Sep 072016
 
 September 7, 2016  Posted by at 9:15 am Finance Tagged with: , , , , , , , , , , ,  


Harris&Ewing “Congressional Union for Woman Suffrage” 1916

Why More QE Won’t Work: Debt Is Cheap But Equity Is Expensive (BBG)
ECB Set To Extend QE Well Into Next Year As It Fights Deflation (CNBC)
Could the ECB Start Buying Stocks? (WSJ)
Now Companies Are Getting Paid to Borrow (WSJ)
Message to the Fed: We’re not in Kansas Anymore (Farmer)
China Grabs Bigger Slice Of Shrinking Global Trade Pie (BBG)
Why China Isn’t a Financial Center (Balding)
Time to Worry: Stocks and Bonds Are Moving Together (WSJ)
First Factories, Now Services Signal Cracks in US Economy (BBG)
New Zealand Tops World House Price Increase (G.)
EU Ethics Watchdog Intervenes Over Former EC Chief Barroso’s Goldman Job (G.)
How Snowden Escaped (NaPo)
Greece Overhauls Refugee Center Planning As Islands Appeal For Help (Kath.)
UK Immigration Minister Confirms Work To Start On £1.9 Million Calais Wall (G.)
Nearly Half Of All Refugees Are Now Children (G.)

 

 

Pretending you can save an economy by buying already overpriced stocks is absolute lunacy.

Why More QE Won’t Work: Debt Is Cheap But Equity Is Expensive (BBG)

As central banks in Europe and Japan gear up to further expand quantitative-easing policies, market participants have issued a flurry of stark warnings about the potentially-negative unintended consequences, from the hit to pension funds to the risk of fueling market bubbles. But the more-prosaic prognostication — that further easing simply won’t stimulate slowing economies by reviving enfeebled corporate investment — may be the hardest-hitting retort from the perspective of central banks in the U.K., euro-area and Japan. While a clutch of reasons for moribund business investment in advanced economies have been advanced, central banks would do well to wake up to another typically over-looked cause, according to a new report from Citigroup.

Corporate investment faces a financing hurdle as the weighted-average cost of capital for companies (known as WACC) remains elevated thanks to the stubbornly high cost of equity, Hans Lorenzen, Citi credit analyst, said in a report published this week. The report pleads with central banks to forgo further asset purchases, citing diminishing returns from such stimulus programs and their questionable efficacy more generally. Corporates aren’t feeling the financing benefits offered by the global fall in real long-term interest rates thanks to a historically-high equity risk premium — which, in simple terms, is the excess return the stock market is expected to earn over a perceived risk-free rate, Lorenzen said.

Although companies typically aren’t dependent on equity issuance to fund investment programs – relying instead on fixed-income markets – the equity risk premium is an important factor influencing investment decisions made by company boards. The higher the cost of equity, the higher the theoretical overall cost of capital for corporates. In other words, investments that don’t on paper appear to make returns materially greater than the company’s WACC will face financing challenges.

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Only thing is, we know it’s useless-at least for what it purports to be aimed at.

ECB Set To Extend QE Well Into Next Year As It Fights Deflation (CNBC)

The ECB is expected to extend its trillion-euro bond-buying program beyond March 2017 and announce to expand the universe of eligibile bonds as part of its seemingly never-ending struggle to kickstart the euro zone’s economy. The central bank and its President Mario Draghi has been trying to push inflation back to its goal of below but close to 2 percent with a plethora of measures and instruments ranging from negative deposit rates to spur lending, a QE program that has been buying €80 billion ($89 billion) in bonds every month and interest rates close to zero – but without a breakthrough success. Analysts believe the ECB’s governing council has its work cut out when it meets to decide on monetary policy Thursday.

The headline rate of inflation remained unchanged at 0.2% in August. Core, or underlying inflation, which excludes energy, goods, alcohol and tobacco, fell from 0.9% in July to 0.8%, according to Eurostat. The eurozone economy slowed slightly in August as Germany’s services sector faltered, according to surveys of purchasing managers, expanding at the weakest pace in 19 months. Amid the factors for the cooling of the economy is the UK’s decision to leave the EU which may have dampened the currency area’s modest recovery. “We think the ECB will expand the duration of its QE programme from March 2017 currently to September 2017,” Nick Kounis at ABN Amro writes. “The ECB will most likely also need to announce changes to its QE programme to increase the universe of eligible assets as it will not be able to meet even its current targets under the current structure.”

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It could, but it’s the worst thing it could do.

Could the ECB Start Buying Stocks? (WSJ)

Central banks have become some of the biggest investors in bond markets. Now some in the financial markets think stocks should benefit more from their largess. Some economists say the ECB, which meets Thursday to decide if it should expand its current bond-buying program, should invest in equities. The reason: It is running out of bonds to buy. A move by the ECB into equities would have big implications for Europe’s stock markets, which have been rocked by a series of shocks this year, from volatility in China to Britain’s vote to leave the EU. The prospect of billions of euros flowing into equities could prop up prices, much as ECB bond purchases have done for debt securities. The signaling effect from the ECB’s unlimited money-printing power may also limit downturns in equities.

Stock purchases don’t appear to be on the near-term agenda. But ECB officials haven’t ruled them out, and the idea could gain steam if they continue to undershoot their 2% inflation target. Some central banks already invest in equities. Switzerland’s central bank has accumulated over $100 billion worth of stocks, including large holdings in blue-chip U.S. companies such as Apple and Coca-Cola. If the ECB decides to raise its stimulus by extending its current bond program, as many analysts expect, fresh questions will be raised about how it will continue to find enough bonds to buy. The bank is already purchasing €80 billion a month of corporate and public-sector bonds to reduce interest rates across the eurozone. Its holdings of public-sector debt reached €1 trillion last week, the ECB said Monday.

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The ECB is keeping sick companies alive, destroying price discovery in the process.

Now Companies Are Getting Paid to Borrow (WSJ)

Investors are now paying for the privilege of lending their money to companies, a fresh sign of how aggressive central-bank policy is upending conventional patterns in finance. German consumer-products company Henkel AG and French drugmaker Sanofi each sold no-interest bonds at a premium to their face value Tuesday. That means investors are paying more for the bonds than they will get back when the bonds mature in the next few years. A number of governments already have been able to issue bonds at negative yields this year. But it is a rare feat for companies, which also ask investors to bear credit risk.

Yields on corporate debt have plunged in recent months as investors have pushed up prices in the scramble for returns. Roughly €706 billion of eurozone investment-grade corporate bonds traded at negative yields as of Sept. 5, or over 30% of the entire market, according to trading platform Tradeweb, up from roughly 5% of the market in early January. [..] Tuesday’s deals, however, are among just a handful of corporate offerings that have actually been sold at negative yields. They include offerings of euro-denominated bonds earlier this year by units of British oil giant BP and German auto maker BMW, according to Dealogic. Germany’s state rail operator, Deutsche Bahn, also has issued euro-denominated bonds at negative yields.

The ECB launched its corporate bond-buying program in early June and had bought over €20 billion of corporate bonds as of Sep. 2. Most of its purchases came in secondary markets, where investors buy and sell already issued bonds. The central bank meets Thursday and will decide if it should expand its current bond-buying program. The purchases have helped set off a burst of issuance following the traditional summer lull in local capital markets. Last month was the busiest August on record for new issuance of euro-denominated, investment grade corporate debt, according to Dealogic.

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Kansas is all they know.

Message to the Fed: We’re not in Kansas Anymore (Farmer)

There is a lasting and stable connection in data between changes in the interest rate and changes in the unemployment rate. Past data suggest that if the Fed were to raise the interest rate at its next meeting, unemployment would increase and output growth would slow. It is fear of that outcome that causes central bank doves to be reluctant to raise the interest rate. But although an interest rate increase has preceded a slowdown by approximately three months in past data, there is a connection at longer horizons between inflation and the T-bill rate. That connection, sometimes called the Fisher relationship after the American economist Irving Fisher, arises from the fact that, risk-adjusted, T-bills and equities should pay the same rate of return.

The one-year real return on a T-bill is the difference between the interest rate and the expected one-year inflation rate. The one-year real return on holding the S&P 500 is the gain you can expect to make from buying the market today and selling it one year later. Economic theory suggests that the gap between those two expected returns arises from the fact that equities are riskier than T-bills, and importantly, the gap cannot be too big. Therein lies the policy maker’s conundrum. To hit an inflation target of 2%, the T-bill rate must be 2% higher than the underlying risk adjusted real rate: policy makers call this rate r*. There is some evidence that r* is currently very low currently, possibly zero or even negative. But if the Fed were to raise the policy rate to 2% at the next meeting, they are terrified that they might trigger a recession.

Let’s examine that argument. The fact that a rate rise caused a slowdown in past data does not mean that a rate rise will cause a slowdown in future data. This time really is different. It is different because in 2008 the Fed expanded its policy options. Before 2008 the interest rate set by the Fed was the Federal Funds Rate (FFR). That is the overnight rate at which commercial banks can borrow or lend to each other. Before 2008, there was a large and active Fed funds market used by commercial banks to meet reserve requirements. Commercial banks are required to hold roughly 10% of their balance sheets in the form of reserves. In the past, because reserves did not pay interest, banks kept them to a minimum. Excess reserves for much of the post-war period were essentially zero. Firms and households hold cash because they need liquid assets to facilitate trade. But cash is costly to hold because a firm must forgo investment opportunities. In the parlance of economic theory, we say that the FFR is the opportunity cost of holding money.

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Trade wars and currency wars a-coming.

China Grabs Bigger Slice Of Shrinking Global Trade Pie (BBG)

China is eating up a larger chunk of the world’s shrinking trade pie. Brushing off rising wages, a shrinking workforce and intensifying competition from lower cost nations from Vietnam to Mexico, China’s global export share climbed to 14.6% last year from 12.9% a year earlier. That’s the highest proportion of world exports ever in IMF data going back to 1980. Yet even as its export share climbs globally, manufacturing’s slice of China’s economy is waning as services and consumption emerge as the new growth drivers. For the global economy, a slide in China’s exports this year isn’t proving any respite as an even sharper slump in its imports erodes a pillar of demand.

Those trends are likely to be replicated in August data due Thursday. Exports are estimated to fall 4% from a year earlier and imports are seen dropping 5.4%, leaving a trade surplus of $58.85 billion, according to a survey of economists by Bloomberg News as of late Tuesday. While China’s advantage in low-end manufacturing has been seized upon by Donald Trump’s populist campaign for the U.S. presidency, the shift into higher value-added products from robots to computers is also pitting China against developed-market competitors from South Korea to Germany. A weaker yuan risks exacerbating global trade tensions, which became a hot button issue at the G-20 meeting in Hangzhou over cheap steel shipments.

“All the talk we have heard over the last few years about China losing its global competitive advantage is nonsense,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “This will all further fuel increasing trade tensions as already evident in the U.K. with the Brexit vote and in the U.S. with the support for Trump’s populist protectionist platform.”

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Many voices proclaim that China’s foray into SDRs will lead to the end of the USD. Balding sees it differently. SDRs signal China’s weaknesses.

Why China Isn’t a Financial Center (Balding)

Amid all the buzz about China’s hosting the G-20 summit in Hangzhou – all the accords, arguments and alleged snubs – another symbolically significant event was largely obscured. Last week, the World Bank issued bonds denominated in Special Drawing Rights, or SDRs, in China’s interbank market. Beginning in October, the yuan will be included in the basket of currencies used to set the SDRs’ value. To China, this symbolizes its status as a rising power. I’d argue that it instead symbolizes why China is struggling to become a global financial center. Beijing conceived of SDRs as something of a compromise. It would like the global monetary system to be less reliant on the U.S. dollar and more favorable toward its own currency.

Yet it continues to impose capital controls, which limit the yuan’s usage overseas, and it doesn’t want to let the yuan’s value float freely, which would be a prerequisite to its becoming a true reserve currency. China saw SDRs as a way to split the difference, to create a competitor to the dollar and maintain a fixed exchange rate at the same time. The problem is that there’s almost no conceivable reason to use them. SDRs were created as a synthetic reserve asset by the IMF decades ago, under the Bretton Woods system. No country uses them for normal business, and no government is likely to issue bonds denominated in them except for political reasons, as the World Bank is doing. Companies won’t use them either. If a firm wants to borrow to build a plant in Japan, it will issue a bond in yen so it can repay in yen.

If its customers are global, surely an ambitious investment bank would be willing to build a customized currency portfolio index that would match its needs. Rather than using the SDR’s weighting of currencies, the company could sell a bond in a synthetic index of anything: a 25% split between dollars, euros, yen and reals, say. No customer pays in SDRs; why bind yourself to repaying debts in them? The reason China is pushing SDRs is that it hopes to gain the prestige of a global currency without facing the financial pressure to let the yuan float freely or to loosen capital controls. It wants the benefits of global leadership, in other words, but would prefer to avoid the drawbacks. This is precisely the attitude that’s hindering China’s rise as a global financial center.

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Distortion is all we have left.

Time to Worry: Stocks and Bonds Are Moving Together (WSJ)

Wall Street traders and fund managers returning from the summer break are likely to focus on the obvious: a series of central-bank meetings in coming weeks and the imminent U.S. election. They also should be paying close attention to some unusual behavior in the market, where the changing relationship between bonds and stocks may be a sign of trouble ahead. A generation of traders have grown up with the idea that stock prices and bond yields tend to rise and fall together, as what is good for stocks is bad for bonds (pushing the price down and yield up), and vice versa. This summer, the relationship seems to have broken down in the U.S. Share prices and bond yields moved in the same direction in just 11 of the past 30 trading days, close to the lowest since the start of 2007.

This is far from unprecedented. But since Lehman Brothers failed in 2008, such a swing in the relationship has been unusual and suggests prices are being driven by something other than the balance of hope and fear about the economy. It has tended to coincide with times of deep discontent in markets, notably the 2013 “taper tantrum,” when bond yields briefly surged after Federal Reserve officials signaled they would soon end stimulus, and last year’s brief bubble in German bunds. The simplest explanation is that expectations of interest rates being lower for longer—some central bankers have suggested lower forever—pushes the price of everything up, and yields down.

When the focus is on the discount rate used to value all assets, bond and stock prices rise and fall together, creating the inverse relationship between bond yields and shares. Such a focus on monetary policy isn’t healthy. It leaves markets more exposed to sudden shocks, both from changes in policy and from an economy to which less attention is being paid. “It’s a somewhat mercurial thing, but there are big shifts [in correlations], and being on the right side of those big shifts is important,” said Philip Saunders at Investec Asset Management. “You do see some brutal price action at these correlation inflection points.”

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What? We have enough waiters?

First Factories, Now Services Signal Cracks in US Economy (BBG)

Some cracks could be starting to appear in the picture of an otherwise resilient U.S. economy. An abrupt drop in the Institute for Supply Management’s services gauge on Tuesday to a six-year low is the latest in a string of unexpectedly weak data for August. Other less-than-stellar figures include an ISM factory survey showing a contraction in manufacturing; a cooling of hiring; automobile sales falling short of forecasts; and an index of consumer sentiment at a four-month low. While there is hardly any evidence that growth is falling off a cliff, the run of disappointing figures make it tougher to argue that the underlying momentum of the world’s largest economy is holding up.

It also potentially complicates the task of Federal Reserve policy makers, who are debating whether to raise interest rates as soon as this month; traders’ bets on a September move faded further after the report on service industries, which make up almost 90% of the economy. “The latest set of ISM numbers is shockingly weak,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “It certainly gives the doves at the Fed more ammunition. It makes the Fed’s conversation at the September meeting that much more contentious.” The ISM’s non-manufacturing index slumped to 51.4, the lowest since February 2010, from 55.5 in July, the Tempe, Arizona-based group reported. The figure was lower than the most pessimistic projection in a Bloomberg survey.

The ISM measures of orders and business activity skidded by the most since 2008, when the U.S. was in a recession. Readings above 50 indicate expansion. Stocks fell, bonds climbed and the dollar weakened against most of its major peers after the data were released.

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AKA New Zealand has world’s biggest housing bubble.

New Zealand Tops World House Price Increase (G.)

New Zealand has the world’s most frenetic property market, with prices in Auckland now outstripping London, and possibly dashing the hopes of British buyers hoping to escape Brexit. In a global ranking of house price growth by estate agents Knight Frank, New Zealand was second to Turkey, but once the impact of inflation was stripped out it came top with 11% annual growth. Canada was the only other country to see price growth of 10% or more over the past year. It also recorded the fastest price rises of any country over the past three months. Meanwhile once white-hot property markets in the far east are cooling fast. Taiwan saw price falls of 9.4% over the past year, putting it at the bottom of Knight Frank’s ranking. Hong Kong and Singapore have also seen significant reductions in house prices.

Auckland is at the centre of an extraordinary property boom, with separate data revealing that the city’s average house price last month hit NZ$1m (£550,000) for the first time. The country’s QV house price index found that the typical Auckland home was valued at NZ$1,013,632 in August, an increase of 15.9% over the year. That’s just under £560,000 and higher than the average London property price of £472,384 according to data. Spiralling prices – up NZ$20,000 a month over the past quarter – and the falling pound are likely to deter Britons hoping to emigrate.

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After the fact.

EU Ethics Watchdog Intervenes Over Former EC Chief Barroso’s Goldman Job (G.)

The EU’s ethics watchdog is to look into the former European commission president José Manuel Barroso’s new job with Goldman Sachs, which includes advising the investment bank and its clients on Brexit. In a letter to Barroso’s successor, Jean-Claude Juncker, the EU ombudsman, Emily O’Reilly, said Barroso’s appointment as non-executive chairman of Goldman raised widespread concerns. She cited “understandable international attention given the importance of his former role and the global power, influence, and history of the bank with which he is now connected”. Her intervention comes after EU staff launched a petition calling on EU institutions to take “strong exemplary measures” against Barroso including the loss of his pension while he works for Goldman.

The petition now has more than 120,000 signatures. O’Reilly told Juncker that public unease will be exacerbated by the fact that Barroso is to advise Goldman Sachs on Britain’s exit from the EU. She warned of the danger of a breach of ethics in his interaction with former colleagues, including the EU’s chief Brexit negotiator, Michel Barnier, a former special adviser to Barroso. O’Reilly said new guidance was needed to ensure that EU staff were “not affected by any possible failure on Mr Barroso’s part to comply with his duty to act with integrity”. Barroso joined Goldman less than two years after leaving office at the European commission, but after the 18-month cooling-off period stipulated by European rules.

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Great story from an unlikely source, Canada’s right-wing National Post.

How Snowden Escaped (NaPo)

Edward Snowden, a former U.S. intelligence contractor, became the most wanted fugitive in the world after leaking a cache of classified documents to the media detailing extensive cyber spying networks by the U.S. government on its own citizens and governments around the world. To escape the long arm of American justice, the man responsible for the largest national security breach in U.S. history retained a Canadian lawyer in Hong Kong who hatched a plan that included a visit to the UN sub-office where the North Carolina native applied for refugee status to avoid extradition to the U.S.

Fearing the media would surround and follow Snowden — making it easier for the Hong Kong authorities to arrest the one-time CIA analyst on behalf of the U.S. — his lawyers made him virtually disappear for two weeks from June 10 to June 23, 2013, before he emerged on an Aeroflot airplane bound for Moscow, where he remains stranded today in self-imposed exile. “That morning, I had minutes to figure out how to get him to the UN, away from the media, and out of harm’s way with the weight of the U.S. government bearing down on him. I did what I had to do, and could do, to help him,” Robert Tibbo, the whistleblower’s lead lawyer in Hong Kong told the Post in a wide-ranging interview, the first detailing the chaotic days of Snowden’s escape three years ago. “They wanted the data and they wanted to shut him down. Our greatest fear was that Ed would be found.”

The covert scheme to dodge U.S. attempts to arrest Snowden could have been ripped from the pages of a spy thriller. The fugitive was disguised in a dark hat and glasses and transported by car at night by two lawyers to safe houses on the crowded and impoverished fringes of Hong Kong. Snowden hunkered down in small, cluttered, dingy rooms where as many as four people shared less than 150 square feet. Batteries were removed from cellphones when they gathered, burner phones were used to place calls, SIM cards were exchanged and sophisticated computer encryption was used to communicate when face-to-face meetings were not possible. Snowden rarely ventured out, and only at night where he could easily be lost among the many other asylum seekers. “Nobody would dream that a man of such high profile would be placed among the most reviled people in Hong Kong,” recalled Tibbo, a Canadian-born and educated barrister who has practiced law for 15 years. “We put him in a place where no one would look.”

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It is criminal that Europe doesn’t reach out to help. But we still do. Click here and Please Help The Automatic Earth Help The Poorest Greeks And Refugees! This works! No governments, no NGOs. Thats means no overhead, no salaries, just help.

Greece Overhauls Refugee Center Planning As Islands Appeal For Help (Kath.)

Government officials on Tuesday determined which reception centers for migrants across the country are to close and where new, improved facilities are to open but did not determine a time-frame, even as authorities on the Aegean islands warn of dangerously cramped and tense conditions in local camps. More than 12,500 migrants are currently living in reception centers on five Aegean islands – Lesvos, Chios, Kos, Leros and Samos – and hundreds more are arriving every day from neighboring Turkey. Spyros Galinos, the mayor of Lesvos, which is hosting 5,484 migrants, wrote to Alternate Migration Policy Minister Yiannis Mouzalas on Tuesday to express his concern about the “extremely dangerous conditions” on the island.

He asked the minister for the immediate transfer of migrants from Lesvos to other facilities on the mainland “to avert far worse developments.” However, decongesting facilities on the islands is part of the government’s broader overhaul of a network of reception centers spread across the country. An aide close to Mouzalas determined on Tuesday which camps in northern Greece will close and which will be improved but did not say when this would happen. Among the facilities that are to close are those in Sindos and Oraiokastro, near Thessaloniki, and in Nea Kavala, near Kilkis. Reception centers in Diavata and Vassilika, also in northern Greece, are to be upgraded.

A new reception center for minors is to start operating at the Amygdaleza facility, north of the capital, next Monday. Meanwhile, sources said on Tuesday that child refugees will start attending Greek schools at the end of this month. The 22,000 child refugees currently in Greece will be inducted into the school system in groups. Those aged between 4 and 7 will attend kindergartens to be set up within migrant reception centers. Children aged 7 to 15 will join classes at public schools near the reception centers where they are staying. And unaccompanied minors aged 14 to 18 will be able to join vocational training classes if they so desire.

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A tangible monument to incompetence and spectacular failure.

UK Immigration Minister Confirms Work To Start On £1.9 Million Calais Wall (G.)

Work is about to begin on “a big, new wall” in Calais as the latest attempt to prevent refugees and migrants jumping aboard lorries heading for the Channel port, the UK’s immigration minister has confirmed. Robert Goodwill told MPs on Tuesday that the four-metre high wall was part of a £17m package of joint Anglo-French security measures to tighten precautions at the port. “People are still getting through,” he said. “We have done the fences. Now we are doing the wall,” the new immigration minister told the Commons home affairs committee. Building on the 1km-long wall along the ferry port’s main dual-carriageway approach road, known as the Rocade, is due to start this month.

The £1.9m wall will be built in two sections on either side of the road to protect lorries and other vehicles from migrants who have used rocks, shopping trolleys and even tree trunks to try to stop vehicles before climbing aboard. It will be made of smooth concrete in an attempt to make it more difficult to scale, with plants and flowers on one side to reduce its visual impact on the local area. It is due to be completed by the end of the year. The plan has already attracted criticism from local residents who have started calling it “the great wall of Calais”.

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What do you call a world that refuses to protect its children?

Nearly Half Of All Refugees Are Now Children (G.)

Children now make up more than half of the world’s refugees, according to a Unicef report, despite the fact they account for less than a third of the global population. Just two countries – Syria and Afghanistan – comprise half of all child refugees under protection by the United Nations High Commissioner for Refugees (UNHCR), while roughly three-quarters of the world’s child refugees come from just 10 countries. New and on-going global conflicts over the last five years have forced the number of child refugees to jump by 75% to 8 million, the report warns, putting these children at high risk of human smuggling, trafficking and other forms of abuse.

The Unicef report – which pulls together the latest global data regarding migration and analyses the effect it has on children – shows that globally some 50 million children have either migrated to another country or been forcibly displaced internally; of these, 28 million have been forced to flee by conflict. It also calls on the international community for urgent action to protect child migrants; end detention for children seeking refugee status or migrating; keep families together; and provide much-needed education and health services for children migrants. “Though many communities and people around the world have welcomed refugee and migrant children, xenophobia, discrimination, and exclusion pose serious threats to their lives and futures,” said Unicef’s executive director, Anthony Lake.

“But if young refugees are accepted and protected today, if they have the chance to learn and grow, and to develop their potential, they can be a source of stability and economic progress.”

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Jul 052016
 
 July 5, 2016  Posted by at 12:20 pm Finance Tagged with: , , , , , ,  


Dorothea Lange Miserable poverty. Elm Grove, Oklahoma County, OK 1936

We used to have this saying that if someone asks you to do a job good, fast and cheap, you’d say: pick two. You can have it good and cheap, but then it won’t be fast, etc. As our New Zealand correspondent Dr. Nelson Lebo III explains below, when it comes to our societies we face a similar issue with our climate, energy and the economy.

Not the exact same, but similar, just a bit more complicated. You can’t have your climate nice and ‘moderate’, your energy cheap and clean, and your economy humming along just fine all at the same time. You need to make choices. That’s easy to understand.

Where it gets harder is here: if you pick energy and economy as your focus, the climate suffers (for climate you can equally read ‘the planet’, or ‘the ecosystem’). Focus on climate and energy, and the economy plunges. So far so ‘good’.

But when you emphasize climate and economy, you get stuck. There is no way the two can be ‘saved’ with our present use of fossil fuels, and our highly complex economic systems cannot run on renewables (for one thing, the EROEI is not nearly good enough).

It therefore looks like focusing on climate and economy is a dead end. It’s either/or. Something will have to give, and moreover, many things already have. Better be ahead of the game if you don’t want to be surprised by these things. Be resilient.

But this is Nelson’s piece, not mine. The core of his argument is worth remembering:

Everything that is not resilient to high energy prices and extreme weather events will become economically unviable…

…and approach worthlessness. On the other hand,…

Investments of time, energy, and money in resilience will become more economically valuable…

Here’s Nelson:

 

 

Nelson Lebo: There appear to be increasing levels of anxiety among environmental activists around the world and in my own community in New Zealand. After all, temperature records are being set at a pace equal only to that of Stephen Curry and LeBron James in the NBA Finals. A recent Google news headline said it all: “May is the 8th consecutive month to break global temperature records.”

In other words, October of last year set a record for the highest recorded global monthly temperature, and then it was bettered by November, which was bettered by December, January, and on through May. The hot streak is like that of Lance Armstrong’s Tour De France dominance, but we all know how that turned out in the end.

Making history – like the Irish rugby side in South Africa recently – is usually a time to celebrate. Setting a world record would normally mean jubilation – not so when it comes to climate.

Responses to temperature records range from sorrow, despair, anger, and even fury. Anyone with children or grandchildren (and even the childless) who believes in peer review and an overwhelming scientific consensus has every right to feel these emotions. So why do I feel only resignation?

We are so far down the track at this point that we are damned if we do and damned if we don’t. Remember the warnings 30 years ago that we needed 30 years to make the transition to a low carbon economy or else there would be dire consequences? Well, in case you weren’t paying attention, it didn’t happen.

While these warnings were being issued by scientists much of the world doubled down – Trump-like – on Ford Rangers, Toyota Tacomas, and other sport utility vehicles. The same appears to be happening now, with the added element that we are experiencing the dire consequences as scientists issue even more warnings and drivers buy even more ‘light trucks’. Forget Paris, the writing was on the wall at Copenhagen.

 

The bottom line is that most people will (and currently do) experience climate change as a quality of life issue, and quality of life is related to a certain extent to disposable income. Acting or not acting proactively or reactively on climate change is expensive and gets more expensive every day.

If the international community ever takes collective action on climate change it will make individuals poorer because the cost of energy will rise significantly. If the international community fails to act, individuals will be made poorer because of the devastating effects of extreme weather events – like last year’s historic floods where I live as well as in northern England, etc – shown to be on the increase over the last 40 years in hundreds of peer-reviewed papers with verifiable data.

And here is the worst part: most economies around the world rely on some combination of moderate climate and cheap fossil fuels. For example, our local economy is heavily dependent on agriculture and tourism, making it exceptionally vulnerable to both acting AND not acting on climate change.

Drought hurts rural economies and extreme winds and rainfall can cost millions in crop damage as well as repairs to fencing, tracks and roads. As a result, both farmers and ratepayers have fewer dollars in their pockets to spend on new shoes, a night out, or a family trip. This is alongside living in a degraded environment post-disaster. The net result is a negative impact on quality of life: damned if we don’t.

On the other hand, tourism relies on inexpensive jet fuel and petrol to get the sightseers and thrill seekers to and around the world with enough dollars left over to slosh around local economies. Think about all of the service sector jobs that rely on tourism that in turn depend entirely on a continuous supply of cheap fuel. (This is not to mention peak oil and the lack of finance available to fund any long and expensive transition to an alternative energy world.) I’m told 70% of US jobs are in the service sector, most of which rely on inexpensive commuting and/or a highly mobile customer base.

Any significant approach to curbing carbon emissions in the short term will result in drastic increases to energy prices. The higher the cost of a trip from A to Z the less likely it is to be made. As a result, business owners and ratepayers at Z will have fewer dollars in their pockets to spend on new shoes, a night out, or a family vacation of their own. The net result is a negative impact on their quality of life: damned if we do.

 

I suppose it deserves repeating: most OECD economies and the quality of life they bring rely on both moderate climate and cheap fossil fuels, but these are mutually exclusive. Furthermore, regardless of emissions decisions made by the international community, we are already on track for decades of temperature records and extreme weather events that will cost billions if not trillions of dollars.

The response in many parts of the world has been to protest. That’s cool, but you can’t protest a drought – the drought does not care. You can’t protest a flood – the flood does not care. And even if the protests are successful at influencing government policies – which I hope long-term they are – we are still on track for decades of climatic volatility and the massive price tags for clean up and repair.

Go ahead and protest, people, but you better get your house in order at the same time, and that means build resilience in every way, shape and form.

Resilience is the name of the game, and I was impressed with Kyrie Irving’s post NBA game seven remarks that the Cleveland Cavaliers demonstrated great resilience as a team.

As I wrote here at TAE over a year ago, Resilience Is The New Black. If you don’t get it you’re not paying attention.

This article received a wide range of responses from those with incomplete understandings of the situation as well as those in denial – both positions dangerous for their owners as well as friends and neighbours.

The double bind we find ourselves in by failing to address the issue three decades ago is a challenge to put it mildly. Smart communities recognize challenges and respond accordingly. The best response is to develop resilience in the following areas: ecological, equity, energy and economic.

The first two of these I call the “Pope Index” because Francis has identified climate change and wealth inequality as the greatest challenges facing humanity. Applying the Pope Index to decision making is easy – simply ask yourself if decisions made in your community aggravate climate change and wealth inequality or alleviate them.

For the next two – energy and economics – I take more of a Last Hours of Ancient Sunlight (credit, Thom Hartmann) perspective that I think is embraced by many practicing permaculturists. Ancient sunlight (fossil fuels) is on its way out and if we do not use some to build resilient infrastructure on our properties and in our communities it will all be burned by NASCAR, which in my opinion would be a shame.

As time passes, everything that is not resilient to high energy prices and extreme weather events will become economically unviable and approach worthlessness.

On the other hand, investments of time, energy, and money in resilience will become more economically valuable as the years pass.

Additionally, the knowledge, skills and experience gained while developing resilience are the ultimate in ‘job security’ for an increasingly volatile future.

If you know it and can do it and can teach it you’ll be sweet. If not, get onto it before it’s too late.

 

 

Dr. Nelson Lebo is a serial permaculture property developer and consultant. He likes underdogs but not drug cheats. Congratulations Cleveland and Ireland.

 

 

Jun 132016
 
 June 13, 2016  Posted by at 8:28 am Finance Tagged with: , , , , , , , , , , ,  


G. G. Bain Police machine gun, New York 1918

Surging Yen Sends Nikkei Down 3.1% Amid Pan-Asia Sell-Off (CNBC)
Trading Floors Go Quiet Across Asia as Equity Desks Face the Ax (BBG)
Growing Corporate Debt a ‘Key Fault Line’ In China’s Economy: IMF (R.)
Chinese State-Owned Companies Face Greater Scrutiny Of EU Deals (R.)
Bank of America Shares Flash Bearish Signals Galore (MW)
About That US Economic Rebound… (ZH)
David Stockman’s View of Trump vs. Clinton (BBG)
US Student Loans Numbers Are Simply Mad (Gurdgiev)
The US Has Already Reinstated Debtors’ Prisons (NY Times)
Why I Am Voting To Leave The EU (AEP)
EU Chief Says Getting Closer To Granting Turks Visa-Free Travel (R.)
Negative Rates Drive Major Changes At European Pension Funds (II)
Frustrations of Telling the Truth (Paul Craig Roberts)
Over 2,500 Migrants Rescued Off Italy Over Weekend (AFP)

The surging yen is fixing to kill Abe(nomics).

Surging Yen Sends Nikkei Down 3.1% Amid Pan-Asia Sell-Off (CNBC)

Asian markets were sharply lower Monday, ahead of central bank meetings in the U.S. and Japan this week and amid jitters over the upcoming referendum on whether the U.K. would remain in the EU. Japan’s Nikkei 225 tumbled 3.09%, as fresh strength in the yen pressured stocks, with major exporters selling off. Shares of Toyota, Nissan, Honda and Sony traded down between 3.18 and 3.89%. The yen strengthened against the greenback ahead of the Bank of Japan’s two-day policy meeting starting June 15. Additionally, the yen is considered a safe-haven currency and increased concerns over the risk of a Brexit may be driving funds into the currency.

The currency pair traded at 105.98 as of 12:44 p.m. HK/SIN, compared with levels around 106.80 on Friday afternoon local time. “The BOJ … will likely delay a rate cut in the meeting, favoring a coordinated event when the government releases its fiscal stimulus package in Autumn,” said Stephen Innes, a senior foreign exchange trader at OANDA Asia Pacific. “This delay will likely appreciate the yen over the short term if the BOJ remains sidelined.”

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“Revenue from trading stocks in China and Hong Kong could fall 30% to 50% in the first half from a year earlier..”

Trading Floors Go Quiet Across Asia as Equity Desks Face the Ax (BBG)

Even by the boom-bust standards of Asia’s equity business, it’s been a turbulent 12 months. At this time last year, the industry was riding high as China’s stock market soared, volumes jumped to records and some of the biggest names in finance boosted hiring. Now, turnover is shrinking at the fastest pace since at least 2006 and banks are under growing pressure to either downsize their Asian equity desks, or exit parts of the business altogether. Investors and issuers are retrenching after Chinese shares crashed, the Federal Reserve tightened monetary policy and divisive political debates from the U.S. to Britain weighed on sentiment. Revenue from trading stocks in China and Hong Kong could fall 30% to 50% in the first half from a year earlier, according to senior executives at four firms.

Equity derivatives sales in Asia are on track to drop at least 50%, while prime brokerage is down roughly 20%, two of the executives said. “Because overall revenue is down, further cuts are likely across the industry,” said Taichi Takahashi at UBS in Hong Kong. “Some second-tier players will throw in the towel because their market share is shrinking.” Revenue for the industry in Asia slumped 32% to $2.6 billion in the first quarter from a year earlier, compared with a 20% drop worldwide, according to estimates from Coalition, a banking research firm. Regional equities headcount dropped by about 300, or 6%, Coalition figures show. Turnover on Asia’s 10 biggest exchanges has declined 69% from last year’s peak in May, the deepest slump over any period of the same length since Bloomberg began tracking the data in 2006.

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It’s corporate PLUS local government.

Growing Corporate Debt a ‘Key Fault Line’ In China’s Economy: IMF (R.)

China must act quickly to address mounting corporate debt, a major source of worry about the world’s second-largest economy, a senior IMF official said on Saturday. David Lipton, first deputy managing director of the IMF, warned in a speech to a group of economists in the southern city of Shenzhen that companies’ indebtedness is a “key fault line in the Chinese economy.” “Company debt problems today can become systemic debt problems tomorrow. Systemic debt problems can lead to much lower economic growth, or a banking crisis. Or both,” Lipton said, according to a copy of his prepared remarks provided to Reuters.

China, whose economy grew in 2015 at its slowest pace in a quarter of a century, has been grappling with rising debt levels and overcapacity. Last week, the People’s Bank of China warned in its mid-year work report that the government’s push to reduce debt levels and overcapacity could increase bond default risks and make it more difficult for companies to raise funds. Lipton said corporate debt in China stands at about 145% of GDP, a high ratio. He singled out state-owned enterprises, which he said accounted for about 55% of corporate debt but only 22% of economic output, according to IMF estimates.

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The EU is not all bad. Don’t let China buy your assets with monopoly money.

Chinese State-Owned Companies Face Greater Scrutiny Of EU Deals (R.)

Chinese state-owned companies seeking to buy European assets are going to face greater regulatory scrutiny following a landmark European Commission decision on a recent deal. In its review of a proposed joint venture between France’s EDF and state-owned China General Nuclear Power (CGN), the Commission – which has exclusive power over antitrust issues in the EU – ruled that CGN was not independent from China’s central administrator for state-owned enterprises, the State-owned Assets Supervision and Administration Commission (SASAC). As a result, it decided that it did have the power to decide whether the deal should be cleared.

It meant that the Commission didn’t only consider CGN’s own revenue but the combined revenue of all Chinese energy state-owned enterprises when considering whether the deal came under its jurisdiction. This approach automatically bumped CGN’s turnover above the minimum EU threshold for merger clearance, a warning shot for other Chinese state-owned enterprises (SOEs) who may be considering buying assets in Europe and were not anticipating needing to get a regulatory green light. The Commission generally only reviews a merger if each party to it has more than €250 million in sales in the EU as well as combined global sales of more than €5 billion. CGN’s turnover, alone, didn’t cross that €250 million threshold, but the Chinese energy SOEs as a whole do breach that level.

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Negative rates hurt.

Bank of America Shares Flash Bearish Signals Galore (MW)

The selloff in Bank of America stock Friday capped a week in which a number of bearish chart patterns were completed, implying potential for further declines to multi-month lows. The banking giant’s shares slumped 2.5% to close at $13.83 Friday. Volume of 89.6 million shares made them the most-actively traded on the NYSE, according to FactSet. The selloff comes as the yield on the 10-year Treasury note slumped to a three-year low of 1.639%, as part of a global bond rush that pushed yields on several government benchmarks to record lows. Lower long-term interest rates can hurt banks’ earnings, as they narrow the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Here are some of the bearish technical developments in BofA’s stock that have occurred this past week: • On Tuesday, the stock fell below an uptrend line, supported by three support points, that began at the Feb. 11 bottom. That suggests the short-term trend has flipped to negative. • The trendline breakdown occurred as the stock failed to get back above its 200-day moving average, which many see as a dividing line between shorter-term and longer-term trends. This indicates that the rally off the February low was just a minor bounce within a more dominant downtrend. • The stock closed Thursday below its 50-day moving average, which many use as a guide to the short-term trend. After the 50-day moving average held as support during the May pullback, the drop below it this week was a warning sign that the trendline break was for real.

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Forgive me for thinking this is clear enough.

About That US Economic Rebound… (ZH)

Following the steep drop in first quarter GDP which printed at 0.7% in the first revision, economists, strategists and pundits have once again put their collective hopes on another second-half rebound, with expectations for a Q2 rebound running high – the Atlanta Fed’s latest GDP nowcast stands at 2.5%. Unfortunately, this may once again be unwarranted. The reason: the collapse in retail spending which many had expected would be transitory and which has pressured discretionary consumer stocks in recent weeks, just refuses to go away. As we showed on Friday, both critical categories of retail sales (based on BofA credit and debit card spending data), there has been a dramatic collapse in both luxury …

… and home improvement related spending.

The math here is simple: without a strong rebound in spending, there simply can not be a strong rebound in GDP, period. Which, incidentally, is precisely what Goldman’s latest Current Activity Indicator – a real-time proxy for GDP – has found. Here is David Kostin in his latest US Weekly Kickstart: “The Goldman Sachs Economics US Current Activity Indicator (CAI) is a proxy for real-time GDP growth and the metric has slowed to 1.3%. Our economics colleagues expect GDP growth will accelerate to a 3.2% pace in 2Q and average 2.3% during 2H 2016.”

This was the lowest print in over five years. And here is why the Fed will not only not be hiking in June or July, or frankly any time soon. In fact, judging by this chart – and based on the recent collapse in global bond yields – the Fed’s next move will be to cut rates.

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I’m -mostly- with David on this.

David Stockman’s View of Trump vs. Clinton (BBG)


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No, really, America’s problem is debt. And the western world’s problem is debt. And China, and Japan.

US Student Loans Numbers Are Simply Mad (Gurdgiev)

If you like hockey stick charts, you’ll love these two covering U.S. student loans debt evolution over time:

The numbers are simply mad: total debt rose from around $100 billion ca 2006 to almost $1 trillion by the end of 2015. On a per capita of student population basis, same period rise was from around $16,000 per student to over $100,000 per student. More recent data, through May 2016 shows that average student debt is now at $133,000 and the total quantum of student loans outstanding is at over $1.2 trillion. Data from Bloomberg, through 2014, shows that Federal Government-originated student loans have increased 10-fold since 1990:


Source: Bloomberg, data from Collegeboard.org

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“.. in Ferguson, Mo., the average household paid $272 in fines in 2012, and the average adult had 1.6 arrest warrants issued that year..”

The US Has Already Reinstated Debtors’ Prisons (NY Times)

In the 1830s, the civilized world began to close debtors’ prisons, recognizing them as barbaric and also silly: The one way to ensure that citizens cannot repay debts is to lock them up. In the 21st century, the US has reinstated a broad system of debtors’ prisons, in effect making it a crime to be poor. If you don’t believe me, come with me to the county jail in Tulsa. On the day I visited, 23 people were incarcerated for failure to pay government fines and fees, including one woman imprisoned because she couldn’t pay a fine for lacking a license plate. [..] “It’s 100% true that we have debtor prisons in 2016,” says Jill Webb, a public defender. “The only reason these people are in jail is that they can’t pay their fines. “Not only that, but we’re paying $64 a day to keep them in jail — not because of what they’ve done, but because they’re poor.”

This is as unconscionable in 2016 as it was in 1830, and it is a system found across the country. In the last 25 years, as mass incarceration became increasingly costly, states and localities shifted the burden to criminal offenders with an explosion in special fees and surcharges. Here in Oklahoma, criminal defendants can be assessed 66 different kinds of fees, from a “courthouse security fee” to a “sheriff’s fee for pursuing fugitive from justice,” and even a fee for an indigent person applying for a public defender (I’m not kidding: An indigent person is actually billed for requesting a public defender, and if he or she does not pay, an arrest warrant is issued). Even the Tulsa County district attorney, Stephen Kunzweiler, thinks these fines are a ridiculous way to finance his office.

“It’s a dysfunctional system,” he says. A new book, “A Pound of Flesh,” by Alexes Harris of the University of Washington, notes that these modern debtors’ prisons now exist across America. Harris writes that in Rhode Island in 2007, 18 people were incarcerated a day, on average, for failure to pay court debt, while in Ferguson, Mo., the average household paid $272 in fines in 2012, and the average adult had 1.6 arrest warrants issued that year. “Impoverished defendants have nothing to give,” Harris says, and the result is a system that disproportionately punishes the poor and minorities, leaving them with an overhang of debt from which they can never escape.

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I agree with Ambrose for once. On balance, what’s negative about the EU far outweighs the advantages.

“Brexit vote is about the supremacy of Parliament and nothing else..“ “Where we concur is that the EU as constructed is not only corrosive but ultimately dangerous..”

Why I Am Voting To Leave The EU (AEP)

With sadness and tortured by doubts, I will cast my vote as an ordinary citizen for withdrawal from the European Union. Let there be no illusion about the trauma of Brexit. Anybody who claims that Britain can lightly disengage after 43 years enmeshed in EU affairs is a charlatan, or a dreamer, or has little contact with the realities of global finance and geopolitics. Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error. For some of us – and we do not take our cue from the Leave campaign – it has nothing to do with payments into the EU budget.

Whatever the sum, it is economically trivial, worth unfettered access to a giant market. We are deciding whether to be guided by a Commission with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service; and whether to submit to a European Court (ECJ) that claims sweeping supremacy, with no right of appeal. It is whether you think the nation states of Europe are the only authentic fora of democracy, be it in this country, or Sweden, or the Netherlands, or France – where Nicholas Sarkozy has launched his presidential bid with an invocation of King Clovis and 1,500 years of Frankish unity. My Europhile Greek friend Yanis Varoufakis and I both agree on one central point, that today’s EU is a deformed halfway house that nobody ever wanted.

His solution is a great leap forward towards a United States of Europe with a genuine parliament holding an elected president to account. Though even he doubts his dream. “There is a virtue in heroic failure,” he said. I do not think this is remotely possible, or would be desirable if it were, but it is not on offer anyway. Six years into the eurozone crisis there is no a flicker of fiscal union: no eurobonds, no Hamiltonian redemption fund, no pooling of debt, and no budget transfers. The banking union belies its name. Germany and the creditor states have dug in their heels. Where we concur is that the EU as constructed is not only corrosive but ultimately dangerous, and that is the phase we have now reached as governing authority crumbles across Europe.

The Project bleeds the lifeblood of the national institutions, but fails to replace them with anything lovable or legitimate at a European level. It draws away charisma, and destroys it. This is how democracies die. “They are slowly drained of what makes them democratic, by a gradual process of internal decay and mounting indifference, until one suddenly notices that they have become something different, like the republican constitutions of Athens or Rome or the Italian city-states of the Renaissance,” says Lord Sumption of our Supreme Court.

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Tusk driving the final nail in Cameron’s coffin?!

EU Chief Says Getting Closer To Granting Turks Visa-Free Travel (R.)

The EU is getting closer to granting Turks visa-free travel to Europe, but talks on this will continue until at least October, EC President Donald Tusk said in an interview with German newspaper Bild published on Monday. Asked when Turks would be given visa freedom, Tusk said: “When they have fulfilled all of the conditions without exception.” He added: “The negotiations will certainly last until October but we’re getting ever closer.” The deal to give Turks visa-free travel in return for reducing the flow of illegal migrants to the bloc has been held up by a disagreement over Turkey’s anti-terror laws, which some in Europe see as too broad. Turkey says its needs the law to fight its multiple security threats. Last week Turkey said it expected a positive outcome in coming days in talks with the EU about visa-free travel for Turks.

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Want to see collapse in action? Watch pension plans.

Negative Rates Drive Major Changes At European Pension Funds (II)

In recent years European pension fund managers have been moving down the credit spectrum, wading into private markets, putting money into infrastructure and other illiquid assets; in short, doing almost anything to generate yield. But with negative interest rates strengthening their grip on Europe, many plan sponsors are realizing they can’t earn their way out of today’s dilemma. So even as they do what they can to diversify assets, pension funds are moving to curb their liabilities by limiting payouts to retirees, shifting to defined contribution-type models from defined benefit ones and taking other steps to make sure the money doesn’t run out. Consider Credit Suisse. The Zurich-based bank offers one of the more generous retirement plans in the country with the second-largest pension system in continental Europe.

But the pension fund, like most others in Switzerland, was blindsided by the Swiss National Bank’s January 2015 abandonment of its exchange rate ceiling, which sent the Swiss franc soaring and bond yields falling deeper into negative territory than anywhere in Europe. The Sf15.6 billion ($15.8 billion) fund saw its return plunge to 1.6% last year from 7.3% in 2014. Concerned that negative rates and ever-rising life spans put the financial health of the fund at risk, trustees late last year adopted a sweeping reform of the scheme that will gradually raise the retirement age, trim benefits for future retirees and shift workers with high salaries into a pure defined contribution savings plan for part of their incomes. “We do not want an underfunded situation,” says Matthias Hochrein, the plan’s chief operating officer.

In the Netherlands, which has Europe’s largest pension system by far in proportional terms, with assets worth nearly 184% of GDP, plans are also looking to tighten their belts. In recent weeks the country’s two largest plans -ABP, the €358 billion pension fund for civil servants, and PFZW, the €billion plan for health care workers- have warned that they may have to cut benefit payments to existing retirees next year because low interest rates have reduced their funding ratios to just a hair above 90%, the threshold that triggers mandatory remedial action.

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Well, at least we still can for now.

Frustrations of Telling the Truth (Paul Craig Roberts)

Some examples of the ‘abuse’ one gets when telling the truth: If I criticize the Israeli government for abusing Palestinians and stealing their country, the Israel Lobby accuses me of being an anti-semite who wants to repeat the holocaust. In the same batch of emails, anti-semites denounce me for being too easy on Israel and covering up for the Jewish conspiracy against mankind. When I write about the One Percent using the government to loot the economy, I receive emails blaming me because I worked for Reagan “who started it all by cutting tax rates for the rich.” These people have no conception of supply-side economics, its purpose, success, and the way it prepared the way for Reagan to negotiate the end of the Cold War. At one point in their lives they read a left-wing screed against Reagan, and that is the extent of their understanding. But they are full of blind hate.

When I write about Washington’s crimes against other countries, I receive emails asking me where I was during Iran-Contra and Grenada. Apparently, they think that a Treasury official can run the State Department and Pentagon. Some of the readers are so confused that they think Reagan overthrew Allende in Chile. Alllende was overthrown in 1973. Reagan was inaugurated in 1981. It is dispiriting that there actually are people this ignorant and so proud of it that they will accuse me of helping Reagan to overthrow Allende. When I point out the dangers of the reckless folly of Washington’s aggressions against Russia, China, and the independent Muslim world, superpatriots denounce me for being anti-American. There is a stratum of the US population that thinks that it is a criminal act to disbelieve the government or to question its judgment and motives. “You are with us or against us.”

When I document the death of the US Constitution and the rise of the American Police State, “law and order” conservatives admonish me that the police state only appies to terrorists and criminals and does not apply to law abiding citizens. They are convinced that Snowden and Assange are traitors, and no amount of evidence or reason can convince them otherwise. Neither can they be convinced that in the 21st century, law has become a weapon in the hands of government and no longer is a shield of the people. The Rule of Law in America is dead.

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While you were looking the other way…

Over 2,500 Migrants Rescued Off Italy Over Weekend (AFP)

More than 2,500 migrants seeking to reach Europe were rescued off the coast of Sicily over the weekend in 20 separate operations, the Italian coastguard said Sunday. Vessels from the Italian navy and coastguard took part in rescue operations, along with ships from volunteer and aid groups. Medical charity Doctors Without Borders said it had recovered one dead body from one of the migrant boats. Authorities said 1,348 migrants were picked up Saturday and 1,230 on Sunday. So far this year more than 48,000 people have been brought to the Italian coast after being pulled from boats trying to cross from Libya, according to the UN refugee agency. With the return of the good weather the rescue operations are expected to increase. For the time being the numbers arriving are similar to those seen last year and in 2014.

Read more …

Apr 012015
 
 April 1, 2015  Posted by at 12:29 pm Finance Tagged with: , , , , , , , , , , ,  


NPC Pennsylvania Avenue storefront view, Washington DC 1921

Americans Just Aren’t Spending (CNN)
The Glory Days of Private Equity Are Over (WSJ)
Japan’s Newest Export: Deflation (Pesek)
The Oil Price Slump Is Fuelling Financial Instability Globally (Satyajit Das)
‘A Lot More Easing’ Coming From China Central Bank (CNBC)
Iceland Looks At Ending Boom And Bust With Radical Money Plan (AFP)
Tsipras Vows To Stop Greek ‘Bleeding’ As Creditors Frustrate Athens (Telegraph)
Merkel Faces Rebellion As Senior Official Resigns Over Greek Bail-Out (DT)
Greek Prime Minister Vows No Capitulation To Creditors (Independent)
Greece Fails To Reach Initial Deal On Reforms With Lenders (Reuters)
Japanese Hoarding $300 Billion Under Mattresses (CNBC)
‘Wealth Creators’ Are Robbing Our Most Productive People (Monbiot)
Is It Time For ‘Shadow Bank’ Stress Tests? (CNBC)
The Way Out (Jim Kunstler)
Ukraine Interior Ministry ‘Uncooperative And Obstructive’ In Maidan Probe (RT)
License to Kill (Dmitry Orlov)

Deflation.

Americans Just Aren’t Spending (CNN)

Consumer spending is often called an engine of the United States economy. That engine may be about to blow a gasket. Consumers are sitting on their wallets. The government reported Monday that personal consumption expenditures – aka consumer spending – rose just 0.1% in February. That follows two months of declines of 0.2%. It comes at a time when people actually do have a little bit more money to spend. In the same report, the government said disposable personal incomes rose 0.4% in February, after rising 0.5% in January and 0.3% in December. So what are consumers doing? Despite some headlines to the contrary, it appears that Americans are showing signs of fiscal responsibility. They are saving more. Mind you, they still may not be saving enough for things like retirement, a new house, or their kids’ college education.

But the savings rate rose to 5.8% in February – the highest level since late 2012. This is a bit of a surprise. Many economists were predicting that consumers would spend all that money they were saving from cheaper gas prices as if it were a tax refund check courtesy of OPEC. But oil prices may have now stabilized. As such, economists at Barclays wrote Monday that “the boost from energy prices is fading.” They suggested that the awful winter weather could be one reason for soft consumer spending in February. And Barclays is predicting that spending will rebound in the second quarter and the savings rate will fall. Still, sluggish consumer spending could mean that the economy will report very little in the way of growth for the first quarter — despite the continued strength of the labor market.

The economy has been adding jobs at an impressive clip for the past year. And the unemployment rate has fallen. But even though personal incomes are rising, wages have not risen that much to make consumers feel as if they are rolling in the dough. That’s because the personal income figure takes into account increases in other items such as interest and dividend payments on investments as well as Social Security, Medicare and other government safety net distributions. So wages have to pick up more dramatically, or consumers may not be willing to spend more. And that’s a proverbial Catch-22 for the economy. Saving more is great for the long-term. But spending is what’s needed to get the economy roaring again in the short run.

Read more …

No markets left.

The Glory Days of Private Equity Are Over (WSJ)

Private equity is done. Stick a fork in it. With Kraft singles and Heinz ketchup as toppings, there are many signs that private equity has peaked as an asset class. Sure, private equity is pervasive, which is one of its problems. According to Dow Jones LP Source, 765 funds raised $266 billion in 2014, up 11.7% over 2013. Ever since David Swensen, the investment manager of the Yale University endowment, almost 30 years ago began successfully allocating outsize portions of the portfolio to “alternate” assets, especially private equity, the so-called Swensen model has been widely duplicated. Last week the Stanford endowment named Swensen-disciple Robert Wallace as CEO. There is a lot of capital chasing similar deals.

When it comes down to it, private equity is pretty simple. You buy a company, putting up some cash and borrowing the rest, sometimes from banks but often via exotic instruments that Wall Street is happy to sell. Then you manage the company for cash flow, making sure you can make interest payments with enough left over for fees and investor dividends. With enough cash flow, you either take the company public or sell it to someone else. And how do you generate cash flow? You can expand the company, but more likely you slash costs, close divisions, cut staff, curtail marketing, eliminate research and development and more. In other words, cutting to the bone.

The Swenson model has worked for the past three decades. But it’s a bull-market investment vehicle whose time is done. Here are the main reasons private equity has peaked—the first four are reasonably obvious, but the last one is the killer. First, interest rates are going up. As they say on “Game of Thrones,” winter is coming. The Federal Reserve will no longer be “patient” on raising rates. This year? Next year? It doesn’t matter. Rising interest rates mean private equity will see higher costs of capital, wreaking havoc on Excel spreadsheets justifying future returns. Second, banks are slowing lending for leveraged deals. Since 2013, regulators have been discouraging leverage above six times earnings before interest, taxes, depreciation and amortization, or Ebitda, a measure of cash flow. Leveraged loans are the lifeblood of private equity; limits are already crimping the ability to do deals.

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What’d I say?

Japan’s Newest Export: Deflation (Pesek)

In 2006, seven years before he became Bank of Japan governor, a testy Haruhiko Kuroda told me he thought China was raising its own living standards at the expense of its Asian neighbors. “The relationship between exchange rates and poverty reduction is not so direct, but a more flexible Chinese exchange rate would benefit Asia,” Kuroda, who at the time was head of the Asian Development Bank, told me in his office overlooking the Manila skyline. “It would make a difference.” Today, those remarks demand to be read with a sense of irony. As Japan’s leading central banker for the past two years, Kuroda has relentlessly weakened the yen, which means he is now responsible for precisely the same regional dynamic he once lamented.

None of this is to suggest Kuroda is up to anything sinister. His mandate, after all, is to produce 2% inflation for Japan, and thus pull its $4.9 trillion economy out of a two-decade deflationary spiral. But it’s impossible to deny that the yen’s weak exchange rate is indirectly exporting deflation to the region. Taiwan’s export-dependent economy is feeling the strain, and Singapore might be next. But South Korea has been hit particularly hard. The country’s 4.7% plunge in industrial output in February is the latest sign that deflation is on its doorstep. The country’s consumer prices also rose by only 0.5% last month (the slowest pace since 1999), and its exports were down 3.4%.

Korean manufacturers have responded to the yen’s 20% drop in value by trying to keep the prices of their own products down. In practice, that’s meant executives with excess cash on their balance sheets have avoided making investments or giving workers a raise. The resulting wage suppression, however, is having negative consequences of its own, by hampering domestic consumption. (It doesn’t help that Korean households are sitting on record debt, equivalent to about 70% of GDP)

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“..Emerging markets have about 75% of their $2.6trn debt denominated in dollars. A similar proportion of their $3.1trn bank borrowings is dollar-denominated.”

The Oil Price Slump Is Fuelling Financial Instability Globally (Satyajit Das)

Financial markets have generally assumed lower oil prices are good for asset prices, resulting from the positive effect on growth and lower inflation which extends the period of low interest rates. In reality, the large movement in oil prices has the potential to create significant financial instability, especially in debt markets. Heavily indebted energy companies and sovereign or near-sovereign borrowers with large oil exposures face increased risk of financial distress. The boom in borrowings by energy businesses, especially shale gas and oil producers, has created a dangerous debt overhang. Energy companies now make up around 15% of the Barclays US Corporate High-Yield Bond Index, up more than 300% from 2005. Since 2010, energy producers have raised $550bn of funds.

In 2014, more than 40% of new non-investment grade syndicated loans were to the oil and gas sector. During the boom, non-investment grade bond issues and loans for the oil industry were underpinned by high oil prices and the search for yield. Now low oil prices have reduced revenues sharply, making it difficult to service debt. The industry’s weak financial structure and business model compounds the problem. A significant proportion of the industry is highly levered with borrowings that are greater than three times gross operating profits. Many firms were cash flow negative even when prices were high, usually debt-funded to maintain production. If the firms have difficulty meeting existing commitments, then the decrease in available funding and higher costs will create a toxic negative spiral.

Sovereign and near-sovereign borrowers in oil-dependent countries are similarly vulnerable. Energy companies, such as Brazil’s Petrobras, Mexico’s Pemex and Russia’s Gazprom are among the largest issuers of emerging market debt. Since 2009, they borrowed about $140bn in bond markets. Petrobras has around $170bn in debt, one of the most indebted companies in the world. Many oil-dependent economies also face additional problems from a growing currency mismatch. Many producers borrow in dollars. Falling oil revenues as a result of lower prices reduce the dollar cash flow available to service the debt. Weak oil prices also drive weakness in the value of the domestic currency of oil producers, while higher dollar interest rates compound the mismatch.

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QE Peking Duck.

‘A Lot More Easing’ Coming From China Central Bank (CNBC)

China’s most recent effort to prop up its softening real estate market is not enough, analysts say, noting that a series of interest rate cuts from the central bank is the best remedy. “I’m virtually certain we’ll see further interest rate cuts and a lot more easing, probably bank reserve requirement ratio (RRR) cuts, in the coming months,” Macquarie’s Sam Le Cornu told CNBC. “I think people are underestimating the degree of liquidity that will be put into the market and the number of interest rate cuts.” Chinese homebuyers were given a break on Monday after authorities lowered the threshold of down payments on mortgages for second homes to 40% from 60% and waived the business tax on the resale of property after two years. The measures follow Beijing’s effort to spur the economy by cutting interest rates twice since November and lowering the reserve requirements of major banks.

But that isn’t enough for many investors who continue to call for further easing. “[China still needs] further across-board monetary policy easing,” Nomura’s China economics team said in a note on Monday. It expects “more policy easing, with three more interest rate cuts and three more reserve requirement ratio cuts over the remainder of 2015.” However, Nomura believes that Mondays’ move will “see the pace of property market correction stabilizing in the second half of the year.” Monday’s move comes amid growing concerns over slowing economic growth. China set its 2015 growth target “at around 7%” in early March – it’s lowest target in 11 years – after posting its slowest annual growth rate in 24 years in 2014. The housing sector accounts for around 15% of China’s economy, and recent housing data suggests that growth continues to slow.

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No moar.

Iceland Looks At Ending Boom And Bust With Radical Money Plan (AFP)

Iceland’s government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled “A better monetary system for Iceland”. “The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy,” Prime Minister Sigmundur David Gunnlaugsson said. The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

According to a study by four central bankers, the country has had “over 20 instances of financial crises of different types” since 1875, with “six serious multiple financial crisis episodes occurring every 15 years on average”. Mr Sigurjonsson said the problem each time arose from ballooning credit during a strong economic cycle. He argued the central bank was unable to contain the credit boom, allowing inflation to rise and sparking exaggerated risk-taking and speculation, the threat of bank collapse and costly state interventions. In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money, which occurs as soon as a commercial bank offers a line of credit. The central bank can only try to influence the money supply with its monetary policy tools.

Under the so-called Sovereign Money proposal, the country’s central bank would become the only creator of money. “Crucially, the power to create money is kept separate from the power to decide how that new money is used,” Mr Sigurjonsson wrote in the proposal. “As with the state budget, the parliament will debate the government’s proposal for allocation of new money,” he wrote. Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders. Mr Sigurjonsson, a businessman and economist, was one of the masterminds behind Iceland’s household debt relief programme launched in May 2014 and aimed at helping the many Icelanders whose finances were strangled by inflation-indexed mortgages signed before the 2008 financial crisis.

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My man.

Tsipras Vows To Stop Greek ‘Bleeding’ As Creditors Frustrate Athens (Telegraph)

Greece’s prime minister has vowed not capitulate to the country’s eurozone creditors, reviving controversial calls for debt relief as his government battles to unlock bail-out cash. Addressing his parliament on Monday evening, Alexis Tsipras said he would seek an “honest compromise” with Greece’s international paymasters, but warned he would not submit “unconditionally” to demands for further austerity on his stricken economy. Mr Tsipras, who spoke after a frustrating day of progress between his government and officials from the Brussels Group, insisted he would stop “the Greek people’s bleeding” as he ruled out measures such as hiking VAT. The Leftist premier also repeated his claims for Second World War reparations from Germany, and insisted on debt relief from Greece’s lenders.

Greek pleas for a bond-swap or outright haircut on its debt mountain have subsided following a February 20 agreement to extend its bail-out by four months. But Mr Tsipras said he would now pursue a claim for debt forgiveness in order to maintain the sustainability of the country’s finances. Greece is racing to get the seal of approval on a bail-out extension, before financial deadlines in April, six weeks after its Leftist government agreed an eleventh hour deal with European creditors. Despite reports Athens would submit a final comprehensive list of proposals to finance ministers on Monday, work on completing the revenue-raising measures has yet to be completed, according to European officials. Speaking in Helsinki alongside her Finnish counterpart on Monday, German Chancellor Angela Merkel cautioned any final Greek blueprint had to “add up”.

“We will await the outcome of these discussions, but in the end the broad framework has to add up,” said Ms Merkel. Circulated drafts of the reforms included cutting early retirement, raising €350m from clamping town on VAT fraud, and €250m from stamping out oil, alcohol and tobacco smuggling. But the measures are likely to fall short of creditor demands. Dissatisfied eurozone officials warned the government would still need cut pensions and wages to receive the €7.2bn it needs to stay afloat. The government’s current public sector wage and pension bill amounts to €1.2bn a month, an outlay which Athens will struggle to meet in April without a fresh injection of cash. The fledgling Greek premier also faces a domestic battle to retain the support of Syriza’s Left Platform, who oppose measures such as a property tax and the continued privatisation of the country’s ports, airports and power grids.

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You tell ’em girl.

Merkel Faces Rebellion As Senior Official Resigns Over Greek Bail-Out (DT)

Political tensions in Europe’s largest creditor nation were laid bare after a senior ally of Angela Merkel’s ruling party stepped down in protest at his government’s support for a Greek bail-out. Peter Gauweiler, deputy chairman of the Christian Social Union – the Bavarian sister party of the ruling CDU – said Greece was a “bankrupt state” and he could not serve as a member of parliament as long as his “dissenting vote against an extension of the current and completely ineffective program” was ignored. Mr Gauweiler, a fierce critic of financial support for the eurozone’s indebted countries, was appointed vice-chairman of the CSU in November 2013 in a move to appease the growing eurosceptic elements within his party.

“I have been publicly pressured to vote in the Bundestag for the exact opposite, on the grounds that I am a vice-president,” said Mr Gauweiler in a statement on his website. “This is incompatible with my interpretation of the duty of a legislator.” Leader of the CSU Horst Seehofer also came in for heavy criticism from Mr Gauweiler, who has lodged legal complaints with the German Constitutional Court against the ECB’s attempts to establish financial backstops and its purchases of government bonds. Mr Gauweiler was also one of the 28 members of Ms Merkel’s coalition to vote in opposition to Greece’s bail-out extension in February. The rapid rise of the Alternative for Germany party (AfD) who seek to force Greece out of the monetary union, has put pressure on Ms Merkel’s ruling coalition.

Her conservative Christian Democrat party suffered its worst election result since the Second World War last month, at the hands of the eurosceptics. The AfD have already made overtures towards Mr Gauweiler, extending an invitation for him to join their ranks on Tuesday. The new Greek government is currently appealing for debt relief and the unlocking of a fresh round of bail-out money as it seeks to avert bankruptcy. Speaking in Helskini on Monday, Ms Merkel warned Athens plans for reforming the economy must “add up”.

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“The European authorities want to show who is boss; This is a government they didn’t want. And they really don’t want this government to succeed.”

Greek Prime Minister Vows No Capitulation To Creditors (Independent)

Germany turned the screws on Greece again yesterday, as officials insisted Athens has still not provided a satisfactory programme of economic reforms to its single currency partners. However, in a defiant speech, the anti-austerity Greek prime minister, Alexis Tsipras, warned that his government would not “capitulate” and would keep on pushing for a “fair compromise” with its creditors. Greece’s fellow eurozone member states, including Germany, must approve the release of the remaining €7.2bn in bailout funds the country is expecting. Without the cash, Greece could run of money to pay its civil servants by the end of next month and might be unable to meet a €450m loan repayment to the International Monetary Fund which is due on 9 April.

Greece has prepared a list of proposed economic reforms, but sources in Berlin said yesterday that it was not good enough to unlock the vital funding. “We need to wait for the Greek side to present us with a comprehensive list of reform measures which is suitable for discussion with the institutions and then later in the Eurogroup,” said Martin Jaeger, a spokesman for the German finance ministry. Chancellor Angela Merkel, on a visit to Helsinki, also implied Athens was still falling short. “The question is, can and will Greece fulfil the expectations that we all have?” she asked. According to Greek sources, Athens’s plan, which is projected to raise some €3.7bn this year, includes a crackdown on tax evasion through thorough audits of offshore bank transfers.

Other proposed revenue raisers are a value-added tax on the lottery, the auction of television broadcast licences and a smuggling crackdown. But, in an indication that Mr Tsipras intends to partly reverse the previous administration’s privatisation programme, the plan also targets only €1.5bn of revenues from state asset sales, down from €2.2bn in the previous budget. And in a speech to the Athens parliament last night, Mr Tsipras insisted, once again, that Greece’s large national debt needs to be restructured – anathema to Greece’s eurozone sovereign creditors. Mark Weisbrot of the Centre for Economic and Policy Research think-tank yesterday accused Brussels and Berlin of deliberately trying to undermine the Greek economy in order to force concessions from Athens. “The European authorities want to show who is boss,” he said. “This is a government they didn’t want. And they really don’t want this government to succeed.”

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Someone up there doesn’t like you.

Greece Fails To Reach Initial Deal On Reforms With Lenders (Reuters)

Greece failed to reach an initial deal with the EU and the IMF to unlock aid after the creditors dismissed a package of reforms from Athens as ideas rather than a concrete plan, officials said on Tuesday. The lack of a deal further raises pressure on Athens, which faces the prospect of running out of money in a few weeks unless it can convince lenders to dole out more financial help. Athens put a brave face on the failure to reach an agreement with the “Brussels Group” of representatives from the EU and the IMF, saying it remained keen for a deal on the basis of its long-held demand that the measures it is asked to implement do not hurt economic growth. Lenders will intensify efforts to collect data in Athens, it said. One source close to the talks said the halt in negotiations was not a sign of a rupture but an indication of slow-moving progress in the discussions.

Mistrust and acrimony have characterized much of Greece’s talks with lenders since Prime Minister Alexis Tsipras stormed to power in January pledging to end austerity and a bailout program that has kept Greece afloat for over four years. Greece and its European partners have sought to show publicly that relations have improved in recent weeks after Tsipras held a series of talks with EU leaders, but both sides remain far apart on issues ranging from pension reform to debt relief. At issue now is a list of reforms that Greece presented to the Brussels Group representatives last week, in an effort to show lenders that it is committed to living up to pledges of financial discipline and is worthy of aid. But euro zone officials panned the list as inadequate. One EU official said the lenders had yet to receive the list they had been waiting for.

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They’re small ones too.

Japanese Hoarding $300 Billion Under Mattresses (CNBC)

The Japanese are hoarding over $300 billion under their mattresses and that cash will likely stay there unless a crisis of epic proportions sparks capital flight, analyst say. “The money has been sitting there so long, it’s difficult to pin down what will prompt people to spend the cash,” Mizuho Securities’ chief market economist Yasunori Ueno told CNBC by phone. The notion came to public attention last year when Finance Minister Taro Aso scolded the Japanese for sitting on 880 trillion yen ($7.33 trillion) in cash, which was widely reported by the local press as being ‘kept under mattresses’. “It’s ridiculous – the money should be deposited at financial institutions so the banks can fund promising industries,” said Aso, according to a Sankei newspaper report.

But that figure was based on household cash deposits at Japanese banks, rather than hidden under mattresses, Ueno said. As per his calculations in a note dated March 25, households are probably hoarding around 36 trillion yen ($301 billion) of cash. “It’s like an iceberg – it just won’t melt,” said Dai-ichi Life Research Institute (DLRI) chief economist Hideo Kumano. “It will just sit there, immobile and frozen in time.” In many countries hoarding cash at home is synonymous with the underground economy, but the reasons in Japan are more mundane. “Under deflation, cash is king,” said DLRI’s Kumano, although he added that an unknown portion of the cash is probably just being hidden from the taxman.

At any rate, putting cash in the bank doesn’t mean it will earn any interest. Deposit accounts do not pay any interest in Japan. Even a ten-year savings account will only pay interest of between 0.10% and 0.150%, or one dollar on every 10,000 dollars in the bank, according to Mizuho Bank’s website. “Why bother going to the bank to deposit your money when it earns no interest? You may as well save yourself the effort of taking the trip down to the bank,” said Kumano.

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Up vs down.

‘Wealth Creators’ Are Robbing Our Most Productive People (Monbiot)

There is an inverse relationship between utility and reward. The most lucrative, prestigious jobs tend to cause the greatest harm. The most useful workers tend to be paid least and treated worst. I was reminded of this while listening last week to a care worker describing her job. Carole’s company gives her a rota of, er, three half-hour visits an hour. It takes no account of the time required to travel between jobs, and doesn’t pay her for it either, which means she makes less than the minimum wage. During the few minutes she spends with a client, she may have to get them out of bed, help them on the toilet, wash them, dress them, make breakfast and give them their medicines. If she ever gets a break, she told the BBC radio programme You and Yours, she spends it with her clients. For some, she is the only person they see all day.

Is there more difficult or worthwhile employment? Yet she is paid in criticism and insults as well as pennies. She is shouted at by family members for being late and not spending enough time with each client, then upbraided by the company because of the complaints it receives. Her profession is assailed in the media as the problems created by the corporate model are blamed on the workers. “I love going to people; I love helping them, but the constant criticism is depressing,” she says. “It’s like always being in the wrong.” Her experience is unexceptional. A report by the Resolution Foundation reveals that two-thirds of frontline care workers receive less than the living wage. Ten%, like Carole, are illegally paid less than the minimum wage. This abuse is not confined to the UK: in the US, 27% of care workers who make home visits are paid less than the legal minimum.

Let’s imagine the lives of those who own or run the company. We have to imagine it because, for good reasons, neither the care worker’s real name nor the company she works for were revealed. The more costs and corners they cut, the more profitable their business will be. In other words, the less they care, the better they will do. The perfect chief executive, from the point of view of shareholders, is a fully fledged sociopath. Such people will soon become very rich. They will be praised by the government as wealth creators. If they donate enough money to party funds, they have a high chance of becoming peers of the realm. Gushing profiles in the press will commend their entrepreneurial chutzpah and flair.

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“..the sector is viewed as likely to be larger than the supervised banking industry..”

Is It Time For ‘Shadow Bank’ Stress Tests? (CNBC)

A leading member of Germany’s Bundesbank has backed U.S. calls for “shadow banking”, the unregulated sector that provides credit on a global scale, to be subject to stress-testing. “Stress testing, as has been suggested, may be a good idea,” Andreas Dombret, a member of the Bundesbank’s executive board responsible for banking supervision, told CNBC on Tuesday. “But if we were to go by this route, it should be directed to the link between the shadow banking sector and the banks. So it is not about introducing regulation, if there is no systemic link between this sector and the banks. That is what we really have to care about.”

Dombret was commenting after Fed Vice Chairman Stanley Fischer suggested tougher rules for shadow banking on Monday, as well as stress tests to assess the risk the sector could pose to global finance in the event of a slump. Shadow banking is huge on a global scale, handled $75 trillion in funds in 2013, up $5 trillion on the start of the year, according to the Financial Stability Board. In some countries, such as the U.S., the sector is viewed as likely to be larger than the supervised banking industry. Stress tests for conventional banking activities were adopted by the U.S. and Europe after the 2007-08 financial crisis to gauge big banks’ ability to manage risk and plan for a potential economic shock.

On Tuesday, Dombret, who has worked for major international banks like Deutsche and JPMorgan, said there might be a need to regulate shadowing banking, if it proved to be a “systemic risk” to the financial sector. “We need to monitor very closely what is happening in this sector, and the relationship between these so-called shadow banks—I would rather call them ‘non-bank’ banks—and the banking sector, and should there be a systemic risk, and should there be a close link, we may even have to go beyond monitoring and we have to go towards may be also regulation.”

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“I don’t think we’ll go there via rational political discourse..”

The Way Out (Jim Kunstler)

The truth is, when you rig a money system with price interventions, distortions, and perversions, they will eventually express themselves in ways destructive to the system. In the present case of world-wide QE and central bank monkey business, these rackets are expressing themselves, finally, in wobbling currencies. In many nations, people are deeply unsure of what their money is worth, and how much it might be worth a month from now. This includes the USA, except for the moment our money is said to be magically appreciating in value compared to everyone else’s. Aren’t we special?

Get this: nothing is more hazardous than undermining people’s trust in their money. All of this financial perfidy conceals the basic fact that the human race has reached the limits of techno-industrialism. There are too many people and not enough basic resources to grow more of them — oil, fishes, soil, ores, fertilizers — and there is no steady-state “solution” to keep that economy going. In other words, it must either grow or contract, and it can’t really grow anymore (despite the exertions of government statisticians), so the authorities are trying to provide a monetary illusion of growth, when instead we’re in contraction.

Yes, contraction. The way out is to get with the program, shed the dead-weight and go where reality wants to take you. In the USA that means do everything possible to quit supporting giant failing systems — Big Box shopping, mass motoring, GMO agribiz, TBTF banks — and get behind local Main Street integrated economies, walkable towns, regular railroads, smaller and more numerous farms, local medical clinic health care, artistry in public works, and community caretaking of the unfit. All this surely implies a reduced role for the national government, and maybe the states, too. You could call it a lower standard of living, or just a different way to live.

I don’t think we’ll go there via rational political discourse. The current instabilities around the world are so sinister that they are liable to lead to even more strenuous efforts at the top to pretend that everything’s working, and even war is one way to pretend you’re okay (and the “other guy” isn’t). Of course, war has already broken out, in the MidEast and Ukraine, and it has everything to do with the sequential failure of nations, in one way or another, to overcome the limits of techno-industrialism. America will be dragged kicking and screaming to the realization of what it needs to do. The 2016 election will be the convulsion point.

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And for good reasons too.

Ukraine Interior Ministry ‘Uncooperative And Obstructive’ In Maidan Probe (RT)

The investigation into Maidan violence during Ukraine’s coup didn’t satisfy the requirements of the European Convention on Human Rights, says a report from the European Council, adding that Ukraine’s Interior Ministry was “uncooperative and obstructive.” The report specifically concentrated on the investigation of violent acts during the three months of Maidan demonstrations: Violent dispersal of the protest by Berkut riot police on November 30, 2013, clashes on January 22, 2014, which resulted in the first deaths of protesters, and February 18-21, 2014, the deadliest days of the Kiev protests. Before the February 2014 coup, “there was no genuine attempt to pursue investigations,” said a document by the International Advisory Panel.

The panel was established by the Council of Europe to review investigations into the violent incidents during the Maidan demonstrations. “The lack of genuine investigations during the three months of the demonstrations inevitably meant that the investigations did not begin promptly and this constituted, of itself, a substantial challenge for the investigations, which took place thereafter and on which the Panel’s review has principally focused,” the report stated. The panel added that “the appointment post-Maidan of certain officials to senior positions in the MoI [Ukraine Interior Ministry] contributed to the lack of appearance of independence.” It also “served to undermine public confidence in the readiness of the MoI to investigate the crimes committed during Maidan.”

The EU experts call the number of investigations performed by the Prosecutor General’s Office (PGO) on Maidan violence “wholly inadequate.” “The Panel did not consider the allocation of investigative work between the PGO, on the one hand, and the Kyiv [Kiev] City Prosecutor’s Office and the MoI, on the other, to be coherent or efficient,” says the report. “Nor did the Panel find the PGO’s supervision of the investigative work of the Kyiv [Kiev] City Prosecutor’s Office to have been effective.” Cooperation by Ukraine’s Interior Ministry “was crucial to the effectiveness of the PGO investigations,” according to the document.

“There are strong grounds to believe that the MoI attitude to the PGO has been uncooperative and, in certain respects, obstructive,” says the report, adding that the “Prosecutor General’s Office didn’t take all the necessary steps to ensure effective co-operation” by the Interior Ministry in the investigations. They also found there were facts of “the grant of amnesties or pardons to law enforcement officers in relation to unlawful killings or acts of ill-treatment” of protesters during the Maidan protests. This “would be incompatible with Ukraine’s obligations under Articles 2 and 3 of the Convention,” said the document. “The serious investigative deficiencies identified in this Report have undermined the authorities’ ability to establish the circumstances of the Maidan-related crimes and to identify those responsible.”

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” ..non-symbolic non-gestures of a preventive nature are sure to follow..”

License to Kill (Dmitry Orlov)

With the strategy of destroying in order to create no longer viable, but with the blind ambition to still try to prevail everywhere in the world somehow still part of the political culture, all that remains is murder. The main tool of foreign policy becomes political assassination: be it Saddam Hussein, or Muammar Qaddafi, or Slobodan Milosevic, or Osama bin Laden, or any number of lesser targets, the idea is to simply kill them.

While aiming for the head of an organization is a favorite technique, the general populace gets is share of murder too. How many funerals and wedding parties have been taken out by drone strikes? I don’t know that anyone in the US really knows, but I am sure that those whose relatives were killed do remember, and will remember for the next few centuries at least. This tactic is generally not conducive to creating a durable peace, but it is a good tactic for perpetuating and escalating conflict. But that’s now an acceptable goal, because it creates the rationale for increased military spending, making it possible to breed more chaos.

Recently a retired US general went on television to declare that what’s needed to turn around the situation in the Ukraine is to simply start killing Russians. The Russians listened to that, marveled at his idiocy, and then went ahead and opened a criminal case against him. Now this general will be unable to travel to an ever-increasing number of countries around the world for fear of getting arrested and deported to Russia to stand trial.

This is largely a symbolic gesture, but non-symbolic non-gestures of a preventive nature are sure to follow. You see, my fellow space travelers, murder happens to be illegal. In most jurisdictions, inciting others to murder also happens to be illegal. Americans have granted themselves the license to kill without checking to see whether perhaps they might be exceeding their authority. We should expect, then, that as their power trickles away, their license to kill will be revoked, and they find themselves reclassified from global hegemons to mere murderers.

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Jun 302014
 
 June 30, 2014  Posted by at 3:04 pm Finance Tagged with: , , ,  


DPC Fisher schooners at ‘T’ wharf, Boston 1904

A principle commonly known as Gresham’s law, though it can be dated as far back as Biblical times, not just the 16th century its namesake lived in, states that bad money drives out good money. It was used to address what happens when bits of metal are ‘shaved’ off coins, or alloys with cheaper metal are introduced, or counterfeits: people tend to keep what is perceived as ‘good’, more valuable, and spend what is seen as ‘bad’, and cheaper.

The obvious ‘trick’ for both issuers of money and anyone handling it is to make the bad sufficiently indistinguishable from the good, so people don’t notice they’re being duped. The end of the gold standard, in its various phases throughout various parts of the world, was a solid step in that direction, as was the introduction of fiat money. Essentially, there was (is) no good money anymore; it no longer represents a physical value, just a belief. So much for Gresham’s law ..

Of course there are still precious metals and other valuable materials, but if fiat money comes in unlimited quantities, it can and will all be bought, just like politicians. So you might say there’s still a bit of Gresham left after all. You might also say that not only gold and politicians are bought with fiat money, so is everybody who works a job and gets paid with it.

Seen in this light, and in the relentless logic of it, it’s a miracle that the ‘sociopath’ who brought back Gresham’s law in its full splendor didn’t arrive much earlier. That sociopath is debt, in the words of Andy McNally, chairman of Berenberg Bank UK. Not that governments and the world of finance never used debt, or let it accumulate, but if you look at the hockeystick graphs that describe all kinds of debt everywhere today, there’s no denying that in its present form it’s a rather recent phenomenon.

Debt today breeds inequality, since some people have access to it at very low interest rates, while others do not. Even if you pay ‘only’ 5% on your mortgage, your bank pays just 0.5%. And that’s merely the beginning. The value of the products of your labor are being distorted, manipulated and eaten alive whole by what others, from behind their luxurious desks, borrow at the flick of a switch and the stroke of trading keyboard. What then is your labor worth? Not much. And its value is necessarily declining.

If money is what you get paid for the work you do, then debt is not money. Or should not be. But the two are sufficiently indistinguishable that you can’t tell the difference. So someone who wants the fruits of your labor can pay you with debt, with something he himself never lifted a finger for. If debt were money, that would not be possible. Nor would it if you could tell the two apart.

The difference between debt and equity is the same as that between debt and money. And McNally wrote a great piece on how debt drives out equity in our world, and reaffirms Gresham’s law.

How Debt The Sociopath Used Its Seductive Charms To Kill Innocent Equity, Provider Of Social Justice

It’s nearly 60 years since Imperial Tobacco’s pension fund manager, George Ross-Goobey, gave his landmark speech with a simple message – company shares represent something that grows, so stand a better chance of rewarding pensioners with a comfortable retirement. Not just that, but he also pointed out that the interest on the shares was higher than on the gilt-edged bonds that his colleagues all “knew” were safe. [..] The back end of 2012 was an equally historic moment for UK pensioners. For the first time in more than half a century, their retirement funds once again held more bonds than equities.

These two events are like front and back cover to one of the greatest murder stories of our age. Equity, in the very broadest sense, has been killed. [..] The culprit was obvious from the start – it was the debt that done it. The word “equity” comes from “aequitas”, the Latin concept of justice, equality, fairness and conformity. It should be no surprise, therefore, that the privation of equity finance in society is leading to an extreme concentration of wealth and a general sense of injustice, unfairness and a feeling that some are not quite playing by the rules.

After a long history of capitalism’s broadening ownership through 19th century land reform and 20th century home-ownership, its finest trait has been thwarted by the greatest sociopath of all time. Our productive assets are debt-financed like never before and, although it flatlined after the Second World War, inequality’s sudden upsurge after 1971 tallies curiously well with credit creation. The numbers are staggering. The UK’s banks’ assets have gone from 70% of national income in 1970 to more than 450% today.

Debt’s cohorts often pointed to this “financial deepening” as a clear sign that finance was being democratised. But once debt outgrew its natural purpose – a mortgage perhaps – the death of equity was a certain outcome. [..] Since 1987, the debt of UK companies has gone from 45% to more than 90% of GDP. For the six years running up to the crisis, the UK equity market actually used to get money out of companies, rather than putting it in. Like all good sociopaths, debt befriended the most unsuspecting accomplices. Tax, governments, accountants, actuaries, regulators, banks and even cultural values all fell under the spell of debt, keeping productive equity out of the hands of the many.

[..] Gordon Brown’s canning of the dividend tax credit was the final nail in equity’s coffin. One actuary calculates the impact on UK pension funds at more than £100bn but, more importantly, it has left equities less attractive for investors and debt finance more attractive for companies. The banks were soon incentivised to advise on debt before equity. Companies with secure balance sheets make for bad investment banking clients – much better to lend to them at 5% and fund that debt at 0.5% than find them some equity finance and send them on their way.

Governments and regulators around the world bought into the “safety” that debt claimed to offer. When debt stopped returning their call, politicians of all shades soon cried for credit to flow again. Regulators set the tone for financial advisers – equity is risky, debt is safe. Eventually debt mesmerised the greatest accomplice of all – our cultural values. [..] Debt financed impatience and gave us permission to live beyond our means. It destroyed our sense of partnership and reduced relationships to mathematics rather than shared endeavour.

When the inquest into the death of equity is held, and the economists, central bankers, politicians and regulators have given their evidence, the jury will endure an expert witness on the basic difference between debt and equity. They are not merely different forms of finance, as debt would have us believe. They embody different incentives and rewards that define how we operate as a society.

The financial rewards of economic progress are always returned through the equity, not the debt, which is why only the few who defied debt’s charm now get most of the rewards. The jury will see how debt duped us all and deprived us of one of the most powerful forces in society. We should have financed our productive assets with as much equity as possible, whenever possible. Equity aligned owners of assets with their custodians: it was fair and impartial. It was even-handed. It was effective. It was the purest form of finance.

Just like 99% of our ‘money supply’ is made up of credit, 99% of all debt is bad. Not in the sense that it can’t be paid back, but that it distorts our lives, even if we don’t always understand how that works. Why can’t you pay for a house with your labor, why do you need a loan to do it? Because the others do it that way. Which drives up prices so much, you have to as well.

Central banks today are the sociopath debt’s main accomplices. They lower rates to near zero and hand out the stuff like Halloween candy. To banks, who, if they feel like it, hand it to you at a rate at least ten times higher than what they pay. It may seem to work as long as those rates are so low. But if equity markets are basically dead, then who’s going to finance the real economy? There’ll be no-one left.

Lip service.

BIS: Global Markets Euphoria Does Not Reflect Economic Reality (Finfacts)

The Bank of International Settlements (BIS) says in its annual report which was issued Sunday that the current global markets euphoria does not reflect economic reality and its general manger warned on interest rates that: ” if they persist too long, ultra-low rates could validate and entrench a highly undesirable type of equilibrium – one of high debt, low interest rates and anaemic growth.” The BIS is the bank for central banks and is the oldest international financial organisation, having been founded in Basel, Switzerland in 1930. The annual report says: “The overall impression is that the global economy is healing but remains unbalanced. Growth has picked up, but long-term prospects are not that bright. Financial markets are euphoric, but progress in strengthening banks’ balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession.”

“Financial markets are euphoric, in the grip of an aggressive search for yield…and yet investment in the real economy remains weak while the macroeconomic and geopolitical outlook is still highly uncertain,” said Claudio Borio, the head of the BIS’s monetary and economic department. The BIS said growth is still below its precrisis levels and while the world economy expanded 3% in the first quarter of 2014 compared with a year earlier – weaker than the 3.9% average growth rate between 1996 and 2006, in some advanced economies, output, productivity and employment remain below their precrisis peaks. “Good policy is less a question of seeking to pump up growth at all costs than of removing the obstacles that hold it back,” the bank said pointing to the recent upturn in the global economy as a precious opportunity for reform while warning that policy needed to become more symmetrical in responding to both booms and busts.

Global markets are currently “under the spell” of central banks and their unprecedented accommodative monetary policies, it said and warned that returning to normal monetary policy too slowly could also be dangerous for government finances. “Keeping interest rates unusually low for an unusually long period can lull governments into a false sense of security that delays the needed consolidation,” it said, as the glut of cash encourages cheap government borrowing.

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Andy McNally is chairman of Berenberg Bank UK.

How Debt the Sociopath Killed Innocent Equity, Social Justice (McNally)

It’s nearly 60 years since Imperial Tobacco’s pension fund manager, George Ross-Goobey, gave his landmark speech with a simple message – company shares represent something that grows, so stand a better chance of rewarding pensioners with a comfortable retirement. Not just that, but he also pointed out that the interest on the shares was higher than on the gilt-edged bonds that his colleagues all “knew” were safe. It was a hard sell, but he clearly had all the skills you need to succeed in modern finance. Imperial Tobacco’s retirees had a better old age than most, not least Ross-Goobey himself, who retired with a handsome pension and, supposedly, a limitless supply of his favourite cigar.

The back end of 2012 was an equally historic moment for UK pensioners. For the first time in more than half a century, their retirement funds once again held more bonds than equities. These two events are like front and back cover to one of the greatest murder stories of our age. Equity, in the very broadest sense, has been killed. This is no Agatha Christie novel, however. Although there are many discredited witnesses, clues, red herrings and disguises, there is no “Least Likely Suspect”. The culprit was obvious from the start – it was the debt that done it.

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Debt.

Hong Kong’s China Debt Trap (MarketWatch)

All eyes this week will be on Hong Kong’s protest march for democratic reform, with numbers expected to be swollen by Beijing’s recent hardening stance towards the territory. But how soon will Hong Kong have another gripe to take up with its sovereign as more alarms sound over a massive lending boom to mainland China? This potential debt trap is increasingly on the radar of investors after a succession of cautionary comments from analysts and regulators about mainland-bound loans from Hong Kong-based banks. The latest came from Moody’s last week, as they reiterated an earlier warning about the risks in the rapid expansion of Hong Kong banks’ lending to mainland Chinese entities.

The exposure of Hong Kong to the mainland grew by 29% in 2013 to 2.3 trillion Hong Kong dollars ($297 billion), accounting for 20% of total banking assets, Moody’s said. This, they said, poses credit challenges as it increases banks’ exposures to China’s economic and financial vulnerabilities, as well as pressuring some of the banks’ liquidity profiles and capitalization levels. Both the IMF and the Hong Kong Monetary Authority have also recently flagged similar concerns about the wall of money Hong Kong was sending into a slowing and fragile-looking Chinese economy. Earlier this year, brokerage Jefferies described a “parabolic” rise in lending to mainland China, which it saw as a looming problem for Hong Kong. From almost zero in 2009, this lending has reached 150% of Hong Kong’s GDP.

This surge illustrates that we are talking about a relatively new phenomenon which has coincided with massive quantitative easing by the world’s top central banks, along with a series of measures by China to internationalize its currency. This also means that assessing the level of risk when these two very different financial systems come together puts us in somewhat unchartered territory. What we do know is Hong Kong’s lending is by far the largest. Earlier this month, Fitch Ratings calculated that Hong Kong’s exposure to the mainland had reached $798 billion. This compared to a total of $400 billion for banks elsewhere in the Asia-Pacific region – mainly Australia, Japan, Macau, Taiwan and Singapore.

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Debt.

China Debt Set for Biggest Quarterly Gain in Two Years on Easing (Bloomberg)

Chinese sovereign bonds headed for their biggest quarterly increase in two years after the central bank eased monetary policy to spur economic growth. The government notes rose 2.4% since March, the most since the second quarter of 2012, a Bloomberg index shows. The yield on benchmark 10-year securities fell 45 basis points to 4.05% this quarter through June 27, according to ChinaBond data. The yield on the 4.42% debt due March 2024 was steady today at 4.07% as of 10:48 a.m. in Shanghai, National Interbank Funding Center figures show. Premier Li Keqiang said this month authorities would ensure growth of at least 7.5% in 2014 after year-on-year expansion dipped to 7.4% in the first quarter from 7.7% in the preceding three months. The People’s Bank of China has cut some lenders’ reserve requirements twice this quarter and the State Council has announced a ‘mini-stimulus’ program including tax relief for small companies and increased spending on railways.

“The PBOC’s policy direction is to guide interest rates lower to ensure growth,” said Zhang Guoyu, a Shanghai-based analyst at Orient Futures Co. “If it continues to want lower financing costs to benefit the real economy, the 10-year yield may have further downside.” The official Purchasing Manufacturing Index (CPMINDX) may have climbed to 51 in June, the highest level this year, according to a Bloomberg News survey ahead of the statistics bureau’s data release tomorrow. Targeted cuts in reserve requirements have helped companies’ profitability, although the foundation for recovery isn’t solid, Caixin magazine reported on its website yesterday, citing Zhang Jianhua, head of the PBOC’s Hangzhou branch.

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Slowing China Economy Dims Profit Outlook to 2012 Low (Bloomberg)

The most-actively traded Chinese companies in the U.S. are on pace to report the smallest profits in two years as growth in the world’s second-largest economy decelerates to the slowest since 1990. Analysts covering stocks listed on the Bloomberg China-US Equity Index estimate that on average they will post earnings of $5.64 per share this year, which would be the lowest profits reported since 2012, data compiled by Bloomberg show. They’ve cut revenue forecasts by 7.9% in the past 11 weeks. Earnings and sales projections are falling as economists surveyed by Bloomberg estimate China’s gross domestic product expansion will slow to 7.4% this year, the weakest pace in 24 years, after back-to-back annual increases of 7.7%.

While the government has implemented tax breaks, accelerated spending and cut some banks’ reserve requirements, investors are concerned that officials aren’t doing enough to stem a decline in real estate prices and boost private consumption. “What we’re seeing now is the near-term impact of the adjustment in expectations as these policies get implemented,” Alan Gayle, senior investment strategist, who helps oversee about $50 billion for RidgeWorth Investments, said by phone from Atlanta on June 27. “They’re trying to slow down some of the more inflationary real-estate related sectors and improve overall average standards of living.”

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Is China Manufacturing Data Due For A Dip? (CNBC)

Chinese manufacturing data could disappoint this week amid weakness in the economy and that may just be the beginning, analysts told CNBC. A rebound in export orders in recent months boosted China’s manufacturing sector amid a weaker yuan and signs of a recovery in the U.S., one of China’s major trading partners. But some analysts told CNBC they are worried that the underlying risks to China’s economy would spill over to the country’s manufacturing sector, derailing the recent positive trend. “I’m going to take the under,” said Joe Magyer, senior analyst at The Motley Fool, referring to expectations for official purchasing managers’ index (PMI) data out on Tuesday, which he expects to start to reflect weakness in China’s economy. The final reading for HSBC’s PMI data is also due Tuesday.

Last week a flash reading for the HSBC manufacturing data hit a seven-month high of 50.8, up from 49.4 in May, marking the first time the figure crossed the 50 level – the dividing line between expansion and contraction – this year. Meanwhile, official PMI rose to a five-month high of 50.8 in May. But Magyer warned the positive run could end soon. “I know a lot of people think the mini stimulus that’s been going on is going to help but China has been fueled by such an expansion in credit over the past few years any incremental stimulus isn’t going to have much of an effect,” he said, referring to recent targeted reserve requirement ratio (RRR) cuts for banks in weaker sectors of the economy, such as agriculture.

Magyer flagged China’s real estate market as another major risk, amid signs of cooling. Revenue from property sales for the January-to-May period dropped 8.5% on year, while data from Chinese real estate website Soufun show May land sales fell 45% on year and transaction value fell 38%. “When you look at some of the key drivers of China right now one of them is real estate,” said Magyer. “Pricing for real estate in China has finally stalled… and that’s important because 20% of the economy is related to real estate and when you look at all the iron ore that’s piling up in ports I think you have a pretty good reason for that. [The reason] could be [that] one of the major components of the economy is cooling off,” he added.

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Vultures.

Argentina at Brink of Default as $539 Million Payment Due (Bloomberg)

Argentina is poised to miss a bond payment today, putting the country on the brink of its second default in 13 years, after a U.S. court blocked the cash from being distributed until the government settles with creditors from the previous debt debacle. The nation has a 30-day grace period after missing the $539 million debt payment to seek an accord with a group of defaulted bondholders led by billionaire Paul Singer’s NML Capital and prevent a default on its $28.7 billion of performing global dollar bonds. Both Argentina and NML have said that they’re open to talks. A decade-long battle between Argentina and holdout creditors from the country’s $95 billion default in 2001 is coming to a head. The U.S. Supreme Court on June 16 left intact a ruling requiring the country pay about $1.5 billion to holders of defaulted debt at the same time it makes payments on restructured bonds.

Argentina last week transferred funds to its bond trustee to pay the restructured notes, only to have U.S. District Court Judge Thomas Griesa order the payment sent back while the parties negotiate. The judge’s decision “closes Argentina’s options to finally force it to negotiate,” said Jorge Mariscal, the chief investment officer for emerging markets at UBS Wealth Management, which oversees $1 trillion. “Argentina should now stop using these delay tactics and get serious.” Argentina took out a full-page advertisement in yesterday’s New York Times saying that Griesa favored the holdout creditors and was trying to push Argentina into default. The ruling “is merely a sophisticated way of of trying to bring us down to our knees before global usurers,” Argentina said. “But he will not achieve his goal for quite a simple reason: The Argentine Republic will meet its obligations, pay off its debts and honor its commitments.”

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Debt.

Emerging-Market Companies Vulnerable on $2 Trillion Debt Binge (Bloomberg)

Emerging-market companies that took on more than $2 trillion of foreign borrowing since 2008 are vulnerable to an evaporation of funding at the first sign of trouble, according to the Bank for International Settlements. Bond investors willing to lend generously when conditions are good can pull out in a crisis or when central banks tighten monetary policy, analysts led by Claudio Borio, head of the monetary and economic department, wrote in the BIS annual report. Emerging-market companies that lose access to external debt markets may then be forced to withdraw bank deposits, depriving domestic lenders of funding as well, they said.

Low interest rates and central bank stimulus in developed nations, combined with a retreat in global bank lending, have encouraged emerging-market borrowers to raise debt abroad, according to the Basel, Switzerland-based BIS, which hosts the Basel Committee on Banking Supervision that sets global capital standards. Demand for higher-yielding securities also helped suppress borrowing costs for riskier issuers. “Like an elephant in a paddling pool, the huge size disparity between global investor portfolios and recipient markets can amplify distortions,” the analysts wrote. “It is far from reassuring that these flows have swelled on the back of an aggressive search for yield: strongly pro-cyclical, they surge and reverse as conditions and sentiment change.” Loose financing conditions “feed into the real economy, leading to excessive leverage in some sectors and overinvestment in the industries particularly in vogue, such as real estate,” according to the report.

“If a shock hits the economy, overextended households or firms often find themselves unable to service their debt.” Emerging-market companies sell bonds mainly through foreign units, exposing them to currency risk, the BIS said. The true size of their borrowing could also be masked as foreign direct investment, making it a “hidden vulnerability,” according to the report. With emerging markets becoming more important to the global economy and financial system, any stress affecting them will probably hurt developed nations, too, it said. “The ramifications would be particularly serious if China, home to an outsize financial boom, were to falter,” the analysts wrote. That would hurt commodity exporters that have seen strong credit and asset price increases drive up debt and property prices, as well as other nations still recovering from the financial crisis, the BIS said.

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If you can make people believe in perpetual growth, perpetual motion should be an easy one.

The Delusion of Perpetual Motion (Hussman)

The central thesis among investors at present is that they are “forced” to hold stocks, given the alternative of zero short-term interest rates and long-term interest rates well below the level of recent decades (though yields were regularly at or below current levels prior to the 1960s, which didn’t stop equities from being regularly priced to achieve long-term returns well above 10% annually). The corollary is that investors seem to believe that as long as interest rates are held near zero, stocks will continue to advance at a positive or even average or above-average rate. It’s certainly true that from a psychological standpoint, the Federal Reserve has induced the same sort of yield-seeking speculation that drove investors into mortgage securities (in hopes of a “pickup” over depressed Treasury-bill yields), fueled the housing bubble, and resulted in the deepest economic and financial collapse since the Great Depression.

This yield-seeking has clearly been a factor in encouraging investors to forget everything they ever learned from finance, history, or even two successive 50% market plunges in little more than a decade. But the finance of all of this – the relationship between prices, valuations and subsequent investment returns – hasn’t been altered at all. As the price investors pay for a given stream of future cash flows increases, the long-term rate of return that they will achieve on their investment declines. Zero short-term interest rates may “justify” the purchase of stocks at higher valuations so that stocks promise equally dismal future returns. But once stocks reach that point, investors should understand that those dismal future returns will still arrive.

Let me say that again. The Federal Reserve’s promise to hold safe interest rates at zero for a very long period of time has not created a perpetual motion machine for stocks. No – it has simply created an environment where investors have felt forced to speculate, to the point where stocks are now also priced to deliver zero total returns for a very long period of time. Put simply, we are already here. Based on valuation measures most reliably associated with actual subsequent market returns, we presently estimate negative total returns for the S&P 500 on every horizon of 7 years and less, with 10-year nominal total returns averaging just 1.9% annually. I should note that in real-time, the same valuation approach allowed us to identify the 2000 and 2007 extremes, provided latitude for us to shift to a constructive stance near the start of the intervening bull market in 2003, and indicated the shift to undervaluation in late-2008 and 2009.

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Good history lesson.

The Mythical Banking Crisis and the Failure of the New Deal (Stockman)

The Great Depression thus did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression – absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions. Instead, the Great Depression was a unique historical occurrence – the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens – Keynesian economics and monetary central planning.

Together, these two doctrines eroded and eventually destroyed the great policy barrier – that is, the old-time religion of balanced budgets – that had kept America a relatively peaceful Republic until 1914. To be sure, under Mellon’s tutelage, Harding, Coolidge and Hoover strove mightily, and on paper successfully, to restore the pre-1914 status quo ante on the fiscal front. But it was a pyrrhic victory – since Mellon’s surpluses rested on an artificially booming, bubbling economy that was destined to hit the wall. Worse still, Hoover’s bitter-end fidelity to fiscal orthodoxy, as embodied in his infamous balanced budget of June 1932, got blamed for prolonging the depression. Yet, as I have demonstrated in the chapter of my book called “New Deal Myths of Recovery”, the Great Depression was already over by early summer 1932.

At that point, powerful natural forces of capitalist regeneration had come to the fore. Thus, during the six month leading up to the November 1932 election, freight loadings rose by 20%, industrial production by 21%, construction contract awards gained 30%, unemployment dropped by nearly one million, wholesale prices rebounded by 20% and the battered stock market was up by 40%. So Hoover’s fiscal policies were blackened not by the facts of the day, but by the subsequent ukase of the Keynesian professoriat. Indeed, the “Hoover recovery” would be celebrated in the history books even today if it had not been interrupted in the winter of 1932-1933 by a faux “banking crisis” which was entirely the doing of President-elect Roosevelt and the loose-talking economic statist at the core of his transition team, especially Columbia professors Moley and Tugwell.

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Ph.

Climate Change Goes Underwater (Bloomberg)

When it comes to climate change, almost all the attention is on the air. What’s happening to the water, however, is just as worrying — although for the moment it may be slightly more manageable. Here’s the problem in a seashell: As the oceans absorb about a quarter of the carbon dioxide released by fossil-fuel burning, the pH level in the underwater world is falling, creating the marine version of climate change. Ocean acidification is rising at its fastest pace in 300 million years, according to scientists. The most obvious effects have been on oysters, clams, coral and other sea-dwelling creatures with hard parts, because more acidic water contains less of the calcium carbonate essential for shell- and skeleton-building. But there are also implications for the land-based creatures known as humans.

It’s not just the Pacific oyster farmers who are finding high pH levels make it hard for larvae to form, or the clam fishermen in Maine who discover that the clams on the bottom of their buckets can be crushed by the weight of a full load, or even the 123.3 million Americans who live near or on the coasts. Oceans cover more than two-thirds of the earth, and changes to the marine ecosystem will have profound effects on the planet. Stopping acidification, like stopping climate change, requires first and foremost a worldwide reduction in greenhouse-gas emissions. That’s the bad news. Coming to an international agreement about the best way to do that is hard.

Unlike with climate change, however, local action can make a real difference against acidification. This is because in many coastal regions where shellfish and coral reefs are at risk, an already bad situation is being made worse by localized air and water pollution, such as acid rain from coal-burning; effluent from big farms, pulp mills and sewage systems; and storm runoff from urban pavement. This means that existing anti-pollution laws can address some of the problem. States have the authority under the U.S. Clean Water Act, for instance, to set standards for water quality, and they can use that authority to strengthen local limits on the kinds of pollution that most contribute to acidification hot spots. Coastal states and cities can also maximize the amount of land covered in vegetation (rather than asphalt or concrete), so that when it rains the water filters through soil and doesn’t easily wash urban pollution into the sea. States can also qualify for federal funding for acidification research in their estuaries.

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Better start packing, guys.

Scotland Has Billions of Barrels of Shale Deposits Under Its Cities (Bloomberg)

Scotland may have billions of barrels of shale oil and gas buried under the country’s most densely populated areas, geologists said today. Scotland’s central belt, running between Glasgow and Edinburgh, may have 80.3 trillion cubic feet of gas in place and 6 billion barrels of oil, a report by the British Geological Survey said. While it’s not an estimate of how much can be extracted, if only a fraction of that amount was drilled it could transform prospects for Scottish oil and gas output.

The oil and gas industry is central to the debate on Scotland’s independence before a referendum in September. The yes campaign says existing fields in the North Sea will underpin the economy of an independent Scotland, while supporters of a no vote say declining production from offshore reserves leaves the country vulnerable. The U.K. government is offering tax breaks to shale drillers to spur development of the resource as North Sea reserves dwindle The Bowland basin in northern England may supply local natural gas demand for half a century at extraction rates of 10% similar to U.S. fields, according to a report last year.

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