Feb 202016
 
 February 20, 2016  Posted by at 9:18 am Finance Tagged with: , , , , , , , , ,  


Russell Lee “Yreka, California. Magazine stand” 1942

Commodities’ $3.6 Trillion Black Hole (BBG)
‘It’s Going To Be Much Worse Than 2008’ (FS)
Has The Market Crash Only Just Begun? (ZH)
The US Economy Has Not Recovered and Will Not Recover (PCR)
Worldwide M&A Activity Falls 23% (Reuters)
US Shale Faces March Madness With $1.2 Billion in Interest Due (BBG)
Moody’s Tallies 28 Downgrades In The Energy Sector Since December (MW)
Why Oil Rout Is Hurting The Global Economy Instead Of Helping (MW)
China’s Foreign Exchange Reserves Dwindling Rapidly (NY Times)
China ‘Removes’ Top Securities Regulator (Reuters)
Fannie Mae At Risk Of Needing A Bailout (FT)
Independent Modelling May Show Way Out Of Oz Housing Bubble (SMH)
Brexit!? France And Germany Can Not Wait (Gefira)
Tsipras, Merkel, Hollande Agree On Open Borders Until March 6 Summit (Kath.)
EU Summit On Refugee Crisis Ends In Disarray (FT)
Two Children Drown Every Day On Average Trying To Reach Europe (UNHCR)

” If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5% of the total assets of all the world’s publicly traded banks. [..] U.S. subprime mortgages represented less than 1% of listed banks’ assets at the end of 2007.

Commodities’ $3.6 Trillion Black Hole (BBG)

Markets rallied this week after it became clear that some of the world’s biggest oil producers were going to curb production to stop prices from dropping any further. The news also buoyed other commodities, from coal to iron ore. Then everything dropped on Thursday with oil. Before the global financial crisis, a rise in raw-materials prices used to be bad news for the economy and stocks in general. Since central bank easy-money policies took off, that’s become a thing of the past:

One possible explanation is the level of exposure that banks and investors have to the industry. The 5,000 biggest publicly traded companies tracked by Bloomberg in the iron and steel, metals and mining, and energy sectors have a combined $3.6 trillion in debt, according to their most recent financial reports, double what they had at the end of 2008. Much of the increase is due to money that was borrowed to dig mines and wells whose output, at previous prices, would have easily repaid most maturing bonds and loans. But as commodity prices have tumbled, so has the ability of companies to meet their obligations. The Bloomberg Commodity Index is still only 3.9% higher than a 25-year low hit on Jan. 20. Five years ago, those companies tracked by Bloomberg had more operating income than debt, on average. Now, it would take them more than eight years’ worth of current earnings, without provisioning for interest, taxes, depreciation or amortization, to clear their combined net obligations.

Yield-hungry bond investors sucked up a lot of the debt that was issued and now hold about $2.1 trillion of outstanding notes. They’ll be first to feel the pain considering Standard & Poor’s has already downgraded securities equivalent to 47% of that amount and made some 400 negative-ratings moves in the basic materials and energy sectors over the past 12 months alone. Such scale and depth is reminiscent of the way banks were slaughtered by ratings companies during the 2008 financial crisis. It’s unclear where the other portion of the $3.6 trillion in liabilities lies but probably, most of it is owed to banks. If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5% of the total assets of all the world’s publicly traded banks. That doesn’t seem very significant, or any cause for concern. But to put it in some context, U.S. subprime mortgages represented less than 1% of listed banks’ assets at the end of 2007.

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“You have every major economic zone in the world in big, big trouble including the US and that is why I say this crisis has the potential of becoming much, much worse than the last one.” (h/t Stockman)

‘It’s Going To Be Much Worse Than 2008’ (FS)

Bert Dohmen, founder of Dohmen Capital Research, is uber-bearish and believes that it is time for investors to panic (before everyone else does) given a potential collapse of the stock market greater than what we saw in 2008. Here’s what he had to say on Thursday’s podcast: “Over a year ago we said that we are now in a transition year from a bull market to a bear market and from a growing economy to a recession—and this could be a very deep recession… now we see that we are finally there and more and more people are starting to realize it. But I raise the question here, ‘Is it too late to panic?’ Because…the advice given by so many analysts is ‘Don’t panic, don’t sell, don’t panic.’ And I say, ‘Yes, panic!’ And it’s not too late to panic. Panicking at the right time can save you a lot of money…

I predict in this bear market you will see the majority of stocks—majority meaning over 50% of the stocks—selling at $5 or less. Okay, just put that into your portfolio and see if you should be selling some stocks… We here other analysts say, ‘Oh, this is nothing like 2008’ and I agree with that, but I say that because I think it’s going to be much worse. 2008 was really a crisis triggered by the subprime mortgage market and the confetti that the Wall Street firms distributed around the world. They took those subprime mortgages, put them into pools, they sold participations in these pools, in these CDOs…they got a triple-AAA rating on all this garbage and sold it around the world and then they started defaulting. That caused ripples throughout the financial system and a global financial crisis, okay; but it was basically a mortgage crisis—that’s how it started.

Now, look at what we have currently. We have every major economic zone in the world in financial trouble. You have Japan with a debt-to-GDP ratio of 280%. You have China at 300% debt-to-GDP. China has over $34 trillion of debt and the banking system is flooded with bad loans. The best estimate—and this was two years ago I wrote a book called The Coming China Crisis—and I said the best estimate is that they have $11 trillion of bad loans in the banking system. $11 trillion is the annual GDP of China—this is huge! You have Europe, you have Latin America in trouble, you have Russia in big trouble, you have Saudi Arabia even thinking about doing an IPO on their big oil company in order to make up for the shortfall of oil revenues. You have every major economic zone in the world in big, big trouble including the US and that is why I say this crisis has the potential of becoming much, much worse than the last one.”

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“..it can’t be done in a non-messy way.”

Has The Market Crash Only Just Begun? (ZH)

Having successfully called the market’s retreat in the fall of 2015, Universa’s Mark Spitznagel is not taking a victory lap as he warns Bloomberg TV that “the crash has only just begun.” Investors are facing the most binary “let’s make a deal” market in history in Spitznagel’s view: choose Door #1 to bet on Keynesianism, central planners, and monetary interventionism; or Door #2 to bet on free markets and natural price discovery. “There is massive cognitive dissonance here,” Spitznagel explains as history teaches us that door #2 is the right choice… but it’s not possible to do that today as investors have been coerced to choose door #1, but when door #1 is slammed open “we will see that dreaded black swan monster.” That is what is going on right now:

“Investors want to go with The Fed when it’s working – like David Zervos… the problem is, when do you know that it is not working?” “At some point this stops working…” “the market is going through a resolution process, transitioning from the cognitive dissonance of Door #1 to the harsh reality of Door #2… if everyone were to change doors at the same time, that is a market crash… it can’t be done in a non-messy way.”

Must watch reality check behind the smoke and mirrors we call markets… (we note Mark’s excellent analogy starting at around 3:10)

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Amen Paul Craig Roberts.

The US Economy Has Not Recovered and Will Not Recover (PCR)

The US economy died when middle class jobs were offshored and when the financial system was deregulated. Jobs offshoring benefitted Wall Street, corporate executives, and shareholders, because lower labor and compliance costs resulted in higher profits. These profits flowed through to shareholders in the form of capital gains and to executives in the form of “performance bonuses.” Wall Street benefitted from the bull market generated by higher profits. However, jobs offshoring also offshored US GDP and consumer purchasing power. Despite promises of a “New Economy” and better jobs, the replacement jobs have been increasingly part-time, lowly-paid jobs in domestic services, such as retail clerks, waitresses and bartenders.

The offshoring of US manufacturing and professional service jobs to Asia stopped the growth of consumer demand in the US, decimated the middle class, and left insufficient employment for college graduates to be able to service their student loans. The ladders of upward mobility that had made the United States an “opportunity society” were taken down in the interest of higher short-term profits. Without growth in consumer incomes to drive the economy, the Federal Reserve under Alan Greenspan substituted the growth in consumer debt to take the place of the missing growth in consumer income. Under the Greenspan regime, Americans’ stagnant and declining incomes were augmented with the ability to spend on credit. One source of this credit was the rise in housing prices that the Federal Reserves low interest rate policy made possible.

Consumers could refinance their now higher-valued home at lower interest rates and take out the “equity” and spend it. The debt expansion, tied heavily to housing mortgages, came to a halt when the fraud perpetrated by a deregulated financial system crashed the real estate and stock markets. The bailout of the guilty imposed further costs on the very people that the guilty had victimized. Under Fed chairman Bernanke the economy was kept going with Quantitative Easing, a massive increase in the money supply in order to bail out the “banks too big to fail.” Liquidity supplied by the Federal Reserve found its way into stock and bond prices and made those invested in these financial instruments richer.

Corporate executives helped to boost the stock market by using the companies’ profits and by taking out loans in order to buy back the companies’ stocks, thus further expanding debt. Those few benefitting from inflated financial asset prices produced by Quantitative Easing and buy-backs are a much smaller%age of the population than was affected by the Greenspan consumer credit expansion. A relatively few rich people are an insufficient number to drive the economy. The Federal Reserve’s zero interest rate policy was designed to support the balance sheets of the mega-banks and denied Americans interest income on their savings. This policy decreased the incomes of retirees and forced the elderly to reduce their consumption and/or draw down their savings more rapidly, leaving no safety net for heirs.

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As trade plummets, so does M&A. So how are they going to pump up stock prices now? All buybacks all the time?

Worldwide M&A Activity Falls 23% (Reuters)

Worldwide mergers and acquisitions deals have fallen 23% to $336 billion so far this year compared with last year, but cross-border activity by amount targeting U.S.-based companies reached a record high, Thomson Reuters data shows. After hitting a record high by deals value in 2015, worldwide M&A activity has been hurt this year by falling oil prices, worries about slowing growth in China and the health of the financial sector. A trio of deals for U.S. companies topped the list of M&A announced this week, including Chinese company Tianjin Tianhai’s $6.3 billion offer for U.S.-based Ingram Micro, bringing year-to-date China outbound M&A targeting the U.S. to $23.3 billion. China, Ireland and Canada account for 88% of cross-border acquirers in the U.S. so far this year. European M&A activity, which lagged the U.S. in 2015, has hit $92 billion so far this year, up 4% compared with a year ago, after state-owned ChemChina announced it would buy Swiss seeds and pesticides group Syngenta for $43 billion in February.

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$9.8 billion for the year. With hedges disappearing.

US Shale Faces March Madness With $1.2 Billion in Interest Due (BBG)

The U.S. shale industry must come up with $1.2 billion in interest payments by the end of March as $30-a-barrel oil makes it harder for companies to scrape up the cash needed to stay current on their debts. Almost half of the interest is owed by companies with junk-rated credit, according to data compiled by Bloomberg on 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. Energy XXI said in a filing Tuesday that it missed an $8.8 million interest payment. The following day, SandRidge announced that it didn’t make a $21.7 million interest payment. “You’ve seen two of these happen in two days, and I wouldn’t be surprised to see more in the next month as these payments come due,” said Jason Wangler at Wunderlich in Houston.

Energy XXI may not be able to meet its commitments in the next 12 months, raising “substantial doubt regarding the Company’s ability to continue as a going concern,” according to a company filing with the U.S. Securities and Exchange Commission. A company representative didn’t return a phone call and e-mail seeking comment. SandRidge “has sufficient liquidity to make these interest payments, but has elected to use the 30-day grace period in connection with its ongoing discussions with stakeholders,” the company said in a statement released Wednesday. “Today’s actions will preserve liquidity and flexibility as we continue to engage in constructive dialogue with our stakeholders,” James Bennett, SandRidge president and chief executive officer, said in the statement.

Oil has tumbled about 70% since a June 2014 peak of $107 a barrel. While prices were high, many drillers spent more money than they earned, plugging the shortfall with debt. That debt has become increasingly burdensome as prices collapse. Since the start of 2015, 48 North American oil and gas producers have declared bankruptcy, owing more than $17 billion, according to law firm Haynes & Boone. Deloitte said this week that bankruptcies in the oil and gas industry could surpass levels seen in the Great Recession.

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And with hedges gone, borrowing gets much more expensive at the same time.

Moody’s Tallies 28 Downgrades In The Energy Sector Since December (MW)

Moody’s Investors Service said Friday it has downgraded a total of 28 energy companies since December, as it continues a global review of the troubled sector. The agency surprised investors in January when it placed the credit ratings of 120 energy companies and 55 mining companies from around the world on review for a possible downgrade. The move came after a deep slump in the price of oil and other commodities, hurt by oversupply and the slowdown in China, a major consumer of natural resources. Today’s tally includes issuers that had already been placed on review in December and surprised some in the market. “Moody’s drops another hammer,” is how analysts at credit research firm CreditSights described the move Friday.

“Over the past several weeks, it has become increasingly clear in our discussions with clients and in hearing from company managements that the agency was taking a very Draconian view of the sector,” they wrote in a note. Moody’s said it downgraded two energy companies by five notches each, sending them deep into speculative-grade, or “junk” territory. Denbury Resources was cut to Caa2 from Ba3, and Whiting Petroleum was cut to Caa1 from Ba2. The agency downgraded seven energy companies by four notches, nine companies by three notches and five companies by two notches. The agency affirmed ratings on another nine companies. It continues to review a total of 137 global issuers for a possible downgrade.

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Oil is everywhere in society. And lots of places rely on mostly high, but certainly somewhat stable, prices.

Why Oil Rout Is Hurting The Global Economy Instead Of Helping (MW)

Saudi Arabia saw Standard & Poor’s cut its credit rating cut two notches this week to A-minus—an unsurprising move that nevertheless helps illustrate why collapsing oil prices haven’t seemed to be the economic boon many had anticipated. In a Thursday note, Carl Weinberg, chief economist at High Frequency Economics, used the downgrade—along with cuts in ratings for Bahrain, Oman and Kazakhstan—to remind clients of his explanation of how falling commodity prices can weigh on global growth. Weinberg has calculated that a $100 drop in the price of a barrel of crude would reduce global income from extraction alone by $3.2 trillion, or about 4.5% of world gross domestic product. That’s to say nothing of the impact on global economic activity from oil sales, transportation and exploration.

The U.S. benchmark settled below $31 a barrel on Thursday, or about $76 below its mid-2014 high after settling as low as $26.21 earlier this month. Brent crude, the global benchmark, ended Thursday at $34.28. It traded around $115 a barrel in mid-2014. It isn’t wrong to assume that those losses would rebound to the benefit of oil consumers, Weinberg says. But the rub lies in the fact that consumers in oil-importing countries may be more likely to stash those savings away while workers in oil-exporting countries would have been more likely to spend that lost income. That means it can take “years or decades” before that savings is translated into spending. He writes:

If purchasing power is transferred from one country to another, and if the countries receiving the windfall have a higher marginal propensity to save than the countries that are paying the transfer, then world GDP will be reduced. So if oil-importing countries tend to have higher incomes and higher savings rates, then world GDP will be reduced. In other words, halving the weekly income of an oil field worker in Nigeria earning near-subsistence wages will likely affect his or her consumption more than reducing the monthly auto fuel bill of a dentist in Belgium by the equivalent amount.

Needless to say, the oil market carnage has translated into real fiscal problems for oil-producing nations. It feeds into ideas that this week’s talk of a production freeze that would include OPEC members and Russia—seemingly shot down by Saudi Arabia after Iran refused to comply—was a sign of desperation. While freezing output at record levels wasn’t seen as likely to do much to alleviate a global glut, oil futures have rallied on the idea that producers are at least talking to each other is an important step. Helima Croft, global head of commodities at RBC Capital Markets, said this week’s talks were “one of the first clear acknowledgments by the oil heavyweights that all isn’t entirely well in the current price environment.”

It might even lay the groundwork for a “more proactive” approach later in the year after OPEC has had a chance to gauge the impact of Iran’s post-sanctions return to the global oil market as well as the trajectory of non-OPEC production, Croft said in a Tuesday note. ”Recently, some leading Saudi experts have suggested that by the June meeting, those variables will be known, and with the supply-and-demand balance expected to be tighter by then, it will be easier for cartel to pull additional barrels if needed in order to accelerate a price recovery,” she wrote.

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“Beijing has also instructed bank branches in Hong Kong to limit their lending of renminbi to make it harder for traders and investors to place bets against the Chinese currency in financial markets.”

China’s Foreign Exchange Reserves Dwindling Rapidly (NY Times)

During China’s biggest boom years, its currency could have risen in value as huge sums in dollars, euros and yen flowed into the country. Instead, Beijing tightly controlled the value of the renminbi, buying up much of the inflows and putting them into its reserves instead. That brought angry accusations from the United States and Europe that it was manipulating its currency to help keep Chinese exports inexpensive and competitive in foreign countries. Now that the renminbi faces pressure to fall, China is spending its reserves in an effort to prop up the currency. But many American lawmakers and presidential candidates still accuse China of keeping its currency artificially weak. The reserves are still considerable, more than double Japan’s, which has the world’s second-largest amount.

The central bank chief, Mr. Zhou, and others have questioned whether the reserves are too big and the money could be better invested if left in the private sector. Mr. Zhou led a move over the last two years to make it easier for Chinese companies and families to invest their own money overseas, only to find in recent months that the outflows have been disconcertingly fast at times. China has taken steps to stem further flows out of the country. This winter the Chinese authorities arrested the leaders of underground banks that were converting billions of renminbi into dollars and euros. They also made it harder for Chinese citizens to use their renminbi to buy insurance policies in dollars. More quietly, Beijing bank regulators have halted sales within China of investment funds known as wealth management products that are denominated in dollars.

Beijing has also instructed bank branches in Hong Kong to limit their lending of renminbi to make it harder for traders and investors to place bets against the Chinese currency in financial markets. “We did receive notice from Beijing in the earlier part of January to be more stringent in approving renminbi-denominated loans,” said a Hong Kong-based China bank executive, who insisted on anonymity for fear of employer retaliation. “It is no fun being caught in the middle, with marketing officers wanting to do more business and the higher-ups telling you to be tougher when reviewing credit proposals.” The erosion of reserves is also politically awkward, given public perception, and Beijing has taken steps aimed directly at shoring them up.

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Big deal. He offered to step down last month. Beijing should understand that heavy-handedness does not boost confidence. What does this say about how Chinese securities have been regulated until today? Not much good.

China ‘Removes’ Top Securities Regulator (Reuters)

China has removed the head of its securities regulator following a turbulent period in the country’s stock markets, appointing a top state banking executive as his replacement, as leaders move to restore confidence in the economy. The announcement on the official Xinhua news agency on Saturday follows a string of assurances from senior leaders following the Lunar New Year holiday that China will underpin its slowing economy and steady its wobbly currency. Xinhua said Xiao Gang, chairman of the China Securities Regulatory Commission (CSRC) since 2013, had been succeeded by Liu Shiyu, chairman of the Agricultural Bank of China Ltd. (AgBank) and a former deputy governor of the central bank. “Xiao’s departure is not a surprise following the recent stock disaster. This is a role vulnerable to public criticism because most Chinese retail investors are destined to lose money in such a market,” said Zhang Kaihua, a fund manager of Nanjing-based hedge fund Huyang Investment.

Xiao and the CSRC came under fire as China’s Shanghai and Shenzhen stock markets slumped as much as 40% in just a few months last summer. In a further blow, a stock index “circuit breaker” introduced in January to limit stock market losses was deactivated after four days of use because it was blamed for exacerbating a sharp selloff. Online media nicknamed Xiao “Mr. Circuit Breaker.” Reuters reported in January that Xiao, 57, had offered to resign following the “circuit-breaker” failure. The CSRC said at the time the information did not conform to the facts. The gyrations in China’s stock markets, an unexpected devaluation of the yuan in August and sharp falls in currency reserves rattled global markets, raising concerns about the health of the economy and Beijing’s ability to steer the country through both a protracted slowdown in growth and a shift away from manufacturing towards services.

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They do it on purpose. Set it up so poorly losses are inevitable, and meanwhile use it to keep housing prices propped up. The taxpayer can fork over the difference.

Fannie Mae At Risk Of Needing A Bailout (FT)

Fannie Mae, the state-sponsored U.S. mortgage backer, is at risk of needing a government bailout that could shake confidence in the housing finance market, senior officials have warned. Fannie Mae’s chief executive and its regulator are sounding the alarm on a decline in the institution’s capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds. Their warnings highlight Washington’s inaction on housing policy and its failure to reform the institution, which guarantees nearly $3 trillion of securities and enables 30-year fixed rate loans, following the last financial crisis. Since 2008 Fannie Mae has been in the post-crisis limbo of state-sponsored “conservatorship,” neither fully nationalized nor private, following several unsuccessful attempts by Congress to overhaul it.

Because the government does not let Fannie Mae retain profits, Tim Mayopoulos, its chief executive, told the Financial Times on Friday that its capital buffer, which has dwindled from $30 billion before the crisis to $1.2 billion today, was on track to disappear by January 2018. At that point it would be unable to weather quarterly losses and would need to draw on Treasury funds to avoid being placed into receivership. So far investors who own Fannie Mae’s mortgage-backed securities have not been spooked, Mr. Mayopoulos said, but he added: “We are a major source of liquidity to the mortgage markets and it would be better to avoid testing the market as to what the breaking point is well in advance of us getting to that point.” His comments came the day after Mel Watt, Fannie Mae’s top regulator, thrust the issue into the spotlight.

Addressing both Fannie Mae and its counterpart Freddie Mac, Mr Watt, director of the Federal Housing Finance Agency, said: “The most serious risk and the one that has the most potential for escalating in the future is the enterprises’ lack of capital.” “If investor confidence in enterprise securities went down and liquidity declined as a result, this could have real ramifications on the availability and cost of credit for borrowers,” he said in a speech. Fannie Mae’s inability to retain profits, which must instead be swept into government coffers, also makes it almost impossible for the institution to exit federal control.

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Refusing to kill the golden goose.

Independent Modelling May Show Way Out Of Oz Housing Bubble (SMH)

Independent modelling has dented the Turnbull government’s attack on Labor’s negative gearing policy, finding it will generate billions for the Commonwealth with the vast bulk of revenue coming from just the top 10% of households who negatively gear their properties. The report’s author says the policy would likely slow the pace of house-price growth and boost new housing construction, making it “potentially the biggest housing affordability policy the country has seen.” Prime Minister Malcolm Turnbull launched a scathing attack on Labor’s negative gearing policy on Friday, saying home owners across the country would see the value of the family home “smashed” by the “very blunt, very crude” idea.

In a clear sign his government is preparing to launch a massive scare campaign in the lead-up to the 2016 election over Labor’s proposal, which is designed to save $32 billion over a decade, Mr Turnbull warned the policy was “calculated” to reduce the value of all homes. n”The Labor Party’s negative gearing policy and its wind-back on the capital gains discount – its increase in tax on capital gains – is a very dangerous one. It’s been very, very poorly thought out,” Mr Turnbull said on Friday. “The consequence of it will be a decline in property prices, every home owner in Australia has a lot to fear from Bill Shorten.”

But independent modelling shows there will be “significant” long-term savings from Labor’s proposal to quarantine negative gearing to new housing investments from July 2017, eventually raising between $3.5 to $3.9 billion a year. It also shows Labor’s proposal to cut the capital gains tax discount from 50% to 25% would raise about $2 billion a year in the long term. It shows the vast majority of savings would be at the expense of the top 10% of earners who negatively gear their properties. It also estimates that by restricting negative gearing to new housing, the policy would “increase the share of investment housing devoted to newly built housing” by 10 to 20%. It does not say house prices would drop. “Our modelling shows that negative gearing benefits high-income families with 52.6% of the benefit going to the top 20% of incomes,” the paper says.

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EU must turn into EMU. Which nobody wants outside of Brussels and EU capitals. Anyway, the coming economic downturn will turn the EMU into a crumbling ruin.

Brexit!? France And Germany Can Not Wait (Gefira)

If London decides to leave the European Union nobody in Europe will even notice. Great Britain is an entirely separate country, isolated from the European Union and does not participate in the Euro or Schengen Agreement. The EU as a political platform is disintegrating and becoming more and more irrelevant and will be displaced by the European Monetary Union (EMU). The center of power in Europe has shifted from the EU to the EMU and London politicians are fully aware of it. A Brexit will accelerate the process of political integration of the EMU members and make the EU politically less significant.

Over the past decade we saw:
• Countries can enter the European Union;
• The very core values of the European Union can be set aside as we saw happening in Turkey just before the European Commission announced to restart Turkey’s accession negotiations;
• Trade relations with Great Britain can be suspended without any upheaval, as we saw it concerning non-EU member Russia;
• Borders can be opened and closed as is the case in south-east Europe due to the refugee crisis;
• The Dublin Regulation can be dissolved overnight in the face of the fact that more than a million refugees have entered Europe since the summer of 2015;

All these events hardly changed the life of the Europeans. Being a member of the European Monetary Union is of another magnitude. The Greek euro crisis changed the lives of millions of Greeks. During the tense days in July 2015, when the future of Greece, the EMU and indirect the future of Europe was at stake, Chancellor Merkel and President Hollande held 24 hours emergency meetings as did the Eurogroup. Great Britain and the European Parliament did not play any role whatsoever in these decisive moments for the future of Europe. Cameron was not even invited to share his opinion.

The European Monetary Union is doomed for further political integration; the euro members have no other option but to create a fiscal union and a banking union. Without these two pillars, the whole Euro will fall apart dragging with it the complete Western financial system. A fiscal and banking union means that these countries have to integrate far beyond the European Union framework. Prime Minister Cameron is an annoyance for the already struggling EMU. The European Monetary Union faces extreme difficulties, as on one hand further integration of the Euro countries is inevitable and on the other hand, the widespread support for this integration is eroding. In 2011, French President Sarkozy told Cameron:”We’re sick of you criticizing us and telling us what to do. You say you hate the euro, you didn’t want to join, and now you want to interfere in our meetings”.

The EMU countries face a big political problem that is to be solved. Germany and France will never let countries outside the EMU have a say in their affairs as Cameron proposed. The diplomatic words from French Prime Minister Manuel Valls make it all clear to London as he said; “a Brexit is a shock for Europe but still members can not pick and choose rules that suit them”. The UK leaving the EU will make life easier for Paris and Berlin as Figaro writes: “Brexit? An opportunity for Europe, for France and for Paris”. When the UK is outside the EU Frankfurt and Paris will have more opportunities to crush London as a financial center. London could not miss Merkel’s warning against gains for British banks under ‘Brexit’. If the UK decides to leave, Berlin and Paris will do definitely more than prevent London banks from making any gain; they will do everything to establish Paris or Frankfurt as the financial center of the EMU at London’s expense.

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Expect refugee numbers to soar over next 2 weeks.

Tsipras, Merkel, Hollande Agree On Open Borders Until March 6 Summit (Kath.)

Greek Prime Minister Alexis Tsipras met with German Chancellor Angela Merkel and French President Francois Hollande on the sidelines of a European Union summit in Brussels on Friday. At the meeting, which reportedly lasted for an hour, the three leaders discussed the refugee crisis and the Greek bailout. According to a close Tsipras aide, the Greek premier reiterated that Greece would not accept any action against its interests. The three leaders agreed that the key with regard to decreasing the migration flow was Turkey and that NATO’s involvement was a positive development. Tsipras reportedly received assurances from Germany and France that assistance would be provided if necessary.

A pivotal point in the discussion was that the three leaders stressed that there would be no change in the European borders’ status quo until March 6, when a new summit on the refugee crisis is scheduled to take place, after Turkish PM Ahmet Davutoglu canceled his trip to Brussels following a bomb attack in Ankara which claimed the lives of 28 people on Wednesday. The leaders also agreed that representatives of the institutions should return to Athens as soon as possible in order to complete the review.

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Because Brexit allows convenient alternate story line. Much more important than human misery.

EU Summit On Refugee Crisis Ends In Disarray (FT)

Chancellor Angela Merkel hoped this week’s EU summit on migration would provide at least a show of European unity in the refugee crisis. Instead, it ended in disarray. An Austrian plan to cap the entry of asylum-seekers at just 80 a day left the German leader isolated, Greece threatening to scupper any deal on Brexit in response, and leaders more divided than ever over the EU’s biggest challenge in decades. European leaders, from Berlin to Vienna to Athens, are now improvising and pursuing often contradictory policies. Ms Merkel took even her own officials by surprise when she demanded another summit on the refugee crisis on March 6, just before three key German regional elections on March 13 and before the onset of spring boosts the numbers crossing the Aegean.

Refugee arrivals have picked up, with more than 4,800 arriving in Greece from Turkey on Thursday a rate not far off the autumn peak, when an average of 7,000 people a day were arriving. A backlog is building up along the western Balkans route, where fractious states have had to pull together to cope with the arrival of more than 1m people since the start of 2015. In private, previously optimistic officials are starting to despair, with worries shifting to a potential humanitarian disaster on the bloc s south eastern border. An EU leader said: “It’s a serious situation”. Ms Merkel is still banking on a deal with Ankara to secure the vulnerable Greek-Turkish frontier. As the chancellor said in the early hours on Friday: “It is an absolute given that we must urgently move faster”.

But bad luck waylaid even this plan: Turkish prime minister Ahmet Davutoglu cancelled a planned trip to Brussels to discuss migration following a car-bomb attack in Ankara. After the stormy summit debate, a tired looking Ms Merkel put a brave face on events at the 2.30am press conference, pointing to the efforts made in recent weeks to engage with Turkish president Recep Tayyip Erdogan and boost Greece’s sea defences by deploying Nato ships. Meanwhile, Vienna has been accused of trampling on international law, including the Geneva Convention on refugees, throwing already barely enforced rules on asylum into further doubt. “Conventions are like fairies; if you stop believing in them, they die”, said Elizabeth Collett, a director at the Migration Policy Institute.

However, the Austrian public backs its chancellor Werner Faymann’s migrant cap, with Der Standard newspaper on Friday defending him, saying that Brussels had scored “an own goal” by criticising Vienna. Ms Merkel, who rarely criticises EU partners in public, said that she had been “surprised” by Mr Faymann. Privately, German officials are furious that an old ally has broken ranks. Brussels had desperately attempted to force member states to abide by the rules, with little success. Despite EU member states agreeing to share out 160,000 refugees from Italy and Greece among themselves, fewer than 600 have actually been moved. While some leaders such as Viktor Orban, Hungary’s prime minister, have noisily disagreed, others — such as Madrid and Paris — have simply dragged their feet.

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Here’s warning you once again, Brussels, you’re not going to survive this, somone will have your head on a platter for it, and it ain’t going to be silver. Even this UNHCR piece tries to blame the smugglers, but Europe could have provided safe passage all along.

Two Children Drown Every Day On Average Trying To Reach Europe (UNHCR)

Two children have drowned every day on average since September 2015 trying to cross the eastern Mediterranean to find safety with their families in Europe, UNHCR, the UN Refugee Agency, said today. In a joint statement, issued in Geneva, UNHCR, UNICEF and the IOM warned that the number of child deaths was on the increase and called for more measures to increase safety for those escaping conflict and despair. Since last September, when the tragic death of toddler Aylan Kurdi captured the world’s attention, more than 340 children, many of them babies and toddlers, have drowned in the eastern Mediterranean. The total number of children who have died may be even greater, the sister organisations said, with their bodies lost at sea and never recovered.

One of those statistics was seven-year-old Houda from Afghanistan who went missing in a shipwreck off the Greek island of Kos at the end of January. Her mother, father, two sisters and one of her brothers had left Kabul for Istanbul earlier that month after her father, a middle-ranking police officer, received death threats. In Turkey, the family made a deal with a smuggler who promised them an “extra-safe trip in a spacious large boat” to Greece. To pay for the trip, Houda’s father had sold his house and borrowed money from family and friends. At night in a dark bay as they prepared to leave, they saw the boat was little more than a sailing coffin. It was small, old and massively overcrowded with around 80 passengers covering a few metres of deck. They tried to step back, but were forced by the smuggler to board the boat with no questions.

Smugglers allow no last-minute change of mind. Houda’s sister Aisha and her brother Aziz survived that deadly trip, along with 26 others, but her mother, father and an older sister perished. Their bodies were recovered. Houda’s was never found. Aisha and Aziz, 16 and 15 respectively, had learned to swim in school and that saved them. The stretch of the Aegean Sea between Turkey and Greece is now among the deadliest routes in the world for refugees and migrants. “These tragic deaths in the Mediterranean are unbearable and must stop,” said UN High Commissioner for Refugees Filippo Grandi. “Clearly, more efforts are needed to combat smuggling and trafficking. Also, as many of the children and adults who have died were trying to join relatives in Europe, organising ways for people to travel legally and safely, through resettlement and family reunion programmes for example, should be an absolute priority if we want to reduce the death toll,” he added.

With children now accounting for 36% of those on the move, the chance of them drowning on the Aegean Sea crossing from Turkey to Greece has grown proportionately. During the first six weeks of 2016, 410 people drowned out of the 80,000 people crossing the eastern Mediterranean. This amounts to a 35-fold increase year-on-year from 2015. Aisha and Aziz are now accommodated at a transit facility UNHCR runs with a national NGO offering specialized services to unaccompanied refugee children in Greece until they are assigned to a permanent facility. They wish to reunite as soon as possible with what remains of their family. They have a brother in Germany and hope one day to be able to join him there.

“These children expressed incredible dignity and courage throughout the many challenges they faced after the shipwreck. After already identifying the corpses of his own family members at the Coast Guard, Aziz insisted on seeing more pictures in order to recognize fellow travellers and help in their identification so that their families could also find out what had happened to them. They repeatedly expressed their gratitude towards me and other colleagues for the help we provided,” said Georgios Papadimitriou, a senior protection officer with UNHCR.

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 October 31, 2014  Posted by at 12:03 pm Finance Tagged with: , , , , , , , , , , , ,  


Russell Lee Saloon, Craigville, Minnesota Aug 1937

Kuroda Jolts Markets With Assault on Deflation Mindset (Bloomberg)
Kuroda Surprises Again With Stimulus Boost as Japan Struggles (Bloomberg)
Japan Stocks Soar To 7-Year High On BOJ, Pension Fund Boost (Bloomberg)
US And China Tighten In Unison, And Damn The Torpedoes (AEP)
Shadow Banking Grows to $75 Trillion Industry (Bloomberg)
The $75 Trillion Shadow Hanging Over The World (Telegraph)
QE Central Bankers Deserve A Medal For Saving Society (AEP)
Falling Bank Deposits Add to China Economy Warning Sign (Bloomberg)
China Snares 180 Fugitives Abroad in Global Anti-Graft Sweep (Bloomberg)
Time To Take A Zero-Tolerance Approach To The Banks (Guardian)
New Junk Bond Risk: It Matters Who Owns What (CNBC)
Putin To Western Elites: Play-Time Is Over (Dmitry Orlov)
Russia Agrees to Terms With Ukraine Over Gas Supply (Bloomberg)
Oil Rout Seen Diluting Price Appeal of US LNG Exports (Bloomberg)
Oil Price Declines Have Small-Cap Shale Investors Scrambling (Reuters)
Iran A ‘Time Bomb’ For Oil Prices (CNBC)
Drones Spotted Over Seven French Nuclear Sites (AFP)
US Fracking Advocates Urged to Win Ugly by Discrediting Foes (Bloomberg)

PM Abe and the BOJ are panicking big time. Japan debt is already well over 400% of GDP, and nothing they have done has had any positive effect other than those they’ve made up. It’s a matter of when, not if. Expect ugly.

Kuroda Jolts Markets With Assault on Deflation Mindset (Bloomberg)

Today’s decision to expand Japan’s monetary stimulus may be regarded as shock treatment in the central bank’s effort to affect confidence levels. Bank of Japan Governor Haruhiko Kuroda’s remedy to reflate the world’s third-largest economy through influencing expectations saw the yen sliding and stocks climbing. Kuroda led a divided board in Tokyo in a surprise decision to expand unprecedented monetary stimulus. Bank officials hadn’t provided any hints in recent weeks that additional easing was on the cards to help reach the BOJ’s inflation goal. Kuroda, 70, repeatedly indicated confidence this month that Japan was on a path to reaching his 2% target in the coming fiscal year. Just three of 32 economists surveyed by Bloomberg News predicted extra easing. “We have to admit that this is sort of a second shock – after we had the first shock in April last year,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase, referring to the first round of stimulus rolled out by Kuroda in 2013.

Kanno, who used to work at the BOJ, said “this is very effective,” especially because it comes the same day as the government pension fund said it will buy more of the nation’s stocks. The BOJ chief, a former Finance Ministry bureaucrat who at one time was in charge of currency affairs, had repeatedly said that the central bank wouldn’t hesitate to expand asset buying if necessary. At the same time, his public confidence in Japan being on a path to reach the inflation target left the idea that no stimulus was coming today, Kanno said. “Kuroda loves a surprise – Kuroda doesn’t care about common sense, all he cares about is meeting the price target,” said Naomi Muguruma, a Tokyo-based economist at Mitsubishi UFJ Morgan Stanley Securities Co., who correctly forecast more stimulus today. “Kuroda knows that when he moves it must be big and surprising.” The BOJ is aiming to pre-empt any risk of a delay in ending Japan’s “deflationary mindset,” it said in today’s policy statement. Kuroda later told reporters that surprising the markets wasn’t his intention.

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And the Japanese are still not spending, so inflation can’t and won’t rise. The Nikkei may have gained 5%, but the people in the street only got even more scared and prudent.

Kuroda Surprises Again With Stimulus Boost as Japan Struggles (Bloomberg)

Bank of Japan Governor Haruhiko Kuroda led a divided board to expand what was already an unprecedentedly large monetary-stimulus program, boosting stocks and sending the yen tumbling. Kuroda, 70, and four of his eight fellow board members voted to raise the BOJ’s annual target for enlarging the monetary base to 80 trillion yen ($724 billion), up from 60 to 70 trillion yen, the central bank said in Tokyo. An increase was foreseen by just three of 32 analysts surveyed by Bloomberg News. The BOJ also cut its forecasts for consumer prices. Facing projections for failure to reach the BOJ’s 2% inflation target in about two years, and with the economy under pressure from a higher sales tax, enlarging the stimulus at some point had been anticipated by analysts for months. Kuroda opted not to telegraph his intentions in recent weeks, leaving today’s move a surprise – sending the Nikkei 225 Stock Average to the highest level since 2007.

“It was great timing for Kuroda,” said Takeshi Minami, Tokyo-based chief economist at Norinchukin Research Institute, one of two who correctly forecast today’s easing. Minami noted that it follows the Federal Reserve’s ending of quantitative easing, helping highlight the differing paths for the U.S. and Japan. Today’s decision comes almost 19 months after Kuroda unleashed his initial asset-purchase plan, with the intention of doubling the monetary base. That move similarly drove up stocks and undercut the yen. Since then, a more competitive exchange rate has triggered higher corporate earnings, and asset-price gains have expanded Japanese households’ net worth. The bank will purchase exchange-traded funds so their amounts outstanding increase by about 3 trillion yen a year, it said. Japanese real estate investment trusts will be purchased with a view to raising their amounts outstanding by about 90 billion yen annually, according to the bank.

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Down 5% again on Monday?

Japan Stocks Soar To 7-Year High On BOJ, Pension Fund Boost (Bloomberg)

Japanese stocks soared, with the Nikkei 225 Stock Average closing at a seven-year high, as the Bank of Japan unexpectedly boosted easing and the nation’s pension fund prepared to unveil new asset allocations. The Nikkei 225 jumped 4.8% to 16,413.76 at the close in Tokyo, the highest since Nov. 2, 2007. The Topix index surged 4.3% to 1,333.64, bringing its gain for the week to 7.4%, the most since April 2013. The measure erased its losses for the year and is now up 2.4%. Volume on both gauges was more than 75% higher than their 30-day averages. The yen tumbled 1.5% to 110.83 per dollar.

Shares rose in the morning session after a Nikkei newspaper report that the $1.2 trillion Government Pension Investment Fund would announce new portfolio targets today, more than doubling its goal for domestic shares to 25% of assets. They surged in the afternoon after BOJ policy makers voted 5-4 to target an 80 trillion yen ($726 billion) annual expansion in the central bank’s monetary base. “Today you’re getting a double boost with talk of the GPIF increasing its shares allocation and the BOJ pumping more cash in at a faster rate,” Shane Oliver, head of investment strategy at AMP Capital Investors, which manages about $125 billion, said by phone. “It had become increasingly apparent that what the BOJ was doing wasn’t enough and they needed to do more, and it’s always been a question of when they would do that. It’s an excellent outcome.”

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” … the “Euroglut”, the largest surplus in the history of financial markets.”

US And China Tighten In Unison, And Damn The Torpedoes (AEP)

Mind the monetary gap as the world’s two superpowers turn off the liquidity spigot at the same time. The US Federal Reserve and the People’s Bank of China have both withdrawn from the global bond markets, each for their own entirely different reasons. The combined effect is a shock of sorts for the international financial system. The Fed’s message on Wednesday night was hawkish. It did not invoke the excuse of a stronger dollar or global market jitters to extened bond purchases. It no longer sees “significant” constraints to the labour market. Instead it spoke of “solid job gains” and a “gradual diminishing” of under-employment. This a tightening shift, and seen as such by the markets. The euro dropped 1.5 cents against a resurgent dollar within minutes of the release, falling back below $1.26. Rate rises are on track for mid-2015 after all. The Fed is no longer printing any more money to buy Treasuries, and therefore is not injecting further dollars into an interlinked global system that has racked up $7 trillion of cross-border bank debt in dollars and a further $2 trillion in emerging market bonds.

The stock of QE remains the same. The flow has changed. Flow matters. The Fed has ended QE3 more gently than QE1 or QE2. This helps but it may also have given people a false sense of security. The hard fact is that the Fed has tapered net stimulus from $85bn a month to zero since the start of the year. The FOMC tried to soften the blow in its statement with pledges to keep interest rates low for a very long time. This assurance has value only if you think QE works by holding down interest rates, as the Yellen Fed professes to believe. It cuts no ice if you are a classical monetarist and think that QE works its magic through the quantity of money effect, most potently by boosting broad M3/M4 money through purchases of assets outside the banking system. Pessimists argue that the world economy is so weak that it needs a minimum of $85bn a month of Fed money creation (not to be confused with zero interest rates) just to avoid stalling again.

Or put another way, there is nagging worry that tapering itself may amount to an entire tightening cycle, equivalent to a series of rate rises in the old days. If they are right, rates may never in fact rise above zero in the US or the G10 states before the global economy slides into the next downturn. It is no great mystery why the world is caught in this “liquidity trap”, or “secular stagnation” if you prefer. Fixed capital investment in China is still running at $5 trillion a year, and still overloading the world with excess capacity in everything from solar panels to steel and ships, even after Xi Jinping’s Third Plenum reforms. Europe has been starving the world of demand by tightening fiscal policy into a depression, running a $400bn current account surplus that is now big enough to distort the global system as a whole. George Saravelos, at Deutsche Bank, dubs it the “Euroglut”, the largest surplus in the history of financial markets.

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Scary situation.

Shadow Banking Grows to $75 Trillion Industry (Bloomberg)

The shadow banking industry grew by $5 trillion to about $75 trillion worldwide last year, driven by lenders seeking to skirt regulations and investors searching for yield amid record low interest rates. The size of the shadow banking system, which includes hedge funds, real estate investment trusts and off-balance sheet investment vehicles, is about 120% of global gross domestic product, or a quarter of total financial assets, according to a report published by the Financial Stability Board today. Shadow banking “tends to take off when strict banking regulations are in place, when real interest rates and yield spreads are low and investors search for higher returns, and when there is a large institutional demand for assets,” according to the report. “The current environment in advanced economies seems conducive to further growth of shadow banking.”

While watchdogs have reined in excessive risk-taking by banks in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008, they are concerned that lenders might use shadow banking to evade the clampdown and cause risks to build up out of sight of regulators. The FSB published guidelines for supervisors last year to keep track of the industry. “Risks can migrate outside of the core and as a result, the FSB’s shadow banking monitoring exercise is of the utmost importance,” Agustin Carstens, who heads up the FSB’s risk assessment committee, said in the statement. The FSB, a global financial policy group comprised of regulators and central bankers, found that shadow banking increased most rapidly in Argentina, which saw a 50% jump, and China, where growth was more than 30%. The global share of activity based in the U.S. declined to 33% last year from 41% in 2007, according to the report, while the proportion of shadow banking based in China rose to 4% from 1%.

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Same, with graphs.

The $75 Trillion Shadow Hanging Over The World (Telegraph)

Global shadow banking assets rose to a record $75 trillion (£46.5 trillion) last year, new analysis shows. The value of risky investment products, mortgage-backed securities and other non-bank entities increased by $5 trillion to $75 trillion in 2013, according to the Financial Stability Board (FSB). Shadow banking, which is not constrained by bank regulation, now represents about 25pc of total financial assets – or roughly half of the global banking system. It is also equivalent to 120pc of global gross domestic product (GDP). The FSB, which monitors and makes recommendations on financial stability issues, said that while non-bank lending complemented traditional channels by expanding access to credit, data inconsistencies together with the size of the system meant closer monitoring was warranted.

“Intermediating credit through non-bank channels can have important advantages and contributes to the financing of the real economy; but such channels can also become a source of systemic risk, especially when they are structured to perform bank-like functions and when their interconnectedness with the regular banking system is strong,” the FSB said in its annual shadow banking report. While regulators have highlighted that the size of the shadow banking system does not pose a systemic risk on its own, many non-bank lenders obtain short-term funds to invest in longer-term assets, which can trigger fire sales if nervous investors decide to withdraw their money at once.

During the financial crisis, the rapid sell-off reduced asset values and spread the stress to traditional banks, some of which controlled shadow lenders. “The system-wide monitoring of shadow banking is a core element of the FSB’s work to strengthen the oversight and regulation of shadow banking in order to transform it into a transparent, resilient, sustainable source of market-based financing for real economies,” said Mark Carney, chairman of the FSB and Governor of the Bank of England.

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Yes, it’s Ambrose.

QE Central Bankers Deserve A Medal For Saving Society (AEP)

The final word on quantitative easing will have to wait for historians. As the US Federal Reserve winds down QE3 we can at least conclude that the experiment was a huge success for those countries that acted quickly and with decisive force. Yet that is not the ultimate test. The sophisticated critique – to be distinguished from hyperinflation warnings and “hard money” bluster – is that QE contaminated the rest of the world in complicated ways and may have stored up a greater crisis for the future. What we can conclude is that extreme QE enabled the US to weather the most drastic fiscal tightening since demobilisation after the Korean War, without falling back into recession. Much the same was true for Britain. The Fed’s $3.7 trillion of bond purchases did not drive up debt ratios, as often claimed. It reduced them.

Flow of Funds data show that total non-financial debt has dropped from a peak near 260pc of GDP in 2009 and since stabilised at 237pc of GDP. Public debt did jump, matched by falls in household and corporate debt ratios. On cue, federal debt is now falling as well. The deficit is down to 2.8pc of GDP, low enough to erode the debt ratio in a growing economy through the magic of the denominator effect. This is not a “pure” economic experiment, of course. There are other variables: the shale boom and the manufacturing renaissance in chemicals and plastics that it has spawned; quick action by the US authorities to clean up the banking system. Yet it is indicative. By contrast, the eurozone carried out its fiscal austerity without monetary stimulus to cushion the shock, lurching from crisis to crisis as a result. The region has yet to reclaim it former levels of output, a worse outcome than during the Great Depression by a wide margin. Not even the 1840s were this bad. You have to go back to the Thirty Years War in the 17th century to trump the economic devastation of EMU.

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“Beijing-based ICBC reported its biggest jump in soured credit since at least 2006 in the third quarter. Smaller rival Bank of China more than doubled its provisions for bad loans”.

Falling Bank Deposits Add to China Economy Warning Sign (Bloomberg)

Chinese bank deposits dropped following a crackdown on lenders manipulating their numbers and “illicit” means of attracting money, threatening to weigh on credit growth and hinder efforts to reignite the economy. Four of the five biggest banks, led by Industrial & Commercial Bank of China, posted a drop in deposits as they reported third-quarter earnings this week. Central bank data showed it was the first quarterly decline for the nation’s banking industry since at least 1999. The lower deposit levels are likely to curtail credit as banks are prohibited from lending more than 75% of their quarter-end holdings, while a sustained drop could hamper government efforts to rejuvenate an economy forecast to expand this year at the weakest pace since 1990. The lenders may also come under pressure to tap more expensive financing.

“With banks now less able to window-dress their deposit figures, some will be forced to scale back lending to meet loan-to-deposit requirements,” Julian Evans-Pritchard, China economist for Capital Economics said. “Regulatory controls are getting harder for banks and that’s weighing on credit growth.” ICBC, the world’s largest lender by assets, posted the biggest decline in funds during the third quarter, with its deposits dropping by 388 billion yuan ($63 billion) from June to 15.3 trillion yuan. Bank of China, Agricultural Bank of China and Bank of Communications also reported declines. Only China Construction Bank, the nation’s second-largest, had an increase. As a housing-market slump drags on the nation’s growth, bad loans are piling up. Beijing-based ICBC reported its biggest jump in soured credit since at least 2006 in the third quarter. Smaller rival Bank of China more than doubled its provisions for bad loans, while the combined profit growth of the five biggest banks slowed to 6% from 10% a year earlier.

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Reminds me of the IRS, for some reason. Australia in joint operation with China …

China Snares 180 Fugitives Abroad in Global Anti-Graft Sweep (Bloomberg)

China said it has now captured 180 economic fugitives from 40 countries as part of a campaign started in July to recover billions of dollars of illicit gains. The suspects were apprehended under Operation Fox Hunt 2014, the official Xinhua News Agency reported yesterday. Authorities arrested 104 suspects and the rest turned themselves in, Xinhua said. The number of those apprehended is up from 128 announced earlier this month. The Communist Party under President Xi Jinping has mounted a crackdown on corruption that has netted thousands of cadres in the country and is targeting Chinese abroad. Between 2002 and 2011, $1.08 trillion of illicit funds were spirited out of China, estimates Washington-based Global Financial Integrity.

China has sent 20 teams of investigators to Thailand, the Philippines, Malaysia, Cambodia and other neighboring countries, Xinhua reported. The government estimates the number of corrupt officials who have moved abroad at anywhere from 4,000 to 18,000 people, according to China’s chief prosecutor Cao Jianming. The two top destinations for economic fugitives are the U.S. and Canada, in part because China doesn’t have extradition treaties with them, the official China Daily reported last month. The Australian Federal Police will take part in a joint operation with Chinese counterparts to seize assets of fugitive officials, the Sydney Morning Herald reported Oct. 20.

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Right. That time goes back decades.

Time To Take A Zero-Tolerance Approach To The Banks (Guardian)

It’s been a wretched week for Britain’s banks. On Tuesday, Lloyds Banking Group announced it was setting aside an additional £900m for the mis-selling of payment protection insurance. On Thursday, Barclays made a £500m provision for the fine it can expect for rigging the foreign exchange market. The banking list of shame will no doubt be added to when Royal Bank of Scotland reports on Friday. Patience with the banks is wearing thin. As Minouche Shafik, the deputy governor of the Bank of England, said in a speech earlier this week, it is no longer credible to put the wrongdoing down to a few bad apples. The language used by Shafik was instructive. She talked of “appalling cases of misconduct”, and of a long tail of “outrageous conduct cases”. Unless banks have a tin ear, they must surely have got the message: Threadneedle Street has had enough.

What was a bit strange about Shafik’s speech was her comment that she found some of the behaviour in the City “truly shocking”. There is no longer anything remotely shocking in the unearthing of financial malfeasance. It is only shocking in the way that the gambling going on in Rick’s night club in Casablanca was shocking to Captain Renault. There are many explanations for why the rigging of markets and the rooking of customers happened. In the end, though, the simplest explanation is the best. It happened because the banks thought they could get away with it. The culture was one in which self-enrichment was seen as serving the greater good; regulation was so light-touch as to be non-existent; and the chances of being punished were slim. It’s not just the banks, of course. Why did newspapers hack phones? Because they could get away with it. Why do multinational companies pay so little tax on their UK activities? Because they can. Public trust in business generally, not just the banks, has rarely been lower and it’s not hard to see why.

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PIMCO owns dangerously large amounts of certain companies’ bonds.

New Junk Bond Risk: It Matters Who Owns What (CNBC)

Add a new concern to the stable of high-yield bond risks: ownership of some companies’ issuance has become concentrated in the hands of just a few fund managers. “A reduced number of asset managers hold a significant amount of the debt of large corporate issuers across advanced and emerging market economies,” the IMF said in a report issued earlier this month, noting the top-five fund families hold at least 50% of reported bond ownership filings by many large non-resource companies in the JPMorgan Corporate Emerging Markets Bond Index. Some managers hold large chunks of a company’s debt, with the report highlighting that Pimco holds more than 20% of Ally Financial’s total bonds outstanding and around 15% of Navient’s, while in emerging markets, the top-five hold around 30% of Digicel’s bond issuance and more than 20% of Melco’s.

Pimco didn’t immediately return an emailed request for comment But while the IMF is concerned about how dependence on just a few funds may affect issuers’ access to markets in “times of stress,” others believe the risk may be to the fund manager. “If you own 20% of a company’s debt – and that’s something we would never do, because we don’t think that’s prudent – you’re almost duty bound to support the company in its next financing,” said Tim Jagger, portfolio manager at Aviva Investors, which has around $371 billion under management. “It’s going be very difficult if you’re not involved, to think other investors will get involved.” Jagger also noted that the concentration of ownership highlights what may be one of the biggest risks in the fixed income market generally: liquidity may suffer as changes in regulations since the Global Financial Crisis mean banks can’t warehouse an inventory of bonds like they used to.

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Must read.

Putin To Western Elites: Play-Time Is Over (Dmitry Orlov)

Most people in the English-speaking parts of the world missed Putin’s speech at the Valdai conference in Sochi a few days ago, and, chances are, those of you who have heard of the speech didn’t get a chance to read it, and missed its importance. (For your convenience, I am pasting in the full transcript of his speech below.) Western media did their best to ignore it or to twist its meaning. Regardless of what you think or don’t think of Putin (like the sun and the moon, he does not exist for you to cultivate an opinion) this is probably the most important political speech since Churchill’s “Iron Curtain” speech of March 5, 1946.

In this speech, Putin abruptly changed the rules of the game. Previously, the game of international politics was played as follows: politicians made public pronouncements, for the sake of maintaining a pleasant fiction of national sovereignty, but they were strictly for show and had nothing to do with the substance of international politics; in the meantime, they engaged in secret back-room negotiations, in which the actual deals were hammered out. Previously, Putin tried to play this game, expecting only that Russia be treated as an equal. But these hopes have been dashed, and at this conference he declared the game to be over, explicitly violating Western taboo by speaking directly to the people over the heads of elite clans and political leaders. The Russian blogger chipstone summarized the most salient points from Putin speech as follows:

1. Russia will no longer play games and engage in back-room negotiations over trifles. But Russia is prepared for serious conversations and agreements, if these are conducive to collective security, are based on fairness and take into account the interests of each side.

2. All systems of global collective security now lie in ruins. There are no longer any international security guarantees at all. And the entity that destroyed them has a name: The United States of America.

3. The builders of the New World Order have failed, having built a sand castle. Whether or not a new world order of any sort is to be built is not just Russia’s decision, but it is a decision that will not be made without Russia.

4. Russia favors a conservative approach to introducing innovations into the social order, but is not opposed to investigating and discussing such innovations, to see if introducing any of them might be justified.

5. Russia has no intention of going fishing in the murky waters created by America’s ever-expanding “empire of chaos,” and has no interest in building a new empire of her own (this is unnecessary; Russia’s challenges lie in developing her already vast territory). Neither is Russia willing to act as a savior of the world, as she had in the past.

6. Russia will not attempt to reformat the world in her own image, but neither will she allow anyone to reformat her in their image. Russia will not close herself off from the world, but anyone who tries to close her off from the world will be sure to reap a whirlwind.

7. Russia does not wish for the chaos to spread, does not want war, and has no intention of starting one. However, today Russia sees the outbreak of global war as almost inevitable, is prepared for it, and is continuing to prepare for it. Russia does not war—nor does she fear it.

8. Russia does not intend to take an active role in thwarting those who are still attempting to construct their New World Order—until their efforts start to impinge on Russia’s key interests. Russia would prefer to stand by and watch them give themselves as many lumps as their poor heads can take. But those who manage to drag Russia into this process, through disregard for her interests, will be taught the true meaning of pain.

9. In her external, and, even more so, internal politics, Russia’s power will rely not on the elites and their back-room dealing, but on the will of the people.

To these nine points I would like to add a tenth:

10. There is still a chance to construct a new world order that will avoid a world war. This new world order must of necessity include the United States—but can only do so on the same terms as everyone else: subject to international law and international agreements; refraining from all unilateral action; in full respect of the sovereignty of other nations.

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On off on off.

Russia Agrees to Terms With Ukraine Over Gas Supply (Bloomberg)

Russia agreed to terms for restoring natural-gas exports to Ukraine, laying the groundwork to prevent residents going without heat as temperatures drop. The gas negotiations, brokered by the European Union, came as pro-Russian rebels stepped up attacks on Kiev government forces. They violated the wobbly truce 45 times in the past 24 hours, the Defense Ministry said on Facebook today. One civilian was killed by shelling, the Donetsk city council said on its website. European leaders said they hoped the agreement would help mend ties between the two countries. “This breakthrough will not only make sure that Ukraine will have sufficient heating in the dead of the winter,” European Energy Commissioner Guenther Oettinger told a news conference in Brussels last night. “It is also a contribution to the de-escalation between Russia and Ukraine.”

The 28-nation EU sought to avoid a repeat of 2006 and 2009, when disputes between the former Soviet republics over gas debts and prices led to fuel transit disruptions and shortages across Europe amid freezing temperatures. Tensions remained even as the sides made progress on fuel supplies. The EU yesterday rebuked Russia for an announcement by Foreign Minister Sergei Lavrov that the country would recognize separatist elections planned for Nov. 2 in Ukraine’s rebel-held territories. The conflict in east Ukraine has killed at least 3,700 people, the United Nations estimates. [..] Under yesterday’s agreement, Russia said it would resume sending natural-gas to Ukraine – halted since June – after receiving the first tranche of debt repayment and upfront payments for future deliveries. Ukraine agreed to pay $3.1 billion to Russia by the end of this year to partially cover what Russia estimates is $5.3 billion owed by Naftogaz Ukrainy to Gazprom. The first tranche, $1.45 billion, will be paid “in the coming days,” Russian Energy Minister Alexander Novak said.

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Large scale (would-be) LNG exporters, US, Australia, Qatar, risk a lot.

Oil Rout Seen Diluting Price Appeal of US LNG Exports (Bloomberg)

Oil’s collapse is eroding the appeal of potential U.S. LNG exports to Asia as it cuts the cost of competing supplies linked to the price of crude. Brent’s 22% drop this year outpaced the 8.9% decline in natural gas at Henry Hub, the benchmark for U.S. liquefied natural gas shipments that are scheduled to begin in 2015. When the cost of processing and shipping American supplies to Asia is taken into account, the price advantage over oil-linked cargoes from producers such as Qatar has more than halved, according to data compiled by Bloomberg. While the U.S. shale boom prompts the world’s biggest natural gas producer to plan exports of the fuel, it’s also boosting the country’s crude output to the most in 30 years, helping drive down global oil prices.

“The U.S. will not sell cheap gas,” Umar Jehangir, the deputy secretary of development and joint ventures at Pakistan’s Petroleum and Natural Resources Ministry, said in Singapore on Oct. 29, adding that the opinion was his own. “U.S. LNG will be exactly the same price as gas coming out of Qatar to Asia.” Cheniere Energy Inc., which is set to become the first natural gas exporter from the U.S. shale boom when its Sabine Pass terminal in Cameron Parish, Louisiana, starts next year, says the economics still make sense. Even after crude’s slump, there’s a 15% gap between Henry Hub-indexed prices and oil-linked supplies, Jean Abiteboul, the president of Cheniere Supply & Marketing, said in London on Oct. 29.

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” … a victim of its own success”?!

Oil Price Declines Have Small-Cap Shale Investors Scrambling (Reuters)

Plummeting oil prices are pushing some of the small-cap companies which flourished as part of the U.S. shale energy boom close to their breaking point, while also prompting some well-known fund managers to aggressively buy energy stocks. Concerns about slowing growth in Europe and a stronger dollar have helped push the price of light crude oil down about 25% since June to about $82 a barrel, creeping closer to the average marginal cost of crude production of about $73 a barrel for U.S. onshore work, according to a research note from Baird Equity Research. Those declines have sent the SIG Oil Exploration and Production index down 21.2% over the last three months. “The market is selling all of these companies, even if it’s clear that $75 a barrel oil is not going to affect every company the same,” said Mike Breard, an analyst who works on the Hodges Small-Cap fund, part of Hodges Capital.

It’s a sudden turnabout for an industry that appears to be a victim of its own success. The high price of oil over the last decade was largely behind the push to mine shale oil through fracking, a controversial technique that uses high pressure to capture gas and oil trapped in deep rock. Fracking has helped the U.S. become among the world’s largest oil producers and led to concern that there is now an oversupply of crude. Production in the U.S. is on pace to add a record 1.1 million barrels a day in 2014, and another 963,000 in 2015, according to the U.S. Energy Information Administration. Already, the share price of small-cap shale oil companies such as Forest Oil has fallen below $1 as a result of high debt levels. Analysts now say that with the price of oil now close to the point where it’s no longer profitable to drill, small-cap energy stocks laden with high costs and little cash on their balance sheets could prove vulnerable to further price declines and may become acquisition targets if oil stays below $75 a barrel for six months or more.

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“If Iran walks away from the negotiation table over the proliferation of nuclear weapons technology in the country, markets could easily be spooked over the region’s stability”.

Iran A ‘Time Bomb’ For Oil Prices (CNBC)

Markets should look for “a significant additional political risk premium on the price of Brent” if nuclear arms talks between Iran and major world powers break down, Nomura has warned. If Iran walks away from the negotiation table over the proliferation of nuclear weapons technology in the country, markets could easily be spooked over the region’s stability and that could affect the price of Brent, which has tumbled since June, Nomura’s senior political analyst Alastair Newton said in a note Thursday. “Iran could bring politics very much to the fore again in determining the price of Brent crude before year-end,” Newton warned.

Brent crude for December delivery fell below $86 a barrel on Friday to $85.41 as a stronger dollar and over-supply combined to put pressure on the benchmark. The price has slipped more than 9% so far in October, its biggest monthly drop since May 2012, and a quarter since June. The deadline for the completion of negotiations between Tehran and the so-called P5+1 group which comprises the five permanent members of the UN Security Council (China, Russia, France, the U.K. and the U.S.) plus Germany is on November 24. “In the event of no agreement by the 24th, I think that the U.S. Congress would impose fresh sanctions anyway,” Newton said. He added there were grounds for caution that the likelihood of agreement was less than 50%.

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Curious. Mysterious.

Drones Spotted Over Seven French Nuclear Sites (AFP)

France’s state-run power firm Électricité de France (EDF) on Wednesday said unidentified drones had flown over seven nuclear plants this month, leading it to file a complaint with the police. The unmanned aircraft did not harm “the safety or the operation” of the power plants, EDF said, adding that the first drone was spotted on 5 October above a plant in deconstruction in eastern Creys-Malville. More drone activity followed at other nuclear power sites across the country between 13 October and 20 October, usually at night or early in the morning, EDF said, adding that it had notified the police each time. Greenpeace, whose activists have in the past staged protests at nuclear plants in France, denied any involvement in the mysterious pilotless flight activity.

But the environmental group expressed concern at the apparent evidence of “a large-scale operation”, noting that drone activity was detected at four sites on the same day in 19 October – at Bugey in the east, Gravelines and Chooz in the north and Nogent-sur-Seine in north-central France. Neither EDF nor the security forces had given any explanation about the overflights, the group said, urging the authorities to investigate. “We are very worried about the occurrence and the repetition of these suspicious overflights,” said Yannick Rousselet, head of Greenpeace’s anti-nuclear campaign, in a statement.

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“These are people who want to live in a dream world.”

US Fracking Advocates Urged to Win Ugly by Discrediting Foes (Bloomberg)

As he took the floor at the tony Broadmoor resort in Colorado Springs, the veteran Washington public relations guru had an uncompromising message for oil and gas drillers facing an anti-fracking backlash. “You can either win ugly or lose pretty. You figure out where you want to be,” Rick Berman told the Western Energy Alliance, according to a recording. “Hardball is something that I’m a big fan of, applied appropriately.” Berman has gained prominence, including a “60 Minutes” profile, for playing hardball with animal activists, labor unions and even Mothers Against Drunk Driving. In Colorado, he was offering to take on environmentalists pushing restrictions on hydraulic fracturing, or fracking. The fight over fracking in the state has been viewed as a bellwether for similar debates brewing from New York to Sacramento. Energy companies are lobbying against a slew of regulations, including ones setting safety rules for fracking on public lands and another capping carbon emissions from power plants.

That partly explains why energy and resources companies, including Koch Industries, Exxon Mobil and Murray Energy are spending lavishly on political campaigns this year. The Center for Responsive Politics data shows the industry will contribute an amount second only to its record $143 million leading up to the 2012 election. So far they have given $95.5 million to candidates and political committees. Industry supporters say they have no choice. They face a well-funded environmental campaign from groups such as the Sierra Club that threaten to endanger the boom in production and domestic manufacturing that followed the shale revolution. “There is an anti-fossil fuel movement, and a very well-funded lobbying campaign is behind it,” said Michael Krancer, Pennsylvania’s former top natural-gas regulator and an energy attorney at Blank Rome LLP in Philadelphia. “These are people who want to live in a dream world.”

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