of holding down their currencies to gain export share. This certainly provides a buffer. Yet the reserves cannot fruitfully be used in a recessionary crisis because sales of foreign bonds automatically entail monetary tightening. [..] .. these reserves are a mirage. If you deploy them in such circumstances, you choke your own economy unless you can sterilize the effects. [..]

Investors are counting on the European Central Bank to keep the world supplied with largesse as the Fed pulls back. Yet the ECB could not pick up the baton even if it were to launch a blitz of quantitative easing, and there is no conceivable consensus for action on such a commensurate scale.

The world’s financial system is on a dollar standard, not a euro standard. Global loans are in dollars. The US Treasury bond is the benchmarks for global credit markets, not the German Bund. Contracts and derivatives are priced off dollar instruments. Bank of America says the combined monetary stimulus from Europe and Japan can offset only 30% of the lost stimulus from the US.

What more can I say? 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. Be that globally, if you live in poorer countries, or domestically, if you belong to a poorer segment of the population where you are. In both senses, the poorest will be hit hardest.

It’s the new model along which the clowns we allow to run the show, do so. Unless ‘we the people’ take back control, it’s pretty easy to see how this will go down.

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


Unknown California State Automobile Association signage 1925

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

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

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

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

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

Read more …

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

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

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

Read more …

Fed meeting to announce end of QE on Wednesday.

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

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

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

Read more …

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

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

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

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

Read more …

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

Oil Speculators Bet Wrong as Rebound Proves Fleeting (Bloomberg)

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

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

Read more …

A good call for once?

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

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

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

Read more …

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

A Scary Story for Emerging Markets (Worth Wray)

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

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

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

Read more …

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

Fed-Driven ‘Locomotive USA’ (Ivanovitch)

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

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

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

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There’s no such thing as good deflation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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World’s oldest bank turns into merger target.

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

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

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

Europe’s Banks Are Still a Threat (Bloomberg)

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

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

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

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

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

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

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

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

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Lowest in 22 months.

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

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

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All your bucks are belong to us.

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

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

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

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Winter time.

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

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

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

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

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

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

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

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

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Oct 042014
 
 October 4, 2014  Posted by at 9:19 pm Finance Tagged with: , , , , ,  


Jack Delano Atchison, Topeka & Santa Fe line at Duoro, NM March 1943

Weekend. Saturday. Beautiful Indian summer imitation where I’m presently located in western Europe. Good time to start out with an empty sheet of text file (for lack of a better term), and stream some consciousness.

Most people must have figured out that things in the economic sphere haven’t gotten any quieter lately. That’s at least something. Stock exchanges in the developed world jumped from a -1%+ loss one day to a 1%+ gain the next. Volatility, nerves, and probably ritalin, have returned. You have to wonder what that means in markets reigned supreme by high-frequency robot traders and central banks, but nevertheless, the public perception remains. And perception is key.

At first glance, US data coming in on Friday look positive, with more jobs and a lower unemployment rate of 5.9%. Bloomberg even had a headline that said the real payrolls increase was 600,000 jobs, instead of the ‘official’ BLS 248,000, because American wage slaves allegedly worked 0.1 hour more per week, 34.6, up from 34.5 in August.

The most since May 2008, the article claims, citing Deutsche’s Joseph LaVorgna. I’m sure if y’all clocked in those 0.1 hours, or 6 minutes, later, you really made them count. I just don’t know whether to laugh or cry when I see things like that reported.

What would seem to me to matter more is the rates in labor participation and Americans not in the labor force.Unfortunately, both are still ugly as warthogs and getting worse. New records all around, as Tyler Durden notes:

While by now everyone should know the answer, for those curious why the US unemployment rate just slid once more to a meager 5.9%, the lowest print since the summer of 2008, the answer is the same one we have shown every month since 2010: the collapse in the labor force participation rate, which in September slid from an already three decade low 62.8% to 62.7% – the lowest in over 36 years, matching the February 1978 lows. And while according to the Household Survey, 232,000 people found jobs, what is more disturbing is that the people not in the labor force, rose to a new record high, increasing by 315,000 to 92.6 million!

But, you know, that’s just the usual nonsense from the usual suspects, and at least today for once we can confidentially state that America is not the horse most likely to be slaughtered tomorrow morning at the glue factory. Drinks all around! Just make sure you finish them within 6 minutes. Or if want to really help out, hand on to your glasses for 10 minutes, and raise job numbers, as calculated by Bloomberg and Deutsche, by a million …

Anyway, the US, the greenback, that’s this week’s story. And it will be for a while to come. The Fed has gone out all guns blazing, cold turkey QE, push up the dollar, (10% or so vs the ‘basket’ of currencies in no time), and the finishing touch waiting in the wings, the rate hike.

The US economy in the months ahead is set to shine. The higher dollar and rates will throw lots of Americans out of their – export-oriented – jobs, but you’re not going to see that reflected in the numbers. Remember how Obama said he was going to double exports in 5 years? That lofty thought is long gone; the basic reality always was.

America is in the process of calling its – dollar – children home. All it needs to do is execute those three steps: QE, dollar, interest rates. That will increase its power, economic and therefore political, over the rest of the world to such an extent that many nations will effectively turn to panhandlers in Lower Manhattan.

Emerging markets, and economies, are the easiest victims. They have risen to what seemed to be great heights, despite the global financial crisis – or is it because of it? – in the past 7-8 years, on the wings of loose monetary policy. From the Fed, from other central banks. Now they need to roll-over the debts that made them shine, and they find themselves having to scramble for the dollar their debts are denominated in.

Every step in the three step program, QE, dollar, interest rates, makes it harder and – much – more expensive for them to service their debts. And the effects haven’t even truly started to sink in yet. For that matter, even the Fed policies haven’t. 2015 is not going to be a nice year for the citizens of Brazil, Thailand, Turkey, you name them, and there will be an enormous amount of unrest and fighting and worse.

Whoever prints the reserve currency rules the world, and the lives of untold millions trying to make a better future for their kids. That last bit: not going to happen.

Japan still plays the role of a rich society, and convincingly, but in reality it’s done. It has been able to keep up appearances more or less so far by selling state debt to its own citizens, but Mrs. Watanabe is not a complete fool. If your 2nd quarter GDP is down -7.1%, that’s not some minor detail.

The final blow to the Japanese economy will be delivered by PM Abe’s insistence that the main pension funds invest in stocks, which will plummet in the upcoming global market plunge – or recalibration if you will -. At which point Abe will be left with two choices: either he leaves in disgrace, not a favorite pastime among the Japanese, or he declares war on China over a bunch of islands. I think Abe’s mind is made up.

As for China, it will have to accept that growth numbers will be way below what it desires, and that ‘massaging’ those numbers is not a solution anymore than it is in Washington, although creative accounting can buy time. The present ‘official’ Beijing growth target is 7.5%, but the real number is nowhere near that.

Which is a huge problem in a society built on the effects and consequences of the higher numbers. Like the by far largest human migration in history, which has seen 100-200 million Chinese peasants into urban centers. And the empty apartment buildings these former peasants have ‘invested’ their hard earned money in. And the unprecedented pollution and other devastation in the areas the peasants came from, to which they can now never return and make a living.

I have no idea how the sequence of Xi’s and Li’s plan to keep that burning cooking cauldron in check, but there’s no way this is going to be pretty and peaceful. Hong Kong is a 5 year old girl’s birthday party compared to what’s coming. And a soaring US dollar will hit the Forbidden City, just as it will most of the world, like a sledgehammer.

And then there’s Europe.. Which needs no help on the way down, it has all the boxes ticked for a descent into mayhem. From what I can see, it will take years for Brussels to admit that Brussels is a really bad idea (and it eats women and children alive), other than as the capital of Belgium, and Europe doesn’t have those years. It needs to decide now that if Germany wants Greece in the eurozone and EU, it will have to pay big bucks for that. No such notion is even considered, but that makes it no less true.

The EU is a dead experiment, a Frankenstein and Mr. Hyde all in one. But no-one wants to see it, and no-one has a clue. Well, wait till interest rates go back up to historically ‘normal’ levels, to 5% or so for the lowest, to 8% or so for you average mortgage loan. That should be interesting to watch.

It’s coming, though, courtesy of Grandma Yellen and the puppeteers that move her limbs and lips up and down. It’s time, wherever you are on the planet, to collect your belongings outside of the reach of the ‘system’, sit down on your porch, and watch the sky for that mushroom cloud on the horizon.

Oct 032014
 
 October 3, 2014  Posted by at 5:31 pm Finance Tagged with: , , , , , ,  


Jack Delano Brakeman Jack Torbet at Atchison, Topeka & Santa Fe Railroad March 1943

Hi, Ilargi here. As per today, October 3, I’m going to make some changes I’ve been thinking about for a while, for a number of reasons. That is, the Daily Links that used to be at the top of every page will now become part of a daily separate post, entitled Debt Rattle +date (to be found below where all posts are, at about 8am ET every day), which will also include the quotes from these same links, which used to be below our own daily essays. The latter will now stand on themselves, and also be separate posts. So the only change for you is that to get to the links, you will need to execute one extra click, but then you get everything I read everyday presented in one go.

If you think this is the worst idea ever, or if you think it’s great, please do let me know at ilargi •AT• theautomaticearth •DOT• com. And thanks for your support. Talking of which: please check our donate box, top of the left hand column, below the ad, and donate what you can. This site runs well below the poverty line these days, and it shouldn’t. I want to bring back a lot more Nicole Foss here, but she does have to make a living.

Yours, Raúl Ilargi Meijer

As I watch the euro losing another 1.3% against the dollar today, it’s now at $1.25, and down from close to $1.40 recently, it’s getting clearer all the time: the greenback is busy eating currencies and economies alive.

There is of course the fact that Abenomics in Japan is living up to its longstanding promise of utter failure. And there is Mario Draghi torn between two lovers, one the one hand the Germany/Austria camp – with France as a surprise third – who don’t want the ECB to buy up junk paper, and on the other hand those EU members whose sole road to survival inside the EU is for Draghi to buy up anything that even looks like it was once toilet paper.

But Japan and Europe have been in the economic doghouse for a long time. It wasn’t until the Fed pulled the trigger on the dollar steamroller that they started paying the real price for it.

Japan, at least as long as it chooses to cling to the growth fairy, has nowhere to turn but to something in the vein of Abenomics, i.e. huge money and credit expansion. But it’s not the money supply, no matter how it’s defined, that is the problem, it’s that people refuse to spend. And if people don’t spend, no government or central banks has a way to boost inflation. Why they should want to in the first place is another question.

Europe has the added problem of disagreement on how to escape the walls that are closing in. And the more they close in, the less comfortable the shared living space on the old continent becomes. With a bit of imagination, you can see different people, different cultures, different languages, and different economies, all forced to live in the same ever shrinking – economic -space.

There’s less of everything to go around, and no-one wants to give up what’s theirs. Still, at the same time we already saw that two-thirds of Greeks live at or below the poverty line, and that Naples is even worse than Greece. Where do you personally think that will go? With a dollar that is set to make lots of things, not the least of which is oil and gas, more expensive?

It’s not just that for Europe, the growth fairy is evasive, their economies are bound to shrink a lot more still. And then what is Draghi, or his successor, supposed to do? The eurozone, and the EU itself, has already become a straightjacket with a noose attached to it, and that noose will start to tighten as we go forward. Brussels and Frankfurt can spin all they want – and do they ever -, but they can’t squeeze milk out of a deceased goat.

No matter what side of which fence you’re sitting on here, you to give it to the Fed and Wall Street, though: their timing is impeccable. Victim no. 1 of the Dollar is King move are the emerging markets:

Emerging Stocks Pummeled as Weak Yen Boosts Japan

The yen’s slide to a six-year low is amplifying a rout in emerging-market stocks as investors shift their focus to Japanese companies with earnings in dollars, according to Morgan Stanley. The MSCI Emerging Market Index tumbled 7.6% in September, the most since May 2012, led by China and Hong Kong. That compares with a 3.8% drop for the Topix Index in the period. The yen depreciated 5.1% versus the dollar to the weakest level since August 2008 last month, while a gauge tracking developing-nation currencies retreated 3.8%. “Asset allocation away from emerging markets was in part because Japan was back and that yen weakness is a positive catalyst,” Jonathan Garner, Hong Kong-based head of Asia and emerging-market strategy at Morgan Stanley, said by phone on Sept. 25.

“We don’t have a large export-industrial dollar earnings sector for EM, while Japan’s corporate-sector earnings responded positively to yen weakness.” Japan’s exporters are benefiting from a weaker currency, which boosts overseas income when repatriated, while developing-nation assets have come under pressure as the prospect for higher Federal Reserve interest rates dents demand for riskier assets. Toyota, the world’s biggest carmaker by market value which derives most of its revenue from the U.S., rallied 9% last month. Net inflows to U.S. exchange-traded funds that invest in emerging-markets tumbled 82% to $977.9 million in September, led by a 90% decline to China and Hong Kong, data compiled by Bloomberg show.

And the weak yen has long since stopped boosting Japan in a net, overall, sense:

Japanese Stocks Have Crashed Over 1000 Points Since Friday

After ticking just above 110.00, USDJPY has been a one-way street lower and that means only one thing… Japanese stocks are cratering. From Friday’s highs, The Nikkei 225 has crashed over 1000 points (despite Abe’s promises yet again of more pension reform buying of stocks). Of note, perhaps, is that, Japanese investors bought a net $3.6 billion of foreign stocks last week – the most since January 2009 – perfectly top-ticking global equities… Well played Mrs. Watanabe.

And:

Japan Inc. Begins To Turn Against The Weak Yen

When the Japanese yen began its long descent in late 2012 — around the time it became clear Shinzo Abe would be elected to another prime-ministership — the executives running Japan’s top corporations seemed to believe that the lower the currency, the better, regardless of all else. But since then, the yen has trekked steadily, inexorably downward against the dollar, with the greenback rising from around ¥78 two years ago to ¥110 earlier this week. And, at least according to a Nikkei news survey out Friday, some senior corporate officers are having second thoughts about the race to the bottom for forex. [..] … not a single CFO said they wanted to see the dollar breach above ¥115.

And also:

Yen’s Steepest Decline in 20 Months Spreads Unease in Japan

The yen’s steepest decline in 20 months is prompting concern in Japan that the central bank’s support for a weaker currency may hurt consumers and companies. Monetary authorities intervention to curb the slump is “possible,” according to Hirohisa Fujii, a former finance minister and member of the opposition party, after the currency’s steepest drop last month since January 2013. Some companies are suffering from the weaker yen, Nobuhide Minorikawa, Japan’s vice finance minister said this week [..] The chorus of dissent against the Bank of Japan’s accommodative monetary policy [..] is growing louder, as consumer prices remain depressed and growth is anemic. The weaker yen puts Japan at risk of recession, Kazumasa Iwata, deputy governor of the central bank until 2008, warned last month.

“The whole notion of devaluing the currency has been a bad policy,” Robert Sinche, a global strategist at Pierpont Securities, said. [..] BOJ Governor Haruhiko Kuroda said last month, after the dollar rose above 109 yen, that he didn’t see any big problems with current movements in exchange rates.

You have to like the suggestion that “The weaker yen puts Japan at risk of recession”. Tokyo may want to pick whatever stats they like, but it should be obvious that Japan, like the EU, is in a recession, not at risk of one. Take a look:

What 110 Yen to the Dollar Means for Japan’s Consumers

The weakening yen is starting to squeeze Japanese consumers as prices rise for everything from Burgundy wine to instant noodles, threatening Prime Minister Shinzo Abe’s plans to revive the country’s economy. The currency slid to 110 yen to the dollar yesterday, the lowest level in six years, making imported goods and materials more expensive. Though inflation is one of Abe’s monetary goals, the yen’s sharp slide undermines steps to boost consumer spending and endangers public backing for his economic program.

[..] The success of Abe’s plans for a sustained economic recovery after two decades of stagnation depends on consumers, since they account for about 60% of GDP. They’ve turned cautious as the sales tax rose and companies, including many that profited from the weaker yen, have failed to raise wages enough to keep up with inflation.

Supermarket sales fell for a 5th straight month in August, following an April jump in the consumption tax to 8% from 5%. Wages adjusted for inflation fell 2.6% in August from a year earlier, the 14th straight monthly decline

Nissin Food Products, inventor of the world’s first instant noodles, is increasing their price in January and Ueshima Coffee Co., Japan’s biggest supplier of beans to retailers, will sell them for 25% more from November

[..] Abe, who must decide whether to raise Japan’s sales tax to 10% as planned next year. The increase this April plunged the economy into its deepest contraction in five years as the government tries to cap gains in the developed world’s highest debt burden.

Japan’s biggest employers, including Toyota, Hitachi and Panasonic, have benefited from the yen’s drop. A weaker currency makes their exports more competitive and increases the value of overseas earnings when converted into yen. Japanese companies’ pretax profit rose to a record 17.5 trillion yen ($161 billion) in the quarter ended March 31, according to figures from the finance ministry.

In the five years prior to Abe’s call for unprecedented monetary easing, the Japanese currency averaged 85.69 yen to the dollar and never rose above 93.03 yen, prompting manufacturers to move production out of the country and fueling declines in consumer prices.

The yen’s drop since Abe started his campaign to become prime minister helped fuel a 23% gain in the benchmark Nikkei 225 Stock Average in 2012, followed by a 57% surge last year, the biggest annual gain since 1972.

Abe’s failure so far to broaden the recovery beyond the direct benefits of a weaker currency and unprecedented monetary easing has damped enthusiasm, leaving the Nikkei down 1.3% this year, as of yesterday. Fast Retailing, which is Asia’s largest clothing retailer and accounts for 8.9% of the Nikkei, has fallen 15% this year. Aeon Co., the nation’s largest retailer, is down 22%.

Japan’s GDP shrank an annualized 7.1% in the April-to-June period, the most since the first quarter of 2009.

“The impact to the overall economy is not necessarily all positive; rather, negatives may be outweighing,” Kazumasa Iwata, the BoJ deputy from 2003-2008, said.

Japanese consumers have started to expect that imported foods will become too pricey. “I don’t go to import food shops much recently,” said Kazuha Hemmi, who works in the overseas section of a company in Tokyo. “Some of them stopped selling bargain products.”

“Not necessarily all positive”. Now there’s a dead spin. Any country that sees a 7.1% drop in GDP, no matter what sales tax changes, is in very serious trouble. The nation’s largest retailer is down 22% (!) Want to try that on for size at WalMart?

And then there’s Europe. Where plenty folk probably think they’re in some lower euro honeymoon still. Today, EU exchanges are up 1% or so. While the euro loses big. I suggest these happy shiny people should check on Japan to see what’s in store.

European Stocks Plunge Most In 16 Months As Draghi Disappoints

Broad European stocks plunged into the red for 2014 today as a rattled Mario Draghi disappointed a hungry-for-more risk market. Bloomberg’s BE500 index dropped its most since June 2013 to 2-month lows led by weakness in Italian banks. UK stocks underperformed (-3.6%) but Spain, Italy, and Portugal all tumbled 2-3%. The selling pressure interestingly stayed in stocks as bond spreads rose only modestly and EURUSD roundtripped to only a small rise from pre-ECB. Notably, US equities are cratering as they are so used to the pre-EU-close pump that did not happen.

Draghi’s plan to buy Toilet Paper Backed Securities is dead is a dead in the water as it is on dry land:

France’s Noyer Is Third ECB Dissenter Against ABS Buying Plan

France’s Christian Noyer joined European Central Bank policy makers from Germany and Austria in opposing a program to buy asset-backed securities, according to two euro-area officials. His dissent leaves President Mario Draghi facing a clash with policy makers from the region’s two largest economies, albeit for different reasons. While Noyer disapproved of the way the purchases will be conducted, Austrian central bank Governor Ewald Nowotny shared Bundesbank President Jens Weidmann’s view that the measure involves too much balance-sheet risk, said the people, who asked not to be identified because the talks are private.

Draghi unveiled details of the program yesterday, pledging to buy both covered bonds and ABS before the end of the year. He shied away from a definitive goal for the plan, saying total stimulus may fall short of the 1 trillion euros ($1.3 trillion) he had signaled in September. Noyer opposed the design of the program because it will exclude national central banks from its implementation …

And there’s more to that:

Mario Draghi’s QE: Too Little For Markets, Too Much For Germany

European stocks have suffered the steepest one-day fall in 15 months after the European Central Bank retreated from pledges for a €1 trillion blitz of stimulus and failed to clarify the scale of quantitative easing. The sell-off came amid a mounting political storm in Europe as leading German economists and jurists reacted with fury to the ECB’s first asset purchases, denouncing the move as monetary debauchery, and threatening a blizzard of lawsuits in the German courts. “Our worst fears are being fulfilled,” said Hans Werner Sinn, head of Germany’s IFO Institute. The Milan bourse tumbled almost 4pc, led by sharp falls in Italian banks counting on fresh ECB liquidity. [..]

Mario Draghi, the ECB’s president, seemed unable to secure backing for far-reaching measures from Germany’s two ECB members or from the German finance ministry, forcing him to play down earlier hints for a €1 trillion boost to the ECB’s balance sheet. As he spoke inside a renaissance palace in Naples, riot police doused crowds of protesters on the street outside with water cannon. The city has become a political cauldron, with the highest “misery index” Europe. Youth unemployment in Italy’s Mezzogiorno is still rising, topping 56pc in the second quarter. Mr Draghi said the ECB would start to buy covered bonds and asset-backed securities (ABS) as soon as this month, but gave no concrete figure and deflected all questions on the scope of stimulus.

“I wouldn’t want to emphasise the balance sheet size per se,” he said. Sovereign bond strategist Nicholas Spiro said the ECB was “backtracking” on earlier pledges and seemed to be losing confidence in its ability to halt deflation at all. “Mr Draghi is facing a severe credibility problem,” he said.

It’s not just Draghi, the entire EU leadership has a severe credibility problem. With – seemingly – nothing left on the economical front that member nations can agree on, other than there’s a huge and imminent disaster waiting in the wings, what ways forward are available? There’s only one, really: split up the whole caboodle in as amicable a divorce as you can muster, and then try to stay friends.

But even that doesn’t seem likely, at all. A split-up of the EU would obviously be grossly costly, and the lion’s share of those costs would have to be borne by the richer north. But the richer north, too, is getting poorer fast. So what campaign slogan do you think will win out in the next election in Germany, France etc?

Will it be: let’s pay for Greek debts, so they can have a good life again? Or will it be: let them cook in their own fat, so we can party on for a while longer in Berlin and Paris?

I think you know the answer. So does Albert Edwards. And he includes the US, and China, in his dark panorama for good measure. And he’s right of course

Albert Edwards Says Watch Japanese Yen and Be Very Afraid

The Japanese yen goes into freefall. China’s fragile economy tips over the edge. A wave of profit-crushing deflation comes washing over the U.S. and Europe. Investors panic. That’s the view of perennial pessimist Albert Edwards. The London-based analyst and his team at investment bank Societe Generale SA have been ranked No. 1 for global strategy in surveys by Thomson Reuters Extel every year since 2007, even with a history of saying unpleasant things that few want to hear. “My role is to step back from the excessive enthusiasm that builds up in the market, and to just say, ‘This is wrong. This is going to go horribly wrong,’” the 53-year-old said by phone last week. The cliche is that when the U.S. sneezes, Japan catches a cold. Edwards says Japan is just as apt to lead the way.

When the Internet bubble burst in 2000, Japan’s tech-heavy Jasdaq index started to slide weeks before the Nasdaq. Japan also pioneered the deflation that now threatens the West. In 1997, it was a plunging yen that helped trigger Asia’s currency crisis. With the yen’s drop this week to a six-year low of 110 versus the dollar, Japan’s currency may once again be the first domino to fall in a chain of events that could be bad for everyone, according to Edwards. The U.S. stock market rally has been going for 66 months since the financial crisis bottomed in March 2009, a streak that’s already a year longer than average. A disconnect between buoyant equity prices and corporate profit growth in the low single-digits makes the situation especially precarious. “Almost 100% of investors think we’re at the start of a long recovery,” Edwards said.

“It’s already a long recovery. Forget about starting from here.” In an hour-long interview, during which he made the global economy sound like a game of Mousetrap, Edwards explained why investors should be watching Japan for clues about what may happen in the next big trouble-spot: China, whose economy is already headed for its slowest full-year growth since 1990. The argument was this: if the yen falls, it will take other Asian currencies down with it. Eventually China will be forced to weaken the yuan, by adjusting its trading range and expanding its money supply, to keep its exports competitive. That will squeeze developed economies that have yet to fully recover from the financial crisis.

[..] In 2006, when the S&P 500 was rising ever higher and then-Fed Chairman Alan Greenspan was being feted as “the Maestro,” Edwards called him “an economic war criminal.” Two years later financial markets were in crisis. Edwards’ aversion to equities stems from watching the experience of Japan, where the market took more than two decades to find a bottom after the 1989 bust. According to Edwards’ view, it’s a template for the extended bear market that will unfold in the U.S. and Europe, as stocks recover only to crash again and plumb ever-new lows. “What happened in March 2009, when the S&P 500 touched 666, that was just a brief stop,” he said. “We will go lower than that.” The structural bear market ends when equities are dirt cheap.”

More Albert Edwards:

“When Bad News Becomes Bad News Again”: Albert Edwards (Zero Hedge)

Inflation expectations in the US have just followed the eurozone by plunging lower. Until very recently, the Fed and the ECB had been quite successful at keeping inflation expectations in their normal range – this despite their clear failure to control actual inflation itself, which has consistently undershot expectations. Investors are beginning to realise that contrary to their confident actions and assurances, the Fed and the ECB have failed to prevent a dreaded replay of Japan’s deflationary template a decade earlier in the West.

The Ice Age is once again about to exert its frosty embrace on markets as investors wake up to a new and colder reality. There were two key parts to our Ice Age thesis. First, that the West would drift ever closer to outright deflation, following Japan’s template a decade earlier. And second, financial markets would adjust in the same way as in Japan. Government bonds would re-rate in absolute and relative terms compared to equities, which would also de-rate in absolute terms. [..]

Another associated element of the Ice Age we also saw in Japan is that with each cyclical upturn, equity investors have assumed with child-like innocence, that central banks have somehow ‘fixed’ the problem and we were back in a self-sustaining recovery. Those hopes would only be crushed as the next cyclical downturn took inflation, bond yields and equity valuations to new destructive lows. In the Ice Age, hope is the biggest enemy.

[..] “amid the inevitable impending global economic and financial carnage, when people, like Queen Elizabeth ask, as she did in November 2008, why no-one saw this coming, tell them that many did. But just like in 2006, before the Great Recession, investors once again chose to tilt their ears towards the reassuring siren songs of the Central Bankers and away from the increasingly hysterical ramblings of the perma-bears and doomsayers.”

Down the line, the insane debt levels all around the globe will do in everyone. That goes for, in order of appearance, Japan, Europe, China and the USA. An order that can still be shaken up by various kinds of unrest and other black swans. Hong Kong protests, Catalunya, a country voting to leave the EU, there are too many options to mention.

But aside from these, Japan looks the furthest gone, with 400%+ debt to GDP and rapidly rising. Europe is a good second, because of debt levels AND the difference in wealth between rich and poor member nations AND all the other differences between rich and poor member nations.

China is a bit of an odd one out, it has room to move, but it also committed to $25 trillion in new debt in just a few years, without anything solid to show for it except apartment buildings that can only go down in price and bridges to a nowhere nobody wants to go to. And then there’s dozens of emerging nations with nowhere to go but down.

For the US, it’s now shooting fish in a barrel – but just for now. The three-pronged plan the Fed has started to execute is plain for everyone to see:

1) Stop QE. This hauls back in to the US dollars from around the planet, from a million parties that owe debt denominated in USD. Already happening at a frantic pace, though no-one involved would advertize it.

2) Raise the value of the greenback. This makes it that more expensive for all parties under 1) to pay off their debts. They have to offer ever more just to stand still. And when they can’t, assets will be confiscated.

3) Raise interest rates. The final blow. It will make life much harder on the US government too, but they’ll have trillions of dollars flowing in to cope with that. It’ll put millions of Americans into the equivalent of medieval torture instruments, and out of their homes and cars and jobs, but that too will be initially softened by the dollars coming home to papa. Crucial take home: they’ve given up on the US real economy, likely a long time ago.

And it will have the rest of the world begging for mercy. In that regard, it’s funny to see Britain planning to raise its rates too. Do be careful what you wish for there, lads.

The full taper of QE means everyone needs dollars, and most who do are leveraged to the hilt, while the combination of higher interest rates and higher dollar value means the buck will come much more expensive.

It’s going to be carnage out there.

Sep 222014
 
 September 22, 2014  Posted by at 9:52 pm Finance Tagged with: , , ,  


DPC Herald Square, New York 1903

Emerging markets are about to get hit by a whopper of a double whammy. And if I were you, I wouldn’t be too surprised if it takes on epic proportions.

The exposure that emerging markets, countries in the less wealthy parts of the globe, Asia, Eastern Europe, Africa, Latin America, have to the west has grown at a very rapid clip since, let’s say, Lehman. These countries were hit hard by the western crisis, but found what looked like a sugar mountain afterward when western interest rates plunged to zero and beyond, which provided them with both of the seemingly beneficial sides of what will now become their double whammy.

First, western money flowed, make that flooded, into their economies at unparalleled levels, driven by a chase for yield instigated by the difference between ultra low interest rates in the west and much higher rates beyond. For emerging countries, this has been a boon beyond belief. No matter how corrupt or poorly organized they may have been or still are, most showed nice growth numbers for a few years. It wasn’t really a carry trade in the literal sense of the word, but it was close. And it’s now coming to an end.

Second, and likely to work out even much worse, the ’emerging governments’ borrowed those cheap US dollars using anything not bolted down, including their national treasures, as collateral, and they now face a doubling, tripling, quadrupling etc. of the interest rates they have to pay on those loans. Which looks about like this (and something tells me this could well underestimate reality by a considerable margin):

Janet Yellen is about to announce rising rates, and whether it’s tomorrow or in 6 months is not that relevant in all this, it’s expectations that rule the day. Emerging markets will first be hit by outflows of western investment – or rather casino – capital, just because of the fear in the markets of what Yellen will do, and then get the second whammy when rates move from 0.25% to 1.25% and then some.

We see the initial jitters today. Or rather, they’re not the initial ones, just the first ones to come from people other than western investors.

What sticks out that the western press has very little attention for the ‘other side’s’ point of view. Still, here’s the Indonesian FM with a pretty clear message for someone who sees his country being suspended by its balls:

Asia May Need to Sacrifice Growth to Cope With Fed Rate Hike

Asia’s developing nations may have to sacrifice some growth next year and focus on keeping their economies stable amid potential fallout from higher U.S. interest rates, Indonesian Finance Minister Chatib Basri said. Capital outflows are a threat facing emerging markets as the prospect of the Federal Reserve lifting rates lures funds, Basri said [..] In Indonesia, where the benchmark rate is already at its highest since 2009, policy makers may have to tighten further to preserve the nation’s relative appeal to investors, he said. “In the short term, some emerging markets may have to choose stabilization over growth,” Basri said. “You cannot promote economic growth when dealing with this issue. It will exacerbate the situation.”

The U.S. dollar has appreciated as the Fed edges closer to its first rate increase since 2006, while Indonesia’s rupiah has dropped for five straight weeks amid global funds pulling money from local stocks in anticipation of higher U.S. borrowing costs. As some of the world’s fastest-growing economies adapt to changing policy at the Fed, their contribution to global expansion might weaken, Basri said. [..] The prospect of higher rates in the U.S. is the single biggest challenge facing Indonesia’s new government, Basri said.

Basri has called for the incoming government to focus on narrowing the budget deficit, raising fuel prices and luring foreign investment. In Indonesia, where the key rate is at 7.5%, policy makers may have to hold firm to prevent funds from flowing out of the country, Basri said.

“Maybe the tightening cycle will continue, from both the fiscal and the monetary side,” he said. Such a step “is not really conducive to promoting economic growth,” he said. Indonesia also needs to diversify its base of investors, the finance minister said. Relying more on domestic bond buyers would help, he said. “If global liquidity becomes tighter because of this tightening policy at the Fed, it will be more difficult for a country like Indonesia to get foreign financing,” Basri said.

Not that all investors will leave. If only because the emerging market countries need to raise their base rates even higher.

Investors Bet on Asia Despite U.S. Rate Threat

A consensus is emerging among investors that some Asian markets can do well even with the prospect of higher U.S. interest rates on the horizon. Fund managers see stepped up corporate and economic overhauls by leadership in China and India this year, combined with relatively strong growth in Asian economies compared with the rest of the world, as reasons to be bullish. Investors choosing Asia have been rewarded in the past three months. The MSCI Asia ex-Japan index is up 2.4%, topping the 0.4% gain in emerging markets globally and comparable to the 2.6% increase in the S&P 500.

The Fed said Wednesday that it remains on track to end its bond-buying stimulus program in October. It is widely expected to raise interest rates next year. Higher interest rates in the U.S. can hurt Asian assets by drawing investment money into U.S. assets and away from Asia’s markets. Despite the concerns over U.S. interest rates, investors say they are selectively investing in Asian markets that they see as cheap and where economic fundamentals have improved or where they believe reforms are on the way. Investors continued putting money into Asian emerging markets last month, according to the latest data on money flows from the Institute of International Finance.

Still, the world’s smaller economies are plenty afraid.

Wary of Another ‘Tantrum,’ Emerging Economies Prep for Fed Rate Hike

As the Federal Reserve debates the timing of a potential interest rate increase, some policymakers in the developing world aren’t taking any chances. Officials from Indonesia to Hungary say they’re trying to curb their reliance on foreign investors in case an eventual Fed rate increase sparks another broad retreat from emerging markets. “Everyone is getting prepared” for a U.S. rate increase, Mauricio Cardenas, Colombia’s finance minister, said in an interview on Tuesday.

Mr. Cardenas said his government has worked to shift its borrowing from foreign to domestic buyers, on the view that locals are less likely to sell en masse based on shifts in global monetary policy. “I don’t think it fully insulates us from an increase in interest rates in the U.S., but it certainly protects us,” Mr. Cardenas said.

Years of low rates and stimulus from the Fed, deployed in an effort to jumpstart growth in the U.S., had the side effect of sending investors piling into developing world assets. The rock-bottom interest rates available in the U.S. essentially made the higher returns promised by bonds and stocks in countries such as Brazil and Turkey more attractive.

But what happens when that flow reverses? Global markets got a taste last year during a so-called “taper tantrum,” as investors fled emerging markets in anticipation of a reduction in the Fed’s stimulus efforts.

One more then, because you enjoy it so much:

Fed Dims Emerging Markets’ Allure

Fears of higher U.S. interest rates are prompting fund managers to cut back on investments in emerging markets. For now, investors still are moving into developing markets, though the pace has moderated. Emerging-market stocks and bonds received $9 billion from investors in August, compared with an average $38 billion a month between May and July, according to the latest data from the Institute of International Finance. But after months of heavy buying in such places as Brazil and India, lured by the prospect of higher returns than in the Western world, investors are taking a more cautious stance. Chief among these money managers’ concerns: that the recent rally in emerging-market stocks, bonds and currencies could be derailed as the U.S. Federal Reserve gets closer to raising interest rates.

The Fed, by raising its rates and relinquishing its downward pressure on the US dollar, is about to kill off most of the emerging markets. That’s a whole lot of misery in one pen stroke. That’s a whole lot of millions of people who will see their dreams of better lives shattered, just as they were beginning to think they had a chance.

It’s how the game is played. The weak must be sacrificed so the strong be stronger. It’s like a law of nature. From some point of view, at least. For me, it looks more like ‘we’ have found another way, and another victim, to keep ‘our’ game going a bit longer. There is no way this just happens, in some accidental kind of way. There is a reason the Fed raises both interest rates and the US dollar inside the same timeframe.

Short emerging markets. Play it well and their misery can make you a fortune. Isn’t that what life is all about?

Bond Losses Wiped Out for Treasuries With Dollar Conquering All (Bloomberg)

The prospect of higher U.S. interest rates is proving to be a boon for the biggest owners of Treasuries outside of the Federal Reserve. While the government bonds have fallen this month as the Fed boosted its forecast for how much rates will rise next year, the dollar climbed to its highest level since 2010 against a broad range of currencies. That’s transformed losses into gains for most foreign holders, who own $6 trillion of Treasuries. The U.S. currency has appreciated so much that Treasuries are the developed world’s best-performing sovereign debt this quarter for investors based in euros, pounds and yen. Sustaining demand from America’s biggest foreign creditors, such as the Chinese government and Japan’s Kokusai Asset Management Co., is crucial in containing funding costs as the Fed winds down its own extraordinary bond buying and prepares to lift rates for the first time since 2006.

With Treasuries offering the highest yields in seven years relative to sovereign bonds worldwide, the dollar’s strength may now help prevent an exodus of overseas investors from upending the $12.2 trillion market for U.S. government debt. “You’re getting a relatively higher yield by owning Treasuries as well as benefiting from a rising dollar, so the U.S. is going to suck in capital,” Philip Moffitt, the Sydney-based head of fixed income for Asia-Pacific at Goldman Sachs Asset Management, which oversees $935 billion globally, said in an e-mail response to questions on Sept. 19.

With the amount of U.S. public debt almost doubling since the financial crisis erupted in 2008, the stakes have never been higher for Fed Chair Janet Yellen. As she tries to extricate the central bank from six years of near-zero benchmark rates and trillions of dollars of debt purchases, any slack in demand for Treasuries may trigger a jump in borrowing costs for the government, companies and consumers. That threatens to upend the U.S. economy, which is still growing slower on average than before the credit crisis. After advancing 4.45% in the first eight months of the year, Treasuries have lost 1.1% in September, the most this year, index data compiled by Bloomberg show.

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Will, not could.

Stronger Dollar Could Put Squeeze On Earnings (MarketWatch)

Financial results from Nike this week could offer a preview of how the rallying U.S. dollar may wind up squeezing corporate profits and outlooks this earnings season. Stocks finished slightly higher this past week near all-time highs with the Dow Jones Industrial Average DJIA rising 1.7%, the S&P 500 finishing up 1.3%, and the Nasdaq up 0.3%, after the Federal Reserve indicated rate hikes were not just around the corner and Scotland voted to remain part of the United Kingdom. Nike, the first of the Dow 30 Industrials components to report earnings this season, reports earnings on Thursday. The athletic apparel and gear giant could be a litmus test for earnings season as it has considerable exposure to foreign markets and represents what’s expected to be one of the weakest sectors this season: consumer discretionary.

While some analysts are concerned about weak revenue growth over the next few quarters, Mark Luschini, chief investment strategist at Janney Montgomery Scott, said the stronger dollar will likely be a more significant problem. “I’m more concerned about currency,” said Luschini. “Multinationals seeing that strength in the dollar could be a headwind for earnings growth.” Since June 30, the U.S. Dollar Index, which tracks the dollar against six major currencies, has gained more than 6% after moving in a relatively narrow range in the 12 months prior. Even back in March, when the dollar index was more than 5% lower than its current level, Nike was warning a stronger dollar would be a significant drag on earnings.

In a recent note, Susquehanna Financial Group analyst Christopher Svezia lowered his full-year earnings estimate by 2 cents to $3.31 a share solely based on the stronger dollar. “Headwinds are strongest in [Nike’s fiscal second quarter] and don’t appear to be baked into estimates,” Svezia noted. The higher dollar will likely hit all multinationals, especially in the consumer discretionary sector. As the dollar has gathered strength, consumer discretionary earnings estimates have dropped significantly over the course of the quarter. Back on June 30, the sector was expected to see an earnings decline of 0.4%. Now, earnings are expected to decline by 5.4%, according to John Butters, senior earnings analyst at FactSet.

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Yes but.

The Fallacy Of US Dollar “Strength” (Macleod)

You’d think that the US dollar has suddenly become strong, and the chart below of the other three major currencies appears to confirm it.

The US dollar is the risk-free currency for international accounting, because it is the currency on which all the others are based. And it is clear that three months ago dollar exchange rates against the three currencies shown began to strengthen notably. However, each of the currencies in the chart has its own specific problems driving it weaker. The yen is the embodiment of financial kamikaze, with the Abe government destroying it through debasement as a cover-up for a budget deficit that is beyond its control. The pound had been poleaxed by the Scotish independence campaign, plus an ongoing deferral of interest rate expectations. And the euro sports negative deposit rates in the belief they will cure the Eurozone’s gathering slump, which if it develops unchecked will threaten the stability of Europe’s banks. So far this has been mainly a race to the bottom, with the dollar on the side-lines. The US economy, which is officially due to recover (as it has been expected to every year from 2008) looks like it’s still going nowhere.

Indeed, if you apply a more realistic deflator than the one that is officially calculated, there is a strong argument that the US has never recovered since the Lehman crisis. This is the context in which we must judge what currencies are doing. And there is an interpretation which is very worrying: we may be seeing the beginnings of a major flight out of other currencies into the dollar. This is a risk because the global currency complex is based on a floating dollar standard and has been since President Nixon ended the Bretton Woods agreement in 1971. It has led to a growing accumulation of currency and credit everywhere that ultimately could become unstable.

The gearing of total world money and credit on today’s monetary base is forty times, but this is after a rapid expansion of the Fed’s balance sheet in recent years. Compared with the Fed’s monetary base before the Lehman crisis, world money is now nearly 180 times geared, which leaves very little room for continuing stability. It may be too early to say this inverse pyramid is toppling over, because it is not yet fully confirmed by money flows between bond markets. However in the last few days Eurozone government bond yields have started rising. So far it can be argued that they have been over-valued and a correction is overdue. But if this new trend is fuelled by international banks liquidating non-US bond positions we will certainly have a problem.

We can be sure that central bankers are following the situation closely. Nearly all economic and monetary theorists since the 1930s have been preoccupied with preventing self-feeding monetary contractions, which in current times will be signalled by a flight into the dollar. The cure when this happens is obvious to them: just issue more dollars. This can be easily done by extending currency swaps between central banks and by coordinating currency intervention, rather than new rounds of plain old QE. So far market traders appear to have been assuming the dollar is strong for less defined reasons, marking down key commodities and gold as a result. However, the relationship between the dollar, currencies and bond yields needs watching as they may be beginning to signal something more serious is afoot.

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Flaky.

Change Of Tone By Fed Dove Dudley May Lift Dollar (CNBC)

The U.S. dollar may push higher this week if an influential policymaker from the U.S. Federal Reserve drops his dovish tone and suggests the world’s largest economy is ready for an interest hike earlier than the mid-2015 consensus, currency strategists told CNBC. New York Federal Reserve President William Dudley – also vice-chairman of the central bank’s rate-setting panel, a permanent voting member and widely regarded as a policy dove – is scheduled to speak tonight in New York. Dudley’s remarks this week – the highlight for currency markets – will be followed by speeches from fellow policymakers including Jerome H. Powell, Narayana Kocherlakota and Loretta J. Mester – all voting members of the Federal Open Market Committee (FOMC) in 2014. “I want to hear Dudley,” said Robert Rennie, Westpac’s global head of FX strategy in Sydney. “That will be big.” Dudley said in late June that the Fed can reasonably wait to raise interest rates until mid-2015 without risking an undesirable rise in inflation.

Any indication by Dudley that he favors an earlier rate hike may send the dollar higher, said Khoon Goh, senior FX strategist at ANZ. The Australian bank expects the first Fed rate hike to occur in March. “Any pronunciation from him on the dovish side shouldn’t come as a surprise,” Goh told CNBC Monday. “The big risk is if he does come out less dovish than what the market is expecting, then we could see a further boost to the USD.” Fed policymakers last week indicated they expect faster rate hikes next year and the year after. The central bank pushed up its expected path of interest rate increases – the so-called Fed ‘dots’ forecast – boosting yields on U.S. treasuries, and the dollar. As a policy dove, Dudley may “downplay the dots from last week’s FOMC,” ANZ’s Goh said. Still, given Fed Chair Janet Yellen’s insistence that the rate outlook is data-dependent, upside surprises in this week’s economic indicators – which include existing home sales, durable goods orders and consumer sentiment – may shift the balance in favor of the dollar bulls.

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Everything’s down vs the dollar is all.

Global Stocks Drop With Commodities on Slowing China Growth (Bloomberg)

Shares fell around the world and commodities tumbled to a five-year low amid speculation China will accept slower growth. Bonds rose after officials from the world’s biggest economies warned of rising financial risks. The MSCI All-Country World Index slid 0.2% at 10 a.m. in London. The Stoxx Europe 600 Index fell 0.3% and Standard & Poor’s 500 Index futures lost 0.5%. A gauge of Chinese stocks in Hong Kong dropped to a two-month low. French and Belgian government bonds gained the most in Europe and the rand led currencies of commodity-producing nations lower. Silver retreated to the lowest level since July 2010.

China’s Finance Minister Lou Jiwei said growth in Asia’s largest economy faces downward pressure and reiterated that there won’t be major changes in policy in response to individual economic indicators. Group of 20 finance chiefs and central bankers said low interest rates could lead to a potential increase in financial-market risk, as major economies rely on monetary stimulus to bolster uneven growth. U.S. housing data is scheduled for today. Lou “gave a real hint that the recent policy easing may actually be quite limited,” Stuart Beavis, head of institutional equity derivatives at Vantage Capital Markets in Hong Kong, said by phone. “We’re not just going to see this wall of money thrown at the Chinese slowdown.”

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Asia May Need to Sacrifice Growth to Cope With Fed Rate Hike (Bloomberg)

Asia’s developing nations may have to sacrifice some growth next year and focus on keeping their economies stable amid potential fallout from higher U.S. interest rates, Indonesian Finance Minister Chatib Basri said. Capital outflows are a threat facing emerging markets as the prospect of the Federal Reserve lifting rates lures funds, Basri said in an interview yesterday in Cairns, Australia, where Group of 20 finance chiefs met. In Indonesia, where the benchmark rate is already at its highest since 2009, policy makers may have to tighten further to preserve the nation’s relative appeal to investors, he said. “In the short term, some emerging markets may have to choose stabilization over growth,” Basri said. “You cannot promote economic growth when dealing with this issue. It will exacerbate the situation.”

The U.S. dollar has appreciated as the Fed edges closer to its first rate increase since 2006, while Indonesia’s rupiah has dropped for five straight weeks amid global funds pulling money from local stocks in anticipation of higher U.S. borrowing costs. As some of the world’s fastest-growing economies adapt to changing policy at the Fed, their contribution to global expansion might weaken, Basri said. Basri’s concern highlights the task facing G-20 finance chiefs as they attempt to lift collective economic growth by an additional 2% or more over five years. Officials agreed monetary policy should continue to support the recovery and particularly address deflationary pressures where evident, Australian Treasurer Joe Hockey said yesterday in Cairns. The prospect of higher rates in the U.S. is the single biggest challenge facing Indonesia’s new government, Basri said.

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Malaise ….

Metals Malaise Weighs On Equity Markets (CNBC)

The prices of a range of commodities continued their slide on Monday with the effect spilling over into stock markets with investors fearing more pain ahead for the asset class. Spot silver was the standout laggard, slouching to a low of $17.34 an ounce on Monday, reaching a four-year low. Data on Friday from the Commodity Futures Trading Commission confirmed that money managers had turned negative on the commodity. Spot gold also dipped, to $1,208.70 per ounce, and effectively wiped out all of its gains this year as the precious metal traded at levels not seen since early January. Other metals were also lower with platinum extending losses and hitting new nine-month lows and palladium also slipping to levels not seen since mid-May. A London benchmark for copper hit a 3-month trough and Reuters reported that Chinese steel and iron ore futures slid to record lows on Monday.

Soft commodities like wheat, corn and soybean are all lower for the trading year and prices eased again on Monday morning. Oil benchmarks and natural gas also saw weakness as the trading week began. “The liquidation is universal,” Dennis Gartman, a commodities trader and editor and publisher of the Gartman letter, told CNBC via email. “Today may be quite ugly around the world as deflation, rather than inflation, is the order of the day.” The malaise in the metal markets was felt across the broader equities indexes. Shanghai shares widened losses on Monday to close down 1.7%. In Sydney, shares saw hefty losses in mining majors which helped drag Australia’s benchmark S&P ASX 200 lower on the first day of the trading week. Fortescue Metals and Rio Tinto lead declines with losses of 4.8 and 2.5% each as iron ore prices slumped.

In Europe, the basic resources sector lost around 2.5% in early deals and stocks like Anglo American, Rio Tinto and Glencore suffered heavy losses. The latter’s fall was accentuated by an announcement that it was in a contract dispute with another mining firm. A slew of reasons were given for the weak sentiment. In the fields, economic reports have reinforced an expectation that there are massive harvests ahead. There’s also the stellar rally for the U.S. dollar. The greenback has climbed to trade at two-year highs, with anticipation of an interest rate hike in the U.S., and commodities have had to duly readjust with this currency strength. And then there’s also China. The Asian powerhouse, renowned for its large consumption of commodities, has seen some weak data points recently. The People’s Bank of China has had to add more stimulus to the world’s second largest economy and investors are cautious ahead of Tuesday’s preliminary reading on the country’s manufacturing sector, which could provide more evidence of a slowdown.

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Hussman’s got it.

The Broken Backbone of the Ponzi Economy (Hussman)

When the most persistent, most aggressive, and most sizeable actions of policymakers are those that discourage saving, promote debt-financed consumption, and encourage the diversion of scarce savings to yield-seeking financial speculation rather than productive investment, the backbone that supports a rising standard of living is broken. [..]

Meanwhile, financial repression by the Federal Reserve has held interest rates at zero, discouraging savings while encouraging and enabling households to go more deeply into debt. Various forms of deficit-financed government assistance and unemployment compensation have also been used to make up the shortfall, allowing consumption, and by extension, corporate revenues and profits, to be sustained. As long-term economic prospects have deteriorated, the illusion of prosperity has been maintained through soaring indebtedness, coupled with yield-seeking speculation in risky assets that has repeatedly (albeit not always immediately) been followed by crashes throughout history.

The U.S. Ponzi Economy is one where domestic workers are underemployed and consume beyond their means; household and government debt make up the shortfall; corporate profits expand to a record share of GDP as revenues are sustained by household and government deficits; local employment is replaced by outsourced goods and labor; companies refrain from productive investment, accumulate the debt of other companies and issue new debt of their own, primarily to repurchase their own shares at escalating valuations; our trading partners (particularly China and Japan) become our largest creditors and accumulate trillions of dollars of claims that can effectively be traded for U.S. property and future output; Fed policy encourages the yield-seeking diversion of scarce savings toward speculation in risky securities; and as with every Ponzi scheme, everyone is happy as long as nobody seeks to be repaid.

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Europe Will Never Be The Same After Scot Vote, Nor Will Euroscepticism (AEP)

Each of Europe’s aggrieved clans sent witnesses to Scotland for the vote. Some were nationalities seeking statehood, some more explosively seeking Anschluss with a mother country broken by victors’ cartography after the First World War. The flaming red and yellow Senyera of the Catalans flew over Edinburgh. The German-speakers of the Sud-Tirol sent a delegation, careful not to violate Italian law by speaking too loudly of reunion with Austria. The Corsicans turned up. Flemings who could not make it lit candles on the Scottish Saltire in Brussels. The Bosnian Serbs invoked the precedent, and so did Okinawan separatists in Japan as the chain reaction reached Asia. If the Okinawans get anywhere, their island will become a strategic hot potato, pitting China and Japan against each other on the world’s most dangerous fault line. Chinese nationalists are already combing through archives to bolster claims to the land dating back to the early Ming Dynasty in the 14th century.

Those descending on Scotland were not so much aiming to celebrate a Yes – though all wanted a Salmond triumph to make their point crushingly emphatic – but rather hoping to bottle the intoxicating air of democratic secession and take it home to countries were no such vote is allowed. What matters to them is the precedent set by this extraordinary episode. Scotland’s right to self-determination was recognised. The British state allowed events to run their course, vowing to accept the outcome. “It is a great lesson for democracy for the whole world. What we have seen in Scotland is the only way to settle conflicts,” said Artur Mas, the Catalan leader.

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Germans Would Shoot Down A ‘Helicopter Mario’ (CNBC)

The former Fed Governor Ben Bernanke’s speech on November 21, 2002 (“Deflation: Making Sure “It” Doesn’t Happen Here”) earned him the affectionate sobriquet “Helicopter Ben.” Building on the concepts of Milton Friedman, the Nobel Prize winning economist, that price inflation and price deflation were monetary phenomena, Bernanke espoused Friedman’s view that price deflation (the “It”) can be prevented and overcome by an aggressively expansionary monetary policy. Friedman metaphorically described the extreme form of such a policy as money being dropped on people from a helicopter. Bernanke came pretty close to the “helicopter money” with his virtually zero interest rate policies since late 2008, augmented by monthly purchases (better known as “quantitative easing”) of debt instruments issued by government-sponsored enterprises and including, later on, the U.S. Treasury securities.

Following that example, massive asset purchases are now being advised to Mario Draghi, President of the European Central Bank (ECB), on the view that the near-zero interest rates over the last three years have not prevented the euro area economy from a recessionary relapse and a steady deceleration of consumer prices to 0.3% in August from 1.3% in the same month of 2013. Before following asset purchase policies practiced by the Fed, I believe the ECB might wish to address the reasons why the transmission mechanism of the cheap and abundant loanable funds it keeps supplying to the banking system fail to find their way into strong business and consumer lending to support the euro area recovery.

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I agree, but not for the same reasons.

The Solution To Italy’s Woes Is Quite Simple – Leave The Euro (Telegraph)

No country epitomises the European economic malaise better than Italy. People often say that Italy cannot get into trouble because it is so rich. It is. Rich in natural beauty and historical treasures, with wonderful cities and beautiful countryside, lovely people, marvellous food and wine and an attractive way of life. But as a country it doesn’t really work. Some aspects of the problem have been there for ages; some are comparatively new. Before the war, much of Italy was poor. During the 1950s and 1960s, although Italian politics were chaotic and government was dysfunctional, as it industrialised the economy grew very fast and it climbed up the GDP leagues. In 1979, in respect of measured GDP, Italy even overtook the UK, an event that the Italians rejoiced in, calling it Il Sorpasso. The underlying problems were disguised. Although there was a tendency for inflation to be high, relief was always close at hand in the shape of a weaker lira. And the economy kept growing. But then it all started to go wrong.

The UK overtook Italy again in 1995 and the gap between the two economies has been widening ever since. To get the problem in perspective, all G7 countries except Italy and Japan have now exceeded the level of GDP they enjoyed before the Great Recession. Canada is 9pc above the 2008 level, while Italian GDP is still 9pc below. What’s more, the economy is contracting. This is not a bolt from the blue. Since the euro was formed in 1999 the annual average growth rate of the Italian economy has been only 0.3pc – in other words, next to nothing. Mind you, not all of this is due to the euro. There is a desperate need for reform yet the political system seems incapable of delivering what is needed. And Italy has been one of the prime sufferers from the rise of the emerging markets. Whereas Germany produces high-spec, large consumer durables and machinery, Italy has been specialised in precisely the low-to mid-spec consumer goods which China and others have come to produce more cheaply.

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Didn’t he put them there?

Sarkozy Says ‘Despair’ in France Reason for Return to Politics (Bloomberg)

Former President Nicolas Sarkozy said he couldn’t stay out of politics, noting that he has never seen such “despair” in France. “I have never seen such anger in this country, such a lack of perspective,” Sarkozy said on France2 television last night in his first interview since announcing on Sept. 19 that he’s in the running to lead his political party. “Being just a spectator would have been an act of abandonment.” The decision, which may be a stepping stone to the 2017 presidential race nomination, reversed his pledge in May 2012 that he was leaving politics after his defeat by Francois Hollande. His return comes as his UMP party has been riven by succession battles, and as Hollande finds himself France’s most unpopular president in more than half a century. Sarkozy said yesterday that he never lied to the French during his five years in office, saying, however, that Hollande has left behind him “a long list of lies.”

Sarkozy said “the French model has to be re-thought” to stop young people leaving the country to look for work. “When capital moves freely, if you raise taxes how can you expect to keep companies?” he said. “If companies’ margins go down, how can they hire? There are solutions, France is not condemned.” Sarkozy’s return to politics may pose a further hurdle to Hollande, 60, whose popularity rating stands at 13%, according to a recent poll. Opinion surveys show voters don’t want Hollande to run for re-election and he would stand little chance if he did. The French economy has barely grown during his two years in office, and the number of jobless has risen to a record 3.4 million from 2.9 million when he assumed office.

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All EU sinking.

EU Periphery Currencies Left at Draghi’s Mercy After Losses (Bloomberg)

Strategists divided on the outlook for eastern Europe’s currencies agree on one thing: Mario Draghi holds the key to their performance in the months ahead. Societe Generale SA and Commerzbank AG are bullish on Poland’s zloty and Hungary’s forint amid bets some of the 1 trillion euros ($1.3 trillion) of extra stimulus the European Central Bank has pledged to pump into the euro-region economy will head eastward in search of higher yields. Danske Bank A/S says ECB President Draghi will need to make more funds available for the currencies to strengthen.

An influx of ECB cash would support the zloty and forint at a time when the nations’ economies are being hurt by the prospect of deflation, the conflict in Ukraine and a stagnating euro region. Six of the eight worst-performing emerging-market currencies versus the dollar and euro this quarter are in eastern Europe. “For the currencies to show sustainable gains, the ECB would need to start aggressive, Federal Reserve-style quantitative easing, but that’s not what we expect,” Stanislava Pravdova, an emerging-markets analyst at Danske Bank in Copenhagen, said by phone on Sept. 18. “The current ECB stimulus won’t be enough.”

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ECB Member and Bundesbank Chief Weidmann Criticizes ECB Stimulus Plan (RTT)

Bundesbank President Jens Weidmann has criticized the European Central Bank’s latest measures to boost the euro area economy, such as the planned purchases of covered bonds and asset-backed securities and covered bonds, as well as the interest rate reduction this month. The latest decisions suggest a fundamental shift in strategy and a drastic change for the ECB’s monetary policy, Weidmann reportedly said in an interview to the German magazine Der Spiegel, published on Sunday. The majority of the Governing Council has signaled that monetary policy is ready to go very far and to enter new territory, he added. Last week, banks took up less-than-expected amount of funds at the ECB’s first targeted longer term refinancing operation, or TLTRO, damping the hopes of the success of the measure that was aimed to boost liquidity to help revive lending to small businesses and households.

Results of its first TLTRO showed that 255 banks were allotted EUR 82.60 billion, which was below the EUR 100 – EUR 150 billion predicted by analysts. With the poor take-up of TLTRO funds, the question remains whether the ECB’s proposed measure of purchasing covered bonds and ABS will help it to achieve its goal of expanding the central bank’s balance sheet to EUR 1 trillion. Buba’s chief warned that depending on the exact design of the ABS purchase-plan, banks could be exempt from risks at cost of taxpayers. Hence, it was important that the ECB should not take on no significant risks of individual banks or countries, he added. Further, Weidmann, who is also a Governing Council member, said the ECB should only buy low-risk securities, but he expressed concern regarding the adequate availability of such assets in the market to meet the central bank’s plan targets.

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Funny.

Short Sellers Target China From The Shadows (Reuters)

Short-sellers who profit from stock price declines have resumed targeting Chinese companies after a three-year lull, but many of the researchers who instigate the strategy are now cloaked in anonymity, shielding themselves from angry companies and Beijing’s counter-investigations. Three reports published this month separately accused three Chinese companies – Tianhe Chemicals, 21Vianet and Shenguan Holdings – of business or accounting fraud. All three companies said the allegations were baseless but their shares were hit by a wave of short-selling by clients of the research firms and then by other investors as the reports were made public. The reports were written by research firms that did not publicly disclose names of research analysts or even a phone number. In the last wave of short-selling that peaked in 2011 and wiped more than $21 billion off the market value of Chinese companies listed in the United States, the researchers advocating short-selling were mostly public.

Carson Block of Muddy Waters, one of the most prominent short sellers, openly accused several Chinese companies of accounting fraud. Block said in 2012, according to several media reports, that he moved to California from Hong Kong because he had received death threats. “If you have researchers who are based in China, it makes sense to operate anonymously because some of the mainland Chinese companies have a history now of retaliating against people who do negative research,” said short-seller Jon Carnes in an interview with Reuters. Carnes’s research firm Alfred Little has the best track record among short sellers, according to data compiled by Activists Shorts Research that shows the share performances of companies it targeted. Carnes has said he was threatened by representatives of one of the companies he reported on in 2011. His researcher Kun Huang was jailed in China for two years and then deported.

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Yes we do.

We Are Living In A State Of Keynesian “Bliss” (Rebooting Capitalism)

John Maynard Keynes is the grandfather of all modern mainstream economic thought. Richard Nixon was famously attributed as saying, “We are all Keynesians now” whilst slamming shut the gold window and launching the era of global fiat money. (Nixon didn’t really say this, it was actually Milton Friedman) The phrase came back in vogue in the aftermath of the Global Financial Crisis when neo-Keynesians like Paul Krugman called for, and got, massive government and Central Bank intervention into the global economy in order to “save it”. Back in 1930, Keynes looked out into the future and saw that with the proper management of the economy, monetary policy and the like, the world could attain a type of utopian stasis:

Keynes, working in 1930, expected growth to come to an end within two to three generations, and the economy to plateau. He referred to this imaginary state of equilibrium as “bliss”.
– Nick Gogerty, “The Nature of Value”

In his essay “The Economic Possibilities of Our Grandchildren” Keyne’s imagined the big challenges of our days in the 21st century would be what to do with all that extra leisure time and how to achieve fulfillment since by now the quest for wealth and material gain would become more or less unfashionable or even obsolete. “Thus for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.”

Granted, Keynes did say this would happen if mankind avoided any calamitous wars and if there was no appreciable increase in population. Two more flawed base assumptions there could not have been. But this hasn’t stopped the world’s conventional economists, not to mention the political and policy-making class (a.k.a The Overlords) from embracing the uniquely Keynesian notion that if you just know which macro-economic levers to pull, and how much and for how long, and when to do it; then you can get just the right amounts of: money quantity, money velocity, interest rates, nominal inflation, savings rates, capital expenditures, unemployment levels and consumer spending to make Everything Just Right All The Time without ever having so much as a downtick or a speed-wobble, ever again.

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Big cheat.

Merkel’s Taste for Coal to Upset $130 Billion German Green Drive (Bloomberg)

When Germany kicked off its journey toward a system harnessing energy from wind and sun back in 2000, the goal was to protect the environment and build out climate-friendly power generation. More than a decade later, Europe’s biggest economy is on course to miss its 2020 climate targets and greenhouse-gas emissions from power plants are virtually unchanged. Germany used coal, the dirtiest fuel, to generate 45% of its power last year, the highest level since 2007, as Chancellor Angela Merkel is phasing out nuclear in the wake of the Fukushima atomic accident in Japan three years ago. The transition, dubbed the Energiewende, has so far added more than €100 billion ($134 billion) to the power bills of households, shop owners and small factories as renewable energy met a record 25% of demand last year. RWE AG, the nation’s biggest power producer, last year reported its first loss since 1949 as utility margins are getting squeezed because laws give green power priority to the grids.

“Despite the massive expansion of renewable energies, achieving key targets for the energy transition and climate protection by 2020 is no longer realistic,” said Thomas Vahlenkamp, a director at McKinsey, and an adviser to the industry for 21 years. “The government needs to improve the Energiewende so that the current disappointment doesn’t lead to permanent failure.” While new supplies sent wholesale power prices to their lowest level in nine years, consumer rates are soaring to fund the new plants. Germany’s 40 million households now pay more for electricity than any other country in Europe except Denmark, according to Eurostat in Brussels. A decade ago, Belgium, the Netherlands and Italy all had higher bills than Germany. “Politicians are often trying to kid us,” Claudia Fabinger, a 65-year-old self-employed marketing manager, said in between shopping for groceries on Leipziger Strasse in Frankfurt. “Our power bills keep rising and rising to fund clean energies; on the other hand, we are still polluting the air with old coal plants.”

[..] … the burning of coal rose 68% from 2010 to provide a steady supply of electricity. Fossil-based power plants, including those fired by hard coal and lignite, are “indispensable for the foreseeable future,” reads the agreement between Merkel’s conservatives and the Social Democratic Party that helped form her current government. “The ‘black gold’ is still an important factor in the energy generation mix,” the government says on its website. “The share of renewable energy is rising and is at nearly 30% now, but the remaining 70% is getting dirtier and dirtier,” Carsten Thomsen-Bendixen, a spokesman at EON, Germany’s biggest utility, said. “That’s an obvious flaw in the system that needs to be put to an end.” “Yes, we are burning more coal; on the other hand it is also true that Germany still plays a leading role when it comes to emission reductions in Europe,” Beate Braams, a spokeswoman for the German Economics and Energy Ministry, said.

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No.2!

China Beats Europe in Per-Capita Emissions for First Time (Bloomberg)

China surpassed the European Union in pollution levels per capita for the first time last year, propelling to a record the worldwide greenhouse gas emissions that are blamed for climate change. The findings led by scientists at two British universities show the scale of the challenge of reining in the emissions damaging the climate. They estimate that humans already have spewed into the atmosphere two-thirds of the fossil fuel emissions allowable under scenarios that avoid irreversible changes to the planet. If pollution continues at the current rate, the limit for carbon will be reached in 30 years, the scientists concluded in a report issued on the eve of a major United Nations summit designed to step up the fight against climate change.

“We are nowhere near the commitments needed to stay below 2 degrees Celsius of climate change, a level that will be hard to reach for any country, including rich nations,” said Corinne Le Quere, co-author of the report and a director of the Tyndall Center for Climate Change Research at the University of East Anglia, England. “CO2 growth now is much faster than it was in the 1990s, and we’re not delivering the improvements in carbon intensity we anticipated 10 years ago.” Each person in China produced 7.2 tons of carbon dioxide on average compared with 6.8 tons in Europe and 1.9 tons in India in 2013, according to the study by the Tyndall Center and the University of Exeter’s College of Mathematics and Physical Sciences.

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