emissions Archives - Page 2 of 3 - The Automatic Earth

And you can say good on the WaPo for publishing this, but they have thrown so much echo chamber stuff out there over the past year, this doesn’t make that right.

• Clinton Campaign, DNC Paid For Research That Led To Russia Dossier (WaPo)

The Hillary Clinton campaign and the Democratic National Committee helped fund research that resulted in a now-famous dossier containing allegations about President Trump’s connections to Russia and possible coordination between his campaign and the Kremlin, people familiar with the matter said. Marc E. Elias, a lawyer representing the Clinton campaign and the DNC, retained Fusion GPS, a Washington firm, to conduct the research. After that, Fusion GPS hired dossier author Christopher Steele, a former British intelligence officer with ties to the FBI and the U.S. intelligence community, according to those people, who spoke on the condition of anonymity. Elias and his law firm, Perkins Coie, retained the company in April 2016 on behalf of the Clinton campaign and the DNC.

Before that agreement, Fusion GPS’s research into Trump was funded by an unknown Republican client during the GOP primary. The Clinton campaign and the DNC, through the law firm, continued to fund Fusion GPS’s research through the end of October 2016, days before Election Day. Fusion GPS gave Steele’s reports and other research documents to Elias, the people familiar with the matter said. It is unclear how or how much of that information was shared with the campaign and the DNC and who in those organizations was aware of the roles of Fusion GPS and Steele. One person close to the matter said the campaign and the DNC were not informed by the law firm of Fusion GPS’s role.

The dossier has become a lightning rod amid the intensifying investigations into the Trump campaign’s possible connections to Russia. Some congressional Republican leaders have spent months trying to discredit Fusion GPS and Steele and tried to determine the identity of the Democrat or organization that paid for the dossier. Trump tweeted as recently as Saturday that the Justice Department and FBI should “immediately release who paid for it.”

“Mathematically, as long as China runs surpluses, foreign holding of yuan will not match foreign holding of dollars.”

• Gold-Backed Petro-Yuan Silliness: Reserve Currency Curse? (Mish)

A massive amount of hype is spreading regarding China’s alleged ambitions to dethrone the dollar. The story this time involves China’s plan is to price oil in yuan using a gold-backed futures contract. Even if that were true, the impact would be zero. Nonetheless, CNBC is now in on the hype. CNBC reports China has grand ambitions to dethrone the dollar. It may make a powerful move this year. Yuan pricing and clearing of crude oil futures is the “beginning” of a broader strategic push “to support yuan pricing and clearing in commodities futures trading,” Pan Gongsheng, director of the State Administration of Foreign Exchange, said last month. To support the new benchmark, China has opened more than 6,000 trading accounts for the crude futures contract, Reuters reported in July. Yawn.

Jeff Brown, president at FGE, an international energy consultant has a more accurate assessment. “Most counterparties will not want anything to do with this contract as it adds in a layer of cost and risk. They also don’t like contracts with only a few dominant buyers or sellers and a government role.” Repeat after me: It’s meaningless what currency oil is quoted in. Once you understand the inherent truth in that statement, you immediately laugh at headlines like that presented on CNBC. For those who do not understand the simple logic, consider the fact that one does not need to have dollars to buy oil. Currencies are fungible. In less than a second, and at ant time day or night, one can convert any currency to any other currency. If countries want to hold dollars they can. If one wants to hold Swiss Francs, Euros, or Yen they can as well. Oil likely trades in all of those currencies right now.

Countries accumulate US dollars because the US runs a trade deficit, and those dollars will eventually return to the US. If China wants to assume the role of having the world’s reserve currency, something I highly doubt actually, it will need to have a free-floating currency and the world’s largest bond market . China will need property rights protection and a global willingness of countries to hold the yuan. To assume the role of China would have to be willing to run trade deficits instead of seeking trade surpluses via subsidized exports. Please read that last sentence over and over again until it sinks in. Mathematically, whether they like it or not, China and Japan have massive US dollar reserves as a result of cumulated trade surpluses. Mathematically, as long as China runs surpluses, foreign holding of yuan will not match foreign holding of dollars.

More on that cesspool. Nothing to do with ideas, or convictions, or voters. Just power.

• Do Democrats Really Need Wall Street? (BM)

Halloween is coming and fear mongering seems to be the order of the day — not just on the part of Republicans, but apparently no less so on the part of “centrist” and conservative Democrats who are expressing growing anxiety about offending big donors who see politics not as the pursuit of justice but as the pursuit of their interests. Douglas Schoen, said to have been Bill Clinton’s favorite pollster during his presidency, has taken to the op-ed page of The New York Times to warn center-right party members and friends that ‘all Hell will break loose’ if the Democrats embrace a platform promising “wealth redistribution through higher taxes and Medicare for all” and utilizing democracy to challenge the power of money.

Don’t be bewitched by the fantasies of folks such as Sens. Bernie Sanders (I-VT) and Elizabeth Warren (D-MA), Schoen counsels, for if you do, the American financial elite will not keep the party’s “coffers full.” Indeed, he argues, “Democrats should strengthen their ties to Wall Street,” for “America is a center-right, pro-capitalist nation.” “Memories in politics are short,” Schoen wrote. And he wrings his hands over the amnesia that robs people of remembering that the center-right assembled under Bill Clinton enabled him to balance the budget, limit government and protect essential programs “that make up the social safety net.” Leaving behind “that version of liberalism,” Schoen writes, has cost Democrats several elections. He even claims that Hillary Clinton lost in Michigan and Wisconsin in 2016 because she “lurched to the left.”

Yes, memories are short indeed, but they are made even shorter by the likes of Schoen. The horrors he prophesies make it clear that he does not want us to remember. He wants us to forget, and therefore to tame our aspirations for social democracy and an economy that serves everyday people instead of the 1%. Schoen wants us to forget that Hillary Clinton lost the Upper Midwest not because of her supposed “lurch to the left,” but because many working people could not erase from their minds her lavishly paid Wall Street engagements and her adamant refusal to “release the transcripts” of those flattering speeches to the bankers. To many a Rust Belt voter she was the “Goldman Sachs” candidate, something Schoen would consign to the memory hole.

You will see this wherever a housing bubble rules the economy.

• 4 In 10 Canadians Can Not Cover Basic Expenses Without Adding More Debt (ZH)

[..] BNN reported that a survey released yesterday found that almost half of Canadian households don’t feel financially prepared for further interest rate increases. According to the Ipsos poll, conducted on behalf of MNP, 40% of respondents said they fear ending up in financial trouble if rates go up much higher, with one-in-three already feeling the impact of higher rates. “It’s clear that people are nowhere near prepared for a higher rate environment,” MNP President Grant Bazian said in a release. “The good news is that there seems to be at least the acknowledgement now that rates are going to climb which might make people reassess their spending habits – especially using credit.”

It gets worse: 42% of respondents said they don’t think they can cover basic expenses over the next year without going deeper into more debt. The same number said they’re within $200 of not being able to cover monthly expenses. This familiar “ponzi state” means that more than 4 in 10 Canadians effectively have no savings, which is ominously similar to US trends: as we reported earlier this year, a quarter of American adults can’t pay all their monthly bills, while 44% have less than $400 in cash. The Ipsos poll also found 70% of Canadians said they will take a more cautious approach to spending amid higher interest rates, which may be enough to choke off any economic growth and make the Canadian rate hikes a “one and one” affair.

Concern about rising rates is greater among lower-income Canadians – those who tend to rely on credit cards – according to the survey, as opposed to homeowners who said they are a bit more optimistic they can absorb a rate increase of… a whopping 1%. Geographically, over half of Albertans say they’ll be more concerned about paying off debt if interest rates rise, which is more than those in British Columbia and Quebec, where less than half said they are worried. Meanwhile, Ontarians are the least concerned (44 per cent) about their ability to pay down their debts.

But .. but .. Draghi’s Italian… At one point, he wanted to be its PM.

• Italy Faces Worst Shock In Europe As ECB Prepares To Taper Bond Buys (MW)

The entire eurozone will face a crucial test when the European Central Bank begins to wind down its asset-buying program, but one country stands to lose the most as the monetary punch bowl is taken away: Italy. Saddled with mountains of debt and a looming election, the southern European nation will likely struggle to find buyers for its government bonds when the European Central Bank stops snapping up Italian debt over the coming years, according to Christian Schulz, European economist at Citigroup. That means yields are set to rise, potentially strangling the country’s nascent recovery. “It comes at a difficult time. At the moment political uncertainty is rising and the ECB pulling out of the market just makes [the end of quantitative easing] so much harder on Italy than other countries,” Schulz said.

“They have a huge pile of debt, which makes the country much more sensitive to interest rate changes than countries with smaller piles of debt,” he said. Italy has particularly benefited from the ECB’s quantitative easing program that began in 2015, as it’s been one of the biggest bond issuers in the currency union. The central bank has purchased 300 billion euros ($352.9 billion) of Italian bonds under the program, which is more than three times the net bond issuance for the country during that period, according to Schulz. That means the ECB has not only bought pretty much all new bonds issued in Italy since 2015, but also existing bonds from other investors. The ECB is widely expected to announce some sort of tapering at its monetary policy setting meeting on Thursday, and most economists expect the asset purchases to end altogether in late 2018.

” Schaeuble said Greece had decided to cut pensions instead of taxing wealthy ship-owners..” Not true.

• Don’t Blame Others For Your Problems, Germany’s Schaeuble Tells Greece (R.)

Outgoing German Finance Minister Wolfgang Schaeuble urged debt-wracked Greece to stop blaming others for its financial woes and stick to a reform agenda instead of relying on debt relief. Schaeuble, a leading advocate of Greece’s tough austerity programs and one of Germany’s most powerful politicians, was elected speaker of its lower house of parliament on Tuesday. The 75-year-old lawyer, whose no-nonsense approach on austerity made him a popular hate figure among Greeks, told Greek Skai TV that Athens must take responsibility for its fiscal difficulties and act on them. “When you ask others for loans, you cannot insult them for granting the loans. It doesn’t make sense. Greece’s problems are Greece’s problems,” the conservative Christian Democrat said in an interview aired in Greece on Tuesday.

Asked if he ever suggested a “time out” on Greece’s participation in the euro zone, he said he had discussed the option “as a currency devaluation tool” with a former finance minister, who rejected it saying Greece would implement reforms. Schaeuble said he warned Prime Minister Alexis Tsipras while the latter was still in opposition in 2014 that the Greek politician would not be able to meet his pre-election platform of zero austerity. Tsipras, Schaeuble said, told him he wanted to remain in the euro without any conditions. “I responded that I wished, for his sake, that he didn’t win that election because he wouldn’t be able to keep his promises,” Schaeuble said in comments translated from German to Greek.

Seven months after he was elected, Tsipras was forced to cave into lenders’ demands for more belt-tightening. He was re-elected saying the bailout, the country’s third since 2010, was a product of blackmail. Greece is eyeing a bailout exit in 2018. Asked if the Greek case had become a personal issue for him, Schaeuble said: “Obviously in Greece I was a bogeyman, or at least for some media.” Politicians, he said, had a habit of using lenders as an excuse to impose cutbacks. “That saddened me somewhat, because nobody ever wanted to harm Greece,” he said. By way of example, Schaeuble said Greece had decided to cut pensions instead of taxing wealthy ship-owners – contrary to what the leftist Syriza party promised before elections. “This wasn’t a German parliament decision, it was a Greek government decision,” he said.

Anything to say on this, Wolfgang? Where I come from this is called ordinary blackmail.

• What Happened To The €8 Billion Europe Took From Greece? (EN)

In 2012 with Greece on the verge of bankruptcy, fellow Eurozone states rallied round to rescue one of their own. Part of the bailout package they agreed was to use almost 27 billion euros to buy up Greek debt to prevent a vicious circle that would see the country facing more and more expensive borrowing costs. At the time, the countries agreed that they should not profit from this action and that the interest paid to them by Athens linked to the bonds they had bought should be returned. To this day, that interest amounts to almost €8 billion (More precisely €7,838,000,000, according to an email sent by EU finance commissioner Pierre Muscovici to MEPs). Some of this money has been sent back to Greece but much of it remains in the hands of other European countries. And they seem determined not to reveal how much.

“For legal reasons, it’s not possible for member states to declare the amounts paid by their central banks to Greece,” said a source at the European Commission, citing the principle that central banks should not disclose details about their investments to avoid unduly influencing the behaviour of markets. For once, it seems, that Europe is united on the issue – Ireland, Italy, Spain and even Greece all refused to disclose how much had been returned and how much they were still holding. In Luxembourg, the press revealed that the government had handed back to Greece €28.3 million and was committed to returning the entire €40.2 million of interest it had accrued.

According to Euronews’ calculations, the Bundesbank, due to its position as the largest of Europe’s central banks earned €2 billion of interest since 2012 on the debt they purchased from Greece. France took €1.58 billion and Italy €1.37 billion. Documents obtained by Euronews confirm the figure for France, officials from other countries would not confirm or deny the amounts by the time this story was published.

Under the Securities Market Programme, Eurozone central banks bought up Greek government bonds, pushing up the prices for that debt and thereby lowering the interest rates Athens needed to pay to borrow. This offset to a degree the impact of market fears about the country’s economy which had obliged the government to pay significantly higher rates to secure the money it needed to keep operating. As a result of this programme, the countries participating received interest from Greece on the bonds they had purchased.

It was this money that they agreed to return under the 2012 bailout deal. When Alexis Tsipras swept to power in 2015 and rejected a proposed deal to extend the bailout, Eurozone finance ministers agreed to freeze these payments, having returned €4.3 billion relating to the debt buyup and a separate programme known as ANFA. The withholding of this money, according to Christopher Dembik, an economist at Saxo Bank, serves as a “kind of punishment” combined with a “means to pressure” Greece to fulfill its bailout obligations.

What Greece moves close to the US.

• Turkey Says Doesn’t Want Greece To Become ‘Safe Haven’ For Coup Plotters (R.)

Turkish Foreign Minister Mevlut Cavusoglu urged Greece on Tuesday to not become a “safe haven” for plotters of last year’s coup attempt, citing the 995 people who have applied for asylum since the failed putsch. Speaking at a joint news conference with his Greek counterpart, Nikos Kotzias, Cavusoglu said asylum seekers needed to be evaluated to determine those linked to the network of U.S.-based cleric Fethullah Gulen, blamed by Turkey for masterminding the putsch. “We would not want our neighbor Greece, with whom we are improving our ties, to be a safe haven for Gulenists. We believe these applications will be evaluated meticulously and that traitors will not be given credit,” Cavusoglu said.

Responding to Cavusoglu’s comments, Kotzias said the decisions on asylum seekers were made by the Greek judiciary and had to be respected even if “it doesn’t please some”. Relations between Turkey and Greece were further strained in May after a Greek court ruled to not extradite eight Turkish soldiers who fled to Greece following last year’s coup attempt. Turkey alleges the men, who fled to Greece in a military helicopter as the July coup unfolded, were involved in efforts to overthrow President Tayyip Erdogan and has repeatedly demanded they be sent back. Greek courts have blocked two extradition requests by Ankara, drawing an angry rebuke from Turkey and highlighting the tense relations between the NATO allies, who remain at odds over issues from territorial disputes to ethnically split Cyprus.

Lies, threats and ghostwriting.

• Monsanto Faces Blowback Over Cancer Cover-Up (Spiegel)

Some companies’ reputations are so poor that the public already has low expectations when it comes to their ethics and business practices. That doesn’t make it any less shocking when the accusations against them are confirmed in black and white. Agricultural chemicals giant Monsanto is under fire because the company’s herbicide, Roundup (active ingredient: glyphosate), is suspected of being carcinogenic. Permission to sell the chemical in the European Union expires on December 15 with member states set to decide on Wednesday whether to renew it for another 10 years. And now, the longstanding dispute about glyphosate has been brought to a head by the release of explosive documents. Monsanto’s strategies for whitewashing glyphosate have been revealed in internal e-mails, presentations and memos.

Even worse, these “Monsanto Papers” suggest that the company doesn’t even seem to know whether Roundup is harmless to people’s health. “You cannot say that Roundup is not a carcinogen,” Monsanto toxicologist Donna Farmer wrote in one of the emails. “We have not done the necessary testing on the formulation to make that statement.” The email, sent on Nov. 22, 2003, is one of more than 100 documents that a court in the United States ordered Monsanto to provide as evidence after about 2,000 plaintiffs demanded compensation from Monsanto in class-action suits. They claim that Roundup has caused non-Hodgkin’s lymphoma, a form of lymph node cancer, in them or members of their family.

The documents suggest the company concealed risks, making their publication a disaster for the company. The matter is also likely to be a topic of discussion at Bayer, the German chemical company in the process of acquiring Monsanto. “The Monsanto Papers tell an alarming story of ghostwriting, scientific manipulation and the withholding of information,” says Michael Baum, a partner in the law firm of Baum, Hedlund, Aristei & Goldman, which is bringing one of the US class actions. According to Baum, Monsanto used the same strategies as the tobacco industry: “creating doubt, attacking people, doing ghostwriting.”

First of multiple steps. The European Commission has totally different ideas.

• EU Parliament Votes To Ban Controversial Weedkiller Glyphosate By 2022 (AFP)

The European Parliament Tuesday called for the controversial weedkiller glyphosate to be banned by 2022 amid fears it causes cancer, a day before EU states vote on whether to renew its licence. MEPs approved a resolution which is not binding but will add fresh pressure on the European Commission, the bloc’s executive arm, which has recommended the licence for the herbicide be renewed for 10 years. Glyphosate critics, led by environmental campaigners Greenpeace, are calling for an outright ban in Europe and on Monday activists handed the EU a petition signed by more than 1.3 million people backing such a move.

Experts from the EU’s 28 member states are due to vote on the commission recommendation on Wednesday, just as a row escalates over claims that US agro giant Monsanto unduly influenced research into its weedkiller’s safety. MEPs criticised the commission’s proposal, saying it “fails to ensure a high level of protection of both human and animal health and the environment (and) fails to apply the precautionary principle”. They called for a halt to non-professional use of glyphosate when its licence runs out in December 15 and for its use to end near public parks and playgrounds. Opponents of glyphosate, used in Monsanto’s best-selling herbicide Roundup, point to a 2015 study by the World Health Organization’s (WHO) International Agency for Research on Cancer that concluded it was “probably carcinogenic”.

Madrid better be careful.

• Spain’s Government Prepared To ‘Discipline Disobedient Catalans’ (CNBC)

Spain’s central government is prepared to discipline Catalan citizens who chose to disobey direct rule from Madrid, the Spanish government’s official representative in Catalonia told CNBC. “The Spanish government is going to have the responsibility of taking decisions of a disciplinary nature if there is a rejection, by any functionaries, of any of the orders that they receive,” Enric Millo told CNBC on Monday, according to a translation. Prime Minister Mariano Rajoy invoked unprecedented constitutional powers on Saturday, vowing to curtail some of the freedoms of Catalonia’s parliament, sack some of its political players and force regional elections within six months. A vote in the national Senate to implement this direct rule is scheduled for Friday.

In response, the far-left CUP party — a key supporter of Catalonia’s pro-independence minority government in the regional parliament — described Madrid’s actions as an aggression against all Catalans. The secessionist group also urged Catalan citizens to engage in “massive civil disobedience.” Millo said he was hopeful the “large majority” of public servants based in the northeast of Spain would resist calls from separatist leaders to disobey the constitution. However, when he was asked what preparations had been made for those who ignored Madrid’s direct rule, Millo said that it would be the politicians who had decided to break with “democratic legality” that would be dealt with first. “These people will resign … And therefore, although they may not agree, they will not have any type of responsibility, validity, nor any type of authorization in any institutional decision. They will be left without any responsibilities,” he said.

Colonialism 2.0

• US Military Is Conducting Secret Missions All Over Africa (Vice)

U.S. troops are now conducting 3,500 exercises, programs, and engagements per year, an average of nearly 10 missions per day, on the African continent, according to the U.S. military’s top commander for Africa, General Thomas Waldhauser. The latest numbers, which the Pentagon confirmed to VICE News, represent a dramatic increase in U.S. military activity throughout Africa in the past decade, and the latest signal of America’s deepening and complicated ties on the continent. With the White House and the Pentagon facing questions about an Oct. 4 ambush in Niger in which four U.S. Special Forces soldiers were killed, Secretary of Defense James Mattis reportedly indicated to two senior members of the Senate Armed Services Committee Friday that these numbers are only likely to increase as the U.S. military shifts even greater attention to counterterrorism in Africa.

“You’re going to see more actions in Africa, not less,” said Sen. Lindsey Graham after the briefing. “You’re going to see more aggression by the United States toward our enemies, not less; you’re going to have decisions being made not in the White House but out in the field.” But the U.S. military has already seen significant action in Africa, where its growth has been sudden and explosive. When U.S. Africa Command, the umbrella organization for U.S. military operations on the continent, first became operational in 2008, it inherited 172 missions, activities, programs, and exercises from other combatant commands. Five years in, that number shot up to 546. Today’s figure of 3,500 marks an astounding 1,900 percent increase since the command was activated less than a decade ago, and suggests a major expansion of U.S. military activities on the African continent.

But…

• Yes, The US Leads All Countries In Reducing Carbon Emissions (Rapier)

Last week, in an interview with Fox News, Environmental Protection Agency Administrator Scott Pruitt claimed: “We are leading the nation – excuse me – the world with respect to our CO2 footprint in reductions.” The Washington Post fact-checked this claim and rated it “Three Pinocchios,” which means they rate the claim mostly false. They further wrote that Pruitt’s usage of data appeared to be a “deliberate effort to mislead the public.” I agree that this is a nuanced issue, but the data mostly support Pruitt’s claim. According to the 2017 BP Statistical Review of World Energy, since 2005 annual U.S. carbon dioxide emissions have declined by 758 million metric tons. That is by far the largest decline of any country in the world over that timespan and is nearly as large as the 770 million metric ton decline for the entire EU.

By comparison, the second largest decline during that period was registered by the United Kingdom, which reported a 170 million metric ton decline. At the same time, China’s carbon dioxide emissions grew by 3 billion metric tons, and India’s grew by 1 billion metric tons. Thus, I don’t think it’s the least bit misleading to claim that the U.S. is leading the world in reducing carbon dioxide emissions. The Washington Post gets into per capita emissions, and indeed despite the decline, U.S. per capita emissions are still among the highest in the world. However, the Washington Post story claimed: “The United States may have had the largest decrease in carbon emissions, but it is still the largest per capita emitter.” That’s not accurate either. According to World Bank data, U.S. per capita carbon dioxide emissions rank 11th among countries.

So, we are not the largest per capita emitter, but we do emit 2.2 times as much on a per capita basis as China. But, China has 4.3 times as many people, and that matters from an overall emissions perspective. China’s lower per capita carbon dioxide emissions are more than offset by its greater population, so China emits over 70% more carbon dioxide annually than the U.S. The story quoted Pruitt a second time: “We have reduced our CO2 footprint by over 18%, almost 20%, from 2000 to 2014.” The Post also disputes this claim, citing EPA numbers that stated “energy-related CO2 emissions” have fallen by 7.5% since 2000. I am not sure why anyone is using numbers from 2000, as U.S. carbon dioxide emissions continued to rise until 2005. That’s when they began to fall.

Can’t say that makes me feel happy.

• Global Wine Output Hits 50-Year Low (AFP)

Worldwide wine production tumbled 8.2% this year to hit a 50-year low due to unfavourable climate conditions, the International Organisation of Vine and Wine (OIV) said Tuesday. The total output of 246.7 million hectolitres was due in large part to steep drops in the top three wine producing countries: Italy, France and Spain. “This drop is consecutive to climate hazards, which affected the main producing countries, particularly in Europe,” said the Paris-based OIV, an intergovernmental organisation that provides scientific and technical advice on vines and wine. In Italy production slumped 23% to 39.3 mhl, while in France the drop was 19% to 36.7 mhl. Production in Spain fell 15% to 33.5 mhl.

Symbol of all our troubles as a species.

• Ancient Amazon Tribe Vow To Defend Their Territory Against Mining (AFP)

They appear silently, seemingly from nowhere: a dozen figures, naked except for bright red loincloths, blocking the dirt road. These are the Waiapi, an ancient tribe living in Brazil’s Amazon rainforest but now fearing invasion by international mining companies. Leading AFP reporters to a tiny settlement of palm-thatched huts hidden in foliage, the tribesmen streaked in red and black dye vow to defend their territory. They brandish six-foot (two-meter) bows and arrows to reinforce the point. “We’ll keep fighting,” says Tapayona Waiapi, 36, in the settlement called Pinoty. “When the companies come we’ll keep resisting. If the Brazilian government sends soldiers to kill people, we’ll keep resisting until the last of us is dead.”

The Waiapi indigenous reserve is in pristine rainforest near the eastern end of the Amazon river. It is part of a much larger conservation zone called Renca, covering an area the size of Switzerland. Surrounded by rivers and towering trees, the tribe operates almost entirely according to its own laws, with a way of life at times closer to the Stone Age than the 21st century. Yet modern Brazil is barely a few hours’ drive away. And now the center-right government is pushing to open Renca to international mining companies who covet the rich deposits of gold and other metals hidden under the sea of green.

Debt Rattle September 19 2016

Sep 192016

September 19, 2016 Posted by Raúl Ilargi Meijer at 9:23 am Finance Tagged with: Bakken, BIS, bubble, China, emissions, Le Pen, Merkel, OPEC, refugees, VW, WaPo Comments Off

Jack Delano Chicago & North Western Railroad locomotive shops 1942

• BIS Flashes Red Alert For a Banking Crisis in China (AEP)

• BIS Warning Indicator for China Banking Stress Climbs to Record (BBG)

• China Relies on Housing Bubble to Keep GDP Numbers Elevated (CNBC)

• Chinese Yuan Borrowing Rate Hits Second Highest Level On Record (R.)

• Oil Investors Flee as OPEC Freeze Hopes Face Supply Reality (BBG)

• The Death Of The Bakken Field Has Begun (SRSrocco)

• Canada To Impose Nationwide Carbon Price (R.)

• 1000s of VW Lawsuits To Be Filed By The End Of Monday, All in Print (BBG)

• Many Car Brands Emit More Pollution Than Volkswagen (G.)

• The Ongoing Collapse of Economics (Caswell)

• WaPo 1st Paper to Call for Prosecution of its Own Source -After Pulitzer- (GG)

• ‘People’s Candidate’ Le Pen Vows To Free France From EU Yoke (AFP)

• Merkel Suffers Drubbing In Berlin Vote Due To Migrant Angst (R.)

• Why Won’t The World Tackle The Refugee Crisis? (Observer)

“..China’s “credit to GDP gap” has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution”

• BIS Flashes Red Alert For a Banking Crisis in China (AEP)

China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog. A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late. The Bank for International Settlements warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences. It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed. Indicators for what would happen to debt service costs if interest rates rose 250 basis points are also well over the safety line. China’s total credit reached 255pc of GDP at the end of last year, a jump of 107 percentage points over eight years. This is an extremely high level for a developing economy and is still rising fast.

Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP, and it is this that is keeping global regulators awake at night. The BIS said there are ample reasons to worry about the health of world’s financial system. Zero interest rates and bond purchases by central banks have left markets acutely sensitive to the slightest shift in monetary policy, or even a hint of a shift. “There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull,” said Claudio Borio, the BIS’s chief economist. “This explains the nagging question of whether market prices fully reflect the risks ahead.”

really? “..the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis.”

• BIS Warning Indicator for China Banking Stress Climbs to Record (BBG)

A warning indicator for banking stress rose to a record in China in the first quarter, underscoring risks to the nation and the world from a rapid build-up of Chinese corporate debt. China’s credit-to-GDP “gap” stood at 30.1%, the highest for the nation in data stretching back to 1995, according to the Basel-based Bank for International Settlements. Readings above 10% signal elevated risks of banking strains, according to the BIS, which released the latest data on Sunday. The gap is the difference between the credit-to-GDP ratio and its long-term trend. A blow-out in the number can signal that credit growth is excessive and a financial bust may be looming. Some analysts argue that China will need to recapitalise its banks in coming years because of bad loans that may be higher than the official numbers.

At the same time, the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis. In a financial stability report published in June, China’s central bank said lenders would be able to maintain relatively high capital levels even if hit by severe shocks. While the BIS says that credit-to-GDP gaps exceeded 10% in the three years preceding the majority of financial crises, China has remained above that threshold for most of the period since mid-2009, with no crisis so far. In the first quarter, China’s gap exceeded the levels of 41 other nations and the euro area. In the U.S., readings exceeded 10% in the lead up to the global financial crisis.

“.. the importance of the property sector to China’s overall economic health, posed a challenge. It contributes up to one-third of GDP..”

• China Relies on Housing Bubble to Keep GDP Numbers Elevated (CNBC)

Policymakers in China were facing the dilemma of driving growth while preventing the property market from overheating, an economist said Monday as prices in the world’s second largest economy jumped in August. Average new home prices in China’s 70 major cities rose 9.2% in August from a year earlier, accelerating from a 7.9% increase in July, an official survey from the National Bureau of Statistics showed Monday. Home prices rose 1.5% from July. But according to Donna Kwok, senior China economist at UBS, the importance of the property sector to China’s overall economic health, posed a challenge. It contributes up to one-third of GDP as its effects filter through to related businesses such as heavy industries and raw materials.

“On the one hand, they need to temper the signs of froth that we are seeing in the higher-tier cities. On the other hand, they are still having to rely on the (market’s) contribution to headline GDP growth that property investment as the whole—which is still reliant on the lower-tier city recovery—generates…so that 6.5 to 7% annual growth target is still met for this year,” Kwok told CNBC’s “Street Signs.” The data showed prices in the first-tier cities of Shanghai and Beijing prices rose 31.2% and 23.5%, respectively. Home prices in the second tier cities of Xiamen and Hefei saw the larges price gains, rising 43.8 percent and 40.3 percent respectively, from a year ago.

Liquidity.

• Chinese Yuan Borrowing Rate Hits Second Highest Level On Record (R.)

Hong Kong’s overnight yuan borrowing rate was fixed at the highest level in eight months on Monday after the long holiday weekend. China’s financial markets were closed from Thursday for the Mid-Autumn Festival, and Hong Kong’s markets were shut on Friday. The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), set by the city’s Treasury Markets Association (TMA), was fixed at 23.683% for overnight contracts, the highest level since Jan. 12. Traders said the elevated offshore yuan borrowing rates in the past week were due to tight liquidity in the market and rumors that China took action to raise the cost of shorting its currency.

“Normal lenders of the yuan, like Chinese banks, have refrained from injecting liquidity into the market recently due to speculation that the yuan will depreciate toward certain levels like 6.68, 6.7 per dollar,” said a trader in a local bank in Hong Kong. “(The yuan’s) inclusion into the SDR basket nears, so the central bank would like to maintain the offshore yuan near the stronger side,” said the trader, adding that seasonal reasons including national holidays and caution near the quarter-end also drains yuan liquidity from the market. The U.S. dollar traded near a two-week high against a basket of major currencies on Monday after U.S. consumer prices rose more than expected in August, bolstering expectations the Federal Reserve will raise interest rates this year.

Really, it’s about demand.

• Oil Investors Flee as OPEC Freeze Hopes Face Supply Reality (BBG)

Oil speculators headed for the sidelines as OPEC members prepare to discuss freezing output in the face of signs the supply glut will linger. Money managers cut wagers on both falling and rising crude prices before talks between OPEC and other producers later this month. The meeting comes after the International Energy Agency said that the global oversupply will last longer than previously thought as demand growth slows and output proves resilient. “It’s a cliff trade right here,” said John Kilduff, partner at Again Capita, a New York hedge fund focused on energy. “There’s more uncertainty than usual in the market because of the upcoming meeting. People are waiting for the outcome and a number think this is a good time to stand on the sidelines.”

OPEC plans to hold an informal meeting with competitor Russia in Algiers Sept. 27, fanning speculation the producers may agree on an output cap to shore up prices. Oil climbed 7.5% in August after OPEC announced talks in the Algerian capital. [..] World oil stockpiles will continue to accumulate into late 2017, a fourth consecutive year of oversupply, according to the IEA. Just last month, the agency predicted the market would start returning to equilibrium this year. OPEC production rose last month as Middle East producers opened the taps, the IEA said. Saudi Arabia, Kuwait and the UAE pumped at or near record levels and Iraq pushed output higher, according to the agency. “OPEC is out of bullets,” said Stephen Schork, president of the Schork Group. “Even if they agree on a production freeze it will be at such a high level that it will be meaningless.”

“..the energy companies producing shale oil in the Bakken are in the hole for $32 billion. ”

• The Death Of The Bakken Field Has Begun (SRSrocco)

The Death of the Great Bakken Oil Field has begun and very few Americans understand the significance. Just a few years ago, the U.S. Energy Industry and Mainstream media were gloating that the United States was on its way to “Energy Independence.” Unfortunately for most Americans, they believed the hype and are now back to driving BIG SUV’s and trucks that get lousy fuel mileage. And why not? Americans now think the price of gasoline will continue to decline because the U.S. oil industry is able to produce its “supposed” massive shale oil reserves for a fraction of the cost, due to the new wonders of technological improvement. [..] they have no clue that the Great Bakken Oil Field is now down a stunning 25% from its peak just a little more than a year and half ago:

Some folks believe the reason for the decline in oil production at the Bakken was due to low oil prices. While this was part of the reason, the Bakken was going to peak and decline in 2016-2017 regardless of the price. This was forecasted by peak oil analyst Jean Laherrere. [..] I took Jean Laherrere’s chart and placed it next to the current actual Bakken oil field production:

As we can see in the chart above, the rise and fall of Bakken oil production is very close to what Jean Laherrere forecasted several years ago (shown by the red arrow). According to Laherrere’s chart, the Bakken will be producing a lot less oil by 2020 and very little by 2025. This would also be true for the Eagle Ford Field in Texas. According to the most recent EIA Drilling Productivity Report [8], the Eagle Ford Shale Oil Field in Texas will be producing an estimated 1,026,000 barrels of oil per day in September, down from a peak of 1,708,000 barrels per day in May 2015. Thus, Eagle Ford oil production is slated to be down a stunning 40% since its peak last year.

Do you folks see the writing on the wall here? The Bakken down 25% and the Eagle Ford down 40%. These are not subtle declines. This is much quicker than the U.S. Oil Industry or the Mainstream Media realize. And… it’s much worse than that. The U.S. Oil Industry Hasn’t Made a RED CENT Producing Shale. Rune Likvern of Fractional Flow has done a wonderful job providing data on the Bakken Shale Oil Field. Here is his excellent chart showing the cumulative FREE CASH FLOW from producing oil in the Bakken: [..] the BLACK BARS are estimates of the monthly Free Cash flow from producing oil in the Bakken since 2009, while the RED AREA is the cumulative negative free cash flow. [..] Furthermore, the red area shows that the approximate negative free cash flow (deducting CAPEX- capital expenditures) is $32 billion. So, with all the effort and high oil prices from 2011-2014 (first half of 2014), the energy companies producing shale oil in the Bakken are in the hole for $32 billion. Well done…. hat’s off to the new wonderful fracking technology.

Lofty.

• Canada To Impose Nationwide Carbon Price (R.)

Canada will impose a carbon price on provinces that do not adequately regulate emissions by themselves, Environment Minister Catherine McKenna said on Sunday without giving details on how the Liberal government will do so. Speaking on the CTV broadcaster’s “Question Period,” a national politics talk show, McKenna said the new emissions regime will be in place sometime in October, before a federal-provincial meeting on the matter. She only said the government will have a “backstop” for provinces that do not comply, but did not address questions on penalties for defiance. Canada’s 10 provinces, which enjoy significant jurisdiction over the environment, have been wary of Ottawa’s intentions and have said they should be allowed to cut carbon emissions their own way.

Prime Minister Justin Trudeau persuaded the provinces in March to accept a compromise deal that acknowledged the concept of putting a price on carbon emissions, but agreed the specific details, which would take into account provinces’ individual circumstances, could be worked out later. Canada’s four largest provinces, British Columbia, Alberta, Ontario and Quebec, currently have either a tax on carbon or a cap-and-trade emissions-limiting system. But Brad Wall, the right-leaning premier of the western energy-producing province of Saskatchewan, has long been resistant to federal emissions-limiting plans. McKenna said provinces such as Saskatchewan can design a system in which emissions revenues go back to companies through tax cuts, which would dampen the impact of the extra cost brought by the carbon price.

“Lower Saxony, home state to Volkswagen doesn’t offer electronic filing for civil litigation.”

• 1000s of VW Lawsuits To Be Filed By The End Of Monday, All in Print (BBG)

There was one thing Andreas Tilp and Klaus Nieding needed most for taking a wave of Volkswagen investor cases to court: a pickup truck. Nieding had a load of 5,000 suits sent Friday from his office in Frankfurt to Braunschweig, about 350 kilometers (218 miles) away. Tilp’s 1,000 or so complaints will arrive in a transport vehicle Monday, traveling more than 500 kilometers from his office in the southern German city of Kirchentellinsfurt. There was no other way to do it: Lower Saxony, home state to Volkswagen doesn’t offer electronic filing for civil litigation. The court in Braunschweig, the legal district that includes VW’s Wolfsburg headquarters, is expecting thousands of cases by the end of the day.

Investors are lining up to sue in Germany, where VW shares lost more than a third of their value in the first two trading days after the Sept. 18 disclosure of the emissions scandal by U.S. regulators. Monday is the first business day after the anniversary of the scandal and investors fear they have to sue within a year of the company’s admission that it had equipped about 11 million diesel vehicles with software to cheat pollution tests. The lawsuits disclosed so far are seeking 10.7 billion euros ($11.9 billion). The Braunschweig court has said it will release the total number this week. Volkswagen has consistently argued that it has followed all capital-markets rules and properly disclosed emissions issues in a timely fashion.

The super-sized filing is yet another example of the sheer scale of the scandal that’s haunted VW for a year. It forced the German carmaker into the biggest recall in its history to fix the cars or get them off the road entirely, the fines already levied are among the steepest against any manufacturer, and the carmaker has built up massive provisions to absorb the hit.

What are the odds VW sponsored the report?

• Many Car Brands Emit More Pollution Than Volkswagen (G.)

A year on from the “Dieselgate” scandal that engulfed Volkswagen, damning new research reveals that all major diesel car brands, including Fiat, Vauxhall and Suzuki, are selling models that emit far higher levels of pollution than the shamed German carmaker. The car industry has faced fierce scrutiny since the US government ordered Volkswagen to recall almost 500,000 cars in 2015 after discovering it had installed illegal software on its diesel vehicles to cheat emissions tests. But a new in-depth study by campaign group Transport & Environment (T&E) found not one brand complies with the latest “Euro 6” air pollution limits when driven on the road and that Volkswagen is far from being the worst offender.

“We’ve had this focus on Volkswagen as a ‘dirty carmaker’ but when you look at the emissions of other manufacturers you find there are no really clean carmakers,” says Greg Archer, clean vehicles director at T&E. “Volkswagen is not the carmaker producing the diesel cars with highest nitrogen oxides emissions and the failure to investigate other companies brings disgrace on the European regulatory system.” T&E analysed emissions test data from around 230 diesel car models to rank the worst performing car brands based on their emissions in real-world driving conditions. Fiat and Suzuki (which use Fiat engines) top the list with their newest diesels, designed to meet Euro 6 requirements, spewing out 15 times the NOx limit; while Renault-Nissan vehicle emissions were judged to be more than 14 times higher. General Motors’ brands Opel-Vauxhall also fared badly with emissions found to be 10 times higher than permitted levels.

Exposed. But too late.

• The Ongoing Collapse of Economics (Caswell)

If we accept the rapidly growing body of evidence and authority suggesting that many of the core concepts of conventional macroeconomics are bollox, and that economists don’t really know what they’re doing, then the important question becomes ‘What next?’ As conventional macroeconomic theory crumbles in the face of facts, what will replace it? One of the primary contenders is Modern Monetary Theory, which focuses on money itself (something which, believe it or not, conventional macroeconomic theory doesn’t do). Another possibility is that macroeconomics will learn from complexity and systems theory, and that its models (and, hopefully, their predictive ability) will become more like those used in meteorology and climate science.

Anti-economist Steve Keen is working in this direction, influenced by the Financial Instability Hypothesis (FIH) of Hyman Minsky, whatever that is. But wherever macroeconomics is going, it’s clear that the old order is collapsing. The theoretical orthodoxy that has guided the highest level of economic management for many decades is crumbling. Either economics is an objective science or it’s not. And if economics is not an objective science, then we quickly need an economics that is. Countless livelihoods and lives will be deeply affected by the revolution we are witnessing in theoretical macroeconomics. It may be dry, it may be boring, it may be theoretical, and it may seem incomprehensible. But it’s hard to think of any discussion that’s more important.

Not looking good.

• WaPo 1st Paper to Call for Prosecution of its Own Source -After Pulitzer- (GG)

Three of the four media outlets which received and published large numbers of secret NSA documents provided by Edward Snowden – The Guardian, The New York Times and The Intercept – have called for the U.S. Government to allow the NSA whistleblower to return to the U.S. with no charges. That’s the normal course for a newspaper, which owes its sources duties of protection, and which – by virtue of accepting the source’s materials and then publishing them – implicitly declares the source’s information to be in the public interest. But not The Washington Post.

In the face of a growing ACLU-and-Amnesty-led campaign to secure a pardon for Snowden, timed to this weekend’s release of the Oliver Stone biopic “Snowden,” the Post Editorial Page not only argued today in opposition to a pardon, but explicitly demanded that Snowden – their paper’s own source – stand trial on espionage charges or, as a “second-best solution,” “accept [] a measure of criminal responsibility for his excesses and the U.S. government offers a measure of leniency.” In doing so, The Washington Post has achieved an ignominious feat in U.S. media history: the first-ever paper to explicitly editorialize for the criminal prosecution of its own paper’s source – one on whose back the paper won and eagerly accepted a Pulitzer Prize for Public Service. But even more staggering than this act of journalistic treachery against their paper’s own source are the claims made to justify it.

The Post Editors concede that one – and only one – of the programs which Snowden enabled to be revealed was justifiably exposed – namely, the domestic metadata program, because it “was a stretch, if not an outright violation, of federal surveillance law, and posed risks to privacy.” Regarding the “corrective legislation” that followed its exposure, the Post acknowledges: “we owe these necessary reforms to Mr. Snowden.” But that metadata program wasn’t revealed by the Post, but rather by the Guardian.

Soon one of many.

• ‘People’s Candidate’ Le Pen Vows To Free France From EU Yoke (AFP)

French far-right National Front leader Marine Le Pen on Sunday vowed to give her country back control over its laws, currency and borders if elected president next year on an anti-EU, anti-immigration platform. Addressing around 3,000 party faithful in the town of Frejus on the Cote d’Azur, Le Pen aimed to set the tone for her campaign, declaring in her speech: “The time of the nation state has come again.” The FN leader, who has pledged to hold a referendum on France’s future in the EU if elected and bring back the French franc, said she was closely watching developments in Britain since it voted to leave the bloc. “We too are keen on winning back our freedom…. We want a free France that is the master of its own laws and currency and the guardian of its borders.”

Polls consistently show Le Pen among the top two candidates in the two-stage presidential elections to take place in April and May. But while the polls show her easily winning a place in the run-off they also show the French rallying around her as-yet-unknown conservative opponent in order to block her victory in the final duel. In Frejus, Le Pen sought to sanitise her image, continuing a process of “de-demonisation” that has paid off handsomely at the ballot box since she took over the FN leadership from her ex-paratrooper father Jean-Marie Le Pen in 2011. “I am the candidate of the people and I want to talk to you about France, because that is what unites us,” the 48-year-old politician said in a speech that avoided any reference to the FN which is seen as more taboo than its leader.

What would happen if she decides not to run next year?

• Merkel Suffers Drubbing In Berlin Vote Due To Migrant Angst (R.)

Chancellor Angela Merkel’s conservatives suffered their second electoral blow in two weeks on Sunday, with support for her Christian Democrats (CDU) plunging to a post-reunification low in a Berlin state vote due to unease with her migrant policy. The anti-immigrant Alternative for Germany (AfD) polled 11.5%, gaining from a popular backlash over Merkel’s decision a year ago to keep borders open for refugees, an exit poll by public broadcaster ARD showed. The result means the AfD will enter a 10th state assembly, out of 16 in total.

Merkel’s CDU polled 18%, down from 23.3% at the last election in 2011, with the centre-left Social Democrats (SPD) remaining the largest party on 23%. The SPD may now ditch the CDU from their coalition in the German capital. The blow to the CDU came two weeks after they suffered heavy losses in the eastern state of Mecklenburg-Vorpommern. The setbacks have raised questions about whether Merkel will stand for a fourth term next year, but her party has few good alternatives so she still looks like the most likely candidate.

Perhaps there’s a contradiction hiding in realizing that globalization is moving in reverse, but still expecting global responses to crises.

• Why Won’t The World Tackle The Refugee Crisis? (Observer)

It is now the greatest movement of the uprooted that the world has ever known. Some 65 million people have been displaced from their homes, 21.3 million of them refugees for whom flight is virtually compulsory – involuntary victims of politics, war or natural catastrophe. With just less than 1% of the world’s population homeless and seeking a better, safer life, a global crisis is under way, exacerbated by a lack of political cooperation – and several states, including the United Kingdom, are flouting international agreements designed to deal with the crisis. This week’s two major summits in New York, called by the United Nations general assembly and by President Barack Obama, are coming under intense criticism before the first world leaders have even taken their seats.

Amnesty, Human Rights Watch and refugee charities are among those accusing both summits of being “toothless” and saying that the declaration expected to be ratified by the UN on Monday imposes no obligations on the 193 general assembly nations to resettle refugees. The Obama-led summit, meanwhile, which follows on Tuesday, is designed to extract pledges of funding which critics say too often fail to materialise. Steve Symonds, refugee programme director at Amnesty, said: “Funding is great and very much needed, but it’s not going to tackle the central point of some sharing of responsibility. The scale of imbalance there is growing, and growing with disastrous consequences.”

He said nations were sabotaging agreements through self-interest. “It’s very, very difficult to feel any optimism about this summit or what it will do for people looking for a safe place for them and their families right at this moment, nor tackle the awful actions of countries who are now thinking, ‘If other countries won’t help take responsibility, then why should we?’ and are now driving back desperate people. “Compelling refugees to go back to countries where there is conflict and instability doesn’t help this awful merry-go-round going on and on.”

Debt Rattle March 22 2016

Mar 222016

March 22, 2016 Posted by Raúl Ilargi Meijer at 8:59 am Finance Tagged with: China, dinosaurs, disorder, ECB, emissions, Erdogan, GAAP, housing, inflation, oil, refugees 6 Responses »

NPC Ford Motor Co., McReynolds & Sons garage, L Street, Washington DC 1926

• US Existing Home Sales Tumble 7.1% In Warning For Housing Market (Reuters)

• Companies Haven’t Fudged Their Numbers This Much Since 2009 (Yahoo)

• Beware of Draghi Dropping Hints (FT)

• Central Banks Creep Toward Uncomfortable Role as Central Planners (WSJ)

• The ECB and The Mississippi Company Bubble (Macleod)

• Germany Must Leave Eurozone To Save It: Mervyn King (CNBC)

• Government Debt Could Bring China’s Credit Party To A Halt (MW)

• China’s Debt Burden Is Only Going To Get Bigger (BV)

• Home Is Where the Inflation Is (BBG)

• Get Ready For An Australian Recession By 2017 (Steve Keen)

• Regulator Warns Canadian Banks on Oil and Gas Reserves (WSJ)

• Petrobras Posts Record $10 Billion Loss (Reuters)

• Erdogan To Include Journalists, Politicians in ‘Terrorist’ Definition (Ind.)

• The Uses of Disorder (Jim Kunstler)

• Carbon Emission Release Rate ‘Unprecedented’ In Past 66 Million Years (G.)

• The EU’s Deal With Turkey Is a No-Win Situation (Fortune)

• Greece Appeals For EU Logistics Aid For Migrant Deal To Work (Reuters)

• EU Rights Chief Demands More Protection For Refugees (AP)

• Greece Sets Up Detention Camps As Refugee Deal Hits Delays (AP)

The US will keep doing what it can to prop up this bubble.

• US Existing Home Sales Tumble 7.1% In Warning For Housing Market (Reuters)

U.S. home resales fell sharply in February in a potentially troubling sign for America’s economy which has otherwise looked resilient to the global economic slowdown. The National Association of Realtors said on Monday existing home sales dropped 7.1% to an annual rate of 5.08 million units, the lowest level since November. Sales have been volatile and prone to big swings up and down in recent months following the introduction in October of new mortgage regulations, which are intended to help homebuyers understand their loan options and shop around for loans best suited to their financial circumstances. February’s decline weighed on investor sentiment, with the S&P 500 stock index falling after the data was released. Sales fell across the country, including a 17.1% plunge in the U.S. Northeast.

Economists had forecast home resales decreasing 2.8% to a pace of 5.32 million units last month. Sales were up 2.2% from a year ago. The median price for a previously owned home increased 4.4% from a year ago to $210,800. The housing report runs counter to data showing strong job growth and a stabilization of factory output, which had taken a hit from weaker demand overseas and a strong U.S. dollar. Housing continues to be supported by a tightening labor market, which is starting to push up wage growth, boosting household formation. But a relative dearth of properties available for sale remains a challenge. “Finding the right property at an affordable price is burdening many potential buyers,” said NAR economist Lawrence Yun.

Beware when accountants become society’s most creative people.

• Companies Haven’t Fudged Their Numbers This Much Since 2009 (Yahoo)

Almost all of the companies in the S&P 500 have announced their quarterly earnings, and now Wall Street’s number crunchers are finalizing their conclusions as to what actually happened during the last three months of 2015. Unfortunately, it’s become an increasingly challenging task to understand the true financial performance of the big publicly traded companies because of the widening of something called the “GAAP gap.” Don’t worry: this topic isn’t as scary a concept as it sounds. In a nutshell, there’s a standard known as generally accepted accounting principles, or GAAP, which encourages some uniformity in how companies will report financial results. Unfortunately, the strict standards of GAAP often force companies to report big one-time, non-recurring items that will distort quarterly earnings, in turn making them a poor reflection of underlying operations.

And so, many companies will make adjustments for these items and separately report adjusted or non-GAAP financial results. All of that’s well and good. But there’s an unsettling trend we’ve been witnessing: the gap between GAAP and non-GAAP numbers is widening. Specifically, this “GAAP gap” is widening in such a way that more and more costs and expenses are being removed to make underlying profits look higher. “The gap between GAAP (reported) and pro forma (adjusted) EPS continued to widen in 4Q, with the GAAP/Pro forma ratio of 0.74 still at its most extreme levels since 2009,” Bank of America Merrill Lynch’s Savita Subramanian said on Monday. “Trailing four-quarter (2015) GAAP EPS came in at $87 vs. $118 for pro forma EPS.”

It’s jarring to hear that any metric has returned to levels last seen during the financial crisis. Unfortunately, it’s hard to conclude what the implications are here because the issues are tied to just a few industries that are facing their own unique issues. “As was the case last quarter, the chief contributor to “GAAP gap” has been Energy asset impairments/write-downs, followed by M&A costs within Health Care,” Subramanian continued. “The Energy sector alone contributed to nearly half of the “GAAP gap” this quarter.” While this is certainly a top worth keeping an eye on, it would probably be a mistake to jump to any sweeping conclusions about the market and the economy. “We found that while a widening GAAP gap is not a leading indicator of a market downturn, companies with increasing deviations tend to systematically underperform the market,” Subramanian said.

One day we’ll understand just how crazy this is.

• Beware of Draghi Dropping Hints (FT)

It is a risky game, taking central bankers at their word. Investors should be wary of what central bankers appear to be saying or signalling. Like some politicians, economists and even journalists, they often change their mind. Mario Draghi, the president of the ECB, is a case in point. Don’t be fooled by Mr Draghi when he signals that interest rates have been cut as low as they can go, as he did at the ECB’s March policy meeting. After reducing the deposit rate to minus 0.4%, he could not have been clearer when he said: “We don’t anticipate that it will be necessary to reduce rates further.” Although he kept the option of further cuts open, he outlined his unease about negative rates and their impact on the region’s commercial banks. Consequently, some investors and commentators think interest rates have hit their floor in the euro zone.

But Mr Draghi has made similar assertions after cutting rates before. In June 2014, he reduced rates to minus 0.1% and said: “For all practical purposes we have reached the lower bound.” In September 2014, he dropped rates to minus 0.2% and said: “We are at the lower bound where technical adjustments are not going to be possible any longer.” There is an obvious pattern. Mr Draghi signals the floor has been reached, only to change his mind later. The likely reason for his “no lower” signals is that he does not want to scare markets. Bank stocks, bonds and credit default swaps, which are a kind of insurance against default, have all been rocked by worries about negative rates and their impact on the banking business. There are also concerns for banks in euro zone countries such as Austria, Portugal and Spain, where mortgage rates could go negative in the event of the ECB cutting further, as these mortgages are linked to euro zone money market rates.

In other words, banks in Austria, Portugal and Spain may end up paying customers for lending to them, which would be bad news for their balance sheets. The Bank for International Settlements warned in a report this month that there was great uncertainty over the potential for deeper cuts into negative territory. However, “Life Below Zero”, a research paper by HSBC, the bank, suggests that the ECB could cut rates much further. It says that the Swiss National Bank currently operates the most negative rate of all the world’s leading central banks (minus 0.75%). If the costs incurred by Swiss banks were applied to the euro zone banking system, then the ECB’s deposit rate would be much more negative, at minus 1.8%. The ECB could also tier rates. At the moment, the ECB charges about 90% of its bank reserves at negative rates.

“It’s capitalism with Chinese characteristics.”

• Central Banks Creep Toward Uncomfortable Role as Central Planners (WSJ)

Are central banks heading back to an era of rationing money? The question may sound daft when policy makers are pumping gushers of cash into several of the world’s major economies. But as the central banks become more desperate to boost inflation and growth, they are starting to break one of the modern tenets of the profession by funneling that cash directly to what they regard as “good” uses. The past two weeks brought interventions by the Bank of Japan and ECB, which would have been unthinkable just a few years ago. The Bank of Japan’s conditions for companies to qualify for exchange-traded funds it would like to buy sound like they come from a well-meaning government minister, not a monetary authority concerned about overall growth and inflation.

Companies could qualify by offering an “improving working environment, providing child-care support, or expanding employee-training programs.” The central bank wants financiers to create a new breed of ETFs it would like to buy. The ETFs would hold only shares of companies that are increasing capital spending, expanding spending on research and development or boosting what the Bank of Japan calls “human capital.” The latter means pay raises for staff, taking on more people or improving human resources. All these are eminently reasonable things to demand of companies, especially Japanese firms. All would probably be good for the economy, too. However, they have nothing to do with monetary policy. The basic aim of central banks is to adjust the overall economy while leaving the market and government to decide the best use of capital, decisions that are inherently political.

The problem, as Neal Soss, vice chairman of research at Credit Suisse, puts it, is “these are very, very challenging times for the economic orthodoxy,” and if governments won’t step up with an expansionary fiscal policy, central banks have little choice but to fill the gap. To be fair, Bank of Japan Gov. Haruhiko Kuroda is hardly drawing up a Soviet-style five-year plan. Only ¥300 billion ($2.7 billion) a year will be spent “with the aim of supporting firms that are proactively investing in physical and human capital.” The worry is that the Bank of Japan has only just begun. “It’s a massive politicization of credit: Here are the legitimate things for lending, and here are the illegitimate things,” said Russell Napier, an independent strategist and author of “Anatomy of the Bear,” a study of 70,000 Wall Street Journal articles during major bear markets. “It’s capitalism with Chinese characteristics.”

It’s awfully similar indeed. So why do we allow it to happen?

• The ECB and The Mississippi Company Bubble (Macleod)

Last week, the ECB extended its monetary madness, pushing deposit rates further into negative figures. It is extending quantitative easing from sovereign debt into non-financial investment grade bonds, while increasing the pace of acquisition to €80bn per month. The ECB also promised to pay the banks to take credit from it in “targeted longer-term refinancing operations”. Any Frenchman with a knowledge of his country’s history should hear alarm bells ringing. The ECB is running the Eurozone’s money and assets in a similar fashion to that of John Law’s Banque Generale Privée (renamed Banque Royale in 1719), which ran those of France in 1716-20. The scheme at its heart was simple: use the money-issuing monopoly granted to the bank by the state to drive up the value of the Mississippi Company’s shares using paper money created for the purpose.

The Duc d’Orleans, regent of France for the young Louis XV, agreed to the scheme because it would provide the Bourbons with much-needed funds. This is pretty much what the ECB is doing today, except on a far larger Eurozone-wide basis. The need for government funds is of primary importance today, as it was then. In Law’s day, France did not have a central bank, such as the Bank of England, managing the issue of government debt, let alone a functioning government bond market. The profligate spending of Louis XIV had left the state three billion livres in debt, which was the equivalent of 1,840 tonnes of gold. This was about 85% of the world’s estimated gold stock at that time, at the livre’s conversion rate into Louis d’Or. John Law would almost double that by June 1720, with unbacked livre notes issued by his bank.

Today, the assets being overvalued for the governments’ benefit are government bonds themselves, but the principal is the same. There is no need to use a separate, Mississippi-style vehicle, because there is a fully functioning government bond market. Banque Generale created the bank credit for France’s upper and middle classes to buy Mississippi Company shares, driving up the price and making yet higher prices a certainty. Law had set up a money-making machine for those with a modicum of wealth, but the ten% down-payment required to subscribe for Mississippi shares made speculation available to the servant classes as well. The result was virtually everyone in Paris was caught up in the speculative fever, and Mississippi shares increased from the 15 livres deposit to 18,000 livres fully paid at the peak in June 1720. The term “millionaire” dated from that time.

Simplistic. if Germany goes, so must Holland. And Austria. And then Belgium. France.

• Germany Must Leave Eurozone To Save It: Mervyn King (CNBC)

Germany has grown too powerful and should leave the euro zone in order to save the union, former Bank of England Governor Mervyn King said Monday. “That would be the best way forward, and I would hope that many of my American friends would stop pushing the Europeans to throw money at the problem and say we must make the euro successful,” he told CNBC’s “Squawk Box.” The tragedy of the euro zone, said King, is that Germany entered the project in a bid to bind itself into Europe so that no European country would ever again fear the country’s power. But now Germany is more powerful economically and politically than it was when the euro was adopted, he said. Germany also sacrificed the Deutsche mark in the process, “the one really successful symbol of post-war German reconstruction,” he said.

While the United States, the U.K., and some European countries need to export and invest more while consuming less, Germany and China need to spend more and export less, King said. “Unless we’re prepared to tackle that problem head-on, which will involve some restructuring of the economy, then we shall just continue down this path of ever-lower rates and no growth,” he said. Last week, European Central Bank President Mario Draghi warned European leaders that monetary policy alone would not be enough to jump-start the economy and that governments needed to do their job by pushing through structural reforms. “I made clear that even though monetary policy has been really the only policy driving the recovery in the last few years, it cannot address some basic structural weaknesses of the euro zone economy,” Draghi told reporters.

It’s just a matter of what comes first: run out of credit or run out of growth. Since ever more credit is needed to produce one ‘unit’ of growth, diminishing returns rule the day.

• Government Debt Could Bring China’s Credit Party To A Halt (MW)

China’s economy may have run out of growth before it ran out of credit, but no one told its companies. One of the biggest China puzzles today is the seemingly never-ending ability of its corporates to access new supplies of credit, without running into trouble or someone saying no. Some analysts warn that we are looking in the wrong place for distress; it could be building in the government bond market. This year, China’s easy money policy has been most graphically on display through an unprecedented overseas buying spree by its companies. The latest Chinese company throwing its checkbook around is insurer Anbang with a $13.1 billion cash offer for Starwood Hotels and Resorts. Earlier ChemChina broke China’s record for outbound merger and acquisition activity with an offer to buy Syngenta in cash for $44.1 billion.

In fact, in the first three months of this year, China outbound M&A activity has rocketed to $102.7 billion, almost equal to the record total of $107.5 billion for the whole of 2015, according to data from Dealogic. Heavily geared balance sheets appear no hindrance to connected mainland companies being able to access funding. On Monday, Shanghai shares rallied after more, cheaper money was promised to China’s brokers for margin financing. Yet it was possible to detect a hint of caution from the central bank governor at the weekend after the chorus of upbeat commentaries on the economy from China’s leaders in recent weeks. Zhou Xiaochuan said that “lending as a share of [gross domestic product], especially corporate lending as a share of GDP, is too high” and also that a high leverage ratio is more prone to macroeconomic risk.

Corporate gearing in China is now widely estimated at some 160% of GDP. It is these kinds of concerns that have led Moody’s to downgrade the outlook on China’s sovereign rating at the beginning of March. Other analysts are also turning their attention to central government debt — which has long been viewed as manageable — as these funding needs could emerge as a new fault line of distress. Societe Generale said in a new report the government bond market faces an unprecedented supply glut due to combined local and central government bond issuance. As the market has yet to factor in this exponential growth in government paper, it could lead to disruption, which could potentially spill over into the corporate bond market, they warn.

The upswing in issuance is due to an expanded local government debt swap program (where bad loans from special funding vehicles were swapped for debt) and central and local government fiscal deficits. In total, SG calculates this year could see a total net issuance of 7.58 trillion yuan, up by 2.66 trillion yuan from 2015. And this paper will keep coming. The latest audit report put the amount of local government debt eligible for being swapped into bonds at a massive 15.4 trillion yuan.

Until it no longer can.

• China’s Debt Burden Is Only Going To Get Bigger (BV)

China’s debt burden is only going to get bigger. Total borrowing has grown rapidly to reach about 250% of GDP last year, raising concerns about runaway credit. But pressure to meet unrealistic economic growth targets will delay any sustained effort to bring debt back down. The government’s latest five-year plan highlights the dilemma. Prime Minister Li Keqiang pledged that the world’s second-largest economy will expand by at least 6.5% a year, in real terms, until 2020. Meanwhile, planners expect total “social financing” – a broad measure of private sector credit – to grow by 13% in 2016 alone. So even if inflation reaches the optimistic target of 3%, debt will outstrip nominal GDP.

Extend those trends, and borrowing will hit about 290% of annual output by 2020. Central bank Governor Zhou Xiaochuan has expressed concerns about rising corporate debt levels but there’s little sign that China is reining in credit. Banks extended new loans worth 3.5 trillion yuan ($540 billion) in the first two months of 2016, a third more than in the same period of last year. Meanwhile, Chinese companies are using domestic debt to help finance an overseas M&A binge which totals nearly $100 billion this year, according to ThomsonOne. Though a healthier stock market would allow corporations to deleverage by issuing more equity, the collapse of last year’s bubble has made investors understandably skittish.

The government could perhaps take on a greater burden: official borrowing was about 44% of GDP last year, according to Breakingviews calculations based on data from the Bank for International Settlements. That’s well below the level in developed countries. However, this excludes borrowing by state-owned entities and local governments. Moody’s puts these contingent liabilities at between 50 and 70% of GDP. That leaves consumers, whose borrowings are just 39% of GDP. So households have plenty of scope to load up on mortgages and credit cards. A consumer credit boom might help deliver growth targets while also shifting the economy towards greater consumption. Whoever does the borrowing, however, debt levels will keep rising. As in the rest of the world, deleveraging will have to wait.

More or less correct.

• Home Is Where the Inflation Is (BBG)

The U.S. Federal Reserve has had a tough time getting inflation back up to desired levels. There’s one area, though, where it may be having a bigger effect than some of its major foreign counterparts: house prices. Comparing house prices across borders can be a fraught enterprise, given the idiosyncratic nature of housing markets and statistics. That said, after the U.S. housing bust tanked the global economy, the Bank for International Settlements started collecting and publishing data for a large number of countries. Though still imperfect, the data allow for some rough comparisons. The latest numbers, updated Friday, show the U.S. on a run: Over the year through September 2015, house prices exceeded consumer-price inflation by 5.9% – more than in the euro area, Japan or the U.K.

That put them up almost 15% in inflation-adjusted terms since the economy hit bottom in mid-2016, just short of the U.K. Although many factors can affect house prices, much of the difference is probably attributable to central-bank policy – pushing up house prices, after all, is one of the goals of monetary stimulus. The Fed and the Bank of England moved quickly and decisively to push down short-term and long-term interest rates in 2009 and beyond, while the ECB was relatively slow to respond to economic malaise and the Bank of Japan had already used much of its ammunition (though Japan’s demographics play a role, too).

The question, then, is whether higher house prices will do any good. In the short term, they increase inequality, because the benefit accrues to relatively wealthy property owners and raises the bar for poorer folks who want to own. The expectation is that this wealth effect will translate into greater spending and investment that will benefit everyone. There are some signs that may be happening – the U.S. economy is certainly doing better than the euro area’s. Still, real median household income – though rising – only slightly exceeds its pre-recession level. Price gains are undoubtedly a relief for millions of U.S. homeowners who came out of the crisis owing more on their mortgages than their houses were worth. Now the rest of the economy just has to catch up.

I’m sure Steve will come back to the BIS source data, this time for other countries.

• Get Ready For An Australian Recession By 2017 (Steve Keen)

For the last 25 years, Australian politicians of both Liberal and Labor hue have been able to brag that, under their stewardship, Australia has avoided a recession. Those bragging rights are about to come to an end. During the life of the next Parliament -and probably by 2017- Australia will fall into a prolonged recession. Whichever party is in opposition at the time will blame the incumbent, but in reality this recession has been set up by the sidestep both parties have used to avoid downturns for the past quarter century: whenever a crisis has loomed, they’ve avoided recession by encouraging the private sector to borrow and spend.

The end product of that is starkly evident in a new database on private and government debt published by the Bank of International Settlements. Australia’s most famous recession sidestep was during the GFC, when it was one of only two countries in the OECD to avoid experiencing two consecutive quarters of negative GDP growth (the other country was South Korea). Since then, the private sectors of the advanced countries have collectively de-levered, reducing their debt levels from about 170 to 160% of GDP. Australia, in stark contrast, has levered up. Our private debt to GDP ratio is now more than 20% higher than when the GFC began, and more than 50% higher than in the USA (see Figure 1).

This credit sidestep has worked because the extra debt-financed expenditure lifted aggregate demand and income well above what it would have been in the absence of a debt binge (see Figure 2).

Unfortunately for Australia’s next Prime Minister, there are two catches to this trick. The obvious catch is that getting that much extra demand out of credit necessarily increases debt much faster than it increases income — hence the runaway ratio of debt to GDP shown in Figure 1 —and this can’t go on forever. The less obvious one is that when debt is at stratospheric levels that apply in Australia today, total demand falls even if the debt ratio merely stabilises. The logic is pretty simple: your spending in a year is the total of what you earn plus what you borrow, and the same maths applies to the economy as a whole. If nominal GDP grows this year at the 2.8% rate it has averaged for the last five years, then GDP in 2016 will be roughly $1,634 billion. If private debt continues to grow at its average rate of 6.9% per year, it will reach $3,414 billion —an increase of $220 billion over the year.

Total private sector demand (which is spent on both goods and services and asset purchases) will be $1,855 billion. What about 2017, if private debt grows at the same rate as GDP itself, so that the debt ratio stabilises? Then GDP will be $1,680bn, and private debt will rise from $3,414bn to $3,509bn — an increase of just $96bn over the year (compared to $220bn the year before). The sum of the two will be $1,775bn — 4.3% less than the year before. This is the inevitable debt crunch coming Australia’s way, but conventional economists are oblivious to this danger because they’ve brainwashed themselves to ignore private debt as just a “pure redistribution”, to quote Ben Bernanke. This deluded textbook thinking is why Bernanke didn’t see the GFC coming.

But American banks’ exposure is much higher.

• Regulator Warns Canadian Banks on Oil and Gas Reserves (WSJ)

Canada’s banking regulator is urging the country’s major banks to review their accounting practices to ensure they have sufficient reserves as the commodity-price collapse takes a toll on the economy. The Office of the Superintendent of Financial Institutions wants lenders to scrutinize their collective allowances, reserve funds that act as cushions to absorb potential future loan losses, the regulator’s chief said in an interview. “We want them to take a good look at their accounting practices,” said Superintendent of Financial Institutions Jeremy Rudin. “They should support loss-absorbing capacity and the ability to manage through difficult times in general,” he added.

The regulator is giving the country’s six biggest banks this guidance on their accounting as they face mounting criticism from some analysts that they haven’t amassed enough reserves to cover soured loans to the energy sector. That criticism was a recurring theme during calls following their fiscal first-quarter results, in which many banks warned of rising provisions for credit losses but assured investors their rainy-day cushions were adequate. Canadian bank shares have tumbled over the past year as the price of oil has collapsed, but the S&P/TSX Composite Bank Index is now up about 16.77% from its low in February, reflecting a rebound in oil. Still, oil prices remain an overhang for banks, underscoring the size of the energy industry in the Canadian economy and concerns that lenders will eventually be stung by higher loan losses.

Energy loans totaled 49.7 billion Canadian dollars ($38.2 billion) for the country’s six biggest banks during the November-to-January quarter, according to a report by TD Securities. Bank of Nova Scotia, Canada’s third-largest bank by assets, has the biggest direct oil and gas exposure at 3.6% of total loans. Some analysts are skeptical about the lenders’ reserving practices in part because U.S. banks, including J.P. Morgan and Wells Fargo, have set aside millions more for their reserves as they brace for bigger energy-related losses.

Brazil is a game of dominoes.

• Petrobras Posts Record $10 Billion Loss (Reuters)

Brazil’s state-controlled oil company Petrobras posted its biggest-ever quarterly loss on Monday after booking a large writedown for oil fields and other assets as oil prices slumped and refinery projects faltered. Petróleo Brasileiro as the company at the epicenter of Brazil’s massive corruption scandal is commonly known, had a consolidated net loss of 36.9 billion reais ($10.2 billion) in the fourth quarter, according to a securities filing. The bigger-than-expected shortfall was 48% larger than the 26.6 billion-real loss a year earlier, the previous record. It also turned the company’s full-year 2015 result, which was positive through September, into a full-year loss. For a second year in a row, CEO Almir Bendine said, Petrobras will not pay dividends to either its government or non-government investors and it plans to make no bonus payments to employees.

The result caught analysts and investors by surprise. The largest fourth-quarter loss expected in a Reuters survey of analysts was 9.7 billion reais. Petrobras common shares fell 5.5% in after-hours electronic trading in New York, after the results were released. The red ink at Petrobras was driven by a 46% decline in the price of benchmark Brent crude oil, a drop that has driven up losses and caused writedowns throughout the global oil industry. Of the 46.4 billion reais written off in the quarter, 83% was for oil fields. A year earlier, writedowns were also the cause of Petrobras losses, although they were largely related to the giant price-fixing, bribery and political kickback scandal that has roiled the company and help fuel calls for the impeachment of Brazilian President Dilma Rousseff.

Who needs enemies with friends like…

• Erdogan To Include Journalists, Politicians in ‘Terrorist’ Definition (Ind.)

Turkey’s President Tayyip Erdogan has claimed the definition of a terrorist should be changed to include their “supporters” – such as MPs, civil activists and journalists. It comes after three academics were arrested on charges of terrorist propaganda after publicly reading out a declaration that reiterated a call to end security operations in the south-east of Turkey, a predominantly Kurdish area. Mr Erdogan has said the academics will pay a price for their “treachery”. A British national was also detained on Tuesday despite having ordered the arrests, after he was found with pamphlets printed by the Kurdish linked People’s Democratic Party (HDP). “It is not only the person who pulls the trigger, but those who made that possible who should also be defined as terrorists, regardless of their title,” President Erdogan said on Monday, adding that this could be a journalist, an MP or a civil activist.

His comments came the day after a suicide bomb attack in the country’s capital of Ankara killed at least 34 people and wounded 125 others when a car bomb was detonated near a main square in the Kizilay neighbourhood. Violent action between the government and the PKK – which is being blamed by authorities for the Ankara bombing – has reached its worst level for 20 years since fighting restarted last July. Hundreds of civilians, militants and security forces have been killed since the summer. President Erdogan has already threatened the future of Turkey’s highest court after it ruled that holding two journalists in pre-trial detention was a violation of their rights to freedom of expression. The journalists, Cumhuriyet newspaper editor Can Dundar and Ankara bureau chief Erdem Gul, were arrested on charges of revealing state secrets and attempting to overthrow the government. They reportedly face calls for multiple life sentences from prosecutors and will stand trial later in March.

“It would be an awesome and wondrous event if the nation landed on November 8 with both parties in complete disarray..”

• The Uses of Disorder (Jim Kunstler)

Many thoughtful and patriotic citizens entering the Kubler-Ross free-fire zone of desperate bargaining with reality are at work attempting to chart an orderly course around the Godzilla-like figure of Trump looming outside the desecrated once-shining city of American democracy. I doubt there is such an orderly way through this political bad weather. When storms hit, things break up. It can be argued endlessly whether times produce the man or vice versa, but except in the most schematic and wishful sense, is there any question that Donald Trump is unfit for the office he’s seeking? Personally, I am tortured by the question: why him? Why this vulgarian who can’t string together two sequentially coherent thoughts? Are there in this land of 320 million-plus people no other men or women with comfortable fortunes and better minds bold enough to take on the matrix of mafias running our affairs into the ground? Apparently not.

Then there is the question — only nascently theoretical at this point — of where such an orderly course of decision and action might lead this country. For Trump, it seems to be a restoration of the 1950s, when armies of “breadwinner” factory workers churned out cornucopias of Maytag washers and Zenith black-and-white televisions, and the less numerous Wogs of the outside world busied themselves with basket-weaving, and Atoms For Peace would make electric power “too cheap to meter,” and popular entertainment came in the chaste form of Dinah Shore urging the upward-aspiring masses to “see the USA in your Chevrolet!” That was, of course, the time of Trump’s childhood (and my own), and if there is anything more certain than night following day, it is that America is not going back to that sunny moment.

Trump and I are way past done growing up as human organisms and America is done growing as a techno-industrial political economy. People decline and die and are replaced by new people, and political economies wither and morph into sets of new activities and relations. The forces of history want to take us to this new disposition of things, and just about everything on the American scene these days is a manifestation of resistance to that journey. The destination is a much re-scaled and down-scaled edition of daily life in a de-globalized economy, with far fewer luxuries and a greater demand for earnestness, purposeful work, generosity-of-spirit, and plain dealing. These are not qualities exhibited by Trump, who represents only the poorly-articulated and grandiose wish to “make America great again.”

The institutional collapse of the Republican Party is in full swing now thanks to Trump. By the way, it could easily be matched by an equally brutal collapse of the Democratic Party if the head of the FBI makes any criminal referrals in the matter of the Clinton Foundation’s entanglements in official State Department business via an email slime trail. It would be an awesome and wondrous event if the nation landed on November 8 with both parties in complete disarray and more than a couple of rump factions posting candidates with dubious legitimate credentials to stand for election. In over two hundred years we have not seen a national election postponed, or canceled.

Not since the dinosaurs died off. [..] “at the start of the PETM, no more than 1bn tonnes of carbon was being released into the atmosphere each year. In stark contrast, 10bn tonnes of carbon are released into the atmosphere every year by fossil fuel-burning and other human activity.”

• Carbon Emission Release Rate ‘Unprecedented’ In Past 66 Million Years (G.)

Humanity is pumping climate-warming carbon dioxide into the atmosphere 10 times faster than at any point in the past 66m years, according to new research. The revelation shows the world has entered “uncharted territory” and that the consequences for life on land and in the oceans may be more severe than at any time since the extinction of the dinosaurs. Scientists have already warned that unchecked global warming will inflict “severe, widespread, and irreversible impacts” on people and the natural world. But the new research shows how unprecedented the current rate of carbon emissions is, meaning geological records are unable to help predict the impacts of current climate change. Scientists have recently expressed alarm at the heat records shattered in the first months of 2016.

“Our carbon release rate is unprecedented over such a long time period in Earth’s history, [that] it means that we have effectively entered a ‘no-analogue’ state,” said Prof Richard Zeebe, at the University of Hawaii, who led the new work. “The present and future rate of climate change and ocean acidification is too fast for many species to adapt, which is likely to result in widespread future extinctions.” Many researchers think the human impacts on the planet has already pushed it into a new geological era, dubbed the Anthropocene. Wildlife is already being lost at rates similar to past mass extinctions, driven in part by the destruction of habitats. “The new results indicate that the current rate of carbon emissions is unprecedented … the most extreme global warming event of the past 66m years, by at least an order of magnitude,” said Peter Stassen, a geologist at the University of Leuven in Belgium, and who was not involved in the work.

The new research, published in the journal Nature Geoscience, examined an event 56m years ago believed to be the biggest release of carbon into the atmosphere since the dinosaur extinction 66m years ago. The so-called Palaeocene–Eocene Thermal Maximum (PETM) saw temperatures rise by 5C over a few thousand years. But until now, it had been impossible to determine how rapidly the carbon had been released at the start of the event because dating using radiometry and geological strata lacks sufficient resolution. Zeebe and colleagues developed a new method to determine the rate of temperature and carbon changes, using the stable isotopes of oxygen and carbon. It revealed that at the start of the PETM, no more than 1bn tonnes of carbon was being released into the atmosphere each year. In stark contrast, 10bn tonnes of carbon are released into the atmosphere every year by fossil fuel-burning and other human activity.

“Franck Düvell is an associate professor and senior researcher at The University of Oxford’s Centre on Migration, Policy and Society.”

• The EU’s Deal With Turkey Is a No-Win Situation (Fortune)

As of this year, 2.7 to 3.5 million Syrians, Iraqis, Afghans, and others have escaped to Turkey from the various evils and conflicts in the region, while 1 million moved on to the European Union. Policy failed to prevent this, and the EU is now entrenched in a moral panic over what is equivalent to a mere 0.2% of the population. Its recent deal with Turkey to send back irregular migrants in exchange for visa-free travel and billions in aid is not only a human rights violation, but could turn out to be a total PR stunt. The primary root of the refugee crisis stems back to the conflicts in Syria, Iraq, and Afghanistan. But a secondary root lies in the lack of access to protection in the countries outside of the EU. Notably in Turkey, non-Syrians have to wait eight years for asylum interviews, Syrians only get temporary protection, and access to regular employment and social services is restricted for both groups.

They endure severe poverty and years in limbo. Meanwhile, the continuation of the flow is partly driven by women and children following their husbands who made the journey last year. Until the summer of 2015, the EU failed to agree on preventive policies, and Turkey bemoaned that it was left alone with the refugee crisis while failing to stop the outflow. Meanwhile, the EU kept relatively quiet, embracing an almost laissez faire attitude. But then numbers exploded and borders were practically overrun, eventually collapsing under the sheer weight of the number of people. In some incidences, refugees protested, occasionally hurling stones, replicating the actions during the Arab Spring and once more demonstrating for human dignity. Their suffering added a Ghandi-esc dimension to their claims. Human agency supported by a myriad of facilitators proved stronger than state policy.

The EU-Turkey “deal” refers to stopping and returning “irregular migrants” and “migrants not in need of international protection” in exchange for refugees to be resettled from Turkey. But 85% of all arrivals are from countries with many refugees, so the numbers affected would be comparably small. But then it also lists Syrians, hence refugees, to be returned. So far, Turkey has already struggled to stop the outflow within the limits of the law, and now turns to violent and illegal measures. The deal is thus inconsistent—and in case refugees are returned—highly legally questionable. The deal is also practically questionable. Which border gates will be used? Are there ferries, planes, and busses available to ship tens of thousands of people back to Turkey? Where will the returned be kept? How will their human dignity be secured?

How will the people who are resettled in exchange from Turkey to Europe be selected? Does Turkey have the political will and capacity to prevent human rights violations like destitution, or to change its legislation and extent refugee status to non-Europeans? In order to make the deal work, Turkey would (a) need to grant a refugee status that complies with EU and international law, and (b) rapidly develop and, more importantly, implement an integration strategy that could justify containing and simultaneously convincing refugees to stay in Turkey. And in the EU, many political parties and several governments need to drop their objections to visa liberalization for Turkey. And Member states that have so far refused to resettle refugees would need to change their position. All of this seems rather unrealistic.

Insane that this was not done BEFORE the deal was signed.

• Greece Appeals For EU Logistics Aid For Migrant Deal To Work (Reuters)

Greece appealed to EU partners on Monday for logistical help to implement a deal with Turkey meant to stem an influx of migrants into Europe, as people – many unaware of the tough new rules – continued to come ashore on Greek islands. Economically battered Greece, for months at the epicenter of Europe’s biggest migrant crisis since World War Two, is struggling to mount the massive logistics operation needed to process asylum applications from the many hundreds of migrants still arriving daily along its shoreline. Turkish officials arrived on the Greek island of Lesvos on Monday to help realize the deal, which requires new arrivals from March 20 to be held until their asylum applications are processed and for those deemed ineligible to be sent back to Turkey from April 4 onwards.

“We must move very swiftly and in a coordinated manner over the next few days to get the best possible result,” Greek Prime Minister Alexis Tsipras said after meeting EU Migration Commissioner Dimitris Avramopoulos in Athens. “Assistance in human resources must come quickly.” Under the EU-Turkey roadmap agreed last Friday, a coordination structure must be created by March 25 and some 4,000 personnel – more than half from other European Union member states – deployed to the islands by next week. Avramopoulos said France, Germany and the Netherlands had already pledged logistics and personnel. “We are at a crucial turning point … The management of the refugee crisis for Europe as a whole hinges on the progress and success of this agreement,” he said.

However, on Monday, the day after the formal start of an agreement intended to close off the main route through which a million refugees and migrants arrived in Europe last year, authorities said 1,662 people had arrived on Greek islands by 7 a.m. (0500 GMT), twice the official count of the day before.

Too late.

• EU Rights Chief Demands More Protection For Refugees (AP)

The Council of Europe commissioner for human rights is calling for additional measures to protect the rights of migrants now that a deal has been reached by the EU and Turkey. Nils Muiznieks said the deal’s legal and procedural safeguards should apply to all people – not just Syrians – reaching Greece or any EU country. Such safeguards should likewise extend to anyone who is returned to Turkey. He also called on Greece and Turkey to limit the use of detention of migrants to “exceptional” cases and take steps to ensure there are no collective returns. Muiznieks described the deal, which officially came into effect on Sunday, as “just a patch to plug one of the holes in the highly dysfunctional approach of European states to migration.”

People come to you for help and you lock them up?!

• Greece Sets Up Detention Camps As Refugee Deal Hits Delays (AP)

Greece detained hundreds of refugees and migrants on its islands Monday, as officials in Athens and the European Union conceded a much-heralded agreement to send thousands of asylum-seekers back to Turkey is facing delays. Migrants who arrived after the deal took effect Sunday were being led to previously open refugee camps on the islands of Lesbos and Chios and held in detention, authorities on the islands said. EU countries are trying to avoid a repeat of the mass migration in 2015, when more than a million people entered the bloc. Most were fleeing civil war in Syria and other conflicts, traveling first to Turkey and then to the nearby Greek islands in dinghies and small boats. Efforts to limit migration have run into multiple legal and practical obstacles.

Under the deal, Greek authorities will detain and return newly arrived refugees to Turkey. The EU will settle more refugees directly from Turkey and speed up financial aid to Ankara. The two sides, however, are still working out how migrants will be sent back. “We are conscious of the difficulties,” EU Commission spokesman Margaritis Schinas said in Brussels. “And we are working 24-7 to make sure that everything that needs to be in place for this agreement to be implemented soon is happening.” Commission officials said support staff needed to implement the deal -including hundreds of translators and migration officers- would not start arriving until next week. Returns, they said, cannot start until Greece changes its law to recognize Turkey as a “safe country” for asylum applications.

The human rights group Amnesty International sharply criticized the plan. “Turkey does not offer adequate protection to anyone,” Iverna McGowan, the head of Amnesty’s EU office, told The Associated Press, accusing Turkey of routinely forcing Syrians back across the border.

Debt Rattle Christmas Eve 2015

Dec 242015

December 24, 2015 Posted by Raúl Ilargi Meijer at 10:52 am Finance Tagged with: China, drownings, emissions, Greece, nuclear, oil, OPEC, poverty, recovery, refugees, savings 3 Responses »

NPC “Poli’s Theater, Washington, DC. Now playing: Edith Taliaferro in “Keep to the Right” 1920

• Half The Country Is Either Living In Poverty Or Damn Near Close To It (AN)

• Most Americans Have Less Than $1,000 In Savings (MarketWatch)

• The Keynesian Recovery Meme Is About To Get Mugged, Part 2 (Stockman)

• Extreme Oil Bears Bet on $25, $20 and Even $15 a Barrel in 2016 (BBG)

• US Banks Hit By Cheap Oil As OPEC Warns Of Long-Term Low (FT)

• Oil Crash Is a Party Pooper as Holiday Affairs Lose Their Luster (BBG)

• New Saudi Budget Expected to Be Squeezed by Low Oil Prices (WSJ)

• OPEC Faces A Mortal Threat From Electric Cars (AEP)

• The Trouble With Sovereign-Wealth Funds (WSJ)

• China Tackles Housing Glut To Arrest Growth Slowdown (Xinhua)

• German Emissions Scandal Threatens To Engulf Mercedes, BMW (DW)

• Australia Approves Expansion of Barrier Reef Coal Terminal (WSJ)

• Japanese Court Clears Way For Restart Of Nuclear Reactors (BBG)

• On the 19th day of Christmas… [Am 19. Tag der Weihnachtszeit…] (Orlov)

• Greek Banking Sector Cut In Half Since 2008 (Kath.)

• No Further Cuts To Greek Pensions, Tsipras Tells Cabinet (Kath.)

• Donald Trump: An Evaluation (Paul Craig Roberts)

• 20 Refugees Drown; 2015 Death Rate Over 10 Human Beings Each Day (CNN)

Yeah, recovery. Sure. “Jobs gained since the recession are paying 23% less than jobs lost..”

• Half The Country Is Either Living In Poverty Or Damn Near Close To It (AN)

Recent reports have documented the growing rates of impoverishment in the U.S., and new information surfacing in the past 12 months shows that the trend is continuing, and probably worsening. Congress should be filled with guilt — and shame — for failing to deal with the enormous wealth disparities that are turning our country into the equivalent of a 3rd-world nation.

Half of Americans Make Less than a Living Wage According to the Social Security Administration, over half of Americans make less than $30,000 per year. That’s less than an appropriate average living wage of $16.87 per hour, as calculated by Alliance for a Just Society (AJS), and it’s not enough — even with two full-time workers — to attain an “adequate but modest living standard” for a family of four, which at the median is over $60,000, according to the Economic Policy Institute. AJS also found that there are 7 job seekers for every job opening that pays enough ($15/hr) for a single adult to make ends meet.

Half of Americans Have No Savings A study by Go Banking Rates reveals that nearly 50% of Americans have no savings. Over 70% of us have less than $1,000. Pew Research supports this finding with survey results that show nearly half of American households spending more than they earn. The lack of savings is particularly evident with young adults, who went from a five-percent savings rate before the recession to a negative savings rate today. Emmanuel Saez and Gabriel Zucman summarize: “Since the bottom half of the distribution always owns close to zero wealth on net, the bottom 90% wealth share is the same as the share of wealth owned by top 50-90% families.”

Nearly Two-Thirds of Americans Can’t Afford to Fix Their Cars The Wall Street Journal reported on a Bankrate study, which found 62% of Americans without the available funds for a $500 brake job. A Federal Reserve survey found that nearly half of respondents could not cover a $400 emergency expense. It’s continually getting worse, even at upper-middle-class levels. The Wall Street Journal recently reported on a JP Morgan study’s conclusion that “the bottom 80% of households by income lack sufficient savings to cover the type of volatility observed in income and spending.” Pew Research shows the dramatic shrinking of the middle class, defined as “adults whose annual household income is two-thirds to double the national median, about $42,000 to $126,000 annually in 2014 dollars.” Market watchers rave about ‘strong’ and even ‘blockbuster’ job reports.

But any upbeat news about the unemployment rate should be balanced against the fact that nine of the ten fastest growing occupations don’t require a college degree. Jobs gained since the recession are paying 23% less than jobs lost. Low-wage jobs (under $14 per hour) made up just 1/5 of the jobs lost to the recession, but accounted for nearly 3/5 of the jobs regained in the first three years of the recovery. Furthermore, the official 5% unemployment rate is nearly 10% when short-term discouraged workers are included, and 23% when long-term discouraged workers are included. People are falling fast from the ranks of middle-class living. Between 2007 and 2013 median wealth dropped a shocking 40%, leaving the poorest half with debt-driven negative wealth. Members of Congress, comfortably nestled in bed with millionaire friends and corporate lobbyists, are in denial about the true state of the American middle class. The once-vibrant middle of America has dropped to lower-middle, and it is still falling.

Damning.

• Most Americans Have Less Than $1,000 In Savings (MarketWatch)

Americans are living right on the edge — at least when it comes to financial planning. Approximately 62% of Americans have less than $1,000 in their savings accounts and 21% don’t even have a savings account, according to a new survey of more than 5,000 adults conducted this month by Google Consumer Survey for personal finance website GOBankingRates.com. “It’s worrisome that such a large%age of Americans have so little set aside in a savings account,” says Cameron Huddleston, a personal finance analyst for the site. “They likely don’t have cash reserves to cover an emergency and will have to rely on credit, friends and family, or even their retirement accounts to cover unexpected expenses.”

This is supported by a similar survey of 1,000 adults carried out earlier this year by personal finance site Bankrate.com, which also found that 62% of Americans have no emergency savings for things such as a $1,000 emergency room visit or a $500 car repair. Faced with an emergency, they say they would raise the money by reducing spending elsewhere (26%), borrowing from family and/or friends (16%) or using credit cards (12%). And among those who had savings prior to 2008, 57% said they’d used some or all of their savings in the Great Recession, according to a U.S. Federal Reserve survey of over 4,000 adults released last year. Of course, paltry savings-account rates don’t encourage people to save either.

In the latest survey, 29% said they have savings above $1,000 and, of those who do have money in their savings account, the most common balance is $10,000 or more (14%), followed by 5% of adults surveyed who have saved between $5,000 and just shy of $10,000; 10% say they have saved $1,000 to just shy of $5,000. Just 9% of people say they keep only enough money in their savings accounts to meet the minimum balance requirements and avoid fees. But minimum balance requirements can vary widely and be hard to meet for some consumers. They can vary anywhere between $300 a month and $1,500 a month at some major banks.

Some age groups are less likely to have savings than others. Some 31% of Generation X — who are roughly aged 35 to 54 for the purpose of this survey — while being older and presumably more experienced with money than their younger cohorts, actually report a savings account balance of zero, which is the highest%age of all age groups. Around 29% of millennials — aged 18 to 34 — and 28% of baby boomers — aged 55 to 64 — said they have no money in their savings account. Baby boomers (17%) and seniors aged 65 and up (20%) have the most money saved of any age group while less than 10% of millennials and approximately 16% of Generation X have $10,000 or more saved.

“High powered central bank credit has exploded from $2 trillion to $21 trillion since the mid-1990’s..”

• The Keynesian Recovery Meme Is About To Get Mugged, Part 2 (Stockman)

Our point yesterday was that the Fed and its Wall Street fellow travelers are about to get mugged by the oncoming battering rams of global deflation and domestic recession. When the bust comes, these foolish Keynesian proponents of everything is awesome will be caught like deer in the headlights. That’s because they view the world through a forecasting model that is an obsolete relic – one which essentially assumes a closed US economy and that balance sheets don’t matter. By contrast, we think balance sheets and the unfolding collapse of the global credit bubble matter above all else. Accordingly, what lies ahead is not history repeating itself in some timeless Keynesian economic cycle, but the last twenty years of madcap central bank money printing repudiating itself.

Ironically, the gravamen of the indictment against the “all is awesome” case is that this time is different – radically, irreversibly and dangerously so. High powered central bank credit has exploded from $2 trillion to $21 trillion since the mid-1990’s, and that has turned the global economy inside out. Under any kind of sane and sound monetary regime, and based on any semblance of prior history and doctrine, the combined balance sheets of the world’s central banks would total perhaps $5 trillion at present (5% annual growth since 1994). The massive expansion beyond that is what has fueled the mother of all financial and economic bubbles. Owing to this giant monetary aberration, the roughly $50 trillion rise of global GDP during that period was not driven by the mobilization of honest capital, profitable investment and production-based gains in income and wealth.

It was fueled, instead, by the greatest credit explosion ever imagined – $185 trillion over the course of two decades. As a consequence, household consumption around the world became bloated by one-time takedowns of higher leverage and inflated incomes from booming production and investment. Likewise, the GDP accounts were drastically ballooned by a spree of malinvestment that was enabled by cheap credit, not the rational probability of sustainable profits. In short, trillions of reported global GDP – especially in the Red Ponzi of China and its EM supply chain – represents false prosperity; the income being spent and recorded in the official accounts is merely the feedback loop of the central bank driven credit machine.

More casino. That’s all that‘s left.

• Extreme Oil Bears Bet on $25, $20 and Even $15 a Barrel in 2016 (BBG)

Oil speculators are buying options contracts that will only pay out if crude drops to as low as $15 a barrel next year, the latest sign some investors expect an even deeper slump in energy prices. The bearish wagers come as OPEC’s effective scrapping of output limits, Iran’s anticipated return to the market and the resilience of production from countries such as Russia raise the prospect of a prolonged global oil glut. “We view the oversupply as continuing well into next year,” Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc., wrote in a note on Tuesday, adding there’s a risk oil prices would fall to $20 a barrel to force production shutdowns if mild weather continues to damp demand.

The bearish outlook has prompted investors to buy put options – which give them the right to sell at a predetermined price and time – at strike prices of $30, $25, $20 and even $15 a barrel, according to data from the New York Mercantile Exchange and the U.S. Depository Trust & Clearing. West Texas Intermediate, the U.S. benchmark, is currently trading at about $36 a barrel. The data, which only cover options deals that have been put through the U.S. exchange or cleared, is viewed as a proxy for the overall market and volumes have increased this week as oil plunged. Investors can buy options contracts in the bilateral, over-the-counter market too. Investors have bought increasing volumes of put options that will pay out if the price of WTI drops to $20 to $30 a barrel next year, the data show. The largest open interest across options contracts – both bullish and bearish – for December 2016 is for puts at $30 a barrel.

2016 will be a very bad year for US energy lenders. And that’s not just the banks.

• US Banks Hit By Cheap Oil As OPEC Warns Of Long-Term Low (FT)

US banks face the prospect of tougher stress tests next year because of their exposure to oil in a sign of how the falling price of crude is transforming the outlook not just for energy companies but the financial sector. OPEC on Wednesday lowered its long-term estimates for oil demand and said the price of crude would not return to the level it reached last year, at $100 a barrel, until 2040 at the earliest. In its World Oil Outlook it said energy efficiency, carbon taxes and slower economic growth would affect demand. Crude oil’s price on Tuesday hit an 11-year low below $36, piling further pressure on banks that have large loans to energy companies or significant exposure to oil on their trading books.

The US Federal Reserve subjects banks with at least $50bn in assets, including the US arms of foreign banks, to an annual stress test, that is designed to ensure they could keep trading through a deep recession and a big shock to the financial system. Today’s oil prices are about 55% below their level when the Fed set last year’s stress test scenarios in October 2014. That test included looking at how banks’ trading books would fare if there was a one-off 68% fall in oil prices sometime before the end of 2017. Banks’ loan books were not tested against falls in oil prices. Banks including Wells Fargo have recently spoken about the dangers of low oil prices that could make exploration companies and oil producers unable to pay their loans.

There are now five times as many oil and gas loans in danger of default to the oil and gas sector as there were a year ago, a trio of US regulators warned in November. Michael Alix, who leads PwC’s financial services risk consulting team in New York, warned the price of oil would weigh much more heavily on the assessors when drawing up next year’s bank stress tests. “It would test those institutions [banks] for both the direct effects [of oil price falls] on their oil or commodity trading business but importantly the indirect effects [of] lending to energy companies, lending in areas of the country that are more dependent on energy companies and energy-related revenues.”

No kidding: “You can’t have a $2 million Christmas party while at the same time laying off half your workforce..”

• Oil Crash Is a Party Pooper as Holiday Affairs Lose Their Luster (BBG)

The Grinch nearly stole Christmas in the oil patch this year. Thanks to the lowest crude and natural gas prices in more than a decade, Norwegian oil and natural gas producer Statoil cut its holiday party budget by about 40% from 2014. KBR Inc. and Marathon Oil opted for smaller affairs with less swank. One Houston hotel said its seasonal party business is down 25% from 2014. Pricey wine and champagne are off the menu. The industry has shed more than 250,000 jobs and idled more than 1,000 rigs as crude prices fell by more than half since last year. Oil services, drilling and supply companies are bearing the brunt of the downturn and account for more than three quarters of the layoffs, according to industry consultant Graves & Co. “You can’t have a $2 million Christmas party while at the same time laying off half your workforce,” said Jordan Lewis at Sullivan Group, a Houston event planning company.

Independent power generators have also been stung by cheap electricity amid declining gas prices. The heating and power plant fuel slid recently to the lowest level since 1999, and is heading for the biggest annual drop since 2006 as the lack of demand leaves stockpiles at a seasonal record. The commodity rout and the layoffs that followed have dampened holiday festivities. Several hundred Statoil employees were invited earlier this month to Minute Maid Park, where Major League Baseball’s Houston Astros play, for a party that featured scaled back entertainment and décor, spokesman Peter Symons said. At the Houston-based oil and gas construction firm KBR, management canceled this year’s companywide party. Instead, individual departments were encouraged to hold their own gatherings from potlucks to group socials, spokeswoman Brenna Hapes said.

Like all the rest, they’ll go to war to hide their troubles.

• New Saudi Budget Expected to Be Squeezed by Low Oil Prices (WSJ)

The drastic slide in global crude prices is expected to force Saudi Arabia, the world’s leading oil exporter, to slash spending and cut back on the billions of dollars it spends on generous benefits for its citizens in next year’s budget. The oil-rich kingdom spent hundreds of billions of dollars at home in the past decade to bolster its economy and dole out subsidies that provide cheap energy and food for its 30 million people, as it enjoyed years of high crude prices. But the price of oil has fallen by more than half since the middle of last year, forcing the government to dip into reserves, reassess its spending plans and look for ways to diversify sources of revenue. “I’m worried that prices would go up,” said a man waiting for his SUV to be filled in a gas station in northern Riyadh this week.

“There is a lot of talk but I think the government has put this into account,” he said, adding that he expects the increase in prices to be small. Saudi Arabia exports about seven million barrels of oil a day and those revenues make up around 90% of the government’s fiscal revenues, and around 40% of the country’s overall gross domestic product. Saudi Arabia sees the need to cut output to boost prices but so far has been reluctant to do it alone. Officials say that preserving the country’s share of the global market is more important. The 2016 budget, expected to be unveiled in the coming days, will be the first major opportunity for the government to publicly outline a strategy to cope with a prolonged period of cheap oil and soothe the nerves of both the public and investors in the Middle East’s largest economy.

It isn’t clear whether ambitious and sensitive policy changes—such as privatizations and the cutting of energy subsidies—will be included. But even if energy subsidies are cut, the government is unlikely to immediately target consumers, who have become accustomed to some of the lowest gas prices in the world. Any reduction would risk a backlash from the public. “My expectation is that it will start gradually, and that it will target non-consumers first,” said Fahad Alturki, chief economist at Riyadh-based firm Jadwa Investment, of potential subsidy cutbacks. “We won’t see a radical change….The change will be gradual, with a clear road map—and it may not be part of the budget.”

Ambrose is the posterchild for techno-happy. The thinking is that all it takes is for a lot of money to be thrown at the topic. Mind you, the projection is for the number of cars to double in 25 years. That is a disaster no matter what powers the cars. The magic word is ‘grid-connected vehicles’, but that grid would then have to expand, what, 4-fold?

• OPEC Faces A Mortal Threat From Electric Cars (AEP)

OPEC remains defiant. Global reliance on oil and gas will continue unchanged for another quarter century. Fossil fuels will make up 78pc of the world’s energy in 2040, barely less than today. There will be no meaningful advances in technology. Rivals will sputter and mostly waste money. The old energy order is preserved in aspic. Emissions of CO2 will carry on rising as if nothing significant had been agreed in a solemn and binding accord by 190 countries at the Paris climate summit. OPEC’s World Oil Outlook released today is a remarkable document, the apologia of a pre-modern vested interest that refuses to see the writing on the wall. The underlying message is that the COP21 deal is of no relevance to the oil industry. Pledges by world leaders to drastically alter the trajectory of greenhouse gas emissions before 2040 – let alone to reach total “decarbonisation” by 2070 – are simply ignored.

Global demand for crude oil will rise by 18m barrels a day (b/d) to 110m by 2040. The cartel has shaved its long-term forecast slightly by 1m b/d, but this is in part due to weaker economic growth. One is tempted to compare this myopia to the reflexive certainties of the 16th Century papacy, even as Erasmus published in Praise of Folly, and Luther nailed his 95 Theses to the door of Wittenberg’s Castle Church. The 407-page report swats aside electric vehicles with impatience. The fleet of cars in the world will rise from 1bn to 2.1bn over the next 25 years – topping 400m in China – and 94pc will still run on petrol and diesel. “Without a technology breakthrough, battery electric vehicles are not expected to gain significant market share in the foreseeable future,” it said. Electric cars cost too much. Their range is too short. The batteries are defective in hot or cold conditions.

OPEC says battery costs may fall by 30-50pc over the next quarter century but doubts that this will be enough to make much difference, due to “consumer resistance”. This is a brave call given that Apple and Google have thrown their vast resources into the race for plug-in vehicles, and Tesla’s Model 3s will be on the market by 2017 for around $35,000. Ford has just announced that it will invest $4.5bn in electric and hybrid cars, with 13 models for sale by 2020. Volkswagen is to unveil its “completely new concept car” next month, promising a new era of “affordable long-distance electromobility.” The OPEC report is equally dismissive of Toyota’s decision to bet its future on hydrogen fuel cars, starting with the Mirai as a loss-leader. One should have thought that a decision by the world’s biggest car company to end all production of petrol and diesel cars by 2050 might be a wake-up call.

Goldman Sachs expects ‘grid-connected vehicles’ to capture 22pc of the global market within a decade, with sales of 25m a year, and by then – it says – the auto giants will think twice before investing any more money in the internal combustion engine. Once critical mass is reached, it is not hard to imagine a wholesale shift to electrification in the 2030s. Goldman is betting that battery costs will fall by 60pc over the next five years, driven by economies of scale as much as by technology. The driving range will increase by 70pc. This is another world from OPEC’s forecast.

They’re all invested in hubris.

• The Trouble With Sovereign-Wealth Funds (WSJ)

Kazakhstan’s $55 billion sovereign-wealth fund helped pull the country through the global financial crisis and offered funding for the country’s bid to host the 2022 Winter Olympics. But the collapse in oil prices has hit Kazakhstan and its fund, Samruk-Kazyna JSC, hard. In October, the fund borrowed $1.5 billion in its first syndicated loan to help a cash-strapped subsidiary saddled with a troubled oil-field investment. “Our oil company lost lots of its revenues,” says the fund’s chief executive, Umirzak Shukeyev. “Currently, we are trying to adjust to the situation.” Funds like Samruk are at a critical juncture. For years, sovereign-wealth funds—financial vehicles owned by governments—swelled in size and number, fueled by rising oil prices and leaders’ aspirations to increase economic growth, invest abroad and boost political influence.

A new wave of sovereign funds came from African countries like Ghana and Angola. Asian nations joined in with funds like 1Malaysia Development Bhd., or 1MDB. The world’s sovereign-wealth funds together have assets of $7.2 trillion, according to the Sovereign Wealth Fund Institute, which studies them. That is twice their size in 2007, and more than is managed by all the world’s hedge funds and private-equity funds combined, according to JP Morgan. The number of funds tracked by the Institute of International Finance is up 44% to 79 since the end of 2007. Nearly 60% of sovereign-wealth-fund assets are in funds dependent on energy exports. Now, some funds are shrinking or are being tapped by governments as oil revenues fall.

That is forcing them to borrow or sell investments, potentially pressuring global markets just as other investors are pulling back from risk. Saudi Arabia’s central bank, which functions in some ways like a sovereign-wealth fund as it holds significant reserves that are invested widely, has sold billions in assets this year. Norway says it plans to tap its fund, the world’s largest, for the first time in 2016. The stress from low energy prices comes at a sensitive time. At least two funds are embroiled in controversy. 1MDB, which amassed $11 billion in debt, is the subject of at least nine investigations at home and abroad. One of its main financial backers was an Abu Dhabi fund. The head of South Korea’s fund stepped down in the wake of a public outcry over his plan to invest in the Los Angeles Dodgers baseball team.

Adnan Mazarei, deputy director of the IMF’s Middle East and Central Asia Department, says the worry is sovereign-wealth funds will be forced to sell during a period of already turbulent markets. “A withdrawal of assets by sovereign-wealth funds against the background of liquidity concerns could lead to large price movements,” he says. “Nobody knows how much or when but the concern is there.”

Behind the curve by a mile and a half: “China will roll out policy to transform 100 million farmers into registered urban residents..”

• China Tackles Housing Glut To Arrest Growth Slowdown (Xinhua)

China will continue to actively destock its massive property inventory over concerns that the ailing housing market could derail the economy.Along with cutting overcapacity and tackling debt, destocking will be a major task in 2016, according to a statement released on Monday after the Central Economic Work Conference, which mapped out economic work for next year.Attendees of the meeting agreed that rural residents that move to urban areas should be allowed to register as residents, which would encourage them to buy homes in the city. Property developers have been advised to reduce home prices, according to the statement.”Obsolete restrictive measures [in the property market] will be revoked,” said the statement, without specifying which “restrictive measures” it was referring to.

To rein in house prices, China has been trying to curb real estate speculation, with policies such as “home purchase restriction” that only allows registered residents to buy houses. It is believed the restrictive policies mainly affected the property markets in third- and fourth-tier cities, which saw the most supply glut. The property market took a downturn in 2014 due to weak demand and a supply glut. This cooling continued into 2015, with sales and prices falling, and investment slowing. Property investment’s GDP contribution in the first three quarters of this year hit a 15-year low of 0.04%. The property market is vital to steel and cement manufacturers, as well as furniture producers; its poor performance would breed financial risks.

GDP growth during the January-September period eased to 6.9%, down from 7.4% posted for the whole of 2014. Policymakers believe the housing inventory will be lessened as long as rural residents are encouraged to buy. Nearly 55% of the population live in cities but less than 40% are registered to do so. There are around 300 million migrant workers but most are denied “hukou” (official residence status). In addition to housing rights, a hukou gives the holder equal employment rights and social security services, and their children are allowed to be enrolled in city schools. Starting next year, China will roll out policy to transform 100 million farmers into registered urban residents, according to Xu Shaoshi, head of the National Development and Reform Commission, on Tuesday. No deadline for completion was specified.

Be that way: “Should you in any way present the accusation that my client manipulated its emissions data, we will act against you with all necessary sustainability and hold you responsible for any economic damage that my client suffers as a result.”

• German Emissions Scandal Threatens To Engulf Mercedes, BMW (DW)

The environmental group Deutsche Umwelthilfe (DUH) and German state broadcaster ZDF presented the results of nitric oxide tests they had conducted on two Mercedes and BMW diesel models. They appeared to show similar discrepancies between “test mode” and road conditions that hit Volkswagen earlier this year, triggering one of the biggest scandals in German automobile history. In response to the report released on December 15, a law firm representing Daimler, which owns Mercedes, sent a letter to the DUH that read, “Should you in any way present the accusation that my client manipulated its emissions data, we will act against you with all necessary sustainability and hold you responsible for any economic damage that my client suffers as a result.”

In defiance of another threat by the Schertz law firm, the DUH published the threatening letter in full on its website. “We have been massively threatened two more times, demanding that we take down the letter – we have told them we won’t,” DUH chairman Jürgen Resch told DW on Wednesday. “For me it’s a very serious issue, because in 34 years of full-time work in environmental protection, and dealing with businesses, I have never experienced a business using media law to try and keep a communication – and a threatening letter at that – secret. “How are we supposed to do our work as a consumer and environmental protection organization when industry forbids us from making public certain threats it makes?” an outraged Resch added. “I think the threat itself is borderline legal coercion.”

In a short documentary broadcast on December 15, ZDF tested three diesel cars – a Mercedes C200 CDI from 2011, a BMW 320d from 2009, and a VW Passat 2.0 Blue Motion from 2011 – and showed that all three produced more nitric oxide on the road than they did in an official laboratory test. “The measurement results show that the cars behave differently on the test dynamometer than when they are driven on the road,” said the laboratory at the University of Applied Sciences in Bern, Switzerland, which carried out the tests. The discrepancies researchers found were not small – while all three cars kept comfortably below the European Union’s legal nitric oxide limit (180 milligrams per kilometer) in the lab, they all went well over the standard on the road, where the BMW recorded 428 mg/km (2.8 times its lab result), the Mercedes hit 420 mg/km (2.7 times its lab result), and the VW Passat reached 471 mg/km (3.7 times its lab result).

Anything for a buck.

• Australia Approves Expansion of Barrier Reef Coal Terminal (WSJ)

Australia approved the expansion of a shipping terminal close to the Great Barrier Reef on Tuesday, drawing criticism from environmentalists who say an area of outstanding natural beauty is threatened by the decision. Environment Minister Greg Hunt said he would allow the extension the Abbot Point terminal—used to ship coal to markets in Asia—with 30 conditions to help protect the environment, including a requirement that dredge material be dumped on land instead of in water near the World Heritage-listed reef. The expanded port will serve one of the world’s largest coal mines that is being developed by Adani Group in Queensland, a state in eastern Australia where the Great Barrier Reef Marine Park is also located.

The Indian conglomerate aims to use the port to ship as much as 60 million tons of thermal coal annually to its power plants in India. “The port area is at least 20 kilometers from any coral reef and no coral reef will be impacted,” said a spokeswoman for Mr. Hunt, adding: “All dredge material will be placed onshore on existing industrial land.” The government of Queensland, which receives an estimated 6 billion Australian dollars (US$4.3 billion) a year from reef tourism, has yet to approve the expansion, but isn’t expected to block it with the government hoping to unlock a new wave of resource projects. The extension of Abbot Point will lead to the dredging of more than 1 million cubic meters of mud and rock nearby to the reef.

Environmentalists have been equally critical of Adani’s plans to build its Carmichael coal mine and associated infrastructure in the region—because of the potential impact on a native Australian lizard and another vulnerable species. Pro-environment groups said the federal government’s approval of the port expansion wouldn’t only harm wildlife, but also run counter to Australia’s pledge at the Paris global climate conference this month to work toward curbing emissions from fossil fuels such as coal, among the country’s top exports. “The Abbot Point area to be dredged is home to dolphins and dugongs which rely on the sea grass there for food,” said Shani Tager, a Greenpeace campaigner. “It’s also a habitat for endangered marine life like turtles and giant manta rays, and is in the path of migrating humpback whales. “It’s reckless and pointless to gouge away at a pristine habitat to build a port for a coal mine nobody needs,” she added.

One more accident away from civil war.

• Japanese Court Clears Way For Restart Of Nuclear Reactors (BBG)

A Japanese court has cleared the way for Kansai Electric Power to restart two of its nuclear reactors early next year. The Fukui District Court on Thursday removed an injunction preventing the operation of Kansai Electric’s Takahama No. 3 and No. 4 nuclear reactors, Tadashi Matsuda, a representative for the citizen’s group that initiated the case, said by phone. The court also rejected a demand by local residents to block the resumption of reactor operations at Kansai Electric’s Ohi plant. The ruling was earlier reported by broadcaster NHK. “We think that today’s decisions are a result of the understanding that safety at Takahama and Ohi is guaranteed,” Kansai Electric said in a statement. Residents of Fukui who oppose the restarts plan to appeal the ruling to a higher court, according to Matsuda.

Kansai Electric, the utility most dependent on nuclear power before the March 2011 Fukushima disaster, aims to restart Takahama No. 3 in late January or February, according to a company presentation last month. It is slated to be the third Japanese reactor to restart under post-Fukushima safety rules. Firing up both units will boost Kansai Electric’s profits by as much as 12.5 billion yen ($104 million) a month, according to Syusaku Nishikawa, a Tokyo-based analyst at Daiwa Securities. The two reactors at the Takahama facility, about 60 kilometers (37 miles) north of Kyoto, were commissioned in 1985 and have a combined capacity of 1,740 megawatts.

Operations of the units were suspended in the aftermath of the massive earthquake and tsunami in March 2011 that caused a meltdown at Tokyo Electric Power Co.’s Fukushima Dai-Ichi facility. The units received restart approval from the Nuclear Regulatory Authority in February, though court challenges stopped them from resuming operation. On Tuesday, Fukui prefecture Governor Issei Nishikawa granted his approval for the restarts. While not enshrined in law, local government approval is traditionally sought by Japanese utilities before they return the plants to service.

Very much worth reading by Dmitry. I can’t copy the whole thing, but do read it.

• On the 19th day of Christmas… [Am 19. Tag der Weihnachtszeit…] (Orlov)

You see, the Ukraine produces over half of its electricity using nuclear power plants. 19 nuclear reactors are in operation, with 2 more supposedly under construction. And this is in a country whose economy is in free-fall and is set to approach that of Mali or Burundi! The nuclear fuel for these reactors was being supplied by Russia. An effort to replace the Russian supplier with Westinghouse failed because of quality issues leading to an accident. What is a bankrupt Ukraine, which just stiffed Russia on billions of sovereign debt, going to do when the time comes to refuel those 19 reactors? Good question! But an even better question is, Will they even make it that far? You see, it has become known that these nuclear installations have been skimping on preventive maintenance, due to lack of funds.

Now, you are probably already aware of this, but let me spell it out just in case: a nuclear reactor is not one of those things that you run until it breaks, and then call a mechanic once it does. It’s not a “if it ain’t broke, I can’t fix it” sort of scenario. It’s more of a “you missed a tune-up so I ain’t going near it” scenario. And the way to keep it from breaking is to replace all the bits that are listed on the replacement schedule no later than the dates indicated on that schedule. It’s either that or the thing goes “Ka-boom!” and everyone’s hair falls out. How close is Ukraine to a major nuclear accident? Well, it turns out, very close: just recently one was narrowly avoided when some Ukro-Nazis blew up electric transmission lines supplying Crimea, triggering a blackout that lasted many days.

The Russians scrambled and ran a transmission line from the Russian mainland, so now Crimea is lit up again. But while that was happening, the Southern Ukrainian, with its 4 energy blocks, lost its connection to the grid, and it was only the very swift, expert actions taken by the staff there that averted a nuclear accident. I hope that you know this already, but, just in case, let me spell it out again. One of the worst things that can happen to a nuclear reactor is loss of electricity supply. Yes, nuclear power stations make electricity—some of the time—but they must be supplied with electricity all the time to avoid a meltdown. This is what happened at Fukushima Daiichi, which dusted the ground with radionuclides as far as Tokyo and is still leaking radioactive juice into the Pacific.

And so the nightmare scenario for the Ukraine is a simple one. Temperature drops below freezing and stays there for a couple of weeks. Coal and natural gas supplies run down; thermal power plants shut down; the electric grid fails; circulator pumps at the 19 nuclear reactors (which, by the way, probably haven’t been overhauled as recently as they should have been) stop pumping; meltdown!

And what is left is being sold to investor funds.

• Greek Banking Sector Cut In Half Since 2008 (Kath.)

The unprecedented crisis that has been squeezing the country since 2009 has seen domestic banks shrink to half the size they were seven years ago. According to data compiled by Kathimerini, some 50,000 jobs have been lost in the sector since 2008, of which 25,000 are in Greece and 25,000 abroad. The total number of branches has been reduced by 3,500 to 4,200 from 7,715 at the end of 2008. Local lenders have also halted operations at 1,700 branches in Greece as well as 2,175 cash machines. The number of branches in Greece has dropped by 42.3%, employees by 36% and ATMs by 28.7%. There are 49.3% fewer branches abroad and 51.7% fewer employees.

The storm within the banking system and the domestic economy is best reflected in the level of deposits and loans: The total deposits of €240 billion six years ago have now been cut in half to €120 billion. The sum of outstanding loans may be 35% less than in 2009 in theory, at €204 billion, but in reality the reduction is far greater, as €100 billion of that €204 billion is not being serviced. Therefore the real picture of the banking system shows deposits of 120 billion and serviced loans of less than €110 billion, meaning that the credit sector has halved since end-2008. Bank officials say that contraction was inevitable given the 25% decline of GDP from 2009 to 2015, with forecasts pointing to a greater recession in 2016.

If the troika wants it, it’ll happen anyway.

• No Further Cuts To Greek Pensions, Tsipras Tells Cabinet (Kath.)

Greek Prime Minister Alexis Tsipras has pledged there will be no further cuts to pensions adding that social security reform is necessary for the completion of the nation’s bailout program review by foreign creditors. “This red line is non-negotiable: we will not reduce main pensions for a 12th time,” Tsipras told his cabinet on Wednesday. Tsipras said the bailout agreement did not mandate fresh cuts to pensions. “What the agreement calls for is cuts in spending; it does not say that these will come by reducing pensions,” he said.

Previous cuts, Tsipras said, had brought Greek pensions down by an average 45%. However, they had failed to ensure the sustainability of the country’s social security system. The government is trying to build a viable system without disrupting social cohesion, the leftist PM said. Tsipras said that pension reform is the final prerequisite for wrapping up the assessment of the Greek program so that talks on debt relief can proceed. “The goal is to complete the first review as soon as possible while keeping in place a safety net for the weakest,” he said.

Well written.

• Donald Trump: An Evaluation (Paul Craig Roberts)

Donald Trump, judging by polls as of December 21, 2015, is the most likely candidate to be the next president of the US. Trump is popular not so much for his stance on issues as for the fact that he is not another Washington politican, and he is respected for not backing down and apologizing when he makes strong statements for which he is criticized. What people see in Trump is strength and leadership. This is what is unusual about a political candidate, and it is this strength to which voters are responding. The corrupt American political establishment has issued a “get Trump” command to its presstitute media. Media whore George Stephanopoulos, a loyal follower of orders, went after Trump on national television. But Trump made mincemeat of the whore.

Stephanopoulos tried to go after Trump because the world’s favorite leader, President Putin of Russia, said complimentary things about Trump, and Trump replied in kind. According to Stephanopoulos, “Putin has murdered journalists,” and Trump should be ashamed of praising a murderer of journalists. Trump asked Stephanopoulos for evidence, and Stephanopoulos didn’t have any. In other words, Stephanopoulos confirmed Trump’s statement that American politicians just make things up and rely on the presstitutes to support invented “facts” as if they are true. Trump made reference to Washington’s many murders. Stephanopoulos wanted to know what journalists Washington had murdered. Trump responded with Washington’s murders and dislocation of millions of peoples who are now overrunning Europe as refugees from Washington’s wars.

B ut Trumps advisors were not sufficiently competent to have armed him with the story of Washington’s murder of Al Jazerra’s reporters. Here is a report from Al Jazeera, a far more trustworthy news organization than the US print and TV media:

“On April 8, 2003, during the US-led invasion of Iraq, Al Jazeera correspondent Tareq Ayoub was killed when a US warplane bombed Al Jazeera’s headquarters in Baghdad. “The invasion and subsequent nine-year occupation of Iraq claimed the lives of a record number of journalists. It was undisputedly the deadliest war for journalists in recorded history.

“Disturbingly, more journalists were murdered in targeted killings in Iraq than died in combat-related circumstances, according to the group Committee to Protect Journalists. “CPJ research shows that “at least 150 journalists and 54 media support workers were killed in Iraq from the US-led invasion in March 2003 to the declared end of the war in December 2011.” “’The media were not welcome by the US military,’” Soazig Dollet, who runs the Middle East and North Africa desk of Reporters Without Borders told Al Jazeera. ‘That is really obvious.’”

A political candidate with a competent staff would have immediately fired back at Stephanopoulos with the facts of Washington’s murder of journalists and compared these facts with the purely propagandistic accusations against Putin which have no basis whatsoever in fact. The problem with Trump is the issues on which the public is not carefully judging him. I don’t blame the public. It is refreshing to have a billionaire who can’t be bought expose the insubstantialality of all the Democratic and Repulican candidates for president. A collection of total zeros. Unlike Washington, Putin supports the sovereignty of countries. He does not believe that the US or any country has the right to overthrow governments and install a puppet or vassal. Recently Putin said: “I hope no person is insane enough on planet earth who would dare to use nuclear weapons.”

3700 deaths in the Mediterranean in 2015. We don’t have enough shale or tears left to do them justice. We’re morally gone.

• 20 Refugees Drown; 2015 Death Rate Over 10 Human Beings Each Day (CNN)

The Turkish coast guard launched a search and rescue mission after at least nine migrants drowned off the nation’s coast. Eleven people remain missing and 21 have been rescued, the coast guard said Thursday. There was no information on their country of origin. The International Organization for Migration released a report this week saying more than a million migrants had entered Europe this year. The figures show that the vast majority – 971,289 – have come by sea over the Mediterranean. Another 34,215 have crossed from Turkey into Bulgaria and Greece by land. Among those traveling by sea, 3,695 are known to have drowned or remain missing as they attempted to cross the sea on unseaworthy boats, according to IOM figures. That’s a rate of more than 10 deaths each day this year.

Debt Rattle November 4 2015

Nov 042015

November 4, 2015 Posted by Raúl Ilargi Meijer at 10:51 am Finance Tagged with: aluminum, China, coal, death, debt, emissions, Greece, panic, refugees, slump, VW, Xi 1 Response »

Lesvos town hall mourns the dead Nov 4 2015

• China’s Slump Might Be Much Worse Than We Thought (Bloomberg)

• China Burns Much More Coal Than Reported (NY Times)

• Investors Are Way More Scared of China Than of Janet Yellen (Bloomberg)

• Corporate Debt in China: Above Cruising Altitude (CEW)

• A 127-Year-Old US Industry Collapses Under China’s Weight (Bloomberg)

• Xi Says China Needs at Least 6.5% Growth in Next Five Years (Bloomberg)

• China’s Xi Says 6.5% Annual Growth Enough To Meet Goals: Xinhua (AFP)

• China’s Money Exodus (Bloomberg)

• Standard Chartered’s Bad Loans Reveal Cracks in Asian Economies (Bloomberg)

• VW Admission Suggests Cheats Went Much Further Than Diesel Emissions (Guardian)

• VW Emissions Issues Spread to Gasoline Cars (Bloomberg)

• VW Says Fuel Usage Understated On Some Models; Porsche Warns (Reuters)

• Hugh Hendry: “Today We Would Advise You That You Don’t Panic!” (Zero Hedge)

• Hugh Hendry Says “Don’t Panic”; Paul Singer Says You May Want To (Zero Hedge)

• Europe’s Biggest Banks Are Cutting 30,000 Jobs, More To Come (Bloomberg)

• Wall Street/Washington Revolving Door More Dangerous Than Ever: Prins (Yahoo)

• Gathering Financial Storm Just One Effect Of Corporate Power Unbound (Monbiot)

• Merkel Warns Of Balkans Military Conflicts Amid Migrant Influx (AFP)

• European Union States Have Relocated Just 116 Refugees Out Of 160,000 (Guardian)

• Greek Coast Guard Says 5 Refugees Die In Boat Accident Tuesday Night (AP)

As I’ve said a thousand times now.

• China’s Slump Might Be Much Worse Than We Thought (Bloomberg)

The unreliability of Chinese official economic data has become almost a cliche. A few years before he became China’s premier, Li Keqiang said that the country’s numbers were “man-made” and “for reference only.” If the top economic policy maker of a country says that the numbers aren’t reliable … well, you believe him. But how unreliable? [..] Economic number-fudging is a cheap way to prevent jittery investors from making a stampede for the exits. Of course, knowing this, a number of people have tried to estimate China’s true growth rate. Tom Orlik, Bloomberg’s chief Asia economist, recently rounded up a number of independent figures, and collected them in the following chart:

The numbers range from Lombard Street’s pessimistic figure of a bit more than 3% to Bloomberg Intelligence’s optimistic number of just under 7%. In other words, there is a wide band of uncertainty here. But I would like to suggest a scenario even more pessimistic than the lowest of the numbers above. After reading reports by Peking University professor Chris Balding on the state of China’s financial sector, I think there’s a possibility that China’s growth is lower even than 3%. Chinese electricity usage is growing at more like 1%. Rail freight traffic, though volatile, has suffered some dizzying drops in recent months. These are traditional proxies for heavy industry output. That they are barely growing, if at all, implies that much of Chinese industry has ground to a halt.

China bulls, of course, will argue that the country is merely in the middle of a transition from industry to services, and from wasteful power usage to greater efficiency. That is probably true. But the speed of the transition would have to be incredible to make up for the precipitate drop in industrial activity. Why would China’s service sector and energy efficiency suddenly skyrocket immediately following the bursting of a major stock bubble? One reason is government spending. A stealth stimulus is underway. But another big part of the equation is the financial sector, which has logged stunning growth in recent months despite the stock crash. Why are Chinese financial services growing? Loan growth alone will not do the trick – banks need to be paid in order to log revenue. Or do they? Chris Balding reports:

“[S]ome Chinese researchers…compared the loan payments made by firms to the amount owed to banks…[Their findings imply] that Chinese firms are paying only half the financial costs they should be paying…The amount of revenue that banks are recording from loans is nearly four times the cost firms are associating with those loans…[B]ank revenue [has been] outpacing firm financial cost growth by a factor of almost four.” In other words, the amount of loan payments Chinese banks say they are receiving is a whole lot more than the amount Chinese borrowers say they are paying. If Balding’s numbers are to be believed – and of course, they are only one glimpse into a murky financial system – a large portion of the recent growth surge of China’s financial services sector may simply be fake.

Rounding error: “.. the new figures add about 600 million tons to China’s coal consumption in 2012 — an amount equivalent to more than 70% of the total coal used annually by the United States.”

• China Burns Much More Coal Than Reported (NY Times)

China, the world’s leading emitter of greenhouse gases from coal, is burning far more annually than previously thought, according to new government data. The finding could vastly complicate the already difficult efforts to limit global warming. Even for a country of China’s size and opacity, the scale of the correction is immense. China has been consuming as much as 17% more coal each year than reported, according to the new government figures. By some initial estimates, that could translate to almost a billion more tons of carbon dioxide released into the atmosphere annually in recent years, more than all of Germany emits from fossil fuels. Officials from around the world will have to come to grips with the new figures when they gather in Paris this month to negotiate an international framework for curtailing greenhouse-gas pollution.

The data also pose a challenge for scientists who are trying to reduce China’s smog, which often bathes whole regions in acrid, unhealthy haze. The Chinese government has promised to halt the growth of its emissions of carbon dioxide, the main greenhouse pollutant from coal and other fossil fuels, by 2030. The new data suggest that the task of meeting that deadline by reducing China’s dependence on coal will be more daunting and urgent than expected, said Yang Fuqiang, a former energy official in China who now advises the Natural Resources Defense Council. “This will have a big impact, because China has been burning so much more coal than we believed,” Mr. Yang said. “It turns out that it was an even bigger emitter than we imagined.

This helps to explain why China’s air quality is so poor, and that will make it easier to get national leaders to take this seriously.” The adjusted data, which appeared recently in an energy statistics yearbook published without fanfare by China’s statistical agency, show that coal consumption has been underestimated since 2000, and particularly in recent years. The revisions were based on a census of the economy in 2013 that exposed gaps in data collection, especially from small companies and factories. Illustrating the scale of the revision, the new figures add about 600 million tons to China’s coal consumption in 2012 — an amount equivalent to more than 70% of the total coal used annually by the United States.

“..concern over growth in China and the rest of the developing world coincided with a rise in the share of investors who think deflation is a larger risk to the markets than inflation.”

• Investors Are Way More Scared of China Than of Janet Yellen (Bloomberg)

China—not the prospect of the first rate hike from the Federal Reserve in almost a decade—is what keeps investors up at night. Barclays surveyed 651 of its clients around the world to glean their biggest fears, as well as their thoughts on commodities, yields, currencies, and other questions about the market outlook. “Only 7% sees Fed normalization as the main risk for markets over the next 12 months, compared with 36% whose main worry is China,” said Guillermo Felices, head of European asset allocation. The share of investors who judged softness in China and other developing economies to be the biggest risk to markets spiked in the third quarter, the period in which Beijing unexpectedly moved to devalue the yuan. The elevation in concern over growth in China and the rest of the developing world coincided with a rise in the share of investors who think deflation is a larger risk to the markets than inflation.

China’s devaluation sparked similar moves from other nations that had pegged their currencies to the greenback. All else being equal, this process engenders a stronger U.S. dollar and weaker commodity prices, thereby exerting downward pressure on headline inflation rates. As such, investors’ reactions to the Fed’s Oct. 28 statement, which resulted in an increase in the implied odds of a December rate hike, may not fully be reflected in its results. Nonetheless, roughly 40% of those surveyed indicated that they expected the Fed to initiate its tightening phase before the year was out. A plurality of respondents think liftoff will be a negative for risk assets, though only for a short period. “Indeed, the risk of Fed policy withdrawal is at a two-year low, suggesting complacency about the threat of higher rates,” warned Felices.

Pon Zi.

• Corporate Debt in China: Above Cruising Altitude (CEW)

By far the most worrying debt in China is held by the corporate sector. Total borrowing by the nonfinancial sector shows that the total debt-to-GDP ratio has reached 240% of GDP as of the first quarter of 2015. The corporate debt-to-GDP ratio was 160% of GDP, or $16.7 trillion as of the first quarter of 2015, and total corporate liabilities up to 200% of GDP when including corporate debt securities (bonds). For some perspective, the corporate debt-to-GDP ratio in the United States is 70%, less than half that of China’s. China’s economy has seen some cyclical scares this year (think stock market and currency), but high corporate debt is a structural issue, potentially leading to a period of slower expansion of credit in an effort to reduce the debt-to-GDP ratio weighing on rapid growth.

Corporate debt has risen faster than expected. As noted in an earlier blog post, in 2013, Standard & Poor’s predicted that China’s corporate debt would be between 136 and 150% of GDP by 2017. This year Standard & Poor’s said China’s corporate debt has already reached 160% of GDP, a figure in line with data from the Bank of International Settlements. Yu Yongding, a senior fellow at the Chinese Academy of Social Sciences (CASS), has calculated that without any fundamental change in the current situation, the corporate debt-to-GDP ratio will reach 200% by 2020. Increased borrowing by state-owned enterprises (SOEs) has contributed significantly to this rise, and SOEs account for around half of all the corporate debt in China. But problematically, SOEs have a much lower return on assets than private firms, as low as one-third.

Which begs the question: If a large SOE is unable to pay its interest payments, what will the government do? Will it take control of the debt, and will the debt therefore be counted as government rather than corporate debt? This would do nothing to the overall credit-to-GDP ratio but may cause moral hazard. Besides corporate debt from bank loans, China has seen dramatic growth of the corporate bond market. Overall this growth is seen as a positive move, as it means the firms are either refinancing old loans with bonds at lower yields or simply expanding their balance sheets using the bond market rather than bank loans. Also helpful is that the majority of corporate bonds in China are in renminbi, protecting them from foreign exchange fluctuations. The IMF reports that total bond issuance in China in 2014 was over $600 billion.

Real estate, construction, mining, and energy production have been leading the increase in leverage. These cyclical sectors loaded up on credit after the 2008 financial crisis and have some of the most highly leveraged firms in China. The rise in corporate debt in China is one of the most pressing issues for future growth. A drop in corporate revenue could prompt a number of defaults, lowering overall economic growth and reducing revenue further—a vicious cycle. Potential headwinds include normalizing interest rates in the United States, decreasing capital efficiency, disinflation, or a property market slowdown. Moreover, banks lend about half of their loans to corporations, so a rise in corporate defaults could have broader banking implications, including liquidity concerns and nonperforming loans.

“If prices don’t recover, the researcher predicts almost all U.S. smelting plants will close by next year..”

• A 127-Year-Old US Industry Collapses Under China’s Weight (Bloomberg)

Alcoa’s latest aluminum-making cutback is signaling the end of the iconic American industry. For 127 years, the New York-based company has been churning out the lightweight metal used in everything from beverage cans to airplanes, once making it a symbol of U.S. industrial might. Now, with prices languishing near six-year lows, it’s wiping out almost a third of domestic operating capacity, Harbor Intelligence estimates. If prices don’t recover, the researcher predicts almost all U.S. smelting plants will close by next year. While that’s a big deal for the U.S. industry and the people it employs, it doesn’t mean much for global supplies. Alcoa’s decision to eliminate 503,000 metric tons of smelting capacity accounts for about 31% of the U.S. total for primary aluminum, but less than 1% of the global total, according to Harbor.

For more than a decade, output has been moving to where it’s cheaper to produce: Russia, the Middle East and China. A global glut has driven prices down by 27% in the past year, rendering American operations unprofitable and accelerating the pace of the industry’s demise. “You’ve seen a fair clip of closures in the U.S., that is just unfortunate, but a development that’s very difficult to change,” Michael Widmer at Bank of America said. “It means you’ll just have to purchase from somewhere else.” That’s exactly what Jay Armstrong, the president of Trialco is doing. The company, which turns aluminum into finished manufactured products, now buys about 80% of the supplies it turns into car wheels from overseas. That’s up from 40% five years ago, he said. “It’s not the kind of business where we’re going to pay more and buy all American,” Armstrong said in a telephone interview. “It’s too competitive a business to do that.”

Not.Going.To.Happen. So what then?

• Xi Says China Needs at Least 6.5% Growth in Next Five Years (Bloomberg)

China’s president signaled policy makers will accept slower growth, but not much slower, as details of a blueprint set to define his term as leader were released Tuesday. Annual growth should be no less than 6.5% in the next five years to realize the goal to double 2010 gross domestic product and per capita income by 2020, President Xi Jinping said Tuesday, according to the official Xinhua News Agency. The 13th five-year plan, details of which were announced Tuesday, is the first to confront an era of sub-7% economic growth since Deng Xiaoping opened the nation to the outside world in the late 1970s. “Policy makers still want to maintain a high growth pace, while the policy expectation is tuned slightly lower,” said Tao Dong at Credit Suisse in Hong Kong.

“The stance of policy makers is to gradually transform to a ’new normal.’ But to maintain the peoples’ confidence, the bar is set relatively high.” China will seek to increase the yuan’s convertibility in an orderly manner by 2020 and change the way it manages currency policy, according to the Communist Party’s plan. Authorities will opt for a “negative list” foreign-exchange system – an approach that lets companies do anything that’s not specifically banned – and open the finance industry as it promotes the yuan’s inclusion in the International Monetary Fund’s Special Drawing Rights basket, Xinhua reported. The proposals coincide with heightened anxiety over China’s economic outlook following a stock market slump and a surprise yuan devaluation in August that roiled global markets.

China will target medium- to high-speed growth during the period, and officials pledged to reduce the income gap, further open up to overseas investment and boost consumption, according to the draft. Officials said they will accelerate financial system reform and promote transparent and healthy capital markets while also overhauling stock and bond sales. They’ll continue reforms of the fiscal and tax systems and transfer some state capital to pension funds. [..] Xi’s growth baseline matches guidance provided by Premier Li Keqiang, who said Sunday that China needs average growth of more than 6.5% in the next five years to meet the goal of achieving a “moderately prosperous” society by 2020. Xi and Li are managing the priorities of both reforming the economy and keeping short-term growth fast enough so that structural changes don’t cause a hard landing.

“..Xinhua cited Xi as saying that annual growth should be no less than 6.5% in the next five years to achieve the Communist Party’s aim of doubling GDP per capita from 2010 by the end of the decade..”

• China’s Xi Says 6.5% Annual Growth Enough To Meet Goals: Xinhua (AFP)

Growth of only 6.5% a year in 2016-2020 will be enough for China to meet its wealth goals, President Xi Jinping said on Tuesday according to the official news agency Xinhua. The report came as the ruling Communist party issued guidelines for the next five-year plan for the world’s second-largest economy, whose slowing growth has alarmed investors worldwide. The first documents released by the leadership conclave did not include a numerical growth target. But Xinhua cited Xi as saying that annual growth should be no less than 6.5% in the next five years to achieve the Communist Party’s aim of doubling GDP per capita from 2010 by the end of the decade. It said he made the remarks in a speech, without giving direct quotes. The doubling target is part of achieving what China’s ruling party calls a “moderately prosperous society” in time for the 100th anniversary of its foundation.

The comments are the clearest indication yet that Beijing will reduce its target growth rate from the current “around 7%”, after expansion slowed last quarter to its lowest in six years. Some economists say that the current figure is unattainable going forwards, and that trying to do so risks derailing painful but necessary markets reforms. The country has faced economic turbulence in recent months as it attempts to transition its economy from years of super-charged growth to a more modest pace it has dubbed the “new normal”. Botched stock market interventions and a sudden currency devaluation have rattled confidence in the country’s leadership, which has staked its legitimacy on maintaining an aura of economic infallibility.

“..during the three weeks in August after China devalued its currency, Goldman Sachs calculated that another $200 billion may have left.”

• China’s Money Exodus (Bloomberg)

The ranks of China’s wealthy continue to surge. As their economy shows signs of weakness at home, they’re sending money overseas at unprecedented levels to seek safer investments — often in violation of currency controls meant to keep money inside China. This flood of cash is being felt around the world, driving up real estate prices in Sydney, New York, Hong Kong and Vancouver. The Chinese spent almost $30 billion on U.S. homes in the year ending last March, making them the biggest foreign buyers of real estate. Their average purchase price: about $832,000. Same trend in Sydney, where Chinese investors snap up a quarter of new homes and are forecast to double their spending by the end of the decade. In Vancouver, the Chinese have helped real estate prices double in the past 10 years.

In Hong Kong, housing prices are up 60% since 2010. In total, UBS Group estimated that $324 billion moved out last year. While this year’s numbers aren’t yet in, during the three weeks in August after China devalued its currency, Goldman Sachs calculated that another $200 billion may have left. So how do these volumes of cash get out when Chinese are limited by rules that allow them to convert only $50,000 per person a year? The methods include China’s underground banks, transfers using Hong Kong money changers, carrying cash over borders and pooling the quotas of family and friends – a practice known as “smurfing.” The transfers exist in a gray area of cross-border legality: What’s perfectly legitimate in another country can contravene the law in China.

“It’s not legal for people to use secret channels to move money abroad, because this is smuggling,” says Xi Junyang, a finance professor at Shanghai University of Finance & Economics. “But the government has kept a laissez-faire attitude until recently.” Now, policy makers are starting to take the outflow seriously. While it’s not about to run out of money, China has intensified a crackdown on underground banks that illegally channel cash abroad. It’s also trying to capture officials suspected of fleeing overseas with government funds. Longer term, China has pledged to remove its currency controls and make the yuan fully convertible by 2020.

There’s so much more of this in the pipeline.

• Standard Chartered’s Bad Loans Reveal Cracks in Asian Economies (Bloomberg)

As China’s growth sputters, the troubles at Standard Chartered are another bad omen for what were once Asian economic darlings. The bank, which generates most of its income in the region, had gambled on success in emerging markets such as India, which instead saddled the lender with delinquent loans. As a result, the company which opened its offices in Mumbai under Queen Victoria is now axing 15,000 jobs and is asking investors for $5.1 billion. “Standard Chartered are Asian specialists and are in all the main markets in the region, so in looking at them you can get a good sense for credit direction and lending appetite,” said Mark Holman at TwentyFour Asset Management. For now, Asia still has fewer corporate debt defaults than other developing countries, but rising leverage from India to Indonesia point to the risk of further nonpayments.

More stringent conditions from banks like Standard Chartered are slowing loan growth in the region, exposing more fissures in the corporate credit market. “The picture that emerges is that Asian credit cycles are far more advanced than those in Europe and loan losses and impairment charges are mounting,” Holman said. Like other developing nations, Asian companies took advantage of low interest rates overseas to go on a borrowing binge. The move is backfiring as slower economic growth makes it more difficult to pay back the obligations. Fitch Ratings warned on Nov. 2 that 11% of India’s loans will fall into the category of “stressed assets” in the fiscal year ending in March 2016 and only improve “marginally” the next year. In China, Sinosteel, a state-owned steelmaker, missed an interest payment last month, becoming the latest firm that teeters on the verge of default.

It’s still only about money: “VW said it estimated the “economic risks” of the latest discovery at €2 billion..”

• VW Admission Suggests Cheats Went Much Further Than Diesel Emissions (Guardian)

The crisis at Volkswagen has deepened after the carmaker found “irregularities” in the carbon dioxide levels emitted by 800,000 of its cars. An internal investigation into the diesel emissions scandal has discovered that CO2 and fuel consumption were also “set too low during the CO2 certification process”, the company admitted on Tuesday night. The dramatic admission raises the prospect that VW not only cheated on diesel emissions tests but CO2 and fuel consumption too. VW said it estimated the “economic risks” of the latest discovery at €2bn (£1.42bn). The company said the “majority” of cars involved have a diesel engine, which implies that petrol cars are involved in the scandal for the first time.

Matthias Müller, chief executive of VW, said: “From the very start I have pushed hard for the relentless and comprehensive clarification of events. We will stop at nothing and nobody. This is a painful process, but it is our only alternative. For us, the only thing that counts is the truth. That is the basis for the fundamental realignment that Volkswagen needs.” VW said it will now work with the authorities to clarify what took place during the CO2 tests and “ensure the correct CO2 classification for the vehicles affected”. Müller added: “The board of management of Volkswagen AG deeply regrets this situation and wishes to underscore its determination to systematically continue along the present path of clarification and transparency.”

VW has already admitted fitting a defeat device to 11m vehicles worldwide that allowed them to cheat tests for emissions of nitrogen oxides. The carmaker has put aside €6.7bn to meet the cost of recalling the 11m vehicles, but also faces the threat of fines and legal action from shareholders and customers. The company has hired the accountancy firm Deloitte and the law firm Jones Day to investigate who fitted the device into its vehicles. It is understood that the carmaker believes a group of between 10 and 20 employees were at the heart of the scandal.

“VW is leaving us all speechless..”

• VW Emissions Issues Spread to Gasoline Cars (Bloomberg)

Volkswagen said it found faulty emissions readings for the first time in gasoline-powered vehicles, widening a scandal that so far had centered on diesel engines. Separately, the company’s Porsche unit said it’s halting North American sales of a model criticized by U.S. regulators. Volkswagen said an internal probe showed 800,000 cars had “unexplained inconsistencies” concerning their carbon-dioxide output. Previously, the automaker estimated it would need to recall 11 million vehicles worldwide — more than Volkswagen sold last year. It was unclear how much overlap there was between the two tallies. The company said the new finding could add at least €2 billion to the €6.7 billion already set aside for fixes to the affected vehicles but not litigation, fines or customer compensation.

The crisis that emerged after Volkswagen admitted in September to cheating U.S. pollution tests for years with illegal software has shaved more than one-third of the company’s stock price and led to a leadership change. Today’s revelation adds to the pressure on Volkswagen’s new chief executive officer, Matthias Mueller, who replaced Martin Winterkorn and was previously head of Porsche. Volkswagen’s supervisory board said it will meet soon to discuss further measures and consequences. “VW is leaving us all speechless,” said Arndt Ellinghorst, a London-based analyst with Evercore ISI. [..] The 3.0-liter diesel motors targeted on Monday by a U.S. Environmental Protect Agency probe aren’t part of the latest finding. The company rejected allegations that its cheating on diesel-emissions tests included Porsche and other high-end vehicles.

The EPA said its new investigation centers on the Porsche Cayenne and VW Touareg sport utility vehicles and as well as larger sedans and the Q5 SUV from Audi. But then late Tuesday, Porsche’s North American division said it would voluntarily discontinue sales of diesel-powered Cayennes from model years 2014 to 2016 until further notice. The Atlanta-based unit’s statement reiterated that the EPA notice was unexpected and that owners can operate their vehicles normally. “We are working intensively to resolve this matter as soon as possible,” Porsche said in the statement.

Porsche is worried about ‘its results’. It should rethink that one.

• VW Says Fuel Usage Understated On Some Models; Porsche Warns (Reuters)

Volkswagen on Tuesday said it had understated the fuel consumption of 800,000 cars sold in Europe, while majority stakeholder Porsche Automobil Holding warned that VW’s latest findings could further weigh on its results. The latest revelation about fuel economy and carbon dioxide emissions, which Germany’s largest automaker said represented a roughly €2 billion economic risk, deepened the crisis at VW. The scandal initially centered on software on up to 11 million diesel vehicles worldwide that VW admitted vastly understated their actual emissions of smog-causing pollutant nitrogen oxide. U.S. environmental regulators said on Monday that similar “defeat devices” were installed on larger 3.0 liter engines used in luxury sport utility vehicles from Porsche and Audi, although VW has denied those allegations.

Porsche’s North American unit said it was discontinuing sales of Porsche Cayenne diesel sport utility vehicles until further notice, citing the allegations. The latest findings that VW understated fuel consumption and carbon dioxide emissions, areas which U.S. regulators have yet to address, were disclosed as VW continues a broad review of its handling of all pollution-related issues. While the findings mostly apply to smaller diesel engines, one gasoline-powered engine is also affected. “VW is leaving us all speechless,” said Arndt Ellinghorst of banking advisory firm Evercore ISI. “It seems to us that this is another issue triggered by VW’s internal investigation and potentially related to Europe.” The carmaker said it would immediately start talking to “responsible authorities” about what to do about the latest findings.

Will Hugh be the greater fool?

• Hugh Hendry: “Today We Would Advise You That You Don’t Panic!” (Zero Hedge)

In his latest letter, he valiantly trudges on down the path of bullish abandon and tries to convince if not so much others as himself why continuing his desertion of the bearish camp he did two years ago is the right thing to do, and how in the aftermath of the VIX explosion in August, he “learned to stop worrying and love the bomb.” Key highlights:

… it is ironic that we are perhaps best known for advising “that you panic”. However, if you are anxious at the wrong time it can prove very painful. Today, we would advise that you don’t panic!

… by withdrawing the “Greenspan put” and using their asset purchase schemes to eviscerate any notion of value, the authorities have paradoxically created a safer yet more paranoid market.

… first it was Europe, then the high yield credit space with the vulnerabilities of the shale oil issuers, and then it was back to Greece and then the mother of them all, China, with its falling property and stock prices seemingly knocking economic growth and making a sizeable devaluation inevitable. And yet nada… the weeping prophets have failed to force a crisis after one hell of a go.

… perhaps we are being premature and the cards are about to fall. Or perhaps there simply are no dead bodies in the system and the global economy has proven itself much more resilient to shocks. We certainly believe that if we had been forewarned two years ago that the dollar would rise versus selected EM currencies by 50% and that important commodities such as oil and iron ore would fall by 50% we would never have been able to predict just how orderly things have turned out at both the company and sovereign level. The turmoil it seems has remained contained within financial markets in a very curious way.

… perhaps it’s time to stop worrying and love the bomb?

Actually at last check, practically all the “bears” predicted exactly what happened: trapped by their own policies, central banks would have no choice than to unleash another onslaught of easing. This is precisely what happened when first the ECB previewed its QE2, then the PBOC cut rates, then Sweden boosted QE, then the BOJ said it would “not hesitate” to act (and would have done so had other central banks not pushed the Yen lower thanks to its carry trade status). The real question, Hugh, is how much time did the latest doubling down by the world’s central banks buy? We should know the answer in 2-4 months.

“What policymakers will do, in all likelihood, is hope and pray, and when that fails, they will likely double down on monetary extremism. ”

• Hugh Hendry Says “Don’t Panic”; Paul Singer Says You May Want To (Zero Hedge)

Businesspeople in today’s world are either concerned, actively sweating or oblivious to the rumblings and dangers around them. We recommend that both investors and businesspeople be highly alert to the implications of populism, the increasing concentration of power into the hands of unaccountable elites and the dissipation of the rule-of-law protections of liberty. It is very odd and dangerous that governments, satisfied with policies which, by raising asset prices (stocks, bonds, real estate, high-end art), are seemingly designed to make the rich richer, nevertheless simultaneously excoriate inequality as the cause of slow growth and societal disquiet. It is also strange that policymakers are not concerned by the obvious failure of monetary extremism to achieve the predicted levels of growth, or by the risks that may exist either in the continuation of the monetary experiment or in its ultimate unwinding.

Policymakers who are sticking with the failed policy mix have invented creative explanations for why growth has been so bad for such a long a period of time. The most prevalent (and tautological) of these explanations is “secular stagnation,” a theory that the developed world simply cannot grow faster due to ageing populations, growth-destructive technologies and competition from cheap labor around the world. We disagree with this theory, and assert that it can be examined for validity only after a full range of first-line “fiscal” policies (as we have defined them) has been put firmly and comprehensively in place. In contrast to the “secular stagnationistas,” we believe that there is a great deal of low-hanging fruit (that is, far higher rates of growth in incomes, jobs and national wealth) to be had from simple changes in leadership and policies.

The question of the day is: What will be the policy response of the developed world toward the currently deteriorating (at least in EMs and China) conditions, and the policy response if the deterioration spreads to Europe and the U.S.? If we know anything about the policy decision-making landscape in developed countries, it is that policymakers are all on super-keen-alert for signs of deflation (which they basically equate with credit collapse — a false and misleading connection, but that is a topic for another day). They will not remain passive in the face of a renewed global recession and/or financial crisis. So what will they do next, and how will it affect global markets? We can be reasonably certain that policymakers will not leap into action on the fiscal measures that we have described as the front-line policies needed to meaningfully quicken economic growth. Try to imagine more flexible and business-friendly tax, regulatory and labor policies being enacted by current political leadership in the U.S., Europe and Japan.

Sorry, our imaginations — never inert — just can’t get there. What policymakers will do, in all likelihood, is hope and pray, and when that fails, they will likely double down on monetary extremism. This landscape is essentially baked, unless you think that sometime in the near future the global economy will turn higher, either on its own or in anticipation of such policy measures in the future. To many policymakers today, jawboning seems like a magic button, since markets often create the desired result in anticipation of possible future actions. Consequently, governments may be able to get a particular outcome without requiring the central bankers to actually take any action.

This is nothing yet. Wait till next year’s pring cleaning.

• Europe’s Biggest Banks Are Cutting 30,000 Jobs, More To Come (Bloomberg)

Standard Chartered became the third European bank in less than two weeks to announce sweeping job cuts, bringing the total planned reductions to more than 30,000, or almost one in seven positions. The London-based firm said Tuesday it will eliminate 15,000 jobs, or 17% of its workforce, as soaring bad loans in emerging markets hurt earnings. Deutsche Bank last week announced plans for 11,000 job cuts, while Credit Suisse said it would trim as many as 5,600 employees. The three firms, which all named new chief executive officers this year, are undertaking the deepest overhauls since the financial crisis as stricter capital rules erode profitability. Standard Chartered and Credit Suisse will tap shareholders for funds, while Deutsche Bank scrapped its dividend for this year and next to conserve capital.

“It’s just further evidence that Europe’s banks didn’t adapt quickly enough to the post-crisis world and are now playing catch up,” said Christopher Wheeler at Atlantic Equities in London. More bloodletting may be on the way. UniCredit is considering as many as 12,000 job cuts as it seeks to improve profit and capital levels, people with knowledge of the discussions said last week. The numbers, which are still under review, increased from 10,000 a month ago and may change depending on the outcome of asset sales. The largest Italian bank reports earnings next week. Including jobs lost through asset sales, John Cryan, Deutsche Bank’s co-CEO since July, intends to eliminate 26,000 employees, or a quarter of the workforce, by 2018. Tidjane Thiam, Credit Suisse’s new CEO, will shed jobs in the U.S., U.K. and Switzerland.

“..the big six banks in this country control 97% of all trading assets in the U.S. and 93% of all derivatives.”

• Wall Street/Washington Revolving Door More Dangerous Than Ever: Prins (Yahoo)

What are the consequences of regulators leaving government work to join the financial services industry, and vice versa? Nomi Prins, a Senior Fellow at Demos, chronicles the problems of the revolving door between Washington and Wall Street in her latest book “All the Presidents’ Bankers.” “The difference is that now people know each other less in their personal lives before they make those transitions,” she says. “Now it’s a little more like ‘I know you from the industry of Wall Street and Washington’ as opposed to ‘We hung out and our dads smoked cigars together.’ Prins notes that there was more personal accountability in the relationships between Wall Street and Washington during the mid-20th century.

She points out that before the crash of 1929, the Morgan bank (predecessor of J.P. Morgan) had strong connections with Presidents Coolidge and Hoover. Yet, a shift in the relationships occurred during the Great Depression. “There was this accountability moment where the bankers that ascended to run these banks, to run Chase, to run Citibank & they wanted economic stability throughout the country,” she says. “They actually thought [stability] was important for confidence in the banking system & people would actually keep their money there and trust that they had a future with this bank, so the relationships with individuals and corporations and countries all mattered.” Prins says that the modern-day deterioration of the bank-customer relationship is a direct result of the growing size and risk profiles of bank behemoths.

“The banks are so big right now [and] they have access to so much of apercentage of the deposits of individuals, she says. “The leverage is so much higher on the back of those deposits, the bailouts that have happened for numerous reasons in the past 25 years have all been an indication that is okay to take more reckless bets.” And while the idea of banks being “too big to fail” caused widespread Main Street anger towards Wall Street, Prins believes the policy of government bailouts will continue post-Financial Crisis as banking has become more concentrated. She noted that the big six banks (J.P. Morgan, Citi, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo) in this country control 97% of all trading assets in the U.S. and 93% of all derivatives.

Prins also added that the anti-banking rhetoric of many U.S. Presidents (remember President Obama’s Wall Street “fat cats”?) has a long history, but one that is at odds with actual policy. It goes all the way back to Woodrow Wilson and the creation of the Federal Reserve, she said. “In practice Woodrow Wilson was behind the creation of the Fed, which we know now has substantiated a lot of Wall Street losses, has a $4.5 trillion book. It’s the largest hedge fund in the world right now…But [Dodd Frank] hasn’t fundamentally changed the concentration of power. The revolving door…influences the risk inherent to what’s going on on Wall Street. It hasn’t made the economy more stable with respect to the banking industry, which is an industry that infiltrates every aspect of our individual and political lives.

“..to force nations to accept new financial products and services, to approve the privatisation of public services and to reduce the standards of care and provision.”

• Gathering Financial Storm Just One Effect Of Corporate Power Unbound (Monbiot)

What have governments learned from the financial crisis? I could write a column spelling it out. Or I could do the same job with one word: nothing. Actually, that’s too generous. The lessons learned are counter-lessons, anti-knowledge, new policies that could scarcely be better designed to ensure the crisis recurs, this time with added momentum and fewer remedies. And the financial crisis is just one of the multiple crises – in tax collection, public spending, public health and, above all, ecology – that the same counter-lessons accelerate. Step back a pace and you see that all these crises arise from the same cause. Players with huge power and global reach are released from democratic restraint. This happens because of a fundamental corruption at the core of politics.

In almost every nation the interests of economic elites tend to weigh more heavily with governments than do those of the electorate. Banks, corporations and landowners wield an unaccountable power, which works with a nod and a wink within the political class. Global governance is beginning to look like a never-ending Bilderberg meeting. As a paper by the law professor Joel Bakan in the Cornell International Law Journal argues, two dire shifts have been happening simultaneously. On one hand governments have been removing laws that restrict banks and corporations, arguing that globalisation makes states weak and effective legislation impossible. Instead, they say, we should trust those who wield economic power to regulate themselves.

On the other hand, the same governments devise draconian new laws to reinforce elite power. Corporations are given the rights of legal persons. Their property rights are enhanced. Those who protest against them are subject to policing and surveillance – the kind that’s more appropriate to dictatorships than democracies. Oh, state power still exists all right – when it’s wanted. Many of you will have heard of the Trans-Pacific Partnership and the proposed Transatlantic Trade and Investment Partnership (TTIP). These are supposed to be trade treaties, but they have little to do with trade, and much to do with power. Theyenhance the power of corporations while reducing the power of parliaments and the rule of law. They could scarcely be better designed to exacerbate and universalise our multiple crises – financial, social and environmental.

But something even worse is coming, the result of negotiations conducted, once more, in secret: a Trade in Services Agreement (TiSA), covering North America, the EU, Japan, Australia and many other nations. Only through WikiLeaks do we have any idea of what is being planned. It could be used to force nations to accept new financial products and services, to approve the privatisation of public services and to reduce the standards of care and provision. It looks like the greatest international assault on democracy devised in the past two decades. Which is saying quite a lot.

Damn right. Damn late too.

• Merkel Warns Of Balkans Military Conflicts Amid Migrant Influx (AFP)

German Chancellor Angela Merkel warned that fighting could break out in the Balkans, along the main route of migrants trying to reach Europe, if Germany closed its border with Austria, in remarks published Tuesday. Amid ever-louder calls for Merkel to undertake drastic action to stem the tide of people entering her country, she again rejected the appeals, noting that tensions were already running high between the Western Balkans countries. With an eye to deep rifts exposed after Hungary closed its frontier with Serbia and Croatia, Merkel said blocking the border with Austria to refugees and migrants would be reckless. “It will lead to a backlash,” Merkel was quoted in media reports as saying late Monday in an address to members of her conservative Christian Democratic Union (CDU) in the western city of Darmstadt.

“I do not want military conflicts to become necessary there again,” Merkel added, referring to the Balkans. She said disputes in a region already ravaged by war in the 1990s could quickly escalate, touching off a cycle of violence “no one wants.” Germany has become the main destination for people fleeing war and poverty in the Middle East, Africa and Asia via the Balkans, with up to one million people expected this year. The EU vowed last month to help set up 100,000 places in reception centres in Greece and along the migrant route through the Balkans as part of a 17-point action plan devised with the countries most affected by the crisis. But just as Merkel attempts to convince European partners to share out the burden more fairly, she has faced a revolt from within her own conservative alliance against the welcome she has extended to people escaping violence and persecution.

Must take this out of the hands of the EU. All it is is a facade for sociopaths to hide behind.

• European Union States Have Relocated Just 116 Refugees Out Of 160,000 (Guardian)

EU member states have so far relocated only 116 refugees of the 160,000 they are committed to relocating over the next two years, according to new figures. EU members states agreed in September to relocate 160,000 people in “clear need of international protection” through a scheme set up to relocate Syrian, Eritrean, and Iraqi refugees from the most affected EU states – such as Italy and Greece – to other EU member states. So far 116 people have been relocated, and only 1,418 places have been made available by 14 member states, according to data released on Tuesday by the European Commission. A total of 86 asylum seekers have been relocated from Italy, and 30 asylum seekers will travel from Athens to Luxembourg on Wednesday.

Denmark, Ireland and the UK have an opt-out from the scheme, but Britain is the only member state that has said it will not contribute to the relocation. The EU’s emergency relocation mechanism is only one facet of the broader refugee crisis. Syria, Iraq and Eritrea account for the majority of those crossing the Mediterranean. According to the UNHCR, more than one in two are fleeing from Syria. While 6% of those arriving via the Mediterranean are originally from Iraq, and 5% from Eritrea. Not all those seeking asylum remain or travel via Italy or Greece. About 770,000 asylum applications were lodged across the EU in the first nine months of 2015, compared to 625,920 in all of 2014 and 431,090 in 2013. This has contributed to a backlog of applications.

At the end of last year there were just under 490,000 pending applications across EU member states. In July of this year, the figure stood at 632,000. The backlog is not showing signs of receding any time soon: for every asylum decision made there are 1.8 new applications. Approximately 240,000 applications were processed between January and June this year. Over the same six months, 432,345 applications were filed. However, the European Commission data also reveals that beyond the logistical challenges, a “large number of member states has yet to meet financial commitments” and “too few member states” have responded to calls to help Serbia, Slovenia and Croatia; among the most used routes by asylum seekers, with essential resources such as beds and blankets.

What happened to numb the rich west the way it did?

• Greek Coast Guard Says 5 Refugees Die In Boat Accident Tuesday Night (AP)

Greece’s coast guard says the total number of people rescued from a boat carrying people from Turkey to the nearby Greek island of Lesvos has increased to 65, while a total of five bodies were recovered from the water. The coast guard said Wednesday that the bodies were those of three children and two men. There were no further missing people reported. The migrant boat ran into trouble north of Lesvos Tuesday night. The coast guard says a total of 457 people were rescued between Tuesday morning and Wednesday morning in 13 separate incidents. More than 600,000 people have arrived in Greece so far this year, with most arriving on Lesbos. From there, they make their way to the Greek mainland on ferries and then head overland to more prosperous EU countries in the north. Thousands of migrants are stranded on Lesvos due to a ferry strike that began Monday.

Debt Rattle October 13 2015

Oct 132015

October 13, 2015 Posted by Raúl Ilargi Meijer at 8:45 am Finance Tagged with: Antarctic, China, default, diesel, downgrade, EM, emissions, leverage, Merkel, refugees, Silk Road, TTIP 3 Responses »

Russell Lee Columbia Gardens outdoor amusement resort, Butte, Montana 1942

• US Debt Markets Shaken Amid More Corporate Downgrades And Defaults (WSJ)

• Why US Banks Soon Will Be Singing The Blues (CNBC)

• China Imports Slump 20% Amid Falling Commodity Prices, Weak Demand (Guardian)

• China Trade Data Unsettle Asian Bourses (FT)

• China’s Stock Rally-to-Rout Is About to Repeat (Bloomberg)

• KKR Warns About Renewed Commodity, Emerging-Market Rout on China (Bloomberg)

• Pimco’s Bear Case Only Gets Stronger as Emerging Currencies Jump (Bloomberg)

• Switzerland to Impose 5% Leverage Ratio on Biggest Banks (Bloomberg)

• Europeans Move To Undercut Global Bank Capital Rules (FT)

• The Failure to Learn From Boom-Bust Cycles (WSJ)

• Higher Interest Rates Would Throw Bank Profits a Lifeline (Bloomberg)

• China’s Great Game: A New Silk Road To A New Empire (FT)

• Angus Deaton Showed We’re Helping the Wrong People (Bloomberg)

• US Annual Oil Output to Drop for First Time Since 2008 (WSJ)

• Oil Sands Boom Dries Up in Alberta, Taking Thousands of Jobs With it (NY Times)

• German Brand Dealt ‘Hammer Blow’ By VW Scandal And Weakening Economy (Telegraph)

• Emissions Test Changes Could Make Diesels ‘Unaffordable’ (BBC)

• Home Flipping Frenzy in Sydney Sparks Warnings on Housing Risks (Bloomberg)

• TTIP Deal Would Remove People’s Rights To Access Basic Human Needs (Ind.)

• Merkel Seeks Turkey’s Aid on Borders to Stem Refugee Flow to EU

• Athens Rules Out Joint Sea Patrols With Turkey (Kath.)

• Marine Food Chains At Risk Of Collapse (Guardian)

• Antarctic Ice Melts So Fast Whole Continent May Be At Risk By 2100 (Guardian)

“Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis..”

• US Debt Markets Shaken Amid More Corporate Downgrades And Defaults (WSJ)

Falling profits and increased borrowing at U.S. companies are rattling debt markets, a sign the six-year-long economic recovery could be under threat. Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis, and measures of debt relative to cash flow are rising. Analysts expect profits at large companies to decline for a second straight quarter for the first time since 2009. The market for riskier debt has become snarled, raising fears that companies could have trouble repaying their obligations following several years of record debt issuance, low corporate defaults and persistently low interest rates. Reflecting those concerns, investors are now demanding more yield to own corporate bonds relative to benchmark U.S. Treasury securities.

The softening U.S. corporate fundamentals have been largely overlooked as investors focused on sharp declines in the shares, bonds and currencies of many emerging-markets nations. Many analysts say the health of China remains the largest source of uncertainty in the global economy. But rising downgrades and an increase in U.S. corporate defaults indicate “some cracks on the surface” of the domestic-growth outlook, said Jody Lurie, corporate credit analyst at financial-services firm Janney Montgomery Scott LLC. Many investors closely monitor debt-market trends as an indicator of U.S. economic health. In August and September, Moody’s Investors Service issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades.

That’s the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession. Standard & Poor’s Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009, compared with just 172 upgrades. Meanwhile, the trailing 12-month default rate on lower-rated U.S. corporate bonds was 2.5% in September, up from 1.4% in July of last year, according to S&P. About a third of the downgrades targeted oil and gas companies or firms in other commodity-linked industries, following a plunge in oil prices in the second half of 2014, said Diane Vazza, head of global fixed-income research at S&P.

“S&P 500 financials are expected to show a 3.8% annualized growth in profits [..] As recently as July analysts had been forecasting 9.9% growth..”

• Why US Banks Soon Will Be Singing The Blues (CNBC)

With Wall Street banks about to report on how much money they’ve been making, estimates are moving in the wrong direction. Coming off a quarter in which the industry collectively reported $43 billion in profits, analysts had been hoping a rising rate environment and increasing demand would keep things moving for the $15.1 trillion sector. However, fading hopes for a rate hike in 2015 and other factors are making analysts nervous about just how the quarterly profit reports will shape up. JPMorgan Chase gets things started for the Big Four on Tuesday, with Bank of America and Wells Fargo on tap Wednesday and Citigroup due Thursday. Goldman Sachs reports Thursday as well and PNC will report Wednesday.

As a sector, S&P 500 financials are expected to show a 3.8% annualized growth in profits, according to S&P Capital IQ. While that’s better than the 5.1% decline projected for the entire index, it’s a big comedown from initial projections. Revenue is expected to grow 4.4%. As recently as July analysts had been forecasting 9.9% growth, and a year ago that expectation was a gaudy 27%. So even if results come in better than expected, they likely will remain well below the initially lofty hopes for financials, which were supposed to be 2015’s best-performing sector. Individual companies have seen substantial revisions in recent days.

Analysts have cut MetLife estimates from 88 cents a share to 77 cents, Goldman Sachs from $3.46 to $3.20 and Morgan Stanley from 68 cents to 63 cents, according to FactSet. Earnings expectations have been reduced for 53 of the 88 companies in the S&P 500’s financial sector. The weakness comes as loan growth has held fairly steady thanks to a robust climate in commercial real estate. The sector jumped 9.7% in the third quarter, its best of the year after rising 6.7% in 2014, according to Federal Reserve data. Investment banking also has been fairly solid throughout the year. While global revenue is down 10% year over year, it’s been flat at $28 billion in the U.S., thanks to a record $9.7 billion haul in mergers and acquisition revenue, according to Dealogic.

Imports down 17.7% in yuan, over 20% in USD. Different numbers reflect the difference between calculations in yuan and in dollars.

• China Imports Slump 20% Amid Falling Commodity Prices, Weak Demand (Guardian)

China’s imports fell heavily in September, official figures said, keeping pressure on policymakers to do more to stave off a sharper economic slowdown. Although exports fell less than expected by 3.7% from the same period last year, the value of imports tumbled more than 20% to register the 11th straight month of falls. Imports plunged 20.4% in September from a year earlier to $145.2bn, customs officials said, due to weak commodity prices and soft domestic demand. These factors will complicate Beijing’s efforts to stave off deflation, one of the headwinds threatening the world’s second biggest economy. Highlighting persistent weakness in demand at home and abroad, China’s combined exports and imports fell 8.1% in the first nine months of the year from the same period in 2014, well below the full-year official target of 6% growth.

“In general, there are no green shoots in this set of data,” said Zhou Hao, senior economist at Commerzbank in Singapore. “The growth of [trade] volume still remains low.” However, monthly figures were much more rosy. Exports to every major market except Taiwan rose from August, as did imports. Julian Evans-Pritchard of Capital Economics said monthly trends showed a steady rise to most major export markets in the US and Europe over the summer. “Basically, exports have been doing better since the second quarter, but that recovery trend has been masked on a year-on-year basis because the second half of 2014 was so strong.” Evans-Pritchard also said that import data had become unreliable given massive swings in prices due to the commodity downturn and a divergence between prices and trading volumes.

“For the major commodities like oil, copper, etc. we’re actually seeing a pretty healthy trend in import volumes.” Import volumes are a leading indicator for exports in China, given a large share of materials and parts re-exported as finished goods. “September’s import figure does not bode well for industrial production and fixed asset investment,” wrote ANZ economists in a research note reacting to the figures. “Overall growth momentum last month remained weak and third quarter GDP growth to be released [on 19 October] will likely have edged down to 6.4%, compared with 7% in the first half.” China posted trade surplus of $60.34bn for the month, the general administration of Customs said on Tuesday, higher than forecasts for $46.8 billion.

China has a record surplus. Sounds good. Exports down ‘only’ 1.1% (still curious if you want to grow GDP by 7%). Imports down 17.7%. That will be largely raw materials. So what will they be able to produce for export next year?

• China Trade Data Unsettle Asian Bourses (FT)

Chinese trade data rattled Asian markets as a bigger-than-expected fall in imports offset the cheer afforded by a record mainland trade surplus and slower pace of decline in exports. The Shanghai Composite was down 0.4% and the tech-focused Shenzhen Composite was up 0.3% after data showed China posted its biggest-ever trade surplus, in renminbi terms, of Rmb376.2 in September, up from Rmb368bn in August and comfortably ahead of economists’ expectations of Rmb292.4bn. That was underpinned by exports declining by 1.1% last month from a year earlier, an improvement from August’s 6.1% pace of decline. Economists expected exports to drop by 7.4%.

Imports fell 17.7% in September from a year ago, a bigger-than-forecast drop and larger than August’s 14.3% decline – less than encouraging in the context of China’s goal to shift its growth model from export-driven to consumption-based. Ahead of the trade data release, economists at ANZ said: “China’s exports have likely contracted in September, but its strong trade surplus should ease the pressure of capital outflows.” They reckon economic activity on the mainland remained sluggish in September, leading to their forecast of 6.4% economic growth in the third quarter. China’s official gross domestic product data are due on October 19, and analysts are increasingly bearish, tipping real growth at 6.7%, according to a Bloomberg survey of 25 economists, lower than the official full-year target of “around 7%”. Among other equities benchmarks, Hong Kong’s Hang Seng was down 0.3% and Australia’s S&P/ASX 200 was down 0.9%. Japan’s Nikkei, reopening after a long weekend, was down 0.9%.

“As oil starts to move and materials follow, investors will by default feel more positive about China,” he said. “This is a bear market rally.”

• China’s Stock Rally-to-Rout Is About to Repeat (Bloomberg)

In August, Thomas Schroeder correctly predicted a rebound in Chinese stocks wouldn’t last. Now, he says, the benchmark equity gauge will plumb new lows as a bear-market rally fails. The Shanghai Composite Index will climb to 4,100 in the next three months before slumping as much as 41% to 2,400 in early 2016, Schroeder, founder and managing director of Chart Partners, said. The benchmark index added 3.3% to close at 3,287.66 on Monday. Schroeder, a former Asian technical analysis chief at UBS, cited triangle and wedge patterns in making his call. The Shanghai Composite tumbled 29% in the third quarter, the biggest slump among benchmark global gauges, as a stock boom turned to bust amid concern about the slowdown in China’s economy and a crackdown on using borrowed money to buy equities.

The bottoming of oil prices and a rebound in emerging market currencies will help bolster a rally in the nation’s equities in the next two months, which will reverse as the Federal Reserve starts raising interest rates, Schroeder said. “As oil starts to move and materials follow, investors will by default feel more positive about China,” he said. “This is a bear market rally.” Schroeder predicted in August that the Chinese equity rout will worsen, with the Shanghai Composite likely sliding below 3,100 within two months. The measure fell to as low as 2,927.29 on Aug. 26. Technical analysts use past patterns to try to predict future movements. [..] “We haven’t seen a major low for the emerging markets,” said Schroeder, whose Chart Partners Group is a provider of trading strategies linked to technical analysis. “There’s likely to be more pain next year as the U.S. starts lifting rates.”

Squeeze.

• KKR Warns About Renewed Commodity, Emerging-Market Rout on China (Bloomberg)

There are few reasons to get excited about the recent rebound in commodities and emerging-market assets, according to KKR which correctly forecast the stock selloff in developing countries five months ago. China will continue to rein in credit growth, reducing the investments in factories and machinery that have been among the key drivers for the commodity boom in recent years, Henry McVey, global head of macro and asset allocation at KKR, one of the world’s largest private equity firms, wrote in a note posted on its website. “Many hard commodity prices are likely to suffer another leg down,” McVey and Frances Lim, who visited Asia recently, said in the note. “We would view any recovery as a bounce, not a sustained re-acceleration in the Chinese economy, as the structural headwinds remain significant.”

The MSCI Emerging Markets Index rose Monday to a two-month high, while commodities are trading around 6% above a 16-year low set in August, on speculation that China will take steps to shore up its faltering economy. The emerging-market stock gauge has still lost about 10% this year, heading for its third annual decline, as lower raw-material prices and the Chinese economic slowdown undermines exports in countries from Brazil to Malaysia. While some “targeted stimulus” in housing and infrastructure in recent months may help stabilize China’s economy, it won’t alter a slowing trajectory because the government needs to reduce debt and production overcapacity, McVey said. KKR,which manages $102 billion in assets, expects growth in China to slow to 6% in 2018, from 6.8% this year, which would be the least since 1990.

McVey, who previously worked as chief investment strategist at Morgan Stanley and a managing director at Fortress Investment, told investors in May to stay away from most of the publicly traded emerging-market companies. He said a buildup in debt and weakening currencies in emerging countries will lead to underperformance in stocks, a call foreshadowing an over 20% decline in the MSCI benchmark gauge over the next four months. McVey said growth in China’s fixed-asset investments, the biggest driver in the country’s rise over the past decade, will decline to as little as 5% a year, from 11% in August, and down from a peak of 34% in 2009.

Dead cats bouncing all over the place.

• Pimco’s Bear Case Only Gets Stronger as Emerging Currencies Jump (Bloomberg)

Pacific Investment Management Co. is sticking with its pessimistic outlook on emerging-market currencies, saying the biggest rally in 17 years has only bolstered the case for making bearish wagers. “These currencies look more interesting to be underweight from here than they were a week ago,” Luke Spajic, an emerging markets money manager at Pimco, whose developing-nation currency fund has outperformed 97% of peers during the past five years, said in a phone interview on Monday. Pimco, which oversees $1.52 trillion, said in an Oct. 1 report that it had short positions in currencies such as Malaysia’s ringgit, the Thai baht and the South Korean won. Emerging-market currencies surged last week, recording the biggest rally since 1998 as traders pushed back expectations for when the U.S. Federal Reserve will start raising interest rates.

While Spajic said he doesn’t know how long the rebound will last, he sees a “wave of deflationary pressure” across Asia that will eventually weigh on currencies as exports and economic growth projections decline. Pimco’s concerns echo those of the IMF, which cut its 2015 outlook for the global economic expansion to 3.1% on Oct. 6 from a July forecast of 3.3%. The fund cited a slowdown in emerging markets, saying the following day that high debt levels at banks and other companies have left developing economies susceptible to financial stress and capital outflows.

Switzerland does as US does.

• Switzerland to Impose 5% Leverage Ratio on Biggest Banks (Bloomberg)

Switzerland’s finance ministry will require the country’s biggest banks to have capital equal to about 5% of total assets after UBS Group AG and Credit Suisse Group AG sought to win easier terms, according to people briefed on the deliberations. The decision would mimic the U.S. leverage ratio for its biggest banks, which exceeds the 3% minimum set in a global agreement by the Basel Committee on Banking Supervision, according to the people, who asked not to be identified because the talks aren’t public. The Swiss government will also align its calculation of the ratio with the method employed in the U.S., resulting in fewer types of debt counting toward capital, one of the people said. The measure of financial strength has gained importance since the 2008 financial crisis as a means of making big banks less prone to collapse.

A government-appointed expert panel recommended in December that Switzerland follow the lead of the U.S., which in recent years has introduced some of the world’s toughest capital requirements. Zurich-based UBS and Credit Suisse reported Basel III leverage ratios of 3.6% and 3.7% at the end of the second quarter, indicating they would be more than 1%age point short of the new target. “Higher requirements mean that the banks will have fewer funds to return to shareholders,” said Andreas Brun at Zuercher Kantonalbank. “For UBS, whose investment case is based on rising dividend expectations, this is a big issue. For Credit Suisse, whose capital situation is worse, this means a higher dilution because of a bigger requirement of a capital increase.”

Meanwhile in the EU, banks are still holier than thou.

• Europeans Move To Undercut Global Bank Capital Rules (FT)

Several European countries are taking action to water down new global capital rules for their top financial institutions, causing concern among investors and EU officials. France is set to become the latest country to introduce legislation that would save its leading banks from having to issue tens of billions of euros of new bonds to meet the rules agreed by global regulators a fortnight ago, people familiar with the situation said. Brussels officials are so worried with the divergence in policies that they have started talks with EU countries on a more co-ordinated stance, two EU officials said. Market insiders said that investors were frustrated and that all banks could end up paying more when they issue debt.

The rules on “total loss absorbing capital” (TLAC) agreed on September 25 by the Financial Stability Board are one of the final pieces of a wave of post-crisis regulation designed to ensure there is never a repeat of the bank bailouts of recent times. The rules apply only to the world’s largest banks but have wider reach, according to Laurent Frings, analyst at Aberdeen Asset Management. “The view from investors to a large degree is that local regulators will force domestically important banks to work to the sale rules,” said Mr Frings. In the UK and Switzerland, banks such as UBS, Credit Suisse and Barclays are building up their “loss absorbing capital” by issuing new debt from bank holding companies that can be “bailed in” in a crisis. The banks will have to issue tens of billions of the new bonds to meet their TLAC requirements.

In Germany and Italy, however, legislators are passing laws to make traditional senior debt easier to bail in. This frees their banks of the obligation to issue new debt for TLAC. Several people close to the situation said that France would also propose a solution to help its banks. “Being a European authority we would always argue that it’s a good idea to put in place a European solution, and not try to come up with 19 or 28 solutions on that,” said Elke Koenig, president of the Single Resolution Board, the new EU-wide resolution authority for failing banks. “We’ve clearly given our support to the basic idea [of the German bank law] at the same time saying it would be preferential longer term to have a European solution.”

Or the failure to see that this is not a boom-bust cycle?

• The Failure to Learn From Boom-Bust Cycles (WSJ)

The plunge in commodity prices is thumping oil exporters around the globe. The scale of the beating rests largely on whether governments heeded the lessons from prior boom-bust cycles. Norway and Saudi Arabia built up sizable rainy-day funds and managed their windfalls from high prices conservatively. Now they’ve got considerable buffers against a downturn. Nigeria and Venezuela splurged and made few economic overhauls as prices surged. They’re now suffering as growth skids. The commodity bust is weighing heavily on resource-rich countries that represent 20% of the world’s economic output. The oil-price decline is supporting some of the largest consumers, such as the U.S. and Europe, that are key to keeping the global economy out of recession.

But it is providing less of an overall global boost than predicted just a year ago, while forcing more vulnerable economies to scramble in an uncertain environment. “The oil price drop came as a surprise,” said Angolan finance minister Armando Manuel. “It captured my country in a state in which we were not sufficiently diversified.” The commodity collapse and its effect on emerging economies drew wide attention in Lima, where the world’s finance ministers and central bankers gathered for the IMF’s annual meeting, which ended Sunday, against a backdrop of dimming global growth. The problem isn’t isolated to oil, fueling a much broader slump in major emerging markets from Brazil to South Africa.

Metal prices are in a long-term funk, hitting exporters of iron, copper and similar industrial commodities. Oil exporters are showing what may be in store for other major commodity exporters. Nigeria, which got nearly 65% of its government revenue from crude exports before the price plunge, has seen its projected 2015 growth slashed to less than 4% from more than 6% a year ago, according to the IMF. Kazakhstan’s growth rate has tumbled to 1.5% this year from 6% before the petroleum collapse. In Venezuela, where the state gets half its revenue from oil sales, the economy is shriveling by 10%.

That’s the number 1 reason the Fed would love to hike rates.

• Higher Interest Rates Would Throw Bank Profits a Lifeline (Bloomberg)

Having bailed them out and then helped to repair their balance sheets with record-low interest rates and bond-buying, policy makers may assist the financial industry once more when the U.S. Federal Reserve begins tightening monetary policy. That’s according to two recently published reports by the Bank for International Settlements and McKinsey & Co., both of which have highlighted the downsides of ultra-easy borrowing costs in the past. Based on seven years of data from 109 large international banks in 14 countries, the BIS confirmed a relationship between short-term rates and the slope of the curve for bond yields with bank profitability.

The conclusion drawn by Claudio Borio, the head of the monetary and economic department at the BIS, and colleagues is that the positive impact of being able to earn income by lending money out for higher rates over time is bigger than the hit of defaults and income that doesn’t carry interest. Even better news for the banks is that the effect is strongest when rates are lower and the yield curve isn’t that steep, as is now the case. That provides another reason for the BIS’s economists to again decry the unintended side-effects of accommodative monetary policy. They reckon that between 2011 and 2014, the average bank of those studied lost one year of profits as a result of low rates. “All this suggests that over time, unusually low interest rates and an unusually flat term structure erode bank profitability,” said Borio et al in the report, which was published on Oct. 1.

Return on equity at 500 global lenders was unchanged in 2014 at 9.5%, about the average of the last 35 years, according to the Sept. 30 study by McKinsey. Profit margins also continued a steady decline, dropping by 185 basis points in 2014, in part because of lower rates. It reckons tighter policy would boost return on equity by about 2 %age points. “Many in the industry are waiting for an interest rate rise or some other structural lift to profits,” McKinsey said. There is a sting in the tail. It warned that even if rates do rise, profit margins may still not return to their pre-crisis highs. “Much of the benefit will get competed away, and risk-costs will likely increase, especially in economies where the recovery is still fragile,” McKinsey said.

China doesn’t, and won’t, have sufficient growth to execute these plans.

• China’s Great Game: A New Silk Road To A New Empire (FT)

The granaries in all the towns are brimming with reserves, and the coffers are full with treasures and gold, worth trillions, wrote Sima Qian, a Chinese historian living in the 1st century BC. “There is so much money that the ropes used to string coins together rot and break, an innumerable amount. The granaries in the capital overflow and the grain goes bad and cannot be eaten”. He was describing the legendary surpluses of the Han dynasty, an age characterised by the first Chinese expansion to the west and south, and the establishment of trade routes later known as the Silk Road, which stretched from the old capital Xi an as far as ancient Rome.

Fast forward a millennia or two, and the same talk of expansion comes as China’s surpluses grow again. There are no ropes to hold its $4tn in foreign currency reserves -the world’s largest- and in addition to overflowing granaries China has massive surpluses of real estate, cement and steel. After two decades of rapid growth, Beijing is again looking beyond its borders for investment opportunities and trade, and to do that it is reaching back to its former imperial greatness for the familiar Silk Road metaphor. Creating a modern version of the ancient trade route has emerged as China’s signature foreign policy initiative under President Xi Jinping.

“It is one of the few terms that people remember from history classes that does not involve hard power …and it s precisely those positive associations that the Chinese want to emphasise”, says Valerie Hansen, professor of Chinese history at Yale University. If the sum total of China s commitments are taken at face value, the new Silk Road is set to become the largest programme of economic diplomacy since the US-led Marshall Plan for postwar reconstruction in Europe, covering dozens of countries with a total population of over 3bn people. The scale demonstrates huge ambition. But against the backdrop of a faltering economy and the rising strength of its military, the project has taken on huge significance as a way of defining China’s place in the world and its relations -sometimes tense- with its neighbours.

Winner of the Fauxbel. Yawn.

• Angus Deaton Showed We’re Helping the Wrong People (Bloomberg)

Presidential candidates from both parties are focusing, as usual, on the middle class. But what’s that? And why, exactly, does it deserve such attention? Princeton’s Angus Deaton, who on Monday was announced as the latest winner of the Nobel Memorial Prize for economics, has offered some intriguing answers. The most important is this: If you care about how people actually experience their lives, you should be concerned about people who earn less than $75,000 per year. Above that amount, Deaton’s evidence suggests that more money may not particularly matter. To understand why, we need to distinguish between two very different measures of human well-being. Researchers have traditionally proceeded by asking people to evaluate their overall life-satisfaction (say, on a scale of 1 to 10).

More recently, researchers have tried to capture people’s actual experiences in a more refined way, for example by asking them about their levels of stress, sadness, happiness and enjoyment during the day (again on a scale of 1 to 10). A key question: Does money buy happiness? Deaton, along with his coauthor Daniel Kahneman (a Nobel Prize winner in 2002), found that in the United States, the answer depends on which question you use. If people are asked about their overall life-satisfaction, money definitely matters. As people’s annual earnings go up, their self-reported life-satisfaction increases as well. But the same is not true for actual experiences. More income is definitely associated with less sadness and more happiness up to $75,000, but above that level people’s experienced happiness is the same regardless of income.

In terms of stress, another important indicator of people’s well-being, it’s a lot worse to earn $20,000 than $60,000 – but above $60,000, stress levels are not reduced by more money. What’s going on here? Deaton and Kahneman don’t exactly know, but they speculate that above a certain threshold, increases in income do not much affect people’s ability to engage in activities that matter most – which include spending time with friends, enjoying good health and taking time off from work. They also suggest that beyond that threshold, more money might have some negative effects, such as a reduced ability to enjoy small pleasures. But below the $75,000 threshold, many of life’s misfortunes have a much bigger negative impact. For the poor, getting divorced, having asthma, and being alone have far more severe effects. Even the benefits of the weekend turn out to be lower.

Let’s see how much banks have buried away in shale loans.

• US Annual Oil Output to Drop for First Time Since 2008 (WSJ)

U.S. oil output will decline in 2016 for the first time in eight years as producers slash spending, OPEC said Monday, while the producer group continues pumping at high levels. In its closely watched monthly oil market report, OPEC slashed its U.S. oil production forecast by 280,000 barrels a day next year, to 13.538 million barrels a day, a number that includes natural gas liquids. That would be about 60,000 barrels a day less than in 2015, the first decline since 2008. The finding is consistent with what the U.S. Energy Information Administration said last week, predicting that U.S. crude production would average about 8.9 million barrels a day in 2016, down from 9.2 million barrels a day in 2015.

OPEC said lower oil prices were forcing U.S. oil producers to cut spending and causing their wells to deplete faster than expected. OPEC producers continued to pump at high rates, the report said, with Saudi Arabia at 10.226 million barrels a day—slightly down from last month—and Iraq producing a near-record 4.143 million barrels a day. Overall the producer group was pumping 31.571 million barrels a day, the highest reported level since April 2012. The increasing levels of OPEC production—and the forecast declines in the U.S.–are part of a new order for the world’s petroleum industry since crude prices collapsed from over $100 a barrel last year to less than $50 this year.

“We see kind of a lot of volatility over the next four or five years..”

• Oil Sands Boom Dries Up in Alberta, Taking Thousands of Jobs With it (NY Times)

FORT McMURRAY, Alberta — At a camp for oil workers here, a collection of 16 three-story buildings that once housed 2,000 workers sits empty. A parking lot at a neighboring camp is now dotted with abandoned cars. With oil prices falling precipitously, capital-intensive projects rooted in the heavy crude mined from Alberta’s oil sands are losing money, contributing to the loss of about 35,000 energy industry jobs across the province. Yet Alberta Highway 63, the major artery connecting Northern Alberta’s oil sands with the rest of the country, still buzzes with traffic. Tractor-trailers hauling loads that resemble rolling petrochemical plants parade past fleets of buses used to shuttle workers.

Most vehicles carry “buggy whips” — bright orange pennants attached to tall spring-loaded wands — to help prevent them from being run over by the 1.6-million-pound dump trucks used in the oil sands mines. Despite a severe economic downturn in a region whose growth once seemed limitless, many energy companies have too much invested in the oil sands to slow down or turn off the taps. In addition to the continued operation of existing plants, construction persists on projects that began before the price fell, largely because billions of dollars have already been spent on them. Oil sands projects are based on 40-year investment time frames, so their owners are being forced to wait out slumps.

“It really is tough right now,” said Greg Stringham, the vice president for markets and oil sands at the Canadian Association of Petroleum Producers, a trade group that generally speaks for the industry in Alberta. “We see kind of a lot of volatility over the next four or five years.” After an extraordinary boom that attracted many of the world’s largest energy companies and about $200 billion worth of investments to oil sands development over the last 15 years, the industry is in a state of financial stasis, and navigating the decline has proved challenging. Pipeline plans that would create new export markets, including Keystone XL, have been hampered by environmental concerns and political opposition.

The hazy outlook is creating turmoil in a province and a country that has become dependent on the energy business. Canada is now dealing with the economic fallout, having slipped into a mild recession earlier this year. And Alberta, which relies most heavily on oil royalties, now expects to post a deficit of 6 billion Canadian dollars, or about $4.5 billion. The political landscape has also shifted. Last spring, a left-of-center government ended four decades of Conservative rule in Alberta. Federally, polls suggest that the Conservative party — which championed Keystone XL and repeatedly resisted calls for stricter greenhouse gas emission controls in the oil sands — is struggling to get re-elected in October.

Merkel will find it harder to impose her will.

• German Brand Dealt ‘Hammer Blow’ By VW Scandal And Weakening Economy (Telegraph)

The VW emissions scandal has dealt a “hammer blow” not just to Volkswagen’s reputation but potentially to the entire German national brand, according to a consultancy that calculates brand worth. The revelations that as many as 11 million diesel vehicles have been fitted with software designed to deceive emissions testers has damaged the German repuation of efficiency and reliability, said the report from Brand Finance. As a result, the value of the ‘Made in Germany’ brand has fallen 4pc – or $191bn – to $4.2 trn this year. The report added the scandal threatens to undo decades of accumulated goodwill and cast doubt over the efficiency and reliability of German industry.

However, the authors said Germany has attracted worldwide admiration for its sympathetic stance to migrants escaping Syria and other war-torn countries, which is boosting the country’s positive image. Not only has the county benefited from goodwill perceptions, but the migrants will also boost the economy, said the report. The country’s birth rate has been flagging and the influx of generally young people and families will boost Germany’s labour force, encouraging investment in Europe’s largest economy. Germany’s birth rate has collapsed to the lowest level in the world. A study by the World Economy Institute in Hamburg earlier this year said the country’s workforce will start plunging at a faster rate than Japan’s by the early 2020s due to the declining birth rate, seriously threatening the long-term viability of Europe’s leading economy.

Data last week showed German exports suffered their worst month since the global recession, as global demand slowed. Exports in Europe’s largest economy collapsed by 5.2pc in August – their largest drop since January 2009, according to figures from the country’s Federal Statistics Office. Overall the US remains the world’s most valuable national brand, having benefited from a large, wealthy market wanting to “buy American”. The country is worth $19.7 trn, when combining its strength as a brand with GDP data. Fast-growing superpower China, which has previously threatened to knock the US off the top spot, has instead been rocked by the recent stock market turbulence and slowing economic growth. Its brand worth slipped 1pc to $6.3 trn, when compared to the previous year. The UK comes in at fourth place, worth $3bn, a rise of 6pc from last year.

Diesel is dead for luxury cars. French carmakers will be hit very hard, if only because Paris MUST scrap its huge diesel subsidies.

• Emissions Test Changes Could Make Diesels ‘Unaffordable’ (BBC)

Making European emissions tests more stringent could make some diesel vehicles “effectively unaffordable”, a trade body has warned. The European Commission is trying to get vehicle makers to agree to bigger cuts in emissions from diesel engines. The pressure comes in the wake of the Volkswagen emissions scandal. The European Automobile Manufacturers’ Association (ACEA) said car companies needed enough time to implement changes to emissions testing. Diesel vehicles have been encouraged in many European markets because they can produce less carbon dioxide – a major greenhouse gas – than those with petrol engines.

The trade body said diesel was an important part of meeting future CO2 targets and it was important for the Commission to let manufacturers plan and implement necessary changes. The VW scandal, in which saw the German car maker admit rigging emissions tests, has put significant pressure on diesel vehicle manufacturers. Diesel engines emit higher levels of nitrogen oxide and dioxide (NOx) that are harmful to human health. European government officials have set out plans to introduce real-world measurements of NOx emissions rather than rely on laboratory tests. The new testing regime is due to start early next year, with the results coming into effect in 2017.

However, talks between officials in Brussels last week to discuss the plans are reported to have stalled. The ACEA said it would continue “to stress the need for a timeline and testing conditions that take into account the technical and economic realities of today’s markets”. The trade body added: “Without realistic timeframes and conditions, some diesel models could effectively become unaffordable, forcing manufacturers to withdraw them from sale.” Such a move would hit both consumers and jobs in the automotive sector, it said.

They’ve denied the bubble for so long now, why not do it a while longer?

• Home Flipping Frenzy in Sydney Sparks Warnings on Housing Risks (Bloomberg)

Sydney home prices soared 44% in the three years ended September, enticing speculators who’ve been partly inspired by home renovation shows on how to spruce up and sell homes for quick profits. The frenzy surrounding Sydney’s property boom, reminiscent of the exuberance in U.S. real estate before the 2008 financial crisis, has prompted regulators and Goldman Sachs to warn the market is overheated, while Bank of America Merrill Lynch on Monday said it expects prices to fall. Since September 2013, more than 1,500 houses and 800 apartments have been resold in less than a year in Sydney, for about 20% more on average, according to online property listing firm Domain Group. That compares with about about 530 houses and almost 400 apartments in the previous two years.

People need to be careful because “house prices aren’t going to continue to rise much more quickly than income; debt levels can’t keep rising faster than income,” Reserve Bank of Australia Deputy Governor Philip Lowe said at a conference in Sydney Tuesday. “Ideally, we’ll now go through a period of quite modest house price growth. I think that would de-risk household balance sheets a little and would probably be good for the economy.” Rushing to buy and sell homes is underscoring a build-up of mortgage risks as households take on record debt, lured by home-loan costs at the lowest in five decades. The housing debt to income ratio touched a record high of 132.8% in the three months ended June 30 up from 119.4% three years earlier, according to government data.

That is the ultimate danger.

• TTIP Deal Would Remove People’s Rights To Access Basic Human Needs (Ind.)

People’s access to basic rights such as water and energy could be at the mercy of multinational corporations, according to a new report into two controversial EU free trade deals. The report claims that the agreements could allow all public services to be locked into commercial deals that would place profit above the rights of individuals to access basic services – regardless of any possible consequences for welfare. According to the report, Public Services Under Attack, such deals would be “effectively irreversible.” They would allow multinational corporations to sue governments that try to regulate the cost of public services if it could be proved companies’ profits would be harmed.

The two trade agreements, the CETA (Comprehensive Economic and Trade Agreement) with Canada and the TTIP (Transatlantic Trade and Investment Partnership) with the US, are currently being negotiated. In their current state, it is claimed, all public services including health, education and energy could be at risk of privatisation. Under current WTO agreements, access to water is regarded as a basic human right. The new trade agreements would effectively undermine this, according to John Hilary, the executive director of War on Want, one of the campaign groups behind the report . He claims that in a worst-case scenario, if individuals were unable to pay their water bill, they would be denied access to it.

“Suddenly, instead of water being considered a human right, it would be treated as a commodity and people could be cut off if they can’t afford it,” Mr Hilary told The Independent. Previously, the UK Government has insisted that public services such as education and the NHS would be protected from such action. In November last year, the UK Government published a document on the deal, Separating Myth from Fact, in which it states: “TTIP will not change the way that the NHS, or other public services, is run. “The European Commission is following our approach that it must always be for the UK to decide for itself whether or not to open up our public services to competition.”

But Mr Hilary believes the public should be sceptical of such assurances. He said: “There is no truth in the government’s claim that public services are safe in TTIP. “Corporate lobbyists have made sure that key services such as health, education, post, rail and water are to be opened up to the private sector, and treaties such as TTIP will lock in that privatisation for ever. “As a result of the lobbying by these special interest groups in the services sector, it’s quite clear that public services are in the frame and any claim to the contrary is bogus.”

Children are stil drowning, Angela. That should be your priority, not borders or camps.

• Merkel Seeks Turkey’s Aid on Borders to Stem Refugee Flow to EU

German Chancellor Angela Merkel said Turkey needs to help stem the flow of Syrian refugees to Europe, setting the tone for her talks with Turkish leaders this week. “It’s necessary to look not just at the European dimension, but also to talk with Turkey about sensible border controls,” Merkel said Monday in a speech to party members in Stade near Hamburg. “We have to start getting more involved internationally. That’s why I will go to Turkey on Sunday.” With a record 800,000 or more refugees and migrants expected to arrive in Germany this year, Merkel is under pressure to offer solutions to an increasingly skeptical public as her approval ratings decline and she says Germany can’t stop the stream on its own. “We don’t know how many there will be,” she said.

In her speech to members of her Christian Democratic Union, Merkel said for the first time that her government is considering screening at Germany’s borders. This way, “we could possibly decide immediately” which people are economic migrants who wouldn’t qualify to stay in Germany as asylum seekers, Merkel said. While saying that all 28 European Union countries need to help stem the continent’s biggest refugee crisis since World War II, Merkel singled out Turkey as part of the solution. After EU leaders discuss the crisis at a summit in Brussels on Thursday, Merkel plans to travel to Ankara on Oct. 18 for talks with Turkish President Recep Tayyip Erdogan and Prime Minister Ahmet Davutoglu, her first official trip to Turkey since February 2013.

In Turkey, control over the border with EU member Greece “was given up at some point” because Turkey felt overwhelmed and its economy “isn’t doing so well anymore,” leaving Greece and the EU’s border patrol mission to deal with the refugee flow, Merkel said. “Naturally, we need to talk to Turkey about that.”

And the ideas won’t fly anyway. Next. Bring in the German navy?!

• Athens Rules Out Joint Sea Patrols With Turkey (Kath.)

Diplomatic sources in Athens Monday ruled out the prospect of Greek and Turkish naval forces conducting joint patrols in the eastern Aegean in a bid to curb a dramatic influx of migrants and refugees. Speaking to Kathimerini, the same sources from the Greek Foreign Ministry stated that no official European documents raise the issue of joint sea patrols – which was first reported in the German press ahead of the draft action plan signed last week between the European Union and Turkey on the support of refugees and migration management.

According to the plan, Turkey will “strengthen the interception capacity of the Turkish Coast Guard, notably by upgrading its surveillance equipment, increasing its patrolling activity and search and rescue capacity, and stepping up its cooperation with the Hellenic Coast Guard.” In an interview with Germany’s Bild newspaper published Monday, Chancellor Angela Merkel heralded closer cooperation between Greece, Turkey and EU border agency Frontex. “In the Aegean Sea, between Greece and Turkey, both NATO members, traffickers do whatever they want,” she told the paper. Diplomatic circles in Athens suggest that Ankara is tempted to use the refugee crisis as a tool for prompting additional EU aid, concessions on the issue of EU visas, or the creation of a buffer zone behind the Syrian border.

Acidification.

• Marine Food Chains At Risk Of Collapse (Guardian)

The food chains of the world’s oceans are at risk of collapse due to the release of greenhouse gases, overfishing and localised pollution, a stark new analysis shows. A study of 632 published experiments of the world’s oceans, from tropical to arctic waters, spanning coral reefs and the open seas, found that climate change is whittling away the diversity and abundance of marine species. The paper, published in the Proceedings of the National Academy of Sciences, found there was “limited scope” for animals to deal with warming waters and acidification, with very few species escaping the negative impact of increasing carbon dioxide dissolution in the oceans. The world’s oceans absorb about a third of all the carbon dioxide emitted by the burning of fossil fuels.

The ocean has warmed by about 1C since pre-industrial times, and the water increased to be 30% more acidic. The acidification of the ocean, where the pH of water drops as it absorbs carbon dioxide, will make it hard for creatures such as coral, oysters and mussels to form the shells and structures that sustain them. Meanwhile, warming waters are changing the behaviour and habitat range of fish. The overarching analysis of these changes, led by the University of Adelaide, found that the amount of plankton will increase with warming water but this abundance of food will not translate to improved results higher up the food chain.

“There is more food for small herbivores, such as fish, sea snails and shrimps, but because the warming has driven up metabolism rates the growth rate of these animals is decreasing,” said associate professor Ivan Nagelkerken of Adelaide University. “As there is less prey available, that means fewer opportunities for carnivores. There’s a cascading effect up the food chain. “Overall, we found there’s a decrease in species diversity and abundance irrespective of what ecosystem we are looking at. These are broad scale impacts, made worse when you combine the effect of warming with acidification. “We are seeing an increase in hypoxia, which decreases the oxygen content in water, and also added stressors such as overfishing and direct pollution. These added pressures are taking away the opportunity for species to adapt to climate change.”

Run away.

• Antarctic Ice Melts So Fast Whole Continent May Be At Risk By 2100 (Guardian)

Antarctic ice is melting so fast that the stability of the whole continent could be at risk by 2100, scientists have warned. Widespread collapse of Antarctic ice shelves – floating extensions of land ice projecting into the sea – could pave the way for dramatic rises in sea level. The new research predicts a doubling of surface melting of the ice shelves by 2050. By the end of the century, the melting rate could surpass the point associated with ice shelf collapse, it is claimed. If that happened a natural barrier to the flow of ice from glaciers and land-covering ice sheets into the oceans would be removed. Lead scientist, Dr Luke Trusel, Woods Hole Oceanographic Institution in Massachusetts, US, said: “Our results illustrate just how rapidly melting in Antarctica can intensify in a warming climate.”

“This has already occurred in places like the Antarctic Peninsula where we’ve observed warming and abrupt ice shelf collapses in the last few decades. “Our model projections show that similar levels of melt may occur across coastal Antarctica near the end of this century, raising concerns about future ice shelf stability.” The study, published in the journal Nature Geoscience, was based on satellite observations of ice surface melting and climate simulations up to the year 2100. It showed that if greenhouse gas emissions continued at their present rate, the Antarctic ice shelves would be in danger of collapse by the century’s end..

Debt Rattle October 9 2015

Oct 092015

October 9, 2015 Posted by Raúl Ilargi Meijer at 9:21 am Finance Tagged with: baby, China, Deutsche, diesel, emissions, liquidity, Ponzi, PQE, refugees, repo, VW 5 Responses »

DPC H.A. Testard Bicycles & Automobiles, New Orleans 1910

• September Liquidity Crisis Forced Fed Into Massive Reverse Repo Operation (IRD)

• Bank Of England Warns Financial Institutions Over Commodities Exposure (Guardian)

• If You Thought China’s Equity Bubble Was Scary, Check Out Bonds (Bloomberg)

• CEO: Deutsche Isn’t Worth What It Once Was And Can’t Pay What It Used To (BBG)

• Day After Deutsche Says Not All’s Well, Credit Suisse Also Admits Trouble (ZH)

• Bruised Germany Is Canary in Coal Mine for Europe Economic Woes (Bloomberg)

• Saudi Arabia Orders Deep Spending Curbs Amid Oil Price Slump (Bloomberg)

• Former IMF Chief Economist Blanchard Backs ‘People’s QE’ (Reuters)

• Hong Kong High Street Shop Rents Fall Up To 43% From Their Peaks (SCMP)

• Bill Gross Sues Pimco For At Least $200 Million (NY Times)

• Ponzi Suspect’s 17 Accounts Raise Questions Over Bank Safeguards (Bloomberg)

• Why This Feels Like A Depression For Most People (Jim Quinn)

• VW Exec Blames ‘A Couple Of’ Rogue Engineers For Emissions Scandal (LA Times)

• VW Facilities, Worker Homes Raided in Diesel Investigation (Bloomberg)

• US House Slams Regulators For Not Catching VW For Years (Reuters)

• Four More Carmakers Join ‘Dieselgate’ Emissions Row (Guardian)

• Merkel Slams Eastern Europeans On Migration (Politico)

• 542 People Rescued In 24 Hours Off Greece (AP)

• Baby Dies After Migrant Boat Breaks Down Off Greek Island Lesbos (Reuters)

Behind the curtain.

• September Liquidity Crisis Forced Fed Into Massive Reverse Repo Operation (IRD)

Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market. Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate. However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008. You can also see from this graph that the size of the “spike” occurrences in reverse repo operations has significantly increased since 2014 relative to the spike up in 2008. In fact, the latest two-week spike is by far the largest reverse repo operation on record.

Besides using repos to manage term banking reserves in order to target the Fed funds rate, reverse repos put Treasury collateral on to bank balance sheets. We know that in 2008 there was a derivatives counter-party default melt-down. This required the Fed to “inject” Treasury collateral into the banking system which could be used as margin collateral by banks or hedge funds/financial firms holding losing derivatives positions OR to “patch up” counter-party defaults (see AIG/Goldman).

What’s eerie about the pattern in the graph above is that since 2014, the “spike” occurrences have occurred more frequently and are much larger in size than the one in 2008. This would suggest that whatever is imploding behind the scenes is far worse than what occurred in 2008. What’s even more interesting is that the spike-up in reverse repos occurred at the same time – September 16 – that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period. You’ll note that this is around the same time that a crash in Glencore stock and bonds began. It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the “Lehman moment” that triggered the 2008 collapse.

The blame on the general stock market plunge was cast on the Fed’s inability to raise interest rates. However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out of sight in the general liquidity functions of the global banking system. Without a doubt, the graphs above are telling us that something “broke” in the banking system which necessitated the biggest injection of Treasury collateral in history into the global banking system by the Fed.

BoA says $100 billion exposure to Glencore alone, and Bernstein says 6 UK traders have only $6 billion? Hard to believe.

• Bank Of England Warns Financial Institutions Over Commodities Exposure (Guardian)

The Bank of England has told major banks to check the impact of falling commodity prices on their lending positions. Threadneedle Street has been asking for information from the major players in light of the rout in the shares in Glencore, the commodity trading and mining firm. Glencore’s shares plunged by 29% a week ago on Monday to 68.62p. Although they have subsequently recovered to 120p, the shares are trading far below their 2011 flotation price of 530p. The fall in Glencore stock came amid concerns about its debt position and fears that the Chinese economy was on the cusp of a hard landing that would further reduce already softening global demand for commodities.

The demand for information by the Bank of England has emerged at a time when banking analysts have been questioning the exposure of banks to the the fallout in the commodity sector. In a research note entitled The $100bn Gorilla in the Room, Bank of America analysts said: “The banking industry may have significantly more exposure to Glencore than is generally appreciated in the market.” Analysts at Bernstein, the broking firm, have conducted a wider analysis of UK banks’ exposure to six commodity trading houses, including Glencore, and concluded about $6bn (£3.9bn) worth of loans are outstanding. Standard Chartered, the Asian-focused London-based bank, was given the highest exposure of $1.9bn.

The move by the Bank to ask financial institutions to check their exposure to commodities follows similar health checks during the Greek crisis and amid Chinese stock market volatility in the summer. The requests are made through the Prudential Regulation Authority, the Bank of England’s regulatory arm. The Bank of England is launching stress tests on the major lenders and has said China is among the factors that will be included in the financial health check. The results are expected to be published in December.

Bubble after bubble, until there’s none left.

• If You Thought China’s Equity Bubble Was Scary, Check Out Bonds (Bloomberg)

As a rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another. So says Commerzbank, which puts the chance of a crash by year-end at 20%, up from almost zero in June. Industrial Securities and Huachuang Securities are warning of an unsustainable rally after bond prices climbed to six-year highs and issuance jumped to a record. The boom contrasts with caution elsewhere. A selloff in global corporate notes has pushed yields to a 21-month high, and credit-derivatives traders are demanding near the most in two years to insure against losses on Chinese government securities.

While an imminent collapse isn’t yet the base-case scenario for most forecasters, China’s 42.1 trillion yuan ($6.6 trillion) bond market is flashing the same danger signs that triggered a tumble in stocks four months ago: stretched valuations, a surge in investor leverage and shrinking corporate profits. A reversal would add to challenges facing China’s ruling Communist Party, which has struggled to contain volatility in financial markets amid the deepest economic slowdown since 1990. “The Chinese government is caught between a rock and hard place,” said Zhou Hao, a senior economist in Singapore at Commerzbank, Germany’s second-largest lender. “If it doesn’t intervene, the bond market will actually become a bubble. And if it does, the market could crash the way the equity market did due to fast de-leveraging.”

Deutsche equals tens of trillions in derivatives exposure. Why is it getting scared, and why now?

• CEO: Deutsche Isn’t Worth What It Once Was And Can’t Pay What It Used To (BBG)

Deutsche Bank’s new boss delivered a harsh message to shareholders and employees: Europe’s biggest investment bank isn’t worth what it once was and can’t pay them what they’re used to. Co-CEO John Cryan decided to mark down the value of the securities unit because of rules that will force the company to hold more capital, Deutsche Bank said in a statement late Wednesday. Higher equity requirements have hurt profitability. Cryan is preparing to shrink the trading empire built by his predecessor, Anshu Jain, to lower costs, lift capital levels and raise Deutsche Bank from its position as the worst-valued stock among global banks. That could mean giving up the aspiration to remain a top global investment bank and rolling back parts of the expansion it pursued over the last two-and-a-half decades.

“This perhaps is the beginning of the new chief executive taking a close look and saying, ‘actually, are we better off being the German champion bank, or do we want to maintain this ambition of being a global player?”’ Robert Smithson at THS Partners said. Deutsche Bank said it wrote down goodwill, a measure of the value a company expects to extract from acquisitions, to zero at both its investment- and consumer-banking units. The charge at the securities business relates in part to the $9 billion purchase of Bankers Trust in 1998, Cryan said in a memo to staff. That deal was a major step in the company’s transformation into a global investment bank because it expanded access to the U.S., home to the world’s biggest capital markets. Paul Achleitner, Deutsche Bank’s supervisory board chairman, advised the bank on the purchase while at Goldman Sachs.

The writedown at the securities unit, as well as charges at the company’s retail-banking division and legal costs, will probably cause a third-quarter net loss of €6.2 billion, Deutsche Bank said. The bank may cut or eliminate this year’s dividend, and employees, by way of compensation, will have to share the pain with investors, Cryan said. The stock fell 1.8% to €25.03. Cryan isn’t alone in writing down the value of acquisitions that failed to deliver anticipated returns. UniCredit, Italy’s biggest bank, posted a record loss for the fourth-quarter of 2013 after taking more than 9 billion euros of impairments, including those on the goodwill of units in Italy, central and eastern Europe and Austria. Investors were already valuing Deutsche Bank at less than it says its assets are worth. The company trades at about 0.6 times book value, the lowest ratio among its global peers.

Deutsche, Credit Suisse and UniCredit. Dominoes starting to drop.

• Day After Deutsche Says Not All’s Well, Credit Suisse Also Admits Trouble (ZH)

Not everything is “fine” in the land of European banks, in fact quite the opposite. One day after Deutsche Bank warned of a massive $7 billion loss and the potential elimination of the bank’s dividend which had been a German staple since reunification, a move which many said was a “kitchen sinking” of the bank’s problems (but not Goldman, which said it was “not a kitchen sinking, but a sign of the magnitude of the challenge” adding that “this development confirms our view that the task facing new management is very demanding. Litigation issues do not end with this mark down – we expect them to persist for a multi-year period. We do not see this as a “clean up” but rather an indication of what the “fixing” of Deutsche Bank will entail over the 2015-18 period), it was the turn of Switzerland’s second biggest bank after UBS, Credit Suisse, to admit it too needs more cash when moments ago the FT reported that the bank is “preparing to launch a substantial capital raising” when the new CEO Thiam unveils his strategic plan for the bank in two weeks’ time.

FT adds that “while not specifying an amount, they pointed to a poll published last week by analysts at Goldman Sachs concluding that 91% of investors expect the Swiss bank to raise more than SFr5bn in new equity.” The stock price did not like it, although just like with DB, we expect the “story” to quickly become that the Swiss bank is putting all its dirty laundry to rest, so an equity dilution is actually quite positive. Incidentally, with DB stock green on the day following a dividend cut, perhaps it would go limit up if Deutsche Bank had announced a negative dividend? The official narrative is well-known: the bank does not need the funds, it is simply a precaution ahead of new, more stringent capital requirements:

The capital is likely to be used to absorb losses triggered by a faster restructuring of the Swiss group, the people said. But Credit Suisse will also need higher capital ratios to comply with toughening demands from regulators. The Swiss authorities are expected to announce an increase of minimum capital ratios over the coming months, which could prove more challenging for the bank than its better capitalised local rival, UBS. Credit Suisse’s common equity tier one capital ratio of 10.3% compares with UBS’s 13.5%..

The real reason, of course, has nothing to do with this, and everything to do with the collapse of manipulation cartels involving Liebor, FX, commodities, bonds, equities, gold, and so on, because when banks can no longer collude with each other to push markets in any given direction, that’s when they start losing money. That and, of course, the fact that central bank intervention in capital markets has made it virtually impossible to trade any more. Or as they call it, “miss capital ratios.” Expect many more such announcements in the coming weeks.

While Brussels insists there is a cyclical recovery…

• Bruised Germany Is Canary in Coal Mine for Europe Economic Woes (Bloomberg)

The euro area’s pillar of economic strength is starting to show cracks. Germany’s manufacturing industry is taking a hit from cooling demand in emerging markets. Two of its icons – Deutsche Bank and Volkswagen – are in turmoil. And refugees are flooding across its borders at a rate of 10,000 a week. The strains are putting the resilience of Europe’s economic powerhouse to the test after exports in August fell the most since the height of the 2009 recession, and factory orders and industrial output unexpectedly declined. The flood of bad news is all the more troubling as the 19-nation euro area strives to sustain an economic revival that remains fragile. “Germany is the canary in the mine for Europe,” said Pau Morilla-Giner at London & Capital Asset Management in London.

“It is the most exposed country to what happens outside of the continent.” German exports slumped 5.2% in August from the previous month, the Federal Statistics Office in Wiesbaden said on Thursday. That’s the most since the recession of 2009. Imports slid 3.1%, shrinking the trade surplus to €15.3 billion from €25 billion. Weakening trade with China and Russia prompted Hamburger Hafen und Logistik, which handles about three in four containers at the city port, to cut its 2015 earnings forecast on declining container volume. Germany’s gateway to Asia serves as a major transfer hub for containers carried by deep-sea ships from the Pacific region and then reloaded onto smaller feeder vessels destined for Baltic Sea ports, including the Russian harbor of St. Petersburg.

BASF, whose dominance in the global chemical industry makes it a barometer for the German economy, is curbing spending and scrapped its 2020 profit and sales target on Sept. 28 after becoming more pessimistic on economic growth and chemical production. The risks for Germany’s steel producers “have increased significantly, especially in the area of foreign trade, in recent weeks and months,” the Wirtschaftsvereinigung Stahl industry group said on Thursday in a report showing crude steel production fell almost 4% in September. “One of the biggest pressure points for the euro zone’s fragile economic recovery is German export orders,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “News that they fell sharply throws the China-driven weakness in the global economy into sharp relief.”

Problems mount for the House of Saud. Only option left is to increase pumping.

• Saudi Arabia Orders Deep Spending Curbs Amid Oil Price Slump (Bloomberg)

Saudi Arabia is ordering a series of cost-cutting measures as the slide in oil prices weighs on the kingdom’s budget, according to two people with knowledge of the matter. The finance ministry told government departments not to contract any new projects and to freeze appointments and promotions in the fourth quarter, the people said, asking not to be identified because the information isn’t public. It also banned the buying of vehicles or furniture, or agreeing any new property rentals and told officials to speed up the collection of revenue, they said. With oil accounting for about 90% of revenue in the Arab world’s largest economy, a drop of more than 40% in crude prices in the past 12 months has combined with wars in Yemen and Syria to pressure Saudi Arabia’s finances.

While public debt is among the world’s lowest, with a gross debt-to-GDP ratio of less than 2% in 2014, that may rise to 33% in 2020, according to estimates from the IMF. “In order to demonstrate a bit of fiscal discipline the government needed to take some measures in 4Q to moderate spending,” John Sfakianakis, Middle East director at Ashmore Group, said. “Going forward Saudi Arabia will have to implement spending cuts and efficiencies in order to avoid a runaway fiscal deficit in 2016.” To help shore up its finances, authorities plan to raise between 90 billion riyals ($24 billion) and 100 billion riyals in bonds before the end of the year, people with knowledge of the matter said in August. The kingdom’s net foreign assets fell for a seventh month to $654.5 billion in August, the lowest level in more than two years.

Maybe someone should define PQE. Would seem handy for future discussion.

• Former IMF Chief Economist Blanchard Backs ‘People’s QE’ (Reuters)

“People’s QE” could be an option to help economies fight future crises, Olivier Blanchard, who has just stepped down as chief economist of the IMF, said on Wednesday. Quantitative easing, where central banks buy assets such as government bonds from banks in exchange for newly created money, has been used in the euro zone, the United States and Britain to increase financial market liquidity and stimulate growth. But the verdict is still out on whether central banks should be buying assets, as they do now, or instead tie up with governments to spend it on ‘real’ goods, known as “people’s QE”, as a way of stimulating the economy, Blanchard said during a lecture at the Cass Business School.

“There is clearly something else you can do if you get to zero (inflation) and still want to increase spending. You can buy goods.” “Which one should you choose? We haven’t asked the question in the crisis but we should,” he said. Blanchard said that this does not mean central banks would buy goods directly. Rather, governments can increase their fiscal deficits by spending on infrastructure projects. Central banks can then buy this debt with newly created money. He also stressed that these fiscal deficits should be “a certain size and not more”. People’s QE was a prominent part of the leadership election campaign for British Labour Party leader Jeremy Corbyn.

QE has come under popular criticism because banks, which were supposed to lend out the new money into the wider economy to stimulate growth, have not necessarily done so. Blanchard argues that buying goods rather than assets can get the money out into the economy another way. People’s QE has also been criticised because it may compromise central bank independence. Bank of England chief economist Andy Haldane said in September people should be “very cautious” about encroaching on the separation between fiscal and monetary policy.

Any questions?

• Hong Kong High Street Shop Rents Fall Up To 43% From Their Peaks (SCMP)

Hong Kong’s high street shop rents have fallen as much as 43% when compared with the peak levels in the fourth quarter of 2013, according to international property consultant DTZ/Cushman & Wakefield. Plagued by smaller growth in tourist arrivals and a decrease in sales of luxury products, retailers have been facing a challenging business environment and find the rents they are paying in prime street shops as too expensive. Some retailers requested landlords to cut rents while others opted to relocate. As a result, the retail high street rents in Causeway Bay, Tsim Sha Tsui, Central and Mongkok had gone down by 26-43% as of the third quarter from their respective peak levels in the fourth quarter of 2013, or during lease renewal compared to the last rent a few years ago, said Kevin Lam, DTZ/Cushman & Wakefield’s Head of Business Space, Hong Kong.

It was all El-Erian after all.

• Bill Gross Sues Pimco For At Least $200 Million (NY Times)

The man known as the bond king, William H. Gross, is suing the company that he built into one of the largest asset managers in the world, providing his own colorful version of an ugly feud that led to his departure last year. The lawsuit, filed on Thursday, represents a bold effort by Mr. Gross to repair the damage that was done to his reputation in the year before and after he was fired from Pimco. News media reports have portrayed Mr. Gross’s departure as a product of his erratic and domineering behavior at the firm he helped found in 1971. Mr. Gross is seeking “in no event less than $200 million” from Pimco for breach of covenant of good faith and fair dealing, among other causes of action.

But to underscore the degree to which the suit is motivated by Mr. Gross’s desire to correct the public record, he has promised to donate any money he recovers to charity, his lawyer, Patricia L. Glaser, said. The lawsuit presents a picture of Pimco — an asset manager based in California that is responsible for billions of dollars in retirement savings — as a den of intrigue riven by back stabbing and competing egos. The first sentence of the suit says that Mr. Gross was pushed out by a “cabal” of Pimco managing directors who were “driven by a lust for power, greed, and a desire to improve their own financial position.” “Their improper, dishonest, and unethical behavior must now be exposed,” the opening paragraph concludes.

The suit takes aim at the man who was once in line to succeed Mr. Gross, Mohamed El-Erian, and at the man who has succeeded Mr. Gross as Pimco’s group chief investment officer, Daniel J. Ivascyn. Mr. El-Erian is now the chief economic advisor at Allianz, Pimco’s parent company. Both men, the suit says, were eager to take Pimco away from its traditional focus on bond funds and into riskier investment strategies that would earn it higher fees and lead to bigger bonuses for top executives. Mr. Gross, on the other hand, is said in the suit to have consistently advocated for keeping the firm focused on lower-fee investment products.

“If the banks had just Googled this guy, they would have known enough to stay away..”

• Ponzi Suspect’s 17 Accounts Raise Questions Over Bank Safeguards (Bloomberg)

The U.S. requires banks to know their customers. Looks like several big ones, including Citigroup, JPMorgan and Wells Fargo, may have missed getting acquainted with Daniel Fernandes Rojo Filho. Filho, a 48-year-old Brazilian self-proclaimed billionaire living in Orlando, Florida, came under U.S. investigation in 2009 related to an alleged conspiracy involving drug trafficking, money laundering and a Ponzi scheme. Around then, he and others under the federal probe forfeited tens of millions of dollars worth of Lamborghinis, gold bars and other assets, according to court documents. He agreed in 2013 to forfeit another $25 million in accounts registered to his children and businesses. That was all a matter of public record in mid-2014, when Filho started opening new bank accounts.

He set up at least 17 of them in the name of his company – DFRF Enterprises, derived from his initials – and signed his own name. Filho’s banking flurry is detailed in several fresh cases against him, including an August criminal indictment alleging he used some of these accounts in a scheme that promised investors income from nonexistent gold-mining operations. Filho faces similar allegations in separate lawsuits filed this year by the Securities and Exchange Commission and by a group of investors. “If the banks had just Googled this guy, they would have known enough to stay away,” said Evans Carter, a Framingham, Massachusetts-based attorney who brought the investors’ class-action suit early this year. Filho, who was arrested in July, awaits a hearing today in Boston connected to the criminal charges against him.

“Today, there are 46 million Americans in an electronic soup kitchen line..”

• Why This Feels Like A Depression For Most People (Jim Quinn)

Everyone has seen the pictures of the unemployed waiting in soup lines during the Great Depression. When you try to tell a propaganda believing, willfully ignorant, mainstream media watching, math challenged consumer we are in the midst of a Greater Depression, they act as if you’ve lost your mind. They will immediately bluster about the 5.1% unemployment rate, record corporate profits, and stock market near all-time highs. The cognitive dissonance of these people is only exceeded by their inability to understand basic mathematical concepts. The reason you don’t see huge lines of people waiting in soup lines during this Greater Depression is because the government has figured out how to disguise suffering through modern technology. During the height of the Great Depression in 1933, there were 12.8 million Americans unemployed.

These were the men pictured in the soup lines. Today, there are 46 million Americans in an electronic soup kitchen line, as their food is distributed through EBT cards (with that angel of mercy JP Morgan reaping billions in profits by processing the transactions). These 46 million people represent 14% of the U.S. population. There are 23 million households on food stamps in a nation of 123 million households. Therefore, 19% of all households in the U.S. are so poor, they require food assistance to survive. In 1933 there were approximately 126 million Americans living in 30 million households. The government didn’t keep official unemployment records until 1940, but the Department of Labor estimated 12.8 million people were unemployed during the worst year of the Great Depression or 24.9% of the labor force.

By 1937 it had fallen to 14.3% or approximately 8 million people. The number of people unemployed during the 1930’s is an excellent representation of the number of households on government assistance during the Great Depression because 79% of all households were occupied by married couples with 4 people per household versus 48% married couple households today with 2.5 people per household. The unemployment rate averaged 19% during the heart of the Great Depression. Therefore, approximately 19% of all the households in the U.S. needed government assistance to feed themselves. That happens to be the exact %age of households currently needing food stamps to feed themselves.

Do they really think this’ll fly? “..it sure does cause you to scratch your head that we have this software that just happens to be in 11 million cars and no one in the whole company noticed it.”

• VW Exec Blames ‘A Couple Of’ Rogue Engineers For Emissions Scandal (LA Times)

A top Volkswagen executive on Thursday blamed a handful of rogue software engineers for the company’s emissions-test cheating scandal and told outraged lawmakers that it would take years to fix most of the nearly half million vehicles affected in the U.S. “This was a couple of software engineers who put this in for whatever reason,” Michael Horn, VW’s U.S. chief executive, told a House subcommittee hearing. “To my understanding, this was not a corporate decision. This was something individuals did.” Horn, chief executive of Volkswagen Group of America, revealed that three VW employees had been suspended in connection with software that detects and fools emissions testing equipment in the company’s diesel vehicles. The automaker said that the so-called defeat device is loaded onto as many as 11 million vehicles worldwide.

Horn’s testimony before the House Energy and Commerce Committee’s oversight and investigations panel coincided with a raid Thursday by German investigators at Volkswagen’s Wolfsburg headquarters. The exact number of engineers the company blames remained unclear. Horn said both “couple” and three, then said under questioning that he did not yet know the exact number. Regardless, the claim that such a small number of people could have pulled off such a massive fraud brought immediate skepticism from lawmakers and industry experts. “I cannot accept VW’s portrayal of this as something by a couple of rogue software engineers,” said Rep. Chris Collins (R-N.Y.). “Suspending three folks — it goes way, way higher than that.”

Auto industry veterans agreed. “There are not rogue engineers who unilaterally decide to initiate the greatest vehicle emission fraud in history. They don’t act unilaterally,” said Joan Claybrook, former administrator of the National Highway Traffic Safety Administration. “They have teams that put these vehicles together. They have a review process for the design, testing and development of the vehicles.” James Womack, an expert on the international auto industry, also expressed doubts. “It might not be reviewed and discussed leaving an email or voicemail trail,” Womack said, “but it sure does cause you to scratch your head that we have this software that just happens to be in 11 million cars and no one in the whole company noticed it.”

The bosses knew. But will that come out?

• VW Facilities, Worker Homes Raided in Diesel Investigation (Bloomberg)

Police and prosecutors swooped in on Volkswagen facilities and private homes on Thursday in a dawn raid to gather evidence about who was behind the carmaker’s decision to cheat on diesel emissions tests. Three prosecutors and some 50 state criminal investigators searched the carmaker’s factories and employees’ homes starting in the early morning and continuing through the afternoon in Wolfsburg, its headquarters city, and elsewhere, said Birgit Seel, a senior prosecutor in the German state of Lower Saxony. Investigators took documents and electronic media, and it may take several weeks to review the material, Seel said. She didn’t identify employees whose homes were searched.

“We will fully support the prosecutor’s office with its investigation into the facts of the case and into the people responsible to swiftly and completely get to the bottom of the matter,” Volkswagen said in an e-mailed statement. The company filed its own criminal complaint on Sept. 23. The raids come as pressure on Volkswagen intensifies. The company’s U.S. chief, Michael Horn, will face U.S. lawmakers Thursday in the first public hearing on the scandal. In Europe alone, Volkswagen will probably need to exchange or rebuild parts for about 3.6 million engines equipped with illegal software that turned on full pollution controls only during tests, German Transport Minister Alexander Dobrindt said. Volkswagen told German regulators the parts for 1.6-liter engines that need the fix won’t be available until September 2016, Dobrindt said.

“.. I think the American people ought to ask that we fire you and hire West Virginia University to do our work.”

• US House Slams Regulators For Not Catching VW For Years (Reuters)

Volkswagen US chief executive blamed “individuals” for using software to cheat on diesel emissions at a House hearing on Thursday as lawmakers attacked federal environmental regulators for failing to catch the fraud for years. Michael Horn, head of Volkswagen Americas, testified before a House of Representatives oversight and investigations panel about the emissions scandal that has chopped more than a third of the company’s market value and sent tremors through the global auto industry. Volkswagen’s use of defeat devices, software that evaded U.S. tests for emissions harmful to human health, was not a corporate decision, but something a few employees engineered, Horn said under oath. “This was a couple of software engineers who put this in for whatever reason,” Horn said about the software code inserted into diesel cars since 2009.

Volkswagen used different defeat devices in Europe and the United States, Horn said, as emissions standards are different in the two regions. “Some people have made the wrong decisions in order to get away with something,” Horn said when asked by lawmakers if Volkswagen cheated with defeat devices because it was cheaper than using special injection systems to cut emissions. Lawmakers slammed an Environmental Protection Agency official who testified after Horn for not catching Volkswagen. Representative Michael Burgess, a Texas Republican, questioned the size of EPA’s annual budget, noting that the cheating was uncovered by a West Virginia University study that had a budget of less than $70,000.

“I’m not going to blame our budget for the fact that we missed this cheating,” replied the EPA’s Christopher Grundler, who said his transportation and air quality office has an annual budget of roughly $100 million. “I do think we do a very good job of setting priorities.” Burgess replied: “With all due respect, just looking at the situation, I think the American people ought to ask that we fire you and hire West Virginia University to do our work.”

“What we are seeing here is a dieselgate that covers many brands and many different car models..”

• Four More Carmakers Join ‘Dieselgate’ Emissions Row (Guardian)

Mercedes-Benz, Honda, Mazda and Mitsubishi have joined the growing list of manufacturers whose diesel cars are known to emit significantly more pollution on the road than in regulatory tests, according to data obtained by the Guardian. In more realistic on-road tests, some Honda models emitted six times the regulatory limit of NOx pollution while some unnamed 4×4 models had 20 times the NOx limit coming out of their exhaust pipes. “The issue is a systemic one” across the industry, said Nick Molden, whose company Emissions Analytics tested the cars. The Guardian revealed last week that diesel cars from Renault, Nissan, Hyundai, Citroen, Fiat, Volvo and Jeep all pumped out significantly more NOx in more realistic driving conditions.

NOx pollution is at illegal levels in many parts of the UK and is believed to have caused many thousands of premature deaths and billions of pounds in health costs. All the diesel cars passed the EU’s official lab-based regulatory test (called NEDC), but the test has failed to cut air pollution as governments intended because carmakers designed vehicles that perform better in the lab than on the road. There is no evidence of illegal activity, such as the “defeat devices” used by Volkswagen. The new data is from Emissions Analytics’ on-the-road testing programme, which is carefully controlled and closely matches the real-world test the European commission wants to introduce. The company tested both Euro 6 models, the newest and strictest standard, and earlier Euro 5 models.

[..] “These new test results [from Emissions Analytics] prove that the Volkswagen scandal is just the tip of the iceberg. What we are seeing here is a dieselgate that covers many brands and many different car models,” said Greg Archer, an emissions expert at Transport & Environment. “The only solution is a strict new test that takes place on the road and verified by an authority not paid by the car industry.”

“The eastern Europeans — and I’m counting myself as an eastern European — we have experienced that isolation doesn’t help..”

• Merkel Slams Eastern Europeans On Migration (Politico)

German Chancellor Angela Merkel harshly criticized eastern European governments for not having learned from their own history in their responses to the migration crisis. “The eastern Europeans — and I’m counting myself as an eastern European — we have experienced that isolation doesn’t help,” she told members of the center-right European People’s Party Wednesday in a closed-door meeting, according to a recording of the session obtained by POLITICO. “It makes me a bit sad that precisely those who can consider themselves lucky that they have lived to see the end of the Cold War, now think that one can completely stay out of certain developments of globalization,” Merkel said, referring to the reluctance of some EU countries to accept refugees.

“It just strikes me as somehow very weird. And that’s why we have to keep talking about that, as friends,” Merkel said, speaking German, as she responded to a question from a Czech MEP on the refugee crisis. “A rejection [of taking refugees in] as a matter of principle, that is — excuse me for being that blunt — that’s a danger for Europe,” Merkel said.

This just keeps going on as the EU discusses ‘fighting’ the smugglers.

• 542 People Rescued In 24 Hours Off Greece (AP)

The latest developments as hundreds of thousands of people seeking safety make an epic trek through Europe. All times local.

9:40 a.m. – Greece’s coast guard says it has rescued 542 people in 12 search and rescue incidents from Thursday morning to Friday morning. The rescues occurred off the coasts of the eastern Aegean islands of Lesbos, Chios, Samos, Agathonissi and Farmakonissi, the coast guard said. Hundreds of thousands of people fleeing war and poverty in their homelands have reached Greece so far this year, the vast majority on rickety boats or cheap inflatable dinghies from the nearby Turkish coast. Although a short sea journey, it can be fatal as the unseaworthy and overloaded boats sometimes sink.

9:30 a.m. – Greece’s coast guard says a wooden boat carrying a large number of refugees or other migrants has run aground on the small eastern Aegean island of Leros, while an infant died after the inflatable dinghy he was in partially sank off the coast of Lesbos island. The wooden boat, carrying about 100 people, ran aground Friday on the northeast coast of Leros, the coast guard said. Those on board were being taken to shore by coast guard and private vessels that arrived to help. In the Lesbos incident, the coast guard rescued 56 people from the sea Thursday night after the rear part of their dinghy burst, partially sinking the boat. A 1-year-old boy was recovered unconscious and transported to a hospital, but rescuers were unable to revive him.

And so does this. No humanity, no shame, no decency.

• Baby Dies After Migrant Boat Breaks Down Off Greek Island Lesbos (Reuters)

A baby died after the rubber boat carrying him and another 56 migrants broke down and was left adrift off the Greek island of Lesbos, the Greek coastguard said on Friday. The 1-year-old boy, whose nationality was not made known, was found unconscious on a rubber dinghy which had broken down and went adrift late on Thursday. The boy was taken to a hospital where he was pronounced dead. The coastguard rescued the rest of the migrants, some of whom were in the sea. The baby was one of thousands of refugees – mostly fleeing war-torn Syria, Afghanistan and Iraq – who attempt the short but perilous crossing from the Turkish coast to Greek islands by boat, often in rough seas.

Almost 400,000 people have arrived in Greece this year, the U.N. refugee agency UNHCR has said, overwhelming the crisis-stricken government’s ability to cope. Most have rapidly headed north towards Germany. The coastguard has rescued a total of 542 migrants and refugees off the Aegean islands of Lesbos, Chios, Samos, Farmakonisi and Agathonisi since early on Thursday. Europe’s migration commissioner, Dimitris Avramopoulos, and Luxembourg Foreign Affairs Minister Jean Asselborn are expected in Athens on Friday and will give a joint news conference on the refugee crisis on Saturday.

Debt Rattle October 3 2015

Oct 032015

October 3, 2015 Posted by Raúl Ilargi Meijer at 9:09 am Finance Tagged with: buybacks, China, credit, debt, emissions, investors, jobs, migrants, refugees, VW Comments Off

DPC Looking south on Fifth Avenue at East 56th Street, NYC 1905

• US Job Growth Disappoints Even More than Usual (NY Times)

• US Payrolls Disaster: Only 142K Jobs Added In September With Zero Wage Growth (ZH)

• Fed: The 94.6 Million Americans Out Of The Labor Force ‘Don’t Want A Job’ (ZH)

• Companies Are Cutting Jobs And Buying Back Stock At The Same Time (MarketWatch)

• Credit Investors Bolt Party as Economy Fears Trump Low Rates (Bloomberg)

• Market Signals Mean Investors Must Start To Question Assumptions (John Authers)

• Jeff Gundlach: Expect ‘Another Wave Down’ In Markets (Reuters)

• The Reality Behind The Numbers In China’s Boom-Bust Economy (Mises Inst.)

• China Imposes New Capital Controls (Chang)

• VW Scandal Deepens As France And Italy Launch Deception Inquiries (Guardian)

• Volkswagen: Full Chronology of The Scene of the Crime (Handelsblatt)

• VW Tsunami: Falsified Emissions Push Company to Limits (Spiegel)

• VW Emissions Cheating Scandal Heading To US Congress (CNBC)

• VW Financial Services Arm A Risk Investors May Be Overlooking (CNBC)

• Canada Opposition Warns TPP Deal Not Binding Ahead Of Imminent Election (G&M)

• Australia Is “Going Down Under”: “The Bubble Is About To Burst”, RBS Warns (ZH)

• Half of World’s Coal Output Is Unprofitable (Bloomberg)

• From Here On Out, This Is Not A Video Game – This Is Real (Martin Armstrong)

• Channel Tunnel Closed As Migrants Occupy Complex (AFP)

• UN Refugee Agency: Over 1.4 Million To Cross Mediterranean To Europe (Reuters)

Go figure: 94.6 million ‘out of the labor force’, but NY Times states: “..weak demand for labor accounts for an estimated 2 million working-age men and women who currently do not have jobs or are not looking for jobs.”

• US Job Growth Disappoints Even More than Usual (NY Times)

The jobs report for September was a real letdown, and that is saying a lot, because what has passed for strong growth in the past year – 243,000 jobs a month on average before the latest data pulled the average down – has always been disappointing. It was a big improvement from job growth earlier in the recovery, but it was still too slow and too uneven to restore full employment and pull up wages. Then, last month, the economy added a scant 142,000 jobs and monthly tallies for July and August were revised down by 59,000 jobs. The labor force shrank – and not only because of retirements. Rather, weak demand for labor accounts for an estimated 2 million working-age men and women who currently do not have jobs or are not looking for jobs.

In addition, the share of 25 to 34-year-olds with jobs, a crucial demographic for home buying, has flattened recently, having never recovered its pre-recession level. There was, yet again, no meaningful wage growth in September. A slower pace of overall job growth plus flat wages is an especially bad sign for consumer spending. A cloudy outlook for spending implies a cloudy outlook for the economy. The best response to a report like September’s is to withhold judgment until more data comes in. It is hard, however, to be optimistic. In September, roughly as many industries gained employment as lost employment. In a healthy economy, employment gains outweigh employment losses across industries.

In the manufacturing sector, employment declines have been greater than employment gains for the past two months. The fear is of a continued slide. The Federal Reserve has rightly held off on interest rate increases in order to give the job market more time to recover. But robust recovery has been hindered, in large part, by the failure of Congress to use fiscal support to amplify the Fed’s efforts. If economic growth were to slow in what is still a near-zero interest rate environment, the Fed would not be able to jolt the economy with interest rate cuts. Janet Yellen, the Fed’s chairwoman, alluded to that possibility in a speech earlier this year. If it came to pass, Congress would be the economy’s best hope for stimulus policy. Would lawmakers step up? Like I said, it’s hard to be optimistic.

“..the household survey was an unmitigated disaster, with 236,000 jobs lost in September..”

• US Payroll Disaster: Only 142K Jobs Added In September With Zero Wage Growth (ZH)

And so the “most important payrolls number” at least until the October FOMC meeting when the Fed will once again do nothing because suddenly the US is staring recession in the face, is in the history books, and as previewed earlier today, at 142K it was a total disaster, 60K below the consensus and below the lowest estimate. Just as bad, the August print was also revised far lower from 173K to 136K. And while it is less followed, the household survey was an unmitigated disaster, with 236,000 jobs lost in September. Putting it into perspective, in 2015 job growth has averaged 198,000 per month, compared with an average monthly gain of 260,000 in 2014. The recession is almost here.

As noted above, the headline jobs print was below the lowest Wall Street estimate. In other words 96 out of 96 economisseds did what they do best. The unemployment rate came in at 5.1% as expected but everyone will be focusing on the disaster headline print. And worst of all, average hourly wages stayed flat at 0.0%, also below the expected 0.2%. Actually, if one zooms in, the change was not 0.0%, it was negative, while weekly earnings actually declined from $868.46 to $865.61. Finally, not only were workers paid less, they worked less, as the average hourly weekweek declined from 34.6 hours to 34.5, suggesting an imminent collapse in economic output.

“..there are nearly 100 million working-age Americans who could be in the labor force, but are not, “mostly” because they don’t want a job.”

• Fed: The 94.6 Million Americans Out Of The Labor Force ‘Don’t Want A Job’ (ZH)

In a note seeking to “explain” why the US labor participation rate just crashed to a nearly 40 year low earlier today as another half a million Americans decided to exit the labor force bringing the total to 94.6 million people… this is what the Atlanta Fed has to say about the most dramatic aberration to the US labor force in history: “Generally speaking, people in the 25–54 age group are the most likely to participate in the labor market. These so-called prime-age individuals are less likely to be making retirement decisions than older individuals and less likely to be enrolled in schooling or training than younger individuals.”

This is actually spot on; it is also the only thing the Atlanta Fed does get right in its entire taxpayer-funded “analysis.” However, as the chart below shows, when it comes to participation rates within the age cohort, while the 25-54 group should be stable and/or rising to indicate economic strength while the 55-69 participation rate dropping due to so-called accelerated retirement of baby booners, we see precisely the opposite. The Fed, to its credit, admits this: “participation among the prime-age group declined considerably between 2008 and 2013.” And this is where the wheels fall off the Atlanta Fed narrative. Because the regional Fed’s very next sentence shows why the world is doomed when you task economists to centrally-plan it:

The decrease in labor force participation among prime-age individuals has been driven mostly by the share who say they currently don’t want a job. As of December 2014, prime-age labor force participation was 2.4 percentage points below its prerecession average. Of that, 0.5 percentage point is accounted for by a higher share who indicate they currently want a job; 2 percentage points can be attributed to a higher share who say they currently don’t want a job.

And there you have it: there are nearly 100 million working-age Americans who could be in the labor force, but are not “mostly” because they don’t want a job.

How to destroy your economy in 2 easy steps.

• Companies Are Cutting Jobs And Buying Back Stock At The Same Time (MarketWatch)

How would you feel if the company that just laid you off said it was spending millions of dollars, or even billions, to buy back its stock? At least you wouldn’t feel lonely. U.S. companies announced 205,759 job cuts during the third quarter, the most since the third quarter of 2009, just after the Great Recession, according to data provided by outplacement company Challenger, Gray & Christmas In September, the number of announced job cuts was nearly double what it was at the same time last year. On Friday, the Labor Department released a stinker of a September jobs report. At the same time, share repurchases announced by U.S. companies during the third quarter remains around the highest levels in at least the last decade, according to data provider Dealogic.

In September, companies authorized buybacks totaling $243.4 billion, more than seven times the amount announced in the same month a year ago, Dealogic said. One might think these corporate actions are mutually exclusive, but as the chart above shows, many companies are doing both. In fact, some companies have even announced job cuts and share buybacks in the same news release. Hewlett-Packard made the biggest job-cut announcement this year, according to Challenger, on Sept. 15, when it said it was laying off up to 30,000 people. In the same statement, it indicated it could spend $700 million on share repurchases in fiscal 2016. Late Thursday, Bebe Stores said in a statement that it will lay off over 50 employees, or nearly 2% of its workforce, to save about $4.8 million a year. In the next paragraph, Bebe said it authorized a $5 million share repurchase program, which at current prices represents nearly 6% of the shares outstanding.

The US is drowning in debt. Anything else is just fluff.

• Credit Investors Bolt Party as Economy Fears Trump Low Rates (Bloomberg)

Debt investors are a nervous lot these days, and new signs that global turmoil is weighing on the U.S. economic outlook are only adding to their angst. Measures of corporate credit risk spiked immediately after a Labor Department report showed that payrolls rose less than projected last month, wages stagnated and the jobless rate was unchanged. Investors are now demanding more than they have in three years to own junk bonds, which are on track to cap off their worst week this year. Frustration is growing that even after seven years of easy-money policies, economic growth remains sluggish. While the Federal Reserve is signaling that it’s in no hurry to normalize interest rates, investors are increasingly worried about what the data will mean for earnings at companies that have sold $9.3 trillion of corporate bonds since the start of 2009.

“At some point the financial markets say, ‘Enough about monetary stimulus, we need real growth,’” said Jack McIntyre at Brandywine Global Investment. “Bad things happen in a low-growth environment. There’s more risk, more potholes.” This was a tough week for the bond market. Glencore kicked things off with investor concerns that the mining and commodities trading company would have trouble harnessing its $30 billion in debt, which sent junk-bond yields skyrocketing. Weakness also spread to investment-grade credit as Hewlett-Packard had to increase the amount it was willing to pay investors to buy $14.6 billion of notes that will fund its split into two companies.

On Friday, the credit-default swaps benchmark tied to the debt of 125 investment-grade companies jumped 3.6 basis points to 98 basis points, the highest level since June 2013. The index pared the jump later in the day. Investors’ diminishing appetite for plowing money into corporate bonds has put the $6.5 trillion market for U.S. company borrowings on track to post losses this year for the first time since the 2008 financial crisis ravaged markets. “The risk environment for credit appears to have deteriorated substantially in the past few weeks,” Barclays strategists led by Jeffrey Meli and Brad Rogoff wrote in a report Friday. “There have been several examples of any negative news leading to an outsized repricing lower, particularly in high yield.”

Authers has been consistently looking at things from the wrong side. And even as he’s slowly waking up, he still does.

• Market Signals Mean Investors Must Start To Question Assumptions (John Authers)

Markets trade on a number of unspoken assumptions. For those who want to understand why markets are now signalling concern, let me list the assumptions that have recently been called into question. First, and most important, was the belief that low interest rates had driven stock markets up (particularly in the US where the central bank had been most aggressive in pumping out cheap money), and that cheap rates would keep share prices up. Last month, after much debate, the Federal Reserve made the marginal decision not to raise rates — and it triggered a sharp sell-off in world stock markets. The “good news” of cheap money was swamped by the “bad news” of the reasons for that decision. Friday’s publication of September’s employment data for the US confirms the wisdom of the Fed’s decision, and also the market’s response.

Payrolls grew by less than 150,000 for two consecutive months — the first time this has happened since 2012. Employment is still growing, and employment data are notoriously noisy. But that rate of growth is now unambiguously slowing, while long-term unemployment remains damagingly high. The instant response, judging by the Fed Funds futures market, was to put the market’s estimate of when the Fed will indeed start raising rates all the way back to March of next year. And the instant response of the stock market to the good news that money would stay cheaper for longer was to sell off, while investors piled into bonds, taking the yield on 10-year Treasury bonds below 2%.

We are now at a point where bad news on growth simply reveals that monetary policy has become impotent in the minds of investors. Economic growth is a concern, and enough of a concern to swamp any relief at countermanding easy monetary policy. Why? Because of the overturning of a second assumption — that China’s remarkable economic growth story can continue uninterrupted, under capable guidance from its political leaders. China continues to grow, but the sharp slowing of its pace, and the perceived miscues of its leaders over the summer, while handling its stock market and a slight devaluation in its currency, have shaken confidence.

There are good reasons for concern over China’s economy, and the Asian economies that surround it. As the latest supply manager surveys demonstrate, export orders are growing at their slowest since the 2009 recession, while inventories are high. The fear is that a slowing Asia will export deflation to the west — a problem that manifests itself most directly in falling prices for metals, of which China is the world’s biggest consumer. That leads to a third assumption: corporate America can be the “little engine that can”, and keep churning out rising profits. The consistent recovery of US companies’ profits since their sudden collapse during the credit crisis of 2008 and 2009 has been a wonder of the age. Cheap money, enabling buybacks of stock, helped. But that growth has also now come to a halt.

“..Markets need buying to go up and they need volume to go up.They can fall just on gravity.”

• Jeff Gundlach: Expect ‘Another Wave Down’ In Markets (Reuters)

DoubleLine Capital co-founder Jeffrey Gundlach, widely followed for his investment calls, warned after the weak jobs number on Friday that the U.S. equity market as well as other risk markets including high-yield “junk” bonds face another round of selling pressure. “The reason the markets aren’t going lower is people are holding and hoping,” Gundlach said in a telephone interview with Reuters. “The market bottoms out when people are selling and sold out — not when they are holding and hoping. I don’t think you’ve seen real selling in risk assets broadly. Markets need buying to go up and they need volume to go up.They can fall just on gravity.”

Investors piled into government bonds on Friday, sending the 10-year Treasury yield below 2%, after the Labor Department said employers hired 142,000 workers last month, far below the 203,000 forecasters had expected, and August figures were revised sharply lower to show only 136,000 jobs added. Gundlach said junk bonds are vulnerable: “I’ll think about buying when it stops going down every single day.” “People are acting like everything is great. Junk bonds are at a four-year low. Emerging markets are at a six-year low and commodities are at a multi-year low – same level as in 1995… GDP is not growing at a nominal basis.” Gundlach, whose Los Angeles-based DoubleLine was overseeing $81 billion in assets under management as of the end of the third quarter, said: “Clearly what’s happening is people are waking up to the idea that global growth is not what they thought it was.”

“What we’re experiencing in the Chinese markets are the death throes of an economy that capital markets have realized is simply not productive enough to service that kind of debt.”

• The Reality Behind The Numbers In China’s Boom-Bust Economy (Mises Inst.)

Last year, the world was stunned by an IMF report which found the Chinese economy larger and more productive than that of the United States, both in terms of raw GDP and purchasing power parity (PPP). The Chinese people created more goods and had more purchasing power with which to obtain them – a classic sign of prosperity. At the same time, the Shanghai Stock Exchange more than doubled in value since October of 2014. This explosion in growth was accompanied by a post-recession construction boom that rivals anything the world has ever seen. In fact, in the three years from 2011 – 2013, the Chinese economy consumed more cement than the US had in the entire 20th century. Across the political spectrum, the narrative for the last fifteen years has been that of a rising Chinese hyperpower to rival American economic and cultural influence around the globe.

China’s state-led “red capitalism” was a model to be admired and even emulated. Yet, here we sit in 2015 watching the Chinese stock market fall apart despite the Chinese central bank’s desperate efforts to create liquidity through government-backed loans and bonds. Since mid-June, Chinese equities have fallen by more than 30 percent despite massive state purchases of small and mid-sized company shares by China’s Security Finance Corporation. But this series of events should have surprised nobody. China’s colossal stock market boom was not the result of any increase in the real value or productivity of the underlying assets. Rather, the boom was fueled primarily by a cascade of debt pouring out of the Chinese central bank.

Like the soaring Chinese stock exchange, the unprecedented construction boom was financed largely by artificially cheap credit offered by the Chinese central bank. New apartment buildings, roads, suburbs, irrigation and sewage systems, parks, and commercial centers were built not by private creditors and entrepreneurs marshaling limited resources in order to satisfy consumer demands. They were built by a cozy network of central bank officials, politicians, and well-connected private corporations.

Nearly seventy million luxury apartments remain empty. These projects created an epidemic of “ghost cities” in which cities built for millions are inhabited by a few thousand. At the turn of the century, the Chinese economy had outstanding debt of $1 trillion. Only fifteen years and several ghost cities later that debt has ballooned to an unbelievable $25 trillion. What we’re experiencing in the Chinese markets are the death throes of an economy that capital markets have realized is simply not productive enough to service that kind of debt.

“The only way Beijing can support its currency is to sell foreign exchange, in most cases the dollar. Reporting by the FT at the end of August suggested that China was selling dollars at the rate of about $20 billion a day for this purpose..”

• China Imposes New Capital Controls (Chang)

The State Administration of Foreign Exchange, China’s foreign exchange regulator, has imposed annual limitations on cash withdrawals outside China on China UnionPay bank cards, the Wall Street Journal learned on Tuesday. The limitations are reportedly contained in a circular SAFE, as the regulator is known, sent to banks. Cardholders, under the new rules, may withdraw a maximum 50,000 yuan ($7,854) in the last three months of this year and a maximum 100,000 yuan next year. Because UnionPay processes virtually all card transactions in China, the new limits apply to all Chinese credit and bank cards. Beijing already imposes a 10,000-yuan daily limit on withdrawals.

And why should the rest of the world care about how much money a holder of a Chinese credit card can get from an ATM in, say, New York? The new rules could be the first in a series of measures leading to draconian prohibitions of transfers of money from China. Draconian prohibitions, in turn, could spark a global panic. Capital has been flowing out of China at a fast pace for more than a year, but the rate has been accelerating recently. In August, for instance, the country’s official foreign exchange reserves dropped by a stunning $93.9 billion according to SAFE, the biggest fall on record. Some analysts, however, had expected Beijing’s cash hoard to plunge by $150 billion, and it’s possible SAFE has underreported the outflow to avoid creating alarm.

Yet it’s hard for Chinese leaders to mask the situation. Wind Information, China’s leading financial data provider, says money is coming out of the country at the rate of $135 billion a month, net of inflow. That assessment appears more or less correct. Capital outflow in August, according to Bloomberg, was a record $141.7 billion, which topped July’s record of $124.6 billion. Goldman Sachs puts the August outflow at $178 billion. The global financial community has been focusing on the wrong crisis in China. Beijing’s efforts to prevent the collapse of equity values by massive purchases of stocks have received wide publicity since early July, but these purchases do not pose an immediate challenge to China’s technocrats.

They are, after all, using their own currency to acquire shares, and they can print as much of it as they like, especially because the country is in a general deflationary era. What is critical however, is Beijing’s defense of the renminbi. The People’s Bank of China, the central bank, began devaluing the currency on August 11th in a move that continues to puzzle observers. In any event, the devaluation triggered a run. Chinese officials, therefore, had to mount a heroic defense of the renminbi. The only way Beijing can support its currency is to sell foreign exchange, in most cases the dollar. Reporting by the Financial Times at the end of August suggested that China was selling dollars at the rate of about $20 billion a day for this purpose. At that “burn” rate, Beijing could use up all its foreign exchange reserves in a year.

“BMW, Chrysler, General Motors, Land Rover and Mercedes-Benz are under scrutiny from the US regulator that exposed Volkswagen’s manipulation of emissions tests.”

• VW Scandal Deepens As France And Italy Launch Deception Inquiries (Guardian)

The Volkswagen emissions-testing scandal is deepening, with authorities in France and Italy launching investigations into the embattled German carmaker. Italy’s competition regulator is to investigate whether VW engaged in “improper commercial practices” by promoting its vehicles as meeting emissions standards which it failed to reach without a “defeat device”. The inquiry involves Volkswagen, Audi, Seat and Skoda diesel vehicles sold between 2009 and 2015. VW has suspended the sale of affected vehicles in Italy and also said it will recall more than 650,000 vehicles in the country. In France, an official from the prosecutor’s office told Reuters that an inquiry had been opened, and the French magazine L’Express said this had been launched at the instigation of Pierre Serne, vice-president of the region Île-de-France responsible for transport.

It also emerged on Friday that other car manufacturers – BMW, Chrysler, General Motors, Land Rover and Mercedes-Benz – are under scrutiny from the US regulator that exposed Volkswagen’s manipulation of emissions tests. The EPA has broadened its investigation to include at least 28 diesel-powered car models made by those companies, according to the Financial Times. VW has admitted to the US regulator that it fitted up to 11m vehicles with software that manipulates the tests. Its chief executive, Martin Winterkorn, has stepped down and is facing a criminal investigation in Germany, along with other, unnamed, employees of the carmaker.

The EPA will initially test one used vehicle of each model and then widen the enquiry if it finds anything suspicious, a senior agency official close to the investigation told the FT. The investigation will include most of the diesel vehicles on US roads, such as BMW’s X3, Chrysler’s Grand Cherokee, GM’s Chevrolet Colorado, the Range Rover TDV6 and the Mercedes-Benz E250 BlueTec. Diesel engines make up a tiny proportion of the overall car market in the US, but are far more common in Europe.

German journalists are digging deeper, and it will be that much harder to bury the scandal.

• Volkswagen: Full Chronology of The Scene of the Crime (Handelsblatt)

Volkswagen, the world’s largest automaker, has been brought to its knees by the emissions cheating scandal. The company’s share price has been virtually halved, its reputation is in tatters, customers are furious and employees are distraught. Handelsblatt pieces together the events that led up to the scandal, based on the facts as they are currently known. The following chronology is based on the work of six reporters and correspondents, who analyzed corporate documents and spoke to many of the people involved.

Chapter 1: The Big Plan is Hatched in Wolfsburg

February 2005 – Wolfgang Bernhard becomes head of the group’s core VW brand and, with the help of CEO Bernd Pischetsrieder, begins developing a new engine that will work with “common rail injection.” The new engine is to be used above all in the United States, where VW wants to start growing again. The group hopes that diesel engines, which are more economical and accelerate quickly, will help it gain ground against U.S. and Japanese rivals. There is one problem, however: The U.S. authorities have the strictest environmental standards.

May 2005 – Mr. Bernhard entrusts the new project to Rudolf Krebs, a developer at VW’s Audi brand. It quickly becomes apparent that it will be impossible to comply with U.S. emissions standards using current technology. Their solution is “adblue,” a technology used by German carmaker Daimler. Developers at VW and Audi are strongly opposed to the use of “adblue” in the planned engine, which later will come to be known as the EA 189, the engine containing the emissions cheating device. Mr. Bernhard is undeterred and presses on with plans for the new engine to incorporate “adblue” and common rail injection.

Fall 2006 – The first prototype is tested in South Africa. Martin Winterkorn, the head of Audi, and Ferdinand Piëch, the chairman of the VW group’s supervisory board and a major shareholder, are reported to have been present, but are not said to have been impressed.

November 11, 2006 – It emerges that Daimler and the VW group will offer diesel cars in the United States under the joint label “Bluetec.”

Chapter 2: The Plan Takes Shape in Wolfsburg

January 7, 2007 – VW subsidiary Audi launches its diesel offensive in the United States at the Detroit Motor Show. It is the first German manufacturer to do so. Wolfgang Bernhard does not attend the show, which surprises journalists. It soon emerges that he is to leave the company at the end of January, after less than two years in his post.

Finally we find out who’s been sacked. But that doesn’t mean the right people have been.

• VW Tsunami: Falsified Emissions Push Company to Limits (Spiegel)

Since Sept. 20, when then-CEO Martin Winterkorn admitted that VW had cheated for years on emissions tests with the help of illegal software, Europe’s largest automobile company has been in crisis mode. Company managers don’t know what tasks to handle first. “It’s like we have been hit by a tsunami,” says one VW manager. Company attorneys have been overwhelmed by inquiries from national authorities on both sides of the Atlantic and by lawyers who have been notifying the company with threats of lawsuits. Beyond that, financial experts have to develop plans in case the company’s ratings fall, which would increase borrowing costs. And sales managers have to come up with promotions to help dealerships sell cars. Diesel models are currently extremely difficult to move off the lot without significant rebates.

And then there is the company investigation that hopes to quickly discover how the scandal could have happened in the first place and who was responsible. Because development of the diesel engine in question began back in 2005, documents, records and emails from the last 10 years have to be examined. But those involved in the investigation have also received clues from the press – for example, the fact that Bosch, a VW supplier, warned Volkswagen early on against using the emissions software in question. But the VW investigation team was unable to find a message to that effect in company records. They contacted Bosch with a request to please send a copy to company headquarters in Wolfsburg.

Four managers who were responsible for the development of engines or vehicles have thus far been suspended. Their experiences were similar to that of Audi board member Ulrich Hackenberg, a long-time confidant of Winterkorn’s and, up until just a few days ago, one of the most powerful men at VW. He received news of his immediate suspension from the personnel department and was asked to turn in his company phone and leave his office. He has also been told not to set foot on company premises. Wolfgang Hatz and Heinz-Jakob Neusser, the heads of R&D for Volkswagen and Porsche respectively, suffered similar fates. In the case of Neusser, there is probable cause: A company employee allegedly told him back in 2011 about the use of the forbidden emissions software.

The moves are vital, as the company seeks to find out what went wrong and begins what promises to be a long process of restoring its reputation. Some of the suspended managers, to be sure, are likely to be reinstated once it is proven that they had nothing to do with the implementation of the software in question. But for the moment, the development of new models at Volkswagen and its affiliates has come to a screeching halt. The old bosses are gone, new ones have yet to be named and projects cannot go forward. That, though, is a small price to pay in comparison to what likely lies ahead. New VW CEO Müller, who was head of Porsche prior to his promotion, has demanded an “unsparing and vigorous investigation.” But with the company’s very existence at risk, even that may not be enough.

How long is this going to take?

• VW Emissions Cheating Scandal Heading To US Congress (CNBC)

Two weeks after revealing that Volkswagen had cheated on diesel emissions tests, officials from the EPA still have not formally ordered a recall of 482,000 VW products, but that step is “likely” to take place, according to an EPA spokesperson. Sources inside Volkswagen, meanwhile, told TheDetroitBureau.com that the automaker is now working with the federal agency to come up with an acceptable fix for diesel models that can produce as much as 40 times the allowed level of pollutants such as smog-causing NOx. VW has already said it is developing a retrofit for a total of 11 million diesel vehicles sold worldwide that contained a secret “defeat device” designed to reduce emissions levels during testing.

VW’s problems have continued to escalate in recent days, and even as prosecutors in both the U.S. and Germany look into the scandal, the automaker’s top U.S. executive has been summoned to Capitol Hill, where he will testify before a congressional oversight panel on Oct. 8. “The American people want to know why these devices were in place, how the decision was made to install them, and how they went undetected for so long. We will get them those answers,” said Rep. Tim Murphy, the Pennsylvania Republican who serves as chairman of the Energy and Commerce Subcommittee on Oversight and Investigations. The hearing will come less than a month after the EPA announced that Volkswagen had secretly added software code to its digital engine controllers designed to rein in emissions during testing.

But in the real world, the nearly half-million diesel vehicles sold in the U.S. over the last seven years were allowed to produce significantly higher levels of pollution than allowed by federal standards. The scandal threatens to consumer the automaker, with potential fines of more than $18 billion from the EPA alone. VW could face additional penalties resulting from the Justice Department investigation, as well as possible criminal sanctions. And the maker has been hit with a number of class-action lawsuits alleging, among other things, that it defrauded customers. September numbers released by VW on Thursday show that the maker did gain about 1% in sales compared to the same month a year ago. But the overall industry saw a 16% jump in volume for September. And since the scandal only hit mid-month, many analysts believe VW could be hit even harder in October.

When -cheating- carmakers get into banking. As if GM’s experiences haven’t been bad enough. Oh wait, GM’s still propping up US cars with cheap loans.

• VW Financial Services Arm A Risk Investors May Be Overlooking (CNBC)

Volkswagen may be an even bigger risk for investors than previously thought, as a key part of its business – aside from making cars – is threatened by the diesel emissions scandal. The company’s financial services business, which gives consumers loans to buy its cars and accounts for close to half of its balance sheet, could be the next source for alarm, according to analysts at Credit Suisse. The previously successful business – which currently has more than €100 billion of outstanding loans to customers – may even need fresh capital, the analysts argue. “We increasingly see risk in VW’s Financial Services business which supported industrial growth in the past.

Higher refinancing costs and risk provisioning makes it difficult for the financial services business to fund itself going forward; thus a capital injection would likely be required unless growth is reduced materially,” Credit Suisse wrote in a research note Friday morning. In other words, the woes of the manufacturing arm of the business are likely to affect the financial services’ ability to borrow to fund its operations. VW’s borrowing costs, measured by its bond yields, are already up by 200 basis points since the company admitted lying about diesel emissions in mid-September. If it is more difficult to get a loan to buy a Volkswagen as a result, the number of consumers wanting to buy its cars may dwindle even further.

But NDP is not high in the polls. On the brighter side, Harper’s not winning either. The liberals were a mess, but Stephen has been a calamity.

• Canada Opposition Warns TPP Deal Not Binding Ahead Of Imminent Election (G&M)

NDP Leader Thomas Mulcair is serving notice that a New Democratic Party government would not consider itself bound by the terms of a major Pacific Rim trade deal which the ruling Conservatives are negotiating on behalf of Canada in Atlanta. The NDP’s hardening of position on the Trans-Pacific Partnership talks comes as the deal appears likely. Discussions in Atlanta have gone into overtime as countries clear obstacles such as how much foreign content should be allowed in Japanese-made cars and Asian auto parts entering North America. Sources said Prime Minister Stephen Harper is being regularly briefed on developments as talks between 12 countries from Chile to Japan enter what is expected to be their final phase. Mr. Mulcair said Friday, however, that he feels the Conservative government has no mandate to agree to the big changes that a TPP deal would bring about.

His bombshell declaration on Friday promises to make the massive trade agreement a bigger factor in Canada’s 42nd federal election, which is 2 1/2 weeks away. It comes as polls suggest the NDP has dropped to third place in the national race. The new marker laid down by the NDP on a potential TPP deal sets it apart from the Conservatives, who favour a deal, and the Liberals, who have focused most of their criticism on the manner in which the Tories have negotiated the agreement rather than its substance. The NDP is trying to consolidate the anti-TPP vote with this move. Mr. Mulcair laid out his reasons in a letter to International Trade Minister Ed Fast, the Conservative government’s point man on the TPP talks, listing a slew of reasons why he’s distancing himself from the agreement, including the expected pain it will bring to Canadian dairy farmers and smaller auto parts makers.

“Your government forfeited a mandate to conclude negotiations on a major international trade agreement the day the election was called,” he writes. The letter also throws into question what would happen should the Conservatives lose power in the Oct. 19 election. “As you participate in Trans-Pacific Partnership negotiations this week in Atlanta, I wish to advise you that an NDP government will not consider itself bound to any agreement signed by your Conservative government during this federal election,” Mr. Mulcair says. He says a caretaker government like the one now running Ottawa during an election campaign is supposed to step carefully and ensure Canada’s interests are “vigorously defended” in Atlanta.

Well put: “Going down under”.

• Australia Is “Going Down Under”: “The Bubble Is About To Burst”, RBS Warns (ZH)

[..] just because other vulnerable countries aren’t beset with ethnic violence and/or street protests doesn’t mean they too aren’t facing crises due to falling commodity prices and the slowdown of the Chinese growth machine. One such country is Australia, which in some respects is an emerging market dressed up like a developed economy, and which of course has suffered mightily from the commodities carnage and China’s transition away from an investment-led growth model. Out with a fresh look at the risks facing Australia is RBS’ Alberto Gallo. Notable excerpts are presented below. From RBS:

Australia has become a commodity focused economy, with an increasing exposure to China. For the past decades, Australia has been buoyed by the rapid Chinese expansion, which outpaced the rest of the world. Australia benefited from China’s strong demand for commodities given its investment-led growth model. China is Australia’s top export destination and 59% of those exports are in iron-ore. But as China struggles to manage its ongoing credit crunch and continues its shift to consumption-led growth Australia’s economy is likely to be hurt by lower demand for commodities. The economy is slowing due to external headwinds. Last quarter, Australian GDP grew at just 0.2% QoQ, its lowest level in the last three years (and below the market consensus of 0.4%).

According to the Australian Bureau of Statistics (ABS) the growth rate was driven by higher domestic demand, while lower exports and a declining mining industry continue to present headwinds. Mining’s gross value-added to GDP fell by – 0.3% QoQ in Q2. Despite Reserve Bank of Australia (RBA) governor, Glenn Stevens, citing lower growth as potentially a “feature of the post financial crisis world” meaning that “potential growth is a bit lower”, Australia’s slowing economy is more than just a victim of the post financial crisis world, in our view. Rising unemployment coupled with soaring house prices and vulnerabilities in the commodity and construction sectors are all cause for concern. Unemployment is rising, and could increase further, given the high proportion of employment in the vulnerable mining and construction sectors.

Unemployment is at 6.2%, just shy of the ten year high of 6.3%. Although the number itself is not worryingly high, unemployment has been rising for the last three years, and is likely to continue in our view. Mining and commodity sectors employ 4.5% of the workforce. With lower demand for commodities from China, unemployment in these sectors could rise. Also, unemployment may rise in the construction sector (8.9% of workforce) given vulnerabilities in the housing market. There are domestic headwinds, too. The housing market is vulnerable, with overvalued properties and over-levered households. House prices in Australia have risen by 22% in the last three years, with property prices in Sydney overtaking those in London. House prices have risen faster than both disposable income and inflation in recent years, with the gap between growth in house prices and household income closing by over 40% in the last three years.

Like oil.

• Half of World’s Coal Output Is Unprofitable (Bloomberg)

Half of the world’s coal isn’t worth digging out of the ground at current prices, according to Moody’s Investors Service. The global metallurgical coal benchmark has fallen to the lowest level in a decade, settling last month at $89 a metric ton. “Further production cuts are necessary to bring the market back into balance,” Moody’s analysts including Anna Zubets-Anderson wrote in a report on Thursday. China’s slowing appetite for the power-plant fuel and steelmaking component has depressed the seaborne market, creating a worldwide glut. In the U.S., cheap natural gas is stealing coal’s share of the power generation market. And the strong dollar has tempered exports.

In North America, the credit rating company said it expects the industry’s combined earnings before interest, taxes, depreciation and amortization to decline by 10% next year after a 25% plunge in 2015. The Illinois Basin stands to be the “most resilient to current market dynamics” because of its lower mining costs and its location in the middle of the country where power plants still burn the fuel, Moody’s said. “We believe that Foresight Energy, a producer concentrated in the region, will be able to maintain steady production volumes over the next two to three years,” Zubets-Anderson wrote.

Armstrong swims in dark waters.

• From Here On Out, This Is Not A Video Game – This Is Real (Martin Armstrong)

The unleashing of Russian firepower in Syria in support of the Syrian government came precisely on the day of the Economic Confidence Model. I have come to learn from observing this model that major world events, whatever the major focus may be, appear to line up with the ECM. This target has been huge for us given that we have TWO WAR CYCLE MODELS: (1) civil unrest that leads to revolution, and (2) international war. It is sort of like the Blood Moon stuff insofar as it does not line up so easily. The main convergence of the War Cycle between both models began to turn in 2014. The economic war against Russia imposing sanctions began on March 6, 2014 (2014.178) when Obama signed Executive Order 13660 that authorizes sanctions on individuals and entities responsible for violating the sovereignty and territorial integrity of Ukraine.

The next day, this order was followed by Executive Order 13661, which claimed that Russia had undermined the democratic processes. On March 20, 2014, Obama issued a new Executive Order: “Blocking Property of Additional Persons Contributing to the Situation in Ukraine”. This order expanded the scope of the two previous orders to the Government of the Russian Federation; it included its annexation of Crimea and its use of force in Ukraine, which the U.S. claimed was a threat to the national security and foreign policy of the United States. Then on April 28, Obama imposed more sanctions on Russia. The third round of U.S. sanctions on Russia began from October into December 2014 over the turning point. On October 3, 2014, Joe Biden said, “It was America’s leadership and the president of the United States insisting, oft times almost having to embarrass Europe to stand up and take economic hits to impose costs.”

The EU imposed sanctions on December 18, 2014, which banned some investments in Crimea and halted support for the Russian Federation Black Sea exploration of oil and gas. The EU sanctions also prevented European companies from offering tourism services and purchasing real estate or companies in Crimea. On December 19, 2014, Obama imposed sanctions on Russian-occupied Crimea by executive order, which prohibited exports of U.S. goods and services to the region. The actual turning point was 2014.8871: November 20, 2014. The one event that took place precisely on that day was the Supreme Court’s ruling to allow same-sex marriage in South Carolina. This decision sparked civil unrest against the government throughout the Bible Belt states. On that same day, Obama took executive action on immigration. On November 24, the Missouri Grand Jury made ruled not to indict Officer Wilson in the shooting of Michael Brown on August 9, which sparked the beginning of civil unrest, such as the Black Lives Matter movement, in a rebuke of corrupt police forces.

Is there any sense of humanity left in Britain? These few thousand people can obviously be of much more value than an equal number of fat Brits.

• Channel Tunnel Closed As Migrants Occupy Complex (AFP)

Traffic through the Channel Tunnel connecting Britain and France was suspended early this morning after around 100 migrants entered the French side of the tunnel complex, the company operating it said in a statement. “At around 12:30 am, around 100 migrants forced a closure and the entry of security agents into the tunnel,” a Eurotunnel spokeswoman told AFP. She said police were at the site and that traffic remained suspended. Ten people, including seven migrants, suffered minor injuries in the storming of the tunnel, a firefighter at the scene said.

The interior ministers of France and Britain in August signed an agreement to set up a new “command and control centre” to tackle smuggling gangs in Calais, as Europe grapples with its biggest migration crisis since World War II. It came after attempts to penetrate the sprawling Eurotunnel site spiked that month, with migrants trying several times a night to outfox hopelessly outnumbered security officials and police. Thousands of people from Africa, the Middle East and Asia are camped in Calais in slum-like conditions, and at least 13 have died since 26 June trying to cross over into Britain, where many have family and work is thought easier to find.

Count on more.

• UN Refugee Agency: Over 1.4 Million To Cross Mediterranean To Europe (Reuters)

The UN refugee agency expects at least 1.4 million refugees to flee to Europe across the Mediterranean this year and next, according to a document seen by Reuters on Thursday, a sharp rise from initial estimates of 850,000. “UNHCR is planning for up to 700,000 people seeking safety and international protection in Europe in 2015,” reads the document, a revision to the agency’s existing appeal for funds. “… It is possible that there could be even greater numbers of arrivals in 2016, however, planning is based for the moment on similar figures to 2015.” UNHCR launched the appeal on Sept. 8 with preliminary plans for 400,000 refugee arrivals in 2015 and 450,000 in 2016. But the 2015 figure was surpassed within days of its publication, and by Sept. 28, 520,957 had arrived.

The revised appeal totals $128 million, a sharp increase from the initial appeal for $30.5 million, and UNHCR asked donors to allow their funds to be allocated flexibly because of the “very volatile operational context”. The appeal is also broadened to include transit countries in the Middle East and North Africa, to enable refugees to get help from UNHCR at an earlier stage of their journey. Although the vast majority of recent arrivals have travelled from Turkey through Greece, Macedonia and Serbia, possible alternative routes mapped out by UNHCR include the sea route from Turkey to Italy, from Greece through Albania to Montenegro or Italy, and from Montenegro by boat to Croatia. Most are fleeing the Syrian civil war, with many others seeking to escape conflict or poverty in Iraq, Afghanistan, Africa or elsewhere.

Debt Rattle October 2 2015

Oct 022015

October 2, 2015 Posted by Raúl Ilargi Meijer at 8:45 am Finance Tagged with: buybacks, CDS, China, commodities, EM, emissions, equities, IMF, stocks, VW, wealth destruction 1 Response »

Edwin Rosskam Service station, Connecticut Ave., Washington, DC 1940

• ‘Destruction Of Wealth’ Warning Looms Over Stocks (MarketWatch)

• Key Global Equity Index Has Fallen Off The Precipice (Dana Lyons)

• Is This The Mother Of All Warnings On Emerging Markets? (CNBC)

• Global Investors Brace For China Crash (Guardian)

• Over Half Of China Commodity Companies Can’t Pay The Interest On Their Debt (ZH)

• Here’s How Ugly The Third Quarter Was For Stocks And Commodities (MarketWatch)

• This Is The Endgame, According To Deutsche Bank (Jim Reid)

• Goldman: Buyback Burst Could Be Enough to Save the S&P 500’s Year (Bloomberg)

• There Are Five Times More Claims On Dollars As Dollars In Existence (Brodsky)

• Few Understand Why Glencore Lost 1/3 Of Its Value. That’s Worrying (BBG)

• Global Economy Loses Steam As Chinese, European Factories Falter (Reuters)

• BOE Says Market May Be Underpricing Risks of Falling Liquidity (Bloomberg)

• JPMorgan Said to Pay Most in $1.86 Billion CDS Rigging Settlement (Bloomberg)

• IMF’s Botched Involvement In Greece Attacked By Former Watchdog Chief (Telegraph)

• Volkswagen Too Big to Fail For Germany’s Political Classes (Bloomberg)

• VW Says Emissions Probe Will Take Months as It Faces Fines (Bloomberg)

• World’s Biggest Pension Fund Is Moving Into Junk and Emerging Bonds (Bloomberg)

• How The Banks Ignored The Lessons Of The Crash (Joris Luyendijk)

The warnings come from all sides now.

• ‘Destruction Of Wealth’ Warning Looms Over Stocks (MarketWatch)

A new health indicator for the S&P 500 Index of the largest U.S. stocks shows a rising likelihood of a broad, long-term decline. The benchmark has fallen 6.8% this year, pulled down by an 11% correction from Aug. 17 through Aug. 25. Earlier this year, the S&P 500 SPX, +0.20% had been setting new highs. Investors are now bracing for more declines as there are plenty of indications of trouble ahead. For one thing, the S&P 500 trades for 16 times aggregate consensus 2015 earnings estimates, which is near a 10-year high. Another headwind is the coming rise in interest rates by the Federal Reserve. Fed Chairwoman Janet Yellen said last week that she anticipated an increase of short-term rates “later this year, followed by a gradual pace of tightening thereafter.”

The federal funds rate has been locked in a range of zero to 0.25% since late 2008. That, combined with the massive expansion of the central bank’s balance sheet, made stocks attractive to investors who might otherwise have been tempted by decent yields form other asset classes. Reality Shares, a San Diego-based firm founded in 2012, has a new market-health indicator called the Guardian Gauge, which uses volatility and price-momentum data to give a long-term outlook for the S&P 500. For the past 15 days, the Guardian Gauge has been in the red. Reality Shares CEO Eric Ervin explained it this way: “Guardian looks at the 10 sectors of the S&P 500. If three of the sectors go negative, it signals a very high probability of going into a bear market. Over the past 15 years, it would have predicted the tech wreck and the financial crisis.”

“Each and every day, we are witnessing the ongoing global selloff inflict more and more damage to the post-2009 cyclical bull market.”

• Key Global Equity Index Has Fallen Off The Precipice (Dana Lyons)

On September 8, we posted a chart showing how a key worldwide equity index – the Global Dow – was “hanging on the precipice”. To refresh, the Global Dow is an equally-weighted index of the world’s 150 largest stocks. Therefore, while it may not directly be the target of a lot of money changing hands, it most certainly represents the stocks that see the most money trading hands. Thus, The Global Dow is a fairly important barometer of the state of the global large cap equity market. The “precipice” that we referenced in the September 8 post was the UP trendline from the bull market bottom in 2009. Not surprisingly, the index did attempt to climb up off of the precipice in the weeks following the post. However, as we suggested, “another test of the precipice here at 2280 would not be surprising”. The Global Dow did return to test that area and is now officially off of the precipice – having fallen down off of it in the last few days, as the following charts illustrate.

Additionally, as the charts indicate, the post-2009 UP trendline also coincided with a cluster of important Fibonacci Retracement levels shown below. Therefore, this breakdown wasn’t just about the trendline but a myriad of significant levels, making it even more consequential. [..] this is one more in a rapidly growing list of examples of indexes around the globe that are breaking long-term UP trendlines and other significant levels of various magnitude. Each and every day, we are witnessing the ongoing global selloff inflict more and more damage to the post-2009 cyclical bull market. And while that bull may not be declared dead for some time, it is now being wounded enough daily to warrant very seriously considering that possibility.

For 27 years, money has flown into emerging markets. That trend has now reversed.

• Is This The Mother Of All Warnings On Emerging Markets? (CNBC)

The last time emerging markets had it nearly this bad, Ronald Reagan was the U.S. President, KKR purchased RJR Nabisco, and a future popstar named Rihanna was born. Net capital flows for global emerging markets will be negative in 2015, the first time that has happened since 1988, the Institute of International Finance (IIF) said in its latest report. Net outflows for the year are projected at $541 billion, driven by a sustained slowdown in EM growth and uncertainty about China, it added. In other words, investors will pull out more money out of emerging markets than they will pump in. The data come on the heels of a separate IIF report this week that showed portfolio capital outflows in EMs amounted to $40 billion during the third quarter, the worst performance since 2008.

Indeed, relief from the Federal Reserve’s decision to delay its first interest rate hike in a decade has proved to be short-lived for EMs amid fresh evidence of a slowing Chinese economy, precipitous currency declines, a sustained slide in commodity prices, and political uncertainty in countries such as Brazil and Turkey. Covering a group of 30 economies, the IIF report estimates net non-resident inflows at $548 billion for 2015 from $1,074 billion last year—levels not seen since the global financial crisis. “As a share of GDP, non-resident inflows have fallen to about 2% from a record high of almost 8% in 2007.” The situation is exacerbated by the fact that investors residing in emerging market countries are buying more foreign assets.

Known as resident outward investment flows, 2015’s reading is expected to hit a historical high of $1,089 billion, which is likely to further pressurize reserves, exchange rates and asset prices of EMs, the IIF said. “On a net basis, lower inflows and rising outflows imply that private capital is leaving EMs for the first time since the early 1980s.” So, which region is the weakest? No surprises here. “It is noteworthy that a large part of the decline in overall flows this year is attributable to flows out of China, which intensified after the People’s Bank of China announced a mini-devaluation of the renminbi and a shift to a more market-oriented exchange rate fixing regime in August.”

“Global investors will suck capital out of emerging economies this year for the first time since 1988..”

• Global Investors Brace For China Crash (Guardian)

Global investors will suck capital out of emerging economies this year for the first time since 1988, as they brace themselves for a Chinese crash, according to the Institute of International Finance. Capital flooded into promising emerging economies in the years that followed the global financial crisis of 2008-09, as investors bet that rapid expansion in countries such as Turkey and Brazil could help to offset stodgy growth in the debt-burdened US, Europe and Japan. But with domestic investors in these and other emerging markets squirrelling their money overseas, at the same time as international investors calculate the costs of a sharp downturn in Chinese growth, the IIF, which represents the world’s financial industry, said: “We now expect that net capital flows to emerging markets in 2015 will be negative for the first time since 1988.”

Unlike in 2008-09, when capital flows to emerging markets plunged abruptly as a result of the US sub-prime mortgage crisis, the IIF’s analysts say the current reversal is the latest wave of a homegrown downturn. “This year’s slowdown represents a marked intensification of trends that have been underway since 2012, making the current episode feel more like a lengthening drought rather than a crisis event,” it says, in its latest monthly report on capital flows. The IIF expects “only a moderate rebound” in 2016, as expectations for growth in emerging economies remain weak. Mohamed El-Erian, economic advisor to Allianz, responding to the data, described emerging markets as “completely unhinged”, and warned that US growth may not be enough to rescue the global economy. “It’s not that powerful to pull everybody out,” he told CNBC.

Capital flight from China, where the prospects for growth have deteriorated sharply in recent months, and the authorities’ botched handling of the stock market crash in August undermined confidence in economic management, has been the main driver of the turnaround. “The slump in private capital inflows is most dramatic for China,” the institute says. “Slowing growth due to excess industrial capacity, correction in the property sector and export weakness, together with monetary easing and the stock market bust have discouraged inflows.” At the same time, domestic Chinese firms have been cutting back on their borrowing overseas, fearing that they may find themselves exposed if the yuan continues to depreciate, making it harder to repay foreign currency loans.

“What wasn’t known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector. We now know, and the answer is truly terrifying.”

• Over Half Of China Commodity Companies Can’t Pay The Interest On Their Debt (ZH)

Earlier today, Macquarie released a must-read report titled “Further deterioration in China’s corporate debt coverage”, in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with “uncovered debt”, or those which can’t even cover a full year of interest expense with profit. The report’s centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio >100%, or as western credit analysts would write it, have an EBIT/Interest <1.0x. As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the "percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample." To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in "uncovered debt" companies) of cash flows, was generally known. What wasn't known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector. We now know, and the answer is truly terrifying.

“..September picked up many of the unresolved issues that we left behind in August..”

• Here’s How Ugly The Third Quarter Was For Stocks And Commodities (MarketWatch)

Needless to say, September and the third quarter overall were tough for many investors. “The third quarter of 2015 proved to be the weakest quarter for risk assets for some years and most market participants are probably glad to see the back of it,” wrote Jim Reid, global strategist at Deutsche Bank, in a Thursday note. “Indeed Q3 saw the poorest quarterly performance for the S&P 500 and the Stoxx 600 since Q3 2011. It was also the worst quarter for the Nikkei since 2010 whereas in [emerging markets] the Shanghai Composite and Bovespa posted their worst quarterly scorecard since 2008. Reid breaks down the quarterly performance in a series of charts…

September on its own was pretty brutal, with 27 of Deutsche Bank’s 42 selected global asset classes ending the month with losses. “In many ways, September picked up many of the unresolved issues that we left behind in August,” Reid wrote. The selloff in commodities and emerging markets gained more momentum on deepening recession fears that, in turn, raised more questions about the sustainability of global growth, he said.

More Jim Reid: “Although we don’t think QE and zero interest rates does much apart from prop up an inefficient financial system it’s all we’ve got until we have a huge policy sea change..“

• This Is The Endgame, According To Deutsche Bank (Jim Reid)

From Jim Reid, Deutsche Bank’s chief credit strategist: “Our thesis over the last few years has basically been that the global financial system/economic fundamentals are so bad that its good for financial assets given it forces central banks into extraordinary stimulus and for them to continue to buy assets in never before seen volumes. The system failed in 2008/09 and rather than allow a proper creative destruction cleansing, policy makers have been aggressively propping it up ever since. This has surely led to a large level of inefficiency in the system which helps explain weak post crisis growth and thus forces them to do even more thus supporting asset prices if not the global economy. However since the summer this theory has been severely tested by China’s equity bubble bursting, China’s small ‘shock’ devaluation and the start of a rundown in reserves for the first time in over a decade.

We’ve also seen associated commodities and EM woes, endless unsettling speculation about the Fed’s next move and more recently the idiosyncratic corporate scandal around VW and funding concerns around Glencore. The hits keep on coming. Is it now so bad it’s actually bad again? The most recent leg of the sell-off begun after the Fed held rates steady two weeks ago as the narrative focused on either this reflecting worrying economic concerns or a Fed that is a slave to financial markets and losing credibility. So do we think we’re now entering a period where central banks are increasingly impotent? The answer is that they have been for a while on growth so not much has changed. However they can still buy more assets and continue to keep policy loose.

Although we don’t think QE and zero interest rates does much apart from prop up an inefficient financial system it’s all we’ve got until we have a huge policy sea change which probably only happens in the next recession (more later). So for now we think central banks are trapped into continuing on the same high liquidity path. The BoJ and the ECB are likely to do more QE in my opinion and the Fed is going to have a real struggle raising rates this year which has been our long-term view. Indeed we have sympathy with DB’s Dominic Konstam that they may also struggle in 2016. At the moment central banks are fortunate that they have the conditions to do more as virtually all are failing on their mandate to keep inflation close to or at 2%. The real problem would be if inflation was consistently looking like breaching 2%.

Then central banks would generally be going beyond their mandate by printing money and keeping rates close to zero. So in short the ‘plate spinning’ era continues for a number of quarters yet and certainly while inflation is so low. We think the end game is that when the next global recession hits, then QE/zero rate world will be re-appraised. Perhaps the G20 will get together and decide to try a different approach. In our 2013 long-term study we speculated how we thought the end game was ‘helicopter money’ – ie money printing to finance economic objectives (tax cuts, infrastructure etc). While it has obvious flaws and huge risks (eg political manipulation and inflation), one can argue it will always have more economic impact than QE in its current form. However that’s perhaps a couple of years away still.”

The only thing left to prop up the US economy is companies buying their own stock. Let that sink in.

• Goldman: Buyback Burst Could Be Enough to Save the S&P 500’s Year (Bloomberg)

Stock repurchases may accelerate enough toward the end of the year to salvage an annual gain for the Standard & Poor’s 500 Index, according to David Kostin, Goldman’s chief U.S. equity strategist. November is the busiest month of the year for buybacks among S&P 500 companies. 13% of annual spending occurs during the month, according to figures that Kostin presented in a report two days ago. The data is based on averages for 2007 and 2009-2014. The fourth quarter is the year’s busiest three-month period for S&P 500 repurchases, accounting for 30% of outlays, according to Kostin’s data. The total compares with 18% during the first quarter, 25% in the second and 26% in the third. These figures don’t add up to 100% because of rounding.

“Buybacks represent the single largest source of demand for U.S. equities,” he wrote, adding that he expects companies in the index to spend more than $600 billion this year on their own shares. “The typical year-end surge in buyback activity could help boost the market above our year-end target.” Kostin reduced his projection for the S&P 500 to 2,000 from 2,100. Assuming the latest estimate from the strategist is accurate, the index would post a loss of 2.9% for the year. A return to optimism among investors may also help the index exceed 2,000, according to Kostin. He cited a Goldman sentiment indicator, based on S&P 500 futures trading, that has been at the lowest possible reading for seven of the past eight weeks. That’s the longest stretch in the gauge’s eight-year history, the report said.

TAE’s long lasting adage in action: “Multiple claims to underlying real wealth”.

• There Are Five Times More Claims On Dollars As Dollars In Existence (Brodsky)

According to the Fed, there is about $60 trillion of US Dollar credit (claims for US dollars):

Also according to the Fed, there are about $12 trillion US dollars:

So, the data show plainly there are five times as many claims for US dollars as US dollars in existence. Does this matter to investors? Well, yes, it matters a lot. Not only is there not enough money to repay outstanding debt; the widening gap between credit and money is making it more difficult to service the debt and more difficult for nominal US GDP to grow through further credit extension and debt assumption. Remember, only a dollar can service and repay dollar-denominated debt. Principal and interest payments cannot be made with widgets or labor, only dollars. This means that future demand and output growth generated through more credit issuance and debt assumption is self-defeating. In fact, it adds to the problem.

Credit-generated growth is not growth in real (inflation-adjusted) terms because rising GDP, which engenders an increase in money, is also accompanied by a larger increase in claims on that money. Why larger? Because debt comes with interest. By definition then, debt compounds while real growth does not. In fact, economies naturally economize because innovation and competition tend to drive prices lower. This natural deflation works against debt service and repayment that needs perpetual inflation. As we know, for thirty years beginning in the early 1980s the Fed helped the US and global economies grow consistently more or less by reducing interest rates, which gave consumers of goods, services and assets incentive to take on more debt. Following the inevitable debt crisis in 2008, the Fed had to reduce the overnight interest rate it targets to 0%.

As we also know, to keep the economy growing from there, the Fed then had to begin creating money, which it did through quantitative easing (QE). It bought assets directly from the money center banks it deals with (primary dealers), and paid for them with the newly created money. At the same time, the Fed paid these banks – and continues to pay them – interest on the money they created for them (Interest on Excess Reserves). This provides a disincentive for banks to lend to the public, which is how the Fed is trying to control US growth and inflation today.

Leverage.

• Few Understand Why Glencore Lost 1/3 Of Its Value. That’s Worrying (BBG)

From London to New York to Hong Kong, the frantic question kept coming: could this be another Lehman? But nowhere did it cause more alarm than inside Glencore – the Swiss commodities giant that had suddenly found itself at the epicenter of a global panic on Monday. What began that morning in London, with a sudden plunge in Glencore’s share price, cascaded across oceans and time zones and left the company’s billionaire chief executive, Ivan Glasenberg, scrambling to calm anxious shareholders, creditors and trading partners. Days later, even as Glencore regained most of the $6 billion of shareholder wealth erased in a few hours, many investors wondered if Glasenberg can hold the markets at bay.

Few market players, including people close to Glencore, are able to pinpoint why a blue-chip member of the FTSE-100 Index – even one that had been under pressure from sliding commodities prices – lost almost a third of its value in a blink. And that, investors worry, suggests this could all happen again. “There’s more pain to be had,” said Serge Berger at Zurich-based Blue Oak Advisors. “I don’t think the story is over.”

Monday started out as just another workday in Baar, the tiny town where Glencore is based. The village could easily pass for a Swiss backwater, except for the billions of dollars worth of commodities that quietly course through Glencore’s headquarters on Baarermattstrasse, between the lake and the Alpine hills. Glasenberg, a former coal trader, has honed his skills over more than 30 years in the commodity-trading business since he joined a predecessor firm, Marc Rich & Co., in 1984. He was part of a $1.2 billion management buyout from Rich in 1994, when the company was renamed Glencore. A 2011 initial public offering – at the peak of a 10-year commodity boom – made him a billionaire on paper, with a stake worth about $9 billion. At the worst of Monday’s panic, that holding was worth $1.2 billion. What unfolded when the London markets opened at 8 a.m. stunned mining-industry veterans.

“Monday was certainly very scary,” said Benno Galliker, a trader at Luzerner Kantonalbank. “It had a similar feeling to that before Lehman collapsed.” There’d been no news of consequence over the weekend; the last major headline – a Bloomberg story about Glencore’s hiring of banks to sell a stake in its agriculture unit – had sent its shares up. In China, whose coal plants and steel mills are the largest consumers of Glencore’s products, there’d been some discouraging economic data. But this year’s drumbeat of negative news about the world’s second-largest economy was hardly a new phenomenon. Meanwhile, South African bank Investec had published a provocative note in which analyst Marc Elliott suggested the company could see its equity all but vanish if commodity prices stayed weak. While that was an alarming prediction, Elliott could hardly have expected his views to have much of an effect on an operation with almost $200 billion in annual turnover.

“..the data highlight just how difficult it will be for policymakers to steer China’s economy out of the biggest slowdown in decades..”

• Global Economy Loses Steam As Chinese, European Factories Falter (Reuters)

The world economy lost momentum in September, with China’s vast factory sector shrinking again and euro zone manufacturing growth weakening slightly, both casualties of waning global demand. The latest business surveys across Asia and Europe paint a darkening picture and are likely to prompt more calls for central banks around the world to loosen monetary policy even further. “The data probably increases the case for more stimulus in certain parts of the world, especially from the People’s Bank of China and the ECB,” said Philip Shaw, economist at Investec in London. “Those economies that are at less advanced paths of the recovery cycle – the key example is the euro zone, where we’re looking at more disinflation – may well find more stimulus is in order.”

Surveys of China’s factory and services sectors showed the world’s second largest economy may be cooling more rapidly than earlier thought, with deeper job cuts. Taken together with a stock market crash in Shanghai during the summer and a surprise devaluation of the Chinese yuan, the data highlight just how difficult it will be for policymakers to steer China’s economy out of the biggest slowdown in decades.

“..a global bond rout in the second quarter erased more than a half a trillion dollars in the value of sovereign debt..”

• BOE Says Market May Be Underpricing Risks of Falling Liquidity (Bloomberg)

Financial markets may not be alert to the potential damage caused by drops in liquidity, according to stability officials at the Bank of England. “Market prices might not yet sufficiently be factoring in the potential for a deterioration in liquidity conditions given changes in market functioning and elevated tail risks” related to emerging markets, the officials said, according to the record of the Financial Policy Committee meeting held on Sept. 23 in London. Concern about liquidity is intensifying since a global bond rout in the second quarter erased more than a half a trillion dollars in the value of sovereign debt. Exacerbating matters, the world’s biggest banks are scaling back their bond-trading activities to comply with higher capital requirements imposed in the wake of the financial crisis.

Stability officials at the BOE have already asked for more work to be done on the topic, including dealers’ ability to act as intermediaries in markets, contagion and investment funds. The record of the September meeting published Thursday also noted the increased importance of emerging markets and said “there was the potential for a material impact on U.K. financial stability.” Officials also discussed the appropriate settings for the countercyclical capital buffer, currently at zero, given that credit conditions were normalizing. When officials reconsider the setting in light of the 2015 stress-test results, they will assess the appropriate level for all stages of the credit cycle. There was a “possible benefit of moving the CCB in smaller increments, especially when credit growth was not unusually strong,” the record said.

In a wide-ranging record that follows last week’s statement, the FPC highlighted its need for new powers to intervene in the buy-to-let housing market. “The rapid growth of the market underscored the importance of FPC powers of direction for use in future,” the FPC said in its record. “Housing tools were important for the FPC,” given the potential for systemic risks.

They’re all involved in scheming yet another system. But jail? Hell, no! Slap on the wrist fines to be paid not by the bankers, but by their corporations, that’s all.

• JPMorgan Said to Pay Most in $1.86 Billion CDS Rigging Settlement (Bloomberg)

JPMorgan Chase is set to pay almost a third of a $1.86 billion settlement to resolve accusations that a dozen big banks conspired to limit competition in the credit-default swaps market, according to people briefed on terms of the deal. JPMorgan is paying $595 million, with the lender’s portion of the accord largely based on the plaintiffs’ measure of market share, said the people, who asked not to be identified because the firms haven’t disclosed how they’re splitting costs. The settlement also enacts reforms making it easier for electronic-trading platforms to enter the CDS market, according to a statement Thursday from attorneys for the plaintiffs, which include the Los Angeles County Employees Retirement Association. Morgan Stanley, Barclays and Goldman Sachs are paying about $230 million, $175 million and $164 million, respectively, the people said.

Plaintiffs’ lawyers disclosed the approximate size of the settlement in Manhattan federal court last month, saying they were still ironing out details. They updated the total Thursday. The accord averts a trial following years of litigation by hedge funds, pension funds, university endowments, small banks and other investors, who sued as a group. They alleged that global banks – along with Markit Group, a market-information provider in which the banks owned stakes – conspired to control the information about the multitrillion-dollar credit-default-swap market in violation of U.S. antitrust laws. Credit Suisse, Deutsche Bank and Bank of America will pay about $160 million, $120 million and $90 million, respectively, the people said. BNP Paribas, UBS, Citigroup, RBS and HSBC also would pay less than $100 million apiece, the people said.

The IMF needs an independent chief. Or its credibility will continue to erode until it is irrelevant.

• IMF’s Botched Involvement In Greece Attacked By Former Watchdog Chief (Telegraph)

The IMF has come under fire for failing in its duty of care towards Greece by pushing self-defeating austerity measures on the battered economy. The fund was told it should have eased up on the spending cuts and tax hikes, pushed for an earlier debt restructuring and paid more “attention” to the political costs of its punishing policies during its five-year involvement in Greece. The recommendations came from a former deputy director of IMF’s Independent Evaluation Office (IEO) David Goldsbrough.The IEO is an independent watchdog tasked with scrutinising the fund’s activities. Mr Goldsbrough worked at the body until 2006. His suggestions are set to embolden critics of the IMF’s handling of the Greek crisis. They follow previous admissions from the fund that it has over-stated the benefits of imposing excessive austerity on successive Greek governments.

The suggestions from the former watchdog chief come as reports suggest the IMF is still poised to pull out of Greece’s third international rescue in five years over the sensitive issue of debt relief. The fund is pushing for a restructuring of at least €100bn of Greece’s debt pile, according to a report in Germany’s Rheinische Post. Such bold measures to extend maturities and reduce interest payments are set to be rejected by its European partners, who are unwilling to impose massive lossess on their taxpayers. The head of Greece’s largest creditor – Klaus Regling of the European Stability Mechanism – told the Financial Times that such radical restructuring was “unnecessary”. This intransigence could now see the IMF withdraw its involvement when its programme ends in March 2016.

In addition to his findings on Greece, Mr Goldsbrough urged the IMF to question its involvement in many bail-out countries for the sake of the institution’s credibility. “Few reports probe more fundamental questions – either about alternative policy strategies or the broader rationale for IMF engagement,” said the report. Accounts from 2010 show the IMF was railroaded into a Greek rescue programme on the insistence of European authorities, vetoing the objections of its own board members from the developing world. The IMF is prevented from lending to bankrupt nations by its own rules. But it deployed an “exceptional circumstances” justification to provide part of a €110bn loan package to Athens five years ago. Greece has since become the first ever developed nation to default on the IMF in its 70-year history.

Despite privately urging haircuts for private sector creditors in 2010, the IMF was ignored for fear of triggering a “Lehman” moment in Europe, by then ECB chief Jean-Claude Trichet. Greece later underwent the biggest debt restructuring in history in 2012. The findings of the fund’s research division have largely discredited the notion that harsh austerity will bring debtor nations back to health. However, this stance has been at odds with its negotiators during Greece’s new bail-out talks where officials have continued to demand deep pension reforms and spending cuts for Greece. Diplomatic cables between Greece’s ambassador to Washington have since revealed the White House pressed the fund to make vocals calls for mass debt relief to keep Greece in the eurozone during fraught negotiations in the summer. However, the issue of debt relief is not due to be discussed when eurozone finance ministers gather to meet for talks on Monday, said EU officials.

“Cars accounted for almost 20% of Germany’s near $1.5 trillion in exports last year, or to put it in blunt political terms: one in seven jobs.”

• Volkswagen Too Big to Fail For Germany’s Political Classes (Bloomberg)

At Volkswagen AG, political connections come already fitted. In part, it’s due to Volkswagen’s iconic role as a symbol of West Germany’s economic revival after Nazi rule and the destruction of World War II. Angela Merkel, who grew up under communism in East Germany, has said her first car after the fall of the Berlin Wall in 1989 was a VW Golf compact. Mostly it’s about jobs: around a third of Volkswagen’s almost 600,000 positions are in Germany, and that’s not to mention the company’s supply chain. For Volkswagen, however, proximity to political power is enshrined in statute. When Germany privatized the automaker in 1960, its home state of Lower Saxony kept a blocking minority and a supervisory board seat for the region’s premier. Future presidents, chancellors and cabinet ministers have cut their political teeth in the state with VW at their side.

That nexus of political affinity and economic awareness ensures the scandal engulfing VW is too big a threat to national prosperity for the government to be a neutral observer. “It’ll be important for the German government to look at scenarios for the worst possible outcome,” Stefan Bratzel at the University of Applied Sciences in Bergisch Gladbach said. Merkel’s options could include helping the state of Lower Saxony increase its stake in VW or tax incentives to promote electric cars, he said. Merkel is thus far trying to keep VW’s scandal over cheating on diesel-car emissions at arm’s length, simply demanding that the automaker come clean quickly. Her restraint signals a reluctance by chancellery officials to exercise direct influence on private companies, according to a person familiar with government policy making. In any case, the full scope of the scandal is still not clear, the person said.

“Of course German governments take business interests into account,” Marcel Fratzscher, head of the Berlin-based DIW economic institute, said by phone. Still, “if you look at France, the ties between business and politics are much closer there than in Germany,” he said. With almost 35% wiped off VW’s share value since the affair came to light, that’s a luxury that might not be granted for long if the company’s position deteriorates further. [..] Merkel has experience of intervening when it comes to autos. In 2013, she watered down European pollution-control legislation aimed at reducing CO2 emissions from cars, an action for which she was lauded by German auto-industry lobby VDA. Justifying her decision to defend jobs, Merkel said at the time there was a need “to take care that, notwithstanding the need to make progress on environmental protection, we don’t weaken our own industrial base.” Cars accounted for almost 20% of Germany’s near $1.5 trillion in exports last year, or to put it in blunt political terms: one in seven jobs.

Stalling as a last defense.

• VW Says Emissions Probe Will Take Months as It Faces Fines (Bloomberg)

Volkswagen said its investigation into rigged diesel engines will probably take months to complete, highlighting the complexity of the scandal that upended the carmaker two weeks ago. The company set up a five-person committee led by Berthold Huber, interim chairman of the supervisory board. The group will work closely with U.S. law firm Jones Day to unravel how software to cheat diesel-emissions tests was developed and installed for years in millions of vehicles, the company said Thursday. Volkswagen stuck to a pre-crisis plan that CFO Hans Dieter Poetsch will become the permanent chairman. Frank Witter, 56, head of the financial-services division, will succeed Poetsch as CFO.

The automaker is facing a significant financial impact, including at least €6.5 billion it already set aside for repairs and recalls and a U.S. fine that may reach $7.4 billion, according to analysts from Sanford C. Bernstein. A sales stop in September already put a dent in its U.S. deliveries. The board’s leadership panel met for seven hours on Wednesday night with CEO Matthias Mueller, who was appointed after his predecessor Martin Winterkorn stepped down under pressure last week. “We’re at the beginning of a long process,” said Olaf Lies, who is economy minister of the German state of Lower Saxony, which owns one-fifth of Volkswagen’s voting shares, and a member of Volkswagen’s investigation committee. “In the end, a series of people will be held accountable, and that doesn’t mean the software developers but those responsible at the senior level.”

Volkswagen postponed an extraordinary shareholders’ meeting that had been planned for Nov. 9, saying “it would not be realistic to provide well-founded answers which would fulfill the shareholders’ justified expectations” by that time. Some investors have criticized the appointment of Poetsch. Though Volkswagen hasn’t assigned blame for the diesel scandal to the CFO or to ousted CEO Winterkorn, the two were close associates. “Making Poetsch the chairman at this point while the investigation into the diesel scandal is ongoing isn’t the right way to go about rebuilding trust in the company,” said Ingo Speich, a fund manager at Volkswagen shareholder Union Investment. “Volkswagen needs a strong chairman right now, and he’ll be in a weak position.”

The company is facing an “enormous recall” in the U.S., though it’s still not clear what hardware and software corrections it will use to fix the problem, U.S. Energy Secretary Ernest Moniz said Thursday in an interview in Istanbul. “Obviously there’s a discussion of fines, of very, very major fines” from the Environmental Protection Agency, Moniz said. The amount of the penalties VW faces is “going to depend upon what corrective actions” the company takes, he said. Volkswagen’s 600,000-person workforce is starting to feel the impact of the scandal as the carmaker cuts spending in anticipation of fines, recalls and a drop in U.S. sales.

Taking your pensions into the casino is an obvious last desperate step.

• World’s Biggest Pension Fund Is Moving Into Junk and Emerging Bonds (Bloomberg)

Japan’s $1.2 trillion Government Pension Investment Fund, the world’s largest, unveiled sweeping changes to its foreign bond investments, hiring more than a dozen new asset managers and creating mandates for junk and emerging-market securities. The fund picked managers for eight categories of active investments in overseas debt, it said Thursday. GPIF chose Nomura Asset Management to oversee U.S high-yield bonds and UBS Global Asset Management for European speculative-grade debt. Janus Capital Management will handle part of the pension giant’s U.S. bond investments as a subcontractor for Diam Co., according to GPIF’s statement, which didn’t specify whether the money would go to Bill Gross’s fund.

Ashmore Japan, a specialist in developing-country investment, won the only local-currency emerging-market contract. GPIF faces mounting pressure to boost returns and diversify assets as pension payouts for the world’s oldest population swell. The fund has pared domestic bonds in the past year in favor of equities, inflation-linked debt and alternative assets. Its foray into high-yield bonds comes as the securities hand investors the biggest losses in four years. “I’m worried,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management in Tokyo. “The timing isn’t good. We’re talking about the Fed raising rates, and the assets that are likely to be affected the most by this are junk bonds. Investing in emerging-market currencies is worrying, too.”

A gauge of global speculative-grade debt compiled by Bank of America Merrill Lynch dropped for a fourth month in September, the longest stretch since the data began in 1998. This year is shaping up as one to forget for investors in risky assets, with stocks, commodities and currency funds all in the red amid concern about the outlook for the global economy and as the Federal Reserve prepares to raise interest rates. Investors pulled $40 billion out of emerging markets in the third quarter, fleeing at the fastest pace since the height of the global financial crisis.

Joris should get into today’s events, things move too fast to linger on the past.

• How The Banks Ignored The Lessons Of The Crash (Joris Luyendijk)

I spent two years, from 2011 to 2013, interviewing about 200 bankers and financial workers as part of an investigation into banking culture in the City of London after the crash. Not everyone I spoke to had been so terrified in the days and weeks after Lehman collapsed. But the ones who had phoned their families in panic explained to me that what they were afraid of was the domino effect. The collapse of a global megabank such as Lehman could cause the financial system to come to a halt, seize up and then implode. Not only would this mean that we could no longer withdraw our money from banks, it would also mean that lines of credit would stop.

As the fund manager George Cooper put it in his book The Origin of Financial Crises: “This financial crisis came perilously close to causing a systemic failure of the global financial system. Had this occurred, global trade would have ceased to function within a very short period of time.” Remember that this is the age of just-in-time inventory management, Cooper added – meaning supermarkets have very small stocks. With impeccable understatement, he said: “It is sobering to contemplate the consequences of interrupting food supplies to the world’s major cities for even a few days.” These were the dominos threatening to fall in 2008. The next tile would be hundreds of millions of people worldwide all learning at the same time that they had lost access to their bank accounts and that supplies to their supermarkets, pharmacies and petrol stations had frozen.

The TV images that have come to define this whole episode – defeated-looking Lehman employees carrying boxes of their belongings through Wall Street – have become objects of satire. As if it were only a matter of a few hundred overpaid people losing their jobs: Look at the Masters of the Universe now, brought down to our level! In reality, those cardboard box-carrying bankers were the beginning of what could very well have been a genuine breakdown of society. Although we did not quite fall off the edge after the crash in the way some bankers were anticipating, the painful effects are still being felt in almost every sector. At this distance, however, seven years on, it’s hard to see what has changed. And if nothing has changed, it could all happen again.

Debt Rattle October 1 2015

Oct 012015

October 1, 2015 Posted by Raúl Ilargi Meijer at 8:41 am Finance Tagged with: credit boom, dams, diesel, emissions, Glencore, Greece, Iceland, junk, oil, PMI, refugees, VW 1 Response »

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

• 2015 Is Turning Out to Be a Terrible Year for Investors (Bloomberg)

• End Of World’s Biggest Ever Credit Boom Means More “Glencores” Ahead (Howell)

• Traders Start Pricing Glencore Bonds Like Junk (FT)

• Why Dow’s Three-Quarter Losing Streak Is A Big Deal (MarketWatch)

• October 1 2015: China Factory Activity Picks Up To Beat Expectations (BBC)

• Futures Soar After Chinese Composite PMI Drops To Lowest On Record (Zero Hedge)

• China Cuts Minimum Home Down Payment for First-Time Buyers (Bloomberg)

• Oil Suffers A Loss Of 24% For The Quarter (MarketWatch)

• Market Moves That Aren’t Supposed to Happen Keep Happening (Tracy Alloway)

• Wide Range Of Cars Emit More Pollution In Realistic Driving Conditions (Guardian)

• VW Emissions Scandal: 1.2 Million UK Cars Affected (Guardian)

• VW Board Considering Steps To Prop Up Credit Rating (Reuters)

• Eurozone Inflation Turns Negative, Putting ECB In Corner (Reuters)

• Tsipras Finds ‘Open Ears’ In US To Greek Appeal For Debt Relief (Kath.)

• Greek Regulator Bans Short-Selling Of Bank Shares (Reuters)

• How Greece Could Collapse The Eurozone (Satyajit Das)

• Greek Shipowners Prepare to Weigh Anchor on Prospect of Higher Taxes (WSJ)

• Iceland’s Next Collapse Is “Unavoidable,” Employers Union Warns (Bloomberg)

• Obama Hands $1 Billion In Military Aid To Goverments Using Child Soldiers (CNN)

• Millions Of Illegal Immigrants Will Overrun Trump’s ‘Beautiful Wall’ (Farrell)

• Farmers Driven From Homes ‘Like Pests’ As Asia Plans 500 Dams (Bloomberg)

Debt. Deflation.

• 2015 Is Turning Out to Be a Terrible Year for Investors (Bloomberg)

For investors around the world, 2015 is turning into a year to forget. Stocks, commodities and currency funds are all in the red, and even the measly gains in bonds are being wiped out by what little inflation there is in the global economy. Rounding out its steepest quarterly descent in four years, the MSCI All Country World Index of shares is down 6.6% in 2015 including dividends. The Bloomberg Commodity Index has slumped 16%, while a Parker Global Strategies index of currency funds dropped 1.8%. Fixed income has failed to offer much of a haven: Bank of America’s global debt index gained just 1%, less than the 2.5% increase in world consumer prices shown in an IMF index. After three years in a virtuous cycle of rising share prices and unprecedented monetary easing, markets are now sinking as emerging economies from China to Brazil weaken and corporate profits slump.

Analysts have cut their global growth estimates for 2015 to 3% from 3.5% at the start of the year, and the turmoil has added pressure on central banks to prolong their stimulus programs, with traders scaling back forecasts for a Federal Reserve interest-rate increase by year-end. “There was an element of people believing they had found some sort of holy grail to investing, then this breakdown occurs and it breaks down in a way that’s remarkable,” said Tobias Levkovich, Citigroup’s chief U.S. equity strategist. “What seemed to trigger this all was China. It sent us on a wave of downward fears.” Investors suffered the brunt of this year’s losses in the third quarter. MSCI’s global equity index sank about 10% in the period, while the Bloomberg commodity index lost 14% in its biggest slump since the global financial crisis seven years ago.

The average level of Bank of America’s Market Risk index, a measure of price swings in equities, rates, currencies and raw materials, was the most this quarter since the end of 2011. The Chicago Board Options Exchange Volatility Index, a gauge of turbulence known as the VIX, reached the highest since 2011 in August. China has been the biggest source of anxiety for investors, after turmoil in the nation’s financial markets fueled concern that the country’s worst economic slowdown since 1990 was deepening. The Shanghai Composite Index fell 29% in the third quarter, the most worldwide, and the yuan weakened 2.4% after authorities devalued the currency in August. That sent a shudder around the world.

And all over the world too.

• End Of World’s Biggest Ever Credit Boom Means More “Glencores” Ahead (Howell)

It’s the great unwind show. Admittedly, Glencore’s latest problems may run deeper and look more specific, but together with Vale and Rio, the other great international mining houses plus their suppliers, like America’s Caterpillar, all are suffering the fall-out from the end of the world’s biggest ever credit boom. Oil is testing recent lows and commodity prices almost across the board are skidding. Alongside, emerging market currencies are being trashed and some even fear that this turmoil will spill-over into a recession by next year. It will. Your white-knuckle ride is far from over. So how did we get here? The answer comes in three parts.

Firstly, the fragile global financial system that disintegrated spectacularly in 2008 has simply been taped back together and not fundamentally rebuilt, so leaving it vulnerable to a renewed bust of funding problems. Secondly, debt problems have not been tackled. By demanding “austerity”, many governments have simply reshuffled debts from their balance sheets on to more fragile private sector ones. Debt burdens across emerging markets, for example, have jumped since 2007. Lastly, the biggest factor is China. China is only just starting to adjust to its huge credit boom. Since the year 2000, the size of its asset economy has jumped an eye-watering 12-fold.

This includes the construction of new cities, thousands of miles of motorway, several airports and, as the brochures once advertised, a new skyscraper every 14-days, pushing up her credit markets to a bloated $25 trillion. History teaches us that there are four stages to every credit cycle: (1) 20-30% rates of new loan growth; (2) asset price bubbles in real estate, commodities, equities and often art; (3) banking problems, corruption and state intervention, and (4) currency collapse. China already ticks the first three boxes, and a pen is hovering over the fourth. The decision to weaken the renminbi in August may have less to do with exchange rate politics, as some have suggested, and more to do with a plain shortage of US dollars.

“..trading in the $36bn of bonds outstanding has moved to a cash basis, where prices are quoted in terms of cents on the dollar of face value.”

• Traders Start Pricing Glencore Bonds Like Junk (FT)

Traders have started to quote prices for Glencore debt in a manner normally associated with lower-quality paper, commonly known as junk bonds. The shift in pricing dynamics in the private over-the-counter markets this week came as shares in Glencore swung wildly as investors worry about the ability of the miner and trading house to manage its debt pile in a commodity downturn. The group retains an investment grade credit rating according to rating agencies and its $36bn of outstanding bonds have up to now been bought and sold on the basis of their yield, which moves inversely to price. But this week, dealers and investors say trading in the $36bn of bonds outstanding has moved to a cash basis, where prices are quoted in terms of cents on the dollar of face value. This form of pricing is generally used for junk bonds, which have a higher risk of default.

Pressure on the company’s debt and equity has intensified as analysts debate the effect of falling raw materials prices and rising debt costs. One investment bank warned on Monday that the group’s equity might be worthless if commodity prices did not recover swiftly. The company said it retained “strong lines of credit and access to funding”. Unsecured senior Glencore debt maturing in May 2016 traded below 93 cents on the dollar on Tuesday, with some trades occurring below 90 cents, according to investors. A buyer of the debt should receive a 0.85 cent coupon in November, and a dollar of principal back in eight months’ time. The return available from doing so is equivalent to around a 13% yield on an annual basis. Prices for longer-term debt fell even further as investors began to assess the potential recovery values for Glencore debt, most of which is unsecured. “Everything beyond five years is trading around or below 70 cents on the dollar,” Zoso Davies at Barclays said.

The history of three-quarter losing streaks is not pretty.

• Why Dow’s Three-Quarter Losing Streak Is A Big Deal (MarketWatch)

The Dow Jones Industrial Average has suffered a third-straight quarterly decline for the first time since the Great Recession. This marks just the third time in nearly 40 years that a quarterly losing streak for the blue-chips benchmark stretched at least that long. The Dow surged 236 points on Wednesday, but has lost 1,335 points, or 7.6%, since the end of June. The Dow had lost 156.61 points, or 0.9%, over the second quarter and 46.95 points, or 0.3%, over the first quarter. The last time the Dow had a three-quarter losing streak was the six-quarter stretch ending the first quarter of 2009. Before that, there was a five-quarter losing streak ending with the first quarter of 1978, according to FactSet data.

In the Dow’s 119-year history, there have now been 20 quarterly losing streaks that stretched at least three quarters. The longest losing streak is six quarters, suffered twice, through the first quarter of 2009 and through the second quarter of 1970. There have been 12 quarterly losing streaks that have lasted longer than three quarters. If the current quarterly losing streak were to be snapped in the fourth quarter, the total three-quarter loss of 8.6% would be the smallest of all the other three-quarter losing streaks.

What a difference a week makes, and/or a survey…

• October 1 2015: China Factory Activity Picks Up To Beat Expectations (BBC)

Factory activity in China picked up in September, beating expectations, according to the government’s official manufacturing survey. The manufacturing purchasing managers’ index (PMI) was up to 49.8 from 49.7 in August, but the sector did shrink for the second consecutive month.

• 23 September 2015: China Factory Activity Contraction Worsens (BBC)

China’s factory activity contracted at the fastest pace for six and a half years in September, according to a preliminary survey of the vast sector. The Caixin/Markit manufacturing purchasing managers’ index (PMI) fell to 47 in September, below forecasts of 47.5 and down from 47.3 in August.

More of that discrepancy in China numbers.

• Futures Soar After Chinese Composite PMI Drops To Lowest On Record (Zero Hedge)

Chinese markets may be closed for the next week due to a national holiday but China’s goalseeked manufacturing survey(s), which were the most anticipated data points of the evening, came right on schedule (or rather, were leaked just ahead of schedule). And they certainly did not disappoint in their disappointment. First, it was the official NBS September PMI, which at 49.8 was the smallest possible fraction above both the previous and expected, both of which were 49.7. The number was leaked about 6 minutes before the official statement, and while the leaked print which all humans were aware of well before the official release time at 9pm Eastern, had no impact on markets, it was the flashing red headline which confirmed the leak and which was read by machine-reading algos everywhere, that sent the E-mini spasming higher.

But while the official “data” was bad, and confirmed the economy remains in contraction, the Caixin – aka the new HSBC – Markit PMIs were absolutely atrocious. We bring you… the HSBC Manufacturing print, which dropped from 47.3 to 47.2, and which according to Caixin was the lowest print since March 2009. From the report:

A key factor weighing on the headline index was a sharper contraction of manufacturing output in September. According to panellists, worsening business conditions and subdued client demand had led firms to cut their production schedules. Weaker customer demand was highlighted by a further fall in total new orders placed at Chinese goods producers in September. Furthermore, the rate of reduction was the steepest seen for just over three years. Data suggested that the faster decline in total new business partly stemmed from a sharper fall in new export work. The latest survey showed new orders from abroad declined at the quickest rate since March 2009.

Reflective of lower workloads, manufacturing companies cut their staff numbers again in September. Moreover, the latest reduction in employment was the fastest seen in 80 months. Meanwhile, reduced production capacity led to an increased amount of unfinished work, though the pace of backlog accumulation was only slight.

Manufacturing companies noted a further steep decline in average cost burdens during September. Furthermore, the rate of deflation was the sharpest seen since April. Reports from panellists mentioned that lower raw material prices, particularly for oil-related products, had cut overall input costs. Increased competition for new work led manufacturing companies to generally pass on their savings to clients, as highlighted by a solid decline in output charges.

“It’s one policy that’s part of a grand strategy to revive property investment and the whole national economy.”

• China Cuts Minimum Home Down Payment for First-Time Buyers (Bloomberg)

China’s central bank cut the minimum home down payment required of first-time buyers for the first time in five years, stepping up support for the property market after five interest-rate reductions since November failed to reverse an economic slowdown. The People’s Bank of China cut the minimum down payment for buyers in cities without purchase restrictions to 25% from 30%, according to a statement released on its website Wednesday. The previous requirement had been in place since 2010, when the government boosted the ratio from 20% to help curb property speculation.

The move extends a year of loosening in the property market as Premier Li Keqiang seeks to boost demand in the world’s second-largest economy after fiscal and monetary stimulus produced few signs of a rebound. Growth will slow to 6.8% this year, according to the median of economist estimates compiled by Bloomberg. That’s below the government’s target for an expansion of about 7%. “Amid China’s economic slowdown, property’s role as a growth pillar has become even more important, and the government clearly sees it,” said Shen Jianguang at Mizuho in Hong Kong. “It’s one policy that’s part of a grand strategy to revive property investment and the whole national economy.”

While property investment has remained weak, home sales have recovered after mortgage policy easing and removal of purchase restrictions helped support demand. New-home prices rose in 35 of 70 cities in August, up from 31 in July and just two cities in February. UBS Group has estimated the real-estate industry accounts for more than a quarter of final demand in the economy when including property-related goods including electric machinery and instruments, chemicals and metals. The government also has urged some cities to allow citizens to borrow more from housing funds to help buyers, and encouraged cities to securitize more of those loans, according to a statement on the housing ministry’s website.

In Q4, a lot of ‘reserves’ must be marked to much more realistic levels. That’s going to hurt.

• Oil Suffers A Loss Of 24% For The Quarter (MarketWatch)

Oil futures tallied a loss of 24% for the third quarter, after ending Wednesday lower on the back of a report revealing the first U.S. crude-supply increase in three weeks. The report also showed a modest decline in domestic production, helping prices limit losses for the session. November West Texas Intermediate crude settled at $45.09 a barrel, down 14 cents, or 0.3%, on the New York Mercantile Exchange, trading between a high of $45.85 and a low of $44.68, according to FactSet data. WTI prices, based the front-month contracts, lost 8.4% for the month and were 24% lower for the quarter. Year to date, they’re down by more than 15%. November Brent crude on London’s ICE Futures exchange tacked on 14 cents, or 0.3%, to $48.37 a barrel.

Year to date, prices have fallen more than 15%. The U.S. Energy Information Administration reported Wednesday an increase of four million barrels in crude supplies for the week ended Sept. 25. That was the first climb in three weeks. Analysts polled by Platts expected supplies to be unchanged, while the American Petroleum Institute Tuesday said supplies jumped 4.6 million barrels. Part of the reason for the increase in crude supplies was less demand from refineries, where activity decreased with maintenance season in effect. Refinery utilization fell to 89.8% last week from 90.9%.

Volatility. Way outside Fed control.

• Market Moves That Aren’t Supposed to Happen Keep Happening (Tracy Alloway)

A counterpoint to Bill Dudley’s Wednesday speech on bond market liquidity comes courtesy of TD Securities. While the New York Fed president argued that there’s little evidence so far that new financial regulation has cut into the ease of trading U.S. Treasuries, TD analysts Priya Misra and Gennadiy Goldberg think otherwise. They point to daily, wild swings in the bond market as evidence of diminished liquidity.

Our findings show that daily changes in 10-year Treasury yields exceeded one standard deviation (√) 58% of the time so far in 2015, considerably higher than the 49% observed last year. The 58% measure is the highest reading going back to 1975, suggesting that recent volatility in Treasury markets is unprecedented. As if a record number of “choppy days” were not enough, 10-year yield movements also exceeded 3√ in as many as 9% of trading days this year. This is higher than the average of 6% of days since 1975.

It’s a point that’s been brought up before, notably by Bank of America Merrill Lynch’s Barnaby Martin. These observers argue that the number of assets registering large moves four or more standard deviations away from their normal trading range has been growing in recent months. Moves greater than one standard deviation should (based on a normal distribution of probabilities) happen about 32% of the time. Instead as the TD analysts point out, they are happening 58% of the time in U.S. Treasuries. Moves greater than three standard deviations should be happening about 1% of the time, not 9%.

While Dudley finds little evidence of average bond market liquidity having deteriorated, TD reckons the problem lies in so-called “tail events,” in which increased regulation and changes to market structure exacerbate the potential for extreme moves. Looking at average liquidity conditions won’t show much evidence of a problem, therefore. That might go some way toward explaining why all those market moves that are supposed to not happen very often keep occurring with some regularity.

If everybody does it, who are you going to punish?

• Wide Range Of Cars Emit More Pollution In Realistic Driving Conditions (Guardian)

New diesel cars from Renault, Nissan, Hyundai, Citroen, Fiat, Volvo and other manufacturers have all been found to emit substantially higher levels of pollution when tested in more realistic driving conditions, according to new data seen by the Guardian. Research compiled by Adac, Europe’s largest motoring organisation, shows that some of the diesel cars it examined released over 10 times more NOx than revealed by existing EU tests, using an alternative standard due to be introduced later this decade. Adac put the diesel cars through the EU’s existing lab-based regulatory test (NEDC) and then compared the results with a second, UN-developed test (WLTC) which, while still lab-based, is longer and is believed to better represent real driving conditions. The WLTC is currently due to be introduced by the EU in 2017.

[..] Emissions experts have warned for some time that there were problems with official lab-based NOx tests, meaning there was a failure to limit on-the-road emissions. “Gaming and optimising the test is ubiquitous across the industry,” said Greg Archer, an emissions expert at Transport & Environment. A recent T&E round-up of evidence found this affected nine out of 10 new diesel cars, which were on average seven times more polluting in the real world. But the Adac data are the first detailed list of specific makes and models affected. Adac also measured a Volvo S60 D4 producing NOx emissions over 14 times the official test level [..]

T&E argues that the Adac WLTC tests are minimum estimates of actual on-the-road emissions. Archer said the EU must back up the WLTC with on-the-road tests and end the practice of carmakers paying for the tests at their preferred test centres. “It is more realistic but it still isn’t entirely representative,” said Archer. “We still think there is a gap of about 25% between the WLTC test and typical average new car driving.”

“The admission means that the UK is one of the countries worst affected by the scandal..”

• VW Emissions Scandal: 1.2 Million UK Cars Affected (Guardian)

Volkswagen has revealed that almost 1.2m vehicles in the UK are involved in the diesel emissions scandal that has rocked the carmaker, meaning more than one in 10 diesel cars on the country’s roads are affected. VW said the diesel vehicles include 508,276 Volkswagen cars, 393,450 Audis, 76,773 Seats, 131,569 Skodas and 79,838 Volkswagen commercial vehicles. The total number of vehicles affected is 1,189,906. This is the first time VW has admitted how many of the 11m vehicles fitted with a defeat device to cheat emissions tests are in the UK.

The admission means that the UK is one of the countries worst affected by the scandal and will increase the pressure on the government to launch a full investigation. Figures from the Department for Transport show that there were 10.7m diesel cars on Britain s roads at the end of 2014 and that an estimated 5.3m of the petrol and diesel cars are Volkswagens or one of the groups sister brands. Patrick McLoughlin, the transport secretary, said: The government s priority is to protect the public and I understand VW are contacting all UK customers affected. I have made clear to the managing director this needs to happen as soon as possible. “The government expects VW to set out quickly the next steps it will take to correct the problem and support owners of these vehicles already purchased in the UK.”

VW said 2.8m vehicles in Germany are involved, while 482,000 cars have been recalled in the US. The company intends to set up a self-serve process that will allow UK motorists to find out if their vehicle is affected. Dealers will also be sent the vehicle identification numbers of those involved. Affected customers will be contacted about visiting a mechanic to have their cars refitted. The cars fitted with a defeat device have EA 189 EU5 engines. However, VW is yet to reveal the full details of the recall plan, which will need to be approved by regulators. The carmaker said: “In the meantime, all vehicles are technically safe and roadworthy. Volkswagen Group UK is committed to supporting its customers and its retailers through the coming weeks.”

Buyback!

• VW Board Considering Steps To Prop Up Credit Rating (Reuters)

Members of Volkswagen’s supervisory board are concerned about the carmaker’s credit rating and are considering steps to prop it up but have no plans to sell off assets, two sources close to the board said. Volkswagen declined to comment on the sources, who spoke to Reuters late on Wednesday evening. They said that following recent actions from credit rating agencies Fitch and Moody’s, there were worries that a downgrade could inflict higher borrowing costs on the company, hampering its ability to win back the trust of investors. As a result, the board is considering cost cuts and revenue-generating measures. However no discussions on selling off VW assets or brands have taken place, the sources said. The Wolfsburg-based company has been hammered by the revelations that it manipulated diesel emissions tests.

An endless supply of stupidity. Or is it perfidiousness?

• Eurozone Inflation Turns Negative, Putting ECB In Corner (Reuters)

Eurozone inflation turned negative again in September as oil prices tumbled, raising pressure on the European Central Bank to beef up its asset purchases to kick start anaemic price growth. Prices fell by 0.1% on an annual basis, the first time since March that inflation has dipped below zero, missing analysts’ expectations for a zero reading after August’s 0.1% increase. The negative reading is a headache for the ECB, which is buying €60 billion of assets a month to boost prices. It has already said it may have to increase or extend the QE scheme because inflation may fall short of its target of almost 2% even in 2017.

Long term inflation expectations have dropped to their lowest since February, before the ECB’s asset purchases started, as China’s economic slowdown, the commodity rout and paltry euro zone lending growth reinforce pessimistic predictions. Even Finnish central bank chief Erkki Liikanen, normally considered an inflation hawk, has warned that euro zone growth is at risk from the slowdown in emerging markets and that inflation could fall short of already modest expectations. “We believe the ECB will extend its QE programme beyond September 2016, most likely until mid-2018, and that it could reach €2.4 trillion – more than twice the original €1.1 trillion commitment,” credit ratings agency Standard & Poor’s said on Wednesday.

Let’s see it first.

• Tsipras Finds ‘Open Ears’ In US To Greek Appeal For Debt Relief (Kath.)

Prime Minister Alexis Tsipras on Wednesday indicated that Greece’s appeal for debt relief had been received far better in New York than in Brussels, continuing his US visit which included talks with Secretary of State John Kerry. “The Greek government has found far more open ears [here] than in Brussels for the need for there to be a fair resolution of the crisis and a necessary reduction of the unbearable and unsustainable public debt that has accumulated all those years,” Tsipras told reporters. He was speaking on the fifth day of an official visit to the US and following meetings with representatives of the Greek-American community in New York who he described as “the best ambassadors for Hellenism in the US, a country which plays the most significant role globally in all the crucial decisions that relate to our country’s future.”

Tsipras said Greeks have been “the victim of choices that led to the gradual erosion of the country’s national sovereignty and to the need for borrowing which resulted in the enforcement of measures which have… weakened the production base and the economy.” The comments came just a few days before representatives of Greece’s international creditors are to return to Athens for negotiations on the prior actions that Greek authorities must legislate to secure crucial rescue loans.

Yeah, that’ll do the trick…

• Greek Regulator Bans Short-Selling Of Bank Shares (Reuters)

The Greek securities regulator said on Wednesday it had banned short-selling of Greek bank shares to avoid pressure on prices ahead of the recapitalization of the sector. “The decision will come into effect starting Oct. 1 and will last until Nov. 9,” the Capital Markets Commission said in a statement. It affects the shares of the country’s four largest banks – National Bank, Alpha Bank, Eurobank and Piraeus Bank – and also the smaller Attica Bank.

“At a deeper level, the EU’s actions are promoting political radicalization on both the political right and left with unknown consequences.”

• How Greece Could Collapse The Eurozone (Satyajit Das)

The Greek debt affair has also harmed the European Project, potentially irreparably. The problem is not that the eurozone found itself facing serious economic challenges. The issue is its failure to anticipate the risk of such a crisis ever happening, the lack of contingency planning, and the eurozone’s inability to deal with the problem on a timely basis. The Greek crisis is now over five years old, with no signs of a permanent solution. There are only unpalatable choices. Some concessions will not solve the problem. Other eurozone members will have to continue to provide additional financing to Greece, further increasing their risk. Favorable treatment for the Greek government risks opening a Pandora’s Box of demands from other countries to relax austerity measures.

Demands for relaxation of budget deficit and debt level targets are likely from Spain, Portugal, Ireland, Italy, and France. A write-down of debt would crystallize losses. It might threaten the governments of Spain, Portugal, Italy, Finland, the Netherlands, and Germany. If Greece leaves the euro, then the consequences for the eurozone are unclear. Should Greece prosper outside the single currency, it reduces the attraction of the eurozone for weaker members. Given the absence of painless solutions, it seems for the moment that neither Greece nor its creditors have any objectives other than avoiding having their fingerprints on the instrument that triggers default, the world’s largest sovereign debt restructuring or a breakup of the euro.

The approach of the EU has also undermined the European project. Major countries such as Germany have reacted to the inability to resolve the crisis by resorting to economic and political repression, entailing less, not more, flexibility, with tougher rules and stricter enforcement, including tighter supervision of national budgets. [..] The EU fails to recognize that its actions may destabilize Europe in unexpected ways. Greece has the potential to undermine Western security, creating a large corridor of vulnerability through the Balkans, the Levant, the Middle East, and Caucasus. While a member of the EU, Greece can veto sanctions reducing European power. Its actions or lack thereof can aggravate the serious refugee crisis confronting Europe. An embittered Greece, hostile to European partners and NATO, has caused alarm in the US. At a deeper level, the EU’s actions are promoting political radicalization on both the political right and left with unknown consequences.

Age old threat.

• Greek Shipowners Prepare to Weigh Anchor on Prospect of Higher Taxes (WSJ)

Many of Greece’s world-leading shipowners are actively exploring options to leave their home country, reacting to the prospect of sharply higher shipping taxes in the debt-ridden nation. Dominated by some 800 largely family-run companies that control almost a fifth of the global shipping fleet from their base at the main Greek port of Piraeus, the industry has long been a source of national pride. But at the behest of Greece’s international creditors, the newly re-elected Syriza-led government has reluctantly agreed to raise taxes on the long-protected sector. While Greek owners have agreed to voluntarily double until 2017 the amount they pay in tonnage tax-a fixed annual rate based on the size of each vessel-they are adamant on keeping their tax-free status on ship profits and money generated from ship sales.

Yet Greece’s creditors want taxes gradually to be applied on all shipping operations and are pushing for a permanent increase in the tonnage tax. Senior Greek government officials, who asked not to be named, said the finance ministry is trying to find alternative sources of income to avoid saddling owners with more taxes, but one said that “the exercise is proving very difficult.” Final decisions on the matter are expected by the end of October. Income-based shipping taxes, levied in countries such as the U.S., China and Japan, can raise much more revenue than tonnage taxes, levied in most European countries. An owner of a midsize vessel in Greece would pay a flat tonnage tax of $50,000 a year at the temporary double rate.

A comparable U.S. owner, depending on daily freight rates, might pay about $3.7 million in annual taxes, and a Japanese owner could pay $7 million. However, while European owners have to pay the tonnage tax every year regardless of profitability, U.S. and Japanese owners get substantial tax refunds if their vessels lose money. Many in the Greek shipping world say any increase in taxes on shipping operations would prompt a mass exodus of the country’s shipowners. Relatively low-tax global shipping centers such as Cyprus, London, Singapore and Vancouver are positioning themselves to benefit.

Rising wages.

• Iceland’s Next Collapse Is “Unavoidable,” Employers Union Warns (Bloomberg)

The head of Iceland’s main employers’ group says the nation is displaying some worrying signs. Wages are soaring much too fast and will ruin the economy if they continue unchecked, according to Thorsteinn Viglundsson, managing director of Business Iceland. “Another economic collapse is unavoidable, if we’re going to keep going down this path,” Viglundsson said in a phone interview in Reykjavik. Pay is set to rise about 30% through 2019 in many industries. Unions wanted increases as high as 50%, to compensate for years of moderate pay growth, but some were forced to settle for less after the government put the matter to an arbitration court. Icelanders, who work longer hours than their Nordic peers according to the OECD, are demanding a bigger share of the island’s economic recovery after eight years of belt-tightening.

Pay growth has barely kept pace with inflation, with real wages rising little more than 3% in the six years through 2014, statistics office figures show. Over the same period, real gross domestic product grew 29%. Viglundsson says wage growth above 25% through 2019 will have “very serious economic consequences.” “It will mean a surge in inflation, to which the central bank will respond by raising rates considerably,” he said. Iceland’s main policy rate is already above 6%, a developed-world record. “It will mean that, in the end, the krona will lose its value, like it has always done in the past under similar circumstances,” Viglundsson said.

To bring democracy. And protect our freedom.

• Obama Hands $1 Billion In Military Aid To Goverments Using Child Soldiers (CNN)

When the extremist group the Islamic State of Iraq and Syria (ISIS) abducts boys from Friday prayers at mosques or indoctrinates children as young as 10 to become fighters or suicide bombers, there is little the United States can do. But when recipients of U.S. military aid recruit children into their forces as soldiers, the United States has a lot of leverage. It is disappointing that the Obama administration has been reluctant to use it. This week, U.S. President Barack Obama is expected to make his annual announcement about the issue, on whether he will waive sanctions on military foreign aid under U.S. law for any of the eight governments currently on the State Department’s list for using child soldiers.

In 14 countries around the world, according to the United Nations, children are recruited and used in armed conflicts as informants, guards, porters, cooks, and often, as front-line armed combatants. In some, only non-state armed groups are responsible for the practice, but in others, the perpetrators are rebel forces and governments alike. In South Sudan, child recruitment spiked sharply last year, with estimates that 12,000 children were fighting with both government and non-state armed groups. In Yemen, where UNICEF has estimated that one-third of all fighters are under 18, all sides to the ongoing conflict, including the government, use child soldiers. Yet both governments have received millions of dollars in U.S. military assistance.

In 2008, Congress enacted a law based on two simple ideas: first, that U.S. tax dollars should not support the use of child soldiers, and second, that suspending U.S. military assistance could be a powerful incentive to prompt governments to end this reprehensible practice. The law, the Child Soldiers Prevention Act, took effect in 2010, restricting U.S. military support to governments using children in their armed forces. But the Obama administration’s implementation of the law has fallen far short of the law’s goals. Our analysis found that during the five years the law has been in effect, President Obama has invoked “national interest” waivers to authorize nearly $1 billion in military assistance and arms sales for countries that are still using child soldiers. In contrast, we found that only $35 million in military assistance and arms sales – a mere 4% of what was sanctionable under the law – was actually withheld from these abusive governments.

Farrell may be on to something.

• Millions Of Illegal Immigrants Will Overrun Trump’s ‘Beautiful Wall’ (Farrell)

Warning to the next president, to all future U.S. presidents: They’re coming. More illegal immigrants. More refugees. Millions more than conservatives fear are here already. Millions more coming, like Syrian refugees storming Europe. This warning is targeted specifically for a future President Donald Trump. You cannot stop them. Nobody can. They will overrun America, add trillions more debt. Brag all you want, this is one deal you will never, never negotiate successfully. Never win. Worse, you lose, we lose big.

Can’t win? No, not even if you’re bankrolled with unlimited funds, a blank-check from a GOP-controlled Congress and Treasury … not even if you win carte blanche clearance to build your “classy, beautiful” dream wall to your specs … build it extra high… superthick … not even if you staff it with thousands of well-armed special-ops soldiers … add new guard towers … patrolled by thousands of drones, sonar ships, nuclear subs … all to stop every illegal coming by aircraft, by boats, using battering rams, secretly entering through an ever-increasing vast underground network built by drug cartels … a near impenetrable system operating as an integrated high-tech network designed by our best minds to keep out the new flood of illegal immigrants that you so fear … it still won’t stop them.

Give it up you guys: Nobody can stop the coming tidal wave rising dead ahead. Not you, Mr. Next President, not Congress, nor any combination of our Armed Forces, FBI, ATF, CIA will ever stop the coming flood, a tsunami of illegals and refugees. Why? Because they’re escaping dying lands, doing what is natural, fighting, desperate, in survival mode, for themselves, their families, future generations, escaping climate-caused natural disasters, droughts, water and food shortages, starvation, genocide, pandemics, dust bowls, and so many more dark consequences of global warming climate change. Yes, all this is so obvious, so predictable. In the next few decades the same conditions that created the Syrian civil war between President Bashar al-Assad and his people will overwhelm the American southwest.

As climate change puts increasing pressure on the 160 million people in Mexico and Central America, millions of refugees and illegal immigrants will escape north into the United States, overrunning us by the end of this century. Of course, this human tsunami will not be understood by the clueless mind of America’s climate-science-denying GOP Congress held captive by Big Oil. Nor by the candidates in the GOP presidential debates. Worse, this would be a total fantasy to a GOP President Trump who’s sole obsession is a slogan “Make America Great Again” by building a “beautiful” wall to keep out illegal refugees. Except they’re all just making matters worse, delaying the inevitable collapse of America.

Clean energy.

• Farmers Driven From Homes ‘Like Pests’ As Asia Plans 500 Dams (Bloomberg)

Developing nations are in the middle of the biggest dam construction program in history to generate power, irrigate fields, store water and regulate flooding. Yet governments are finding it harder to move people, who have become less trusting of officials and more connected to information about the effects of the dams. Corruption and wrangles over payments have stalled projects from Indonesia to India for decades and frustrated governments are increasingly turning to the ultimate threat: Move, or we will flood you out. Jatigede is the latest example, and it is unlikely to be the last. Indonesia plans to build 65 dams in the next 4 years, 16 of which are under construction. India aims to erect about 230.

China is in the middle of a program to add at least 130 on rivers in the mountainous southwest and Tibetan plateau, including barriers across major rivers like the Mekong and Brahmaputra that flow into other countries. It is reported to have relocated people before inundating land. Like Jatigede, many are financed by Chinese banks and led by the nation s biggest dam builder, Sinohydro Corp. China is involved in constructing some 330 dams in 74 different countries, according to environmental lobbying group International Rivers, based in Berkeley, California. “Sending rising waters to flood out people like pests is barbaric”, said Professor Michael Cernea at the Brookings Institution. “Indonesia has the resources and know-how to resettle these people decently”.

“The relocation program is the responsibility of the government”, Sinohydro President Liang Jun said in an interview on Aug. 31 at the Jatigede dam. West Java governor Ahmad Heryawan said the dam will irrigate 90,000 hectares of land and provide water to Cirebon, a city of about 300,000 people on the northern coast of Java. At a ceremony on top of the dam on Aug. 31 to begin filling the reservoir, he acknowledged that not everyone had received compensation and that thousands remained in their homes. Those being relocated were “heroes of development, not victims”, he said. “We don t want them to suffer, we want to improve their welfare”. [..] Protests against dams have multiplied across Asia as activists mobilize residents and media against large projects and question their long-term benefits.

Indian Prime Minister Narendra Modi plans about 200 hydropower projects on the mountainous rivers in northeast India, as well as a program of 30 large dams that would help link major rivers across the country. “We are considering approvals for about 20 to 30 hydro and about 15 irrigation dam projects at the moment,” said Ashwinkumar Pandya, chairman of India’s Central Water Commission, which gives technical and economic clearances for dams. “Dams are an important aspect of planning and they ensure that water and power requirements for the nation are met.” “There is not a single dam – not a single one – for which India has done proper rehabilitation of people,” said Himanshu Thakkar at South Asia Network on Dams, Rivers and People. “And typically, all of them have seen costs escalate and delays in building.”

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