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Quantum, Jazz and Dada – 1

Nov 092018
 
 November 9, 2018  Posted by at 3:41 pm Primers Tagged with: , , , , , , , , , ,  10 Responses »


Marcel Duchamp Nude descending a staircase 1912

 

 

Ilargi: Much to my surprise, I received a mail from an old friend. Alexander Aston last wrote for the Automatic Earth in 2014. But he hasn’t been idle. Alexander is presently finishing his doctorate in archeology at Oxford, after prior degrees in philosophy and history. And for this article, he’s been thinking about how upheaval and collapse tend to lead to new insights, new bursts of creativity, in science, religion, society and the arts. A view that’s -too- rarely contemplated. It’s so long I cut it into three parts. Please don’t miss any of them.

Here’s Alexander:

 

 

Quantum, Jazz and Dada:
The Dynamic Symmetry of Destruction and Creativity

“Do not now seek the answers, which cannot be given to you because you would not be able to live them. And the point is, to live everything. Live the questions now. Perhaps you will then gradually, without noticing it, live along some distant day into the answer.”
– Rainer Maria Rilke

 

Introduction

 

This paper is not about Quantum, Jazz and Dada per se, but rather a meditation on those radical bursts of human creativity that occur during historically destructive moments. Ultimately, my thesis is quite simple. Barring the possibility of extinction, humans are on the precipice of the most radical social reorganizations in the history of the species. In navigating this process of transformation, if we wish to create a world worth living in, it is necessary to understand the interactions between energy, ecosystems, cognitive development and social organization.

Without a grasp on the interdependence of these relationships there is no hope for shaping our world in a healthier manner. What is historically unquestionable is that periods of radical upheaval result in drastic reconfigurations of belief, meaning and knowledge. In the contemporary world, metaphysical and theoretical assumptions about the division of mind and matter, culture and nature, humans and environment all stem from a philosophical and scientific heritage that has divided form and flow. If we are to create something better out of the ongoing destruction of the current system we must radically rethink our understanding of energy, matter and the interdependence of humanity and the Earth.

 

Collapse Ain’t Nuthin New

 

At the beginning of the twentieth century the Industrial Empires and their world order collapsed, imploding into a cataclysm of brutality and desperation that persisted for decades. Czars and Kaisers, empires and vassals dissolved in the onslaught of history. The old order was left rotting in the trenches. Muddy altars to the gods of empire and industry that demanded a blood sacrifice beyond comprehension. In the wake of the destruction, new imperial orders and secular religions emerged in the search for control and stability, dominating and traumatising those that survived the slaughter. It is impossible to grasp fully the horror and devastation of the period.

The wars, depressions, epidemics, famines, revolutions and authoritarian regimes have become so normalised in our narratives that it is hard to grasp the magnitude of these events. It was a cascading systems failure of a scale and intensity without historical parallel in terms of the global scope and the speed at which it unfolded. There are few words for the early twentieth century collapse other than horrific. Yet, even as the tragedy unfolded, a profoundly creative dynamism emerged from the ashes. Like a successional ecology following a wildfire, scientific, artistic and social practices began to transform.

In the ruins physicists began to undermine radically the common pre-war belief that physics was an essentially complete science. Artists began to deconstruct the meaning of cultural institutions that could not account for such technological savagery, leading to the advent of post-modernism. As the global system reoriented it was the descendants of slaves, at the beating heart of American suffering, that catalysed the greatest musical renaissance in world history. Despite the tragedy, there is a kind of beautiful symmetry in the flourishing of Quantum, Jazz and Dada amidst the rubble and devastation of the war.

Destruction is part of the fecundity of life, the dynamism that creates the possibility for growth. Disruption and disintegration break the equilibrium of our systems and feed a creative evolution for more effective, resilient practices and forms of organisation. Peak and trough, complexity and entropy are bound together like a wave to the ocean. Life flourishes amongst dead and decomposing stars, extinctions produce radiations, ovulation leads to menstruation, death and renaissance produce one another. It is in this dynamic symmetry of creation and destruction that uncertainty produces physics, chaos creates art, and the persecuted compose music.

Much like our ancestors at the dawn of the twentieth century, we are on the precipice of immense changes. Indeed, we are already caught in the momentum of this wave. The complexity of the current system has begun to hit hard energetic boundaries, fracturing economic, political and social stability. For the first time in human evolution the species is confronting not only global resource limits but its own behaviour as a geological force. The energetic structure of the global system that has emerged over the past five centuries has begun to radically reorganise.

We are experiencing negative and positive feedback on a planetary scale and facing an ecological, evolutionary and geological transformation of an intensity that is unique in the existence of the biosphere. Extinctions, natural disasters, imperial wars, refugees, financial crises, Arab springs and Syrian deserts, all are systemically entangled with the transforming energy dynamics of our planetary system.

At one pole, we are experiencing the ecological effects of a thermodynamic expansion that has dispersed the fossilised energy of entire geologic ages into the atmosphere in mere centuries. We have amplified the thermal energy retained by the planet and the principle of entropy requires it to be dissipated. Energy that flows through storms, glaciers, and oceans. At the opposite pole, we confront resource depletion and contamination as we feed the energetic demands of the global economy. It is why we claw tar out of the earth in Alberta and drill into the earth miles off the coast of Brazil.

 

 

 

Certainly, no conceptual system can be imposed from the top down. To enforce such abstractions and simplifications on a dynamic reality would require overwhelming violence, as indeed it already does. One of the key insights of modern science is that complex systems are inherently non-linear. In other words, their interactions and emergent properties cannot be determined from initial conditions or inputs. “Our world is governed not only by nonlinear dynamics, which makes detailed prediction and control impossible, but also by nonlinear combinatorics, which implies that the number of possible mixtures of meshwork and hierarchy, of command and market, of centralisation and decentralisation, are immense and that we simply cannot predict what the emergent properties of the myriad combinations will be.” (1) The very nature of “complex adaptive systems” means that we cannot simply engineer solutions with determinate results. (2) This is humbling, it forces us to recognise the limits of our abilities to conceptualise and design systems.

It tells us that whatever comes next, whether for good or ill, is beyond our imaginations. We are akin to medieval peasants attempting to contemplate railroads and telegraphs. The only thing that we are assured of is our current system is undergoing a process of intense reorganisation. It is our burden and privilege to participate in this process. The coming years will take radical creativity and courage if we are to find new ways of living in this world that are balanced and humane. No genius, greater leader or collection thereof can solve this predicament. They cannot scale up to the task, the problems are too intricate, their instruments too blunt and their vision too limited. What we need is not some new ideology or five-year plan but an ethics of practice derived from the organisational dynamics of our world.

It should not be our goal to design and implement a system from the top down but rather to participate in a collective process of reconfiguration through applied practices and the distribution of knowledge, skills and resources. We can only discover how to do this through observation, experimentation and participatory engagement to create new learning environments and social relationships. The next system will not so much be designed as it will be cultivated by individuals, communities and societies seeking resilience and stability. However, our sciences do illuminate fundamental patterns that provide a guide to how we might create the conditions from which new, healthier systems can emerge.

To this end we must engage with three fundamental and interrelated dynamics; energy, ecology, and human development. In other words, we must consider how we produce the fundamental energetic capacity to create and maintain our systems and the ways in which they are integrated within their environments. In turn these elements must be understood in relation to how effectively they distribute available resources in terms of the physiological, psychological and social needs of human beings. In these regards, we must work with human developmental processes in order to create new learning environments that equip people to better articulate and shape these dynamics. Communities and institutions that successfully organise around these relationships will be the steam engines of the twenty-first century.

 

Entropy and Complexity

 

“Without birth and death, and without the perpetual transmutation of all the forms of life, the world would be static, rhythm-less, undancing, mummified.”
– Alan Watts

 

The “next system” will not develop in a context of expansion and growth, at least not initially, but through contraction and disruption. We must consider the dynamics of collapse or disentanglement and transformation that occur in complex adaptive systems so that we might effectively engage with these processes. The universe is an intricate dance of creation and destruction, a fractal of entropy and complexity. Complex adaptive systems emerge through the self-organising dynamics of energy and matter flows in a material and spatial medium.

Think of a murmuration of starlings and one can begin to conceptualise the patterning of relationships in space and time. The process we call history clearly reveals the self-organisation of human communities across multiple, emergent scales. The question is not if humans form complex adaptive systems but how? Ultimately, it is a question of social cognition and how it is that humans understand and understand with each other so as to form relationships that radically alter their ecosystems.

Complex Adaptive Systems are formed of interdependent relationships between “dynamic structures in which faster, smaller processes nest inside and interact with larger, slower ones.” (3) Organisms, ecosystems, and the biosphere interact, aligning and diverging, shaping one another through ongoing developmental processes. The stability and coherence of any self-organising dynamic can be understood emerge through a tension between resilience (the ability to “withstand disturbances and still continue to function”) and connectedness (the ability “within a system to moderate the influences of the outside world”). (4) A highly connected system may be less influenced by external variables; however, the rigidity of its connections only allows it to operate within a limited range of conditions.

Ultimately, the organisation of any system makes trade-offs between forms of high entropy coherence, and low entropy stability. The very nature of entropy ensures that all such systems transform over time, and these processes of change can be schematised into adaptive cycles of rapid growth, conservation, disruption and regeneration. During the conservation phase of a system the “growth rate slows as connectedness increases to the point of rigidity and resilience declines. The cost of efficiency is a loss of flexibility. Increasing dependence on existing structures… such a system is stable, but over a decreasing range of conditions.”

However, it is moments of cascading transformation that are the most dramatic. “The surprise is caused by cross-scale interactions or suites of novelty that ricochet through the system as it reorganizes around alternate sets of mutually reinforcing processes.” (5) Our global system is currently exiting a period of conservation and entering a period of systemic disruption in which “a disturbance that exceeds the systems’ resilience breaks apart its web of reinforcing interactions.” (6)

Such fractal adaptive cycles can be observed repeatedly throughout history, the Neolithic emerges as Pleistocene ecologies begin to break down, the Iron Age emerges from the Bronze Age collapse, the Iroquois Confederacy consolidates out of European epidemics. The examples are numerous beyond recounting; it is an ecological pattern fundamental to the organisation of complex systems. Indeed, it is the breakdown and reorganisation of systems that appears to be one of the key motors of complexity.

Consider for a moment the broad arc of “western” history since Rome. The Roman Imperial system materialized through the resources and slaves extracted from conquered territories. As the empire expanded it required increasing amounts of energy to ensure stability and coherence between the cores and peripheries. Overtime, the cost of maintaining the imperial infrastructure exceeded the energetic returns from further expansion. It is the law of diminishing returns. The growth required to fuel the Empire stalled, sending it into a long, tumultuous process of contraction and decline.

Halting and grinding across the centuries like a receding glacier, the system broke apart, shattering across the Mediterranean world. The very language of the empire fractured, and composed anew as people congregated around the villas and farms that germinated the manorial systems of the Middle Ages. As the crises deepened and intensified a Jewish cult of ostensibly twelve families at the outset, flourished in the cities, providing sustenance and basic care as a result of their cosmology. As plagues, famines and warfare swept through Roman communities in the Third Century AD, patriarchs and patricians fled to their country estates, leaving civil administrations immobilized.

 

As the old patronage systems broke down, the religion spread among the most marginal and vulnerable communities, providing stability by reorienting the basic organization and distribution of social resources around new spiritual practices. Christianity was born within a dying Rome, preserving its bones in the liturgies and communication networks that flowed along the old roads and into the agricultural fortresses of Feudalism. By the time of the High Middle Ages a robust, fractal like system in the throes of a wind and water powered industrial revolution had emerged. With the end of the Medieval Warm Period, famines, schism and conflicts began to erupt in Europe as the Mongols brought the greater part of Eurasia into a single imperial system.

The riders from the Steppe likely helped spread the plague that sent the European Middle Ages into terminal decline. The system initially reoriented around the Italian City States. Those communities that were the gateway of the epidemic also created the first quarantines and effective civil responses while church and aristocracy lay paralysed. As the epidemic burned out, these merchant powers could offer high wages for the scarce labour that survived, drawing people off the manors and into the cities. In turn, the Renaissance transformed into the holocausts of the Reformation and conquests of the Atlantic Empires which in turn produced the Enlightenment and industrialisation, leading to an age of revolutions that would ultimately founder in the trenches.

Breakdown and reorganisation is a critical dynamic driving the evolution of complex systems. Transformations that reconfigure energy-matter flows create ecological bottlenecks as well as new niches to occupy. The biosphere is a “complex thermodynamic system” in which selection occurs around access to available energy gradients. (7) Organisms seek out those sources of energy that sustain their biological function. It is, along with reproduction, the most intense arena of competition amongst biotic communities. The logic of evolution dictates that selective advantage will be conferred to any organism that is more effective at harnessing and sustaining energy flows within its ecology.

In these regards, “selection” can understood “in terms of increasing energy flow through autocatalytic matter-energy loops. Selective advantage will go to those autocatalytic systems that best increase energy flow through their system, those that do so better than their competitors.” (8) Those forms of organisation that are the most flexible and efficient with their use of available resources are the most likely to adapt and succeed. One of the most dramatic examples of such processes are mass extinctions “because they remove incumbents… and unleash a scramble for post-extinction opportunities that can produce bursts of evolutionary novelty.” (9)

Periods of collapse reward forms of organisation that are the most adaptive to radically altering energy-matter flows. “After each mass extinction, the recovery included new species living off new gradients and new habitats. Here we can see a crucial pattern in which complexity declines after a major stress or disturbance and recovers, and often intensifies, during successional processes.

This dynamic of disruption and regeneration holds true across scales such as biosphere and ecosystem evolution. After a perturbation or stress, an “ecosystem rebuilds itself from the remaining species and their genetic material.” (10) These adaptive cycles algorithmically fuel the growth of complexity by selecting energetically efficient and resilient structures that form the baseline of future evolution. A perfect illustration of this is the radiation of endothermic mammals and broad-leafed angiosperms following the extinction of the dinosaurs. Endotherms have greater energetic density than exotherms.

However, though their energy requirements are higher, this was initially offset by the size of early mammals. Their internally self-regulating metabolisms allowed them to better survive in the reduced warmth of the post-meteorite environment. Similarly, with flowers and deciduous trees, their broad thin leaves allowed them to better photosynthesize in the reduced light of the nuclear winter, radiating as the coniferous canopies began to clear. A picture begins to emerge in which energy flows are organized into systems that undergo selection processes shaped by adaptive cycles.

The breakdown and reorganization of those systems has thus far resulted in the emergence of growing complexity, creating increasingly energy dense feedback in ecosystems over time in which “the level of complexity achieved by a living organism can be measured, roughly but quite objectively, by estimating the density of energy flows.” (11) It is why the energy density of ecosystems are far greater than that of stars, and why human brains far exceed both. To light, our world is dominated by institutional dinosaurs caught between the Scylla and Charybdis of resource depletion and climate change.

The future belongs to the “mammals”, those forms of organisation that can most effectively and efficiently harness the energy available in our transforming ecosystems. It is in the cycles of this process that growth occurs, the breakdown or disentanglement of systems create the possibility for new configurations and provides the raw materials from which new complexity emerges. This is how we must approach the next system, the creation of a new and resilient energetic ecology from the ground up as the old-world crumbles.

 

 

1) Manuel De Landa, A Thousand Years of Nonlinear History, (New York: Zone Books, 1997), 273.
2) Neil F. Johnson. Simply Complexity: A Clear Guide to Complexity Theory, (Oxford: Oneworld, 2009).
3) Lance H. Gunderson, and C. S Holling, Panarchy: Understanding Transformations in Human and Natural Systems, (Washington, DC: Island Press, 2002), 22.
4) Ibid., p. 17-19
5) Ibid., p. 47
6) Ibid., p. 6-8
7) Eric D. Schneider and Dorion Sagan, Into the Cool: Energy Flow, Thermodynamics, and Life, (Chicago: University of Chicago Press, 2006), 152.
8) Ibid., p. 254
9) David Jablonski and Paul D.Taylor, ed., Extinctions in the History of Life: The Evolutionary Role of Mass Extinction, (Cambridge: Cambridge University Press, 2004), 173.
10) Schneider and Sagan, p. 253
11) David Christian, Maps of Time: An Introduction to Big History, (Berkeley: University of California Press, 2011), 80.

 

 

Part 2 of Quantum, Jazz and Dada will follow soon. Check TheAutomaticEarth.com.

 

 

Alexander Aston is a doctoral candidate in archaeology at the University of Oxford and is on the board of directors with the Centre for Cognitive Archaeology at the University of Colorado in Colorado Springs. He has prior degrees in philosophy and history. His work lays at the intersection of Cognitive Archaeology, Deep History and Natural Philosophy, examining the relationship between ecology, material culture and social cognition. Alexander grew up between Zimbabwe, Greece and the United States. He has worked as a stone mason, community organiser and collaborative artist focused on issues of sustainability, alternative education and economic justice for nearly two decades. He has helped to establish community collectives, free schools, participatory art projects, sustainability and education programs in several international projects.

 

 

Debt Rattle July 8 2018

Jul 082018
 
 July 8, 2018  Posted by at 8:06 am Finance Tagged with: , , , , , , , , , , ,  15 Responses »


Utagawa Hiroshige Sudden Evening Shower on the Great Bridge near Atake 1857

 

• US Debt Explosion & Weimar II (von Greyerz)
• China Threatened By “Vicious Circle Of Panic Selling” (ZH)
• The Demise of Toys ‘R’ Us Is a Warning (Atlantic)
• Why It’s Not Too Late To Step Back From The Brexit Brink (G.)
• British MPs Should Be Ashamed Of Supporting Regime Change In Tehran (Oborne)
• OPEC’s Dilemma (Lacalle)
• Turkey Sacks Another 18,500 State Employees In New Decree (AFP)
• Trump, the Dragonbear, and the Bipolar World Order 2.0 (M.)
• Trump’s Existential Threat To The Empire (Stockman)
• Are All Societies Destined To Destroy Themselves? (Wef)
• Inventing the Weekend (Jacobin)

 

 

“Prosperity built on debt is short lived..”

• US Debt Explosion & Weimar II (von Greyerz)

[..] change starts in the periphery where very few are looking. Look at China where the Shanghai composite is down 23% since January. And look at Brazil where the Bovespa is off 17% so far this year and Turkey which has lost 20%. What is important to understand is that most major markets are now looking extremely vulnerable, be it Japan, Germany or the US. Fundamentally most markets are overvalued with the help of central bank liquidity. Also, technically we are not far from crashes in most markets. Whilst there is always a possibility of a last hurrah, it looks like all markets have topped, including the US, and that later in 2018 we will see major falls. Once the bear markets start, they are likely to turn into secular trends that last many years and result in falls of 75% to 95%.

Difficult to believe for most investors today, but nobody in 1929 believed that the Dow would fall 90% in the ensuing years and take 25 years to recover. The investment world has been lulled into a permanent state of security and euphoria. Hard to deny that central banks and governments have been extremely skilful in telling the world constant lies. And why would anyone protest, as the rich are getting incredibly rich and many normal people in the West have a higher standard of living than ever. Very few of the “normal people” understand that their prosperity is built on personal debt and their government borrowing more than ever. Nor do they understand that they are responsible for this debt that they of course can never repay.

Even less do they understand that they will be on their own when debt implodes and they lose their jobs. Because the state will at that point have run out of money and there will be no social security or unemployment benefits. Nor will there be any pension for retirees as pension funds will go from extremely underfunded to totally unfunded.

When Trump was elected in November 2016, I forecast that US debt would continue to double every 8 years on average, as it has done since Reagan become president. That would lead to $28 trillion debt by 2021 and $40 trillion by 2025. Well, it seemed quite unrealistic back in 2016 that the US would average over $2.5 trillion deficit in the ensuing 8 years to 2025. Judging by current forecasts, it looks like debt will “only” be $25 trillion in 2021. But as tax revenues decline and spending increases, I would not be surprised to see $28 trillion debt in 2021. That would put the US on course for a $40 trillion debt in 2025.That would mean a doubling of the debt from 2017 which is in line with the historical trend of a 100% increase every 8 years.

A $40 trillion debt in 2025 would be bad enough but things are likely to get worse. With debt exploding, the Fed will lose control of interest rates as foreign investors dump US bonds. A rate of 10% at that point would not be unrealistic. That would lead to an interest bill of $4 trillion per year (10% on $40T). This would mean that just interest costs are likely to be higher than total tax revenue.

Read more …

“$1 trillion worth of stocks are being pledged as collateral for loans..”

• China Threatened By “Vicious Circle Of Panic Selling” (ZH)

Small caps aside, the marketwide numbers are staggering: about $1 trillion worth of stocks listed in China’s two main markets, Shanghai or Shenzhen, are being pledged as collateral for loans, according to data from the China Securities Depository and ChinaClear. More ominously, this trends has exploded in the past three years, and according to Bank of America, some 23% of all market positions were leveraged in some way by the end of last year in China, double from the start of 2015.


Source: WSJ

As a result of the recent market rout which sent the Shanghai Composite into bear market territory, in June UBS warned that it sees a growing risk in China’s stock pledges; the bank calculated that the market cap of pledged stocks that have fallen below levels triggering liquidation amounts to 440 billion yuan with some 500 billion yuan below warning line, which translates to ~1% and 1.1% of China’s entire market value of $6.8 trillion. A separate analysis by TF Securities, as of Jun 19th, stock prices of 619 companies were close to levels where margin calls will be triggered. Since then, that number has increased.

Read more …

When Toys R Us went bankrupt, they got permission to give the executives that drove the company into bankruptcy $32 million in bonuses. Store employees, regular working people, got nothing.

• The Demise of Toys ‘R’ Us Is a Warning (Atlantic)

Ann marie reinhart was one of the first people to learn that Toys “R” Us was shuttering her store. She was supervising the closing shift at the Babies “R” Us in Durham, North Carolina, when her manager gave her the news. “I was almost speechless,” she told me recently. Twenty-nine years ago, Reinhart was a new mother buying diapers in a Toys “R” Us when she saw a now hiring sign. She applied and was offered a job on the spot. She eventually became a human-resources manager and then a store supervisor. She stayed because the company treated her well, accommodating her schedule. She got good benefits: health insurance, a 401(k). But she noticed a difference after the private-equity firms Bain Capital and Kohlberg Kravis Roberts, along with the real-estate firm Vornado Realty Trust, took over Toys “R” Us in 2005.

“It changed the dynamic of how the store ran,” she said. The company eliminated positions, loading responsibilities onto other workers. Schedules became unpredictable. Employees had to pay more for fewer benefits, Reinhart recalled. Reinhart’s store closed for good on April 3. She was granted no severance—like the more than 30,000 other employees who are losing their job with the company. In March, Toys “R” Us announced that it was liquidating all of its U.S. stores as part of its bankruptcy process, which began last September. Observers pointed to the company’s struggle to fight off new competition. In its court filing, the company laid the blame at the feet of Amazon, Walmart, and Target, saying it “could not compete” when they priced toys so low.

Less attention was paid to the albatross that Bain, KKR, and Vornado had placed around the company’s neck. Toys “R” Us had a debt load of $1.86 billion before it was bought out. Immediately after the deal, it shouldered more than $5 billion in debt. And though sales had slumped before the deal, they held relatively steady after it, even when the Great Recession hit. The company generated $11.2 billion in sales in the 12 months before the deal; in the 12 months before November 2017, it generated $11.1 billion.

Read more …

The legal position.

• Why It’s Not Too Late To Step Back From The Brexit Brink (G.)

Last week, in response to a petition seeking a referendum on the final deal, the government not only refused to allow “the people” to decide on the terms of Brexit, it categorically stated that parliament will not be allowed to do so either. Parliament will instead be given what it calls “a meaningful vote … either [to] accept the final agreement or leave the EU with no agreement”. This is the opposite of “meaningful”; the government intends to refuse parliament the chance to reject both options – it must accept what is offered or take nothing at all. And this is the government’s position, irrespective of the dire consequences for our country or “the will of its people” to avoid them. Even though the UK could before March 2019 change its mind, the government says that it will on no account let that happen.

The reason given for this is said to be the government’s “firm policy” that “there must be no attempts to [reverse the referendum and] remain inside the European Union”; the government does not deny that reversal is legally possible. Its position accords with advice, which I am told from two good sources the prime minister has received, namely that the article 50 notification can be withdrawn by the UK at any time before 29 March 2019, resulting in the UK remaining in the EU on its current favourable terms. Such advice would also accord with the view of Lord Kerr, who was involved in drafting article 50, of Jean-Claude Piris, former director general of the Council of the EU’s legal service and of Martin Selmayr, a lawyer and head of cabinet to the president of the European commission.

As a lawyer, I agree with them. Article 50 provides for the notification – not of withdrawal but of an “intention” to withdraw. In law, an “intention” is not a binding commitment; it can be changed or withdrawn. Article 50(5) is, moreover, clear that it is only after a member state has left that it has to reapply to join. Had the drafters intended that once a notification had taken place, a member state would have to request readmission (or seek the consent of the other member states to stay), then article 50(5) would have referred not just to the position following withdrawal, but also following notification. Such an interpretation is in line with the object and purpose of article 50.

Read more …

Britain’s empire days are over. Hard to accept?!

• British MPs Should Be Ashamed Of Supporting Regime Change In Tehran (Oborne)

Britain’s prime minister has been fighting a valiant, losing battle to rescue British relations with Iran in the wake of US President Donald Trump’s reckless attempts to wreck them. But last week Theresa May was dealt a devastating blow to her authority after several Tory MPs defied her by going to Paris for a meeting designed to promote regime change inside Iran. This event is the latest sign that the prime minister and her foreign secretary, Boris Johnson, are facing a mutiny over Iran. Former cabinet minister Theresa Villiers was among senior Tories who travelled to Paris last week to hear Rudy Giuliani, former mayor of New York and Trump’s highly influential lawyer, call for the downfall of the Iranian government.

This meeting was a direct defiance of British government policy, which aims to save the Iran nuclear deal intact, and is against engineering a change of government in Iran. Indeed, Johnson assured Parliament in May that “I do not believe that regime change in Tehran is the objective that we should be seeking.” The overwhelming majority of Conservative MPs favoured Trump’s policy of dismantling the JCPOA – and condemned May’s policy of keeping it Three Tory MPs – along with one Labour MP – travelled to the event, organised by the National Council of Resistance of Iran, a front organisation for Mojahedin-e-Khalq Organisation (MEK), once listed by the US as a terror organisation. There is no question that these reflect a powerful and vocal body of sentiment inside the Conservative Party.

Read more …

Sanctions on Iran conflict with lower oil prices.

• OPEC’s Dilemma (Lacalle)

The fundamental problem of the last OPEC meeting is the evidence of the division between two groups. One, led by Iran, which wants higher prices and deeper cuts, and the two largest producers, Saudi Arabia and Russia, who support a more diplomatic position. Iran wants to continue increasing its own production yet wants OPEC to maintain the group cuts. Iran also faces the backlash of sanctions on exports. Today, the US exports more oil than Iran. Saudi Arabia and Russia have the lowest production costs and stand as the ones to gain more from a moderate production increase. Oil prices will not collapse and they will sell more oil.

The agreed increase in production is a good political move from Saudi Arabia because it shows that it does not aim to harm the world economy or its customers, only to return to a stabilized oil market. With this, Saudi Arabia cements its position as the Central Bank of oil. The winners from this carefully designed agreement are Saudi Arabia, Russia, and the Gulf countries. Those who enjoy lower costs and can generate higher revenues from improved exports. The agreement sets production higher but no individual quotas, so improvement in output is left to the countries with the highest excess capacity. Iran, Venezuela, Ecuador and other countries that have production and geopolitical problems suffer the most. The commitment is likely to add 600,000-650,000 barrels per day to the market.

A figure of 32 million barrels per day is agreed, but the real increase will not be the optical one million barrels per day, but rather the aforementioned 650,000 one. This figure, at a time when oil inventories are in line with the average of the past five years, relieves inflationary pressures and eliminates the risk that the US Administration will take political measures against the OPEC countries. Trump had already alerted OPEC that it could not keep inflating prices artificially. In addition to showing the tension between these two sides, the OPEC summit also reveals that the cartel has much less market control than they would like to have. The fact that the price has only reached 80 dollars a barrel (compared to 100-130 dollars a few years ago) indicates that their ability to manipulate prices to 100 dollars per barrel is very low.

Read more …

How does that country still function?

• Turkey Sacks Another 18,500 State Employees In New Decree (AFP)

Turkish authorities ordered the dismissal of more than 18,500 state employees including police officers, soldiers and academics, in a decree published on Sunday. The Official Gazette said 18,632 people had been sacked including 8,998 police officers in the emergency decree over suspected links to terror organisations and groups that “act against national security”. Some 3,077 army soldiers were also dismissed as well as 1,949 air force personnel and 1,126 from the naval forces. Another 1,052 civil servants from the justice ministry and linked institutions have been fired as well as 649 from the gendarmerie and 192 from the coast guard. Authorities also sacked 199 academics, according to the new decree, while 148 state employees from the military and ministries were reinstated.

Turkey has been under a state of emergency since the July 2016 attempted overthrow of President Recep Tayyip Erdogan. Turkish media dubbed the decree as the “last” with officials indicating the state of emergency could end as early as Monday. The emergency has been renewed seven times and the latest period is officially due to end on July 19. Over 110,000 public sector employees have been removed previously from their jobs via emergency decrees since July 2016 while tens of thousands more have been suspended in a crackdown criticised by Ankara’s Western allies. [..] Sunday’s decree shut down 12 associations across the country as well as three newspapers and a television channel.

Read more …

Recommended by Jim Rickards. The changing shapes of world order.

• Trump, the Dragonbear, and the Bipolar World Order 2.0 (M.)

Just a few days ago, in an unexpected move, Ray Dalio, the founder of world’s largest hedge fund -Bridgewater Associates- announced on Social Media: “Today is the first day of the war with China.” And a day earlier, Trump made a statement about the upcoming summit in Helsinki, claiming that: “Putin’s fine. He’s fine.” One might wonder what the former message has to do with the latter, and how all these contradictory statements fit together. In fact, they make sense if seen through the prism of an emerging bipolar World Order 2.0, which is about the systemic rivalry between the USA and China, and the unique position of Russia in between.

It has become apparent that most of the decision-makers, experts and scholars mistook the end of the US-led unipolarity for the beginning of multipolarity and thus overlooked the emergence of the Global System bipolarity as well as the creation of the Dragonbear (an unique systemic bond between China and Russia as opposed to the USA). Furthermore, the Global System has become too unsustainable regarding its main (man-made) socio-economic components of global finance, monetary, economy, trade, and energy networks, and, as a consequence, is now being shaped by the unprecedented systemic rivalry between the USA and China, with Russia, the EU and India being the free riders, which leads to unexpected new alliances like the Dragonbear or the one between the USA and India, and might also result in the breakup of the NATO and the EU in the long term.

Back in 1975, the West and the Soviet Union bloc met in Helsinki to negotiate and sign a final act with ten principles that have been guiding their relations until now, among which the principle of sovereign equality, the refraining from the threat or use of force, inviolability of frontiers, the territorial integrity of states, and the non-intervention in internal affairs. Indeed, these principles were constantly deteriorated by the actions of single states or organisations over the last decades but were at least recognised by all actors of the global affairs.

However, Trump and Putin might declare new rules of the game, which will reflect the growing great powers competition and the flux of the global affairs. The meeting between Trump and Putin tête-à-tête will most likely address the broader picture of the geopolitical and geoeconomic interests of the two actors in the Middle East and beyond, particularly avoiding sensitive issues such as Ukraine, Syria (except for the sake of coordination efforts) or energy sanctions, and will specifically focus on North Korea, Iran and nuclear non-proliferation.

Read more …

The old world order no longer works.

• Trump’s Existential Threat To The Empire (Stockman)

[..] the NATO subservient think tanks and establishment policy apparatchiks are harrumphing up a storm, but for crying out loud most of Europe’s elected politicians are in on the joke. They are fiscally swamped paying for their Welfare States and are not about to squeeze their budgets or taxpayers to fund military muscle against a nonexistent threat. As Justin Raimondo aptly notes, “Finally an American president has woken up to the fact that World War II, not to mention the cold war, is over: there’s no need for US troops to occupy Germany. Vladimir Putin isn’t going to march into Berlin in a reenactment of the Red Army taking the Fuehrer-bunker – but even if he were so inclined, why won’t Germany defend itself?”

Exactly. If their history proves anything, Germans are not a nation of pacifists, meekly willing to bend-over in the face of real aggressors. Yet they spent the paltry sum of $43 billion on defense during 2017, or barely 1.1% of Germany’s $3.8 trillion GDP, which happens to be roughly three times bigger than Russia’s. In short, the policy action of the German government tells you they don’t think Putin is about to invade the Rhineland or retake the Brandenburg Gate. And this live action testimonial also trumps, as it were, all of the risible alarms emanating from the beltway think tanks and the 4,000 NATO bureaucrats talking book in behalf of their own plush Brussels sinecures. But now comes the piece de resistance. The Donald is going to Helsinki to make peace with Vlad Putin, and just in the nick of time.

Hopefully, in one-fell swoop they can reach an agreement to get the US military out of Syria; normalize the return of Crimea and Moscow’s historic naval base at Sevastopol to the Russian motherland; stop the civil war in Ukraine via a mutually agreed de facto partition; stand-down from the incipient military clashes from the Baltic to the Black Sea; and pave the way for lifting of the absurd sanctions on Russian businessmen and citizens. Needless to say, time is of the essence. Every hour that the Donald wastes tweeting, bloviating about his beloved Mexican wall, sabotaging American exports and jobs and watching Fox & Friends reruns is just more opportunity for the vast apparatus of the Deep State (and most of his own top officials) to deep-six the Donald’s emerging and thoroughly welcome rendition of America First.

Read more …

It’s about energy.

• Are All Societies Destined To Destroy Themselves? (Wef)

In order to illustrate how civilization-planet systems co-evolve, Frank and his collaborators developed a mathematical model to show ways in which a technologically advanced population and its planet might develop together. By thinking of civilizations and planets—even alien ones—as a whole, researchers can better predict what might be required for the human project of civilization to survive. “The point is to recognize that driving climate change may be something generic,” Frank says. “The laws of physics demand that any young population, building an energy-intensive civilization like ours, is going to have feedback on its planet. Seeing climate change in this cosmic context may give us better insight into what’s happening to us now and how to deal with it.” Using their mathematical model, the researchers found four potential scenarios that might occur in a civilization-planet system:

Die-off: The population and the planet’s state (indicated by something like its average temperature) rise very quickly. Eventually, the population peaks and then declines rapidly as the rising planetary temperature makes conditions harder to survive. A steady population level is achieved, but it’s only a fraction of the peak population. “Imagine if 7 out of 10 people you knew died quickly,” Frank says. “It’s not clear a complex technological civilization could survive that kind of change.” Sustainability: The population and the temperature rise but eventually both come to steady values without any catastrophic effects. This scenario occurs in the models when the population recognizes it is having a negative effect on the planet and switches from using high-impact resources, such as oil, to low-impact resources, such as solar energy.

Collapse without resource change: The population and temperature both rise rapidly until the population reaches a peak and drops precipitously. In these models civilization collapses, though it is not clear if the species itself completely dies outs. Collapse with resource change: The population and the temperature rise, but the population recognizes it is causing a problem and switches from high-impact resources to low-impact resources. Things appear to level off for a while, but the response turns out to have come too late, and the population collapses anyway. “The last scenario is the most frightening,” Frank says. “Even if you did the right thing, if you waited too long, you could still have your population collapse.”

Read more …

Lovely treatise on how capitalism shaped leisure time.

• Inventing the Weekend (Jacobin)

Although “commemoration of the Resurrection” was the official reason early Christians began observing the day of rest on Sunday instead of Saturday, they were also eager to differentiate themselves from Jews, and by the fourth century this eagerness translated into the codification of the Sunday Sabbath in ecclesiastical and civil legislation. A millennium and a half later, the Sabbatarian movement pointed to this antisemitism, along with the undue influence of pagan sun worship among early Christians, as reason to reestablish Saturday as the Christian Sabbath day. Temporal, political concerns should not have affected the observance of the true day of rest, so their argument went.

There’s another reason Saturday was re-sanctified in the nineteenth century, which has to do with the “illegitimacy” not of Sunday but of Monday. In preindustrial England, according to a poem of George Davis’s, “people of all ranks, at times, obey[ed] / the festive orgies of this jocund day.” Not just skilled laborers but all classes of workers observed “Saint Monday” as a holiday from work, much to the chagrin of emergent entrepreneurs. While it’s true that many workers spent Saint Monday in the alehouse and at cock or dog fights, it was also a day of relaxation and sociability, a day when the public gardens would be “literally swarming with a well-dressed, happy and decorous body of the working classes.”

The fact that Monday was often taken as a day of rest was a consequence of the typical rhythm of preindustrial work, in which workers would assemble to complete a certain set of tasks, work intensely for a few days until those tasks were completed, and then be at play half the week. In E. P. Thompson’s portrayal, “the work pattern was one of alternate bouts of intense labour and of idleness, wherever men were in control of their own working lives.” The idea that work was to be done during a set amount of regularly apportioned time, time that was well demarcated from another time of “leisure,” was still rather foreign. In 1806, a committee appointed by the House of Commons to assess the state of woolen manufacture in England found an “utmost distaste on the part of the men, to any regular hours or regular habits.” Work was a set of tasks, and when those tasks were completed, play began.

Read more …

America 2.0

Apr 072018
 
 April 7, 2018  Posted by at 12:32 pm Finance Tagged with: , , , , , , , , , , , ,  24 Responses »


Dorothea Lange Farmers’ supply co-op. Nyssa, Malheur County, Oregon 1939

 

 

It’s Dr. D again. Told you he’s on a roll. He remains convinced America can re-invent itself. If only because it must.

 

 

Dr. D: Herbert Stein’s Law states “What Can’t Go On Forever, Doesn’t.” This is a neat summary of the present trade and currency imbalance. China makes real goods and the U.S. consumes them by typing digits on a keyboard. This is the very definition of what cannot go on forever.

 

• How long do you expect a nation can make nothing and consume everything?

• How long do you expect a nation without manufacturing, without a workforce, and now without a viable military to remain pre-eminent?

• How long does wealth and influence remain in a nation that makes nothing, does nothing, and knows nothing?

 

Reminds me of that other Law: “A fool and his money should be parted as soon as possible”, for to be wealthy, and helpless, and dumb, is not a combination that lasts for very long.

Since China cannot send the U.S. free goods forever, ergo, they won’t. That means slowly or quickly, now or later, they will cut us off. Right now it appears that can never happen, but I assure you it will very soon. And what will the U.S. do then? Actually, that’s very simple: the U.S. will have to close a $600B trade deficit instantly. Roughly, that means the U.S. will no longer import $600B worth of goods and be $600B/year poorer, or $2,000/year per person. Nor is this unusual. History is rife with examples of nations that once were prosperous and were suddenly cut off: Spain and Greece come immediately to mind. So how does this happen?

The Core nation, the trading hub has failed dozens of times in history, from Venice to Holland, Spain to England, and although most of history was on a gold standard, nevertheless the same thing happened: repudiation and devaluation of the currency. That’s why a U.K. Pound is no longer a troy pound of pure silver ($192) and why the U.S. Dollar is no longer 1/20th ounce of gold ($267). So let’s run down how this might unfold.

Like other empires, the U.S. rose to prominence with hard work and industry. Like other empires, this personal and physical industry was the foundation of an effective military. This military eventually stood alone, leaving the U.S. to set the rules of trade, the rules of diplomacy, and the rules of conduct. Like other nations, the U.S. bent those rules in its own favor, both early and late. Like other nations, the natural way to take advantage was to run an overvalued currency, which draws in capital from all trading partners worldwide, creating a 100-year spiral of wealth and influence that seems truly endless.

However math, the cruelest of Mother Nature’s laws, is not fooled. If you bend the rules to create market distortions, those distortions are indeed created. If there were fair trade, a gold standard, a nation that increases their wealth would find its currency rise. A rising currency would dampen manufacturing and efficiency, the gold would flow back out, and the unfair advantage would be corrected. But only in a free market. Any market on Earth has an Army, and that Army’s job day and night is to make sure that unfair advantage does NOT end. Ask Smedley Butler.

 

Mother Nature is never deterred. However long it takes, she waits. Lacking fair trade, an abnormally strong currency does the only other thing it can: destroy the Core nation’s industry, totally and completely. More certain than a nuclear explosion, economics will not miss a single spot until the wrong is righted and the truth is out. At first the low-gain commodity industries go: mining, shipping, smelting; then their sooty kinsmen: heavy rail, ships, ports, transportation.

After that go the lighter industries: manufacturing, stamping, autos, and so on up to mainframes, silicon chips and phones, and with them, their children, manufacturing processes and R&D. However, as London and NY showed, you can forestall currency correction even now by moving market distortions into services and financial engineering. At this point, however, the Core nation has nothing left but Banks, Universities, and the Government/Military, and no underlying economy to support them.

However, what Charles Hugh Smith calls the fiefdoms of monopoly cartels and apparatchiks of the 1% now lead an empty parade, horse-whipping the uncompliant 99% into supporting an economy that exists only in their minds. And then “What can’t go on, doesn’t.” The empire collapses from within, to the total surprise of historians of the 1%, and the total lack of interest of the 99%, for whom it had already collapsed decades before.

And of the other side? Thanks to the overly-high currency of the Core nation, the perimeter nation has an artificially LOW currency. They didn’t do that, because they are by definition small and weak and aren’t using an army to set the rules. The artificially low currency leads to low costs, low labor, high enterprise, and in the mirror image of the Core nation, the constant INCREASE in manufacturing. The increase in wealth, and the addition of commodity goods, then heavy industry, then manufacturing, then R&D. Whose fault is that? Who used a worldwide army to enforce the very rules that gutted their homeland? Not the Vandals; not China. It was Rome; it was D.C.

What is this whole imbalance based on? In our case, the artificially strong dollar, backed by a worldwide U.S. military. So how must it end? With a weak dollar, falling real markets, and a U.S. military returning home.

You say this can’t happen? Yet it must happen. To say otherwise means China will give us free goods for 10,000 years, and the U.S. will get always weaker that whole time. So how does the transition go?

The U.S. financial bulwark cracks, being highest and most based on psychology, not reality, very likely in conjunction to a military failure or withdrawal, as in empire finance, the military and currency are equivalent. Slowly, then rapidly, the tide flows out, the U.S. dollar gets weaker, the Chinese Yuan gets stronger, and the whole process reversed as it should have done years ago.

 


(mind the log scale)

 

Mother Nature isn’t fooled, and those 70 years of repression and manipulation are made up in a few years.

Down on the ground, what happens is not that China shuts off free imports to the U.S. directly, with a political embargo, what happens is the U.S. is seen as a has-been and the U.S. dollar falls in purchasing power on the world market, raising the price of foreign goods in a “free” and “open” marketplace. Lacking manufacturing and the military power to stop it, the U.S. can’t hold off Mother Nature and the laws of physics any more.

Knowing this to be inevitable, how would a nation prepare? For one thing, you would need to kick-start your industry, post-haste. Anything that can be made internally will find its prices stabilize and not rise. Yet before the currency rates are corrected this face overwhelming headwinds. Second, as income will be lost and the borders will be shut off, you need to switch the focus of taxation from income to tariffs, from finance to real goods.

Third, you need to open your pipelines, ports, and infrastructure, and expand the required steel, oil by any means necessary, even armed standoffs. Fourth, you’ll need to shove the culture away from government support and subsidies that will soon disappear, and into self-reliance and productivity. Firth, you’ll need to downsize the government and especially the military, which will and must return home. Any of those platforms sound familiar?

 

Despite what you read, it’s not all bad. Just as “The arrogant people will be brought down, and high and mighty people will be humbled”, “Every valley shall be raised up, and every mountain and hill shall be made low; and the crooked shall be made straight, and the rough places smooth.”

 

This is a master reversal of all manipulations, of all imbalances that have reached extremes. As the U.S. – China trade deficit must balance, we know that Chinese goods must rise. But that also means the cost of production for U.S. goods must fall. This cost-advantage puts Americans back to work just as it did the Chinese, while the rise of the Yuan will make China rich, but less productive.

What’s more, as matters reverse, the U.S. will raise prices on their exports: food and oil, two things China must have and cannot get elsewhere. Agriculture is at an all-time, 1,000 year low and must rise. Stocks and housing are at an all-time high and must fall. In a reversal, the high prices fall, the low prices rise, that’s obvious. That’s what “reversal” means, that’s what “extreme” means.

As for manufacturing, the world is changing fast. Even China is opening “dark” factories that employ no people, only robots. That will be true here as well, which undercuts any labor savings they once had. There’s a few problems, however: robotic mega-factories only work with very large scale of identical goods that can source reliable, high-quality inputs. If oil is too high, and/or shipping or marketing fractures, those factories scale down, retool more, and therefore require more people than presently.

How is China going to have huge robotic mega-factories if half their export market can no longer afford them? If the U.S. and China split the market, aren’t all those factories half the size of present? Since the U.S. will now have low-cost people and raw materials, what advantage does China bring to offset shipping and tariffs? The “market” isn’t uniform. There was worldwide mass-integration of manufacturing between India and England and the world in 1910 too, yet it’s didn’t persist; it changed.

 

One way it can change is to leapfrog China. We hear about how the U.S. is a has-been as we are supporting legacy copper telephones while the 3rd world goes directly to fiber and cell, and this is true. However, China has mainlined on low-price, low-profit, mass-manufacturing. Why would anyone compete with them there? It’s irrational. Build a baseline and let them have all the low-profit, environment-destroying work they want, the U.S. can’t and won’t beat them there.

We can beat them by leapfrogging into technology that’s out there, but no one is revealing yet, things they haven’t done, but Americans are good at doing: innovating, high-tech, medical. Much as I hate high-tech and its panacea as an answer, yet I believe there are goods, ideas out there that can transform the way things work.

Look at the rapid development and uptake of LEDs for example. The patent office is filled with them, and an outsized number are American. We have superconducting maglev, field physics, material science of no-weight foam, color-shifting paint, hyperconducting graphite, and transparent concrete to name a few. All there, all unused. Let’s make an example case in a very large, very quiet investment.

Medical and Biotech are to some extent used up, with overpriced, mass-market pharmaceuticals being rejected by price and form even by the wider population. But that’s so last-century. The new biotech is going to take a blood or DNA sample and synthesize a drug specifically for your blood and DNA. They are going to create another organ, a blood transfusion no one but you can use.

In one way, this may be more expensive, and that’s good for profits, but in another way, they will work for you, much better and guaranteed, and therefore fix your health faster, spare you useless drugs, bad side effects, and actually work, and therefore be cheaper. What does it take to make them? A complete revolution in drug manufacturing. Multi-billion dollars’ worth of equipment, extremely unique development and patents, a 20 year head start.

 

Could you sell such a thing to the Chinese? You bet. Could they get off retail manufacturing and scoop us on it? Not a chance. So you see how such a thing could happen, even with a U.S. dollar falling and a hard readjustment ahead. And that’s just one.

If boutique and robotic goods are the new industries, what do we do with 200 million unemployed? We won’t have 200 million. That’s a consequence of the distorted extreme of our finance, our centralization, our currency. For one thing, we have only 100 million now and a lower dollar will definitely restore the competitive advantage of highly-productive U.S. workers. At the same time, if work requires fewer workers, we will find a solution. Why?

Because you can’t have 200 million unemployed. Not even 100 million. The resulting inequity and income disparity can and has caused a revolution. Faced with that, any nation will adjust because they must or perish. As difficult as Americans can be, they are a practical people above all. This has happened to dozens of nations in the past: Spain, France, Germany, England, China, Japan, and they all still exist. Things rotated out in the big wheel of time. New things were made and the old ones faded away, and we will too.

We’re going back to being just one of many nations, and a fair and productive one too. There are ways and we will find them. How can I be so sure? Because “What Can’t Go On Forever, Doesn’t,” and it won’t this time either.

 

 

Coming Apart: The Imperial City At The Brink

Jun 182017
 
 June 18, 2017  Posted by at 1:00 pm Finance Tagged with: , , , , , , , , ,  6 Responses »


Thomas Cole Destruction of Empire 1836

 

The Conflicts Forum, directed by former British diplomat and MI6 ‘ranking figure’ Alastair Crooke, sent me another unpublished article by Alastair and asked if the Automatic Earth would publish it. But of course. Previous articles by Alastair published here are: ‘End of Growth’ Sparks Wide Discontent in October 2016, Obstacles to Trump’s ‘Growth’ Plans in November 2016 and What is this ‘Crisis’ of Modernity? in January 2017.

Here’s Alastair again:

 

 

Alastair Crooke: David Stockman routinely refers to President Trump as the ‘Great Disrupter’. But this is not a bad quality, he insists. Rather, it is a necessary one: Stockman argues (my paraphrasing) that Trump represents the outside force, the externality, that tips a ‘world system’ over the brink: It has to tip over the brink, because systems become too ossified, too far out on their ‘branch’ to be able to reform themselves. It does not really matter so much, whether the agency of this tipping process (President Trump in this instance), fully comprehends his pivotal role, or plays it out in an intelligent and subtle way, or in a heavy-handed, and unsubtle manner. Either serve the purpose. And that purpose is to disrupt.

Why should disruption be somehow a ‘quality’? It is because, during a period when ‘a system’ is coming apart, (history tells us), one can reach a point at which there is no possibility of revival within the old, but still prevailing, system. An externality of some sort – maybe war, or some other calamity or a Trump – is necessary to tip the congealed system ‘over’: thus, the external intrusion can be the catalyst for (often traumatic) transformational change.

Stockman puts it starkly: “the single most important thing to know about the present risk environment [he is pointing here to both the political risk as well as financial risk environment], is that it is extreme, and unprecedented. In essence, the ruling elites and their mainstream media megaphones have arrogantly decided that the 2016 [US Presidential] election was a correctible error”.

But complacency simply is endemic: “The utter fragility of the latest and greatest Fed bubble could not be better proxied than in this astounding fact. To wit, during the last 5,000 trading days (20 years), the VIX (a measure of market volatility) has closed below 10 on just 11 occasions. And 7 of those have been during the last month! … That’s complacency begging to be monkey-hammered”, Stockman says.

Former Presidential candidate, Pat Buchanan concurs: “President Trump may be chief of state, head of government and commander in chief, but his administration is shot through with disloyalists plotting to bring him down.

We are approaching something of a civil war where the capital city seeks the overthrow of the sovereign, and [to achieve] its own restoration. Thus far, it is a nonviolent struggle, though street clashes between pro- and anti-Trump forces are increasingly marked by fistfights and brawls. Police are having difficulty keeping people apart. A few have been arrested carrying concealed weapons.

That the objective of this city is to bring Trump down, via a deep state-media coup, is no secret. Few deny it.”

The extraordinary successful ‘manufacture’ and ‘parachuting-in’ of Macron into the French Presidential election by the French élite, precisely has given to the globalised Deep State (including their US counterparts), renewed confidence that Europe and America’s slide towards ‘populism’, is indeed a ‘correctable error’. European élites now can barely contain their revived schadenfreude at the Brexiters’ and at the Populists’ presumed discomfort (see here).

 


Thomas Cole Consummation of Empire 1836

 

But despite the palpable danger to the integrity of the political system itself, Stockman notes, “it is no inconsiderable understatement to suggest that the S&P 500 at 2440 is about as fragile as the ‘market’ has ever been.

Any untoward pinprick could send it into a tailspin … Doug Kass said it best in his recent commentary: “Over history, as we have learned, a Minksy Moment develops when investor sentiment becomes complacent after long periods of prosperity and the data is ignored, and doesn’t seem to matter anymore, as I wrote in “It’s a ‘Bohemian Rhapsody’ Market: Nothing Really Matters … to investors.” In short, the market has become ‘zombie’ (in the sense of residing within a psychological defence mechanism – as, when to contemplate the alternative – simply is too threatening to the psyche) [emphasis added].

Daniel Henninger, in a Wall Street Journal op-ed, writes: “Donald Trump’s election has caused psychological unhingement in much of the population. But the Trump phenomenon only accelerated forces that were plummeting in this direction before the 2016 election…

“Impossible to miss, though, is how jacked up emotional intensity has become in American politics. The campaign rallies of both Mr. Trump and Bernie Sanders often sat on the edge of violence. Reporters describe political town hall meetings as full of “angry” voters. Shouting down the opposition in these forums or on campus has been virtually internalized as standard behavior. Refusal to reason is the new normal. And then, the unreason is euphemized as free speech.

Explaining away these impulses as a routine turn of the populist political cycle is insufficient. Something more permanent is happening.”

It is not, of course just the markets which are threatened by unperceived risk. Trump shall not be forgiven for challenging the sacrosant meme of a world divided between (good) ‘liberal’ democracies (led by the US and its European allies) and (bad) illiberal autocracies (led today, by President Putin’s Russia): by snubbing Nato and withdrawing from the Paris climate agreement, Professor Michael Klare writes, “we’ve been told, President Trump is dismantling the liberal world order created by Franklin D Roosevelt at the end of World War II”.

 


Thomas Cole Destruction of Empire 1836
 

An offence, it seems, against something somehow sacral: recently, US comedienne Kathy Griffin posted a video of herself holding the bloody, severed head of Donald Trump. “But that wasn’t the end of it” Henninger notes. “We may assume that as Ms. Griffin was creating her video, the artists at New York’s Public Theatre, were rehearsing their production of Julius Caesar, the one in which Central Park audiences watch ‘Caesar’ as a blond-haired Donald Trump, who is pulled down from a podium by men in suits, and assassinated with plunging knives … Whatever once fastened the doors of people’s minds to something secure and stable has become unhinged.”

Mike Vlahos (Professor at the US Naval War college and John Hopkins) tells us that, as a military historian and global strategist, he became curious to know just why it is that ‘world systems’ do ‘come apart’. His first, intuitive sense was that their collapse generally was brought about by some massive external force such as war, pestilence or famine, and by the concomitant mass migrations of peoples.

But when he and his students completed their research, he concluded that though these factors had often played an important part, they were not the prime cause of the system coming apart. Rather, he identified a number of key triggers:

· The élites became stratified, and politics frozen
· The peoples’ allegiance became taken for granted, at the same time that the élites chose to ignore threats to the peoples’ way of life
· Social mobility declined, and change is fiercely resisted
· Rather, élites work to maximize their wealth and status.
· Elite authority becomes excessively militarized – and justified as ‘saving civilization’.

He concludes from this study, “the situation that we inhabit today […] here in the imperial city in Washington DC, is that it is absolutely hollowed out … it is incapable of offering anything to its own people, the American people … I think we have reached a point where there is no possibility of revival within the current system that exists. The current system is set upon … is determined to eat itself out in a kind of civil war that is coming, and at the end of that, it will be done, will be finished”.

“The Methoni, one of the great nations of the late Bronze Age, had this same problem with the élites and the 1% that we have today, and they were overthrown. That’s 3300 years ago, and it keeps happening again and again. And the very structure of the decadent relationships in late periods where élites refuse to accommodate, refuse to adapt, refuse to be sensitive to needs of the larger whole of society, means this has to happen. There has to be an overthrow … for things eventually to get better, to be renewed. In other words, you can’t renew from within”.

Is this the situation today? The pre-conditions that Professor Vlahos relates, in terms of élite hubris, self-regard, and disdain for the real concerns of people are there (the polarization of US society at the US election provides the empirical evidence for this). And Stockman, in calling Trump the ‘Great Disrupter’ plainly implies that he might be precisely the ‘externality’ (coming from outside the élite) – that might tip things ‘over’. This surely is what Stockman means when he warns about ‘the present risk environment’ being extreme.

Of course, the usual retort is that Trump offers no coherent alternative conceptual vision for the future, but only seized successfully upon a number of key insights: the power of cultural nationalism, the pain felt by the casualties of globalism, the impact of a hollowed-out US economy, and the need to put America first. This is true. These insights do not constitute a vision for the future, but why should one expect that, from the ‘Disrupter’? His ‘agency’ is that of catalyst, not that of final ‘constructor’. That comes later.

 


Thomas Cole Desolation of Empire 1836

 

So, from whence does ultimate societal renewal come? The classic answer is that after ‘disruption’ nothing much is left standing amidst the (metaphoric) ruins of whatever stood as the reigning ‘modernity’. Historically, renewal was effected through a communal ‘reaching back’- beyond the roots of whatever represented the contemporary crisis – to delve back, deep into the archetypal cultural history of a people. The rummaging in collective memory, allows a narrative to shape, about why the present ‘hurt’ befell its people, and to bring forward, transformed into contemporary meaning, some ‘solution’: a new meta-historical understanding.

Plainly, this (a type of spiritual renewal) is not President Trump’s ‘bag’. (Steve Bannon’s the more so, perhaps?)

What does all this mean in practical terms? First, it suggests that most of us still prefer not to address the stark reality that “the objective of this city (DC), is to bring Trump down, via a deep state-media coup” and the bitter political trench warfare, which this portends. We prefer to rest in complacency, (as zombies for now), until a crisis squarely hits us – in a personal way.

Secondly, thoughts of an easy return to the status quo ante (such as via Vice-President Pence standing-in), is problematic (Macron’s election in France notwithstanding). Since the élites (all of them), have, in their ‘war’ against ‘populists’ and deplorables, totally lost legitimacy and authority for a substantive part of their populations. And they will not – cannot – adapt. For, that is their nature. This is the moment, Professor Vlahos notes, when a system – i.e. US operational governance – begins to ‘come apart’. Individuals, cabals within government, whole departments of state, look to their own self-awarded ‘authority’, rather than to that of the government as mandated by the electorate.

Thus we have this past week, the Senate voting 97-2 to impose further sanctions on Russia. Another wrench jammed into Trump’s foreign policy wheels – and explicitly conceived to paralyse and impede the President.

Thirdly, the intent is – like some Amazonian reptile venom – to ‘bite’ him with so much innuendo and assorted investigations and further allegations, that Trump, like the reptile’s victim, remains awake – but incapable of moving a muscle: A true zombie, in fact, as the reptile feeds on its living corpse.

Fourth, this zombified US President, will shortly face the requirement to negotiate with Congress an exit from a bubbling financial sphere soaring upwards, whilst a moribund real economy trails downwards – under pressure from the fast-approaching debt-ceiling deadline. The Senate’s slap at the President’s face with the Russia sanctions vote suggests it is more likely that he will be tossed another spanner: this time aimed at the wheels of the ‘Trump reflation’ programme.

What other insights might history offer? Two, perhaps: Professor Vlahos, during his discussion with John Batchelor, the latter points out that, even at the very moment that the hub of the Roman Empire already had fallen apart, the collapsing Empire was celebrated the most, when it was imitated at the furthest edges of Empire: by the peoples of Gaul and Germany, for example. Are we not seeing the same today, in Europe, as Merkel and Macron vow to keep the liberal, globalist values of the American Empire alive — at the edges of the American Empire — in Europe?

And lastly, the constituency that historically led renewal? Professor Vlahos: “The Roman legions, the Czarist armies, the German Imperial armies and the Ottoman armies”.

The Pentagon élites should note well.

 

 

America, the Waning Days

Apr 122017
 
 April 12, 2017  Posted by at 8:25 pm Finance Tagged with: , , , , , , ,  8 Responses »


Frederick Carl Frieseke Girl In Blue Arranging Flowers 1915

 

Potential earthquakes and black swans are right ahead of us. What else is new? On April 16, Turkey has a referendum to decide whether Erdogan will become de facto supreme ruler. What happens if he loses the referendum is completely unclear, undiscussed even, but it’s obvious a loss would have the country shake on its already shaky foundations.

The Turkish economy is in horrible shape and Erdogan’s post-coup firings (hundreds of thousands) and jailings (tens of thousands) have made large parts of society unattended. The biggest of which may well be the army; you can’t fire large numbers of officers and pilots and expect to retain the same strike effectiveness.

Erdogan’s ongoing war on the Kurds is also turning against him, or at least internationally. Both Russia and the US acknowledge the important role Kurdish forces play in the battle against ISIS, and they’re not going to turn against them. So while Turkey demands a major role in neighboring Syria, it has essentially been put off-side, or benched.

Russia maintains (some of) its boycotts of Turkish products ($260 million worth of tomatoes) that were the result of Erdogan downing a Russian jet in late 2015, and the refuses to deliver arch-enemy Gülen, despite Michael Flynn’s best efforts. This means, by the way, that the country simply hasn’t provided irrefutable proof of the man’s role in the coup (if it was ever a real coup).

If Erdogan cannot come up a winner on Sunday, he would lose a lot of face. And he might lose more than that. Of course one must question if it’s even a option that the Turkish people vote NO, and that that would subsequently be announced as the referendum result. He controls just about anything in the country already; why not this too, by right or by might?!

 

Second black swan: France. It could be a genuine black one, as in unexpected. Less than two weeks before the first round of the presidential election, all of a sudden another contender has come to the fore. Far left Jean-Luc Mélenchon was never given any chance of winning, but one TV debate later his popularity is rising fast.

The French have long been tired of their political system, and this time around that could mean all established parties are out. Even perhaps including Emmanuel Macron, who doesn’t belong to a party but is still perceived as a member of the establishment, no matter how hard he tries not to be.

Come round two on May 7, voters might be faced with the -stark- choice between far left and far right, with a big gaping empty hole in between. That would leave no option of a ‘safe choice’, the big hope of everyone who doesn’t like Marine Le Pen. It would also leave no candidate who unwaveringly supports the euro or even the EU.

In fact, it’s ironic -make that funny- to what extent far left and far right ideas ‘meet in the middle’. Add to the irony that Melenchon’s rise makes a Le Pen presidency that much more likely, because a ‘communist’ is seen as at least as dangerous as Le Pen. That might give her the undecided votes she will need to prevail.

 

US Secretary of State Rex Tillerson is in Moscow, he’s way out of his league, and he knows it. His task is, if you read between the lines, to deliver warnings and threats to Putin and Russian Foreign Minister Lavrov, but both are not only at least as smart as Rex, they have the many years of experience in international politics that he woefully lacks.

The White House issued a ‘we can prove it was Assad, and it was sarin’ report yesterday, but they can not. The sarin accusation even makes little sense given the photos of people attending to the victims with bare hands. Accusing Russia of being complicit in Assad attacking his own people with gas/chemicals doesn’t really fly either.

Tillerson said earlier in the week that Russia is either ‘incompetent or complicit’, that it should have made sure Assad had no chemical arsenal. But a 2013 treaty between the US and Russia established a UN body, the Organisation for the Prohibition of Chemical Weapons (OPCW), that is responsible for that. And the US is part of that body, and as such co-responsible.

And yes, there will be people saying that Russia delivered chemical capacity to Assad despite the treaty. But why should it? That question falls into the same category as why Assad would use chemicals to begin with at this point in time. It makes no sense, there is no logic. But then in the US logic has been in short supply for a while, certainly when politics are concerned.

Tillerson apparently was told to tell Russia that it has to stop supporting Assad or else, but that is just real dumb. Syria is Russia’s only haven in the Middle East, and there’s no chance they will give it up. And why should they? Would the world be a better place if the US can do whatever it wants in the region? Haven’t the utterly failed regime changes in Iraq and Libya done enough damage?

Sure, Assad may be a shaky asset. But what about the Saudi’s and their western-supported obliteration of the entire nation and peoples of Yemen? Want to look at some pictures that can drive Ivanka to tears? You won’t see them in your media, and neither will she. It’s all just biased nonsense, and by now it’s hard to see how Trump will find his own way in, let alone find his way out of, this foreign swamp.

Threatening Russia is certainly not that way. But sure, the President must feel eager to disprove the unproven non-stop allegations of collaboration between him and Putin. And the one-sided attacks did indeed stop only when the bombs started to fall. It’s all so predictable it makes you want to puke all over your morning paper all over every single morning, Groundhog Day style.

 

The New York Times was awarded a Pulitzer for “agenda-setting reporting on Vladimir Putin’s efforts to project Russia’s power abroad”. I kid you not. The American press has lost all concerns about its own credibility, and the Pulitzers follow them with a vengeance. And that same press did a weather-vane like 180 as soon as 59 Tomahawks were aimed and fired at an abandoned airport in the sand.

They were anti-Trump mongers the whole time, and changed like a leaf on a tree in seconds, to become pro-war mongers. It’s something to behold. They love him! The starkest example, among too many to keep count of, was presented in a publication named The Hill, which we are apparently supposed to take serious. It’s just another WaPo and NYT clone, but this thing by “General Anthony J. Tata, Opinion Contributor” sums it all up too nicely to ignore:

Trump’s Adherence To American Values Demonstrates His Commitment To Protecting Us

In the wake of Tuesday’s Syrian chemical weapons attack on innocent civilians, President Barack Obama will be remembered as America’s modern day Neville Chamberlain, the infamous United Kingdom Prime Minister who appeased Nazi Germany in 1938 by signing the Munich Agreement, setting the stage for the holocaust. Contrast Obama’s negligence with President Donald Trump’s decisive action a mere two days following the Syrian violation of international law. The Syrian government used chemicals to brutalize its citizens in Khan Sheikhoun.

President Trump immediately denounced the attacks, labeling them, “An affront to humanity.” Less than 72 hours later he ordered the launch of 60 cruise missiles to destroy the airfield from which the bomb delivering airplanes departed. If Obama’s passivity in the face of weapons of mass destruction (WMD) deployed in Syria in 2013 lends to Chamberlain comparisons, President Donald Trump’s military action against Syria this week compares favorably to Winston Churchill, Chamberlain’s effective wartime successor.

Just as Chamberlain and Churchill viewed Nazi Germany differently, how could two modern day American presidents see essentially the same horrifying pictures of chemical weapons attack victims and come to two decidedly different conclusions about their terror and an effective response?

Jarring images of Tuesday’s sarin nerve agent attack on its citizens that circulated the world this week were similar to those that went viral in 2013: bodies torqued in gruesome death poses, patients oozing bodily fluids from their mouths and noses, and children running blind through the streets. In 2013, an unimpressed President Obama found a passive, ineffective diplomatic solution relying on unreliable Russian oversight. Syria obviously maintained and built its weapons of mass destruction stockpiles. The United Nations was even in on the deal, declaring that there were no more chemical weapons in Syria.

There’s so much stupidity and mendacity in that, you really have to take some time out to let it sink in. But it’s also very representative of American media these days. CNN, WaPo, NYT, they’re all full of people who by now must feel really shortchanged because Trump hasn’t dropped many more bombs on Syria, and they’re more than willing not to show us the pictures of the children those bombs would maim and kill. After all, how many pictures have you seen of Yemen’s death and famine?

When Trump told Maria Bartiromo that “we’re not going into Syria”, you can bet your buttocks lots of executives behind the desks there were thinking of one thing only: how do we get him to do it anyway? They still have hope there’ll be a major war soon, I guarantee you that.

But Putin is not going to move an inch, not on Syria and not on anything else. He knows the US army can do a lot of damage, but it can’t win. It hasn’t won an actual war in many decades, and it won’t win this one either if whoever’s in Washington decides to start it.

Before I started writing this I was thinking about Rip van Winkle rather than Groundhog Day. The whole media 180, and the war cries, are exactly like they were in 2003. Now, Rip van Winkle allegedly slept for 20 years, not 14, but hey, details. The cute thing about the Rip van Winkle story is also in the details:

When he awakens, Van Winkle discovers shocking changes: his musket is rotting and rusty, his beard is a foot long, and his dog is nowhere to be found. He returns to his village, where he recognizes no one. Van Winkle returns just after an election, and people are asking how he voted. (Wikipedia)

That election thing is priceless. But Rip woke up to find his entire world completely changed. Whereas today’s hollow US war talk is something we’ve seen before, and many times. That’s more Groundhog Day style. There must be a way to connect the two stories in a way that fits today’s reality. Whoever finds it is in Hollywood blockbuster territory.

War is far too popular in America. It’s scary. Not least of all because the US has zero chance of winning. For the same reasons, by the by, that it can’t fix its health care system.

America as a country, a society, is not effective enough anymore to win anything, there’s no chance of a concerted effort, it’s too inward looking and distracted by TV-shaped reality and ‘social’ media, and its entire society is aimed only at maximizing profit at the expense of one’s own neighbors. America has turned into cats in a sack.

But yes, these are often the most dangerous times in the existence of an empire. The waning days. The downward slope. The swans that will pop up in that are definitely black; there’s no predicting those graceful beauties.

Debt Rattle December 22 2015

Dec 222015
 
 December 22, 2015  Posted by at 9:06 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle December 22 2015


DPC Old Absinthe House, bar, New Orleans 1906

• Global Investors Are More Exposed To Interest-Rate Hikes Than Ever (BBG)
• The Keynesian Recovery Meme Is About To Get Mugged, Part 1 (Stockman)
• Brent Oil Hits 11-Year Low As Global Supply Balloons (Reuters)
• US Gas Prices Fall Below $2 – In Some Places Under $1.60 (MarketWatch)
• The Real “Death Cross” Of Oil Markets (ZH)
• Risk Of Insolvency Hangs Over UK High Street Retailers (Guardian)
• UK Economy Concerns As Household Debt Balloons To £40 Billion (PA)
• The Bank of Japan’s $2.5 Billion Plan to Buy Non-Existent ETFs (BBG)
• China ‘Suspends’ Another Unofficial PMI Data Set For A ‘Major Adjustment’ (ZH)
• Zimbabwe To Make Chinese Yuan Legal Currency After Beijing Cancels Debts (AFP)
• Russia, EU Trade Talks Fail, Kiev Set To Face Retaliation (Reuters)
• Political Uprising In Spain Shatters Illusion Of Eurozone Recovery (AEP)
• Portugal Taxpayers Face €3 Billion Loss After 2nd Bank Bailout In 2 Years (ZH)
• Christmas Present (Jim Kunstler)
• Et Tu, Brute? – How Empires Die (Thomas)
• Do We Need The Fed? (Ron Paul)
• Apple Says UK Surveillance Law Would Endanger All Customers (BBG)
• Half of World’s Coal Must Go Unmined to Meet Paris Climate Target (BBG)
• It’s ‘Almost Too Late’ To Stop A Global Superbug Crisis (PA)

Because the entire system is leveraged to the hilt.

• Global Investors Are More Exposed To Interest-Rate Hikes Than Ever (BBG)

With any luck, the world economy will eventually be strong enough for central banks to follow the U.S. Federal Reserve in ending what has been an unprecedented period of extremely low interest rates. If and when they do, they’ll run straight into the same issue that the Fed now faces: Raising rates will precipitate unusually large losses for investors. Over the past several years, investors have gone to great lengths in their search for returns in a low-rate environment. They’ve done so in part by buying longer-maturity bonds, which tend to offer higher yields but are also more sensitive to changes in rates. One gauge of this risk is effective duration, which estimates the percentage decline in a bond’s price given a one-percentage-point increase in yield.

The measure is near all-time highs in the U.S., according to a report issued last week by the Office of Financial Research. The situation globally is no less precarious. Consider the effective duration for the BofA Merrill Lynch Global Broad Market Index, which tracks about $45 trillion in investment-grade bonds issued in major currencies – including government, corporate, mortgage and other asset-backed securities. As of last week, it stood at 6.6, meaning that a one-percentage-point increase in yield would wipe almost $3 trillion off the value of all the bonds included in the index. That’s a larger potential loss than at just about any point since the index’s inception in 1996. Here’s how that looks:

The high level of interest-rate risk illustrates a dilemma for central bankers everywhere. The power of traditional monetary stimulus depends in large part on the willingness of people and companies to borrow for new projects and purchases. But as the debt burden grows, it makes markets and the entire economy more susceptible to rate increases. It can also undermine the effect of rate cuts, as borrowers increasingly struggle under the weight of their existing obligations.

Read more …

“These academic pettifoggers are so blinded by their tinker toy macro-model that they can’t even see the flashing red lights warning of recession just ahead.”

• The Keynesian Recovery Meme Is About To Get Mugged, Part 1 (Stockman)

Yellen said at least one thing of importance last week, but not in a good way. She confessed to the frightening truth that the FOMC formulates its policies and actions based on forecasts of future economic developments. My point is not simply that our monetary politburo couldn’t forecast its way out of a paper bag; that much they have proved in spades during their last few years of madcap money printing. Notwithstanding the most aggressive monetary stimulus in recorded history – 84 months of ZIRP and $3.5 trillion of bond purchases – average real GDP growth has barely amounted to 50% of the Fed’s preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.

What I am getting at is that it’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed US economy and that balance sheets don’t matter. Actually, balance sheets now matter more than anything else. The $225 trillion of debt weighing on the world economy – up an astonishing 5.5X in the last two decades – imposes a stiff barrier to growth that our Keynesian monetary suzerains ignore entirely. Likewise, the economy is now seamlessly global, meaning that everything which counts such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks is planetary in nature. By contrast, due to the narrow range of activity they capture, the BLS’ deeply flawed domestic labor statistics are nearly useless. And they are a seriously lagging indicator to boot.

Nevertheless, Yellen & Co. are obsessed with the immeasurable and largely irrelevant level of “slack” in the domestic labor market. They falsely view it as a proxy for the purported gap between potential and actual GDP. Not surprisingly, they are now under the supreme illusion that the labor slack has been largely absorbed and the output gap nearly closed. So they are raising money market rates by a smidgeon to confirm the US economy’s strength and that the Keynesian nirvana of full employment is near at hand. No it isn’t! These academic pettifoggers are so blinded by their tinker toy macro-model that they can’t even see the flashing red lights warning of recession just ahead.

Read more …

Oil went up a whiff overnight. I always look at the spread between WTI and Brent. The smaller it gets, the higher the risks. Usually, it hovers between $2-3. Right now, it’s at 50 cents.

• Brent Oil Hits 11-Year Low As Global Supply Balloons (Reuters)

Brent oil cratered to its lowest price in more than 11 years on Monday, as demand for heating oil slumped on warmer-than-normal temperatures and traders tested for a bottom. U.S. crude remained above its 2009 low and settled up a penny a barrel as traders squared positions ahead of the January contract’s expiration. The February contract declined and analysts expect stockpiles to build again this week, signaling further oversupply in already glutted market. Concerns about swelling global crude supply and slow demand sparked by economic weakness in China have been recurring themes during this year’s rout. Analysts said the market was still testing for a bottom. “The key in finding the bottom of the market comes in a tightening of the supply side,” said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.

OPEC and Russia will keep producing at high volumes, increasing pressure on U.S. producers to throttle back production, he said. “I think we’re getting ready for another round of capex cuts in North America,” he said. Heating oil futures weighed down the crude complex, hitting a new July 2004 low warmer-than-expected temperatures have hit seasonal demand. “The market is waiting for the next announcement,” said Tyche Capital Advisors senior research analyst John Macaluso. “The equity markets are waiting on crude oil, and crude oil is waiting for a bounce before shorts will come back into the market.” Crude short-sellers will be reluctant to return before U.S. crude recovers to $35.50, he said. Global oil production is running close to record highs. With more barrels poised to enter the market from nations such as Iran and Libya, the price of crude is set for its largest monthly percentage decline in seven years.

Read more …

“..1% of stations selling gas at $1.59 a gallon..”

• US Gas Prices Fall Below $2 – In Some Places Under $1.60 (MarketWatch)

Christmas came early for U.S. drivers on Monday, as the national average gasoline price fell below $2 a gallon for the first time since March 2009. AAA put the average U.S. gas price at $1.998 per gallon on Monday, while fuel-price tracking service GasBuddy.com calculated the national average at $1.995 a gallon. That’s the lowest price by either measure since March 25, 2009. Unsurprisingly, drivers can credit a global glut of crude oil for the steady pressure on gas prices. Brent crude the global oil benchmark, plumbed levels last seen in 2004 on Monday, while the January contract for the U.S. benchmark CLF6, -0.20% West Texas Intermediate crude, was down 49 cents, or 1.4%, ahead of expiration at $34.24 a barrel on Nymex. The most-active February contract is down 1.3% at $35.58.

“In areas where there are no refinery bottlenecks, we’ve been able to see the falling price of crude oil translated directly into cheaper gas prices,” said Patrick DeHaan, senior petroleum analyst at GasBuddy.com, in a phone interview. Nymex reformulated gasoline futures for January delivery slumped 6.33 cents, or 5%, to $1.2114 a gallon. So how low are gas prices? In much of the country, the price is already well under $2 a gallon, AAA notes, with 1% of stations selling gas at $1.59 a gallon. On a state-by-state basis, Missouri has the lowest average price at $1.77, followed by Oklahoma and South Carolina at $1.78, and Tennessee and Kansas at $1.79.

Read more …

China. That’s all.

• The Real “Death Cross” Of Oil Markets (ZH)

The ‘death cross’ of these two energy market indicators is all one needs to know about the oil market… As Bloomberg notes, total industry oil stocks reported by the International Energy Agency rose for a third month, increasing by 0.5% to the highest on record at 2.99 billion barrels. China’s Beige Book, released last week, showed further economic deterioration in one of the world’s largest commodity-consuming nations in the fourth quarter. Until these two indicators change direction, lower-er for longer-er will remain.

Read more …

Lots of last legs there.

• Risk Of Insolvency Hangs Over UK High Street Retailers (Guardian)

A string of retailers could face insolvency in the new year with tough trading on the high street in the run-up to Christmas leaving businesses fighting for survival, two influential industry bodies have warned. Widespread discounting and warmer-than-average weather have cranked up the pressure on high street retailers over the festive period. In the last few years a number of high street retailers have called in administrations either just before or after Christmas, including Woolworths, HMV, Zavvi, and Jessops. Retailers generate roughly 40% of their annual profits between October and December, underlining the importance of the period. However, if a high street business struggles during the festive season then its death knell is typically the quarterly rental payment they have to make to landlords at the end of December.

Atradius, one of the world’s largest trade credit insurers, has warned that retailers face a “perfect storm” that could lead to a bleak start to 2016 and a “fresh wave of insolvencies”. The comments from Atradius are significant because if a credit insurer refuses to back a retailer then suppliers will be unable to insure their orders with the business and could decide not to provide it with products. Owen Bassett, senior risk underwriter at Atradius, said: “Those who went into the fourth quarter needing – rather than wanting – a strong performance could be looking at a troubled future. “Experience tells us that when retailers need an exceptional seasonal sales period and then hit financial difficulty, we often see failures in the first quarter. It is not unusual in this sector to be loss-making during Q1 and with the first payment of quarterly rent due in January it can be difficult to survive after a poor Q4.”

Read more …

Private debt. Should have a lot more attention. And not just in Britain.

• UK Economy Concerns As Household Debt Balloons To £40 Billion (PA)

Families are expected to run up £40bn of debt this year, sparking fears about Britain’s economic recovery. Labour raised concerns that millions of households would face “serious hardship” if interest rates rise and warned the borrowing trend could harm the economy. The latest Office for Budget Responsibility (OBR) forecasts have found that households have moved from a surplus of £67bn in 2010, the year the coalition took power, to a £40bn deficit this year. Unsustainable borrowing is on course to near the levels reached in the run-up to the 2008 financial crash, according to Labour. Seema Malhotra, the shadow chief secretary to the Treasury, said: “George Osborne is relying on millions of British families going further into debt to hit his growth targets.

“This is risky behaviour from a chancellor whose policy decisions are hurting, not helping, British families. Alarm bells should be ringing. There is a real risk that millions of families will face serious hardship if interest rates start to rise. “Of course families need access to credit and the ability to borrow to invest for the future. George Osborne should be seeking to rebalance the economy away from an over-reliance on borrowing and debt. “Labour is clear about the need for a strong and sustainable economic recovery. Osborne’s short-term political decisions risk real long-term damage to the finances of millions of British families and the nation’s economy.” The former business secretary Sir Vince Cable warned Britain was returning to “old and unhappily discredited” methods of economic growth. He told the Independent: “We’re back on the treadmill of growth being sustained by personal borrowing. Much of it is against an inflating housing stock.

Read more …

Abenomics is a different way of saying anything goes.

• The Bank of Japan’s $2.5 Billion Plan to Buy Non-Existent ETFs (BBG)

Haruhiko Kuroda has a new plan. He’s going to buy $2.5 billion of something that doesn’t exist. Markets were roiled Friday after the Bank of Japan unveiled measures including purchasing exchange-traded funds that track companies which are “proactively making investment in physical and human capital.” The central bank will spend 300 billion yen ($2.5 billion) a year from April buying such securities to offset the market impact as it resumes selling stocks purchased earlier from financial institutions. The only problem is such ETFs have never been made in Japan, at least not yet. Even as fund providers start hundreds of so-called “smart beta” products that choose stocks based on everything from dividends to volatility, ETFs that pick companies for how they deploy their cash are rare in global markets.

“These kinds of ETFs don’t exist now. Using capital spending as a factor in deciding what goes in an ETF is quite unusual,” said Koei Imai, who oversees $25 billion of ETFs at Nikko Asset Management Co. in Tokyo. “I think the message from the BOJ is for us to go out and make them.” The central bank is aware such products aren’t yet available and in the meantime will buy ETFs tracking the JPX-Nikkei Index 400, a government-backed equity measure started last year that chooses companies based on return on equity and operating profit. The BOJ also already purchases ETFs linked to the Nikkei 225 Stock Average and Topix index and owns roughly half of the market for ETFs in Japan.

Read more …

How to kill confidence.

• China ‘Suspends’ Another Unofficial PMI Data Set For A ‘Major Adjustment’ (ZH)

For the second time in two months, an economic data series that indicate drastically weak performance in China has been “suspended.” Having seen Markit/Caixin’s flash gauge of China’s manufacturing discontinued in October (having plunged notably divergently from the government’s official data), Bloomberg reports that the publishers of the alternative China Minxin PMI will stop updating the series to make a “major adjustment.” Guess which time series was just “suspended”…

As Bloomberg details,

Release of the unofficial purchasing managers index jointly compiled by China Minsheng Banking Corp. and the China Academy of New Supply-side Economics will be suspended starting this month, the Beijing-based academy said in an e-mailed statement Monday, about six hours before the latest monthly data were scheduled for release.

Minxin’s suspension is the second in recent months as policy makers in the world’s second-largest economy struggle to arrest a deceleration in growth. Another early estimate of China’s manufacturing sector, a flash gauge of a purchasing managers index compiled by Markit Economics and sponsored by Caixin Media, was discontinued Oct. 1. Minxin’s PMI readings are based on a monthly survey covering more than 4,000 companies, about 70% of which are smaller enterprises. The private gauges have shown a more volatile picture than the official PMIs in the past year.

The manufacturing PMI declined to 42.4 in November from 43.3 in October, while the non-manufacturing reading fell to 42.9 from 44.2, according the the latest release. The factory gauge fell to a record low of 41.9 in August. China’s official PMI from the National Bureau of Statistics fell to a three-year low of 49.6 in November.

Read more …

Humor?

• Zimbabwe To Make Chinese Yuan Legal Currency After Beijing Cancels Debts (AFP)

Zimbabwe has announced that it will make the Chinese yuan legal tender after Beijing confirmed it would cancel $40m in debts. “They [China] said they are cancelling our debts that are maturing this year and we are in the process of finalising the debt instruments and calculating the debts,” minister Patrick Chinamasa said in a statement. Chinamasa also announced that Zimbabwe will officially make the Chinese yuan legal tender as it seeks to increase trade with Beijing. Zimbabwe abandoned its own dollar in 2009 after hyperinflation, which had peaked at around 500bn%, rendered it unusable. It then started using a slew of foreign currencies, including the US dollar and the South African rand.

The yuan was later added to the basket of the foreign currencies, but its use had not been approved yet for public transactions in the market dominated by the greenback. Use of the yuan “will be a function of trade between China and Zimbabwe and acceptability with customers in Zimbabwe,” the minister said. Zimbabwe’s central bank chief John Mangudya was in negotiations with the People’s Bank of China “to see whether we can enhance its usage here,” said Chinamasa. China is Zimbabwe’s biggest trading partner following Zimbabwe’s isolation by its former western trading partners over Harare’s human rights record.

Read more …

Europe’s dumb struggle with Moscow continues.

• Russia, EU Trade Talks Fail, Kiev Set To Face Retaliation (Reuters)

The EU failed to allay Russia’s concerns about Ukraine’s free-trade accord with the 28-nation bloc on Monday, leaving Kiev to face Russian retaliation through tighter bilateral trade rules from 2016. Closer ties between Ukraine and the EU, including the free trade deal, were at the heart of a battle for influence between Brussels and Moscow in Russia’s former satellite. When the then-Ukrainian president, Viktor Yanukovich, ditched the accord in early 2014 under pressure from Russia, protests erupted on the street of Kiev leading to a crisis in which he fled power and a pro-Europe leadership took over. The EU and Ukraine delayed implementation of their trade deal by a year out of deference to Moscow’s concerns that it could lead to a flood of European imports across its borders, damaging the competitiveness of Russian exports.

But comments by EU and Russian officials on Monday indicated that numerous meetings between the two sides to try to narrow differences and assuage Moscow’s concerns had failed. EU Trade Commissioner Cecilia Malmstrom raised doubts about the validity of the Russian concerns, saying some were “not real.” “We have been very open in listening to some of the concerns of Russia. Some of them we think are not real in economic terms. Some of them could potentially be real,” Malmstrom told a news conference following final talks in Brussels. Russian Economy Minister Alexei Ulyukayev, speaking in Brussels, said there was no deal and Moscow would scrap trade preferences dating back to 2011 for Ukraine as of 2016, when the bilateral EU-Ukraine deal will be implemented. “An agreement has not been reached. We were left with our concerns on our own and we are forced to safeguard our economic interest unilaterally,” Ulyukayev told reporters.

Read more …

A stalemate that seems to end in either a fragile left government or new elections.

• Political Uprising In Spain Shatters Illusion Of Eurozone Recovery (AEP)

Spain risks months of political paralysis and a corrosive showdown with Germany over fiscal austerity after insurgent movements smashed the traditional two-party system, leaving the country almost ungovernable. The electoral earthquake over the weekend in one of the eurozone’s ‘big four’ states has echoes of the shock upsets in Greece and Portugal this year, a reminder that the delayed political fuse from years of economic depression and mass unemployment can detonate even once the worst seems to be over. Bank stocks plummeted on the Madrid bourse as startled investors awoke to the possibility of a Left-wing coalition that included the ultra-radical Podemos party, which won 20.7pc of the votes with threats to overturn the government’s bank bail-out and to restructure financial debt.

Pablo Iglesias, the pony-tailed leader of the Podemos rebellion, warned Brussels, Berlin, and Frankfurt that Spain was retaking control over its own destiny after years of kowtowing to eurozone demands. “Our message to Europe is clear. Spain will never again be the periphery of Germany. We will strive to restore the meaning of the word sovereignty to our country,” he said. The risk spread on Spanish 10-year bonds jumped eight basis points to 123 over German Bunds, though there is no imminent danger of a fresh debt crisis as long as the European Central Bank is buying Spanish bonds under quantitative easing. The IBEX index of equities slid 2.5pc, with Banco Popular and Caixabank both off 7pc. Premier Mariano Rajoy has lost his absolute majority in the Cortes.

Support for the conservative Partido Popular crashed from 44pc to 29pc, costing Mr Rajoy 5m votes as a festering corruption scandal took its toll. The electorate punished the two mainstream parties that have dominated Spanish politics since the end of the Franco dictatorship in the 1970s, and which by turns became the reluctant enforcers of eurozone austerity. The Socialists (PSOE) averted electoral collapse but have lost their hegemony over the Left and risk being outflanked and ultimately destroyed by Podemos, just as Syriza annihilated the once-dominant PASOK party in Greece. It had been widely assumed that Mr Rajoy would have enough seats to form a coalition with the free-market and anti-corruption party Ciudadanos, but this new reform movement stalled in the closing weeks of the campaign.

“There is enormous austerity fatigue and the country as a whole has clearly shifted to the Left,” said sovereign bond strategist Nicholas Spiro. Yet the Left has not won enough votes either to form a clear government. “The issue now is whether Spain is governable. All the parties are at daggers drawn and this could drag on for weeks. I don’t see any sustainable solution. We can certainly forget about reform,” he said. Mr Spiro said Spain has already seen a “dramatic deterioration” in the underlying public finances over the last eighteen months, although this has been disguised by a cyclical rebound, the stimulus of cheap oil and a weak euro, and QE from Frankfurt. “They have simply gone for growth,” he said.

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Posterchild no more.

• Portugal Taxpayers Face €3 Billion Loss After 2nd Bank Bailout In 2 Years (ZH)

Back in August of 2014, Portugal had an idea. Lisbon would use some €5 billion from the country’s Resolution Fund to shore up (read: bailout) Portugal’s second largest bank by assets, Banco Espirito Santo. The idea, basically, was to sell off Novo Banco SA (the “good bank” that was spun out of BES) in relatively short order and use the proceeds to pay back the Resolution Fun. That way, the cost to taxpayers would be zero. You didn’t have to be a financial wizard or a fortune teller to predict what was likely to happen next. Unsurprisingly, the auction process didn’t go so well.

As we recounted in September, there were any number of reasons why Portugal had trouble selling Novo, not the least of which was that two potential bidders – Anbang Insurance Group and Fosun International which, you’re reminded, is run by the recently “disappeared” Chinese Warren Buffett – suddenly became far more risk-averse in the wake of the financial market turmoil in China. Talks with US PE (Apollo specifically) also went south, presumably because no one knows if this “good” bank will actually turn out to need more capital going forward given that NPLs sit at something like 20% while the H1 loss totaled €250 million thanks to higher provisioning for said NPLs. Now, the auction process has been mothballed and will restart in January. This matters because if the bank can’t be sold, the cost of the bailout ends up being tacked onto Lisbon’s budget.

The impact is substantial. In September, when the effort to sell Novo collapsed, the government restated its 2014 deficit which, after accounting for the bailout, ballooned to 7.2% of GDP from 4.5%. Portugal will tell you that this is only “temporary,” but let’s face it, if they haven’t managed to sell it by now, then one has to believe the prospects are grim – at least in terms of fetching anything that looks like a decent price. Well don’t look now, but Portugal’s seventh-largest bank, Banco Internacional do Funchal, now needs a bailout too. Banif (as it’s known) will be split into a “good” and “bad” bank, and its “healthy” assets will be sold to Banco Santander for €150 million. The government will inject up to €2.2 billion the European Commission said on Monday, to cover “future contingencies.”

Hilariously, the bailout was necessary because the bank was unable to repay a previous government cash injection. “The government injected €1.1 billion of fresh capital into the lender in January 2013 to allow it to meet minimum capital thresholds imposed by the banking regulator,” WSJ writes. For its trouble, Lisbon got a 60% stake in the bank and several hundred million worth of CoCos which the bank missed a payment on last year. “That,” WSJ goes on to note, “triggered close scrutiny by the European Commission, which opened an investigation into the legality of the state aid.” “The commission had said that Banif’s restructuring plan might not be enough to allow the bank to repay the state,” Bloomberg adds. “The Bank of Portugal said in the statement on Sunday that a ‘probable’ decision from the commission declaring the state aid illegal would create a shortage of capital at the bank.”

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“We now enter the “discovery” phase of financial collapse, where things labeled “capital” and “credit” turn out to be mere holograms.”

• Christmas Present (Jim Kunstler)

Theory du jour: the new Star Wars movie is sucking in whatever meager disposable lucre remains among the economically-flayed mid-to-lower orders of America. In fact, I propose a new index showing an inverse relationship between Star Wars box office receipts and soundness of the financial commonweal. In other words, Star Wars is all that remains of the US economy outside of the obscure workings of Wall Street — and that heretofore magical realm is not looking too rosy either in this season of the Great Rate Hike after puking up 623 points of the DJIA last Thursday and Friday. Here I confess: for thirty years I have hated those stupid space movies, as much for their badly-written scripts (all mumbo-jumbo exposition of nonsensical story-lines between explosions) as for the degenerate techno-narcissism they promote in a society literally dying from the diminishing returns and unintended consequences of technology.

It adds up to an ominous Yuletide. Turns out that the vehicle the Federal Reserve’s Open Market Committee was driving in its game of “chicken” with oncoming reality was a hearse. The occupants are ghosts, but don’t know it. A lot of commentators around the web think that the Fed “pulled the trigger” on interest rates to save its credibility. Uh, wrong. They had already lost their credibility. What remains is for these ghosts to helplessly watch over the awesome workout, which has obviously been underway for quite a while in the crash of commodity prices (and whole national economies — e.g. Brazil, Canada, Australia), the janky regions of the bond markets, the related death of the shale oil industry, and the imploding hedge fund scene. As it were, all credit these days looks shopworn and threadbare, as if the capital markets had by stealth turned into a swap meet of previously-owned optimism.

Who believes in anything these days besides the allure of fraud? Capital is supposedly plentiful these days — look how much has rushed into the dollar from the nervous former go-go nations with their wobbling ziggurats of bad loans and surfeit of production capacity — but what actually constitutes that capital? Answer: the dwindling faith anyone will pay you back next Tuesday for a hamburger today. We now enter the “discovery” phase of financial collapse, where things labeled “capital” and “credit” turn out to be mere holograms. Fed Chair Janet Yellen herself had a sort of hologramatic look last Wednesday when she stepped onto her Delphic platform to reveal the long-heralded interest rate news. Perhaps Mrs. Yellen is a figment conjured by George Lucas’s Industrial Light & Magic shop (now owned by Disney). What could be more fitting in a smoke-and-mirrors culture?

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Recognizable patterns.

• Et Tu, Brute? – How Empires Die (Thomas)

The state-owned Bank of China has been ordered by an American court to hand over customer information to the US. The bank has refused to comply, as to do so would violate China’s privacy law. The US court has subsequently ordered the Bank of China to pay a fine of $50,000 per day. Any guess as to how this is likely to turn out? China is a sovereign nation, halfway around the globe from the US, yet the US seems to feel that it’s somehow entitled to set the rules for China (as well as the other nations in the world). When China sees fit to develop islands in the South China Sea that it has laid claim to for centuries, it begins to hear threatening noises from the US military. A candidate for US president declares that he would buzz the islands with Air Force One, the Presidential jet, saying, “They’ll know we mean business.”

All over the world, those who live outside the US are increasingly observing that the US has become so drunk with power that they’re threatening both friend and foe with fines, trade restrictions, monetary sanctions, warfare, and invasions. And in so-observing, those of us who have studied the history of empires note that history is once again repeating itself. Time and time again, great empires build themselves up through industriousness and sound economic management only to subsequently decline into debt, complacency, and an entitlement mind-set. Over the millennia, empires as disparate as Persia, Rome, Spain, and Great Britain rose to dominate the world. Of course, we know how those empires turned out and, by extension, we might hazard an educated guess as to how the present American Empire will end.

In the final throes of empire-decline, we invariably observe the more sociopathic trends of a failing power, such as we’re seeing today from the US. First and foremost, any empire declines as a result of economic mismanagement. Decline from within (pandering to the populace with “bread and circuses”) and without (endless conquest and/or maintenance of dominance over far-flung geography) drain even the wealthiest government. Even eighteenth-century Spain, with all its billions in stolen New World gold, could not pay its ever-increasing bills and warfare-driven debt. Typically, the empire of the day enjoys the world’s greatest fighting force/armada/weapons build-up yet, when the money runs out, the war machine simply stops. Soldiers think more about their empty bellies than how much ammunition they have left.

Generals continue to issue orders, but they cease to be followed after the supply lines begin to dry up. And the leaders of a collapsing empire invariably make a fatal mistake: they assume that all the goodwill the empire gained when it was on its rise is permanent – that it will continue, even if the empire behaves like the world’s foremost bully. This is never the outcome. Invariably, as the decline nears its end, allies, without ever saying so, begin to withdraw their support. We see this today, as European leaders (America’s most essential allies) realise that the empire is becoming an arrogant liability and they begin cutting deals with the other side, as European leaders are now doing with Russia and others.

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“The only way to avoid future crashes is for the Fed to stop creating inflation and bubbles.”

• Do We Need The Fed? (Ron Paul)

Stocks rose Wednesday following the Fed’s announcement of the first interest rate increase since 2006. However, stocks fell just two days later. One reason the positive reaction to the Fed’s announcement did not last long is that the Fed seems to lack confidence in the economy and is unsure what policies it should adopt in the future. At her Wednesday press conference, Fed Chair Janet Yellen acknowledged continuing “cyclical weakness” in the job market. She also suggested that future rate increases are likely to be as small, or even smaller, then Wednesday’s. However, she also expressed concerns over increasing inflation, which suggests the Fed may be open to bigger rate increases. Many investors and those who rely on interest from savings for a substantial part of their income cheered the increase.

However, others expressed concern that even this small rate increase will weaken the already fragile job market. These critics echo the claims of many economists and economic historians who blame past economic crises, including the Great Depression, on ill-timed money tightening by the Fed. While the Federal Reserve is responsible for our boom-bust economy, recessions and depressions are not caused by tight monetary policy. Instead, the real cause of economic crisis is the loose money policies that precede the Fed’s tightening. When the Fed floods the market with artificially created money, it lowers the interest rates, which are the price of money. As the price of money, interest rates send signals to businesses and investors regarding the wisdom of making certain types of investments.

When the rates are artificially lowered by the Fed instead of naturally lowered by the market, businesses and investors receive distorted signals. The result is over-investment in certain sectors of the economy, such as housing. This creates the temporary illusion of prosperity. However, since the boom is rooted in the Fed’s manipulation of the interest rates, eventually the bubble will burst and the economy will slide into recession. While the Federal Reserve may tighten the money supply before an economic downturn, the tightening is simply a futile attempt to control the inflation resulting from the Fed’s earlier increases in the money supply. After the bubble inevitably bursts, the Federal Reserve will inevitability try to revive the economy via new money creation, which starts the whole boom-bust cycle all over again. The only way to avoid future crashes is for the Fed to stop creating inflation and bubbles.

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The more they can infringe on privacy, the more they will.

• Apple Says UK Surveillance Law Would Endanger All Customers (BBG)

Apple outlined its opposition to a proposed U.K. surveillance law, saying threats to national security don’t justify weakening privacy and putting the data of hundreds of millions of users at risk. The world’s most valuable company is leading a Silicon Valley challenge to the proposed U.K. law, called the Investigatory Powers bill, which attempts to strengthen the capabilities of law-enforcement agencies to investigate potential crimes or terrorist attacks. The bill would, among other things, give the government the ability to see the Internet browsing history of U.K. citizens. Apple said the U.K. government already has access to an unprecedented amount of data.

The Cupertino, California-based company is particularly concerned the bill would weaken digital privacy tools such as encryption, creating vulnerabilities that will be exploited by sophisticated hackers and government spy agencies. In response to the U.K. rules, other governments would probably adopt their own new laws, “paralyzing multinational corporations under the weight of what could be dozens or hundreds of contradictory country-specific laws,” Apple said. “The creation of backdoors and intercept capabilities would weaken the protections built into Apple products and endanger all our customers,” Apple said in an eight-page submission to the U.K. committee considering the bill. “A key left under the doormat would not just be there for the good guys. The bad guys would find it too.”

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And that will not happen.

• Half of World’s Coal Must Go Unmined to Meet Paris Climate Target (BBG)

Coal, the fuel that powered the industrial revolution, is in hiding. While the world still has 890 billion tons of reserves, enough to last more than 65 years, about half must stay underground if nations are to meet environmental limits agreed to earlier this month in Paris, Bank of America Corp. said in a report. Burning less coal is the easiest way to lower emissions blamed for climate change, the bank said. The pact reached by 195 nations doesn’t target specific fuels, yet coal remains the world’s largest source of planet-warming carbon dioxide. A global oversupply of the power plant fuel has pushed producers into bankruptcy and sent prices to at least seven-year lows. The Paris agreement only further diminishes prospects for a recovery.

“The latest carbon initiatives are the nail in the coffin for global coal,” Sabine Schels, Peter Helles and Franciso Blanch, analysts at Bank of America said in the Dec. 18 report. If emissions limits take hold, “50% of the world’s current coal reserves may never be dug out.” Coal demand stopped growing in 2014 for the first time since the 1990s as China’s economy cooled, the Paris-based International Energy Agency said Dec. 18. Coal for delivery to Amsterdam, Rotterdam, and Antwerp, an Atlantic benchmark, is trading near an eight-year low. Newcastle coal, a barometer for the Asia-Pacific market, is at the cheapest in records going back to 2008, data compiled by Bloomberg show.

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Last month, the warning came from China. Now it’s England and Wales.

• It’s ‘Almost Too Late’ To Stop A Global Superbug Crisis (PA)

It is “almost too late” to stop a global superbug crisis caused by the misuse of antibiotics, a leading expert has warned. Scientists have a “50-50” chance of salvaging existing antibiotics from bacteria which has become resistant to its effects, according to Dr David Brown. The director at Antibiotic Research UK, whose discoveries helped make more than £20bn ($30bn) in pharmaceutical sales, said efforts to find new antibiotics are “totally failing” despite significant investment and research. It comes after a gene was discovered which makes infectious bacteria resistant to the last line of antibiotic defence, colistin (polymyxins). The resistance to the colistin antibiotic is considered to be a “major step” towards completely untreatable infections and has been found in pigs and humans in England and Wales.

Public Health England said the risk posed to humans by the mcr-1 gene was “low” but was being monitored closely. Performing surgery, treating infections and even travelling abroad safely all rely to some extent on access to effective antibiotics. It is feared the crisis could further penetrate Europe as displaced migrants enter from a war-torn Middle East, where countries such as Syria have increasing levels of antibiotic resistance. Dr Brown told said: “It is almost too late. We needed to start research 10 years ago and we still have no global monitoring system in place. “The issue is people have tried to find new antibiotics but it is totally failing – there has been no new chemical class of drug to treat gram-negative infections for more than 40 years.

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Debt Rattle December 21 2015

Dec 212015
 
 December 21, 2015  Posted by at 10:27 am Finance Tagged with: , , , , , , ,  Comments Off on Debt Rattle December 21 2015


Lewis Wickes Hine Child Labor in Magnolia Cotton Mills spinning room, Mississippi 1911

• Brent Oil Slides to 11-Year Low as Producers Seen Worsening Glut (BBG)
• Siberian Surprise: Russian Oil Patch Just Keeps Pumping (BBG)
• This So-Called Rate Hike Is Completely Jerry-Rigged (E&M)
• Central Banks Created A Monster That Drives The Economy On The Way Down (King)
• Europe’s Year From Hell May Presage Worse To Come (Reuters)
• Spain Election Confusion: Conservatives Win But Podemos Are Stars (Ind.)
• Alexis Tsipras Pushes For IMF To Stay Out Of Next Greek Bailout (FT)
• After Jumping Over One Hurdle, Greece Faces Another With Pensions (CNBC)
• UK Buyers Need To Save For Up To 24 Years To Get On Property Ladder (Guardian)
• Canada’s Trudeau Cites Risk in Curbing Foreign Real-Estate Investment (WSJ)
• Kansas Suspends Debt Limits To Pay For Tax Cuts (Wichita Eagle)
• The Empire Files: ‘America’s Ship is Sinking’: Former Bush Official (TeleSur)
• The West Dominates Global Arms Sales (Forbes)
• The Refugee Crisis Is Forcing Germans To Ask: Who Are We? (Guardian)
• Vice Chancellor: Austria Can’t Accept Over 100,000 Migrants A Year (Reuters)
• My Baby, The Refugee: Mothers On The Hardest Journey Of Their Lives (Guardian)
• 18 Migrants Drown After Boat Sinks Off Turkey’s Southwestern Coast (Reuters)

China demand tanks. For oil, for everything. If there is to be a ‘Story of 2015’, it should be that. But instead, denial pushes it forward to 2016.

• Brent Oil Slides to 11-Year Low as Producers Seen Worsening Glut (BBG)

Brent crude slumped to the lowest level since 2004 amid speculation suppliers from the Middle East to the U.S. will exacerbate a record glut as they continue fighting for market share. Futures fell as much as 1.9% in London after a 2.8% drop last week. Producers are focusing on reducing costs amid the price decline, Qatar Energy Minister Mohammed Al Sada said Sunday at a meeting of Arab oil-exporting nations in Cairo. Drillers in the U.S. put the most rigs back to work since July, adding 17, data from Baker Hughes showed. Oil has fallen below levels last seen during the 2008 global financial crisis on signs the market’s oversupply will worsen. OPEC effectively abandoned output limits at a Dec. 4 meeting, while the U.S. on Friday passed legislation that lifted a 40-year ban on crude exports.

“There hasn’t been any significant signs of a pick-up in demand and we haven’t seen any meaningful cuts to production,” Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone. “Nothing has really changed in the oil market over the past couple of months apart from the price.” Brent for February settlement slid as much as 71 cents to $36.17 a barrel on the London-based ICE Futures Europe exchange, the lowest level in intraday trade since July 13, 2004. The contract was at $36.41 at 2:21 p.m. Singapore time after falling 18 cents to $36.88 on Friday, the lowest close since December 2008. Front-month prices are down 36% this year, set for a third annual loss. West Texas Intermediate for January delivery, which expires Monday, was 28 cents lower at $34.45 a barrel on the New York Mercantile Exchange. It dropped 22 cents to $34.73 on Friday, the lowest close since February 2009. The more active February contract was down 29 cents at $35.77. Total volume was close to the 100-day average.

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Nobody has a choice.

• Siberian Surprise: Russian Oil Patch Just Keeps Pumping (BBG)

In the fight for market share among the world’s oil producers this year, Russia wasn’t supposed to be a contender. But the world’s No. 3 producer has been pumping at the fastest pace since the collapse of the Soviet Union, adding to the flood on an already-swamped market and helping push prices to the lowest levels since 2009. Russia’s unexpected oil bounty this year is the result not of a new Kremlin campaign but of dozens of modest productivity improvements across the sprawling sector. Even pressured by plunging prices, as well as U.S. and European Union sanctions that cut access to much foreign financing and technology, Russian companies have managed to squeeze more crude out of some of the country’s oldest fields.

They have also brought new projects on line, offsetting steady declines in its core producing region of West Siberia. With a rise of 0.5% in the first nine months of 2015, Russia hasn’t boosted production as much as its larger rivals, the U.S. (up 1.3%) and Saudi Arabia (up 5.8%), according to Citigroup Inc. But having ignored OPEC’s calls earlier this year to join efforts to support prices by pumping less, Russia is keeping up with the cartel. “I know of no one who had predicted that Russian production would rise in 2015, let alone to new record levels,” said Edward Morse, Citigroup’s global head of commodities research. As recently as April, not even the Russian government thought 2015 would break the record.

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It’s about the banks.

• This So-Called Rate Hike Is Completely Jerry-Rigged (E&M)

It’s official. [Last] week the Federal Reserve raised the key overnight Fed Funds rate by 0.25%. The move was discussed, debated, argued, and telegraphed to death. We all heard about it until we hoped anything else financial would happen so we could finally put the tired story to rest. Now that the rate hike is on the books, we can start talking about outcomes, like how in the world the Fed intends to enforce the rate hike, what it means, and what comes next. The first one is not so simple, the second is annoying, and the third is downright depressing. But we’d better start planning for this today, because it will definitely affect our investments in the months to come! This rate hike is unlike any other. It comes on the heels of several quantitative easing programs that have dumped trillions of new dollars into the banking system.

Before the financial crisis, banks held about $60 billion of excess reserves at the Fed. These are funds above and beyond their required reserves. Today, excess reserves total about $2.6 trillion, which represents part of the money the Fed printed and then used to buy bonds. Typically this cash would have flowed into the economy through lending, but in 2008 the Fed started paying interest on excess reserves, which has kept the funds out of circulation. With so much extra cash in their accounts, banks have almost no need to borrow from each other. This creates a problem for the Fed because adjusting the rate at which banks lend to each other, called the Fed Funds rate, is how it historically enforced its interest rate policy. Starting this week, the Fed will have to use new, largely untested tools.

Since there is almost zero demand for money between banks, the Fed is increasing the interest it pays on excess reserves from 0.25% to 0.50%. At the same time, the Fed intends to lend out up to $2 trillion of its own stash of bonds in the overnight repurchase market. It will lend these to banks, money market funds, and other institutions for one night, with an agreement to buy the bonds back the next day at a slightly higher price, effectively paying the counterparty 0.25% interest. It’s more than a little backwards. The upshot is that instead of banks paying each other the higher rate of interest after a rate hike, now it’s the Fed, which means it’s really me and you, since the Fed gets money by taking value from the rest of us. At the new, higher rate, this is about $10.5 billion per year that is nothing but a gift to banks.

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“It depends less on fundamentals, and more on second-guessing what everyone else will do.”

• Central Banks Created A Monster That Drives The Economy On The Way Down (King)

The broader narrative – in which central bank liquidity has pushed up asset prices without fostering a similar improvement in the underlying economy – is one we find the vast majority of [fixed income] investors are sympathetic to. The only question is on the timing: no one wants to get out too early. This is one of the reasons we find the outlook for next year so difficult, and why there is so little agreement about it (even internally at Citi, never mind across the street). It depends less on fundamentals, and more on second-guessing what everyone else will do. Of course, markets are always to some extent like that, but self-reinforcing processes seem to have grown in importance in recent years. Rather than the economy driving markets, as is supposed to be the case, the risk is that central banks have now created a monster such that markets drive the economy, if not on the way up, then certainly on the way down.

Suppose, for example, that all does not go according to plan, and that the current squeeze higher in markets fades and even reverses. Perhaps oil price and EM weakness prove persistent, markets and the developed economies continue to prove more susceptible to these than they “ought” to, inflation breakevens fall, spreads widen and equities suffer even in the face of continuing share buybacks and record M&A. The scenario is far from unthinkable: indeed, it would simply be a continuation of everything we’ve seen in the past six months. What we find really alarming in such a scenario is not only that the safety net might be a while in coming, but that we are increasingly doubtful of how much support it would provide, at least initially.

Clearly the threshold for the Fed to reverse its hike, let alone do more QE or move to negative rates, is very high. And while the ECB should eventually do more, the bar to Draghi being able to spur the rest of the Governing Council to arms would now seem to have been raised. Worse, though, the broad market reaction to central bank stimulus seems to be waning. In credit, and in Europe, this is not too bad. We do still think negative rates and QE retain a positive effect, even if it seems to be driving almost as much money into US fixed income as into European credit and equities.

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Brussels is a crisis-producing machine.

• Europe’s Year From Hell May Presage Worse To Come (Reuters)

By any measure, it has been a year from hell for the European Union. And if Britons vote to leave the bloc, next year could be worse. Not since 1989, the year the Berlin Wall fell and communism crumbled across eastern Europe, has the continent’s geopolitical kaleidescope been shaken up so vigorously. But unlike that year of joyous turmoil, which paved the way for a leap forward in European integration, the crises of 2015 have threatened to tear the Union apart and left it battered, bruised, despondent and littered with new barriers. The collapse of the Iron Curtain led within two years to the agreement to create a single European currency and, over the following 15 years, to the eastward enlargement of the EU and NATO up to the borders of Russia, Ukraine and Belarus.

That appeared to confirm founding father Jean Monnet’s prediction that a united Europe would be built out of crises. In contrast, this year’s political and economic shocks over an influx of migrants, Greek debt, Islamist violence and Russian military action have led to the return of border controls in many places, the rise of populist anti-EU political forces and recrimination among EU governments. Jean-Claude Juncker, who describes his EU executive as the “last chance Commission,” warned that the EU’s open-border Schengen area of passport-free travel was in danger and the euro itself would be unlikely to survive if internal borders were shut. Juncker resorted to gallows humor after the last of 12 EU summits this year, most devoted to last-gasp crisis management: “The crises that are with us will remain and others will come.”

His gloomy tone was a reality check on the “we can do it” spirit that German Chancellor Angela Merkel – Europe’s pre-eminent leader – has sought to apply to the absorption of hundreds of thousands of mostly Syrian refugees. Merkel has received little support from her EU partners in sharing the migrant burden. Most have insisted the priority is sealing Europe’s external borders rather than welcoming more than a token number of refugees in their own countries. This is partly due to latent resentment of German dominance of the EU and payback for its reluctance to share more financial risks in the eurozone. Some partners also accuse Berlin of hypocrisy over its energy ties with Russia, while friends such as France, the Netherlands and Denmark are simply petrified by the rise of right-wing anti-immigration populists at home.

One of the sharpest rebuffs to sharing more of the refugee burden came from close ally Paris. Prime Minister Manuel Valls said of Merkel’s open door policy towards Syrian refugees: “It was not France that said ‘Come!’.” Merkel’s critics rounded on her at an end-of-year EU summit. Italy’s Matteo Renzi, backed by Portugal and Greece, attacked her refusal to accept a eurozone bank deposit guarantee scheme. The Baltic states, Bulgaria and Italy denounced her support for a direct gas pipeline from Russia to Germany at a time when the EU is sanctioning Moscow over its military action in Ukraine and has forced the cancellation of a pipeline to southern Europe. “It was pretty much everyone against Merkel in the room,” a diplomat who heard the exchanges said.

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Left wing coalition?

• Spain Election Confusion: Conservatives Win But Podemos Are Stars (Ind.)

Spain was plunged into the political unknown on Sunday night as no single party emerged as the winner in its closest general election since the end of the Franco dictatorship 40 years ago. The governing Popular Party (PP), led by the Prime Minister, Mariano Rajoy, secured 28.7% of the vote. That put the party in first place, but well below what it needs to maintain its majority. Mr Rajoy will now be given the first opportunity to persuade rival parties to join him in government before parliament reconvenes next month. But the night belonged to Podemos, and its leader, the ponytailed Pablo Iglesias. The left-wing party, which did not even exist two years ago, finished third with 20.6%. The mainstream left-wing opposition, the PSOE, just beat Podemos into second place with 22%.

For four decades the PP and the PSOE have dominated Spanish politics, swapping power at regular intervals. Their combined grip on office is now almost certainly at an end. The 60-year-old Mr Rajoy, who lost two elections before his landslide four years ago, now faces a fight for his political career. Throughout the campaign, commentators have suggested that the PP – always the favourite to emerge as the strongest single party – could overcome a hung parliament by striking a deal with the new centrist party Ciudadanos, which collected 15.2% of the vote. Crucially for Mr Rajoy, however, the election arithmetic – even with Ciudadanos – appears to work against him. Although he only needs a simple majority to be confirmed as prime minister when the Spanish parliament reconvenes on 13 January, he will need at least 176 seats to carry through his programme. According to the exit poll, which surveyed 180,000 people, a combination of the PP and Ciudadanos will not reach that magic number.

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Tsipras should pull the plug on the entire circus.

• Alexis Tsipras Pushes For IMF To Stay Out Of Next Greek Bailout (FT)

Greek prime minister Alexis Tsipras is pushing for the IMF to stay out of the country’s €86 billion third bailout, leaving the euro zone to take full responsibility for overseeing economic reforms. Mr Tsipras said in an interview with the Financial Times he was “puzzled by the unconstructive attitude of the fund on fiscal and financial issues”. He indicated that the IMF should leave his country’s third bailout to the euro zone when it decides whether to stay involved early next year. “We think that after six years of managing in extraordinary crisis, Europe now has the institutional capacity to deal successfully with intra-European issues.” Mr Tsipras’s assertion is likely to anger the German government, which has always insisted the IMF stay on board. Berlin values the fund’s technical expertise as much as it doubts the European Commission’s resolve.

Mr Tsipras also risks alienating the IMF, which is a strong advocate of debt relief for Athens while Germany and other euro zone members are strongly against debt writedowns, although he praised the fund’s support on this issue. Mr Tsipras said his government wanted to implement bailout measures as swiftly as possible with the aim of recovering sovereignty and getting rid of the so-called “troika” of bailout monitors from the commission, IMF and ECB. “We believe the sooner we get away from the [bailout] program the better for our country,” he said. “If Greece completes the first [progress] review in January, we’ll be covering more than 70% of fiscal and financial measures in the agreement.” Mr Tsipras also sounded confident that Greece would lift all remaining capital controls by March and resume borrowing on international capital markets “before the end of 2016”.

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Greece saw 12 seperate pension cuts so far.

• After Jumping Over One Hurdle, Greece Faces Another With Pensions (CNBC)

Don’t look now, but 2016 may bring a host of new troubles for Greece, which just last week barely overcame a dispute with its international creditors. Struggling to meet the demands of its bailout terms, the Hellenic Republic was forced on Thursday to scrap an effort to alleviate the burden of its austerity program on poorer Greeks. The demise of its so-called “parallel program”, although a short-term defeat for Prime Minister Alexis Tsipras, triggered the release of €1 billion in new bailout funding, expected to be disbursed as early as Monday. The money was part of an agreement that was sealed last summer.

Now, momentum shifts to pension reform, which is expected as soon as next month. The battle will take shape just as the Greek government appears to have won a hard-fought consensus with creditors on other outstanding issues such as deregulation and the establishment of a privatization fund – which must gather €50 billion by 2030. A pension system overhaul, however, is shaping up to be a big hurdle for Greece, a hard sell at a time when the country’s economic crises have sent unemployment skyrocketing above 25% and average income plummeting 25% over the last four years. “Both the government’s willingness to reform and its internal cohesion appear to be weak which does not bode well for the prospects of reform,” said Stathis Kalyvas, a professor of political science at Yale University and the co-director of its Hellenic Studies program.

“On the flip side, there is no real alternative for the government right now and the fact that it has already embarked on reform process following last summer’s agreement will be pushing it to implement it sooner rather than later”. Greece challenge is to convince its creditors that it can reduce government expenditure by up to 1% of its economy via pension cuts. But in a country where the social costs of austerity weighs on the mood of the general population, some think new pension adjustments could be the straw that breaks the camel’s back. Some of the government’s 153 MPs have already made clear that they will not support new cuts to pensions. If as few as three MPs vote against pension reform, analysts say it is likely the government will lose its majority, once again sinking back into political crisis.

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Prime candidate for dumbest term ever invented: housing ladder or property ladder. The UK, like Canada, Oz and New Zealand, is busy blowing up its own housing market, and refusing to halt it.

• UK Buyers Need To Save For Up To 24 Years To Get On Property Ladder (Guardian)

Homebuyers now have to save for up to 24 years to set aside a deposit large enough to buy them a foot on Britain’s housing ladder, according to new research. The Resolution Foundation thinktank has used the Bank of England’s latest survey of household finances to show that with house prices rising sharply, it would now take almost a quarter of a century for low- and middle-income households to accumulate a deposit on average, if they set aside 5% of their disposable income each year. It is lower than the peak reached before the financial crisis, but dramatically higher than the three years that was the norm in the 1980s and 1990s – and comes despite interest rates remaining at the emergency level of 0.5% set by the Bank of England in the depths of recession.

George Osborne has introduced a series of help-to-buy policies, including shared ownership schemes and taxpayer guarantees for mortgages for first-time buyers, and pledged in his spending review last month to “turn generation rent into generation buy”. But Resolution’s chief economist, Matt Whittaker, warned that help to buy may simply boost house prices, lifting them further out of the reach of lower-income households. “To the extent that these schemes have stoked demand and so propped up house prices in recent years, they have served to make homeownership even less attainable for many, while increasing the gains flowing to older homeowners who have been the main beneficiaries of the sustained housing boom,” he said.

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It’s an Anglo disease. Trudeau’s too scared to rock the boat, just like the others.

• Canada’s Trudeau Cites Risk in Curbing Foreign Real-Estate Investment (WSJ)

Imposing curbs on foreign investment in Canadian real estate could have unintended consequences for the broader economy, Canadian Prime Minister Justin Trudeau warned in a year-end interview with Canada’s Global Television Network, scheduled to air Christmas Day. Mr. Trudeau said there is a lack of “concrete data” about the impact of foreign buying on Canadian real estate, so moving ahead without proper information is risky. Mr. Trudeau’s comments emerge as a debate heats up over the impact overseas buyers may be having on housing affordability in the two of the country’s biggest housing markets—Toronto and Vancouver, British Columbia.

“You know you have to be cautious about decisions like that that are based on a single factor because at the same time [it] would potentially devalue the equity that a lot of people have in their homes right now,” Mr. Trudeau said, according to a transcript of the interview distributed by Global TV. “We have to be very, very cautious about restricting foreign investment in our country at a time where we know we need foreign investment in businesses, in resource development.”

Economists indicate strong sales and price growth in Toronto and Vancouver are supported by job creation in the two metropolitan areas, and an increasing number of people migrating to those urban centers as resource-rich parts of the country suffer under the weight of low commodity prices, as opposed to foreign investment. Meantime, Evan Siddall, the president of Canada Mortgage and Housing Corp., a government-owned mortgage insurer and housing agency, said in a recent speech that foreign investment could be contributing to the overvaluation of housing prices in the two markets. But, he said, the country lacks “accurate and reliable data” to determine the role foreign investment has on housing prices in the country.

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Almost funny.

• Kansas Suspends Debt Limits To Pay For Tax Cuts (Wichita Eagle)

Right-wing Republican lawmakers have operated under the radar to suspend all statutory limits on highway debt, and that unprecedented authority was recently used to issue record-breaking levels of long-term debt to pay for their reckless income tax cuts this year and next. Six lines buried deep in a 700-page appropriation bill last spring gave the Kansas Department of Transportation unlimited authority to issue debt, and in early December, without public disclosure, the agency used that authority to issue $400 million in highway bonds. State law requires those debt proceeds to be used for improving state highways, but do not expect that to happen. Lawmakers directed that $400 million and more be swept from the highway fund to help pay for the $700 million dip in state revenues caused by income tax cuts in 2012 and 2013.

The $400 million in new highway debt represents the largest single highway bond in state history and bumps up total outstanding highway debt to $2.1 billion, also a state record. The size of the bond issue was boosted 60% higher than planned last January in order to stabilize at least temporarily the precarious condition of state finances. Never before in state history has a state agency been granted unlimited powers to issue debt. Prior to this extraordinary action, state lawmakers had carefully placed specific limits on the state’s ability to borrow money. KDOT’s authority to issue unlimited debt continues through this fiscal year and next, so additional highway bonds could be issued at any time over the next 18 months. The governor and legislative leaders went to extraordinary lengths to hide their suspension of debt limits from public scrutiny.

The governor’s budget report made no mention of the suspension. Republicans who controlled the appropriations conference committee never raised the issue. The Statehouse press corps missed it as well. Further, neither the governor nor KDOT disclosed to the public that KDOT had issued $400 million in new, record-breaking debt. Only after press inquiries last week, two weeks after the fact, did KDOT acknowledge that new bonds had been issued.Gov. Sam Brownback and Republican legislative leaders have elevated the practice of confiscating highway funds to pay for other state obligations to a new level. In this year alone $436 million will be swept from the highway fund – the single largest transfer ever. That amount plus prior transfers during Brownback’s term brings their displacement of highway funds to a breathtaking total of $1.6 billion.

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How empires fall: overreach.

• The Empire Files: ‘America’s Ship is Sinking’: Former Bush Official (TeleSur)

“This ship is sinking,” retired U.S. Army Colonel Lawrence Wilkerson tells Abby Martin, adding that “today the purpose of US foreign policy is to support the complex that we have created in the national security state that is fueled, funded, and powered by interminable war.” The former national security advisor to the Reagan administration, who spent years as an assistant to Secretary of State Colin Powell during both Bush administrations reflects on the sad but honest reflection on what America has become as he exposes the unfixable corruption inside the establishment and the corporate interests driving foreign policy. “It’s never been about altruism, it’s about sheer power.”

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This does not include what’s sold domestically.

• The West Dominates Global Arms Sales (Forbes)

In 2014, sales of the world’s top-100 arms manufacturers totalled $401 billion, according to a report from the the Stockholm International Peace Research Institute. There was a moderate 1.5% decline in sales between 2013 and 2014, primarily due to lower sales for companies based in North America and Western Europe. Despite that decline, the West still dominates global arms sales. In 2014, seven out of the top ten largest arms-producing companies were American. Lockheed Martin grabbed the top spot for the first time since 2009, acccording to SIPRI, with arms sales totaling $37.5 billion. Boeing was in second place with $28.3 billion while Britain’s BAE Systems came third with just under $26 billion in sales.

Last year, the United States accounted for 54.4% of the world’s arms sales. The United Kingdom was in second place, with 10.4% while Russian companies had a 10.2% share of the market. Arms sales by Western European countries fell 7.4% in 2014 with only German and Swiss companies showing growth (9.4 and 11.2% respectively). Increasing national military expenditure and exports in Russia have seen the country’s arms industry grow steadily. According to SIPRI, Russia’s top eleven military companies experienced revenue growth of 48.4% between 2013 and 2014.

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“Are other countries’ wars our responsibility? That’s a question you hear a lot these days. But no one wants to hear the answer.”

• The Refugee Crisis Is Forcing Germans To Ask: Who Are We? (Guardian)

I recently read that criminality is on the rise in German towns that have accepted refugees. But it’s not the refugees who are responsible for this crime wave: Germans in these towns have been committing arson, damaging property and attacking refugees. In other words, Germans have been making their own worst fears come true. Often the fear of loss leads to the very loss we fear – a principle that holds true not only for jealous lovers but also, it seems, for those who turn to violence out of fear that the refugees will cost them their safety and peace. The refugees haven’t even all been registered yet, but already they raise questions about who we are. Some Germans can imagine what it means to lose everything – hence their empathy; some can imagine what it means to lose everything – hence their fear.

We no longer have a universal frame of reference. Angela Merkel’s declaration that refugees are fundamentally deserving of protection – hers was the only declaration of its kind in Europe – has two main sticking points in her own country. First, there’s the free-market logic according to which the German government will prohibit neither the export of weapons by German companies to warring nations nor the ruthless exploitation of resources under corrupt systems in Africa, Asia and eastern Europe. And then there’s the ever-growing violence, both verbal and physical, from part of the German population: those who would like to see their country walled off with barbed wire – as is happening in Hungary – or, failing that, to at least have the Berlin government refuse to accept even the ridiculously low numbers of refugees mandated by the European Union – as Poland and the UK have done.

But which “European values” are best upheld with barbed wire and fences, regulations, harassment and attacks? Liberté, égalité, fraternité? Or is this mainly about our own survival? In eastern Germany, you can once again hear people chanting Wir sind das Volk (“We are the people”). In 1989 that sentence opened a border; now it’s being used to close a border, to insulate this finally unified Volk from the newcomers, who lack any unity since they are fleeing so many different wars. Are other countries’ wars our responsibility? That’s a question you hear a lot these days. But no one wants to hear the answer.

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Lest we forget: one prediction is for 3 million refugees in 2016. Even ‘just’ half that will lead to complete mayhem.

• Vice Chancellor: Austria Can’t Accept Over 100,000 Migrants A Year (Reuters)

Austria’s Vice Chancellor said on Monday that Austria could not accept more than 100,000 migrants a year, following a pledge from its larger neighbor Germany to limit arrivals. Hundreds of thousands of people, many of them fleeing conflict and poverty in the Middle East, Afghanistan and elsewhere, have entered Austria on their route northwest from the Balkans since early September. Most have moved on to Germany, but Austria still expects to have received about 95,000 asylum applications this year, equivalent to more than 1% of its population, compared with the 28,000 registered in 2014. Of those, 38% were approved.

“Around 90-100,000 – a lot more will simply not be possible,” Reinhold Mitterlehner, from the conservative OVP, junior partner in the coalition, told ORF radio. Chancellor Werner Faymann, a Social Democrat who has generally adopted a more compassionate tone on the issue than the conservatives, was quoted as saying on Saturday that Austria should step up deportations of migrants who do not qualify for asylum. Faymann has also emphasized that policy decisions have been closely coordinated with his German counterpart Angela Merkel, who has pledged to “noticeably reduce the number of refugees”, fending off a challenge from critics of her own.

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“If I cry in this Jungle, will anyone help me? No. I am in the Jungle, so I have to try and smile.”

• My Baby, The Refugee: Mothers On The Hardest Journey Of Their Lives (Guardian)

In a caravan in Calais, two little girls are playing a game. While their mother’s attention is elsewhere, they hang out of the small gap of an open window, giggling as they see who can lean the farthest. They could be on a family holiday, if it wasn’t for the squalor surrounding them. Instead, the children are living on mud-covered scrubland, without electricity or heating – just two more inhabitants of the unofficial refugee camp on Britain’s doorstep. A few minutes’ drive from the ferry port, the “new Jungle” is a symbol of the UK’s reluctance to deal with the refugee crises on our borders. Here, 200 women and children are said to be living among the 4,000 refugees, crammed into water-logged tents, caravans and even garden sheds. Thousands more live in similar conditions in nearby Dunkirk. While the young men who risk their lives jumping on to trains or lorries crossing the Channel have become the faces of this crisis, hidden in their midst are these families, trapped in an agonising limbo.

Rima, her shy son Adnan, five, and lively three-year-old daughter, Nour, are among them. The family fled Syria two months ago – just in time, Rima says, to avoid the fate of their nextdoor neighbours, who were killed in their homes the week before we speak. The children’s father was imprisoned in 2012, when Nour was two months old. “There is no security in our city,” Rima tells me. “You don’t have to have done anything for them to put you in prison. Every day I begged the guards to release him. They asked me for money, so I sold everything, but it was never enough. Finally, after a year, they told me he was dead. They allowed me to come every day and plead for him when he was dead. They never gave me his body.” Rima and her children joined the stream of refugees on what has become known as the “ant road”, from Turkey to western Europe.

“Walking through the night was terrifying,” Rima says. “I had a bag on my back and I put my daughter in it. She was ill; she had a temperature of 41C. The most frightening point was when a man on a motorbike wanted to carry my little boy – he said he’d take only the boy, not the girl. I thought he might snatch him.” Like many of the mothers here, Rima’s fear of imminent danger has been replaced with anxieties about the filthy, cold and sometimes violent conditions of the camp. As it becomes more permanent, little shops, cafes and even nightclubs have sprung up, giving a cruel imitation of a music festival – until the riot police come into view, standing guard near the motorway bridge. Despite being just yards from pleasant French houses, and a short drive from Calais’s squares and restaurants, the Jungle residents rely on candles for light and open fires for warmth.

Small fires that rip through caravans and tents are now a regular occurrence. In heavy rain, the area floods. At night, when the police clash with refugees, tear gas fills the air. The noise and insecurity are taking their toll on the already exhausted, traumatised children. “Now, there are no bombs, but we are freezing and still afraid,” Rima says, adding that she developed a heart condition after her husband was imprisoned. “There is no heating and we are living in the mud. In the night, my daughter screams in her sleep and hits out, because she has bad dreams. Four days ago, my heart felt so bad that I thought I would die. If I am not here, who will look after my children?”

Around 400 luckier women and children have found a space in the state-run Jules Ferry Centre, which also provides a hot meal every day for up to 2,500 Jungle residents who live outside, and a hot shower for around 1,000. Dedicated British and French donors and charities have also stepped in, offering warm clothes and nappies, and opening a women and children’s centre with a playground. But their goodwill alone cannot provide lights, heating or somewhere private to wash. For the mothers trapped here, all that is left is to put on a brave face and hope for a better life. Communities have sprung up; neighbours look after each other’s children and try to offer support. Despite their trying circumstances, people greet each other warmly. As one woman tells me, with heart-breaking honesty, “If I cry in this Jungle, will anyone help me? No. I am in the Jungle, so I have to try and smile.”

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Just another day in the Aegean.

• 18 Migrants Drown After Boat Sinks Off Turkey’s Southwestern Coast (Reuters)

Eighteen people died and 14 were rescued late on Friday after a boat carrying migrants trying to sail to Greece sank off the southern Turkish town of Bodrum, Dogan News Agency reported. Fishermen hearing the migrants’ screams of migrants alerted the Turkish coast guard, who picked up the bodies from the sea after the wooden boat carrying migrants from Iraq, Pakistan and Syria capsized about 3.5 km off the coast. Those rescued were taken to the hospital in Bodrum, many in serious condition, the agency said. The coast guard was not immediately available for comment.

A record 500,000 refugees from the four-year-old civil war in Syria have traveled through Turkey then risked their lives at sea to reach Greek islands this year, their first stop in the EU before continuing to wealthier countries. Despite the winter conditions and rougher seas, the exodus has continued, albeit at a slower pace. Nearly 600 people have died this year on the so-called eastern Mediterranean sea route for migrants, according to the International Organization for Migration. Turkey struck a deal with the EU on Nov. 29 pledging to help stem the flow of migrants into Europe in return for €3 billion of cash for the 2.2 million Syrians Ankara has been hosting, visas and renewed talks on joining the 28-nation bloc.

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Debt Rattle May 29 2015

May 292015
 
 May 29, 2015  Posted by at 10:25 am Finance Tagged with: , , , , , , , , ,  1 Response »


Walker Evans “Sidewalk scene in Selma, Alabama.” 1935

• ECB Fears ‘Abrupt Reversal’ For Global Assets On Fed Tightening (AEP)
• US And China Can Avoid Collision Course – If US Gives Up Its Empire (Guardian)
• The Economist Who Realized How Crazy We Are (Michael Lewis)
• Euro-Sclerosis (Alasdair Macleod)
• This Time It Is Different (Martin Armstrong)
• Austerity and Balanced Budgets Doomed To Fail (Rochon)
• John Nash’s Game Theory Doesn’t Bode Well For Greece (El-Erian)
• Stiglitz Tells EU to Admit Mistakes and Ease Up on Greece (Bloomberg)
• ‘Pots of Money’ to Be Found for Greece to Pay IMF, Roubini Says (Bloomberg)
• Greek Commerce Chief Slams Troika Over Bailouts (Kathimerini)
• Greece Owes Drugmakers $1.2 Billion – And Counting (Reuters)
• As Greece Leads The News, Italy’s Problems Mount On Eve Of Elections (CNBC)
• Everyone Is Fleeing Oil’s Biggest Fund (Bloomberg)
• British Women Disproportionately Affected By Austerity (Guardian)
• Borrowing to Replenish Depleted Pensions (NY Times)
• Wall Street Banks Are Being Drawn Into The FIFA Bribery Probe (MarketWatch)
• The Tar Sands Sell-Out (Guardian)
• African Migrants Risk All In Sahara To Reach Europe (Reuters)
• New Zealand, the Land of Disappearing Sheep (Bloomberg)

That’s precisely the risk.

• ECB Fears ‘Abrupt Reversal’ For Global Assets On Fed Tightening (AEP)

The global asset boom is an accident waiting to happen as the US prepares to tighten monetary policy and the Greek crisis escalates, the ECB has warned. The ECB’s financial stability report described a “fragile equilibrium” in world markets, with a host of underlying risks and the looming threat of an “abrupt reversal” if anything goes wrong. Europe’s shadow banking nexus has grown by leaps and bounds since the Lehman crisis and has begun to generate a whole new set of dangers, many of them beyond the oversight of regulators. While tougher rules have forced the banks to retrench, shadow banking has picked up the baton. Hedge funds have ballooned by 150pc since early 2008.

Investment funds have grown by 120pc to €9.4 trillion with a pervasive “liquidity mismatch”, investing in sticky assets across the globe while allowing clients to withdraw their money at short notice. This is a recipe for trouble in bouts of stress. “Large-scale outflows cannot be ruled out,” it said. The ECB warned that a rush for crowded exits could set off a wave of forced selling and quickly spin out of control. “Initial asset price adjustments would be amplified, triggering further redemptions and margin calls, thereby fueling such negative liquidity spirals,” it said. Adding to the toxic mix, the shadow banks are taking on large amounts of “implicit leverage” through swaps and derivatives contracts that are hard to track. The issuance of high-risk “leveraged loans” reached €200bn last year, nearing the extremes seen just the before the Lehman crisis.

Half of all issues this year had a debt/EBITDA ratio of five or higher, implying extreme leverage. The number of junk bonds sold reached a record pace of €60bn in the first quarter. “A deterioration in underwriting standards is evident in the increasing proportion of highly indebted issuers, below-average coverage ratios and growth in the covenant-lite segment,” the report said, warning that this nexus of debt is primed for trouble if there is an interest rate shock. While banks are in better shape than five years ago, their rate of return on equity has dropped to 3pc, far lower than their cost of equity. They remain damaged. The immediate trigger for any market rout is the nerve-racking crisis in Greece, with just a week left until the Greek authorities must repay the IMF €300m.

Vitor Constancio, the ECB’s vice-president, said it is impossible to rule out a default since Greek officials themselves have openly threatened to do so, and this in turn could set off bond market contagion across southern Europe. The ECB’s report said the former crisis states still have extremely high levels of public and private debt and have yet to clean up government finances. “Fiscal positions remain precarious in some countries,” it said. “Financial market reactions to the developments in Greece have been muted to date, but in the absence of a quick agreement, the risk of an upward adjustment of the risk premia on vulnerable euro area sovereigns could materialise,” it said.

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Not going to happen.

• US And China Can Avoid Collision Course – If US Gives Up Its Empire (Guardian)

To avoid a violent militaristic clash with China, or another cold war rivalry, the United States should pursue a simple solution: give up its empire. Americans fear that China’s rapid economic growth will slowly translate into a more expansive and assertive foreign policy that will inevitably result in a war with the US. Harvard Professor Graham Allison has found: “in 12 of 16 cases in the past 500 years when a rising power challenged a ruling power, the outcome was war.” Chicago University scholar John Mearsheimer has bluntly argued: “China cannot rise peacefully.” But the apparently looming conflict between the US and China is not because of China’s rise per se, but rather because the US insists on maintaining military and economic dominance among China’s neighbors.

Although Americans like to think of their massive overseas military presence as a benign force that’s inherently stabilizing, Beijing certainly doesn’t see it that way. According to political scientists Andrew Nathan and Andrew Scobell, Beijing sees America as “the most intrusive outside actor in China’s internal affairs, the guarantor of the status quo in Taiwan, the largest naval presence in the East China and South China seas, [and] the formal or informal military ally of many of China’s neighbors.” (All of which is true.) They think that the US “seeks to curtail China’s political influence and harm China’s interests” with a “militaristic, offense-minded, expansionist, and selfish” foreign policy.

China’s regional ambitions are not uniquely pernicious or aggressive, but they do overlap with America’s ambition to be the dominant power in its own region, and in every region of the world. Leaving aside caricatured debates about which nation should get to wave the big “Number 1” foam finger, it’s worth asking whether having 50,000 US troops permanently stationed in Japan actually serves US interests and what benefits we derive from keeping almost 30,000 US troops in South Korea and whether Americans will be any safer if the Obama administration manages to reestablish a US military presence in the Philippines to counter China’s maritime territorial claims in the South China Sea.

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People are not rational creatures. “To an economist, these findings are somewhere between puzzling and preposterous.”

• The Economist Who Realized How Crazy We Are (Michael Lewis)

For a surprisingly long time behavioral economics wasn’t much more than a bunch of weird observations made by Richard Thaler, more or less to himself. What he calls his “first heretical thoughts” occurred in graduate school, while writing his thesis. He’d set out to determine how to value a human life – so that, say, the government might decide how much to spend on some life-saving highway improvement. It sounds like a question without a clear answer but, as Thaler points out, people answer it clearly, if implicitly, every day, when they accept money for a greater chance of dying on the job. “Suppose I could get data on the death rates of various occupations, including dangerous ones like mining, logging and skyscraper window washing, and safer ones like farming, shop keeping and low rise window washing,” recalls Thaler.

“The risky jobs should pay more than the less risky ones: otherwise why would anyone do them?” Using wage data, and an actuarial table of mortality rates in those jobs, he was able to work out what people needed to be paid to risk their life. (The current implied value of an American life is $7 million.) Only he didn’t stop there. He got distracted by a funny idea. This willingness to allow oneself to be distracted from one’s assigned task would later turn out to be a chief characteristic of behavioral economists, along with a bunch of other traits not normally found in economists, though often found in children: a sense of wonder, a tendency to ask embarrassing questions, and a mistrust of grown-ups’ ideas about what’s worth spending time thinking about and what is not.

They’re the sort of people whose day is made when they discover that health club members are most likely to hit the gym the day after they have received their monthly bill, or that race track gamblers are a lot more likely to bet on the longshot the last race of the day than the first. At any rate, in addition to calculating the market’s price for a human life, Thaler got distracted by how much fun he might have if he asked actual human beings how much they needed to be paid to run the risk of dying. He began with his own students, telling them to imagine that by attending his lecture, they had exposed themselves to a rare fatal disease. There was a 1 in 1,000 chance they had caught it. There was a single dose of the antidote: How much would they be willing to pay for it?

Then he asked them the same question, in a different way: How much would they demand to be paid to attend a lecture in which there is a 1 in 1,000 chance of contracting a rare fatal disease, for which there was no antidote? The questions were practically identical, but the answers people gave to them were – and are – wildly different. People would say they would pay two grand for the antidote, for instance, but would need to be paid half a million dollars to expose themselves to the virus. “Economic theory is not alone in saying that the answers should be identical,” writes Thaler. “Logical consistency demands it. … To an economist, these findings are somewhere between puzzling and preposterous.”

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To what extent are EU and ECB blind to the euro’s inherent weakness?

• Euro-Sclerosis (Alasdair Macleod)

if Greece defaults we would at least expect the validity of this relatively new euro to be challenged in the foreign exchange markets. Even if the ECB decided to rescue what it could from a Greek default by rearranging the order of bank creditors in its favour through a bail-in, it would still have to make substantial provisions from its own inadequate capital base. For this reason, rather than risk exposing the ECB as undercapitalised, it seems likely that Greece will be permitted to win its game of chicken against the Eurozone, forcing the other Eurozone states to come up with enough money to pay off maturing debt and cover public sector wages. So will that save the euro?

Perhaps it will, but if so maybe not for long. If the Eurozone’s finance ministers give in to Greece, it will be harder for other profligate nations to impose continuing austerity. Anti-austerity parties, such as Podemas in Spain, are increasingly likely to form tomorrow’s governments, and Spain faces a general election later this year. Prime Minister Renzi and President Hollande in Italy and France respectively are keen to do away with austerity and increase government spending as their route to economic salvation. Unfortunately for both the undercapitalised ECB and its young currency, they are increasingly likely to be caught in the crossfire between the Northern creditors and the profligate borrowers in the South.

Even if Greece is to be saved from default, the ECB will need to strengthen the Greek banks. This is likely to be done in two ways: firstly by forcing them to recapitalise with or without bail-ins, and secondly to restrict money outflows through capital controls and harsh limits on depositor withdrawals if need be. Essentially it is back to the Cyprus solution. Whichever way Greece is played, Eurozone residents will see themselves having a currency that is becoming increasingly questionable. The bail-in debacle that was Cyprus is still etched in depositors’ minds. Cyprus certainly has not been forgotten in Greece, where ordinary people are now resorting to buying mobile capital goods that can be easily sold, such as German automobiles, with the bank balances that cannot be withdrawn in cash and are otherwise at risk from a Cyprus-style bail-in.

Greek depositors have realised that euro balances held in the banks are not reliably money. Folding cash is still money, but that is all, and furthermore the folding stuff is rationed. The next blow for the euro could come from the exchange rate. If the euro continues to lose purchasing power on the foreign exchanges, it is likely to undermine confidence on the ground. And when that happens it will be increasingly difficult for the ECB to retrieve the situation and maintain the euro’s credibility as money. It just doesn’t seem sensible to take such enormous risks with a currency that has existed for only thirteen years.

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“They may have no intention of defaulting, but very few government have ever paid off their debts in the end.”

• This Time It Is Different (Martin Armstrong)

For years, I have warned that we will face our worst nightmare – the collapse of socialism. In the death throes of this abomination that even the Ten Commandments listed as a serious sin, equal to “thou shalt not kill”, government will become the ugly beast that will devour society to retain power. Of course, they will never see themselves that way, but they will justify in their minds that stripping us of our freedom, rights, privileges, and immunities, is necessary to maintain socialism for the good of the people. Karl Marx, who sought to change society by sheer force, set all this in motion. What has taken place is really scary, for indeed they have altered society far more than anyone dares to ponder.

Why is this Sovereign Debt Crisis collapse different from 1931? When the governments of the world defaulted on their debts in 1931, there were no pension funds. Government has exempted itself from all prudent reason for you take the state operated pension funds, like Social Security in the USA, where 100% of the money is in government bonds. They may have no intention of defaulting, but very few government have ever paid off their debts in the end. Then there are states who regulate pension funds requiring more than 80% to be in government bonds. A Sovereign Debt Default this time around will wipe out socialism, yet the bulk of the people are clueless not merely about the risk, but the ramifications.

Younger generations do not save to support their parents for that was government’s job post-Great Depression. Socialism has altered thousands of years of family structure following the ranting of Karl Marx. This has been one giant lab experiment that ended badly in China and Russia and is coming to a local government near you. So this time it is SUBSTANTIALLY DIFFERENT. Government is now on the hook, which is part of the reason why they are moving to eliminate cash to prevent bank runs and to force society to comply with their demands.

This time it is very different. They have wiped out society placing the entire scheme of socialism as a terrible nightmare that will end badly, and they have ruined the social family structure disarming people that for thousands of years was our very means of self-sufficient survival. These clown have set the tone for wiping out the dreams they sold the elderly, all while hunting taxes and causing job creation to implode as the youth has been converted into the lost generation. All this with pretend good intentions. Can you imagine the damage to society if they had actually intended this mess? They have lied to themselves and to the people. We have to crash and burn – that part is inevitable. Only when the economy turns down will we then argue over solutions.

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“It is a deliberate policy that aims to take away from the poor and give to the rich.”

• Austerity and Balanced Budgets Doomed To Fail (Rochon)

In its April budget, the federal government announced it had succeeded in balancing the budget. Such an achievement, however, will prove to be at best a Pyrrhic victory. History shows austerity and balanced budgets never work and only doom our economies to more misery. The Austerians, as American economist Rob Parenteau calls them, are clearly winning the policy war. In Canada, as in many other places around the world, governments are turning once again to austerity policies in order to reign in public spending believed to be out of control. These cuts, however, are usually done in vital social programs, such as health care, education, social housing and unemployment benefits. As is the case with other policies, austerity has both winners and losers.

The victims of austerian economics are often the disenfranchised and the unemployed, whereas those who benefit from austerity invariably tend to be wealthier Canadians, through reduced tax rates and, in Canada specifically, through a panoply of boutique tax policies such as the recent doubling of tax-free savings accounts and income splitting. In this sense, austerity is not a haphazard policy but a well-crafted approach to rewriting the Canadian social contract. It is a deliberate policy that aims to take away from the poor and give to the rich. Those who disagree with the statement have the burden to show how austerity is a success, but they will have great difficulty proving it. Academic research has come down against austerity. In fact, austerity has zero empirical support, and it has been completely discredited and proven to be the result of questionable research.

The most famous case was a landmark 2010 paper written by Carmen Reinhart and Kenneth Rogoff (both from Harvard University, no less), which argued debt-GDP ratios over 90% would result in considerable damage to national economies, notably a marked decline in economic growth. Their paper had a huge impact on policy and accounted in many respects for the great policy U-Turn of 2010 when countries reversed their previous Keynesian spending policies and reverted to austerity. This was a policy fiasco, with the inevitable result that our economies stalled and have remained in this zombie state ever since.

Yet, the paper was completely discredited. Nobel Laureate Paul Krugman went even further and stated unequivocally, “All of the economic research that allegedly supported the austerity push has been discredited. Widely touted statistical results were, it turned out, based on highly dubious assumptions and procedures – plus a few outright mistakes – and evaporated under closer scrutiny. It is rare, in the history of economic thought, for debates to get resolved this decisively.” Bucknell University economist Matias Vernengo has publicly called for the paper to be officially retracted or “unpublished.”

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Uncooperative games.

• John Nash’s Game Theory Doesn’t Bode Well For Greece (El-Erian)

Economics and finance suffered two tragedies in the past week: the death of the Nobel laureate John Nash and his wife in a horrible car accident, and more delays from Greece and its creditors in reaching an agreement on a path out of the costly and protracted crisis. At first sight there seem to be little to link the two tragedies. Yet the game theory insights that John Nash pioneered – including the concept of a “cooperative game” – shed important light on what is happening in Greece, and help explain why the drama is unlikely to have a happy ending anytime soon. In a cooperative game, players coordinate to achieve better outcomes than the ones that would likely prevail in the absence of such coordination. If the game is played uncooperatively, however, the result is unfortunate for all players.

There are at least four ways to transform uncooperative games into cooperative ones. Unfortunately, these approaches would be ineffective in the case of Greece. One involves using two-sided and mutually supportive conditionality as the transformation agent: for example, by rewarding the implementation of economic reforms with the ready availability of external financing. This has been tried in Greece, but the results have fallen short, which has diminished the effectiveness of this tool. Specifically, Greece’s record on making good on its policy-reform promises has been far from perfect; and its creditors have been too hesitant in providing the extent of debt relief and cash the country needs.

A second way involves a decisive external impetus. In the case of Greece and its creditors, this role has been played by fear, particularly the fear that the Greek economy would implode, which would force it out of the euro zone. This has stoked the additional fear that such an outcome would destabilize other euro zone economies, threaten the integrity of the single currency group and disrupt the global economy. And fear is an inconsistent transformation agent because its impact is hard to sustain. As soon as it dissipates, all sides revert to uncooperative behavior. And this is what has happened in this case since at least 2010.

A third alternative involves the entry of new players that are willing and able to put aside uncooperative legacies. In today’s Europe, however, the political reality is that new players tend to be even more skeptical than their predecessors. The electoral victory of Syriza in Greece is a case in point. Finally, mutually beneficial developments could convince both sides to work together more closely. Regrettably, this hasn’t been the case of Greece and its European partners, given the limited progress on the ground. Assessing the Greek drama through the lens of game theory explains why the crisis – and the question of Greece’s continued euro-zone membership – are no closer to being resolved.

Applying Nash’s theory shows that the best we can realistically expect is yet another attempt to postpone painful decisions. But even this inadequate outcome is proving increasingly difficult to deliver, and if it materializes, the resulting delay will lead to an even more difficult situation, unless the players decide to stop their uncooperative game very soon.

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Finally, some wise words. “When you make a mistake of this depth, the worst thing in the world is not to admit it and not to change it.”

• Stiglitz Tells EU to Admit Mistakes and Ease Up on Greece (Bloomberg)

Nobel laureate Joseph Stiglitz said the European Union should admit the mistake it made imposing austerity on Greece and soften its stance or bear the consequences if the country exits the euro area. “For the wellbeing of Europe and for the betterment of the world, I think the European Commission should soften,” Stiglitz said Tuesday in an interview in Split, Croatia. “Greece has done an enormous amount of work.” Stiglitz’s comments echo calls from economists including fellow Nobel laureate Paul Krugman for EU leaders to compromise to avoid a messy Greek exit from the euro that could send shock waves deeper through the currency bloc. “Europe bears a lot of responsibility as there were fundamental flaws in the design of the euro zone,” Stiglitz said.

“They created a system of divergence, not convergence, and when you combine that with austerity, that’s a recipe for the disaster we’ve seen.” The EU “should help Greece,” Stiglitz said, by starting “fundamental reforms” in the euro zone, shifting policy from austerity to promoting growth and allowing governments to temporarily assist struggling companies. As growth begins to be restored, governments should take actions to improve the efficiency of the public sector, he said. “Europe should admit that it made a mistake,” said Stiglitz, who was in the Croatian Adriatic resort town to receive an honorary degree from the University of Split. Croatia, which joined the European Union in 2013, “shouldn’t rush to the euro,” Stiglitz said.

While the country is set to exit a six-year recession this year, it’s under pressure from the EU to narrow its budget deficit and lower public debt now at 85% of output. “It doesn’t make sense to focus on the deficit when you are in recession,” Stiglitz said. Another option would be to devalue its currency, which is tied to the euro in a managed float, Stiglitz said. And while President Kolinda Grabar-Kitarovic said in an April interview that Croatia may join the euro zone by 2020, Stiglitz said the currency’s troubles had undermined the entire project. “If European voters 20 years ago were told what the consequences of the euro would be, would anybody have voted for it?” he asked. “I think the answer would be, knowing what they know now, that nobody would have voted for it.”

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I agree. Plus, Greece can bundle its June IMF payments. It has just won an entire extra month.

• ‘Pots of Money’ to Be Found for Greece to Pay IMF, Roubini Says (Bloomberg)

Economist Nouriel Roubini said he expects “pots of money” to be found to allow Greece to meet its payment commitments to the IMF. “Radical decisions like capital controls, like deposit freezes, like IOUs that have a lot of collateral damage, not just financially but also economic, can be prevented,” Roubini, chairman of Roubini Global Economics, said in an interview in Dresden, Germany, where he’s attending a meeting of G-7 finance chiefs.

Greece is scheduled on June 5 to make the first of about €1.6 billion in IMF payments coming due in the next three weeks. Talks between Greek officials and the country’s international creditors over unlocking aid remain stalled. If Greece fails to meet its payments, “everybody realizes that’s the beginning of a Greek accident that has lots of other collateral damage, not just for Greece but potentially contagion also in financial markets,” Roubini said in the Bloomberg Television interview on Thursday.

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“Korkidis told MPs taking part in the inquiry that IMF official Poul Thomsen had argued that Greeks should earn around €300 per month.”

• Greek Commerce Chief Slams Troika Over Bailouts (Kathimerini)

The head of the National Confederation of Commerce (ESEE), Vassilis Korkidis said on Thursday to a parliamentary committee investigating Greece’s bailouts that representatives of the troika had only spoken to the organization once since Athens signed its first bailout in 2010 and that during the discussion visiting officials suggested that Greek wages needed to drop to levels similar to other Balkan countries. Korkidis told MPs taking part in the inquiry that IMF official Poul Thomsen had argued that Greeks should earn around €300 per month. Korkidis was also critical of how previous governments handled the bailouts. “Some people rushed to get us involved in this ordeal, while others were in a rush to get us out,” he said.

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“..the effect could be dramatic if it left the euro and prices in euro terms fell sharply.”

• Greece Owes Drugmakers $1.2 Billion – And Counting (Reuters)

Cash-strapped Greece has racked up mounting debts with international drugmakers and now owes the industry more than €1.1 billion, a leading industry official said on Wednesday. The rising unpaid bill reflects the growing struggle by the nearly bankrupt country to muster cash, and creates a dilemma for companies under moral pressure not to cut off supplies of life-saving medicines. Richard Bergstrom, director general of the European Federation of Pharmaceutical Industries and Associations, told Reuters his members had not been paid by Greece since December 2014. They are owed money by both hospitals and state-run health insurer EOPYY.

Drugmakers and EU officials are now discussing options in the event Greece defaults on its debt or leaves the euro zone, disrupting imports of vital goods, including medicines. “We have started a conversation in Brussels with the European Commission,” Bergstrom said. “We want the Commission to know that our companies are in this for the long run and are committed to Greece.” There is a precedent for the pharmaceutical industry to agree exceptional supply measures during a financial crisis. It happened in Argentina in 2002, when some firms agreed to continue to supply drugs for a period without payment. But the situation is complicated in Europe, given EU competition rules. They mean the Commission would need to take the initiative in approving any special scheme.

Drugmakers want any emergency program to include steps to mitigate spillover effects on other markets, including curbs on re-exports of drugs and a block on other governments referencing Greek prices when setting their own drug prices. Although Greece represents less than 1% of world drugs sales, it can have a bigger impact because of such reference pricing – and the effect could be dramatic if it left the euro and prices in euro terms fell sharply. Some drugs imported into Greece are already re-exported to other European countries under EU free-trade rules. The drugs industry has been here before. Greece also ran up large debts for its medicines in 2010-12, although they have since been repaid, with some companies receiving payment in government bonds that were subsequently written down in value.

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Beppe time.

• As Greece Leads The News, Italy’s Problems Mount On Eve Of Elections (CNBC)

While Greece has been hitting the headlines recently, Matteo Renzi has quietly had a tough few months. The Italian prime minister has had to tackle difficulties both abroad and at home – including a slow economic recovery. All this presents a difficult backdrop for Renzi as he faces 22 million voters with elections in 7 regions and over 1,000 municipalities this weekend. On the domestic front, we’ve seen protests over education reform and a court ruling that pension cuts were unconstitutional, a decision that will require €13 billion in repayments. On top of that, there are accusations of political corruption and organised crime links within Renzi’s Democratic Party (PD). When I spoke to Renzi earlier this year, he said he was declaring war on corruption.

That war hasn’t stopped criticism of how contracts were awarded at the Milan Expo, never mind the backlash over mounting costs and delayed completion. On the international scene, Renzi’s much-touted plan to deal with the EU migrant crisis suffered as several governments refused to participate. Awkward. Having said that, let’s not ignore the positives. Early efforts with labor and bank reform show progress and Italy’s economy is showing signs of life, expanding 0.3 percent in the first quarter – the first uptick since the third quarter of 2013 – as a weaker euro and lower oil prices help push the country out of its longest recession on record. The economic figures tie with recent business confidence data and yet unemployment is still ticking higher – hitting 13% in March. As one Italian worker told me in Milan: “If recovery is happening, it isn’t happening fast enough.”

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Oil poised to take a big step down again. US production at record levels, OPEC to increase exports.

• Everyone Is Fleeing Oil’s Biggest Fund (Bloomberg)

The biggest U.S. exchange-traded fund that tracks oil is heading for the largest two-month outflow in six years, raising concern that crude’s 30% rally may stall. Holders of the United States Oil Fund, known as USO, have withdrawn almost $1 billion so far in April and May, according to data compiled by Bloomberg. Crude dropped about $12 a barrel after a $1.4 billion exodus from the fund in the two months ended June 2009. Oil has rebounded from a six-year low in mid-March on speculation that the falling number of drilling rigs will reduce output. U.S. crude stockpiles near the highest level in 85 years and OPEC’s refusal to cut production will continue to weigh on prices, according to Goldman Sachs, Deutsche Bank and Citigroup.

“The oil rebound has run out of gas and now you are seeing nervous investors with itchy trigger fingers bailing out of USO,” Eric Balchunas, a Bloomberg Intelligence analyst, said May 27. “They don’t want to get burned by another drop in oil.” Futures rallied 25% in April, the biggest monthly gain since May 2009, and have fallen 2.4% so far in May. Crude’s recovery has slowed this month. U.S. production climbed to 9.57 million barrels a day last week, the most in Energy Information Administration data going back to 1983.

Inventories were 479.4 million, 86 million above the previous year’s level. OPEC, which supplies about 40% of the world’s oil, meets June 5 in Vienna to discuss output policy. The group will maintain its production target, Mohammad Oun, Libya’s deputy vice prime minister for energy, said Thursday, joining Kuwait in predicting no policy change. “We do not think that the bulls have enough supporting fundamental factors to make a case for a higher oil price,” Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy, said Thursday. The supply surplus will push oil down to “$55 and then possibly lower,” he said.

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Austerity is designed to target the weak.

• British Women Disproportionately Affected By Austerity (Guardian)

The UK risks widening gender inequality because of austerity policies that disproportionately affect women, a coalition of charities has warned. Cuts to social security, the public sector and legal aid will only worsen women’s position in British society, the charities say, while proposals for a five-year lock on tax raises will benefit men over women. Those factors in combination mean that women will bear the brunt of measures to pay off the deficit, they argue. The warning comes from A Fair Deal for Women, an umbrella group of 11 women’s rights charities, including Women’s Aid, the Fawcett Society, the Women’s Resource Centre, and Rape Crisis . They point out that last year Britain fell to 26th place on the World Economic Forum’s Gender Gap Index – lower than almost all its European neighbours.

“Without swift action to address women’s inequality in all areas, we could see the UK falling even lower,” said Florence Burton, a spokeswoman for the group. A Fair Deal for Women raised the alarm after Wednesday’s Queen’s speech launched the first stage of the Tories’ austerity agenda. Caroline Lucas, Green MP for Brighton Pavilion, said: “What we are increasingly seeing is that austerity perpetuates gender inequality. We ought to be tackling inequality head-on to build a strong, fair and successful economy; indeed equality and economic policy should go hand in hand. “Nobody who advocates the kinds of public-spending cuts we’ve been served up, with their disproportionately negative impact on women in particular, can justifiably claim to be an advocate of equal rights for men and women or of an economy that works for all.”

Money-saving proposals in the Queen’s speech included reducing the household benefits cap to £23,000 a year, freezing most benefits and tax credits for two years, and removing housing support from 18-to-21-year-olds. The government sweetened the pill with a five-year lock on tax rises including VAT, income tax and national insurance, as well as the extension of right to buy to housing association tenants. But Burton said the government had put forward economic policies that don’t work for women. “Putting a five-year lock on raising taxes is a policy that benefits men over women, whilst further austerity measures – like cutting benefits – are detrimental to women and their children, placing them in high risk of poverty,” she said.

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Predictable. And stupid.

• Borrowing to Replenish Depleted Pensions (NY Times)

Facing a shortfall of more than $50 billion in his state’s pensions, and with no simple solution at hand, Gov. Tom Wolf of Pennsylvania is proposing to issue $3 billion in bonds, despite the role that such bonds have already played in the fiscal woes of other places. And he is not alone. Several states and municipalities are considering similar action as they struggle with ballooning pension costs. Interest in so-called pension obligation bonds is expected to intensify in the wake of a recent Illinois Supreme Court decision that rejected the state’s attempt to overhaul its severely depleted pension system. The court ruled unanimously that Illinois could not legally cut its public workers’ retirement benefits to lower costs, forcing lawmakers to scramble for the billions of dollars it will take to keep the system intact.

While the Illinois ruling is not binding on other states, analysts think it may influence lawmakers elsewhere to look to alternatives to cutting public pensions. The Illinois justices offered a list of all the times since 1917 that state lawmakers had ignored expert warnings and diverted pension money to other projects. They said, in effect, that the lawmakers had to restore the money. Pennsylvania and other states and cities fear similar restrictions. “My reaction was, ‘Yeah, that’s going to play here,’ “ said John D. McGinnis, a lawmaker in Pennsylvania, which has also been diverting money from its pension system, setting the stage for a crisis as more and more public workers retire. The state has no explicit constitutional mandate to protect public pensions, as Illinois does, but that is irrelevant, said Mr. McGinnis, a Republican and former finance professor at Pennsylvania State University.

“The judiciary in Pennsylvania has been solidly of the belief that there are ‘implicit contracts,’ and you can’t deviate from them,” he said. If lawmakers in Harrisburg were to unilaterally cut pensions now, he said, they could be taken to court and be dealt a stinging rebuke, like their counterparts in Illinois. Against that backdrop, pension obligation bonds may appear tempting, even though such deals have contributed to financial crises in Detroit, Puerto Rico, Illinois and other places. The deals are generally pitched to state and local officials as an arbitrage play: The government will issue the bonds; the pension system will invest the proceeds; and the investments will earn more, on average, than the interest rate on the bonds. The projected spread between the two rates makes it look as if the government has refinanced its pension shortfall at a lower interest rate, saving vast sums of money.

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They fit the model. In fact, they probably are the model.

• Wall Street Banks Are Being Drawn Into The FIFA Bribery Probe (MarketWatch)

Major global banks — including Wall Street giants Citigroup and J.P. Morgan — could be drawn into the sweeping probe into alleged racketeering, wire fraud and corruption in the soccer world, as investigators trawl through evidence tied to the FIFA bribery scandal. A raft of banks have been named in the 164-page indictment that the U.S. Department of Justice released Wednesday, alleging that nine soccer officials from the sport’s top governing body, FIFA, and five sports executives were part of a 24-year corruption scheme involving more than $150 million in bribes. Among major financial institutions allegedly used to facilitate payments and wire transfers are J.P. Morgan, Citigroup, Bank of America, HSBC, UBS, and Julius Baer, according to indictment.

“Part of our investigation will look at the conduct of the financial institutions to see whether they were cognizant of the fact they were helping launder these bribe payments,” Kelly T. Currie, acting U.S. attorney for the Eastern District of New York, said. “It’s too early to say whether there’s any problematic behavior, but it will be part of our investigation.” None of the banks has been accused of wrongdoing. According to the FIFA indictment, the U.S. banking sector played a central role in the alleged bribery scheme. As early as the 1990s, but increasingly in the 2000s and 2010s, “the defendants and their co-conspirators relied heavily on the United States financial system,” the charges state. “This reliance was significant and sustained and was one of the central methods and means through which they promoted and concealed their schemes.”

Many of the transactions involved millions of dollars that would pass through U.S. bank accounts before allegedly being redirected to personal accounts. In one example, transactions totaling $10 million were alleged to have been wired from a FIFA account in Switzerland to a Bank of America account in New York to be credited to accounts held by the Caribbean Football Union (CFU) and CONCACAF, the continental confederation under FIFA headquartered in the United States.

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Devastation on a planetary sclae.

• The Tar Sands Sell-Out (Guardian)

Amid the strip mines and steam plants sprawled across the northern Alberta wilderness, Fort McKay is just a tiny dot on the map. It is also one of the single biggest source sites of the carbon pollution that is choking the planet. This tiny First Nations community grew rich on oil, and was wrecked by oil. Local Cece Fitzpatrick grabbed what she saw as a last chance for Fort McKay and decided to run for chief, promising to stand up to the industry which came here 50 years ago. Within a 25-mile radius of Fort McKay, 21 projects with a capacity of up to 3.3m barrels a day have been approved or are in production. Another 20 with a combined capacity of about 1.6m barrels a day are in the planning stage, according to Fort McKay First Nation.

Locals can hear, smell, feel and taste the evidence of extraction, even inside their homes. On bad days, it smells like cat piss, according to Cece Fitzpatrick. The tar sands here are one of the single biggest source sites of the carbon pollution that is choking the planet. Mine out all the thick black petroleum, as the Canadian government proposes, ship it out by proposed pipelines such as the Keystone XL and oil trains, and abandon all hope of avoiding a climate catastrophe. Even with the drop in oil prices, Canadian crude exports hit an all-time high this year, and the government expects a significant increase in tar sands production.

While oil made some people here rich, it is also poisoning the waters of the Athabasca River. Researchers last year confirmed high rates of cervical cancers and a rare bile duct cancer among First Nations communities who fish from the Athabasca and hunt off the land. Which was why Cece decided to run for chief, challenging a leader in power almost continuously since 1986, and who long ago gave up trying to keep the industry out. The worst thing is my grandkids, Cece said. Enough is enough. When do we stop and say: ‘Let’s look at the future of our kids?’ Because really I don’t want people to have kids any more because our future here is so bleak. We don’t want to live here anymore.

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As many die in the Sahara as do in the Mediterranean.

• African Migrants Risk All In Sahara To Reach Europe (Reuters)

Some 2,000 migrant deaths in Mediterranean waters between the Libyan and Italian coasts this year have prompted alarmed European governments to tighten maritime patrols to stem an influx of migrants in boats from Libya, which has been in widespread chaos since rebels toppled Muammar Gaddafi in 2011. Yet the International Organization for Migration (IOM) warns that at least as many migrants may die during the long desert crossing from Niger, the main staging post for West Africans seeking to cross the Mediterranean. Despite Niger’s passage of a tough new law against people trafficking, some 100,000 migrants fleeing desperate poverty at home in hopes of a better life in Europe are expected to cross the West African state’s borders this year. Many will pass through smugglers compounds known as “ghettos”.

“It’s a bit frightening but I have to deal with it because in life you have to be brave,” said migrant Fousseni Ismael, 16, wearing a blue headscarf to protect him from the sun as he waits to board a truck. As night falls, the pickup rolls out of the metal gates of the compound and snakes through the sandy backstreets of Agadez, passing groups of Muslim men knelt in the evening prayer. It drives unhindered past a police checkpoint on the outskirts of town and into the blackness of the vast desert. The risks are high. Mohamed, a driver, said he was attacked last week by Touareg bandits wielding AK-47 assault rifles who opened fire on his pickup when he refused to stop, wounding a migrant in the leg.

For protection, scores of trucks follow a military convoy that heads north each Monday toward the oasis town of Dirkou. The death of 92 migrants from thirst – mostly women and children – when their vehicle broke down en route to Algeria, to Libya’s west, in 2013 prompted Nigerien authorities to briefly crack down on the corridor — but the lucrative trade quietly returned. “The desert has always been a cemetery for immigrants, in silence and complete indifference. Travelers tell us they often find bodies – skeletons ravaged by the sands,” said Agadez Mayor Rhissa Feltou.

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Cattle country.

• New Zealand, the Land of Disappearing Sheep (Bloomberg)

Once upon a time there were 20 sheep to every Kiwi. Now it’s more like seven to every New Zealander. Blame cows, which are now bringing home the bacon. Huge tracts of flatland once used for sheep farming were converted to dairy pastures as the global price for butter and cheese increased, while demand for sheep meat and wool waned, said Susan Kilsby, a dairy analyst at AgriHQ in Wellington. “Returns for dairy have been substantially better than for a traditional sheep and beef farming operation,” she said. There were other factors at play, too. The removal of subsidies for sheep farming in the mid-1980s exposed ranchers to market forces, explained Adrienne Egger, an agriculture analyst at Beef and Lamb New Zealand, an organization representing farmers.

New irrigation projects also made dairy farming possible for the first time in many parts of the country, AgriHQ’s Kilsby said (cows raised to produce milk are real water guzzlers). In the camp horror classic `Black Sheep’ a flock runs amok after some genetic engineering. The tagline read: “There are 40 million sheep in New Zealand and they’re PISSED OFF!” Fact is, there are far fewer sheep than that. What is true is that thanks to some genetic improvements, productivity has improved. For ranchers who stayed the course, it’s paying off.
Lamb prices at the farm-gate rose 85% in real terms and mutton prices more than doubled from 25 year ago. China, once a market for low-value cuts, has rapidly emerged as a major importer of Made in New Zealand — moving up from eighth place to second between 2008 and 2013. “In 2014, China was the largest single country market by volume of lamb,” Eggers said.

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Debt Rattle March 16 2015

Mar 162015
 
 March 16, 2015  Posted by at 7:17 am Finance Tagged with: , , , , , , , , ,  1 Response »


NPC People’s Drug Store, 11th & G streets, Washington DC 1920

• After Six Years, U.S. Stocks are Back to Normal: Chaos (Bloomberg)
• Indeed This Time Is Different: Because It’s Far Worse (Mark St.Cyr)
• It’s Time For A Criminal Probe Into Tim Geithner’s Leaks As Fed Vice Chair (ZH)
• Germany And Greece Should Look To Goethe To Resolve Their Standoff (Guardian)
• Greek Currency Crisis Calls For Controlled Exit (Münchau)
• If Greece Leaves Eurozone, Spain And Italy Would Be Next – Minister (ToM)
• Greece To Use Nazi Army Archives For Reparation Claim (AFP)
• Varoufakis: Greece Has Things Under Control (Deutsche Welle)
• Germans Tired of Greek Demands Want Country to Exit Euro (Bloomberg)
• Russia Was Ready for Crimea Nuclear Standoff, Putin Says (Bloomberg)
• More Than a Million Hit Brazil Streets to Protest Rousseff (Bloomberg)
• Beware the $300 Billion Shift Into Treasuries Coming From Japan (Bloomberg)
• The Austrian Black Swan Claims Its First Foreign Casualty (Zero Hedge)
• The Full Explanation Of How The ECB Broke Europe’s Bond Market (Zero Hedge)
• Krugman Is Told to Read More, Write Less, by Swedish Riksbanker (Bloomberg)
• A Green Light for the American Empire (Ron Paul)
• How to Build a $400 Billion F-35 that Doesn’t Fly (Fiscal Times)

Anyone who still calls himself an investor doesn’t understand what goes on.

• After Six Years, U.S. Stocks are Back to Normal: Chaos (Bloomberg)

Nobody said waking up from six years of Federal Reserve-induced slumber would be easy In stocks, volatility is back. The Standard & Poor’s 500 Index, which never went more than three days without a gain in 2014, has twice fallen five straight times since January. Daily equity moves exceeding 1% have jumped 50% from last year and shares tumbled 3% or more over four different stretches in the first quarter. What seems like chaos is a return to normalcy for 70-year-old investor Chris Bertelsen, who says the end of Fed stimulus is long overdue in a market that has tripled since 2009. Volatility indicators bear a resemblance to 2007, the final year of the previous bull market – which this one now exceeds by 12 months.

“We are so skewed by the readily available quantitative easing and that was the abnormal,” said Bertelsen, chief investment officer of Global Financial. “For many investors, particularly those that haven’t seen a period of time like this, it does create queasiness.” The market hasn’t been this turbulent since the European debt crisis three years ago as volatility in currency and energy markets spill over to equities and Fed policy makers signal a rate increase by mid-year.

Less than three months into 2015, the market has seen 15 days when the S&P 500 rose or fell 1% or more, compared with 10 days a quarter in 2014. While the index is little changed for the year and has gone 41 months without a 10% tumble, it’s had more retreats of at least 3% than any time since 2011, data compiled by Bloomberg show. After swinging 0.53% a day in 2014 in the calmest year since 2006, the S&P 500’s daily move has widened to 0.71%, versus the average of 0.76% since 1928. “What we’re seeing in the market today is a preview that this is going to a more volatile year and investors should be positioned,” said Jim McDonald at Northern Trust.

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Amen, brother.

• Indeed This Time Is Different: Because It’s Far Worse (Mark St.Cyr)

Suddenly the narrative that “everything is awesome” is showing to not be as “awesome” as it was first proclaimed. Merely a few months have passed since the ending of QE and praises of awesomeness everywhere are morphing into questions more akin to “Oh no: not again!” And with that we are now watching those who pushed, pulled, and levitated that narrative scramble desperately to push another narrative back onto the stage that worked so many times before: “Every sell off over the last 6 years has shown to be a profitable buying opportunity.” i.e., Just buy the dip (JBTFD). Yet it would seem these dips; are far different.

Just for context, over the past week, if you were one of the few remaining “home-gamers” still watching CNBC™, you would have been delighted to see once again their host Jim Cramer go through great pains to explain why he discounts the idea that we’re in a bubble to once again like ringing a bell (he uses buzzers and gongs I believe) the indexes sell off in dramatic fashion bringing back memories of Bear Sterns. As of today any gains for the year have been quelled. But not too worry, for he also contends you should have “dry powder” at the ready. i.e., Be ready to “JBTFD.” My thoughts? “Investing” isn’t going to be so easy this time. Why? Let me be so bold to use the same meme touted by the likes of those who sold it: Because, it truly is – different this time. Without QE, not only is there no one buying.

What’s far, far, far, (did I say far?) worse is: There’s no one to sell too! Effectively through the interventionist policies over the last 6 years via the QE program what the Fed. has accomplished, whether intentionally, or merely complicit in the results were: to systematically exterminate the dreaded “Short sellers.” Today everybody is currently on one side of the market. And that side is: long. The dreaded “Bears” that would even out the markets taking positions on the other side are all about gone. Every empirical statistics, every indicator measured whether it be Investor Intelligence™ data and the like shows, historically – they’ve never been so lopsided. Ever! But that’s only the beginning.

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Great rundown.

• It’s Time For A Criminal Probe Into Tim Geithner’s Leaks As Fed Vice Chair (ZH)

Back in January 2013, when looking at the Fed’s 2007 transcripts we stumbled upon something which in a non-banana republic would be the basis of a criminal investigation. What happened, in a nutshell, is that at precisely 8:00 am on August 17, shortly after the infamous Goldman (and other) quant fund blow ups of the summer of 2007 shook the markets, in an attempt to halt the panic selloff in stocks, the Fed announced the following:

To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4%, to narrow the spread between the primary credit rate and the Federal Open Market Committee’s target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks’ usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.

Why was this abnormal, and why should it be the basis for a criminal inquiry? Simple. As we also wrote previously, hours before the Fed officially announced its primary credit rate cut, the market soared by a whopping 40 points just after 2 pm without any actual public news crossing the tape.

In other words, someone leaked the Fed’s decision to a select few just around 2 pm on Thursday, August 16, which can be further confirmed by the continuation of the market’s exuberance in the moments following the Fed’s announcement. This is a bold accusation, and one we wouldn’t make if none other than the Fed subsequently had confirmed that a member of the FOMC had indeed leaked the news of the upcoming rate cut. The leaker in question: the Vice Chairman of the Federal Reserve and then-head of the NY Fed, Tim Geithner himself. From the August 16, 2007 transcript (page 13 of 37) of the conference call preceding this announcement:

MR. LACKER. If I could just follow up on that, Mr. Chairman.
CHAIRMAN BERNANKE. Yes, go ahead.
MR. LACKER. Vice Chairman Geithner, did you say that [the banks] are unaware of what we’re considering or what we might be doing with the discount rate?
VICE CHAIRMAN GEITHNER. Yes.
MR. LACKER. Vice Chairman Geithner, I spoke with Ken Lewis, President and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that.
CHAIRMAN BERNANKE. Okay. Thank you. Go ahead, Vice Chairman Geithner.
VICE CHAIRMAN GEITHNER. Well, I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the window. The only thing I’ve done is to try to help them understand—and I’m sure that’s been true across the System—what the scope of that is because these people generally don’t use the window and they don’t really understand in some sense what it’s about.

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“..the words “our boys didn’t die on the beaches of Normandy for this” have been used in conversations between the State Department and the German foreign ministry.”

• Germany And Greece Should Look To Goethe To Resolve Their Standoff (Guardian)

The Greek rebellion against Turkish rule, which began in 1821, threatened to upset the entire diplomatic balance of the western world. It flew in the face of the treaty signed by the so-called Holy Alliance (Russia, Austria and Prussia) to suppress revolutionary movements in Europe. Plus it violated the German enlightenment’s ideal of freedom, which was understood as deriving from the rule of law. Under the influence of the philosopher Kant, the Germans who built central Berlin as an off-white replica of Athens believed all freedom came from obeying authority.

The Greeks fighting the Turks in a dirty war, revelling in their image as brigands and urging revolt across Europe, were seen in the Germany of the 1820s much as the German electorate views hordes of radical Greek youth punching the air and singing Katyusha – with distaste. So Goethe, initially, opposed the Greek revolt. He feared Russian power would fill the vacuum if the Turks were beaten. And beyond that he feared it would spark further outbreak of revolution in Europe. What changed Goethe’s mind was the death of Lord Byron, fighing on the Greek side in 1824. In a sudden surge of creativity Goethe set to work on his unfinished drama Faust, modelling the central character now on Byron himself, and turning the second half of the work into a meditation on the nature of freedom.

His U-turn reframed the Greek “rulebreaking” problem within a broader set of rules: the Christian west versus the Ottoman Empire. Goethe declared his support for the Greeks, in opposition to the will of his political masters in Germany. Today, there are a growing number of diplomats in the Anglo-Saxon world who wish Angela Merkel would do a similar volte-face. The Germans’ intransigence on the Greek debt crisis is rooted in the same philosophical stance that initially guided Goethe’s generation: namely, that freedom derives from conformity to authority and the rules. But there was always another idea of freedom in the west – the one espoused by republican France, radical Britain and revolutionary America: that freedom exists in opposition to authority, and that the ultimate human right is to destroy the established order.

It’s strange to see a 200-year-old philosophical debate played out in the diplomatic backchannels of Nato, but that’s what is happening. If Germany’s cultural centre in Athens does end up draped in the banners of the anarchist left, then – in a way – it will be a fine testimony to the relevance of Goethe himself. And yet another example of the troubled psyche of this place called Europe.

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“The conclusion is inevitable: the best way to avoid a Grexident is to prepare for a Grexit.”

• Greek Currency Crisis Calls For Controlled Exit (Münchau)

When German economic illiteracy meets with Greek diplomatic illiteracy, nothing good will come of it. Last week, a Greek minister threatened to swamp Germany with Islamic refugees. The Germans are again debating an accidental Greek exit from the eurozone: Grexident. Alexis Tsipras, the Greek Prime Minister, linked a claim about Second World War reparation payments against Germany to present discussions on the extension of a loan agreement. The reparations claim itself is not frivolous. There are even German lawyers who believe Athens has a case. But it is politically mad to link the two. What we are hearing is not the usual noise: there is a loss of trust. The conclusion I draw from this is that the odds of a Greek exit from the eurozone have shortened dramatically in the past two weeks.

The two sides may tone down their rhetoric in the coming days but I cannot see the creditor countries relenting on the conditions of last month’s debt rollover agreement. Nor can I see the Greek government fulfilling them. Since nobody knows how many days or weeks Athens is from insolvency, the risk of a sudden exit is clear and present. Grexit may never happen – but it is time to get ready. Grexit is not an outcome any rational person would wish for. It will undermine the EU’s geostrategic influence. Economically, it will unmask a hidden truth: that the monetary union is just a beefed-up fixed-exchange system. A large number of financial contracts would instantly default. It is unclear how the global financial system would cope. The eurozone’s fledgling economic recovery would be at risk.

For Greece, an exit may well work in the long run if it is well managed, but it will bring economic misery in the short term. The country is still running a current account deficit, meaning it is reliant on external funding to support domestic consumption. That funding may disappear from one day to the next, should Greece default on its creditors. A preparation for Grexit is not about a Plan B in the top drawer. It means a pre-agreed sequence of actions ready to be implemented. A changeover of a currency regime within a short period of time constitutes an organisational and logistical challenge that goes beyond anything normal states ever do. I would advise against a cold turkey switch into a new currency regime – one that would replace the euro with a new drachma. I doubt this is logically feasible or economically desirable. I would opt for a transitory regime, a smoke-and-mirrors version where nobody knows precisely whether Greece is in or out.

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Crystal clear.

• If Greece Leaves Eurozone, Spain And Italy Would Be Next – Minister (ToM)

If Greece were to leave the eurozone, Spain and Italy would also end up quitting the common currency bloc, Greek Defence Minister Panos Kammenos told German newspaper Bild in an interview published yesterday. “If Greece explodes, Spain and Italy will be next and then at some point, Germany. We therefore need to find a way within the eurozone, but this way cannot be that the Greeks keep on having to pay,” he said, according to an advance extract of the broad-ranging interview. He also said Greece did not need a third bailout but rather “a haircut like the one Germany also got in 1953 at the London debt conference”. Athens and Berlin have become engaged in a war of words and Greece has submitted a formal protest to the German Foreign Ministry, accusing Finance Minister Wolfgang Schaeuble of having insulted his Greek counterpart, Yanis Varoufakis.

Schaeuble denies having called Varoufakis “foolishly naive”, as reported by some Greek media. On Schaeuble, Kammenos was quoted as saying: “I don’t understand why he turns against Greece every day in new statements. It’s like a psychological war and Schaeuble is poisoning the relationship between the two countries through that.” The relationship has already been strained by Berlin’s tough stance on Greece’s debt crisis. Kammenos said Schaeuble needed to put up with the new Greek government because it had been elected by the Greek people. He accused Berlin of interfering in Greek domestic affairs, adding: “I get the feeling that the German government is out to get us and some really want to push us out of the eurozone.”

Last week Greece renewed its campaign to seek compensation for the Nazis’ brutal occupation in World War II, an issue Berlin says was settled decades ago. Kammenos called for reparations in the interview, saying, “The gold that the Nazis took to Berlin from Athens was worth a lot of money. We expect compensation for that and also for the forced loan and the destruction of archaeological statues.” Kammenos also suggested Greece would stop taking refugees in the case of a “forced” Greek exit from the eurozone. “Then no agreements would be valid anymore, no treaties, nothing. We would no longer be obliged to take in refugees as a country of arrival. Whoever wants to push us out of the eurozone should know that.”

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Quite a find.

• Greece To Use Nazi Army Archives For Reparation Claim (AFP)

Greece will use a trove of Nazi army papers to press its claim for German reparation payments, the defence ministry said on Friday. “This archive contains over 400,000 pages…it will be used toward supporting Greek demands over German obligations in 1941-1944,” the ministry said. “These documents do not just substantiate a historic truth – they are the documents of the Wehrmacht itself, the occupation forces,” said junior defence minister Kostas Isichos. The ministry said it had obtained the papers from US archives. “They are diaries, reports by officers to their superiors…these were not written for publicity, they were mainly secret documents,” he said.

Facing resistance from EU paymaster Germany to its claims for a renegotiation to its bailout, the new radical Greek government has stepped up pressure on Berlin over the controversial issue of war reparations. The Greek justice minister this week said he would activate a 15-year-old Greek Supreme Court ruling allowing the seizure of German assets to pay for war damages. Greece’s parliament also approved a motion to reactivate a special committee to look into war reparations, reimbursement of a forced war loan and the return of archaeological relics seized by German occupation forces.

Berlin argues that the issue of reparations to Greece was settled in 1960 as part of an agreement with several European governments. Isichos said Athens hoped the Wehrmact papers would shed further light on aspects of the occupation period, such as illegal archaeological excavation and looting, “in order to strengthen, not poison” Greek-German relations. “German universities, intellectuals and the German people are invited to join us in discovering this historic treasure…and close this open wound,” he said.

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“Small, insignificant problems of liquidity should not divide Europe..”

• Varoufakis: Greece Has Things Under Control (Deutsche Welle)

Finance Minister Yanis Varoufakis told ARD presenter Günther Jauch that Greece would repay its debts while still managing to cover civic needs, social security and a public workforce. In March, Greece is expected to pay €900 million to the IMF. “Small, insignificant problems of liquidity should not divide Europe,” Varoufakis told Jauch. Varoufakis said creditors did not have the right to interfere in Greece’s affairs. The finance minister also repeated a call for Germany to pay 11 billion euros in reparations for Nazi atrocities to Greece. German officials have said that the matter is settled. Varoufakis also addressed a recent video in which he appears to be showing his middle finger at hypothetical German officials at a 2013 speech in Zagreb, two years before he became finance minister. He called it a fake.

Earlier, Greek Prime Minister Alexis Tsipras also said his country was not facing a cash shortage. The denial came as Greece prepares to issue €1 billion in three-month treasury bills on Wednesday to meet debt repayments. “There is absolutely no problem with liquidity,” Tsipras told reporters after meeting with Varoufakis. Negotiations are continuing with creditors on a revised reform plan for Greece. On Sunday, Germany’s Frankfurter Allgemeine Zeitung reported that, with €6 billion in debt bills in March overall on Greece’s books, civil servants should brace themselves for downsized salaries and pensions this month. “Tsipras urgently needs money,” said European Parliament President Martin Schulz in the article. The German parliamentarian, who met Tsipras last week, said Greece would have to convince eurozone nations and the ECB of its determination to carry out reforms.

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Stuffed with propaganda. Not a great idea in Germany.

• Germans Tired of Greek Demands Want Country to Exit Euro (Bloomberg)

Berlin cabdriver Jens Mueller says he’s had it with the Greek government and he doesn’t want Germany to send any more of his tax money to be squandered in Athens. “They’ve got a lot of hubris and arrogance, being in the situation they’re in and making all these demands,” said Mueller, 49, waiting for fares near the Brandenburg Gate. “Maybe it’s better for Greece to just leave the euro.” Mueller’s sentiment is shared by a majority of Germans. A poll published March 13 by public broadcaster ZDF found 52% of his countrymen no longer want Greece to remain in Europe’s common currency, up from 41% last month. The shift is due to a view held by 80% of Germans that Greece’s government “isn’t behaving seriously toward its European partners.”

The hardening of German opinion is significant because the country is the biggest contributor to Greece’s €240 billion twin bailouts and the chief proponent of budget cuts and reforms in return for aid. Tensions have been escalating between the two governments since Prime Minister Alexis Tsipras took office in January, promising to end an austerity drive that he blames on Chancellor Angela Merkel. The shift in sentiment comes as Greece, at risk of running out of cash this month, battles with European officials over the release of more bailout funds. Tspipras has also stepped up calls for war reparations from Germany for the Nazi occupation during World War II and Greek Finance Minister Yanis Varoufakis has been locked in a war of words with his German counterpart Wolfgang Schaeuble.

Last week, the Greek government officially complained about Schaeuble’s conduct, to which Schaeuble replied that the whole matter was “absurd.” “The way the Greeks have been behaving has been impossible. Now they’re making their own demands with these reparations,” said Dorli Schneider, an interpreter waiting for a train at Munich’s central station. “Greece should pay back what they owe. We can’t forever give them more money.” German voters’ growing umbrage may make it harder for Merkel to sell any possible deal down the road to the German public and Budestag, which would have to vote on it. She also has to be wary of the anti-euro AfD party trying to peel off her voters, said Juergen Falter, a political scientist at the Johannes Gutenberg University in Mainz.

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That’s not what he said.

• Russia Was Ready for Crimea Nuclear Standoff, Putin Says (Bloomberg)

Russian President Vladimir Putin said he was ready to put his country’s nuclear forces on alert when he annexed Ukraine’s Crimean peninsula last year in case of intervention by the U.S. and its allies. “We were ready to do that,” Putin said when asked in a documentary film about Russia’s takeover of Crimea aired Sunday on state television if the Kremlin had been prepared to place its nuclear forces on alert. The Russian leader said he warned the U.S. and Europe not to get involved, accusing them of engineering the ouster of Russian-backed Ukrainian President Viktor Yanukovych. “That’s why I think no one wanted to start a world conflict.”

In the film, called “Crimea: the Road to the Motherland,” broadcast by Rossiya-1, Putin said he sent military intelligence and elite navy marines to spearhead the disarmament of 20,000 Ukrainian troops in the territory. No date was given for the Putin interview. The film was made over eight months. Russia’s seizure of Crimea in March last year provoked the worst geo-political confrontation with the U.S. and Europe since the Cold War. Tensions have escalated during a pro-Russian insurgency in eastern Ukraine that’s killed more than 6,000 people over the past year. Despite a European-brokered cease-fire, the U.S. is considering arming Ukrainian forces.

Putin, 62, whose country has been hit by U.S. and European Union sanctions that have helped to drive the Russian economy toward recession, branded President Barack Obama’s administration as “puppet-masters.” He said the U.S. directed the months of mass protests that overthrew Yanukovych in February last year. The Russian president said he decided to seize Crimea after a crisis all-night meeting with security chiefs from Feb. 22-23 to save the majority-ethnic Russian territory from the “nationalists” in Kiev who would have killed Yanukovych if Russia hadn’t given him refuge. He said the annexation of Crimea wasn’t planned before the overthrow of Yanukovych.

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She needs to go.

• More Than a Million Hit Brazil Streets to Protest Rousseff (Bloomberg)

More than 1 million Brazilians, some of them calling for President Dilma Rousseff’s impeachment, took to the nation’s streets Sunday to protest a government beset by scandal and the rising cost of living. The largest protest occurred in Sao Paulo, with 1 million people as of 3:40 p.m. local time, according to its military police. Protests occurred in cites of 16 states and the federal capital, according to O Globo website. Its TV network reported 100,000 protesters in Porto Alegre and 45,000 in Brasilia, citing the military police of those cities. While no violence or vandalism was reported, Sao Paulo police apprehended firework rockets from a group of attendees. Higher taxes and increased prices for government-regulated items like gasoline are rankling Brazilians as the biggest corruption scandal in the nation’s history ensnares elected and appointed officials.

The approval rating of Rousseff’s government has plummeted since she won a close re-election last October. Today’s protests may be bigger than the June 2013 demonstrations in which more than a million people decried deficient public services and demanded an end to corruption. Today’s protest will force the government to present anti-corruption legislation it has already prepared, according to Thiago de Aragao at Arko Advice, a political risk company. Doing so will allow the government to deflect some fire and argue that protests targeted corruption rather than Rousseff or her party, he said. “The government needs to make some response and since, because of the magnitude, they can’t disqualify the size and pressure of the protest, they have to address one of the issues,” De Aragao said by phone.

“The anti-corruption package will be more fluff than anything real, but at this moment it’s one of the main things that the government has to respond with. They don’t have much more than that.” [..] Today marks the 30th anniversary of Brazil’s return to democracy after a 21-year military dictatorship. March 15 will henceforth be remembered as the Day of Democracy, Aecio Neves, who Rousseff bested in the election last year, said in a video posted on his Facebook page, showing him wearing the yellow jersey of the Brazilian national soccer squad. “I’m here to protest against corruption,” said Eliana Batista do Norte, a 55-year-old publicist who marched in Sao Paulo. “It’s not just about throwing the Workers’ Party out. We have to get rid of all the corrupt people. There is already enough information to remove Dilma.”

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They want to buy $300 billion worth of US Treasuries AND purchase all of their own bonds? Wow…

• Beware the $300 Billion Shift Into Treasuries Coming From Japan (Bloomberg)

Back in the 1980s, the billions of dollars that the Japanese plowed into U.S. government debt reflected the Asian nation’s burgeoning economic might. Now, they’re at it again, only this time it’s to eke out any return they can. Yields on Japanese debt have been pinned near zero ever since the Bank of Japan embarked on its latest attempt, in April 2013, to end the two decades of stagnation that followed those go-go years. Europe isn’t much of an option, as yields turned negative this year on the region’s own quantitative easing. So why the U.S.? For one, with the Federal Reserve poised to raise interest rates, Treasuries offer the highest yields among debt from the world’s most-industrialized economies.

Then there’s the dollar, whose meteoric rise against virtually every currency has made U.S. assets even more appealing. HSBC says Japanese investors may funnel $300 billion into Treasuries over the next two to three years, double the pace of the nation’s purchases since 2012. “The BOJ is crowding out private investors,” said Yusuke Ito at Mizuho. “They have to find alternatives.” Mizuho’s overseas bond unit, which stepped up buying of Treasuries in mid-2014, has signed up more clients looking for higher-yielding alternatives to Japanese debt, he said. Japan first began to exert its influence in the U.S. government bond market more than three decades ago, when its booming export-driven economy produced trade surpluses that it then plowed into Treasuries year after year.

Japan has since built a stake of $1.23 trillion, making it America’s second-largest overseas creditor, just behind China’s $1.24 trillion. For the U.S. government, maintaining Japanese demand in the $12.6 trillion market for Treasuries is more important than ever, particularly after China pared its own holdings last year by the most on record and as the Fed prepares to raise rates. The good news is that Japanese purchases are poised to accelerate. Of the $500 billion that investors will pull from Japan’s debt market to put abroad through 2017, about 60% will flow into Treasuries, said Andre de Silva, HSBC’s Hong Kong-based head of global emerging-markets rates research.

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“..if a 1.5% write down in the assets of a supposedly well-capitalized German bank can lead to almost overnight insolvency, one can almost imagine what will happen when the Austrian black swan wave reaches Europe’s actually “undercapitalized” banks…”

• The Austrian Black Swan Claims Its First Foreign Casualty (Zero Hedge)

Precisely one week ago in “A Black Swan Lands In Southern Austria: The Ripple Effects Of “Mini-Greece Going Off In The Heartland Of Europe”, when analyzing the consequences of the collapse of Austria’s bad bank, we noted perhaps the biggest paradox of Europe’s emergency preparedness response to the Greek collapse and imminent expulsion from the Eurozone: namely that the biggest threat to German banks was no longer in some Mediterranean nation, but in its very own back yard. To wit:

Irony #2, and the biggest one of all: while German banks had spent the past 3 years preparing for the inevitable Grexit and offloading all their exposure to the now insolvent Greek state, it was a waterfall chain of events which started in Germany’s own “back yard”, courtesy of auditors who decided it was unnecessary to mark losses to market until it was far too late, and the immediate outcome is that one ninth of until recently Aaa/AAA-rated Austria is now also insolvent. And that is just the beginning. One can only imagine how many such other “0% risk-weighted” Pandora boxes lie in wait across what are otherwise considered Europe’s safest banks, provinces and nations.

Indeed, it was just the beginning, and moments ago we got confirmation that the next domino has tipped over, following a Reuters report that Germany’s deposit protection fund will take over the property lender Duesseldorfer Hypothekenbank AG (DuesselHyp), which has “run into problems” due to its exposure to Austrian lender Hypo Alpe Adria’s “bad bank” Heta. And while in the US FDIC Failure Fridays works like a well-greased machine, Germany has yet to get the hang of the whole “save the bad news for Friday after market close” thing and has for now has stopped on “Shocker Sundays.” Then again, this being Europe, denial persists even after the moment of failure, and according to Reuters, “the German banking association BdB, which runs the fund, is, however, not planning to wind down the bank, but wants to continue its operations.”

“The deposit protection fund is granting a guarantee for the Heta bonds to eliminate the immediate risks. The goal is a complete takeover of Duesseldorfer Hypothekenbank,” the BdB said in a statement on Sunday.

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It’s starting to feel like the last gasps of a fatally distorted system.

• The Full Explanation Of How The ECB Broke Europe’s Bond Market (Zero Hedge)

[..]..it is not just the topic of swapping one asset with a higher collateral velocity for another with a far lower, if not zero, velocity, but also the issue of effective supply. As JPM notes, “another important aspect in Coeuré’s speech regarding market liquidity was the notion of “effective supply”. What matters more for market liquidity and depth is indeed not the overall stock or supply of euro government bonds, but the size of the effective supply as some asset holders may not be willing to sell. And it is effective supply that would determine whether the Eurosystem be able to meet its quantitative targets. While it is inherently difficult to calculate effective supply we believe we can make some reasonable assumptions to proxy it.” But before JPM’s analysis of effective supply in Europe (or lack thereof), it takes one more swipe at just how clueless the Goldman-advised ECB has become:

… we disagree with Coeuré’s view that, similar to their Japanese counterparts, “euro area banks will be more willing to sell euro government bonds to the ECB as they will receive central bank reserves, which in the current low interest rate environment can be viewed by banks as close substitutes for government bonds, and which count towards fulfilling e.g. the required liquidity ratios”. The problem with this argument, in our view, is that the ratio of government bonds + reserves to assets for commercial banks remains low for European banks vs. those in the US or Japan. Euro area and UK banks, in particular, have a ratio of government bonds + reserves to assets of 7% vs. 30% for their US and Japanese counterparts.

If Euro area banks sell no bonds at all to the ECB and at the same time the ECB injects €1.1tr into the Euro area banking system, the ratio of government bonds + reserves to assets would rise to 11%. This will still be well below the 30% for their US and Japanese counterparts. In addition, as we argued above, government bonds are worth more to banks from a collateral point of view given rehypothecation. And this is perhaps one of the reasons that banks are currently willing to hold euro government bonds with yields that are below -20bp. In all, we continue to believe that banks in the Euro area could end up selling bonds to the ECB, but to a much smaller extent than their Japanese counterparts given their much higher need for liquid assets.

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He doesn’t get paid to read…

• Krugman Is Told to Read More, Write Less, by Swedish Riksbanker (Bloomberg)

Nobel laureate Paul Krugman is way off when he accuses the Swedish central bank of being guilty of “sadomonetarism,” according to the target of his criticism. Deputy Governor Per Jansson says the U.S. economist’s analysis suggests he hasn’t read enough about Sweden. Krugman has criticized the bank for raising rates at the height of Europe’s debt crisis in 2010 and 2011, and then for not cutting fast enough to fight disinflation. The moves made sense at the time, Jansson said, given a consensus among forecasters that prices were rebounding and as the economy was expanding faster than much of Europe, driving up credit growth and house prices.

“When he described Sweden as sort of a deflationary economy, and makes these parallels to Japan, you wonder, has he ever had a look at the data?” Jansson said in a March 12 interview in Stockholm. “Has he seen how Swedish GDP recovered over these crisis years? It completely outperformed the euro area, of course, but even the U.K. It’s close to the U.S.’s performance.” Krugman and other critics say the Riksbank’s policies drove Sweden into a deflationary trap that could have been avoided. The Riksbank, which in the mid-1990s became one of the first to target inflation, last reached its 2% target in 2011. Annual consumer prices have fallen for 11 of the past 14 months.

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“Unfortunately history has shown that even using humanitarian rhetoric as a justification for telling others what to do has never worked.”

• A Green Light for the American Empire (Ron Paul)

The American Empire has been long in the making. A green light was given in 1990 to finalize that goal. Dramatic events occurred that year that allowed the promoters of the American Empire to cheer. It also ushered in the current 25-year war to solidify the power necessary to manage a world empire. Most people in the world now recognize this fact and assume that the empire is here to stay for a long time. That remains to be seen. Empires come and go. Some pop up quickly and disappear in the same manner. Others take many years to develop and sometimes many years to totally disintegrate. The old empires, like the Greek, Roman, Spanish and many others took many years to build and many years to disappear. The Soviet Empire was one that came rather quickly and dissipated swiftly after a relatively short period of time. The communist ideology took many decades to foment the agitation necessary for the people to tolerate that system.

Since 1990 the United States has had to fight many battles to convince the world that it was the only military and economic force to contend with. Most people are now convinced and are easily intimidated by our domination worldwide with the use of military force and economic sanctions on which we generously rely. Though on the short term this seems to many, and especially for the neoconservatives, that our power cannot be challenged. What is so often forgotten is that while most countries will yield to our threats and intimidation, along the way many enemies were created.

The seeds of the American Empire were sown early in our history. Natural resources, river transportation, and geographic location all lent itself to the development of an empire. An attitude of “Manifest Destiny” was something most Americans had no trouble accepting. Although in our early history there were those who believed in a powerful central government, with central banking and foreign intervention, these views were nothing like they are today as a consequence of many years of formalizing the power and determination necessary for us to be the policeman of the world and justify violence as a means for spreading a particular message. Many now endorse the idea that using force to spread American exceptionalism is moral and a force for good. Unfortunately history has shown that even using humanitarian rhetoric as a justification for telling others what to do has never worked.

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Why do I keep thinking this is no accident?

• How to Build a $400 Billion F-35 that Doesn’t Fly (Fiscal Times)

The Pentagon’s embattled F-35 Joint Strike Fighter continues to be plagued with so many problems that it can’t even pass the most basic requirements needed to fly in combat, despite soaring roughly $170 billion over budget. As the most expensive weapons program in the Pentagon’s history, the $400 billion and counting F-35 is supposed to be unlike any other fighter jet—with high-tech computer capabilities that can identify a combatant plane at warp speed. However, major design flaws and test failures have placed the program under serious scrutiny for years–with auditors constantly questioning whether the jet will ever actually get off the ground, no matter how much money is thrown at it. Last year, military officials faulted contractors for all of the mistakes.

Contractors claimed they had corrected the issues and that there wouldn’t be more costly problems down the road. During an interview on 60 Minutes, Air Force Lt. Gen. Chris Bogdan, who is in charge of the program said, “Long gone is the time when we will continue to pay for mistake after mistake after mistake. Lockheed Martin doesn’t get paid their profit unless each and every airplane meets each station on time with the right quality.” However, a new progress report from the Defense Department casts serious doubts on the progress of the program. The DoD’s Director of Operational Test and Evaluation cites everything from computer system malfunctions to flaws with its basic design—it even found that the jet is vulnerable to engine fires because of the way it’s built.

A separate report from Military.com unearthed another embarrassing issue with the jet that suggests it won’t take off on time. The “precision-guided Small Diameter Bomb II doesn’t even fit on the Marine’s version of the jet, according to Military.com. On top of that, the software needed to operate the top close-air support bomb won’t even be operational until 2022, inspectors said. The Defense Department’s report also suggested that the program’s office isn’t accurately recording the jet’s problems. “Not all failures are counted in the calculation of mean flight hours between reliability events, but all flight hours are counted, and hence component and aircraft reliability are reported higher than if all of the failures were counted,” the report said.

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Debt Rattle March 11 2015

Mar 112015
 
 March 11, 2015  Posted by at 6:23 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »


DPC Grace Church, New York 1905

• The Blistering Pace Of Dollar’s Rally Is Rattling Markets (MarketWatch)
• EM Currency Turmoil As US Rate-Hike Jitters Bite (CNBC)
• Here’s Why Draghi’s Inflation Bomb Could Prove to Be a Dud (Bloomberg)
• Stronger Dollar Sends U.S. Stocks to Biggest Drop in Two Months (Bloomberg)
• Get Ready For A Much Bigger Oil Shock (CNBC)
• Thomas Piketty on the Eurozone: ‘We Have Created a Monster’ (Spiegel)
• Why Understanding Money Matters in Greece (Rob Parenteau)
• Varoufakis Unsettles Germans With Admissions In Documentary (Reuters)
• Tsipras Says Will Pursue German War Reparations (Kathimerini)
• Greece Got a ‘Deal’ in February, But Things Still Haven’t Calmed Down (Bloomberg)
• Eurozone Central Bank Buying Crushes Yield Curves (Bloomberg)
• Why Does America Continue To Subsidize Housing For The Wealthy? (Guardian)
• China’s Solution to $3 Trillion Debt Is to Deal with It Later (Bloomberg)
• Yellen Meets Senate Bank Chief With Fed Transparency in Focus (Bloomberg)
• Chaos: Practice and Applications (Dmitry Orlov)
• ‘We’ll Buy Reverse Gas Supplies At $245’- Ukraine’s President (RT)
• US Applies Pressure to States Opposing Anti-Russian Sanctions: Nuland (Sputnik)
• It’s NATO That’s Empire-Building, Not Putin (Peter Hitchens)

• The Blistering Pace Of Dollar’s Rally Is Rattling Markets (MarketWatch)

It’s probably not the dollar’s unrelenting march higher that is unsettling U.S. stock investors, but it might be the speed of the rally. “I think what people are concerned about is the pace of the dollar strength,” Douglas Borthwick at Chapdelaine said. “Countries can always adapt to currencies strengthening or weakening, but certainly as the dollar strengthens very, very quickly it leaves very little chance for others to adapt,” he said. On a trade-weighted basis, the dollar remains far from its highs in the mid-1980s and early 2000s, but the pace of the rise over the past half year is the second fastest in the last 40 years, noted David Woo at Bank of America Merrill Lynch.

The ICE dollar index, a measure of the U.S. unit against a basket of six major rivals, is up 9% since the end of last year alone to trade at its highest level since late 2003. U.S. stocks dipped significantly, leaving the S&P 500 down 0.9% and within a whisker of erasing its 2015 gain after clawing back some of its earlier decline. The long-term correlation between the direction of the dollar and the S&P 500 is near zero, analysts note. But there have been periods when the dollar and stocks marched either in lock step or in opposite directions for significant periods. In the end, it all seems to come down to context. If the dollar rises because investors are confident about the future of the economy, then stocks can rise, too, as was the case in the late 1990s.

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“..currencies where countries have higher deficits or fiscal issues are under increased selling pressure..”

• EM Currency Turmoil As US Rate-Hike Jitters Bite (CNBC)

Emerging market currencies were hit hard on Tuesday, while the euro fell to a 12-year low versus the U.S. dollar, on rising expectations for a U.S. interest rate rise this year. The South African rand fell as much as 1.5% to a 13-year low at around 12.2700 per dollar, while the Turkish lira traded within sight of last Friday’s record low. The Brazilian real fell over one% to its lowest level in over a decade. It was last trading at about 3.1547 to the dollar. Meanwhile, Europe’s single currency fell as low as $1.0731, its lowest level in 12 years, fueling talk of a move closer to parity against the greenback. A perception that a U.S. rate hike could come sooner rather than later has been building since the release of Friday’s stronger-than-expected U.S. non-farm payrolls report.

Analysts said that concerns about fiscal issues were compounding weakness in some currencies. In the case of the euro, the massive quantitative easing (QE) program just unleashed by the ECB weighed. “It’s a case of broad-based dollar strength amid increased expectations of a U.S. rate hike this year,” Lee Hardman at Bank of Tokyo-Mitsubishi told CNBC. “So currencies where countries have higher deficits or fiscal issues are under increased selling pressure, such as the South Africa rand, the Turkish lira and the Brazilian real. The euro is weakening on its own accord because of QE.”

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“..the higher the dollar goes the more likely investors will flee developing nations..”

• Here’s Why Draghi’s Inflation Bomb Could Prove to Be a Dud (Bloomberg)

Mario Draghi’s inflation bomb could prove to be a dud. That’s because the weakness in the euro resulting from the European Central Bank’s €1.1 trillion quantitative-easing program risks being more than offset globally by the deflationary impact of a stronger dollar. Making that case as the euro trades around its lowest in 11 years against the greenback is David Woo, head of global rates and currencies at Bank of America Merrill Lynch in New York. He’s telling clients that pressure from a rising dollar threatens to rattle emerging markets, undermine U.S. stocks and curb commodities prices. Here’s how:

First, the higher the dollar goes the more likely investors will flee developing nations; that will make their borrowings in the U.S. currency more expensive, damaging their already-shaky outlook for growth. As Woo notes, the Turkish lira and Mexican peso have both reached or traded near all-time lows against the dollar in the past few days and Brazil’s real is at its weakest since 2004. China, which manages the value of its yuan against a basket of other currencies, may be forced to devalue to keep its products cheap in the international marketplace.

Next, because commodities are priced in dollars, the higher the greenback goes the more downward pressure will be applied to oil prices. Bank of America already says the likelihood is greater that crude falls rather than rises. Finally, Woo estimates the dollar’s rise is starting to undermine profits at home. U.S. companies in the Standard & Poor’s 500 Index get 40% of their earnings from overseas and the index has fallen in 19 out of 27 trading days this year in which the greenback gained. “The obvious implication is that investors are becoming concerned about the ability of the U.S. economy to cope with the strengthening dollar,” Woo said in a report to clients Monday. “The decline of euro/dollar below 1.10 may be less benign than it may appear at first.”

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Pretty big losses.

• Stronger Dollar Sends U.S. Stocks to Biggest Drop in Two Months (Bloomberg)

U.S. stocks fell the most in two months as the dollar strengthened to near a 12-year high versus the euro amid speculation the Federal Reserve is moving closer to raising interest rates. Intel and Cisco lost at least 2.4% as technology companies in the Standard & Poor’s 500 Index led declines. United Technologies Corp., Goldman Sachs and Home Depot dropped more than 1.8% to pace losses among the biggest companies. The S&P 500 retreated 1.7% to 2,044.16 at the close in New York, falling below its average price for the past 50 days for the first time since Feb. 9. The Dow Jones Industrial Average lost 332.78 points, or 1.9%, to 17,662.94. Both indexes erased gains for the year. The Nasdaq 100 Index fell 1.9%. About 7.1 billion shares changed hands on U.S. exchanges, 2.8% above the three-month average.

“A continuation of dollar strength and euro destruction is certainly raising some concerns,” Michael James at Wedbush Securities said in a phone interview. “I don’t think there was any one specific event or item that caused this, but the fact that it’s a trend that’s been going on for the last several weeks is concerning given the levels we’re at now.” Concern the Fed may start raising interest rates this year amid a strengthening economy has weighed on equities and helped boost the dollar. In his last speech as president of the Fed Bank of Dallas, Richard Fisher said the central bank should begin to gradually raise rates before the economy reaches full employment to avoid triggering a recession.

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“..the Iran production growth story is just one but it makes factors such as Libya’s piddly production oscillation and rig count obsessions in the US pale into insignificance.”

• Get Ready For A Much Bigger Oil Shock (CNBC)

So what’s the biggest trade in the markets right now? Could it be the one way bet on European fixed income with Draghi’s massive bond-buying program set to obliterate anyone who challenges ludicrously low bond yields? Or the tech bull position with the Nasdaq around year-2000 highs? For now let’s ignore the collapse in euro zone yield and the nose-bleeding valuations in tech and concentrate on my favourite trade – the brutal battle being fought in the oil market. Last week, InterContinental Exchange revealed that the hedge-betters and speculators were piling into the oil trade in levels not seen since the middle of last year. You remember the middle of last year, that was when crude was still at $110 per barrel, pretty much double where it is now. So are we setting ourselves up for another massive bout of volatility after a few weeks of relatively calm price action?

The longs are out in force, according to the data but are they too early in calling an end to the oil price rout? Brent may have had a fantastic rally in February, having plummeted to the low $40s region after last year’s rout. But was that a dead cat bounce ignoring the still dreadful near term fundamentals? Despite a lot of excitement about the falling rig count and the huge number of job expenditure cuts across exploration and production, there is still over-production not only in the US but also across the world. In fact, if you believe the bears, then the US will shortly run out of storage space above ground. The guys who’ve been in the industry and have seen cycle after cycle like this keep telling me that the cure for lower prices is lower prices. But when will we see supply and demand responses to $50-60 oil?

Well, many of the global wells just can’t afford to stop just yet, whether it is because of the need for Middle Eastern petro-dollars of the demanding Texan bank manager who still expects the oil well-related loan to be serviced. Surely the key factors in where we go next have still to come to the fore this year and we are still at the appetiser stage. For many, June will be the main event. That month is when the next scheduled OPEC meeting is due to take place and it is possibly the most likely time we will see a supply response from the group representing around a third of global production. The end of June just also happens to be the deadline for the Iran nuclear deal. If – and it’s a big “if” – Iran gets a framework agreement by the end of this month, the country will be desperate to ramp up production of oil as quickly as possible. And, believe me, it may take them months if not years but they really want to ramp it up.

Iran doesn’t just want to up its levels from the current 2.8 million barrels a day. It wants to first get to the 4 million barrels it was producing back in 2008 and then it wants to keep going on and on and on. That will set up Iran for a huge row with Saudi over OPEC production levels. Yes, the Iran production growth story is just one but it makes factors such as Libya’s piddly production oscillation and rig count obsessions in the US pale into insignificance. So for me the phoney war going on in the oil market at the moment may just result in a stalemate until the middle of the year. That is when we may get the real battle. The one that may just justify at least one side of the extreme calls from $20 to back up to $90 per barrel.

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A morally bankrupt monster.

• Thomas Piketty on the Eurozone: ‘We Have Created a Monster’ (Spiegel)

SPIEGEL: You publicly rejoiced over Alexis Tsipras’ election victory in Greece. What do you think the chances are that the European Union and Athens will agree on a path to resolve the crisis?
Piketty: The way Europe behaved in the crisis was nothing short of disastrous. Five years ago, the United States and Europe had approximately the same unemployment rate and level of public debt. But now, five years later, it’s a different story: Unemployment has exploded here in Europe, while it has declined in the United States. Our economic output remains below the 2007 level. It has declined by up to 10% in Spain and Italy, and by 25% in Greece.

SPIEGEL: The new leftist government in Athens hasn’t exactly gotten off to an impressive start. Do you seriously believe that Prime Minister Tsipras can revive the Greek economy?
Piketty: Greece alone won’t be able to do anything. It has to come from France, Germany and Brussels. The International Monetary Fund (IMF) already admitted three years ago thatthe austerity policies had been taken too far. The fact that the affected countries were forced to reduce their deficit in much too short a time had a terrible impact on growth. We Europeans, poorly organized as we are, have used our impenetrable political instruments to turn the financial crisis, which began in the United States, into a debt crisis. This has tragically turned into a crisis of confidence across Europe.

SPIEGEL: European governments have tried to avert the crisis by implementing numerous reforms. What do mean when you refer to impenetrable political instruments?
Piketty: We may have a common currency for 19 countries, but each of these countries has a different tax system, and fiscal policy was never harmonized in Europe. It can’t work. In creating the euro zone, we have created a monster. Before there was a common currency, the countries could simply devalue their currencies to become more competitive. As a member of the euro zone, Greece was barred from using this established and effective concept.

SPIEGEL: You’re sounding a little like Alexis Tsipras, who argues that because others are at fault, Greece doesn’t have to pay back its own debts.
Piketty: I am neither a member of Syriza nor do I support the party. I am merely trying to analyze the situation in which we find ourselves. And it has become clear that countries cannot reduce their deficits unless the economy grows. It simply doesn’t work. We mustn’t forget that neither Germany nor France, which were both deeply in debt in 1945, ever fully repaid those debts. Yet precisely these two countries are now telling the Southern Europeans that they have to repay their debts down to the euro. It’s historic amnesia! But with dire consequences.

SPIEGEL: So others should now pay for the decades of mismanagement by governments in Athens?
Piketty: It’s time for us to think about the young generation of Europeans. For many of them, it is extremely difficult to find work at all. Should we tell them: “Sorry, but your parents and grandparents are the reason you can’t find a job?” Do we really want a European model of cross-generational collective punishment? It is this egotism motivated by nationalism that disconcerts me more than anything else today.

SPIEGEL: It doesn’t sound as if you are a fan of the Stability Pact, the agreement implemented to force euro-zone countries to improve fiscal discipline.
Piketty: The pact is a true catastrophe. Setting fixed deficit rules for the future cannot work. You can’t solve debt problems with automatic rules that are always applied in the same way, regardless of differences in economic conditions.

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Great read. h/t Yves.

• Why Understanding Money Matters in Greece (Rob Parenteau)

As Greece staggers under the weight of a depression exceeding that of the 1930s in the US, it appears difficult to see a way forward from what is becoming increasingly a Ponzi financed, extend and pretend, “bailout” scheme. In fact, there are much more creative and effective ways to solve some of the macrofinancial dilemmas that Greece is facing, and without Greece having to exit the euro. But these solutions challenge many existing economic paradigms, including the concept of “money” itself. At the Levy Economics Institute conference held in Athens in November 2013, I proposed tax anticipation notes, or “TANs”, as a way for Greece to exit austerity without having to exit the euro.

This proposal is based on a deeper understanding of what money actually is, and the many roles that it plays in the economies we inhabit. In this regard, Abba Lerner captured the essence of modern fiat currencies, which are created out of thin air by modern states with sovereign currency arrangements. Lerner’s essential insight is contained in the following passage from over half a century ago (and, you will note, Lerner’s view informs much of the neo-chartalist view espoused by advocates of what is called Modern Monetary Theory):

The modern state can make anything it chooses generally acceptable as money…It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.

The modern state, then, imposes and enforces a tax liability on its citizens, and chooses that which is necessary to pay taxes. That means a state with a sovereign currency is never revenue constrained. In fact, the government has to first create the money before the private sector can find a way to get the money it requires to pay taxes and by government bonds. Taxes and bonds are therefore not really the source of government funding or finance. Wait, what? The government itself ultimately is the source of money required to pay for government expenditures. Taxes simply give value to money, as households and nonbank firms cannot create money – that is counterfeiting. Instead, they have to sell an asset or a product or a service to the government to get money, or they need to be beneficiaries of government corporate subsidy or household transfer programs to get money.

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Weird coincidence?

• Varoufakis Unsettles Germans With Admissions In Documentary (Reuters)

Greek Finance Minister Yanis Varoufakis has described his country as the most bankrupt in the world and said European leaders knew all along that Athens would never repay its debts, in blunt comments that sparked a backlash in the German media on Tuesday. A documentary about the Greek debt crisis on German public broadcaster ARD was aired on the same day euro zone finance ministers met in Brussels to discuss whether to provide Athens with further funding in exchange for delivering reforms. “Clever people in Brussels, in Frankfurt and in Berlin knew back in May 2010 that Greece would never pay back its debts. But they acted as if Greece wasn’t bankrupt, as if it just didn’t have enough liquid funds,” Varoufakis told the documentary.

“In this position, to give the most bankrupt of any state the biggest credit in history, like third class corrupt bankers, was a crime against humanity,” said Varoufakis, according to a German translation of his comments. It was unclear when the program was recorded. Although strident criticism of the way Greece has been treated is typical for Varoufakis, a Marxist economist, the remarks caused a stir in Germany where voters and politicians are increasingly reluctant to lend Greece money. Bild daily splashed the comments on the front page and ran an editorial comment urging European leaders to stop providing Greece with ever more financial support. “The Greek government is behaving as if everyone must dance to its tune. But there must be an end to this madness. Europe must not be made to look stupid,” wrote a commentator.

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Syriza is not taking the attempts at humiliations lying down.

• Tsipras Says Will Pursue German War Reparations (Kathimerini)

Prime Minister Alexis Tsipras Tuesday expressed his government’s firm intention to seek war reparations from Germany, noting that Athens would show sensitivity that it hoped to see reciprocated from Berlin. In a speech in Parliament, launching a debate on the creation of a committee to seek war reparations, the repayment of a forced loan and the return of antiquities, Tsipras told MPs that the matter of war reparations was “very technical and sensitive” but one he has a duty to pursue. He also seemed to indirectly connect the matter to talks between Greece and its international creditors on the country’s loan program. “The Greek government will strive to honor its commitments to the full,” he said.

“But it will also strive to ensure all unfulfilled obligations toward Greece and the Greek people are fulfilled,” he added. “You cannot pick and choose on ethical issues.” Tsipras noted that Germany got support “despite the crimes of the Third Reich” chiefly thanks to the London Debt Agreement of 1953. Since reunification, German governments have used “silence, legal tricks and delays” to avoid solving the problem, he said. “We are not giving morality lessons but we will not accept morality lessons either,” Tsipras said. In comments to Parliament later PASOK leader Evangelos Venizelos said it was important not to link the issue of reparations with Greece’s talks with creditors.

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Given the above, what’s that deal worth?

• Greece Got a ‘Deal’ in February, But Things Still Haven’t Calmed Down (Bloomberg)

On February 20th, the Eurogroup came to an agreement with Greece on a way forward that would allow Greece access to further bailout funding. The agreement covered the way forward for Greece and consisted of three main elements.
• Greece would come up with a set of budgetary measures that would allow a successful review by the institutions.
• Greece would then implement these measures.
• The institutions would disburse funding to Greece as successful implementation progressed.

With this deal in place, it briefly seemed like things would quiet down for Greece, for a few months at least. Unfortunately, a sticking point has already emerged, which was highlighted at yesterday’s Eurogroup meeting. That sticking point is due to the very slow progress on meeting any of the elements of the February deal. The institutions are now going to take a larger role in formulating the measures Greece must undertake. The first meeting between Greece and the institutions is due to take place in Brussels tomorrow. If these meetings can produce measures that are acceptable to both sides, that will be a first step. But for Greece to access further funding it will have to also take the second step and start to implement those agreed measures. With time running out, there should be willingness on both sides to expedite this quickly. Recent events have shown, however, that each step forward in the process only happens at the last possible moment.

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Let’s all get sunk in a bottomless pit.

• Eurozone Central Bank Buying Crushes Yield Curves (Bloomberg)

Euro-area government bonds with longer maturities surged as the region’s central banks bought sovereign debt for a second day, pushing yields closer to those on shorter-dated notes. That’s flattening so-called the yield curves of debt from Germany to Italy. Euro-system central banks were said to have purchased securities, including German five-year notes with a negative yield, under the ECB’s expanded quantitative-easing plan, according to three people with knowledge of the transactions. Belgian and Italian securities were also acquired, one of the people said. As the ECB and national members embark on purchases of sovereign debt designed to boost price growth in the region, rates on short-term securities are below zero in seven euro-area nations, meaning a buyer now would get less back than they paid if they held them to maturity.

That’s boosting demand for longer-dated bonds, particularly as the ECB’s rules preclude purchases of debt yielding below its deposit rate of minus 0.2%. German 30-year yields dropped the most in more than two months and touched an all-time low. “Nobody wants to fight the flow,” said Felix Herrmann, an analyst at DZ Bank in Frankfurt. “We have many investors who are desperately looking for yield. They are simply scaling into those bonds that yield some interesting pick up.” The yield premium investors demand to hold Germany’s 30-year bunds instead of two-year notes shrank to 100 basis points, or 1%age point, at 3:59 p.m. London time, the least since October 2008. The spread is down from 234 basis points a year ago. A yield curve is a chart of rates on bonds of varying maturities.

The Bundesbank may struggle to meet its buying quotas given the amount of German debt yielding less than the ECB deposit rate, SocGen analysts wrote in a client note. Germany’s seven-year yield dropped below zero for the first time since Feb. 27. “Without good purchases in the short-dated bonds, where outstandings are big, it is difficult to see how the Bundesbank is going to get its share of the program done,” the analysts wrote. Germany’s three-year note yields reached minus 0.24% Tuesday, while the four-year rate touched minus 0.197%, less than one basis point from the ECB’s deposit rate.

Longer-dated bonds are also being favored after policy makers last week failed to agree on how to share losses from buying bonds with negative yields. 78 of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index already have rates below zero. “For me, as a fund manager, it doesn’t make sense to hold any bonds with a negative yield, so I’m happy to sell,” Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about $20 billion, said Monday. “We are selling to the brokers, not directly to the ECB, but maybe in the end this will be bought by the ECB.”

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Because that’s the only way to keep the housing industry alive.

• Why Does America Continue To Subsidize Housing For The Wealthy? (Guardian)

Many people in the US have given up on the American dream of owning a house: US homeownership rates have now dropped to the lowest point in almost 20 years. But the government shouldn’t be focusing on trying to raise that rate – for now, their priorities should lie with increasing affordable housing. For too long, well-off, high-income homeowners have benefited from generous government support. All the while, ordinary Americans are struggling to pay the rising rent. It is time to stop prioritizing home sales – increasingly out of reach for many Americans – and help everyday people attain a much more basic, and pressing need: affordable housing. Since the Great Depression, US housing policies have aimed almost exclusively at encouraging Americans to become homeowners.

Housing policies favor and heavily subsidize homeownership because it is said to help create strong communities and build family wealth. But it would be a mistake to continue with this approach now. Homeowners receive tax benefits for their housing expenses, mostly because of the enormously expensive mortgage interest deductions, which disproportionately benefits higher-income taxpayers. But no such support is offered to lower-income renters. The government should consider introducing housing tax credits or other tax benefits that would help those who are struggling to pay the rent. The federal government should also consider providing tax subsidies for land trusts or shared equity plans that help renters become homeowners but share the home’s appreciation with a third-party.

The old have policies have failed; we need to try a new approach. Though housing policies succeeded in encouraging renters to buy homes until the 1990s, homeownership has now become unaffordable for lower- and middle-income Americans largely because they do not have savings, and they have unstable and stagnated income – which has changed little (adjusted for inflation) since 1995. Because housing sales have been sluggish since the 2007-2009 recession, the US government has repeatedly tried to get people to buy houses, and keep existing homeowners in their houses. Yet programs like Hope for Homeowners program, the Home Affordable Modification Program and the Home Affordable Refinance Program all failed to achieve their goals of preventing owners from losing their homes, largely because of design flaws.

The homeownership problem is particularly acute in young adults, who entered the labor market at the time of the recession. Overall unemployment rates in 2007 were only 4.6%, but then soared to 9.3% by 2009. The jobs that have been created since the recession ended have mostly come from the low-wage retail, service and food/beverage sectors, making it harder even for young adults who have jobs to save money for a down payment – or even to pay rent. Student debt, which has skyrocketed, isn’t helping: average student loan balances increased by 91% from 2003 to 2012.

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Sounds sort of smart, but most debt is with the shadow banks, and that remains open.

• China’s Solution to $3 Trillion Debt Is to Deal with It Later (Bloomberg)

China’s government has a creative solution to address repayment concerns hanging over more than $3 trillion in regional debt. It will deal with it later. The Finance Ministry issued a 1 trillion yuan ($160 billion) quota for local governments to convert maturing high-cost debt into lower-yielding municipal notes to be repaid at a future date on March 8. Questions left unanswered include whether investors will be forced into the swap, how much transparency there will be over assets involved and whether the liabilities will strain the nation’s finances. China’s bond risk rose the most in a month on March 9 even as debt-rating companies welcomed the government’s plan to address regional debt, which Mizuho estimates may have reached 25 trillion yuan, bigger than Germany’s economy.

The ministry’s 500 billion yuan municipal bond trial and the auction of 100 billion yuan of special bonds is insufficient to meet local-government financing vehicle debt due this year while funding budgets, Moody’s Investors Service said. “It will buy time for the government to solve the local debt problem, as the transition period takes three to five years,” said Ivan Chung, a senior vice president at Moody’s in Hong Kong. “The 1 trillion yuan debt-swap plan will be able to cover the refinancing needs of the maturing bonds this year, as municipal bond issuance is not enough.” The government is seeking to rein in local-government borrowing while accelerating infrastructure spending to defend a 7% economic growth target. Regional authorities set up thousands of funding units to finance projects from sewage systems to subways after a 1994 budget law barred them from issuing notes directly. Their fundraising helped liabilities jump 67% from the end of 2010 to 17.9 trillion yuan as of June 2013.

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“That doesn’t jump out at me as a significant enough change.”

• Yellen Meets Senate Bank Chief With Fed Transparency in Focus (Bloomberg)

Federal Reserve Chair Janet Yellen reached out on Tuesday to Republicans who want to shake up the central bank, meeting with the powerful head of the Senate Banking Committee who has called for more accountability from the Fed. Yellen declined to comment after her 25 minute-long meeting with Alabama Republican Richard Shelby at his offices in Washington. Shelby earlier told reporters that “what we are doing is trying to figure out exactly what we need to do legislatively to make the Fed more accountable to the people and to do a better job as a regulator.” Lawmakers from both parties have voiced concerns about the central bank and are narrowing their focus to the New York Fed, which is the target of proposals to either make its president subject to Senate confirmation or dilute its policy powers.

Republicans have complained about the Fed’s aggressive monetary policies and what they consider regulatory overreach. Democrats have accused the Fed of failing to police the largest banks to prevent the kind of excessive risk-taking that contributed to the financial crisis of 2008. Shelby previously said he’s looking “very strongly” at a proposal from Dallas Fed President Richard Fisher, who is retiring next week, that would strip the New York Fed of its permanent vote on the policy-making Federal Open Market Committee.

Fisher’s staff has already responded to questions about his proposal from Shelby’s aides. Sherrod Brown, the senior Democrat on the Senate banking panel, said on Tuesday he favors a plan to make the president of the New York Fed a presidential appointment requiring Senate approval, like members of the Fed’s Washington-based Board of Governors. “The way we have the Fed structure, banks have so much influence over their regulator,” Brown, from Ohio, told reporters. “I don’t know if it should go any further than the New York Fed but it makes a lot of sense that the New York Fed be selected by the president and be confirmed.” While saying he would like to look more closely at the Fisher proposal, Brown said, “That doesn’t jump out at me as a significant enough change.”

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You can call it the Silly Empire, but that seems to ignore that chaos is the goal, rather than the means.

• Chaos: Practice and Applications (Dmitry Orlov)

The term “chaos” has been popping up a lot lately in the increasingly collapse-prone world in which we find ourselves. Pepe Escobar has even published a book on it. Titled Empire of Chaos, it describes a scenario “where a[n American] plutocracy progressively projects its own internal disintegration upon the whole world.” Escobar’s chaos is tailor-made; its purpose is “to prevent an economic integration of Eurasia that would leave the U.S. a non-hegemon, or worse still, an outsider.” Escobar is not the only one thinking along these lines; here is Vladimir Putin speaking at the Valdai Conference in 2014:

A unilateral diktat and imposing one’s own models produces the opposite result. Instead of settling conflicts it leads to their escalation, instead of sovereign and stable states we see the growing spread of chaos, and instead of democracy there is support for a very dubious public ranging from open neo-fascists to Islamic radicals.

Why do they support such people? They do this because they decide to use them as instruments along the way in achieving their goals but then burn their fingers and recoil. I never cease to be amazed by the way that our partners just keep stepping on the same rake, as we say here in Russia, that is to say, make the same mistake over and over.

Indeed, Escobar’s chaos doesn’t seem to be working too well. Eurasian integration is very much on track, with China and Russia now acting as an economic, military and political unit, and with other Eurasian states eager to play a role. The European Union is, for the moment, being excluded from Eurasia because it is effectively under American occupation, but this state of affairs is unlikely to last due to budgetary problems. (To be precise, we have to say that it is under NATO occupation, but if we dig just a little, we find that NATO is really just the US military with a European façade hammered onto it Potemkin village-style.)

And so the term “empire” seems rather misplaced. Empires are ambitious undertakings that seek to exert control over their domain, and what sort of an empire is it if its main activity is stepping on the same rake over and over again? A silly one? Then why not just call it “The Silly Empire”? Indeed, there are lots of fun silly imperial activities to choose from. For example: arm and train moderate opposition to a regime you want to overthrow; find out that it isn’t moderate at all; try to bomb them into submission and fail at that too.

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Russia won’t stand for it.

• ‘We’ll Buy Reverse Gas Supplies At $245’- Ukraine’s President (RT)

Ukraine will pay $245 per thousand cubic meters for the gas it will get through reverse flow from Europe as the country diversifies its natural gas suppliers away from Russia, President Petro Poroshenko has said. Ukraine has significantly reduced its energy dependence on Russia, and will buy Russian gas through reverse flows from Europe at $245 per 1,000 cubic meters, Ukrainian President Petro Poroshenko said in a TV interview Monday. “We have lived through the winter; we bought only 2 billion cubic meters of gas with the last purchase at a price of less than $300 per 1,000 cubic meter. As a result, it all came down to the Russian Federation having had to apply for a pumping volume increase of 68%, which crashed the gas market. And today we will buy gas for $245 under reverse deliveries,” Poroshenko said.

Ukraine has increased the amount of gas collecting in its underground storage facilities to 23 million cubic meters per day compared with 8 million cubic meters in February, according to the data provided by the GSE association on Tuesday. Currently the country is accepting 10 million cubic meters of Russian gas daily at a price of $329 per 1,000 cubic meters. Ukraine claims it pays 15% more for Russian gas than Europe. Ukraine currently receives reverse deliveries of natural gas from Slovakia, Hungary and Poland. Gas supplies from Hungary have been reduced by Ukraine and stand at 715,000 cubic meters a day from March 7, which is almost 5 times lower than in February, according to reports from the TASS news agency. Capacity from Slovakia remains at 37.7 million cubic meters a day. Poland can deliver up to 717, 000 cubic meters a day compared with 840,000 cubic meters in February. Last week Ukraine imported 330 million of cubic meters of natural gas from Europe, and 81 million cubic meters from Russia.

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Send her home and keep her there.

• US Applies Pressure to States Opposing Anti-Russian Sanctions: Nuland (Sputnik)

The United States government is applying pressure to European countries that oppose sanctions against Russia, US Assistant Secretary of State for European Affairs Victoria Nuland said at a US Senate hearing on Tuesday. “We continue to talk to them bilaterally about these issues,” Nuland said of Hungary, Greece, and Cyprus, whose leaders have opposed anti-Russian sanctions. “I will make another trip out to some of those countries in the coming days and weeks.” Nuland noted that “despite some publically stated concerns, those countries have supported sanctions” in the European Union Council. Additionally, discussions between the United States and Europe have continued, Nuland said in her opening statements to the US Senate Foreign Affairs Committee.

“We have already begun consultations with our European partners on further sanctions pressure should Russia continue fueling the fire in the east or other parts of Ukraine, fail to implement Minsk or grab more land,” she said. The United States, the European Union and their allies blame Russia for fueling the internal conflict in Ukraine and have imposed a series of sanctions against Russia targeting its defense, banking, and energy sectors. Russia has repeatedly denied the allegations and responded with targeted export bans. Some European nations including Greece, Hungary and Cyprus, have opposed further sanctions, and Spain has recently stated its opposition as well.

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Obviously.

• It’s NATO That’s Empire-Building, Not Putin (Peter Hitchens)

Just for once, let us try this argument with an open mind, employing arithmetic and geography and going easy on the adjectives. Two great land powers face each other. One of these powers, Russia, has given up control over 700,000 square miles of valuable territory. The other, the European Union, has gained control over 400,000 of those square miles. Which of these powers is expanding? There remain 300,000 neutral square miles between the two, mostly in Ukraine. From Moscow’s point of view, this is already a grievous, irretrievable loss. As Zbigniew Brzezinski, one of the canniest of the old Cold Warriors, wrote back in 1997, ‘Ukraine… is a geopolitical pivot because its very existence as an independent country helps to transform Russia. Without Ukraine, Russia ceases to be a Eurasian empire.’

This diminished Russia feels the spread of the EU and its armed wing, Nato, like a blow on an unhealed bruise. In February 2007, for instance, Vladimir Putin asked sulkily, ‘Against whom is this expansion intended?’ I have never heard a clear answer to that question. The USSR, which Nato was founded to fight, expired in August 1991. So what is Nato’s purpose now? Why does it even still exist? There is no obvious need for an adversarial system in post-Soviet Europe. Even if Russia wanted to reconquer its lost empire, as some believe (a belief for which there is no serious evidence), it is too weak and too poor to do this. So why not invite Russia to join the great western alliances?

Alas, it is obvious to everyone, but never stated, that Russia cannot ever join either Nato or the EU, for if it did so it would unbalance them both by its sheer size. There are many possible ways of dealing with this. One would be an adult recognition of the limits of human power, combined with an understanding of Russia’s repeated experience of invasions and its lack of defensible borders.

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