Oct 042014
 
 October 4, 2014  Posted by at 9:19 pm Finance Tagged with: , , , , ,  16 Responses »


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sep 142014
 
 September 14, 2014  Posted by at 6:24 pm Finance Tagged with: , , , , ,  11 Responses »


Harris & Ewing Children at water fountain, Washington, DC 1922

Before I get going, let me recommend two wonderful articles I put in today’s Daily Links list at The Automatic Earth. Which is updated every day around 8am Eastern Time, located at the top of every TAE page, and in more elaborate form, at bottom of the day’s essay; they are links to the things we ourselves read at a daily basis.

The first article is a piece by Umair Haque called The Rupture, in which he tries to put on words what is changing in our lives and our world, and how what we see happen today differs from what we once expected, or what most still expect but can no longer obtain. How our dream of eternal progress and growth has been shattered.

Please don’t miss either of the two pieces, you’ll find them more than worth your time.

The Rupture

The future isn’t one of unalloyed, golden progress anymore. Tomorrow is a tale of decline, degeneration, decay. Rupture. The future isn’t flying cars and food pills and a smarthome and a stable career and comfortable prosperity for every family anymore. Rupture.

The future looks more like this. A story of a burning planet, of imploding middle classes, of lost generations, of empty decades, of mass unemployment, of the rule of law breaking, of democracy cracking, of nations splintering, of tribes warring, of broken dreams, of Greater Depressions, of unending Stagnations, of human possibility itself shattering into a million million pieces. Rupture. The future isn’t the steady, forward march of human advancement anymore.

The second, h/t Stockman, is from Peter St. Onge at Mises, in which he presents what I find a lovely take on the Scotland referendum issue. St. Onge, who, like yours truly, was living in Montréal during the last Québec referendum in 1995, draws parallels between the two votes, and suggests two nice lines of thought: 1) smaller countries tend to be richer, and 2) smaller countries tend not to get involved with truly awful ideas – like war-.

Is Scotland Big Enough To Go it Alone?

Even on physical area Scotland’s no slouch: about the size of Holland or Ireland, and three times the size of Jamaica. The fact that Ireland, Norway, and Jamaica are all considered sustainably-sized countries argues for the separatists here. So small is possible. But is it a good idea? The answer, perhaps surprisingly, is resoundingly “Yes!” Statistically speaking, at least.

Why? Because according to numbers from the World Bank Development Indicators, among the 45 sovereign countries in Europe, small countries are nearly twice as wealthy as large countries. The gap between biggest 10 and smallest 10 ranges between 84% (for all of Europe) to 79% (for only Western Europe).

[..] Even among linguistic siblings the differences are stark: Germany is poorer than the small German-speaking states (Switzerland, Austria, Luxembourg, and Liechtenstein), France is poorer than the small French-speaking states (Belgium, Andorra, Luxembourg, and Switzerland again and, of course, Monaco). Even Ireland, for centuries ravaged by the warmongering English, is today richer than their former masters in the United Kingdom, a country 15 times larger.

Why would this be? There are two reasons. First, smaller countries are often more responsive to their people. The smaller the country the stronger the policy feedback loop. Meaning truly awful ideas tend to get corrected earlier. Had Mao Tse Tung been working with an apartment complex instead of a country of nearly a billion people, his wacky ideas wouldn’t have killed millions. Second, small countries just don’t have the money to engage in truly crazy ideas.

When it comes to the going going gone European economy – or economies -, all we can really say is that Europe only goes through the motions by now, because that’s all that it’s got left. Essentially, the old continent now scrambles to find ways to borrow money without adding debt.

And that idea, absurd as it is, apparently seems attractive to the ‘leadership’, edged on by ultra low interest rates. If Draghi can solemnly declare that the ECB funds rate is now 0.05%, they all start concocting plans to borrow. Because without borrowing, without added debt, they know they’re, for lack of a better term, screwed. Whereas at 0.05%, would could go wrong?

And that’s how you get to these, for lack of a better term, kinds of weird things:

Show Us The Money: EU Seeks Billions Of Euros To Revive Economy

The European Union sought ways on Saturday to marshal billions of euros into its sluggish economy without getting deeper into debt [..] EU finance ministers tasked the European Commission, the EU executive, and the European Investment Bank (EIB) to draw up a list of projects that would create growth and decide how to finance them.

“We have given a mandate to the Commission and the EIB to swiftly present an initial report on practical measures that can be taken, on profitable investment projects that are justifiable,” Italy’s economy minister, Pier Carlo Padoan, said.

To finance them, the ministers discussed four ideas: an Italian paper on new financing tools for companies, a Franco-German proposal on how to boost private investments, a Polish proposal on creating a joint EU fund worth €700 billion ($907 billion) and a call from incoming European Commission President Jean-Claude Juncker for a €300 billion investment program to revive the European economy.

The European Central Bank’s plan to resurrect a market for asset-backed securities would be another financing tool. “We don’t have a magic wand but we need growth,we need to stimulate demand without taking on debt,” France’s finance minister, Michel Sapin, told reporters. “We need the right mix of public and private money.”

That is a real desperate statement, “We don’t have a magic wand but we need growth”, only it’s not presented as such. It’s presented as just another difficulty that those smart boys who floated to the top will solve for you, you being the much less smart ‘peuple’. The problem, though, is not just that they can’t generate growth, and it’s not just that they don’t have a magic wand, the problem is they’re so desperate they’re more then willing to lie outright to their voters until the cows come home, and then sacrifice them on the altar of their own blind ambitions. It’s all just words, and then you die.

Investment is the new buzz word among ministers, overriding the German mantra of budget cuts. [..] German Finance Minister Wolfgang Schaeuble strongly supports the search for investment, but this week rebuffed calls for Berlin to spend more to boost the euro zone economy…

In a speech to the EU finance ministers in Milan on Thursday, ECB President Mario Draghi described business investment as “one of the great casualties” of the financial crisis, saying it has fallen 20% since 2008. “We will not see a sustainable recovery unless this changes,” he said.

Poland wants a ‘European Fund for Investments’ that would be able to finance, through leveraging its own capital, €700 billion worth of investment. The fund could be a special-purpose vehicle under the umbrella of the European Investment Bank, the EU bank owned by European governments.

Italy’s proposal is a pan-European market, where smaller companies can raise capital, building on its “minibond” legislation in 2012 that allows unlisted companies to issue. That could be part of a EU capital-market union, building on the eurozone’s banking union, but that will need to closely involve London, the leading financial center in Europe.

Did you catch that? “Leveraging its own capital”. That means going to the casino, having $1 in your pocket and putting $1000 on red. That’s what that means. We need growth, and we don’t have a magic wand, but we know a casino. It’s 2014, and when I hear European officials mention terms like “special-purpose vehicle”, I get chills down my spine.

These guys have no idea what they’re doing, but they do it anyway. Because they can. And because there’s nothing else in sight that would let them keep their jobs. They’s rather take your money and put it down at the crap table, than lose their own jobs and cushy plush positions. That is all this is really about.

Europe sees plummeting investments, refuses to wonder why that is happening, and goes to the slot machines to achieve growth, whatever it may mean and however long it may last. Even 5 minutes is deemed acceptable.

And lo and behold, from the deep burrows of highly indebted nothingness, they pretend they’ve found $1.3 trillion. Which they don’t have. But hey, we need growth, right?

ECB Cash Boost May Near $1.3 Trillion, Ex-Official Says

Banks are likely to take close to €1 trillion ($1.3 trillion) in cash auctions at the European Central Bank that begin this year, former Executive Board member Jose Manuel Gonzalez-Paramo said. “I would not be surprised if we see between €700 billion and €900 billion,” in the so-called TLTRO (Targeted Long Term Refinance Operation ) operations that start on Sept. 18, said Gonzalez-Paramo [..]

“The banks are quite happy to request this money, and they are willing to lend. The take-up in Spain could be big.” [..] After a rate cut this month, the TLTRO offer, which is tied to banks’ lending performance, became even more attractive as the funds are lent for four years at the rate prevailing on auction day plus 10 basis points.

The first of two initial operations is alloted on Sept. 18, the second on Dec. 11, and thereafter banks can bid in quarterly operations until June 2016. “You see demand for credit increasing in the case of Spain,” Gonzalez-Paramo said in a Sept. 11 interview in Milan. The ECB’s latest rate cut is “positive, in terms of making the TLTROs more of a success, because now the takeup I think is assured to be on the high side.”

If by now you’re thinking this is absolute gibberish, don’t think there’s anything wrong with you. It is gibberish. Europe’s in a deep debt hole, and all this stuff will achieve is to dig it in deeper. It’s just that to acknowledge that would cost all these primate clowns their coveted seats high up there in the most coveted trees.

The TLTROs are the first shot in a volley of stimulus driven by ECB President Mario Draghi this year. In addition to the liquidity support, the ECB will also start buying asset-backed securities and covered bonds. Draghi said yesterday that the aim is to return the central bank’s balance sheet to the early-2012 level of about €3 trillion.

Right. The central bank balance sheet. It’s how Japan, China and the US keep their economies ‘presentable’ despite the mountains of debt they’re buried in, so why not Europe? Well, maybe because Germany, they only country left that’s not gone full retard Keynes, doesn’t want it.

But Germany may soon be moved out of position by a ‘clever’ redifining of terms, by Mario Draghi, jockeying for position to become Italy’s next best duce, in what can only be described as pure semantics.

Draghi Says ABS Plan Will Proceed Without Government Guarantees

Mario Draghi said his plan to purchase higher quality asset-backed securities will proceed even if support from EU leaders to extend it to riskier debt isn’t forthcoming. “The program is primarily oriented to the purchase of senior tranches; only if it’s going to be extended to mezzanine tranches is there going to be a need for guarantees,” he said at a press conference …

Translation: the ECB doesn’t need permission for what is still considered good assets. But they are actively thinking about moving into toilet paper. Why? Because that’s all there’s left. But they need governments (yes, that would be taxpayers) to guarantee losses on soiled toilet paper.

“It’s going to be much more effective at facilitating credit expansion with also the mezzanine component, and for that we’ll need a guarantee.” To boost slowing euro-area inflation and spur credit, the ECB said this month it will buy ABS and covered bonds in the latest of a series of stimulus measures that included rate cuts and cheap loans to banks. Draghi pledged to buy senior tranches of “simple” and “transparent” ABS, adding that lower-ranking mezzanine tranches could also be part of the purchase plan provided public guarantees were in place.

Translation: without toilet paper, no growth.

Draghi has said details of the ABS plan will be announced after the next monetary policy meeting on Oct. 2. While euro-area governments have expressed support for reviving securitization in the region, they’ve stopped short of pledging new fiscal backing for the ECB’s plan. “If I understand the program correctly, it’s non-discriminatory, it’s open to all countries and all financial institutions, so it could also open to Dutch banks,” Dutch finance minister Jeroen Dijsselbloem said at the same press conference. “Do I support additional guarantees from the government on these products? The answer would be no.”

Translation: Holland doesn’t want to buy used toilet paper.

If the central bank were to buy mezzanine tranches, it could mean banks have to hold lower provisions against the asset, increasing the amount of cash at their disposal. European regulators have required banks to treat ABS as relatively high-risk since the asset class was blamed for helping fuel the financial crisis. “In the meantime and independently, there will be some regulatory evolution in the way ABS are treated,” Draghi said. “The ABS program will be launched regardless of whether there are guarantees or not.”

But if Draghi buys the stuff, the banks who are loaded beyond their necks with the ‘asset’, can use it as collateral to borrow even more. And then house prices across Europe drop. And then all those rich people in Greece, Spain, Portugal etc. will have to make up the difference.

Sounds like a plan to me. All it takes is semantics: what you need is someone to change the definition of what a central bank, or pension fund, can buy, and you‘re off to the races. In the end, everything is just semantics. As long as Draghi is willing to buy worthless paper from banks, why would anyone think there’s a crisis at all?

For a while, it is indeed possible to transfer private debt to the public sector (and that’s what this is, obviously). You just call a spade a dinner table, and a cow a bathroom mirror. Semantics. But only the very thick amongst us will think that doesn’t make problems much worse down the road.

Draghi simply changes the definitions of what he can buy or not, and Angela Merkel lets it go until some clever kraut picks up on it and protests. Great basis for a strong and decisive economic policy. If and when Mario claims that someting, anything, is a ‘security’, it magically is. It’s the emperor’s new clothes all over again. And why does it work? Because the US, China and Japan do it too. All it really takes is access to your taxpayers’ wallets.

Big Guns Fail To Halt Scottish Independence Bandwagon (Guardian)

The 307-year-old union between Scotland and England hangs by a thread as a fresh Guardian/ICM poll put the yes vote in next week’s referendum just two percentage points behind those supporting no. Despite an intense week of campaigning by pro-union politicians and repeated warnings from business, the poll out on Friday found support for the no campaign on 51% and with yes on 49%, once don’t knows were excluded. The Guardian/ICM poll is based on telephone interviews conducted between Tuesday and Thursday, the first such survey ICM has conducted during the campaign. Previous polls suggesting that the race for Scotland was too close to call have been based on internet-based surveys. The headline figures exclude the 17% of voters in Scotland who ICM found were still undecided a mere week before polling day, a substantial proportion that gives the pro-UK campaign hope that it could arrest September’s surge in support for independence.

Alex Salmond, the SNP leader and first minister, said he was now “more confident than ever” that Scotland would vote yes on 18 September. “Despite Westminster’s efforts we’ve seen a flourishing of national self-confidence,” he said. “It’s this revival in Scottish confidence that tells me we’ll make a great success of an independent Scotland.” At a rally with former prime minister Gordon Brown in Glasgow on Friday night, Labour leader Ed Miliband reached out to the 29% of Labour voters who told ICM they planned to vote yes next week. He said only a no vote could guarantee that Scotland had the money to protect the NHS. “With a vote for no, change is coming with more powers on tax and welfare for a stronger Scotland,” he said. “Change is coming faster with a devolution delivery plan beginning the day after the referendum. And better change, faster change, safer change is the message we will take on to the streets and the doorsteps in the last few days of the campaign.”

Read more …

Free Nelson Mandela too!

Europe Fears Scottish Independence Contagion (AFP)

The prospect of Scottish independence is raising fears in Europe that it could inflame other separatist movements at a time when the continent’s unity and even its borders are under threat, analysts say. While nationalists from Catalonia to Flanders will watch Scotland’s referendum with hope, Brussels is nervous about the possibility of a major European Union member like Britain falling apart. The fear of contagion spreads as far as the EU’s eastern frontier, where the Baltic countries worry that Moscow will back their ethnic Russian citizens who could then claim more autonomy. But while the EU might initially make life difficult for a new Scottish nation, it would most likely allow it to join the bloc eventually, experts said. “It is a very difficult situation for the EU if Scotland becomes independent, it really is,” Pablo Calderon Martinez, Spanish and European Studies fellow at King’s College London, told AFP.

The EU already has a lot on its plate as it tackles a stalled economy and high unemployment, and has insisted in recent days that the Scottish vote is an “internal matter.” But European Commission chief Jose Manuel Barroso made the position clear in 2012: any newly independent country emerging from an EU nation would no longer be part of the bloc, and would have to reapply for membership. Barroso outraged nationalists in February when he said it would be “extremely difficult” for Scotland to gain automatic membership, comparing it to Kosovo, which broke away from Serbia. European Council president Herman Van Rompuy meanwhile weighed in on Catalonia in December, saying he was “confident” Spain would remain “united and reliable.”

Read more …

Never. Got that? Yes or no, there’s no way back.

After Thursday, Britain Will Never Be The Same Again (Observer)

On Thursday, Scotland will take a decision of seismic consequence for the 307-year-old union. Tempered and tested by the Industrial Revolution, the empire, the carnage of war, the birth of the welfare state, it is a union that has been strengthened by the mutual inventiveness and talents of complementary identities. It has been pluralistic, democratic, multicultural, tolerant (mostly), enlightened (for the most part), liberal. As political unions go, it has been a remarkably successful one. But whatever the decision on Thursday, the result should act as a catalyst for change, a harbinger of constitutional shifts for the whole of Great Britain. The Scottish people set out on this journey alone – but they have unwittingly taken on board passengers from the rest of the union. When Gordon Brown – backed by the three Westminster party leaders – last week promised Scotland “nothing less than a modern form of home rule” if the vote is no, it signalled that the constitutional make-up of these islands is about to change irrevocably.

Ed Miliband goes further: writing for this paper today, he suggests that were he to become prime minister the union would undergo fundamental change. “Scotland’s example will lead the way in changing the way we are governed in England too, with the devolution we need to local government from Cornwall to Cumbria.” Few, if any, people were talking about devolved powers to Cumbria or Cornwall two weeks ago. It is a sign that, regardless of the outcome on Thursday, the first minister, Alex Salmond, has already won a significant victory. The decision by the three main Westminster parties – spooked by a poll showing the yes campaign in the lead – to make significant promises of more devolved power revealed how remote they are from the political and cultural winds swirling in Scotland. Cameron, Miliband and Clegg had 18 months but they waited until the last 10 days to spell out just how profound devolution could be. It wasn’t a terrific advertisement for how well the union is working.

Read more …

Love it.

Is Scotland Big Enough To Go it Alone? (Mises.org)

As Scotland goes to the polls to decide on its separation from the United Kingdom, the tone of the campaign is, again, high on passion and, again, secessionists are inching toward the magical 50% line. But don’t uncork the single malt quite yet: as of today (September 2, 2014), bookies in London still put the odds at 4-to-1 against the non-binding referendum. But it remains a real possibility. One core debate is whether Scotland is too small and too insignificant to go it alone. During the Quebec referendum there was a nearly-identical debate, with secessionists arguing that Quebec has more people than Switzerland and more land than France, while federalists preferred to compare Quebec to the US or the “rest-of-Canada” (ROC, in a term from the day).

In a curious coincidence, 2014 Scotland and 1994 Quebec have nearly the same population: about 5–6 million. About the same as Denmark or Norway, and half-a-million more than Ireland. Even on physical area Scotland’s no slouch: about the size of Holland or Ireland, and three times the size of Jamaica. The fact that Ireland, Norway, and Jamaica are all considered sustainably-sized countries argues for the separatists here. So small is possible. But is it a good idea? The answer, perhaps surprisingly, is resoundingly “Yes!” Statistically speaking, at least. Why? Because according to numbers from the World Bank Development Indicators, among the 45 sovereign countries in Europe, small countries are nearly twice as wealthy as large countries. The gap between biggest-10 and smallest-10 ranges between 84% (for all of Europe) to 79% (for only Western Europe).

This is a huge difference: To put it in perspective, even a 79% change in wealth is about the gap between Russia and Denmark. That’s massive considering the historical and cultural similarities especially within Western Europe. Even among linguistic siblings the differences are stark: Germany is poorer than the small German-speaking states (Switzerland, Austria, Luxembourg, and Liechtenstein), France is poorer than the small French-speaking states (Belgium, Andorra, Luxembourg, and Switzerland again and, of course, Monaco). Even Ireland, for centuries ravaged by the warmongering English, is today richer than their former masters in the United Kingdom, a country 15 times larger. Why would this be? There are two reasons. First, smaller countries are often more responsive to their people. The smaller the country the stronger the policy feedback loop. Meaning truly awful ideas tend to get corrected earlier.

Had Mao Tse Tung been working with an apartment complex instead of a country of nearly a billion-people, his wacky ideas wouldn’t have killed millions. Second, small countries just don’t have the money to engage in truly crazy ideas. Like Wars on Terror or world-wide daisy-chains of military bases. An independent Scotland, or Vermont, is unlikely to invade Iraq. It takes a big country to do truly insane things. Of course there are many short-term issues for the Scots to consider, from tax and subsidy splits, to defense contractors relocating to England. And, of course, the deep historico-cultural issues that an America of Franco-British descent should best sit out. Still, as an economist, what we can say is that Scotland’s big enough to “survive” on its own, and indeed is very likely to become richer out of the secession. Nearer to the small-is-rich Ireland than the big-but-poor Britain left behind.

Read more …

Fate of United Kingdom Hangs In Balance After New Scotland Polls (Reuters)

The fate of the United Kingdom remained unclear five days before a historic referendum on Scottish independence as three new polls on Saturday showed a slight lead for supporters of the union, but one saying the separatist campaign was pulling ahead. On the final weekend of campaigning, tens of thousands of supporters of both sides took to the streets of the capital Edinburgh and Scotland’s largest city, Glasgow. Rival leaders worked across the country to convince undecided voters. At stake is not just the future of Scotland, but that of the United Kingdom, forged by the union with England 307 years ago. The battle also took a bitter turn on Saturday when a senior nationalist warned businesses such as oil major BP that they could face punishment for voicing concern over the impact of a secession.

The economic future of Scotland has become one the most fiercely debated issues in the final weeks of impassioned debate. Nationalists accuse British Prime Minister David Cameron of coordinating a scare campaign by business leaders aimed at spooking voters, while unionists say separation is fraught with financial and economic uncertainty. But former Scottish Nationalist Party deputy leader Jim Sillars went much further than separatist leader Alex Salmond, warning that BP’s operations in Scotland might face nationalisation if Scots voted for secession on Thursday. “This referendum is about power, and when we get a ‘Yes’ majority we will use that power for a day of reckoning with BP and the banks,” Sillars, a nationalist rival of Salmond’s, was quoted by Scottish media as saying.

Read more …

Word.

‘Cool’ London Is Dead, And The Rich Kids Are To Blame (Telegraph)

I have seen the future – and the future is Paris and Geneva. The future is a clean, dull city populated by clean, dull rich people and clean, dull old people. The future is joyless Michelin starred restaurants and shops selling £3,000 chandeliers. In the 1990s, we accidentally stumbled upon the formula for a perfect city. Exactly halfway between East and West, serious history, attractive (but not chocolate-boxy), English-speaking, and a capital for the creative industries and financial services. Better still, years of decline and depopulation had left vast central swathes of the city very affordable. So, the cool kids piled in. And, suddenly, a rather grey, down-at-heel capital, a place that had never quite quite recovered from losing an Empire (and winning a war) began to swing again. Back then we all lived in central London, because we all could. It was normal to leave university and get a flat with your mates in Marylebone or Maida Vale or Primrose Hill or Notting Hill. Not because we were rich, but because London was cheap.

And it felt fantastic. Here was a city whose fortunes were reviving and, as 20-somethings, ready to make our mark on the world, we really were bang in the middle of things. Two decades on and you can play a nostalgic little game where you remind yourself what groups London’s inner neighbourhoods were known for 20 years ago. Hampstead: intellectuals; Islington: media trendies; Camden: bohemians, goths and punks; Fulham: thick poshos who couldn’t afford Chelsea; Notting Hill: cool kids; Chelsea: rich people. Now, every single one of these is just rich people. If you want to own a house (or often just a flat) in these places, you need a six figure salary or you can forget it. And, for anyone normal, that means working in finance. As for the bits of London that always were rich – Mayfair, Chelsea and Kensington, they’ve moved up to the next level. Ultra-prime central London is fast becoming a ghost-town where absentee investors park their wealth. As some wag put it, houses in Mayfair are now bitcoins for oligarchs.

So, what does this have to do with Paris and Geneva? The answer is that both are places where the rich have socially cleansed the centres. Inner Paris is a fairytale for wealthy people in their fifties (and outer Paris looks like Stalingrad with ethnic strife) while Geneva has dispensed with the poor altogether. As a result, both cities are safe, pretty and rather boring places to live – and soon London will be too. Why? Because the financiers who can afford inner London neighbourhoods are not cool. Visit Canary Wharf at on any weekday lunchtime and watch the braying, pink-shirted bankers disporting themselves. Not cool. Peruse the shops at Canary Wharf. From Gap to Tiffany’s, they’re all chains stores and you could be anywhere wealthy, safe and dull in the world. Rich people like making money and spending it on dull, expensive things. That’s what they do – and they’re very good it. But being a high-end cog in the machine is not cool.

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Never’s a bit much, perhaps.

America’s Poor Have Never Been Deeper In Debt (Zero Hedge)

Ever since the Lehman bankruptcy, one of the main reasons given by the perpetual apologists about why i) the so-called “recovery” has been the worst in US history and ii) the Fed has been “forced” to conduct 6 years of wealth transferring policies, boosting the stock market to all time highs and creating a record wealth split in US society between the super rich and everyone else (one that surpasses even that seen during the roaring 20s) is that the US consumer, scarred by the economic crash, has been rushing to deleverage and dump as much debt as possible. There are two problems with that story:

First, as we first pointed out in 2012, US households are not deleveraging, they are defaulting, a huge difference which goes to motive and intent, and shows that instead of actively paying down debt households are instead loading up on as much debt as they can, which at some point they simply stop servicing (for a detailed analysis of this disturbing trend, read our series on the student loan bubble).

Second, when it comes to the poorest quartile of US society, some 14 million people, it is dead wrong. In fact, as the Fed’s triennial Survey of Consumer Finances, released last week showed, America’s poorest have never been more in debt! As usual, the full story is one of nuances. As Bloomberg reports, as a result of the first point – mass defaults – US household debt has indeed declined on an average basis. Indeed, average debt burden for all families stood at about 105% of pretax income in 2013, down from about 125% in 2010 and the lowest level since the 2001 survey. Of course, since economists are unable to grasp the difference between default and deleveraging, one look at the chart above gives them reason for hope. As Bloomberg summarizes:

The improved finances, along with more recent signs that consumers are feeling comfortable about borrowing again, has given some economists cause for optimism: The more progress households make in getting out from under their debts, the logic goes, the greater the chances that renewed spending will boost growth.

In reality, the “improved finances”, namely those tens of trillions in financial assets that have been artificially reflated courtesy of the Fed’s monetary policies, have benefited the tiniest sliver of US society – about 1% or less depending on whose calculations one uses. Everyone else, the bulk of US society, was forced to simply stop paying down their credit card and thus “delever.”

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Chinese Growth Slows Most Since Lehman; Electric Output Shrinks (Zero Hedge)

While China may have mastered the art of goalseeking GDP, always coming within 0.1% of the consensus estimate, usually to the upside, even if the bogey has seen dramatic declines in the past few years, dropping from double digit annualized growth to just 7.5% currently and the projections hockey stick long gone… it may need to expand its goalseek template to include the other far more important measure of Chinese economic activity, such as Industrial production, retail sales, fixed investment, and even more importantly – such key output indicators as Cement, Steel and Electricity, because based on numbers released overnight, the Q2 Chinese recovery is now history (as the credit impulse of the most recent PBOC generosity has faded, something we have discussed in the past), and the economy has ground to the biggest crawl it has experienced since the Lehman crash.

What’s worse, and what we predicted would happen when we observed the collapse in Chinese commodity prices ten days ago, capex, i.e. fixed investment, grew at the slowest pace in the 21st century: the number of 16.5% was the lowest since 2001, and suggests that the commodity deflation problem is only going to get worse from here. As JPM summarized earlier today, pretty much every economic data release was a disaster, missing consensus significantly, and suggesting GDP is now trending at an unprecedented sub-7%.

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Read her!

This Changes Everything: Capitalism vs. the Climate (Naomi Klein)

I denied climate change for longer than I care to admit. I knew it was happening, sure. But I stayed pretty hazy on the details and only skimmed most news stories. I told myself the science was too complicated and the environmentalists were dealing with it. And I continued to behave as if there was nothing wrong with the shiny card in my wallet attesting to my “elite” frequent-flyer status. A great many of us engage in this kind of denial. We look for a split second and then we look away. Or maybe we do really look, but then we forget. We engage in this odd form of on-again-off-again ecological amnesia for perfectly rational reasons. We deny because we fear that letting in the full reality of this crisis will change everything. And we are right. If we continue on our current path of allowing emissions to rise year after year, major cities will drown, ancient cultures will be swallowed by the seas; our children will spend much of their lives fleeing and recovering from vicious storms and extreme droughts. Yet we continue all the same.

What is wrong with us? I think the answer is far more simple than many have led us to believe: we have not done the things needed to cut emissions because those things fundamentally conflict with deregulated capitalism, the reigning ideology for the entire period we have struggled to find a way out of this crisis. We are stuck, because the actions that would give us the best chance of averting catastrophe – and benefit the vast majority – are threatening to an elite minority with a stranglehold over our economy, political process and media. That problem might not have been insurmountable had it presented itself at another point in our history.

But it is our collective misfortune that governments and scientists began talking seriously about radical cuts to greenhouse gas emissions in 1988 – the exact year that marked the dawning of “globalisation”. The numbers are striking: in the 1990s, as the market integration project ramped up, global emissions were going up an average of 1% a year; by the 2000s, with “emerging markets” such as China fully integrated into the world economy, emissions growth had sped up disastrously, reaching 3.4% a year. That rapid growth rate has continued, interrupted only briefly, in 2009, by the world financial crisis. What the climate needs now is a contraction in humanity’s use of resources; what our economic model demands is unfettered expansion. Only one of these sets of rules can be changed, and it’s not the laws of nature.

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Naomi Klein: Richard Branson Cheats On Climate Change Pledge (Guardian)

Richard Branson has failed to deliver on his much-vaunted pledge to spend $3bn (£1.8bn) over a decade to develop a low carbon fuel. Seven years into the pledge, Branson has paid out only a small fraction of the promised money – “well under $300m” – according to a new book by the writer and activist, Naomi Klein. The British entrepreneur famously promised to divert a share of the profits from his Virgin airlines empire to find a cleaner fuel, after a 2006 private meeting with Al Gore. Branson went on to found a $25m Earth prize for a technology that could safely suck 1bn tons of carbon a year from the atmosphere. In 2009, he set up the Carbon War Room, an NGO which works on business solutions for climate change. But by Klein’s estimate, Branson’s “firm commitment” of $3bn failed to materialise.

“So the sceptics might be right: Branson’s various climate adventures may indeed prove to have all been a spectacle, a Virgin production, with everyone’s favourite bearded billionaire playing the part of planetary saviour to build his brand, land on late night TV, fend off regulators, and feel good about doing bad,” Klein writes in This Changes Everything, Capitalism vs The Climate. Klein uses Branson and other so-called green billionaires – such as the former New York mayor, Michael Bloomberg – as case studies for her argument that it is unrealistic to rely on business to find solutions to climate change. Branson routed a first pay-out of his $3bn commitment, about $130m, through a new Virgin investment company into corn ethanol. The fuel has now been widely discredited as a greener alternative to fossil fuels, because of its climate change impacts and for driving up the cost of food.

Virgin went on to look at other biofuels, at one point exploring a project to develop jet fuel from eucalyptus trees. “But the rest of its investments are a grab bag of vaguely green-hued projects, from water desalination to energy efficient lighting, to an in-car monitoring system to help drivers conserve gas,” Klein writes. By last year, the total of those investments, in corn ethanol and elsewhere, amounted to about $230m, she estimates. Branson made an additional small investment in an algae fuel company, Solazyme. But Branson still puts the total spend at well under $300m – just a tenth of his $3bn pledge.

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Where’s my Trojan Horse?

Luhansk To Start Distributing Russian Aid Monday, Trucks Return Home (RT)

The last truck from Russia’s second humanitarian aid convoy to the Eastern Ukrainian city of Lugansk has returned home after delivering its cargo. All vehicles had reached the Ukrainian-Russian border without incidents and the last of them crossed the border in the direction of Russia at around 6:30 pm local time. Early on Saturday, a convoy of 245 trucks colored in white paint crossed the border and headed to Lugansk to bring much needed relief supplies to the residents of the war-torn city. The 2,000 tons of Russian humanitarian aid include food, power generators, water purification systems, medicine and blankets. The convoy was welcomed by the population of Lugansk as people lined up on the sides of the roads and waved Russian flags. After unloading in Lugansk, the trucks made their way back to Russia’s Rostov region, which is bordering Ukraine.

The second Russian convoy has arrived just in time as the city almost ran out of first batch of humanitarian aid delivered on August 22, Valery Potapov, deputy prime minister of the self-proclaimed People’s Republic of Donetsk, said. “The supplies from the first convoy have almost ended. We still have a small amount of canned meat, but we had to use our own stock to provide people with sugar and cereal,” Potapov told RIA-Novosti news agency. The handout of the aid to the people will begin in Lugansk on Monday, he said. Potapov added that its “more or less calm [in Lugansk] because of the so-called the cease-fire” and “people began returning (to their homes) en masse”, which makes it difficult to predict how long the aid will last.

Meanwhile, Ukraine claimed that the second Russian humanitarian aid convoy entered the country illegally. Ukrainian border officials were not allowed to inspect the cargo, Col. Andrey Lysenko, spokesman for Ukraine’s National Security Council, said. But Russia’s Federal Security Service has denied the claims, saying that it offered full cooperation to the Ukrainian side. “We repeatedly suggested that Ukrainian border guards and customs officers take part in inspections of a humanitarian convoy that was passing through border and customs control at the Donetsk border-crossing point, but the Ukrainian side rejected the offer,” Nikolay Sinitsyn, a spokesman for the FSB’s border department in the southern Russian Rostov region, said.

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Modern democracy.

Ukraine’s Party of Regions Refuses to Participate in Rada Elections (RIA)

The Ukrainian Party of Regions is not planning to take part in the elections to the country’s parliament, Verkhovna Rada, scheduled for October 26, the Ukrainian Party of Regions deputy Mykhailo Chechetov told RIA Novosti. “The Party of Regions made a decision not to participate in the elections. That is why if the elections will still take place and Donbas will not vote, than, in the given circumstances we will be saying that the level of legitimacy [of the elections] does not meet the people’s expectations,” Chechetov said.
On August 27, Ukrainian President Petro Poroshenko signed a decree, dissolving the country’s parliament and setting new elections for October 26. Following his election on May 25 Poroshenko has repeatedly highlighted the need to hold early parliamentary elections, saying the current composition fails to represent the interests of Ukrainian society. A

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Enron Buster Is Back at Justice and Taking Aim at Real People (Bloomberg)

Lawmakers, in what has become something of a Washington ritual, criticized the Justice Department this week for not holding individual bankers to account for the financial crisis. So, the Justice Department has given the job to Godzilla. Leslie Caldwell, the prosecutor who led the government’s prosecution of Enron Corp., took over the Justice Department’s Criminal Division in June after a decade in private practice. Among her priorities, she says, is focusing on the individual actors behind corporate wrongdoing. “Certainly, there are cases where you also want to prosecute the company,” Caldwell said in an interview last week. “But I think you get the best outcome – really across the board in terms of deterrence, in terms of the message to the public – when you prosecute individuals.” Caldwell’s predecessor was accused by lawmakers and the public of not doing enough to convict Wall Street bankers who securitized and sold low-quality mortgages, helping precipitate the financial crisis of 2008.

The government has won multibillion-dollar settlements from some of the world’s largest banks, only to see their shares rise and their executives win higher bonuses. Caldwell herself has been accused of getting the balance wrong between corporate and individual accountability. To hear critics tell it, it was an overzealous prosecution overseen by Caldwell that brought down accounting firm Arthur Andersen. Under Caldwell, the Justice Department’s Enron task force generated dozens of prosecutions. Early in that probe, federal prosecutors won an indictment of Arthur Andersen for shredding massive amounts of Enron-related paperwork — a move that led to the firm’s collapse and the loss of tens of thousands of jobs. When Caldwell returned to Justice in June, an editorial in Investor’s Business Daily declared: “The Justice Department Unleashes a Godzilla on business.”

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Uglier still.

NSA, GCHQ Have Secret Access To German Telecom Networks: Spiegel (RT)

US and UK intelligence services have secret access points for German telecom companies’ internal networks, Der Spiegel reports, citing slides created in the NSA’s ‘Treasure Map’ program used to get near-real-time visualization of the global internet. The latest scandal continues to evolve around the US’ NSA and the British GCHQ, both of which appear to be able to eavesdrop on German giants such as Deutsche Telekom, Netcologne, Stellar, Cetel and IABG network operators, according to Der Spiegel’s report based on material disclosed by Edward Snowden. The Treasure Map program, dubbed “the Google Earth of the Internet,” allows the agencies to expose the data about the network structure and map individual routers as well as subscribers’ computers, smartphones and tablets. The German telecoms had “access points” for technical supervision inside their networks, marked as red dots on such a map, shown on one of the leaked undated slides, Spiegel reports, warning it could be used for planning sophisticated cyber-attacks.

The Treasure map, first mentioned by the New York Times last year, provides “a near real-time, interactive map of the global Internet,” offering a “300,000 foot view of the Internet,” as it gathers Wi-Fi network and geolocation data as well as up to 50 million unique Internet provider addresses. The Federal Office for Information Security (BSI) spokesman told the DPA news agency that the Federal Office for the Protection of the Telekom has been informed, and that the authorities are analyzing the situation. One of the companies, Stellar, meanwhile voiced fury over US and British spying. “A cyber-attack of this kind clearly violates German law,” said one if its heads. Deutsche Telekom and Netcologne said they had not identified any data breaches but Deutsche Telekom’s IT security chief Thomas Tschersich said, that the “access of foreign secret services to our network would be totally unacceptable.” “We are looking into any indication of a possible manipulation. We have also alerted the authorities,” he stated.

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The Rupture (Umair Haque)

Every age has a story it tells about the end of the world. And every age’s story about the end of the world tells us something; not about how the world will end; but about how that age already is. We call those stories eschatologies. I want to tell you a story, too, in this little essay. Of an eschatology. Our eschatology. Remember our collective vision of the future? Imagine the Jetsons. Imagine high modernism. Imagine Mad Men. The perfect suits, the immaculate hair, the endless cocktails, the towering city, the secret affairs, the endless desire. The gleaming seduction of a better tomorrow. What is the future? We thought—no, we believed, with all our might—that the world would inexorably be moved, by our might. In a single direction. The direction of human progress. We were true believers in a faith. That the right, true, and inescapable trajectory of mankind was forward. It was an idea born in the high industrial age. The machine. The factory. The gear. The sudden, furious birth of plenty.

Like a supernova going off in the heart of a human world that hadn’t changed for millennia. Suddenly, we had more than we could imagine. And we thought: this was the future. The right, noble, just, future. Maybe Nietzsche was right. God was dead. But who needed God? We had forged this wondrous future. Through the sweat of our brows and the might of our faith. And so how was it anything less than destined? Fuck Providence. We were something bigger than providence. We were destiny. This was how the future was meant to be. And so this was how the future would surely always be. And then. Something went wrong. It’s hard to say how. But. The future broke. Rupture. The Rupture is the future slowing, stopping, winding down. Fracturing; splitting apart; coming undone. It is the future ending, collapsing, breaking. Once, we subscribed to a naive view of historical progress. That humanity marched forwards into a place we called the “future”. The future stopped happening. For most of us. We got left behind by it.

The future isn’t one of unalloyed, golden progress anymore. Tomorrow is a tale of decline, degeneration, decay. Rupture. The future isn’t flying cars and food pills and a smarthome and a stable career and comfortable prosperity for every family anymore. Rupture. The future looks more like this. A story of a burning planet, of imploding middle classes, of lost generations, of empty decades, of mass unemployment, of the rule of law breaking, of democracy cracking, of nations splintering, of tribes warring, of broken dreams, of Greater Depressions, of unending Stagnations, of human possibility itself shattering into a million million pieces. Rupture. The future isn’t the steady, forward march of human advancement anymore. What is “declining”? Constitutional democracy, opportunity, mobility, material prosperity, law, equity, fairness, a sense of meaning in life…hope for the future. Rupture.

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Quite a tale.

California Solar Projects Plan Undergoing Major Overhaul (SFGate)

With billions of dollars in federal stimulus money in hand, the Obama administration set out five years ago on a grand experiment in the California desert. The goal: Open public lands to renewable-energy development to wean the nation from fossil fuels. The results haven’t been pretty, a fact the administration has tacitly acknowledged by devising a new plan, expected to be released this month, to find better places to put industrial-scale solar farms in the California desert. Quoting songwriter Joni Mitchell in a speech describing the new approach, Interior Secretary Sally Jewell said, “You don’t know what you’ve got till it’s gone.” The solar plants were rushed through the environmental approval process. Miles of unspoiled desert lands were scraped and bulldozed to make way for sprawling arrays of solar panels.

Desert tortoises required mass relocation, and kit fox burrows were destroyed. Surprise troves of American Indian artifacts found in the Mojave Desert were moved to a San Diego warehouse, where they remain. And once it was built, the largest solar plant of its kind in the world – the Ivanpah installation in the Mojave – began igniting birds and monarch butterflies that fly through intensely concentrated, reflected sunbeams aimed at 40-story “power towers,” according to a confidential report by federal wildlife officials. Owned by BrightSource of Oakland, with investment partners Google of Mountain View and NRG Energy of Houston, the 5.4-square-mile, $2.2 billion facility was built with a $1.6 billion federal loan and went online last fall.

BrightSource underestimated how much natural gas it would need to run the Ivanpah plant when the sun doesn’t shine. And scientists now say desert soils contain vast stores of carbon that are unleashed by construction of solar facilities. Research at UC Riverside’s Center for Conservation Biology indicates that carbon-dioxide-emissions savings from many solar plants “will be compromised, or even negated, by the loss of stores of inorganic and organic carbon sequestered by desert native ecosystems.” Within the next few weeks, state and federal agencies plan to release the mammoth Desert Renewable Energy Conservation Plan, nearly five years in the making, that many hope will correct mistakes made when stimulus dollars and California’s quest to slash carbon emissions set off a solar land rush in the Mojave.

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Aug 132014
 
 August 13, 2014  Posted by at 7:06 pm Finance Tagged with: , , , ,  5 Responses »


Warner Bros Lauren Bacall publicity still from To Have and Have Not 1944

If you put all the pieces in a jigsaw puzzle in their proper places, a picture emerges. An easy enough principle. But how do you get the pieces, and where do they go? That’s often not so easy at all.

Oil prices are low, and falling, in the face of Iraq and Ukraine. But what does that mean, and how does it fit into the puzzle?

In a report issued on Tuesday, the IEA cut its forecast for worldwide oil consumption growth to 1 million bpd (barrels per day), 180,000 bpd less than previously predicted, while supplies have risen by 300,000 bpd above the forecast output.

Now, the IEA and its US sister, the EIA, are notoriously as unreliable in their numbers as the US government is in jobs and growth numbers, and as China is in all economic numbers. But the trend looks believable.

And to think that only in March the IEA predicted increasing demand and said: “Growth momentum is expected to benefit from a more robust global economic backdrop”.

One thing from the IEA report makes sense; it says the oil market seemed “eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world”.

Russia Vulnerable As Oil Prices Hit Nine-Month Low On IEA ‘Glut’ Warnings

Oil prices have fallen to a nine-month low as surging supply from Opec and the US floods the market and fresh demand wilts [..] OECD inventories rose by 88m barrels in the second quarter, the most since 2006. Stocks are still below their five-year average but are no longer as dangerously thin as they were last winter.

[..] Saudi Arabia cranked up its production to more than 10m b/d, the highest since last September. Oil demand fell by 440,000 b/d in Europe and the US over the period [..] The big surprise has been a “sharp contraction” in German demand for oil products, down 3.9pc over the past year. It is much the same picture in Italy and Japan.

I find it curious that Saudi Arabia would raise its production in times when there is an oil ‘glut’. What would they be trying to achieve? Lower prices? For political reasons perhaps? It gets more curious when the EIA says OPEC will reduce production, as per the Wall Street Journal:

EIA Lowers Global Oil Demand Forecast for 2014, 2015

The EIA said it expects the Organization of the Petroleum Exporting Countries to reduce output in 2014 [..] The agency called for 35.84 million bpd of OPEC production in 2014[ ..] OPEC produced 36.12 million bpd last year, according to the EIA. In the U.S., production hit 8.5 million bpd in July, the highest monthly level since April 1987 [..] its forecast total U.S. crude production at 8.46 million bpd in 2015 However, the agency cut its forecast for production in the lower 48 states.

The EIA maintained its forecast for U.S. average daily oil consumption at 18.88 million bpd in 2014 but raised its 2015 forecast to 18.98 million bpd.

The glut can come from either one of two directions: more supply or less demand. Since demand fell by 440,000 b/d in Europe and the US since September, and the IEA says production will rise by 300,000 bpd, there is some wiggle room. But.

US oil consumption never recovered. It’s now at about the same level as in 1997, when there were about 45 million fewer people living in America. That is a huge drop. While there have been advances in efficiency etc., there’s no denying that the economy never recovered either, not by a very long shot. No matter that it supposedly grew at a 4% annualized rate in Q2…

And please don’t forget that this happened at a time when stock markets set records, the Fed balance sheet rose to $4+ trillion and overall debt went to the moon and never looked back. What is that, a quadruple whammy?

Worst Retail Sales Showing in Six Months in Slow Start to Third Quarter

Retail sales were little changed in July, the worst performance in six months, as car demand slowed and tepid wage growth restrained U.S. consumers. The slowdown in purchases followed a 0.2% advance in June [..]

Retailers such as Macy’s are relying on promotions and discounts to entice customers. “There’s no sign of momentum or enthusiasm out of the consumer right now,” said Stephen Stanley, chief economist at Pierpont Securities [..] I don’t think people have the wherewithal, not to mention the inclination, to ramp it up.”

Not even subprime car loans can do the trick anymore. Let alone housing:

Not that that’s a typical American problem:

Chinese Home Sales Fall 10.5%

Home sales in China fell 10.5% in the first seven months of the year to 2.98 trillion yuan ($484 billion) [..] To lure home buyers back to the market, around 30 local governments have loosened property restrictions such as limits on second home purchases. But there has yet to be any meaningful pickup in sales [..] Average home prices in 100 Chinese cities fell for the third straight month in July on a month over month basis, according to data tracker China Real Estate Index System. New construction starts in the January-July period measured by area fell 12.8%

Nor is the US the only country with a retails sales problem:

Japanese GDP Plunges 6.8%, Record Drop in Consumer Spending

Compared to the 3.6% drop in GDP when Japan last hiked its consumption tax in 1997, today’s Q2 GDP collapse of 6.8% annualized is an utter disaster. Consumer Spending collapsed 5.2% QoQ – the most on record.

And Europe fares no better:

Crisis Stalks Europe Again As Deflation Deepens, Germany Stalls

Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral. The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012 [..]

Markets were stunned by the sudden fall in Portugal’s HICP inflation to -0.7% in July, from -0.2% the month before. Spain’s provisional estimate is for a fall of -0.3%. The risk is that this will cause inflation expectations to become unhinged and extremely difficult to reverse.

“The latest inflation figures call for the ultimate bazooka from the ECB. We’re seeing the Japanification of Europe,” said Lena Komileva from G+ Economics. “Deflation pushes up the debt ratios in the southern countries and makes their task even more insurmountable.”

Morgan Stanley warned that Germany’s economy contracted by 0.1% in the second quarter [..] Hans Redeker, the bank’s currency chief said: “It is very difficult to keep recovery going in the eurozone without credit. Companies are just eating up their cash flow.”

Germany’s factory orders from the rest of the eurozone dropped by 10.4% in June [..] The DAX index of stocks in Frankfurt has plummeted 10% over the past month, while yields on 10-year German Bunds have dropped to historic lows of 1.06%.

For Italy, it is already becoming a fresh crisis. The country is caught in a vice, squeezed by a triple-dip recession and zero inflation at the same time. Italy’s €2.1 trillion public debt is rising on a shrinking base of nominal GDP despite austerity policies. The debt ratio has surged five percentage points to 135.6% of GDP over the past year, despite austerity. Portugal is close behind. Its debt has jumped from 127.4% to 132.9% [..] Deflation is pushing both nations into a textbook debt trap.

And then we haven’t even talked about France. Or fresh sanctions that will bite a piece out of GDP both in Russia and in Europe.

Without the markets, or economies, collapsing outright yet, it’s starting to look like while oil cannot save us from economic mayhem, the downfall of our economies is indeed keeping the lack-of-energy monster at bay.

Not that that’s something we should be too happy about, for obvious reasons.

But that’s not the whole story, or the end of the story, and it’s not where the jigsaw pieces fall neatly into place.

What we tend to label geopolitical risks, which will come in very handy to mask economic problems we would have had anyway, are already leading to other events and consequences.

That is to say, the world has started fighting over oil for real. It’s no longer just about dominance, it’s about survival. Of societies, of values, political systems, religions.

Islamist State Funds Caliphate With Mosul Dam, Oil and Gas

Islamic State militants who last week captured the Mosul Dam, Iraq’s largest, had one demand for workers: Keep it going. [..] militants from the al-Qaeda breakaway group told workers hiding in management offices they would get their salaries as long as the dam continued to produce electricity for the region under their control.

[IS] fighters are capturing the strategic assets needed to fund the Islamic caliphate [..] “These extremists are not just mad,” said Salman Shaikh, director of the Brookings Institution’s Doha Center in Qatar. [..] “It’s been a big mistake for some people to think that these guys are some ragtag outfit .. ” [..] “There’s a method to their madness, because they’ve managed to amass cash and natural resources, both oil and water, the two most important things. And of course they are going to use those as a way of continuing to grow and strengthen.”

The dam is the most important asset the group captured since taking Nineveh province in June. The group controls several oil and gas fields in western Iraq and eastern Syria, generating millions of dollars in daily revenue. The group is using the dam as a hideout because it knows it wouldn’t be bombed, he said [..] The dam was completed in 1986 and its generators can produce as much as 1010 megawatts of electricity, according to the website of the Iraqi State Commission for Dams and Reservoirs.

Aziz Alwash, an environmental adviser to the Water Resources Ministry, said the dam needs cement injections as part of its maintenance. “Mosul city would drown within three hours” if the dam broke, he said Aug. 10 in a telephone interview. Other cities down the road to Baghdad would also be inundated while the capital would be under water within four hours.

While you were sleeping, the world changed. Our economies are no longer growing. But some things are. The Islamist State for one. International tension in general. And “We” are actively causing these things to grow as much as anyone else.

It should be crystal clear that oil prices can shoot up at any given moment. One wrong move, one faulty calculation, one missed shot or one stray bullet, that’s all it takes. We like to think of ourselves as being in control, that’s how we grew up. But we no longer are, if we ever were.

Someone at CNBC found a few pieces that fit together:

Are Weaker Oil Prices Signaling Doom For Stocks?

The price of Brent crude slipped to a 13-month low on Wednesday, pushed lower by reports of oversupply in the markets. However, some market watchers believe that this softness could be signaling something more sinister in the global economy, with a risk that the weakness could spread to other assets. [..] Michael Hewson, analyst at CMC Markets, agrees that current global growth forecasts may be too optimistic and depressed demand in Europe and China, along with the anticipated normalization of interest rates in the U.S. and the U.K., could be about to bring investors back down to earth.

[..[ he has felt the market has been too upbeat for most of 2014. “Far be it from me to get in front of a runaway train … but I think that train is a bit crowded.”

“Far be it from me to get in front of a runaway train … but I think that train is a bit crowded,”

Are Weaker Oil Prices Signaling Doom For Stocks? (CNBC)

The price of Brent crude slipped to a 13-month low on Wednesday, pushed lower by reports of oversupply in the markets. However, some market watchers believe that this softness could be signaling something more sinister in the global economy, with a risk that the weakness could spread to other assets. “At the end of the day it’s all about demand,” Michael Hewson, the chief market analyst at brokerage firm CMC Markets told CNBC via telephone. The oil price is simply a leading indicator for demand across the globe, according to Hewson, who predicts the price has more downside risk than upside, barring any unexpected geopolitical event. He agrees that current global growth forecasts may be too optimistic and depressed demand in Europe and China, along with the anticipated normalization of interest rates in the U.S. and the U.K., could be about to bring investors back down to earth.

“I think the (growth forecasts) have been over egging the pudding,” he said, adding that he has felt the market has been too upbeat for most of 2014. “Far be it from me to get in front of a runaway train … but I think that train is a bit crowded,” he said. The price of Brent and WTI has been relatively stable for the last two years as the expansive monetary policy by central banks has coincided with a bull run in the equities market. The commodity saw a brief spike in June with fears over an Islamist militant group taking over large parts of northern Iraq. But markets have slipped since that price move, with Brent crude sliding to $102.45 a barrel on Wednesday to trade near its lowest level since June 2013. U.S. crude fell to $97.16 on Wednesday morning, near levels not seen since February this year.

Oil prices have been in this trend in recent weeks despite tensions in Iraq, Libya and Ukraine, however, it was a new report by the International Energy Agency that weighed on markets Wednesday. On Tuesday, the IEA said that oil has seen weak demand in the last few months and an oil glut has helped to keep a lid on prices. It added that markets were “eerily calm” in the face of the mounting geopolitical risks. Commenting on the report Marshall Gittler, a currency market strategist at IronFX, said that U.S. intervention in Iraq – with targeted airstrikes and militarily advisers entering the country – would only mean a further price fall as the risk premium diminishes.

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Brent Trades Near 13-Month Low Amid Signs China Is Slowing (Bloomberg)

Brent crude traded near its lowest intraday level in 13 months on speculation that supplies are excessive as Libyan output recovers and economic activity in China slows. West Texas Intermediate was steady. Futures slipped as much as 0.6% in London in a fourth daily decline. Libya exported the first oil cargo from Ras Lanuf port since it was closed by rebels a year ago. China’s broadest measure of new credit plunged to the lowest since the global financial crisis, while the National Bureau of Statistics in Beijing said growth in factory production slowed. The IEA said yesterday a supply glut was shielding the market against threats to output in the Middle East. “On the supply side, there’s been positive news from Libya even as the fighting worsens, giving a better situation in the physical market,” said Frank Klumpp, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany. “The demand side has potential for a bearish surprise as we have growing uncertainty” over China’s economy, he said.

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Japanese GDP Plunges 6.8%, Record Drop in Consumer Spending (Zero Hedge)

Compared to the 3.6% drop in GDP when Japan last hiked its consumption tax in 1997, today’s Q2 GDP collapse of 6.8% annualized is an utter disaster (even if it is slightly better than the expected -7.0% expectations thanks to a surge in the deflator). Inventory additions added 1.0% growth. Consumer Spending collapsed 5.2% QoQ – the most on record. Of course, in the tradition of Keynesian hockey-sticks, this XX% collapse in Q2 is expected to surge back to a 2.5% growth figure in Q3 and lead Japan to the holy grail once more.. only it didn’t quite work out that way last time for Japan. Simply put this is the worst posible outcome for bulls, small beat not enough to rejuice QQE.

Here come the hockeysticks …

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Chinese Home Sales Fall 10.5% (WSJ)

Home sales in China fell 10.5% in the first seven months of the year to 2.98 trillion yuan ($484 billion), data released by the National Bureau of Statistics on Wednesday showed, as potential buyers wait for prices to slide further. Sales were 2.56 trillion yuan in the first half of the year – down 9.2% from the same period of 2013. To lure home buyers back to the market, around 30 local governments have loosened property restrictions such as limits on second home purchases. But there has yet to be any meaningful pickup in sales, as home buyers stay away due to expectations of further price falls and rising inventories. Average home prices in 100 Chinese cities fell for the third straight month in July on a month over month basis, according to data tracker China Real Estate Index System. New construction starts in the January-July period measured by area fell 12.8% to 982.3 million square meters. This compared with a decline of 16.4% to 801.3 million square meters in the first six months.

Property investment in the first seven months of this year rose 13.7% to 5.04 trillion yuan, slowing from 14.1% growth in the first six months of the year. The investment figures are a lagging indicator, and reflect continuing activity in projects that started last year. New construction starts grew 13.5% in 2013. Analysts however, noted that they are awaiting sales data in August and September, rather than July, for cues on whether a turnaround is in the works. More property developers plan new home launches for sale during the two months. The statistics bureau doesn’t give data for individual months. Earlier Wednesday, China’s central bank issued data showing that new lending in July fell sharply from June, dashing hopes of a widespread pickup in mortgage loans and housing sales amid some property policy easing. Many economists have said that the downturn in the property sector poses the biggest risk to China’s economy.

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Crisis Stalks Europe Again As Deflation Deepens, Germany Stalls (AEP)

Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral. The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012, during the European sovereign debt crisis. “The European Central Bank has to act now,” said Andrew Roberts, credit chief at RBS. Markets were stunned by the sudden fall in Portugal’s HICP inflation to -0.7% in July, from -0.2% the month before. Spain’s provisional estimate is for a fall of -0.3%. The risk is that this will cause inflation expectations to become unhinged and extremely difficult to reverse.

“The latest inflation figures call for the ultimate bazooka from the ECB. We’re seeing the Japanification of Europe,” said Lena Komileva from G+ Economics. “Deflation pushes up the debt ratios in the southern countries and makes their task even more insurmountable.” The ECB is waiting to see whether its new four-year loans for banks (TLTROs) will stop the relentless contraction of credit and stave off the threat of a Japanese-style deflation trap, but the auctions will not take place until September and December. “Europe could be in deflation before the TLTROs have even begun. They cannot wait until February or March to start thinking about quantitative easing,” said Mr Roberts. Morgan Stanley warned that Germany’s economy contracted by 0.1% in the second quarter, raising the risk of outright recession as the Russia crisis starts to bite. “Momentum really stalled in May and June,” said Hans Redeker, the bank’s currency chief. “It is very difficult to keep recovery going in the eurozone without credit. Companies are just eating up their cash flow.”

Germany’s factory orders from the rest of the eurozone dropped by 10.4% in June, a fall not seen since the white heat of the Lehman crisis in late 2008. The DAX index of stocks in Frankfurt has plummeted 10% over the past month, while yields on 10-year German Bunds have dropped to historic lows of 1.06%. A sudden drop in yields typically signals a recession risk. Ingo Kramer, head of the BDI, the German industry federation, said German companies are struggling but it has not yet reached crisis level. “We are not at risk of recession,” he said. Brussels expects sanctions against Russia to cut eurozone growth by 0.3% this year.

For Italy, it is already becoming a fresh crisis. The country is caught in a vice, squeezed by a triple-dip recession and zero inflation at the same time. Italy’s €2.1 trillion public debt is rising on a shrinking base of nominal GDP despite austerity policies. The debt ratio has surged five percentage points to 135.6% of GDP over the past year, despite austerity. Portugal is close behind. Its debt has jumped from 127.4% to 132.9%, and is certain to move higher after the recovery collapsed earlier this year. There are growing concerns that the Portuguese state will end up footing the bill for the rescue of Banco Espirito Santo after senior bondholders were protected. Deflation is pushing both nations into a textbook debt trap.

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Europe’s Crash-and-Burn Economy (Bloomberg)

As the euro-region economy struggled to emerge from recession in recent years, officials could at least comfort themselves with the performance of the German economy: “We’ll always have Frankfurt,” to miscoin a phrase. That’s no longer true. German investor confidence has worsened for eight consecutive months; today, it collapsed to its lowest level in two years. The euro-region economy is in flames. Here ends the argument that the world of finance and economics is shrugging off Ukraine and Iraq and Ebola and Gaza and all the other geopolitical risks currently assailing the headlines. A sentiment index measuring faith in the six-month economic outlook dropped to 8.6 this month, according to the ZEW Center for European Economic Research in Mannheim. The index has slumped from a seven-year high of 62 reached in December. ZEW explained the situation thus:

The decline in economic sentiment is likely connected to the ongoing geopolitical tensions that have affected the German economy. Since the economy in the euro zone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected.

Figures scheduled for release on Aug. 14 are likely to show that the German economy, Europe’s biggest, contracted by 0.1% in the second quarter, according to the median forecast of economists surveyed by Bloomberg News. The euro zone as a whole will be lucky to manage growth of 0.1%, based on data scheduled for release that same day. So just one slip and the region will be flatlining; two slips, as it were, and recession will be just one quarter away: The specter of deflation, meantime, looms ever larger. In Portugal, consumer prices fell at an annual pace of 0.9% last month, their sixth consecutive decline, figures today showed. In Italy, already mired in recession, prices were unchanged as companies presumably decided their prospects are too gloomy for customers to endure increases. The euro-zone economy is heading for a crash; what will it take for European Central Bank President Mario Draghi to see that?

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Sliding German Output Bodes Ill For Eurozone (NY Times)

An important reading on the health of the eurozone economy is expected to show this week that growth stagnated in the most recent quarter as German output faltered, confirming the assessment of many analysts that a lasting recovery remains out of reach for the region. Economists are expecting that in the 18-nation currency bloc, gross domestic product expanded 0.1%in the second quarter compared with the first quarter, equivalent to an annual rate of growth of 0.4%. The eurozone eked out quarterly growth of 0.2%in the first three months of the year. The eurozone GDP report, to be released Thursday by the European Union statistical agency, Eurostat, is based on data from before the latest tensions about Ukraine and before the sanctions against Russia for its involvement in the crisis began to be felt. That means there are plenty of questions hanging over the second half of the year.

Most worrying are the indications that Germany is beginning to struggle, including a steep drop in economic sentiment reported Tuesday. Germany, which accounts for more than one-fourth of the overall eurozone economy, had been propping up the rest of the area for much of the last few years. On Tuesday, a report from the ZEW economic research institute in Mannheim, Germany, showed German economic sentiment fell this month to the lowest level since December 2012. The drop, the report said, “is likely connected to the ongoing geopolitical tensions that have affected the German economy.” The setback followed a warning from the OECD on Monday that its analysis showed “growth losing momentum” in Germany and an official report last week that showed German factories produced far less than expected in June. The gloomy sentiment in Germany is a “signal that the growth performance in the second quarter could suddenly morph from a one-off into an undesired trend,” said Carsten Brzeski, an economist with ING Group in Brussels.

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Eurozone Industrial Production Fell Again in June (WSJ)

Industrial production in the 18 countries that share the euro fell for a second straight month in June, an indication that the currency area’s economic recovery may have faltered again in the second quarter. The European Union’s statistics agency Wednesday said output from factories, mines and utilities fell 0.3% from May, and was unchanged compared with June 2013. That was a surprise, with 21 economists surveyed by The Wall Street Journal last week estimating the production rose by 0.3% during the month. Eurostat will Thursday release its measure of economic growth during the second quarter. Economists expect the agency to record a second straight quarter of slowing growth, with gross domestic product having risen by just 0.1% from the three months to March. The weakness of industrial production will likely cement those expectations. The euro zone’s economy has struggled to grow in the years since the 2008 financial crisis, and in particular has lagged behind other parts of the world economy since its interlinked government debt and banking crises erupted in late 2009.

But with the worst appearing to have passed last year, policy makers had hoped for a gradual acceleration in the rate of growth as 2014 advanced. Instead, the first quarter marked a slowdown from the final three months of 2013, and hopes for a significant rebound in gross domestic product during the second quarter have faded with every data release. Without higher rates of growth, the currency area will struggle to reduce its high levels of debt and unemployment. Weak demand and high joblessness across much of Europe’s economy is reflected in inflation rates far below the European Central Bank’s target of just under 2%. Spain’s statistics agency Wednesday said consumer prices were 0.4% lower in July than a year earlier, having previously estimated prices were down 0.3%. Portugal’s statistics agency Tuesday said consumer prices were down 0.7% on the year in July, a sixth straight month of deflation.

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Eurozone GDP: Brace Yourself (CNBC)

Complacency about the state of the euro zone’s economy could get a serious shaking Thursday, with the latest growth figures not expected to paint a pretty picture. The gross domestic product figures for the second quarter of 2014, following on from a paltry 0.2% increase in the first three months of the year, are unlikely to banish the looming specter of deflation and economic stagnation. Between April and June, the single currency region’s economy is expected to grow by just 0.1% from the previous quarter – or 0.4% from the same time in 2013. By contrast, the U.S. announced last month that its economy grew 4% on an annual basis.

Most importantly, Germany, long the engine room of Europe, and the region’s largest economy, is expected to show faltering or even declining growth. This can partly be accounted for by an unusually strong first quarter, powered by unseasonably high construction figures. Still, German investors are increasingly sceptical about the country’s economic potential, according to the ZEW figures released on Tuesday. Neighboring France is also unlikely to provide much of a fillip to growth, as pressure grows on its government to enact economic reforms more quickly. “Growth in the euro area is perilously low, and vulnerable to even slight setbacks in sentiment,” according to Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics. “At the current rate, growth is far too low and uncertain to make a meaningful difference to a still high unemployment rate and too high debt levels.”

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Oh mon Dieu.

France’s ‘Recovery’ In 1 Hard-To-Believe Chart (Zero Hedge)

With French government bonds trading at record low yields under 1.5%, it is hard to argue that the troubled socialist nation is ‘priced’ for either recovery or credit risk… but then again, thanks to Draghi’s promise and domestic banks’ largesse, none of that matters. With joblessness at record highs, the following chart of France’s “recovery” shows near-record high bankruptcies and record-low profitability. Oh the beauty of socialism…as Europe’s core diverges dramatically. “Recovery”?

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China money supply is waning.

China Credit Gauge Plunges as Expansion in Money Supply Slows (Bloomberg)

China’s broadest measure of new credit unexpectedly plunged to the lowest level since the global financial crisis, adding risks to economic growth already headed for the weakest annual pace in 24 years. Aggregate financing was 273.1 billion yuan ($44.3 billion) in July, the People’s Bank of China said today in Beijing, compared with the 1.5 trillion yuan median estimate of analysts surveyed by Bloomberg News. New local-currency loans of 385.2 billion yuan were half of projections, while M2 money supply grew a less-than-anticipated 13.5% from a year earlier.

Chinese stocks fell after the credit slowdown joined a property slump in testing Premier Li Keqiang’s economic-expansion target of about 7.5%this year, spurring speculation the government will ease policy. The PBOC said the drop in financing resulted from recent regulation and financial institutions’ enhanced control of risks. n“The numbers reflect both tightened regulation over certain financing activities and an underlying weak economy,” said Zhang Bin, an economist in Beijing with the state-run Chinese Academy of Social Sciences. “There’s still no real recovery in growth – at best, we can say that economic performance is stabilizing at a low level.”

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China is teetering.

China Trust Asset Growth Slows in Shadow Banking Campaign (Bloomberg)

China’s trust assets expanded at the slowest pace in two years as the government cracks down on shadow banking and investors reassess the risks of the high-yield investments. Trust companies’ assets under management climbed 6.4% to 12.5 trillion yuan ($2 trillion) as of June 30 from three months earlier, the China Trustee Association said in a statement yesterday. That’s the slowest growth since the first quarter of 2012 and compares with an average annual gain of 50% since 2008. Premier Li Keqiang is grappling with sustaining economic growth while containing financial risks after shadow banking exploded in China from 2010.

A “day of reckoning” is approaching for the trust industry with repayments to peak this quarter and next, and banks are set to bear the bulk of losses as defaults rise, Haitong International Securities Co. economist Hu Yifan wrote in a July 25 report. “Regulators, banks and local governments are all trying to contain the trust risks but things will only really improve if the economy picks up and borrowers get back on their feet,” Zeng Yu, a Beijing-based analyst at China Securities Co., said today by phone. “Chinese investors are becoming more risk averse and increasingly will go for lower-yield but less risky products.” Trust assets under management fell 240 billion yuan in June from May. That was the first monthly decline, the statement said, without specifying a time period.

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We’ll all be rich!

JPMorgan Joins Goldman in Designing New Generation Derivatives (Bloomberg)

Derivatives that helped inflate the 2007 credit bubble are being remade for a new generation. JPMorgan Chase is offering a swap contract tied to a speculative-grade loan index that makes it easier for investors to wager on the debt. Goldman Sachs Group Inc. is planning as much as €10 billion ($13.4 billion) of structured investments that bundle debt into top-rated securities, while ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt. Wall Street is starting to return to the financial innovation that helped extend the debt rally seven years ago before exacerbating the worst financial crisis since the Great Depression.

The instruments are springing back to life as investors seek new ways to boost returns that are being suppressed by central bank stimulus. At the same time, they’re allowing hedge funds and other investors to bet more cheaply on a plunge after a 145%rally in junk bonds since 2008. “The true sign of a top is when you have these new structures piling up,” said Lawrence McDonald, a chief strategist at Newedge USA LLC, and author of the book “A Colossal Failure of Common Sense” about the 2008 demise of Lehman Brothers Holdings Inc. “At the top of the market in 2007, there were these types of innovation and many investors didn’t realize about it at that time. These products are a clear risk indicator.”

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New York Prosecutors Charge Payday Loan Firms With Usury (NY Times)

A trail of money that began with triple-digit loans to troubled New Yorkers and wound through companies owned by a former used-car salesman in Tennessee led New York prosecutors on a yearlong hunt through the shadowy world of payday lending. On Monday, that investigation culminated with state prosecutors in Manhattan bringing criminal charges against a dozen companies and their owner, Carey Vaughn Brown, accusing them of enabling payday loans that flouted the state’s limits on interest rates in loans to New Yorkers. Such charges are rare. The case is a harbinger of others that may be brought to rein in payday lenders that offer quick cash, backed by borrowers’ paychecks, to people desperate for money, according to several people with knowledge of the investigations. “The exploitative practices — including exorbitant interest rates and automatic payments from borrowers’ bank accounts, as charged in the indictment — are sadly typical of this industry as a whole,” Cyrus R. Vance Jr., the Manhattan district attorney, said on Monday.

In the indictment, prosecutors outline how Mr. Brown assembled “a payday syndicate” that controlled every facet of the loan process — from extending the loans to processing payments to collecting from borrowers behind on their bills. The authorities argue that Mr. Brown, along with Ronald Beaver, who was the chief operating officer for several companies within the syndicate, and Joanna Temple, who provided legal advice, “carefully crafted their corporate entities to obscure ownership and secure increasing profits.” Beneath the dizzying corporate structure, prosecutors said, was a simple goal: make expensive loans even in states that outlawed them. To do that, Mr. Brown incorporated the online payday lending arm, MyCashNow.com, in the West Indies, a tactic that prosecutors say was intended to try to put the company beyond the reach of American authorities. Other subsidiaries, owned by Mr. Brown, were incorporated in states like Nevada, which were chosen for their light regulatory touch and modest corporate record-keeping requirements, prosecutors said.

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Islamist State Funds Caliphate With Mosul Dam, Oil and Gas (Bloomberg)

Islamic State militants who last week captured the Mosul Dam, Iraq’s largest, had one demand for workers: Keep it going. Arriving in their Toyota pickup trucks, armed with Kalashnikov assault rifles and wearing a patchwork of military uniforms, robes and turbans, jubilant militants from the al-Qaeda breakaway group told workers hiding in management offices they would get their salaries as long as the dam continued to produce electricity for the region under their control, according to a technician who was at the dam when nearly 500 militants drove off Kurdish troops. Islamic State’s rampage through northern Iraq has inspired terror as stories spread of beheadings and crucifixions. At the same time, its fighters are capturing the strategic assets needed to fund the Islamic caliphate it announced in June and strengthen its grip on the territory already captured. “These extremists are not just mad,” said Salman Shaikh, director of the Brookings Institution’s Doha Center in Qatar.

“There’s a method to their madness, because they’ve managed to amass cash and natural resources, both oil and water, the two most important things. And of course they are going to use those as a way of continuing to grow and strengthen.” The dam is the most important asset the group captured since taking Nineveh province in June. The group controls several oil and gas fields in western Iraq and eastern Syria, generating millions of dollars in daily revenue. U.S. President Barack Obama said the fight against militants in Iraq will be a “long-term project,” tying the prospects for success to whether the nation’s leaders quickly form an inclusive government. The U.S. conducted several strikes last week against Islamic State fighters attacking Yezidi civilians near Sinjar. The group still controls the dam. Fighter jets and drones were flying over it on Aug. 9 without hitting it, said the technician.

The group, which used to call itself Islamic State in Iraq and the Levant, is using the dam as a hideout because it knows it wouldn’t be bombed, he said [..] The dam was completed in 1986 and its generators can produce as much as 1010 megawatts of electricity, according to the website of the Iraqi State Commission for Dams and Reservoirs. Aziz Alwash, an environmental adviser to the Water Resources Ministry, said he’s concerned the militants will use the dam to blackmail the government. The dam needs cement injections as part of its maintenance, he said. “Mosul city would drown within three hours” if the dam broke, he said Aug. 10 in a telephone interview. Other cities down the road to Baghdad would also be inundated while the capital would be under water within four hours. [..] “It’s been a big mistake for some people to think that these guys are some ragtag outfit,” said Shaikh of the Brookings Institution.

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Just what we needed.

Obama Administration Loosens Ban on Lobbyists in Government (Reuters)

President Barack Obama is loosening restrictions on lobbyists who want to serve on federal advisory boards, a White House official said on Tuesday, a setback to the president’s efforts to tamp down special interest influence in Washington. Obama came to office pledging to curtail the sway of lobbyists and banned lobbyists from serving on such panels, which guide government policy on a range of topics ranging from cancer to towing safety. The president said he was doing so because the voices of paid representatives of interest groups were drowning out the views of ordinary citizens.

But many lobbyists felt they were being unfairly tarred by Obama’s campaign to keep them out of public service. A lawsuit challenging the ban was initially dismissed, but a District of Columbia Circuit Court in January reinstated it. A spokesperson for the White House Office of Management and Budget said the administration was revising its earlier guidance on lobbyists serving on federal advisory panels to clarify that lobbyists may now serve on such panels when they are representing the views of a particular group. There are more than 1,000 federal advisory committees. The head of a lobbying industry trade group called the change a positive step that will allow the government to draw on the expertise of people whose experience can be beneficial in making policy.

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Get out! There’s no future for your children there.

Southwest Braces As Lake Mead Water Levels Drop Further (AP)

Once-teeming Lake Mead marinas are idle as a 14-year drought steadily drops water levels to historic lows. Officials from nearby Las Vegas are pushing conservation but also are drilling a new pipeline to keep drawing water from the lake. Hundreds of miles away, farmers who receive water from the lake behind Hoover Dam are preparing for the worst. The receding shoreline at one of the main reservoirs in the vast Colorado River water system is raising concerns about the future of a network serving a perennially parched region home to 40 million people and 4 million acres of farmland. Marina operators, water managers and farmers who for decades have chased every drop of water across the booming Southwest and part of Mexico are closely tracking the reservoir water level already at its lowest point since it was first filled in the 1930s.

“We just hope for snow and rain up in Colorado, so it’ll come our way,” said marina operator Steve Biggs, referring to precipitation in the Rockies that flows down the Colorado River to help fill the reservoir separating Nevada and Arizona. By 2016, continued drought could trigger cuts in water deliveries to both states. [..] The effect of increased demand and diminished supply is visible on Lake Mead’s canyon walls. A white mineral band often compared with a bathtub ring marks the depleted water level. The lake has dropped to 1,080 feet above sea level this year – down almost the width of a football field from a high of 1,225 feet in 1983. A projected level of 1,075 feet in January 2016 would trigger cuts in water deliveries to Arizona and Nevada. At 1,000 feet, drinking water intakes would go dry to Las Vegas, a city of 2 million residents and a destination for 40 million tourists per year that is almost completely dependent on the reservoir. That has the Southern Nevada Water Authority spending more than $800 million to build a 20-foot-diameter pipe so it can keep getting water.

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Ouch.

Worst Drought In Half A Century Hits China’s Bread-Basket (MarketWatch)

China’s worst drought in half a century is sweeping across crucial agricultural regions, devastating harvests in its wake and threatening food security. Part of the area hit by unusually dry weather — the northeastern Manchurian Plain — is known as China’s bread-basket, supplying much of the country’s corn, wheat and soybean production. In a portion of the plain, in Jilin province, 10 major grain producing counties are facing the lowest rainfall since 1951, and many corn fields are facing “zero harvest,” according to report by the state-run Xinhua New Agency, citing Jilin’s provincial weather bureau. Next door in Liaoning province, there has been no rain at all since late July.

And with Jilin government meteorologist Yang Xueyan warning that the situation will likely get worse in the near future, concern over the drought has sent local corn futures rising more than 4% in less than two week, First Financial Daily reported Friday. But the crisis isn’t confined to the Manchurian Plain alone — according to state broadcaster CCTV, the drought is impacting more than one-third of China. This includes the central Chinese province of Henan, another agriculturally important area, which has seen the weakest flood season in 53 years, leaving some rural communities with no viable drinking water, let alone water needed for irrigation, for as long as three months, CCTV said. In what may be a sign of things to come, the state-owned SDIC Zhonggu Futures brokerage is predicting a 40-million-ton corn deficit this summer.

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Brilliant.

The Privilege Of Watching War (Mises Canada)

The prospect of renewed war has little effect on the public anymore. We have been desensitized to the violence because it seemingly never stops. Material capitalism has created a state of luxury never known to mankind before our current day; yet it renders our sympathy for the plight of others flaccid. We watch movies and play video games and pretend to know what war is like. But in reality, we can’t begin to understand how it feels to live under the threat of bombs and shrapnel every day. As Americans, and Westerners, we are gifted with the option to not partake directly in war, but play the casual observer. It’s a privilege; and not at all like the class privilege egalitarians are constantly harping about. To see explosions go off in foreign lands, destroying homes, mutilating children, killing family members, is a jarring sight. But as long as it’s a pixelated image on a computer screen, it fails to have the same heart-wrenching effect as if it were occurring just a few feet away. It fails to invoke the emotional intensity that is the most potent weapon in battle.

It fails to show the emotional impetus that is behind vindictive combat. How lucky we are to be far removed from the cries of a mother whose child was collateral damage in an air strike. How lucky we are to not have our brothers and sisters disintegrated before our eyes. How lucky we are to not have our parents taken from us by stray bullets. How lucky are we not to have a generation of orphans, angry over the death of their mothers and fathers and wishing to exact revenge. The new Vice News documentary on the growing Islamic State in Syria provides a candid but eerie look into the internal deliberations of West-hating Muslim fanatics. These aren’t ordinary folks happy with careers and raising families. They live for jihad. They feed children propaganda on why American and European infidels must die. What’s discomforting about this mindset is that it’s not completely unjustifiable.

At one point during the mini-series, a pious man dedicated to the cause of the Islamic State declares, “we are going to invade you as you invaded us. We will capture your women as you captured our women. We will orphan your children as you orphaned our children.” Can it really be denied that a century of meddling in the Middle East hasn’t created this sentiment of seething vengefulness? Who are we, as Americans and citizens of militarily-dominant countries, to sit back and ignore this type of anger, when under the same circumstances, we would feel the same way? Such unfettered rage demands reflection: how blessed we are to not live in such a maddening state. And how fortunate we are to have an ocean of distance between us and pit of despair known as the Middle East. It’s truly unfortunate how the suffering of others helps us to understand the blessings wrought by domestic tranquility.

The other day, I shared an elevator with Eli Lake of The Daily Beast. Well-respected as a foreign policy analyst with high-ranking connections, Lake is one of the biggest agitators for war in the media. Seeing him up close was quite a revelation. Clad in nicely-fitted dress clothes, I was struck by Lake’s protruding belly. It was reminiscent of when I ran into Bill Kristol months before in the same elevator. Same clothes, same overweight figure. These men have the benefit of filling their gullets at rubber chicken dinners while begging for death and destruction across the globe. They don’t don military garb, pick up AR-15s and take care of business themselves. They would rather stare into a television camera and make the case for other people’s children to go off and die in war.

Read more …

Highly recommended read.

Sovereign Debt For Territory: A New Global Elite Swap Strategy (Salbuchi)

In recent decades, dozens of sovereign nations have fallen into ever-deepening trouble by becoming indebted with the “private megabank over-world” for amounts far, far in excess of what they can ever pay back. Is this due to bankers’ professional malpractice coupled with government mismanagement on a truly grand scale? Or are we seeing global power elite long-term planners slowly achieving their goals? Recurrent sovereign debt crises reflect neither “over-lending mistakes” by bankers and investors, nor “innocence” on the part of successive governments in deeply indebted nations. Rather, it all ties in with a global model for domination driven by a system of perpetual national debt which I have called “The Shylock Model”. [..] Sovereign debts are a major problem in just about every country in the world, including the US, UK and EU nations. So much so, those debts have become a Damocles’ Sword threatening the livelihood of untold billions of workers around the world.

One often wonders why governments indebt themselves for so much more than they can ever hope to pay… Here, Western economists, bankers, traders, Ivy League academics and professors, Nobel laureates and the mainstream media have a quick and monolithic reply: because all nations need “investment and investors” if they wish to build highways, power plants, schools, airports, hospitals, raise armies, service infrastructures and a long list of et ceteras, economic and national activities are all about. But more and more people are starting to ask a fundamental common-sense question: why should governments indebt themselves in hard currencies, decades into the future with global mega-bankers, when they could just as well finance these projects and needs far more safely by issuing the proper amounts of their own local sovereign currency instead?

Here is where all the above “experts” go berserk & ballistic, shouting back: “Issue currency? Are you crazy?? That’s against the “rules & laws” of economics!!! Issuing national sovereign currency to finance the real economy’s monetary needs leads to inflation and lost jobs and chaos and… (puts us nice mega-bankers out of a job…)!!.” That’s when they all gang-up into noisy “The sky is falling! The sky is falling!!” mode. Then you ask them: What happens when countries default on their unpayable sovereign debts – as they invariably and repeatedly do – not just in Argentina, but in Brazil, Spain, Venezuela, France, Costa Rica, Peru, El Salvador, Portugal, Russia, Bolivia, Iceland, Turkey, Greece, Cyprus, Thailand, Nigeria, Mexico, and Indonesia? Again the voice of the “experts”: “Then countries must “restructure” their debts kicking them forwards 20, 40 or more years into the future, so that your great, great, great grandchildren can continue paying them”. Oh, I see!

Read more …

Russia Vulnerable As Oil Prices Hit Nine-Month Low On IEA ‘Glut’ Warnings

Oil prices have fallen to a nine-month low as surging supply from Opec and the US floods the market and fresh demand wilts, leading to an “oil glut” in the Atlantic region despite the twin crises in Iraq and Russia. The International Energy Agency (IEA) cut its forecast for the rise in global consumption to just 1m bpd (b/d) this year due to near recession conditions in Europe and as pervasive weakness in the world economy disappoints. This comes as supply rises by a further 300,000 b/d beyond what was already planned. The warning sent Brent crude prices tumbling to $104 a barrel, the lowest this year. The sudden shift in the balance of the market has allowed the OECD club of rich states to build up their oil stocks at the fastest rate in eight years, creating an extra layer of protection against any possible supply shock from Russia and Iraq. The agency said OECD inventories rose by 88m barrels in the second quarter, the most since 2006. Stocks are still below their five-year average but are no longer as dangerously thin as they were last winter.

The IEA said in its monthly report that the oil market seemed “eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world”. Yet so far the rise in supply has overwhelmed any actual disruptions from crisis zones. Libya’s output doubled to 430,000 b/d in July from a month earlier despite the continuing war between rival militias for control of the country’s oil wealth. Saudi Arabia cranked up its production to more than 10m b/d, the highest since last September. Oil demand fell by 440,000 b/d in Europe and the US over the period, a sign of how weak global recovery still is, consistent with a rare fall in the CPB’s index of world trade in May. The big surprise has been a “sharp contraction” in German demand for oil products, down 3.9pc over the past year. It is much the same picture in Italy and Japan.

The supply glut leaves the world economy slightly less vulnerable to a shock if the crisis escalates in Russia. The West has already imposed a funding freeze on Russia’s top oil company, Rosneft. This could ratchet up to Iran-style sanctions on Rosneft deliveries as well if the Kremlin launches a full-blown invasion of eastern Ukraine. Falling prices will ratchet up the pressure on Russia, which needs a price near $110 to balance its budget. While it has a reserve fund to cover any shortfall, this would be depleted fast if oil falls anywhere near $80 and Russia goes into a deep recession. Most of Russia’s energy revenues come from oil, not gas. The crisis in Iraq has yet to pose a serious threat to oil exports, though this could change at any time. The vast majority of Iraqi supply comes from Shia-controlled fields in the south. The most powerful force now holding down global prices is the US fracking industry. Shale will boost US output by a further 1.2m b/d this year to a total of 11.5m, increasing America’s lead as the world’s biggest producer.

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Petrol prices expected to fall after Saudis open the oil taps

Petrol prices are poised to fall further after the cost of a barrel of crude oil reached its lowest level this year. The fall followed the publication of an influential report that showed a glut of crude from Saudi Arabia flowing on to the market and rising stockpiles. The Paris-based International Energy Agency, the leading oil think tank, said yesterday that the world will consume less crude than experts had thought this year. Saudi Arabia’s supplies are running at the highest level since last September and crude from Libya is back on the market. Recent figures from Experian Catalist, a petrol analyst, show the typical price of unleaded petrol is almost unchanged this year at 131.3p a litre and the cost of diesel is down from 138.3p to 135.6p. However, supermarkets are already cutting prices at the pumps in a battle for customers that could be intensified by the slump in crude. The supply glut leaves the world economy slightly less vulnerable to a shock if the crisis over Ukraine escalates.

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EIA Lowers Global Oil Demand Forecast for 2014, 2015 (WSJ)

Government forecasters lowered their forecast for global oil consumption this year and next, the latest sign of weak demand that is pressuring prices. The U.S. Energy Information Administration, in its monthly short-term energy outlook released Tuesday, cut its international consumption forecast to 91.56 million bpd this year and 92.96 million bpd next year. Last month, the EIA called for 91.62 million bpd in 2014 and 93.08 million in 2015. Earlier Tuesday, the International Energy Agency also lowered its global demand forecast for 2014 to 92.7 million bpd. Prices have fallen in recent weeks on concerns about weak demand. Ongoing violence in Iraq, Ukraine and other parts of the world hasn’t disrupted oil production, as investors worried earlier this summer. Brent, the global oil benchmark, traded at nine-month intraday lows Tuesday and appeared on track to close at a 13- month low.

The EIA said it expects the Organization of the Petroleum Exporting Countries to reduce output in 2014, offsetting the production growth from such non-OPEC countries as the U.S. The agency called for 35.84 million bpd of OPEC production in 2014, down from its earlier forecast of 35.93 million bpd. OPEC produced 36.12 million bpd last year, according to the EIA. In the U.S., production hit 8.5 million bpd in July, the highest monthly level since April 1987, the EIA said. The agency maintained its forecasts for total U.S. crude production at 8.46 million bpd in 2015 and 9.28 million bpd, noting it would represent the highest level of annual average oil production since 1972. However, the agency cut its forecast for production in the lower 48 states and raised its expectation for production in the offshore Gulf of Mexico.

The EIA maintained its forecast for U.S. average daily oil consumption at 18.88 million bpd in 2014 but raised its 2015 forecast from 18.95 million bpd to 18.98 million bpd. The EIA cut its forecast of average prices for the global Brent benchmark oil contract this year and raised its estimate for next year. The agency said it expects prices of $108.11 a barrel in 2014 and $105.00 a barrel in 2015, compared to its prior assessment of $109.55 a barrel this year and $104.92 a barrel next year. For the U.S. benchmark, the EIA lowered its estimate to an average price of $100.45 a barrel in 2014, from $100.98 a barrel last month. The gap between the Brent and the U.S. benchmark contracts is likely to average $8 in 2014 and $9 in 2015, the EIA said. As a result of soaring domestic energy production, petroleum imports have declined significantly, the EIA said, with the share of consumption met by net imports expected to fall from 33% in 2013 to 22% in 2015, the lowest level since 1970. The EIA lowered its forecast for average retail gasoline prices this year from $3.54 a gallon to $3.50 a gallon.

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The US economy supposedly grew at a 4% annualized rate in Q2.

Worst Retail Sales Showing in Six Months in Slow Start to Third Quarter (Bloomberg)

Retail sales were little changed in July, the worst performance in six months, as car demand slowed and tepid wage growth restrained U.S. consumers. The slowdown in purchases followed a 0.2% advance in June, the Commerce Department reported today in Washington. The median forecast of 82 economists surveyed by Bloomberg called for a 0.2% gain. Excluding cars, sales rose 0.1%. Job growth has yet to stoke the type of wage gains needed to boost household purchases, a sign the economic expansion will probably not sustain the second-quarter pickup into the end of the year.

Retailers such as Macy’s are relying on promotions and discounts to entice customers, whose spending accounts for about 70 percent of the economy. “There’s no sign of momentum or enthusiasm out of the consumer right now,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut, who accurately forecast today’s sales figure. “Income growth continues to be so-so. Employment has picked up in recent months but you’re not seeing the growth in hours worked that would generate big increases in paychecks. I don’t think people have the wherewithal, not to mention the inclination, to ramp it up.”

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Aug 072014
 
 August 7, 2014  Posted by at 8:16 pm Finance Tagged with: , ,  2 Responses »


Jack Delano Men outside beer parlor in Jewett City, Connecticut. Nov 1940

What did I call yesterday’s article again? Oh, that’s right, I called it Europe’s Tumbling, Who’s To Blame?. Well, I’m not a seer, or clairvoyant, but I might as well have used that exact same title again today. Because the same theme plays out again. In an piece initially called Europe’s Recovery Menaced by Putin as Ukraine Crisis Bites, later renamed Draghi Outlook Menaced by Putin as Ukraine Crisis Bites (what’s not to love), Bloomberg spills it all:

The crisis in eastern Europe is showing signs of disrupting Mario Draghi’s economic outlook. Evidence is building that the conflict in Ukraine and European Union sanctions against Vladimir Putin’s Russia are undermining a euro-area recovery that the European Central Bank president already describes as weak. With the ECB expected to keep interest rates on hold near zero today and refrain from any new policy measures, Draghi is likely to face questions on how he plans to keep the economy on track.

The ECB may have few tools left to mitigate the impact of political turmoil that European companies from Anheuser-Busch InBev to Siemens say is hurting their business. A volley of measures introduced in June will take time to work, and policy makers have so far shied away from wheeling out a full-scale asset-purchase program. “The euro-zone recovery is very fragile and the macro situation fluid,” said Andrew Bosomworth, managing director at Pacific Investment Management Co. in Munich. “Expect Draghi to elaborate on spillover risks from the Russia-Ukraine crisis.”

Note that this was first published before Russia announced its sanctions on the west, and before Draghi held a speech in which he said … nothing much at all. Here’s Russia’s sanctions:

Russia Bans Food Imports From EU, US, Canada, Australia (Guardian)

Russia has banned fruit, vegetables, meat, fish, milk and dairy imports from the US, the European Union, Australia, Canada and Norway, Russia’s prime minister told a government meeting on Thursday. Dmitry Medvedev said the ban was effective immediately and would last for one year. Russian officials were on Wednesday asked to come up with a list of western agricultural products and raw materials to be banned. The agriculture minister, Nikolai Fyodorov, said on Thursday that greater quantities of Brazilian meat and New Zealand cheese would be imported to offset the newly prohibited items.

Now, if you’re anything like me, you’ve of course always suspected that all Kiwi’s are nothing but a bunch of closet Hobbit commies. And now we have what looks a lot like proof: New Zealand stands to profit handsomely from the sweeping Russian ban of US and EU food products, along with China, Brazil, Turkey.

Well played, Wellington! Better than Helsinki and Amsterdam, the probably hardest hit Europeans, who have registered only surprise, indignation and, yes, anger, I kid you not, at the ban. Guess they really didn’t see this one coming. The Brits apparently don’t get it either (hey, ask New Zealand, you still got the same queen, get her involved!).

Britain Says ‘No Grounds’ for Russian Retaliation Against West

There are no grounds for Russia to impose retaliatory sanctions against Western countries, a British Foreign and Commonwealth Office official told RIA Novosti. “There are no grounds for Russia to impose these sanctions. We have been pushing for a strong and determined international response to Russia’s unacceptable behavior in Ukraine. We have been clear that we are prepared to play our part and that there will be some costs, but this does not diminish our commitment. Instead of retaliating, Russia should be using its influence with the violent Russian-backed separatists to stop destabilizing Ukraine,” the official said.

At this point, I’m thinking it’s entirely possible that – some of – the leaders of European countries simply don’t know to what extent Brussels has been involved in Ukraine. That the communication lines between on the one hand 28 separate capitals, parliaments and governments – most of which speak their own separate languages -, and on the other hand Brussels, with its myriad commissions, leaders, parliament etc., its many hundreds of parliamentarians and thousands of translators, simply don’t allow for adequate and speedy decision making. Or is Brussels perhaps also genuinely surprised?

EU Ready To Appeal To WTO Over Russian Import Bans

The EU is ready to appeal to the World Trade Organization to have the Russian agriculture import bans lifted, a European diplomatic source told ITAR-TASS. “Politically motivated large-scale trade restrictions are a direct violation of WTO rules, which Russia pledged to comply with,” the diplomat said. “These measures will be thoroughly analyzed, and then relevant claims will be submitted with the WTO.” The source added that the European Commission would start analyzing Russia’s ban on imports from EU states as soon as the official list of banned goods would be published.

The EU Council may convene an urgent meeting in connection with Russia’s response to European sanctions. It is early to say whether the EU will take measures in response to the Russian ban on imports of food products from Europe, source told. “First, it is necessary to see and analyze the official list of product that Moscow intends to ban. After that, decisions will be made both at the European and the national level,” the source stressed. The Russian ban on agricultural imports from the European Union is an “irresponsible measure” that can lead to losses of billions of euro for European as well as Russian consumers, the source told ITAR-TASS.

Question: Are you sure the WTO is the right organization to mediate allegedly “politically motivated” restrictions?

I think the EU has different problems here: some of the 28 member nations will be hit much harder by these sanctions than others. Is there a fund in place to assure that the pain gets spread fairly? Also within nations, one sector gets hit, while another doesn’t. Do all nations have such funds ready to go?

It may not look so bad right now, but wait 6 or 12 months. And don’t let’s forget that economically, Europe is already teetering on the edge of the gutter, despite all assurances to the contrary. It’s therefore of course only human to blame the next step in the downtrend on the universal bogeyman Putin. But let’s get real, Europe never needed any help to to bring down its economy, it’s perfectly capable of doing that all by itself.

The US meanwhile? No pain from any of the sanctions.

Since this is a game of, as Paul Simon said: “All along along, There were incidents and accidents, There were hints and allegations, let’s see what, again, do we know for sure so far, what we can prove? Here’s what:

The EU and US instigated, financed and supporetd the Maidan movement, installed their very own handpicked government in Kiev, established an army aimed at eradicating all signs of discontent among Russian speaking Ukrainians in east Ukraine, with crucial parts played by CIA, Blackwater and various other mercenaries, blamed Putin for the downing of a plane without providing any evidence whatsoever of his involvement, announced a second series of economic sanctions on Russia, and then claim Russia has no reasons at all to announce its own set of counter sanctions.

It would be funny if it weren’t so out there.

Did you, in the midst of the 24/7 wall of words, manage to keep track of the fact that no part of any BUK rocket was ever found at the crash site? Are you also wondering where the Ukraine secret service took the Air Traffic Control recordings 3 weeks ago, and what we’ll be told about them, if anything, ever? It took, what, 24 hours, for the ATC logs from the still unlocated MH370 to be made public…

How about the black boxes, that had not been tampered with as Kiev had alleged? All we’ve heard so far out of the ‘lab’ in Britain where they were taken is that there was nothing out of the ordinary on them. So where’s the info? Why not go public with it?

Donetsk “rebel leader” Borodai stepped down today, to give way to some other schmuck, I know, but schmucks are the only thing they have over there. The May presidential election was between one billionaire and the other. That’s just the turf. Earlier this morning, the Ukraine government called an end to the truce on the crash site. One day after Holland announced its experts will leave the site because there’s too much fighting going on.

What truce, what are you talking about? The one you broke mere minutes after you yourself announced it?

Anyway, leave it be. What Europe would like to do is move the blame for its own gigantic economical failure onto Russia. Or make that Putin. It always works better if “it” has a face.

But Putin has nothing to do with anything. Italy was a lost economy way back (Beppe Grillo said years ago when Nicole and I went to see him, that what happens now, would), Portugal was never more than a nice facade, Greece bank rates will soon soar, it’s all just been a thin veil based on Mario Draghi’s “I’ll do what ever it takes”.

Thing is, Mario doesn’t have what it takes, and it’s not even his fault.

Europe shoots itself in the foot, puts it in its mouth, and chokes on it. How does that sound?

Europe’s in much worse shape than anyone’s let on, and they now have a bogeyman to deflect their own guilt and stupidity and failed conspiracies off of.

Only, Russia has nothing to do with Europe’s problems. Europe has fabricated its own problems. The Brussels leaders, though, would be more than happy to go to war against Russia just to hide their own failures and incompetence.

That’s the kind of thing that’s really dangerous, the bloated sociopaths who lead our nations. That and the propaganda machine they control.

Russia Bans Food Imports From EU, US, Canada, Australia (Guardian)

Russia has banned fruit, vegetables, meat, fish, milk and dairy imports from the US, the European Union, Australia, Canada and Norway, Russia’s prime minister told a government meeting on Thursday. Dmitry Medvedev said the ban was effective immediately and would last for one year. Russian officials were on Wednesday asked to come up with a list of western agricultural products and raw materials to be banned. The agriculture minister, Nikolai Fyodorov, said on Thursday that greater quantities of Brazilian meat and New Zealand cheese would be imported to offset the newly prohibited items. He added Moscow was in talks with Belarus and Kazakhstan to prevent the banned western foodstuffs being exported to Russia from the two countries.

The Kremlin’s move comes in response to the grounding of the budget airline subsidiary of Aeroflot as a result of EU sanctions over Moscow’s support for rebels in Ukraine. Medvedev also said officials were considering a ban on European airlines flying to Asia over Siberia. Russia is Europe’s second-largest market for food and drink and has been an important consumer of Polish pig meat and Dutch fruit and vegetables. Exports of food and raw materials to Russia were worth €12.2bn (£9.7bn) in 2013, following several years of double-digit growth. The UK is less likely to lose out; in 2013, its biggest food and drink export was £17m of frozen fish, followed by £5.7m of cheese and £5.3m of coffee.

Read more …

Britain Says ‘No Grounds’ for Russian Retaliation Against West (RIA)

There are no grounds for Russia to impose retaliatory sanctions against Western countries, a British Foreign and Commonwealth Office official told RIA Novosti. “There are no grounds for Russia to impose these sanctions. We have been pushing for a strong and determined international response to Russia’s unacceptable behavior in Ukraine. We have been clear that we are prepared to play our part and that there will be some costs, but this does not diminish our commitment. Instead of retaliating, Russia should be using its influence with the violent Russian-backed separatists to stop destabilizing Ukraine,” the official said.

On Wednesday, Russian President Vladimir Putin singed an order on economic measures to protect the country’s security. The decree banned for a year imports of agricultural and food products from countries that have imposed sanctions on Russia. The complete “blacklist” of food imports from Australia, Canada, the European Union, the United States and Norway was announced Thursday. The list includes meat, poultry, fish, milk, dairy products, as well as fruits and vegetables. The embargo does not include infant foods and products. Moscow has said that it is ready to review the terms of these restrictions if its Western partners demonstrate behaviors constructive to cooperation. Russian Prime Minister Dmitry Medvedev said the measure offered Russian agricultural producers a unique chance to replace imports with local foods.

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Ambrose is never good for his own opinions.

Vladimir Putin’s Pointless Conflict With Europe (AEP)

The world faces a moment of maximum danger in Ukraine. Vladimir Putin has perhaps 72 hours to decide whether to launch a full invasion of the Donbass, or accept defeat and let the Ukrainian military crush his proxy forces. Nato officials say Russia has massed 20,000 troops in battle-readiness near the border, backed by Spetsnaz commandos, tanks and aircraft. Vehicles have been marked with peace-keeper labels already. Nato sees every sign that the Kremlin intends to disguise an attack as a “humanitarian mission”. This is more serious than the Russian invasion of Afghanistan in 1980. That was a “colonial war”. The Soviet Union was a careful, status quo power in its final decades. It held captive nations but did not overrun new borders in Europe. Mr Putin is expansionist, and far less predictable. He is, in any case, captive to the chauvinist fever that he has so successfully stoked.

He has been clear from the outset that he will deploy any means necessary to bring Ukraine back into Russia’s orbit. Only war can now achieve this, since all else has failed, and since he has turned a friendly Ukraine into an enemy by his actions. The awful implications of this are at last starting to hit the markets. “People thought that Russia was just playing a game of brinkmanship,and that pragmatism would prevail in the end. There is real fear now that this will spin out of control. Nothing cannot be excluded at this point, even a cut-off in oil and gas,” said Chris Weafer, from Macro Advisory in Moscow. Yields on 10-year rouble bonds have jumped to 9.7pc, up 130 basis points since June. The sanctioned bank VTB is up 180 points in a month. A liquidity crunch is rapidly taking hold across the financial system. “The market is shut. Not a single Russian entity has been able to borrow anything in dollars, euro or yen since early July,” said Mr Weafer.

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I like that he can feel safe.

Edward Snowden Receives Three-Year Russian Residence Permit (Reuters)

Former U.S. intelligence contractor Edward Snowden, wanted by the United States for leaking extensive secrets of its electronic surveillance programs, has been given a three-year residence permit by Russia, his Russian lawyer told reporters on Thursday. The announcement comes at a time when Russia’s relations with the West are at Cold War-era lows over Russia’s actions in Ukraine. Russia responded to Western sanctions by banning certain food imports from the United States, the European Union, Australia, Canada and Norway on Thursday. “The decision on the application has been taken and therefore, with effect from Aug. 1, 2014, Edward Snowden has received a three-year residential permit,” Anatoly Kucherena said. “In the future, Edward himself will take a decision on whether to stay on (in Russia) on and get Russian citizenship or leave for the United States.”

He said Snowden could apply for citizenship after living in Russia for five years, in 2018, but that he had not decided whether he wanted to stay or leave. Kucherena said Snowden was studying Russian and had an IT-related job, but did not provide details. “He is a high-class IT specialist”, he said. He said Snowden’s security was being taken seriously and that he was using private security guards. “He leads a rather modest lifestyle, but nevertheless we proceed from the tone of statements that come from the U.S. State Department and other political figures,” he said. “The security issue should not be treated as a secondary one.”

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Italy Shows That The Eurozone Crisis Is Only In Remission (Telegraph)

Italy is in an utterly terrible state. It has just entered its third recession in six years, with GDP tumbling by 0.2pc in the second quarter. It is a triple-dip recession, and a catastrophic state of affairs. By contrast, the UK economy grew 0.8pc in the second quarter. Even though Britain’s recovery was extremely slow, we have now bounced back and our economy is slightly larger than it was prior to the crisis. Horrifically, Italian real GDP is still 9.1pc short of its pre-recession peak – as analysis by RBS points out, its output is now back to the level it last was in 2000. Britain’s GDP is roughly a quarter larger than it was then. Italy had previously spent the pre-recession years quasi-stagnating while the rest of the world was booming; its performance has thus diverged dramatically from much of the rest of the developed world. It gets worse: a combination of no growth and disinflationary pressures means that Italy’s national debt is increasing as a share of its national income. An analysis from Fathom Consulting highlights the fragile nature of Italy’s debt dynamics.

Even if growth were miraculously to return to the 1.5pc a year rate seen in the 30 years prior to the crisis, Italy would also need 2.3pc inflation to stabilise its national debt. More realistically, GDP will probably continue to flatline – and for the time being at least, eurozone inflation will remain low, partly as a result of the European Central Bank’s one-size-fits-all monetary policy. The result is hideously predictable: debt as share of the economy will keep on rising and will eventually asphyxiate the economy. Italy is in desperate need of a supply-side revolution – not merely of a few tweaks to red tape and taxes, but a genuine, radical shake-up, coupled with profound political change. It needs to unleash the forces of entrepreneurial creative destruction across its sclerotic economy. If it fails to change, and fast, Italy, already the eurozone’s new sick man, will eventually threaten the single currency itself. The eurozone crisis is merely in remission.

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Bet cha home prices still rise ….

Australia Jobless Rate Hits 12-Year High In July (Australian)

Australia’s unemployment rate spiked to a 12-year high in July, well above analysts’ expectations and casting a cloud over the economic outlook. Official data showed the unemployment rate surged to 6.4% in the month, compared with 6% in June – an unusually large monthly move and the highest since June 2002. The Australian jobless rate is now higher than in the US, where unemployment sits at 6.2%. The Australian Bureau of Statistics said that methodology changes to the way the labour survey is conducted had no material impact on the month’s data. The figures were significantly weaker than the market was looking for and suggests official interest rates will remain on hold, JP Morgan economist Tom Kennedy said.

“The figures were very soft all round – there was virtually no employment growth, we’ve had hours fall, part-time employment fall and only very tepid full-time employment growth so all in all, a very, very soft report, Mr Kennedy said. “This pours a little bit of cold water over those expecting an earlier rate hike,” he added. The total number of jobs in Australia fell by 300 to 11.57 million in the month on a seasonally adjusted basis. An AAP survey of 15 economists tipped the jobless rate would hold steady at 6% and predicted the employment would rise by 12,000. Reserve Bank governor Glenn Stevens said this week, after leaving the cash rate unchanged at a record low of 2.5%, that there had been some improvement in the outlook for the labour market but it would probably be some time before unemployment declined consistently.

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Smart cookie.

India Central Bank Chief Rajan Sees Risk of Financial Markets Crash (WSJ)

Reserve Bank of India Governor Raghuram Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense. The difference: competitive monetary policy easing has now taken the place of competitive currency devaluations as the favored tool for playing a zero-sum game that is bound to end in disaster. Now, as then, “demand shifting” has taken the place of “demand creation,” the Indian policymaker said. As was the case in the 1930s, the lack of coordination between policymakers is producing spillovers that may be difficult to control, and the world’s financial system may soon face fresh turbulence at a time when central banks have yet to repair the damage that the 2008 financial crisis caused to developed economies. “We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” said Mr. Rajan in an interview with the Central Banking Journal.

A sudden shift in asset prices could happen in a variety of ways, Mr. Rajan said. The most obvious route would be as a result of investors chasing higher yields at a time when they believe central bank policies will protect them against a fall in prices. “They put the trades on even though they know what will happen as everyone attempt to exit positions at the same time – there will be major market volatility,” said Mr. Rajan. A clear symptom of the major imbalances crippling the world’s financial market is the over valuation of the euro, Mr. Rajan said. The euro-zone economy faces problems similar to those faced by developing economies, with the European Central Bank’s “very, very accommodative stance” having a reduced impact due to the ultra-loose monetary policies being pursued by other central banks, including the Federal Reserve, the Bank of Japan and the Bank of England. “The exchange rate is too strong given the euro area’s economic standing,” said Mr. Rajan, who took over the RBI in September.

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Unsold Land In China Signals Developer Uncertainty (CNBC)

For the first time in three years lands plots up for auction in Beijing went unsold last week, signaling that developers are nervous about ongoing weakness in the country’s property market. Two of the five lots put up for sale by the Beijing government last week received no bids – for the first time since April 2011, according to Chinese media reports. In another auction on Monday, two of four lots were sold to developers at lower-than-expected prices. According to Ryan Huang, strategist at IG’s Singapore office, the unsold auctions suggest “a mismatch between what increasingly cautious developers are willing to pay versus what local governments want.”

Local governments in China rely on land sales for the bulk of their revenue and are unwilling to budge on high prices, but developers are seeking lower prices as they have become less cash rich due to recent price declines and a tightening credit market. And Huang said he didn’t see this trend letting up anytime soon. “We’re likely to see the relatively muted appetite by property developers continue, as investors get increasingly concerned over a property slump and take a wait-and-see attitude,” added Huang. Du Jinsong, head of Asia Property Research at Credit Suisse, told CNBC the unsold auctions were result of local government’s misjudging the market. “Developers have adjusted their expectations on future housing prices already, given the housing market weakness for the past six months, but local governments have not yet adjusted their own expectations so some land parcels’ open bid prices (base prices) were set too high,” he added.

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My cash? That won’t go far …

US Treasury Looks To Hold More Cash To Deal With Future Crises (Reuters)

The U.S. Treasury wants to increase its daily cash holdings, a measure that would help Washington pay its bills during a crisis, a senior official said on Wednesday. If adopted, the new policy would help the government in the event an emergency shut down markets and left Washington unable to borrow money to pay creditors and other obligations. “Holding more cash on hand is a prudent measure,” Treasury Assistant Secretary Matt Rutherford said in a news conference. He said the measures would help public finances weather events like the Sept. 11, 2001 attacks or 2012’s Superstorm Sandy, both of which disrupted Wall Street trading. Washington borrows vast sums in weekly auctions to pay its bills. Investors who met with Treasury officials on Tuesday urged the government to increase its daily cash holdings to around $500 billion. That would be enough to cover about 10 days worth of outlays.

A change in policy, however, would not buy the government any additional time if it runs into a legal limit on borrowing next year. Current law will limit the amount of cash Treasury can hold when a cap on federal borrowing becomes binding again in March 2015. The U.S. government suspended the debt ceiling in February of this year. Even if the Treasury changes its cash management policy, it would be obligated to reduce its daily balance to around $33 billion in March, Rutherford said. The Treasury held about $66 billion in cash on Monday, a typical level in recent months. Rutherford said a decision had not been made yet on the policy, and that officials would be studying the matter. Rutherford also announced the United States will buy back debt in the coming quarter for the first time since 2002 to make sure its computer infrastructure is adequate for any future buyback operations.

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Americans Give Up Passports as Asset-Disclosure Rules Start (Bloomberg)

The number of Americans renouncing U.S. citizenship stayed near an all-time high in the first half of the year before rules that make it harder to hide assets from tax authorities came into force. Some 1,577 people gave up their nationality at U.S. embassies in the six months through June, according to Federal Register data published yesterday. While that’s a 13% decline from the year-earlier period, it’s only the second time there’s been a reading of more than 1,500, according to Bloomberg News calculations based on records starting in 1998. Tougher asset-disclosure rules effective as of July 1 under the Foreign Account Tax Compliance Act, or Fatca, prompted 576 of the estimated 6 million Americans living overseas to give up their passports in the second quarter. The appeal of U.S. citizenship for expatriates faded as more than 100 Swiss banks turn over data on American clients to avoid prosecution for helping tax evaders.

“Fatca and the Swiss bank disclosure program has intensified the search for U.S. nationals beyond all measure,” said Matthew Ledvina, a U.S. tax lawyer at Anaford in Zurich. “It’s shocking the levels of due diligence they are going through to ensure they have cleaned house.” Swiss banks are trawling through records going back to the 1990s to find clients with U.S. addresses and telephone numbers, and those who received schooling in the country, Ledvina said. Those identified as U.S. persons are either being asked to leave or placed in special U.S.-only sections of the institution, he said.

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

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You are the banks’ bitches.

Too Big To Fail Is Alive And More Dangerous Than Ever (David Stockman)

[..] … there is nothing to do except go back to the fundamentals. First and foremost, the September 2008 meltdown was not a main street banking problem; it was a crisis confined to the canyons of Wall Street, owing to the fact that the gambling houses domiciled there had massively bloated their balance sheets with toxic assets and risky derivatives trades, and then funded these balance sheets leveraged at 30:1 with huge amounts of “hot money” in the form of repo and unsecured wholesale loans. As I demonstrated in the Great Deformation, the “bank run” was almost entirely in the Wall Street wholesale market. By contrast, there was never any danger of retail runs at the corner branch bank offices, and the overwhelming majority of the 7,000 main street banks did not own the kind of toxic securitized assets that were roiling Wall Street. In fact, the wholesale market runs in the canyons of Wall Street were actually a positive, economically therapeutic event.

They had already taken out three of the reckless gambling houses – Bear Stearns, Lehman and Merrill Lynch -and were fixing to finish off the remainder, that is, Goldman and Morgan Stanley. Had the market been allowed to finish off the work of the economic gods in late September 2008, the TBTF problem would have been substantially alleviated. Today there might have existed a half dozen “sons of Goldman” in the form of M&A, trading, investment banking and asset management boutiques—run by chastened veterans who lost their lunch during the 2008 Wall Street cleansing. The excuse for Washington’s massive intervention against the free market in the form of TARP and the Fed’s monumental flood of liquidity, of course, is that the US economy was about to be annihilated by something called financial “contagion”. But that is a specious urban legend invented by the crony capitalists who controlled the Treasury and the money-printers who had fueled the housing and credit bubble at the Fed.

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Or was it volatility?

Did IPOs Cause Last Week’s Sell-Off? (The Tell)

When the S&P 500 and other U.S. markets skidded last week, news outlets, including this one, pointed to fears that the Federal Reserve could raise interest rates faster than expected and to worries over the fighting in Ukraine and Gaza. But a look at fund flows suggests an additional explanation. “We think the past week’s selloff was due as much to the $12.5 billion in new shares that underwriters dumped into the market as to anything related to the Fed or developments in Argentina, Portugal, or Ukraine,” said TrimTabs Research, a firm that tracks money flowing in and out of mutual funds and exchange-traded funds.

According to Trimtabs, 15 initial public offerings in the U.S. raised total of $7.3 billion in the week ended July 31. The biggest was the spinoff of Synchrony Financial from General Electric , which raised $3.3 billion. IPOs for Mobileye and Catalent each raised $1 billion. Including other share offerings, the week’s deals totaled $12.5 billion. It is of course impossible to pinpoint where all that money came from. But TrimTabs says spikes in new offerings are usually associated with declines in markets. This suggests that the selling must have been exacerbated by investors selling shares in one company to buy into another. TrimTabs, which relies on fund flow data to gauge sentiment, does not anticipate that the selloff will expand to a correction, defined as a 10% drop from the recent peak. Supply and demand indicators turned more bullish in July, while “new offerings should be far lower in the next five weeks than they were in the last week,” it said in its latest weekly report on fund flows.

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Will we ever know?

Argentina Bond Default Punishes Brazil Mailmen as Pension Fund Loses (BW)

Brazilian postal workers became unlikely victims of Argentina’s default last week after a $168 million fund used by their pension plan recorded a loss on most of its assets. The fund administered by Bank of New York Mellon’s local unit wrote down its value by about 51 percent after losses on securities linked to Argentine government debt, according to a regulatory filing yesterday. Postalis, the pension manager serving about 130,000 current and former postal workers in Brazil, is adopting legal measures in Brazil and the U.S. to mitigate losses, the fund’s press office wrote in an e-mailed response to questions. Argentina last week failed to make a $539 million interest payment on its bonds, prompting Standard & Poor’s and Fitch Ratings to declare the country in default for the second time since 2001.

The country’s bond prices have since retreated from a three-year high, and the International Swaps & Derivatives Association ruled that payouts must be made on a net $1 billion of derivatives linked to the country’s creditworthiness. “Based on the ruling of ISDA on the default event, you could see many more” investors declaring losses tied to Argentina, Marco Aurelio de Sa, the head of trading at Credit Agricole Private Banking in Miami, said in a telephone interview. Postalis is Brazil’s 14th-biggest pension group by investments under management, according to June 2013 data available from the Brazilian pension association Abrapp. It had 8 billion reais ($3.5 billion) of assets, according to the latest data available.

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US Judge Tells New York Bank To Hold Onto Argentine Bond Funds (Reuters)

The U.S. judge in charge of Argentina’s debt default case on Wednesday ordered Bank of New York Mellon to hold on to money deposited by the government rather than disburse the funds to holders of the country’s restructured bonds. The move by U.S. District Judge Thomas Griesa came after Argentina earlier in the day demanded the intermediary bank deliver $539 million in bond payments that were due in June but blocked by previous court rulings. Argentina defaulted on its sovereign bonds last week after losing a long legal battle with hedge funds that rejected the terms of debt restructurings in 2005 and 2010. The government has kept up pressure on Bank of New York Mellon to make payouts to the holders of restructured bonds despite Griesa’s order saying it has to pay the holdout hedge funds at the same time.

The holdouts are asking for repayment of 100 cents on the dollar rather than accept steep discounts offered in Argentina’s two restructurings. “The Republic will seek to hold BNY Mellon liable for any damages the Republic has suffered and may suffer as a result of BNY Mellon’s acts and omissions,” the government said in a letter to the bank on Wednesday. “BNY Mellon has placed its interests, and those of the plaintiffs … over those of the Exchange Bondholders, in violation of BNY’s duties as Trustee,” the letter said. Griesa disagreed, saying it was illegal for Argentina to deposit money intended for the exchange bondholders and ordered the bank to hold the funds.

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Way richer.

The 1% May Be Richer Than You Think (Bloomberg)

The 1% is literally rich beyond measure, depriving nations of billions in tax revenue and obscuring shifts in global inequality. Research conducted separately by European Central Bank economist Philip Vermeulen and London School of Economics’ Gabriel Zucman show the wealth of the super-affluent – hidden by tax shelters and nonresponse to questionnaires – is undercounted. Correcting for similar lapses in income data almost erases progress made from 1988 to 2008 in narrowing the gap between the world’s rich and poor, World Bank research found. “We always suspected there was some low-balling of the top 1%,” said Joseph Stiglitz, a Nobel-prize winning economist and author of “The Price of Inequality. ‘‘There’s a growing sense that our system is rigged and unfair.’’

Failure to get a better handle on the actual amount of wealth and income means economists and policy makers don’t have a proper understanding of the degree of disparity, which represents a hurdle in addressing it. For instance, knowing that earnings and assets are more concentrated could spur support for changing the tax structure, Zucman said. ‘‘If you don’t have a good idea of what the world looks like, it’s hard to determine what the effects of policies will be,” said Carter Price, senior mathematician at the Center for Equitable Growth in Washington, which focuses on issues of economic inequality. “Looking retrospectively, it’s hard to assess what the effects of a policy were.”

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Wait for the first western case.

Malaria Cases Mix With Ebola Amid ‘Slow Motion Disaster’ (Bloomberg)

As the death toll rises in West Africa amid the worst Ebola outbreak on record, a separate threat is compounding the problem: the rainy season and the malaria cases that come with it. In Sierra Leone, with the most Ebola cases in the epidemic, a fearful population is failing to seek medical attention for any diseases, health officials say. If they have malaria, the feeling is they don’t want to go near a hospital with Ebola cases. If it’s Ebola, they don’t believe the hospitals can help them anyway.

It’s a widening problem complicated by the fact that Ebola, malaria and cholera share common symptoms early on, including fever and vomiting, which can cause confusion among patients, said Cyprien Fabre, head of the West Africa office of the European Commission’s humanitarian aid department. “We now have increased mortality for these other diseases” as well, Fabre said by telephone from Freetown, the country’s capital, after visiting Ebola treatment centers in Kenema and Kailahun near the eastern border. “This is a slow-motion disaster.”

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Until we die.

Deep Water Fracking Next Frontier for Offshore Drilling (Bloomberg)

Energy companies are taking their controversial fracking operations from the land to the sea – to deep waters off the U.S., South American and African coasts. Cracking rocks underground to allow oil and gas to flow more freely into wells has grown into one of the most lucrative industry practices of the past century. The technique is also widely condemned as a source of groundwater contamination. The question now is how will that debate play out as the equipment moves out into the deep blue. For now, caution from all sides is the operative word. “It’s the most challenging, harshest environment that we’ll be working in,” said Ron Dusterhoft, an engineer at Halliburton, the world’s largest fracker. “You just can’t afford hiccups.” Offshore fracking is a part of a broader industrywide strategy to make billion-dollar deep-sea developments pay off. The practice has been around for two decades yet only in the past few years have advances in technology and vast offshore discoveries combined to make large scale fracking feasible.

While fracking is also moving off the coasts of Brazil and Africa, the big play is in the Gulf of Mexico, where wells more than 100 miles from the coastline must traverse water depths of a mile or more and can cost almost $100 million to drill. At sea, water flowing back from fracked wells is cleaned up on large platforms near the well by filtering out oil and other contaminants. The treated wastewater is then dumped overboard into the vast expanse of the Gulf of Mexico, where dilution renders it harmless, according to companies and regulators. The treatment process is mandated under Environmental Protection Agency regulations. In California, where producers are fracking offshore in existing fields, critics led by the Environmental Defense Center have asked federal regulators to ban the practice off the West Coast until more is known about its effects.

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And so we go.

Human Activity Triples Mercury Levels In Ocean Surface Waters (Guardian)

The amount of mercury near the surface of many of the world’s oceans has tripled as the result of our polluting activities, a new study has found, with potentially damaging implications for marine life as the result of the accumulation of the toxic metal. Mercury is accumulating in the surface layers of the seas faster than in the deep ocean, as we pour the element into the atmosphere and seas from a variety of sources, including mines, coal-fired power plants and sewage. Mercury is toxic to humans and marine life, and accumulates in our bodies over time as we are exposed to sources of it. Since the industrial revolution, we have tripled the mercury content of shallow ocean layers, according to the letter published in the peer-review journal Nature on Thursday. Mercury can be widely dispersed across the globe when it is deposited in water and the air, the authors said, so even parts of the globe remote from industrial sources can quickly suffer elevated levels of the toxic material.

For several years, scientists have warned that pregnant women and small children should limit their consumption of certain fish, including swordfish and king mackerel, because toxic metals including mercury and lead have been accumulating in these species to a degree that made their over-consumption dangerous to human health. Pregnant women are particularly at risk because the metals can accumulate in the growing foetus, and in sufficient quantities can cause serious developmental disorders. The scientists behind Thursday’s letter to Nature, including researchers from the prestigious Woods Hole Oceanographic Institution in the US, stopped short of warning on the dangers to human health from our pouring of mercury into the oceans. However, they said, further research could yield more advice on the potential impacts: “This information may aid our understanding of the processes and the depths at which inorganic mercury species are converted into toxic methyl mercury and subsequently bioaccumulated in marine food webs.”

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Aug 062014
 
 August 6, 2014  Posted by at 5:04 pm Finance Tagged with: , , , ,  2 Responses »


Natl Photo Mailman with “The Flying Merkel” motorcycle 1915

I don’t want to make it a habit to talk about other people’s writing, I don’t find that terribly interesting, but after yesterday’s In The Lie Of The Beholder, please forgive me for doing one more.

This morning, two reports came out of Europe that look pretty bad. Germany’s June manufacturing data fell 3.2% month-on-month (4.1% on exports), and Italy fell back into a recession. So you would think that finance writers try to explain to their readers what is going on, and what the consequences, for them, for the world, could be. CNBC’s Katy Barnato, however, chooses an entirely different path:

Germany Stumbles But Not ‘Canary In The Coal Mine’

Weak manufacturing data for Germany has heightened concerns that the country is losing economic steam, hit by an aggressive Russia …

Not wasting any time to start bashing, and on unfounded grounds: as we’ll see, weak German manufacturing in June had very little, if anything, to do with Russia. But the tone is set.

… and a slow recovery in the euro zone. German manufacturing orders fell 3.2% month-on-month in June – the largest decline since September 2011 – while the annual rate slumped 2.4%. This was worse than expected, despite warnings from the country’s central bank, the Bundesbank, that the economy had stalled in the second quarter. Business confidence data and forward-looking indicators have also suggested a softening trend.

The economy stalled in Q2, April, May, June. That is, before MH17, and before the stronger sanctions. Confidence data and forward-looking indicators suggest a softening trend.

Manufacturing orders from abroad fell 4.1% in June, which the German Economy Ministry linked to sanctions against Russia amid the Ukrainian crisis. It cited “geopolitical developments and risks” as the dominant factor in the “clear reticence in orders”.

That makes little sense. The pre-MH17 sanctions wouldn’t have been strong enough to cut manufacturing orders by anything close to 4.1%. By now I’m thinking the author – and not just her – tries to skirt the real issues. Note that orders both from abroad and from inside Germany fell, the latter a bit less than the former.

“We have had the Malaysian airlines tragedy and the escalation of sanctions since then (June) – so it is reasonable to assume that the geopolitical impairment to business activity may well get worse still before it gets better,” said Derek Halpenny of Bank of Tokyo-Mitsubishi in a research note after the data was released.

The “geopolitical impairment to business activity” may get worse, or it may not, but we were talking about the June manufacturing data. The author tries to lead the reader away from her topic, and towards “something else”. And continues with that:

In July, the European Union and the U.S. announced new penalties against Russia, including barring its biggest state-run banks from raising finance in the West’s capital markets. Europe has also banned selling arms to Russia, along with certain types of oil exploration technologies. German companies including Adidas and Lufthansa have already complained about the impact of Russia sanctions on their business. Russia is also the principle source of energy for Germany, with 31% of its gas imports coming from the country.

We know about the gas imports, but they have absolutely nothing to do with June manufacturing data. The imports were never in danger, and they didn’t get more expensive.

Germany also has the highest exposure to eastern Europe among the larger euro area countries, exporting around 15% of its goods to the region, although exports to Russia account for only 3.3% out of this, according to Societe Generale. “In this sense, Germany is not the canary in the coal mine, unless the sanctions indirectly also hit on eastern Europe more broadly,” said Societe Generale’s Anatoli Annenkov in a note on Tuesday. “This also explains the German government’s decision to stop a defense contract worth €120 million ($160 million) this week, suggesting confidence that sanctions will not hurt the economy materially in the medium-term.”

Now we may be getting somewhere. Demand in eastern Europe may indeed have faltered (unrelated to Russia, sanctions or the plane crash). A $160 million contract is peanuts, and probably elected because of that: full publicity value (defense contract!), with little money involved.

NOTE: Placing Russia in eastern Europe in just plain strange: “exporting around 15% of its goods to the region, although exports to Russia account for only 3.3% out of this.”

Moreover, if the author herself contends that Russia accounts for just 3.3% out of the 15% of German exports that go to the eastern Europe “region”, then what part of the 4.1% OVERALL export manufacturing slump can possibly be blamed on Moscow?

Concerns are rising that Russia will retaliate against the sanctions, however – a prospect that Annenkov and some other economists warned was more problematic. A Russian business newspaper reported on Tuesday that the country was considering banning European airlines flying through Russian airspace, and Moscow has already begun to target iconic Western food brands, including McDonald’s. “In our view, the direct impact from the sanctions on Germany will be rather limited. It is rather the possible reaction from Russia, which could affect German growth in the second half of this year,” warned ING Economist Carsten Brzeski in a note on Wednesday.

Dear author, all this may or may not be, but this is forward looking, and you still haven’t done anything to explain why German June manufacturing data fell.

In addition, Wednesday’s figures showed Germany suffered a 10.4% decline in orders from the euro area in June. “Today’s data shows that downside risks for the German economy do not only come from geopolitical tensions but also from longer-than-expected weak demand from euro zone peers,” said Brzeski.

Hold on, the author merely waited until the last paragraph, after an almost entire article full of innuendo, Russia bashing and confused and confusing dates and data, to reveal to her reader what is really happening. That reader by then already has such a head full of everything suggested – but not true – that the actually relevant information – mostly – escapes him/her. And it’s not as if a 10.4% decline in orders from the euro area in June is some small additional detail either, it’s the only piece of data that explains the falling manufacturing data.

This risk was highlighted on Wednesday by disappointing gross domestic product (GDP) data for Italy. The euro area’s third-biggest economy contracted by 0.2% quarter-on-quarter between April and June. “Italy’s provisional GDP data provide a timely reminder that the euro zone economy is still deep in the mire,” said ADM ISI Chief Economist Stephen Lewis in a note.

And there we go: the author knew all long what is relevant, and what isn’t. She just chose to hide the real data behind a wall of nonsense. The Eurozone is “deep in the mire”, Italy’s in a recession, the demise of Espírito Santo may cost Portugal, as we saw yesterday, 7.6% or so of its GDP, France – the EU’s 2nd economy – is doing very poorly, Greek bank stocks fell off a cliff today, etc. etc.

But apparently one can focus on other issues, especially if one doesn’t know, or chooses not to know nor mention, that any June data were subject to the first, weak, batch of sanctions only. Author, author!

That things can be done differently is shown by, of all places, the Daily Telegraph today. Same topic, same data, same look on life, but a completely different article.

Second Fall In German Factory Orders As Eurozone Flags – But Don’t Blame Russia

After what was dismissed as an irregular drop last month, Germany’s factory orders have seen another surprise fall in June. But the downturn has not been solely down to German exposure to ongoing tensions in Russia and Ukraine. Much of the poor performance is explained by crumbling demand from eurozone peers. Evelyn Herrmann, European economist at BNP Paribas, said that “the weakness was mainly driven by orders from within the eurozone” which fell by 10.4% in June.

Non-eurozone orders were stagnant in that month. Ms Herrmann said that overall the data “was very soft” and raises concerns about “the loss of steam in the German manufacturing sector”. The monthly data series is historically volatile, but Ms Herrmann said that “the bulk of today’s downward surprise is likely to be more than noise”. The powerhouse of the euro area, Germany saw total factory orders plunge by 3.2% in June, their worst performance since September 2011. That follows a 1.6% fall in May, according to data released by the Bundesbank this morning.

In both months, analysts had been expected to see growth in factory orders. Ms Herrmann said that “market consensus and us had expected a dull, but at least positive 1% rebound” in June after May’s weakness. Berenberg’s chief economist Holger Schmieding said that even before recent escalations over Ukraine that eurozone companies “were probably applying some extra-caution in their investment decisions”.

Mr Schmieding said that this “Putin factor”, and the introduction of even soft sanctions “probably raised alarm bells in many boardrooms” as firms prepare for the possibility of escalating tit-for-tat sanctions. Up to May, much of the weakness in second quarter data could be attributed to a particularly mild winter, which saw a downward bias introduced to the second quarter’s seasonally adjusted data. “This effect really should have faded in June,” said Ms Herrmann. Germany’s domestic orders were also weak in June, off by 1.9% after a 2.4% decline in May.

How simple do you want it? Or should I say: how hard was that, Ms Barnato? I know, I know, the Telegraph can’t help itself from bringing up the “Putin factor” either, but at least they start off with the relevant info, instead of hiding it on page 16, next to the obituaries. And only then do they veer off into insinuations and conjecture.

German Factory Orders Fall On Weak Eurozone Demand, Not Russia (Telegraph)

After what was dismissed as an irregular drop last month, Germany’s factory orders have seen another surprise fall in June. But the downturn has not been solely down to German exposure to ongoing tensions in Russia and Ukraine. Much of the poor performance is explained by crumbling demand from eurozone peers. Evelyn Herrmann, European economist at BNP Paribas, said that “the weakness was mainly driven by orders from within the eurozone” which fell by 10.4pc in June. Non-eurozone orders were stagnant in that month. Ms Herrmann said that overall the data “was very soft” and raises concerns about “the loss of steam in the German manufacturing sector”. The monthly data series is historically volatile, but Ms Herrmann said that “the bulk of today’s downward surprise is likely to be more than noise”. The powerhouse of the euro area, Germany saw total factory orders plunge by 3.2pc in June, their worst performance since September 2011. That follows a 1.6pc fall in May, according to data released by the Bundesbank this morning.

In both months, analysts had been expected to see growth in factory orders. Ms Herrmann said that “market consensus and us had expected a dull, but at least positive 1pc rebound” in June after May’s weakness. Berenberg’s chief economist Holger Schmieding said that even before recent escalations over Ukraine that eurozone companies “were probably applying some extra-caution in their investment decisions”. Mr Schmieding said that this “Putin factor”, and the introduction of even soft sanctions “probably raised alarm bells in many boardrooms” as firms prepare for the possibility of escalating tit-for-tat sanctions. Up to May, much of the weakness in second quarter data could be attributed to a particularly mild winter, which saw a downward bias introduced to the second quarter’s seasonally adjusted data. “This effect really should have faded in June,” said Ms Herrmann. Germany’s domestic orders were also weak in June, off by 1.9pc after a 2.4pc decline in May.

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Not good. Bring on Beppe.

Italy Q2 GDP Growth Negative, Economy Slides Into Recession (Bloomberg)

Italian gross domestic product unexpectedly dropped in the second quarter, showing the economy is in recession. Gross domestic product fell 0.2% from the previous three months, when it declined 0.1%, the national statistics institute Istat said in a preliminary report in Rome today. That compares with the median forecast of a 0.1% expansion in a Bloomberg survey of 22 economists. From a year earlier, output shrank 0.3%. With Italian youth unemployment above 40% and sovereign debt of about 2 trillion euros ($2.7 trillion), Prime Minister Matteo Renzi is under pressure to quickly turn around the euro region’s third-biggest economy.

Lower-than-expected growth may undermine his plans to bring the country’s deficit-to-GDP ratio to 2.6% this year and start reducing Europe’s second-biggest debt. Renzi has acknowledged that annual GDP growth will probably fall well below the Treasury’s 0.8% forecast, while the government’s debt reduction plans also seem to be yielding disappointing results, Wolfango Piccoli, managing director at Teneo Intelligence in London, wrote in a research note this week. “Under present conditions, and assuming a more realistic growth rate of 0.3%, the cabinet will need to find at least €15 billion to €16 billion to keep its 2014 deficit reduction plans on course,” he said.

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Two linked articles: A Brookings study of aging US business, and Tyler Durden’s conclusions, using the study, about the BLS Birth/Death model:

4 Million Fewer Jobs: How The BLS Overestimates US Job Creation (Zero Hedge)

Indeed, and sadly, just as the Fed’s artificial capital misallocation has forced companies to invest hundreds of billions into stock buybacks and other non-growth friendly (but very shareholder friendly) activities, so ZIRP has also shifted the balance of power so far to the side of older, less dynamic, less robut companies that the very premise of statistical inference of “entrepreneurship” via the Birth/Death adjustment is worthless. Or will be once the BLS realizes what the Brookings authors have concluded.

In the meantime, here is the bottom line: since Lehman, or starting in 2009, the Birth/Death adjustment alone has added over 3.5 million jobs. Or rather “jobs”, because these are not actual jobs – these are BLS estimates for how many jobs newly-formed businesses have created based purely on statistical estimations and hypotheses that the US economy in 2014 is as it was in 1960. Which means that the traditional dynamics used behind the Birth and Death adjustment are now merely Dead, and US employment is overestimated by as much as three and a half million jobs!

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The Other Aging of America: Increasing Dominance of Older Firms (Brookings)

“It is no secret that the population in the United States is aging; the product of a baby boom and increased life expectancy. The numbers validate the obvious: the Census Bureau projects that the share of America’s population accounted for by people aged 65 or over will explode from 13% in 2010 to more than 20% by 2025. The strains this aging of the population will place on the economy and our society are well known. Here we provide evidence of another type of aging that hasn’t received enough attention yet— the aging of American businesses, or the firm structure of the U.S. economy.

Previously, we documented the decline in entrepreneurship and in overall “business dynamism” in the American economy, finding that this has been occurring across a broad range of sectors, firm sizes, states, and metropolitan areas. Business dynamism is the inherently disruptive, yet productivity-enhancing process of firm and worker churn that reallocates capital and labor to more productive uses. Older firms are less dynamic than younger ones, and their increasing share in the American economy coincides with a three-decade decline in business dynamism. In this essay we highlight the flip side of an economy that has become less entrepreneurial: the shift of economic activity into mature firms. While this may not come as a surprise to some, we think the sheer magnitude will. Though more research is needed, we think that an American economy that has become less entrepreneurial and more concentrated in mature firms could support the “slow growth” future that many economists have projected.”

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Well, that makes perfect sense!

UK Productivity ‘Abysmal’ – But Economy Growing Well (CNBC)

U.K. workers are still far less productive than before the financial crisis of six years ago even though the country’s economic recovery is “entrenched”, a leading think tank said on Tuesday. In a quarterly report, the National Institute of Economic and Social Research (NIESR) said labor productivity—a measure of the amount of goods and services produced by one hour of labor—was still around 4.5% below the pre-crisis peak of 2007. “Productivity performance, therefore, remains abysmal,” said NIESR in the report, which was published on Tuesday. The Institute forecast that pre-crisis productivity levels would be regained, but not before the latter half of 2017. “Given the continuing puzzle about the causes of poor productivity performance, large uncertainties remain,” it said. Labor productivity growth in the U.K. has been particularly weak since the start of the global financial crisis. Reasons remain unclear, and economists, including those at the Bank of England, refer to the “productivity puzzle”.

Despite the “puzzle”, U.K. economic growth has been 0.5% or more per quarter for the last six consecutive quarters—nearly twice the rate seen between 2010 and 2012. The labor market continues to improve, with total employment now more than 4% higher than it was at the start of 2008. “The fall in labor productivity during the recent recession has been larger than in any other post-war recession and the recovery has been more protracted than previous experiences,” said the Bank of England its second quarter bulletin. “Although measurement issues may explain some part of the shortfall in productivity relative to a continuation of its pre-crisis trend, a large part still remains unexplained.” The Bank hypothesized that trend growth in productivity had started falling before the crisis, perhaps due to slowing North Sea extraction output, which the U.K. relies on for much of its oil and gas.

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He’s right. The UK has much more to fear from Boris himself.

London Mayor Says UK Has Nothing to Fear From EU Exit (Bloomberg)

London Mayor Boris Johnson said the U.K. could thrive outside the European Union and should be prepared to leave the bloc if Prime Minister David Cameron fails to win sufficient changes to the way it functions. The best option for Britain, where Cameron has pledged a referendum on membership by the end of 2017, would be to stay within a “reformed” EU, Johnson said today, according to extracts of a speech e-mailed by his office, and the U.K. should be able to achieve that. “But if we can’t, then we have nothing to be afraid of in going for an alternative future,” Johnson said at Bloomberg’s European headquarters in London. “It is crucial to understand that if we can’t get that reform, then the second option is also attractive.”

London’s economy is set to grow by an average 2.75% a year in a reformed EU or by 2.5% in a managed exit with the U.K. remaining open to the bloc and the rest of the world, according to a report by Johnson’s economic adviser, Gerard Lyons, published today entitled “The Europe Report: a Win-Win Situation.” That compared with 1.9% under the status quo or 1.4% growth if Britain follows inward-looking policies after leaving the EU. Johnson, who is among the favorites to succeed Cameron as leader of the Conservative Party, is setting out his position on an issue that has dominated and divided the party for 30 years. The party needs to balance the views of voters — who have shifted support to the anti-EU U.K. Independence Party, which campaigns to leave the bloc — with those of business leaders, who want Britain to remain inside the 28-nation EU.

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Will Beijing let them default?

China Default Storm Seen as $1 Billion of Private Bonds Mature (Bloomberg)

The small companies that dominate China’s private market for high-yield bonds face rising default risks as their debt obligations soar to a record and economic growth slows to the lowest in more than two decades. Privately issued notes totaling 6.2 billion yuan ($1 billion) come due next quarter, the most since authorities first allowed such offerings from small- to medium-sized borrowers in 2012, according to China Merchants Securities Co. The guarantor of debentures sold by Xuzhou Zhongsen Tonghao New Board Co. stepped in to help after the building-materials producer based in the eastern province of Jiangsu missed a coupon payment in March. Three other issuers have also faced “payment crises” this year, China Merchants said.

Premier Li Keqiang has sought to expand financing for small companies, which account for 70% of China’s economy, as expansion is set to cool to the slowest since 1990 at 7.4% this year, according to a Bloomberg survey. The nation’s bond clearing house last month suspended valuation of privately placed securities sold by an auto-parts exporter after it failed to clarify media reports regarding a possible default. A polyester maker with similar notes had a bankruptcy application accepted in March. “The current risks exposed in the private-bond market are probably a prelude to a storm,” said Sun Binbin, a Shanghai-based bond analyst at China Merchants. “There’s been improvement in only some sectors of the economy, not in all.”

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Internal boom and bust.

China’s Offshore “Dim Sum” Debt Market Not Yet A Global Play (Reuters)

China’s offshore bond market looks to be booming with record issuance and strong demand, but rather than the global market that was hoped for it has been a speculative play on the yuan dominated by Chinese issuers and investors. The “dim sum” bond market has been largely shunned by big U.S. and European institutional investors, and worries about the lack of information on issuers, debt structures and rights in case of a default mean that is unlikely to change soon. Despite record half-yearly issuance of 359 billion yuan ($58 billion) in the first six months of 2014, the perception that it is an insider’s market has hampered its global development and intended role in helping internationalize the yuan.

“You’ve got to be a fairly specialist investor to be interested in these bonds if you are in Europe because a lot of issuers are below investment grade, an area we wouldn’t seek to invest in,” said Andrew Main, a managing director at London-based Stratton Street with assets of $1.55 billion at end May. A slowdown in the economy and volatility in the yuan has tempered enthusiasm for Chinese debt among foreigners. And with Beijing starting to allow companies to default on debts instead of bailing them out, as part of its push to introduce more market discipline, investors have to better assess their risks.

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” … under the assumption that they stood to get annual returns in excess of 10%”.

Banco Espirito Santo Loan Mystery Confronts Derivatives Buyers (Bloomberg)

Some investors are waking up from a stimulus-induced malaise and realizing they don’t exactly know what risk they’ve assumed. There’s a prime example in buyers of credit-linked notes created by Banco Espirito Santo SA last year. Investors who bought the securities agreed to protect against losses on a €2 billion ($2.68 billion) pool of commercial loans made by the Portuguese bank, according to marketing documents reviewed by Bloomberg News. That was under the assumption that they stood to get annual returns in excess of 10%. Now that Banco Espirito Santo’s finances are unraveling, investors in the Lusitano Synthetic II Ltd. deal are understandably getting nervous about the specific loans they’re guaranteeing. They asked for details last month, which the issuer is declining to give them, according to a July 23 notice on the Cayman Islands Stock Exchange.

The Lisbon-based lender’s sudden fall is a rude awakening for bondholders who’ve generally been rewarded for delving into the riskiest, most-illiquid securities for the past five years. The easy-money policies of central banks across the globe have propped up debt prices, suppressing borrowing costs so much that investors have piled on more and more risk to meet their return targets. Credit-linked notes work like traditional bonds with interest payments, except the principal gets wiped out when losses on the underlying debt accumulate enough. Such deals, which use credit-default swaps, have been used as way for banks to raise cash while offloading some of the risk tied to the loans they’ve made. In Banco Espirito Santo’s case, investors who bought the €184 million of synthetic securities agreed to absorb losses on thousands of loans, according to the marketing documents. The notes were sold with expected returns of more than 10%….

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Smoldering story.

Hedge Funds Betting Against Banco Espírito Santo in Line for Big Gains (WSJ)

A handful of hedge funds may have made tens of millions of dollars on the collapse of troubled Portuguese lender Banco Espírito Santo. One of the biggest funds to bet the bank’s shares would fall was Marshall Wace LLP, which initially made the wager on May 15, according to a filing with the Portuguese regulator. The shares were then trading at around 99 euro cents. The London-based hedge fund would have made a profit of around €27 million ($36 million) from the position if it closed the position at 12 cents, the price when the shares were suspended. The firm, which manages $18 billion in assets and is headed by founders Paul Marshall and Ian Wace, increased its position from 0.51% of the bank’s share capital to 0.85% by mid-June, before slowly reducing it to 0.51% as of July 30. Trading in Espírito Santo’s shares was finally halted from trading last Friday at 12 euro cents.

The fund’s gains are based on the opening share prices on the days when it traded the shares and don’t allow for borrowing or brokerage costs. It couldn’t be determined at precisely what price Marshall Wace opened the position, nor whether it actually closed it. In a short sale, an investor borrows a stock and sells it in the hopes the price will fall. If the bet works out, the investor can buy the shares at a lower price, repay the loan and pocket the difference. On Sunday the Portuguese central bank unveiled plans to break up the troubled bank into a bad bank, which will be wound down, and a good bank, and to pump in billions of euros of state money. Another hedge fund that may have benefited is TT International, which put on a short position as far back as July last year and increased it in June this year, according to filings.

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Let’s see how bad we can make it.

How Student Loans Are Shaping US Mortgage Approvals (WSJ)

The loan-application data show clear signs of growing student-debt burdens. Through the first half of this year, applicants with student debt carried more than $35,000 in student loans. But there is very little difference in total debt burdens between the funded and not-funded pools. A key metric that mortgage underwriters use to evaluate a borrowers’ ability to repay a loan is their total debt-to-income ratio, and it’s this metric that can make student loans a big negative in the loan approval process. New rules that took effect this year give lenders greater legal liability if they don’t properly verify a borrower’s ability to repay a mortgage. Those rules give a greater legal shield to lenders if they verify a borrower’s total debt-to-income ratio is no greater than 43%, which means borrowers with total debt that exceeds 43% of their income could put them at greater risk of being denied.

The LoanDepot data shows little difference in average debt-to-income ratios or credit scores for loans that were and weren’t funded. But it does show that, so far this year, loan applications that weren’t funded had almost $500 in monthly student loan payments, compared to around $300 in monthly payments on applications that were approved. “Between the approved universe and the denied universe, the [borrower’s] credit is the same. The fundamental difference is a few hundred dollars in student loan debt that pushed the debt-to-income above the approved threshold,” said Anthony Hsieh, the chief executive of LoanDepot.com. These numbers mirror the concerns of some housing analysts, who say that young adults often don’t realize how signing up for thousands of dollars of student debt could hurt their ability to borrow later.

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Really?

US Fails To Report $619 Billion In Spending On Transparency Site (WaPo)

The White House budget office launched USASpending.gov in 2007 to track federal spending after scores of lawmakers, including then-Sen. Barack Obama, successfully pushed through a bipartisan bill to ensure greater transparency with the funding. At last check, less than 8% of the site’s spending information was accurate, and federal agencies had failed to report nearly $620 billion in grants, loans and other forms of assistance awards, according to a recent report from Congress’s nonpartisan Government Accountability Office. The Federal Funding Accountability and Transparency Act of 2006, sponsored by Sen. Tom Coburn (R-Okla.) and signed into law by President George W. Bush, required the Office of Management and Budget to set up a Web site with data on federal awards and develop guidance on reporting requirements. President Obama later set a goal of 100% accuracy by the end of 2011.

But the legislation is not working as well as lawmakers and the administration had hoped. The GAO said a review of the 2012 data found “significant underreporting of awards and few that contained information that was fully consistent with the information in agency records.” The findings drew criticism from members of the Senate Homeland Security and Government Affairs Committee, including Coburn, the panel’s ranking Republican. Coburn said the reporting problems hinder Congress’s ability to determine the pros and cons of spending decisions.”It is disappointing that the federal bureaucracy is so vast and unaccountable that the administration cannot enact the president’s signature accomplishment as a senator requiring the government to disclose how and where it spends money,” he said in a statement on Monday.

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Too big to fail lives!

U.S. Tells Big Banks to Rewrite ‘Living Will’ Bankruptcy Plans (WSJ)

In a sweeping rebuke to Wall Street, U.S. regulators said 11 of the nation’s biggest banks haven’t demonstrated they can collapse without causing damaging economic repercussions and ordered them to try again. The Federal Reserve and the Federal Deposit Insurance Corp. said bankruptcy plans submitted by big banks make “unrealistic or inadequately supported” assumptions and “fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for” an orderly failure. The regulators raised the specter of slapping banks with tougher rules on capital and leverage or restrictions on growth—and even eventually forcibly breaking them up—should they fail to make significant progress to address the shortcomings by July 2015.

The findings applied to 11 banks with assets greater than $250 billion, including Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, State Street, and the U.S. units of Barclays, Credit Suisse, Deutsche Bank, and UBS. The firms all received letters detailing shortcomings in their so-called “living wills.” “Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support,” said Thomas Hoenig, the No. 2 official at the FDIC, in a statement. Representatives of banks declined to comment or had no immediate comment Tuesday.

The Financial Services Forum, a big bank trade group, said banks are safer now than before the crisis and “the industry remains strongly committed to ensuring the financial system is less complex, safe, transparent, accountable and capable of fulfilling its role of promoting economic growth and weathering substantial stress scenarios without taxpayer dollars being at risk.” The rebuke is almost certain to fuel the debate over whether some firms remain “too big to fail” – or so big their collapse would make government support necessary to avert broad economic damage. It will likely feed the appetite of some lawmakers to push for more aggressive action to force structural changes at the biggest banks.

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Standard Chartered Faces New US Legal Issues as Profit Plunges (CNBC)

Standard Chartered is facing another substantial fine from U.S. regulators as it announced its first-half profits fell by 20% from the same period in 2013, to $3.27 billion. Standard Chartered confirmed “certain issues have been identified with respect to the group’s post-transaction surveillance system” in a statement. The issues are likely to result in a nine-figure fine from the New York State Department of Financial Services, led by Benjamin M.Lawsky, who previously tackled the bank over sanctions violations, according to reports. Standard Chartered said that its focus on the conduct of its employees had intensified. These particular issues are with its money-laundering control process, which is separate from its sanctions screening.

Part of the penalty for the problem is likely to include an extension of the term of the monitor appointed to oversee the bank in the light of its earlier fine. Standard Chartered flagged its profits fall in June, after falling revenues in its business, which is around three quarters emerging markets-focused. The bank paid $340 million to the regulator in 2012, over transactions linked to Iran. Chief executive Peter Sands, the longest-serving British bank chief executive, has faced question marks over his future following the bank’s recent troubles. Its board said just a couple of weeks ago that “it is united in its support” for him and chairman John Peace.

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Good read.

Fear And Loathing On The Marketing Trail (Ben Hunt)

For all of us that rely directly or indirectly on healthy, growing public markets for our livelihood, it’s high time to recognize that these markets are neither healthy nor growing. They are hollow and declining. A 50-year bull market in the market itself ended with policy responses to the Great Recession, and we are now in the 5th year of a bear market in the market itself, a bear market that shows no sign of abating but rather of accelerating. I’m calling this an existential risk, because it is, but it’s also a phenomenal opportunity for any investment firm that can make an emotional, animal-spirited connection with public market investors. The capacity for faith is there. Investors will absolutely come back to public markets if they’re given a rationale that works not only for the head but also for the gut, if they’re given a philosophy that is not only smart but also something they can believe in.

What is that investment philosophy that can inspire as well as inform? I don’t know where it ends, but I know where it starts. It starts with what Tennyson called honest doubt. It starts with what Confucius described as his first principles – faithfulness and sincerity. There’s absolutely nothing sincere about the public sphere today, in its politics or its economics, and as a result we have lost faith in our public institutions, including public markets. It’s not the first time in the history of the Western world this has happened … the last time was in the 1930’s … and over time, perhaps a very long period of time, a modicum of faith will return. This, too, shall pass. But in the meantime, investment firms immersed in the public markets had better start adapting to these new political realities.

How? By embracing honest doubt and rejecting the didactic, crystal ball-driven approach to asset allocation and broad portfolio construction that is so rampant in our industry. By embracing sincerity and rejecting the hard sell of “alpha”, as if market-beating returns in this politically-driven investment environment were just a matter of listening to this analyst’s opinion rather than that analyst’s opinion. Adaptation to difficult times is never easy, and the implications of embracing honest doubt and sincerity within an investment philosophy will start to seem rather uncomfortable and weird to most investment firms pretty quickly. But as Hunter S. Thompson said in his most famous line, when the going gets weird, the weird turn pro.

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Moscow May Force European Airlines To Fly Around Russia (Reuters)

Russian Prime Minister Dmitry Medvedev threatened on Tuesday to retaliate for the grounding of a subsidiary of national airline Aeroflot because of EU sanctions, with one newspaper reporting that European flights to Asia over Siberia could be banned. Low-cost carrier Dobrolyot, operated by Aeroflot, suspended all flights last week after its airline leasing agreement was cancelled under European Union sanctions because it flies to Crimea, a region Russia annexed from Ukraine in March. “We should discuss possible retaliation,” Medvedev said at a meeting with the Russian transport minister and a deputy chief executive of Aeroflot. The business daily Vedomosti reported that Russia may restrict or ban European airlines from flying over Siberia on Asian routes, a move that would impose costs on European carriers by making flights take longer and require more fuel.

Vedomosti quoted unnamed sources as saying the foreign and transport ministries were discussing the action, which would put European carriers at a disadvantage to Asian rivals but would also cost Russia money it collects in overflight fees. Shares in Aeroflot – which according to Vedomosti gets around $300 million a year in fees paid by foreign airlines flying over Siberia – tumbled after the report, closing down 5.9% compared with a 1.4% drop on the broad index. At the height of the Cold War, most Western airlines were barred from flying through Russian airspace to Asian cities, and instead had to operate via the Gulf or the U.S. airport of Anchorage, Alaska on the polar route. European carriers now fly over Siberia on their rapidly growing routes to countries such as China, Japan and South Korea, paying the fees which have been subject to a long dispute between Brussels and Moscow.

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And that’s just in one county ….

Dozens Of Suburban Police And Fire Pension Funds Drying Up (SunTimes)

There are 217 police and fire pension funds in suburban Cook County. The taxpayer-supported systems, with collective assets of nearly $5 billion, are intended to provide public safety workers and their families with stable retirement incomes. But a Better Government Association analysis found that dozens of local police and fire pension funds are in financial peril, putting retirement incomes at risk – as well as the fiscal health of numerous municipalities. Rescuing the troubled funds may require tax hikes, service cuts or both, say experts. Already, some public safety agencies are looking to privatize or merge with neighboring departments in an effort to cut personnel and ease future pension payouts. Whatever the method, taxpayers can expect to bear a heavier cost burden because of the severe local pension shortfall. In all, unfunded liabilities for police and fire pension funds throughout suburban Cook County total $3.3 billion, according to a BGA analysis of the most recent municipal pension fund data.

Fifty-eight or roughly a quarter of the systems were less than half-funded, meaning there was fewer than 50 cents for every dollar owed in long-term benefits, according to the analysis. Generally, a minimum 80% funding is considered healthy. A state law approved in 2010 requires such pension plans to be 90% funded – by 2040. At the current low funding levels the systems aren’t cushioned against investment losses, and may have to liquidate assets to pay benefits, raising the risk that some systems could run dry. In such a scenario, taxpayers could be responsible for any shortfall. If and how municipalities and pension funds can declare bankruptcy and get out from under financial obligations is unchartered terrain. “The gravity of the situation goes from grave concern to outright terror,” says Roger Huebner, deputy executive director of the Illinois Municipal League. “Some of the funds are in such bad shape I don’t know how they recover.”

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Brown coal, lignite, we’ll be burning lots of the stuff. The real irony is that Germany needs it to offset the dangers to the grid caused by wind and solar.

Dirtiest Fuel Threatens 700-Year-Old Villages in Europe (Bloomberg)

Europe’s energy dilemma — burning the dirtiest coal while meeting pollution targets – is crystallizing in opposition to a plan that would uproot 700-year-old villages and dig two pits the size of Manhattan. PGE SA and Vattenfall AB, the Warsaw- and Stockholm-based utilities, want to tap Europe’s richest lignite deposit, along the German-Polish border. They’re opposed by communities already suffering sporadic sand storms and crumbling roads, in an area where the 12 kilometer (7.5 miles) long Jaenschwalde mine has dominated the landscape for three decades. Locals will form an 8-kilometer cross-border human chain on Aug. 23 in protest.

The battle reflects the divide across Europe. Polish Prime Minister Donald Tusk sees coal, used to generate 90% of his nation’s power, as a way for Europe to depend less on Russian natural gas. German Chancellor Angela Merkel’s government calls lignite “the black gold” that will help smooth out fluctuations from wind and solar generation. The European Union, to which both belong, wants tighter pollution rules that make coal pricier to burn. “We feel like Asterix and Obelix fighting the Roman Empire,” said Andreas Stahlberg, an engineer analyzing the impact of the expansion for the German municipality of Schenkendoebern, referring to the French comic strip characters resisting powerful invaders. “Since Poles are dealing with the same problem and the mines will be so close, we think this is an international issue,” he said in an interview in Gubin, Poland.

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They have reason to be scared.

Greek Bank Shares Drop Sharply On ECB Stress Test Fears (RT)

Greek bank shares fell sharply on Wednesday, leading the broader Greek equities market lower, with traders citing jitters over the European Central Bank’s region-wide stress test and weakness in other European markets. The Athens bourse’s banking index was down 8.2% at 134.82 points at 0851 GMT with shares in Alpha Bank shedding 10% and National Bank losing 5.7%.

“There are worries banks may need additional capital after the ECB’s stress test in November and there is also nervousness because of resurging geopolitical tension and weak European bourses,” said Theodore Krintas, head of wealth management at Attica Bank. Greece’s top four banks, which have already been through two rounds of recapitalisation, will be part of the ECB’s stress region-wide health check later this year. “The steep drop is hitting stop losses in relatively thin trading volume but I think the selling pressure is overdone,” said fund manager Costantine Morianos, head of AssetWise asset management.

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Boy!

Bodies Dumped In Streets As West Africa Struggles To Curb Ebola (Reuters)

Relatives of Ebola victims in Liberia defied government orders and dumped infected bodies in the streets as West African governments struggled to enforce tough measures to curb an outbreak of the virus that has killed 887 people. In Nigeria, which recorded its first death from Ebola in late July, authorities in Lagos said eight people who came in contact with the deceased U.S. citizen Patrick Sawyer were showing signs of the deadly disease. The outbreak was detected in March in the remote forest regions of Guinea, where the death toll is rising. In neighboring Sierra Leone and Liberia, where the outbreak is now spreading fastest, authorities deployed troops to quarantine the border areas where 70% of cases have been detected. Those three countries announced a raft of tough measures last week to contain the disease, shutting schools and imposing quarantines on victim’s homes, amid fears the incurable virus would overrun healthcare systems in one of the world’s poorest regions.

In Liberia’s ramshackle ocean-front capital Monrovia, still scarred by a 1989-2003 civil war, relatives of Ebola victims were dragging bodies onto the dirt streets rather than face quarantine, officials said. Information Minister Lewis Brown said some people may be alarmed by regulations imposing the decontamination of victims’ homes and the tracking of their friends and relatives. With less than half of those infected surviving the disease, many Africans regard Ebola isolation wards as death traps. “They are therefore removing the bodies from their homes and are putting them out in the street. They’re exposing themselves to the risk of being contaminated,” Brown told Reuters. “We’re asking people to please leave the bodies in their homes and we’ll pick them up.”

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Jul 302014
 
 July 30, 2014  Posted by at 5:01 pm Finance Tagged with: , , , , ,  4 Responses »


Arnold Genthe Long Beach, New York Summer 1927

Oh yay, US Q2 GDP supposedly rose by 4%. Aw, come on. That’s only 7% more than in Q1 (or 6.1% in the once again revised Q1 number). Wonder what made that happen? Don’t bother. It’s complete nonsense. New home sales and lending home sales went down – again – recently, wages are not going anywhere, the ADP jobs report was – again – low today. There’s nothing that adds up to a 6% or 7% difference between Q1 and Q2.

The real story of the American economy lies elsewhere. The economy is sinking away in a debt quagmire. If it were a body, the economy would be in up to its neck in debt by now, with the head tilted backwards so it can still breathe. Barely. But your government doesn’t want you to know. There are a lot of things that illustrate this.

First , let’s go back a few days to the Russell Sage Foundation report, Wealth Levels, Wealth Inequality And The Great Recession, that I mentioned in Washington Thinks Americans Are Fools. I posted a pic from the report and said it “makes clear ‘recovery’ is about the worst possible and least applicable term to use to describe what is happening in the US economy”:

Households at the “median point in the wealth distribution – the level at which there are an equal number of households whose worth is higher and lower”, saw their wealth plummet -36% from 2003 to 2013. From the highest point, in 2007, to 2013 the number is -43%. Five years after 2008 and Lehman, five years into the alleged recovery, which raised US federal, Federal Reserve, and hence taxpayer, obligations by $10-$15 trillion or more, US median household wealth was down -36% from 2003. And that’s by no means the worst of it:

If you look at the 5th and 25th percentile ‘wealth’ numbers (much of it negative), you see that they went down from 2003 to 2007, while the median was still rising. For both, wealth in the 2003-2013 timeframe deteriorated by some -200% (or two-thirds, if you will). -$9,479 to -$27,416 for the poorest 5%, $10.219 to $3,2000 for the lowest 25%.

What I didn’t do was add up the numbers, and though when you’re using ‘median’ or ‘typical’, it’s hard to be sure about those numbers, we can derive some things from it that won’t be too far off. The -36% loss suffered between 2003 and 2013 by the ‘typical household’, which lowered the inflation-adjusted net worth from $87,992 to $56,335 (a loss of $31,657 per household), meant, assuming 120 million US households, that some $3.8 trillion in wealth went up in air. Because wealth (though partially virtual) went up from 2003 to 2007, the loss between 2007 and 2013 was larger: at $42.537 per household, the total loss came to $5.1 trillion. And don’t forget, that happened during the so-called ‘recovery’.

It should surprise no-one, therefore, that a report issued by the Urban Institute and the Consumer Credit Research Institute states that over a third of Americans in 2013 had debt in collection (i.e. reported to a major credit bureau). WaPo’s take:

A Third Of Americans With Credit Files Had Debts In Collections in 2013

About 77 million Americans have a debt in collections, a new report finds. That amounts to 35% of consumers with credit files or data reported to a major credit bureau, according to the study released Tuesday by the Urban Institute and Encore Capital Group’s Consumer Credit Research Institute. “It’s a stunning number,” said Caroline Ratcliffe, senior fellow at the Urban Institute and author of the report. “And it threads through nearly all communities.” The report analyzed 2013 credit data from TransUnion to calculate how many Americans were falling behind on their bills. It looked at how many people had non-mortgage bills, such as credit card bills, child support payments and medical bills, that are so past due that the account has since been closed and placed in collections.

Researchers relied on a random sample of 7 million people with data reported to the credit bureaus in 2013 to estimate what share of the 220 million Americans with credit files have debts in collection. About 22 million low-income adults who did not have credit files were not represented in the study. This is the first time the Urban Institute calculated the collection figure, but Americans may have been struggling with debt for a while: Researchers noted that the 35% is basically unchanged from when the Federal Reserve studied the issue in 2004 and found that 36.5% of people with credit reports had debt in collections. The debts sent to collections ranged from $25 on the low end and to more than $125,000 on the high end. [..]

… not all consumers get hassled: some people may not even learn they’ve been sent to collections until they check their credit reports, the study noted. That doesn’t mean the debts didn’t cause any setbacks. Bills that are sent to collections can stay on a person’s credit report for up to seven years, hurting a consumer’s credit score and in turn hindering their chances of accessing loans, credit cards and other forms of borrowing. A bad credit score can also hurt a person’s ability to land a job or their odds of getting approved for an apartment [..]

Note that not all debt is included, and perhaps quite a lot is not: in the gutters of America, there are for instance 22 million low-income Americans who don’t even have a credit file. They are most likely to use things like payday loans, which are also not included. But there is more slipping through the reporting cracks, as I noticed the end of the WaPo piece unveils, just like Tyler Durden did:

Deadbeat Nation: A Shocking 77 Million Americans Face Debt Collectors

But how is it possible that tens of millions of Americans are in such dire straits? After all, banks have been reporting better delinquency data for years. The answer: the study found that the share of people with debt past due, meaning they are at least 30 days late with payment on a non-mortgage debt, was much smaller: 1 in 20 people. That includes people who are late with credit card bills, student loan payments and auto loans. The majority of those people, 79%, also had debt in collections. However, because certain bills, such as medical bills and parking tickets, may not show up on a person’s credit score until they are sent to collections, the total share of people falling behind on their bills may actually be much higher.

… the stunner is that the share of Americans with debt in collections is 7 times greater than those with merely debt past due …

I’ll add something else: since only 220 million of the 320 million Americans have a credit file, it’s safe to assume that if you add dependents, children, close to 120 million Americans, perhaps even more (an average of one for every household), live in a household that has debt so far past due that debt collectors have been notified. In other words, not just debt, but bad debt.

AP points out the link to the jobs market and wages:

The Urban Institute’s Ratcliffe said that stagnant incomes are key to why some parts of the country are struggling to repay their debt. Wages have barely kept up with [rising prices] during the five-year recovery, according to Labor Department figures. And a separate measure by Wells Fargo found that after-tax income fell for the bottom 20% of earners during the same period.

But what I find more interesting is the positive twist USA Today manages to give to the story (just when you thought all was lost, here comes the cavalry):

A Third Of Americans Delinquent On Debt

When it comes to overall debt levels, most comes from mortgages, which make up 70%, on average, of Americans’ debt load. Wealthier states tend to have the highest amount of debt and percentage of debt held in mortgages, but the researchers point out that Americans with higher debt may also have higher incomes and better access to credit.

Isn’t that just a swell trick? The report the paper comments on is about the 77 million Americans who have debt in collection, but before you know it they switch to overall debt, and insinuate that because a lot of it is in mortgages, things are not that bad. And the trick gets better, even one of the report’s authors gets sucked in:

“Total debt really mimics mortgage debt,” says Caroline Ratcliffe, a senior fellow at the Urban Institute and one of the authors of the report. Ratcliffe classifies mortgage debt as what’s generally considered “productive debt.” “We talk about credit and access to credit as a good thing, but debt as a bad thing,” she says. “Access to credit can result in productive debt that moves us forward.”

I read somewhere the past week that credit is, in principal, good, and it’s the American way etc. And as we see here, mortgage debt is seen as productive, even by the report’s authors. But that’s not what the report was about!! (picture me shouting here).

I think that in today’s economy it’s a grave mistake to classify all mortgage debt as productive. I definitely see that as an idea of long lost times. After all, the same classification must have been used in 2007, but then right after a lot of that mortgage debt turned sour. It wasn’t so productive after all.

To see debt as productive, you have to have the expectation that it’s going to make money for the debtor. Or better yet, actually produce something of value. And to think that today’s mortgage debt will produce profits, you need the idea that home prices will rise.

But when you look at the wealth loss suffered by Americans as seen above, and you combine that with the huge rise in bad debt, where would you want to get that rise in home prices from? There’s only one place, isn’t there: more debt. And that trick won’t wash ad infinitum.

Classifying all of today’s mortgage debt as productive, de facto seeks not just to redefine the word productive, but to turn it on its head.

There’s one sector of the US economy that is going kind of strong: car sales. But why do you think that is? That’s right: debt. Is car debt classified as productive too, perhaps? Bloomberg:

Is Your Car an Underwater Time Bomb?

Even as job and wage growth have stagnated, auto sales have uncoupled themselves from those traditional economic drivers to become one of the few sources of strength in the macroeconomic picture. As the economists Amir Sufi and Atif Mian point out in their new book “House of Debt,” one of the big factors supporting overall retail spending in the U.S. since 2008 has been the expansion of auto credit. Sufi and Mian don’t celebrate this fact – they rightly see it as a symptom of broader secular stagnation in the U.S. economy. Indeed, a few recent statistics demonstrate the very precarious underpinnings of the auto industry’s prosperity:

  • The average auto-loan term has increased every year since 2010, reaching 66 months in the first quarter of this year, according to Experian Automotive. In the same period, loans with terms of 73 to 84 months grew 28%, while loans with terms from 25 to 72 months actually fell.
  • Equifax reports that U.S. auto loan volumes are at an all-time high, with some $902.2 billion outstanding at the end of the first half of 2014, up 10% year-over-year.
  • The New York Times reports that subprime auto loans have grown by 130% in the last five years, with subprime lending penetration reaching 25% last year.
  • Leases make up another quarter or so of auto “retail sales” according to Experian, another metric that is currently at all-time highs.
  • 27% of trade-ins on new vehicle purchases in Q1 2014 had negative equity, according to the Power Information Network, another troubling indicator on the rise in recent years.

With half of new car sales supported either by leases or subprime credit, and ballooning loan terms leaving an increasing number of new car buyers underwater on their trade-ins, it’s clear that auto demand is hardly at a sustainable, organic level. Last year, 38.8% of dealer profits came from financing operations, according to the National Automobile Dealers Association, and General Motors has relied on some $30 billion in largely subprime receivables held by its GM Financial unit to show an increase in revenue in the first two quarters of this year.

The only thing that keeps the American economy from collapsing outright and face first in this debt crisis is more debt. And it’s not just America: China, Japan, UK, they’re all on the same path, while Europe, once deflation sets in, will have to follow suit or break into smithereens.

And what should make me believe that Putin has not already had his economic team figure out a sweet spot for gas delivery to Europe, where he can reduce volume and let the Europeans fight amongst themselves over what’s left, and at the same time still keep his profits rising?

With a 4% official GDP number, the Fed has no choice but to keep up the taper. And I don’t think it would even want to have that choice. In the current geopolitical environment, which the US has largely created all by itself, making fewer dollars available in global markets can work wonders for the American dreams of empire.

The amount of dollar-denominated debt emerging economies have ‘engaged’ in will in short order devastate many of them, Europe will have a very hard time, and Japan will sink into oblivion (and perhaps try to shoot its way out). The BRICS’ plans to start their own bank will only hasten US determination.

Yellen doesn’t have to make a decision to raise rates, all she has to do is taper and rates will rise by themselves. If she raises rates on top of that, it’ll be a matter of weeks or months for many nations, companies and individuals.

Higher rates will stab the global economy in the heart, including US citizens, but they will boost the – dreams of – empire. For a while. But then, as the sanctions on Russia, based on at best paper thin and at worst entirely fabricated allegations, make abundantly clear, we’ve entered a new age. The pie is shrinking, and ever more people are clamoring for the ever fewer pieces of that pie.

Debt can only carry us so far, and that’s not a huge distance either; the game stops when the combination of principal and interest payments grows over debtors’ heads, as many of you can attest to. The taper alone will cause many to reach that point of no return; it will push a billion people, or two, over the brink. Argentina’s default is but the first of many.

What’s more important now is that fossil fuels, too, have a limited ‘carrying capacity’. And the planet. It’s going to be all cats in a sack from here on in, with everyone jockeying for a handful of rotting, dwindling and crumbling musical chairs. A 4% US GDP print is but a sidenote in that; it merely serves to avert people’s eyes away from their real futures. But then, Americans are no longer used to looking at those anyway. They’re not exactly a people with a strong link to reality.

A Third Of Americans With Credit Files Had Debts In Collections in 2013 (WaPo)

About 77 million Americans have a debt in collections, a new report finds. That amounts to 35% of consumers with credit files or data reported to a major credit bureau, according to the study released Tuesday by the Urban Institute and Encore Capital Group’s Consumer Credit Research Institute. “It’s a stunning number,” said Caroline Ratcliffe, senior fellow at the Urban Institute and author of the report. “And it threads through nearly all communities.” The report analyzed 2013 credit data from TransUnion to calculate how many Americans were falling behind on their bills. It looked at how many people had non-mortgage bills, such as credit card bills, child support payments and medical bills, that are so past due that the account has since been closed and placed in collections.

Researchers relied on a random sample of 7 million people with data reported to the credit bureaus in 2013 to estimate what share of the 220 million Americans with credit files have debts in collection. About 22 million low-income adults who did not have credit files were not represented in the study. This is the first time the Urban Institute calculated the collection figure, but Americans may have been struggling with debt for a while: Researchers noted that the 35% is basically unchanged from when the Federal Reserve studied the issue in 2004 and found that 36.5% of people with credit reports had debt in collections. The debts sent to collections ranged from $25 on the low end and to more than $125,000 on the high end. Many consumers were burned for relatively small amounts – about 10% of the debts were smaller than $125, Ratcliffe says. But the median debt, $1,350, is still pretty substantial, she adds.

The phrase “debt collection” normally brings to mind dealing with harassing phone calls, repeated letters and other efforts from third parties attempting to collect the payment. But not all consumers get hassled: some people may not even learn they’ve been sent to collections until they check their credit reports, the study noted. That doesn’t mean the debts didn’t cause any setbacks. Bills that are sent to collections can stay on a person’s credit report for up to seven years, hurting a consumer’s credit score and in turn hindering their chances of accessing loans, credit cards and other forms of borrowing. A bad credit score can also hurt a person’s ability to land a job or their odds of getting approved for an apartment, Ratcliffe says. “This could impact you in multiple ways,” she adds.

The study found that the share of people with debt past due, meaning they are at least 30 days late with payment on a non-mortgage debt, was much smaller: 1 in 20 people. That includes people who are late with credit card bills, student loan payments and auto loans. The majority of those people, 79%, also had debt in collections. However, because certain bills, such as medical bills and parking tickets, may not show up on a person’s credit score until they are sent to collections, the total share of people falling behind on their bills may actually be much higher. The report did not break down which types of bills were most likely to be sent to collections and researchers could not distinguish between debts that were sent to collection years ago and those that were added more recently.

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Is Your Car an Underwater Time Bomb? (Bloomberg)

America has had a rocky recovery from the 2007-08 financial crisis, but one group of Americans has done quite well: car dealers. Even as job and wage growth have stagnated, auto sales have uncoupled themselves from those traditional economic drivers to become one of the few sources of strength in the macroeconomic picture. As the economists Amir Sufi and Atif Mian point out in their new book “House of Debt,” one of the big factors supporting overall retail spending in the U.S. since 2008 has been the expansion of auto credit. Sufi and Mian don’t celebrate this fact – they rightly see it as a symptom of broader secular stagnation in the U.S. economy. Indeed, a few recent statistics demonstrate the very precarious underpinnings of the auto industry’s prosperity:

• The average auto-loan term has increased every year since 2010, reaching 66 months in the first quarter of this year, according to Experian Automotive. In the same period, loans with terms of 73 to 84 months grew 28%, while loans with terms from 25 to 72 months actually fell.
• Equifax reports that U.S. auto loan volumes are at an all-time high, with some $902.2 billion outstanding at the end of the first half of 2014, up 10% year-over-year.
• The New York Times reports that subprime auto loans have grown by 130% in the last five years, with subprime lending penetration reaching 25% last year.
• Leases make up another quarter or so of auto “retail sales” according to Experian, another metric that is currently at all-time highs.
• 27% of trade-ins on new vehicle purchases in Q1 2014 had negative equity, according to the Power Information Network, another troubling indicator on the rise in recent years.

With half of new car sales supported either by leases or subprime credit, and ballooning loan terms leaving an increasing number of new car buyers underwater on their trade-ins, it’s clear that auto demand is hardly at a sustainable, organic level. Last year, 38.8% of dealer profits came from financing operations, according to the National Automobile Dealers Association, and General Motors has relied on some $30 billion in largely subprime receivables held by its GM Financial unit to show an increase in revenue in the first two quarters of this year.

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From before Columbus: “Yields fell this low in Genoa in the 15th century but there has been nothing like this in Europe in modern times..”

Europe’s Bond Yields Lowest Since 15th Century Genoa (AEP)

Bond yields have fallen to the lowest level in modern history in Germany, France and the eurozone’s core states, signalling a high risk of deflation and mounting concerns about sanctions against Russia. The yield on German 10-year bonds fell to a record low of 1.11pc in intra-day trading, partly on safe-haven flows. French yields dropped in tandem to 1.5pc. These levels are far below rates hit during the 1930s or even during the deflationary episodes of the 19th Century. “Yields fell this low in Genoa in the 15th century but there has been nothing like this in Europe in modern times,” said professor Richard Werner, from Southampton University. “This reflects the weakness in nominal GDP and a slow economic implosion caused by credit contraction. The European Central Bank is at last starting to act but it is only scratching the surface.”

German, French and Dutch yields have been sliding for months as the eurozone recovery wilts and several countries flirt with recession, but the latest plunge reflects a confluence of forces. “Investors may fear that the worsening tensions with Russia could be the external shock that finally pushes the eurozone into a deflation trap,” said Simon Tilford, from the Centre for European Reform. Bond yields have also fallen to all-time lows in Spain and Italy but the “risk-spread” over German Bunds has been widening over recent weeks. The cost of insuring Italy’s debt through credit default swaps has risen by a third since June.

European diplomats reached a deal on Tuesday on “tier 3” sanctions aimed at shutting Russian banks out of global capital markets and slowly suffocating the Russian economy, though the original plan to limit technology for oil and gas exploration has been diluted. Creditors have already frozen a $1.5bn loan for VTB bank due to be agreed last week. The European Commission said the measures are likely to cut 0.3pc of GDP off EU economic growth this year, and 0.4pc next year, even if the crisis is contained without a serious disruption of energy supplies. “This is a significant hit to growth. It implies such low growth in parts of southern Europe that it makes it almost impossible to arrest the rise in debt ratios,” said Mr Tilford.

The Moscow newspaper Izvestia said Russia’s parliament is already drawing up legislation to blacklist “aggressor countries”, specifically targeting auditors and consultants. These include Deloitte, KPMG, EY (formerly known as Ernst & Young), Boston Consulting and McKinsey. Tim Ash, from Standard Bank, said this would trigger clauses on bond covenants that rely on external audits. “If they go down this path they could provoke a brutal market reaction,” he said. David Owen, from Jefferies, said a lack of genuine economic recovery is what lies behind Europe’s falling yields, already replicating the pattern seen in Japan in the 1990s. “A third of all countries in the eurozone are already in deflation once you strip away taxes, and another four have no inflation, including France and Spain,” he said.

“Corporate profits fell in the first quarter, and so did household disposable income, if you exclude Germany. We are seeing no growth at all in world trade, which is highly unusual. The CPB trade index rolled over in May and fell 0.6pc,” he said. Mr Owen said investors are starting to price in quantitative easing by the ECB, which would entail sovereign bond purchases and potentially push yields lower. The Bundesbank would be the biggest buyer on a pro-rata basis under the ECB’s “key”, but German debt is relatively scarce. “Investors know this and it is driving Bund yields even lower,” he said. For Russia, deep recession looks inevitable. The commission said sanctions will cut Russia’s growth by 1.5pc in 2014, and by 4.8pc in 2015. A return to the Soviet stagnation of the early 1980s is becoming all too likely.

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No ZIRP here?!

US Credit Card Variable Interest Rates Highest Since July 2001 (Zero Hedge)

With 77 million Americans having debt past due and the average household owing more than $15,000 in credit card debt, it appears the Fed’s supposed plan to ‘help Main Street’ is not working so well. As the following chart from NewEdge’s Brad Wishak shows, despite Fed Funds at practically zero, US credit card variable interest rates continue to rise – now at their highest since July 2001.

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Interest rates.

UK Personal Insolvency Storm Could Be Gathering (Guardian)

A big increase in the number of people becoming insolvent in England and Wales has prompted fresh warnings about the fate of financially stretched households when interest rates start to rise. There were 27,029 personal insolvencies in England and Wales in the second quarter, a 5.1% rise on a year earlier. The increase was driven by a 20% jump in the number of people entering into individual voluntary arrangements (IVAs) to a record high of 14,571, the Insolvency Service, which published the figures, said. Some experts said it was evidence that creditors were more confident about recovering debts in an improving economy. But others insisted it showed more families were on a financial knife-edge after years of falling real wages and government cuts. “Aside from all the talk of economic recovery, it’s clear that people are really struggling,” said Bev Budsworth, the managing director of The Debt Advisor.

She said hundreds of thousands of people were only just about making their monthly debt repayments because interest rates are still at a record low of 0.5%. But financial markets are pricing in a rate hike by the end of the year against a backdrop of stronger economic growth. “The acid test will be when the Bank of England starts to raise its base rate and people’s mortgage payments follow suit.” Brian Johnson, insolvency partner at the chartered accountants, HW Fisher & Company, said the figures showed Britons were shrugging off austerity and had been tempted to overextend. “With as many as a quarter of mortgage holders facing unaffordable payments if interest rates rise to a more normal level of 3%, a personal insolvency storm could be gathering,” he said.

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Time for Abe to leave. But he won’t.

Japan’s Output Drops Most Since 2011 as Consumers Spend Less (Bloomberg)

Japanese industrial output fell the most since the March 2011 earthquake, highlighting the widening impact to the economy of April’s sales-tax increase. Industrial output dropped 3.3% in June from May, the trade ministry said today in Tokyo, more than twice the median forecast for a 1.2% contraction in a Bloomberg News survey of 31 economists. The manufacturing sector has cut back in response to a slump in consumer spending and a failure of exports to pick up even after an 18% drop in the yen last year. Honda Motor and Nissan Motor this week reported jumps in profit, showing how the weaker currency is contributing to earnings gains without bolstering the economy. “Today’s data are very ugly – companies are becoming even more cautious on the outlook for the economy after the sales-tax hike,” said Taro Saito, director of economic research at NLI Research Institute in Tokyo.

“Japan’s economy doesn’t have a driving force, with consumer spending and exports having stalled.” [..] Japanese production fell across most sectors, with transport equipment, which includes automobiles, dropping 3.4% from the previous month, and output of desktop computers, mobile phones and other communications equipment sliding 9%. Domestic demand, which had compensated for weak exports, fell off from April, and inventories rose in May as companies didn’t slow production much, contributing to the June output cut, according to Yasushi Ishizuka, a director in the trade ministry statistics department.

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US Regulator Wants Monitors in Deutsche Bank, Barclays US Offices (WSJ)

New York’s banking regulator is pushing to install government monitors inside the U.S. offices of Deutsche Bank and Barclays as part of an intensifying investigation into possible manipulation in the foreign-exchange market, according to people familiar with the probe. The state’s Department of Financial Services notified lawyers for the two European banks earlier this month that it wanted to install a monitor inside each firm, based on preliminary findings in the agency’s six-month currencies-market probe, these people said. Negotiations are continuing over the details of the monitors’ appointments, but New York investigators expect to reach an agreement soon. The regulatory agency has selected Deutsche Bank and Barclays for extra scrutiny partly because the records it has collected so far from more than a dozen banks under its supervision point to the greatest potential problems at those two banks, the people said.

Plus, Deutsche Bank and Barclays are among the dominant players in the vast foreign-exchange market, so investigators hope a close-up view into their businesses will help them observe other players and trading patterns, the people said. A Barclays spokesman declined to comment; the U.K. bank previously has said it is cooperating with authorities. A Deutsche Bank spokesman said it is cooperating with investigators “and will take disciplinary action with regards to individuals if merited.” The New York regulator’s concerns about Deutsche Bank and Barclays are becoming the latest U.S. headaches for both banks. Barclays in 2012 settled U.S. interest-rate-rigging allegations, while an investigation into Deutsche Bank’s activities is continuing. Both banks have said they are cooperating with regulators looking into their so-called dark pools, or private stock-trading venues, including relationships with high-frequency trading firms. Barclays has settled charges that it violated U.S. sanctions, while Deutsche Bank still faces an investigation in that area.

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Why Can’t the Banking Industry Solve Its Ethics Problems? (NY Times)

The financial crisis that nearly brought down the global economy was triggered in no small part by the aggressive culture and spotty ethics within the world’s biggest banks. But after six years and countless efforts to reform finance, the banking scandals never seem to end. The important question that doesn’t yet have a satisfying answer is why. Why are the ethical breaches at megabanks so routine that it is hard to keep them straight? Why do banks seem to have so many scandals — and ensuing multimillion dollar legal settlements — compared with other large companies like retailers, airlines or manufacturers? Some of the world’s leading bank regulators are trying to figure that out. And they have taken to sounding like parents who have grown increasingly exasperated at teenage children who keep wrecking the family car. This week, it was the turn of Mark Carney, the governor of the Bank of England. The latest British banking scandal was enough to make Mr. Carney, a former Goldman Sachs investment banker, sound like an Occupy Wall Street populist.

Lloyd’s Banking Group stands accused of manipulating a key interest rate to reduce what it would owe the Bank of England in a program meant to spur lending in Britain. “Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved,” Mr. Carney wrote to the head of the bank. (Pro-tip: If you are going to manipulate interest rates to squeeze an extra few million bucks out of somebody, don’t make that somebody the entity that regulates you). Mr. Carney has company among top bank regulators. Bill Dudley, the president of the Federal Reserve Bank of New York, said in a speech last November that “there is evidence of deep-seated cultural and ethical failures at many large financial institutions.” The Financial Times reported this week that New York Fed officials were putting the screws to major banks in private meetings, insisting they strengthen their ethical standards and culture.

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What sort of country is it becoming?

Australia Blindfolds Citizens With ‘Unprecedented’ Media Gag Order (RT)

WikiLeaks has accused the Australian government of blindfolding the public with the worst suppression order in “living memory.” The media gag bans Australian news outlets from reporting on a multinational corruption case for reasons of national security. The whistleblowing organization published the details of the “unprecedented” gag order issued by the Australian government on Wednesday. The super injunction passed by the Supreme Court of the state of Victoria prohibits Australian media organizations from publishing material on a multi-million-dollar graft case involving high-ranking officials from Malaysia, Indonesia, Vietnam and the Reserve Bank of Australia (RBA). “The gag order effectively blacks out the largest high-level corruption case in Australia and the region,” said a statement published on WikiLeaks’ website.

The case pertains to RBA subsidiaries Securency and Note Printing who bribed the officials to secure lucrative contracts to supply bank notes to their governments. The gag order was issued after the secret indictment of seven senior executives from the RBA subsidiaries on June 19, writes WikiLeaks. The Australian government justifies the order as being in the interests of national security and prevention of “damage to Australia’s international relations.” However, WikiLeaks founder Julian Assange argues such an act of “unprecedented censorship” is unjustifiable. “With this order, the worst in living memory, the Australian government is not just gagging the Australian press, it is blindfolding the Australian public,” said Assange in a statement published on the WikiLeaks website. He called on Australia’s Foreign Minister Julie Bishop to explain “why she is threatening every Australian with imprisonment in an attempt to cover up an embarrassing corruption scandal involving the Australian government.”

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Outsmarting the west?!

Ukraine Pipelines To Lose 50% Of Value When South Stream Line Starts (RT)

The South Stream gas pipeline, which bypasses Ukraine, may halve the value of Ukraine’s gas transportation system (GTS), according to Andrey Kobolev, head of Ukraine’s national oil and gas company Naftogaz. After the Russian–led South Stream project is complete and working at full capacity, the value of Ukraine’s GTS may fall as much 50% from the present estimate of $25-$35 billion, RIA Novosti quotes the head of the company. “We have no wish to lose it, and it’s unreasonable,” Kobolev said on a Ukrainian local TV channel.

Construction of the South Stream pipeline in Bulgaria and Serbia was suspended following pressure from the EU to comply with competition law. After a while construction resumed. “They [Gazprom] are ready to invest their own 15 billion euro in South Stream construction … This gas pipeline will take away from the Ukrainian transit potentially up to 60 billion cubic meters. Currently the transit carries 86 billion cubic meters,” Kobolev said. Previously 110-120 billion cubic meters were fed through Ukraine, but now the Nord Stream pipeline has taken a share of it, Kobolev explained, and concluded that once South Stream is operational Ukraine could be in a very difficult situation.

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Ouch.

Housing Market in France in ‘Total Meltdown’ (Bloomberg)

French President Francois Hollande’s government may have made a housing slump worse, pushing the construction market to its lowest in more than 15 years. Housing starts fell 19% in the second quarter from a year earlier, and permits — a gauge of future construction — dropped 13%, the French Housing Ministry said yesterday. The rout stems from a law this year that seeks to make housing more affordable by capping rents in expensive neighborhoods. To protect home buyers, the law also boosted the number of documents that must be provided by sellers, leading to a decline in home sales and longer transaction times. While the government is now adjusting the rules, the damage is done, threatening France’s anemic recovery that’s already lagging behind those of the U.K. and Germany.

“Construction is in total meltdown,” said Dominique Barbet, an economist at BNP Paribas in Paris. “It’s difficult to see how the new housing law is not to blame.” Barbet says the drop in home building lopped 0.4 points off France’s gross domestic product growth last year and cut the pace of expansion by a third in the first quarter. Expenditure in the sector was at its lowest level ever as a portion of total real GDP in the first quarter at 4.7%, down from 6.3% in the first three months of 2007, he estimates. Sales of new-build homes fell 5% in the first quarter from a year earlier and are down by about a third compared with their level in 2007, according to Credit Agricole.

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Best-Paid Finns Seek Jobless Aid as Recession Pain Widens (Bloomberg)

Finns once employed in the country’s highest paying jobs are now joining the ranks of the unemployed and asking the state for financial aid. “The crisis in the Finnish economy has hit especially high-productivity industries,” Juhana Brotherus, an economist at Danske Bank in Helsinki, said by phone. That means “the impact is harsher on gross domestic product than on unemployment.” The Nordic nation is reeling from body blows to its two biggest employers — the forest and technology industries. Its erstwhile largest company, Nokia, has sought to control debt growth by selling its mobile phone business to Microsoft Corp.

The U.S. company said this month the takeover will result in the loss of 1,100 Finnish jobs, or 20% of its workforce there, putting some of Finland’s best-qualified people out of work. Jobless claims soared 17.5% to €4.15 billion ($5.6 billion) last year, the Social Insurance Institution of Finland estimates. That’s the highest level since the 1990s, the last time Finland was dragged into a prolonged period of economic decline. Unemployment was 9.2% in June, not adjusting for seasonal swings, compared with 7.8% a year earlier, according to the statistics agency.

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That’s going to speed things up!

Sixteen-Foot Swells Reported In Once Frozen Region Of Arctic Ocean (WaPo)

Big waves like those fit for surfing are not what we think of when contemplating the Arctic Ocean. The water is ice-covered most of the time — and it takes large expanses of open sea plus wind to produce mighty surf. So the fact that researchers have now measured swells of more than 16 feet in the Arctic’s Beaufort Sea, just north of Alaska, is a bit of a stunner. Swells of that size, researchers say, have the potential to break up Arctic ice even faster than than the melt underway there for decades thanks to rapid global warming. The wave measurements, using sensors beneath the surface communicating via satellite, were recorded by Jim Thomson of the University of Washington and W. Erick Rogers of the Naval Research Laboratory in 2012 and reported in an article in Geophysical Research Letters this year. “The observations reported here are the only known wave measurements in the central Beaufort Sea,” they wrote, “because until recently the region remained ice covered throughout the summer and there were no waves to measure.”

Sixteen feet was the average during a peak period, Thomson said in an email. “The largest single wave was probably” 9 meters, or about 29 feet, he said. The average over the entire 2012 season was 3 to 6 feet. The distances of open water change “dramatically throughout the summer season, from essentially zero in April to well over 1000 km in September,” they reported. “In recent years, the seasonal ice retreat has expanded dramatically, leaving much of the Beaufort Sea ice free at the end of the summer.” Because swells carry more energy, they reported, they will likely increase the pace of ice breakup in the region, eventually producing an “ice-free summer, a remarkable departure from from historical conditions in the Arctic, with potentially wide-ranging implications for the air-water-ice system and the humans attempting to operate there.”

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Redefining derivatives’ terms would make banks “less too big”. That means they acknowledge derivatives still are their main risk.

Ending ‘Too Big to Fail’ Could Rest on Obscure Contract Language (Bloomberg)

Wall Street and global financial regulators, trying to squash the lingering perception that banks remain “too big to fail,” are looking to an obscure change in derivatives contracts to solve the problem. The main industry group for the $700 trillion global swaps market is rewriting international protocols to impose a “stay” or pause designed to prevent trading partners from calling in collateral all at once when a bank nears failure. U.S. and international banking regulators are considering making use of the new protocols mandatory, according to two people who spoke on condition of anonymity to discuss private meetings. The International Swaps and Derivatives Association is aiming to release the revised contract guidelines by November, the people said. The change is designed to prevent a recurrence of one of the most vexing problems revealed by the 2008 financial crisis: When Lehman Brothers Holdings Inc. failed, counterparties trying to unwind derivatives contracts touched off a panic that triggered a worldwide credit crisis.

The new protocol “puts another nail in the coffin of ‘too big to fail,’” Wilson Ervin, a senior adviser at Credit Suisse and the bank’s chief risk officer during the 2008 crisis, said in an e-mail. “Most banks want to get this done and are working hard for a good solution.” [..] U.S., U.K. and European regulators, still wrestling with the aftermath of the financial crisis, have held months of discussions aimed at buttressing the new and untested system for dismantling failing banks that was built by the Dodd-Frank Act and similar efforts in other countries. Some lawmakers and many participants in the market remain skeptical that regulators are really prepared to let a systemically large firm fail. In addition to the regular bankruptcy process, Dodd-Frank created a separate “liquidation” authority that the FDIC could use to seize and take apart a firm if a bankruptcy would shake the wider financial system.

However, as a U.S.-focused law, Dodd-Frank didn’t have the authority to solve the question of how to treat derivatives contracts as part of that process, in part because so many of them are international. Derivatives were already exempt from the stay that normally applies during bankruptcy; financial firms had successfully argued for decades that the financial system would be more stable and risks would be contained if traders could immediately end deals with a failing institution. Lehman’s failure exposed that argument as flawed. When it filed for bankruptcy, Lehman had more than 900,000 derivatives positions and its counterparties moved immediately to terminate trades and demand collateral. The new terms for the ISDA contracts would bar a firm from ending swap trades with a bank being put into liquidation for 24 or 48 hours, depending on which country’s laws apply. That would give regulators time to move the contracts to a new company, limiting contagion to the larger financial system.

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There are some brave people out there.

Canadian Ebola Doctor (Not?!) In Self-imposed Quarantine (CTV)

A spokesperson for the Christian relief organization Samaritan’s Purse says a Canadian doctor is not in self-imposed quarantine after treating patients in West Africa for Ebola. The group earlier said Dr. Azaria Marthyman of Victoria, B.C., had voluntarily quarantined himself after spending nearly a month treating patients for the deadly disease. “Dr. Marthyman has assured us that (‘self-imposed quarantine’) is not a correct term to be applied to this situation,” spokesperson Jeff Adams told CTV News on Tuesday. Marthyman was among a handful of Canadian health-care workers who travelled to Liberia, one of three countries hit by the outbreak. He was part of a North American team from Samaritan’s Purse.

He worked at the agency’s facility in Liberia’s capital, Monrovia, before returning to Canada last Saturday. He has not tested positive for the disease. “Azaria is symptom-free right now and there is no chance of being contagious with Ebola if you are not exhibiting symptoms,” Melissa Strickland, a spokesperson for Samaritan’s Purse, had earlier told CTV Vancouver Island. Two Americans working in Liberia have come down with the disease, including one of Marthyman’s colleagues with Samaritan’s Purse, Dr. Kent Brantly. The 33-year-old married father of two children is undergoing intensive treatment for the disease, but has been able to speak with doctors and work on his computer.

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Sierra Leone’s Top Ebola Doctor Dead After Contracting Virus (TIME)

Sierra Leone’s top Ebola doctor, Sheikh Umar Khan on Tuesday died from complications of the disease. His death came just days after three nurses who worked with him perished. Khan served on the front lines of what is now considered the worst Ebola outbreak in history, with 670 dead, primarily in West Africa. He is credited with treating more than 100 victims and has previously been hailed as a national hero. Now, hundreds of condolences are pouring in on Twitter, praising his courage and altruism. “Khan’s death is yet another recognition that health workers is the group most at risk,” Tarik Jasarevic, a spokesman with World Health Organization, tells TIME. More than 100 health workers have contracted the virus since the beginning of the outbreak and around half of them have died. “This is the first time most of these workers face such an outbreak. We have to equip them with protective gear and train them on how to use it.

We also need to make sure there are enough workers. If they work reasonable shifts they can focus not only on the patients, but also on themselves.” Sierra Leone is the country that has been worst hit by the latest outbreak, but neighboring Liberia is also struggling since the contagion breached its borders. The country’s overland border crossings have been closed since Sunday, and Doctors Without Borders reports that they are only able to provide limited technical support to Liberia’s Ministry of Health and Social Welfare. The fear is now that the deadly disease could also spread far beyond West Africa, possibly via air travelers. Medical services across Europe are on high alert because of the outbreak, and U.K. Foreign Secretary Philip Hammond told the BBC that the disease is a “threat” to his country. “There is a risk that the epidemic will spread, but first of all we need to stop it on the ground,” says Jasarevic. “We know exactly what needs to be done, but it requires a lot of resources.”

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Jul 292014
 
 July 29, 2014  Posted by at 3:49 pm Finance Tagged with: , , , , ,  15 Responses »


Arthur Rothstein Elm Street, Theater Row, Dallas Jan 1942

I don’t think it’s ever a good sign, no matter how funny it may look, when the US state Department makes one think of Monty Python. But it does. With a Silly Claims instead of Silly Walks department. Would these people really sit around a big table in the evening and brainstorm about what anti-Russia statement to feed to the press the next morning? What else could possibly be going on here? I mean, just look at this bit from the New York Times:

US Says Russia Tested Cruise Missile, Violating Treaty

The United States has concluded that Russia violated a landmark arms control treaty by testing a prohibited ground-launched cruise missile, according to senior American officials, a finding that was conveyed by President Obama to President Vladimir V. Putin of Russia in a letter on Monday. It is the most serious allegation of an arms control treaty violation that the Obama administration has leveled against Russia [..]

At the heart of the issue is the 1987 treaty that bans American and Russian ground-launched ballistic or cruise missiles capable of flying 300 to 3,400 miles. That accord, which was signed by President Ronald Reagan and Mikhail S. Gorbachev, the Soviet leader, helped seal the end of the Cold War and has been regarded as a cornerstone of American-Russian arms control efforts.

Russia first began testing the cruise missiles as early as 2008, according to American officials, and the Obama administration concluded by the end of 2011 that they were a compliance concern. In May 2013, Rose Gottemoeller, the State Department’s senior arms control official, first raised the possibility of a violation with Russian officials. The New York Times reported in January that American officials had informed the NATO allies that Russia had tested a ground-launched cruise missile [..]

If we are to believe the NYT, Russia started testing the system 6 years ago, it then took the US at least 3 years to ‘conclude’ it was ‘a compliance concern’, another 18 months or so to ‘raise the possibility of a violation with Russian officials’, 8 more months after that to inform NATO – and have the NYT write it up – and another half year on top of that for Obama to write a letter to ‘President Vladimir V. Putin of Russia’ (excellent choice of title, love the extra V.) and feed the press.

Whereas we can all agree that timing is everything, how many of you recognize that any and every single day over the past 6 years and change would have been better to go public with this than today? In all the papers, we can read that ‘Senior American officials’ stress that this is ‘a serious violation’.

Look, we know you’re trying to make Russia look bad. We get it. But we also know that if this would have been such a serious violation, you would have spoken out a long time ago. We therefore have no other choice but to file this under ‘whatever’. And wait with glee for what you come up with tomorrow.

By the way, while reading up on this, I happenstanced upon something else in the field of nuclear treaties. And since you guys insisted on putting us in Python mood, here goes. This is from the Santa Barbara Independent:

Feds Looks to Quash Nuclear Treaty Lawsuit

Federal attorneys have made their first big move to dismiss a lawsuit that alleges the United States, along with eight other countries, has violated a 46-year-old treaty to dismantle its nuclear arsenal. The lawsuit was filed in April — in U.S. Federal Court as well as in the International Court of Justice in The Hague – by the tiny Pacific nation of the Marshall Islands, which the U.S. bombarded with nuclear weapons tested between 1946 and 1958. Marshall Islands officials maintain that radioactive fallout from the tests sickened citizens and rendered some territories unlivable.

“Our people have suffered the catastrophic and irreparable damage of these weapons,” said Marshall Islands Foreign Minister Tony de Brum in May, “and we vow to fight so that no one else on Earth will ever again experience these atrocities.” The Treaty on the Non-Proliferation of Nuclear Weapons (NPT) was signed in 1968 and mandates that the United States, Russia, United Kingdom, France, China, Israel, India, Pakistan, and North Korea “pursue negotiations in good faith” to end the nuclear arms race “at an early date and to work toward worldwide nuclear disarmament.”

Attorneys for the Marshall Islands argue that the countries have instead increased and modernized their nukes over the decades. [..] In the fed’s Motion to Dismiss, the government claims the lawsuit should be thrown out because of procedural and jurisdictional issues. “The U.S.… does not argue that the U.S. is in compliance with its NPT disarmament obligations,” the NAPF explained in a prepared statement. “Instead, it argues in a variety of ways that its non-compliance with these obligations is, essentially, justifiable, and not subject to the court’s jurisdiction.”

That doesn’t exactly make that claim against Russia look better, does it? Anything else? Alright then, moving on. The Financial Times has a particularly spicy rendering of the Yukos lawsuit story in which Russia was ordered to pay $50 billion in damages:

‘Yukos Is Insignificant, There Is A War Coming In Europe’

Beleaguered shareholders of Yukos could scarcely have imagined when they launched arbitration in 2005 they would one day be awarded $50bn in damages – nor that the ruling would be released into the febrile atmosphere that exists between Russia and the west today.

Just six months ago, say legal experts, Russia still seemed interested in being part of international “clubs” like the Organisation for Economic Co-operation and Development, the group of mainly rich countries. As the Ukraine crisis worsens, protecting its international reputation no longer seems a priority. “If one were to be quite cynical, I think the reputational consequences for Russia [of not paying] will be very limited indeed, because they have already been through a lot of things,” said Loukas Mistelis, director of the School of International Arbitration at Queen Mary University of London. “I think they would be prepared to take quite a bit of risk.” [..]

… if Russian state businesses find themselves hit both by western sanctions and attempts to seize assets by Yukos shareholders, relations between the Kremlin and the west could sour further. One person close to Mr Putin said the Yukos ruling was insignificant in light of the bigger geopolitical stand-off over Ukraine.

“There is a war coming in Europe,” he said. “Do you really think this matters?”

I don’t know. I catch myself thinking at times that there’s already a war going on in Europe. It could certainly expand and accelerate a lot further, but the sanctions the US and EU intend to slam on Russia sure look like economic warfare to me. As do the innuendo, the lack of evidence, the constant stream of smear stories leaked through fuzzy channels, it all fits the picture.

The Yukos case is already causing people to wake up from various stages of slumber. BP reported ‘great’ profits today, largely from their interest in Russian oil giant Rosneft (got to love the irony), but it also said the sanctions that are being prepared could hurt its shares, because it has a 19% stake in Rosneft.

What it didn’t say out loud, but what is certainly an added threat, is that the parties who won the case can now go sue BP to get their $50 billion. Because of the same 19% stake. And given that many of the stakeholders of the other 81% will be hard to go after, BP could face a bit of a problem.

But something tells me that’s still not Beyond Petroleum’s biggest worry: the deals with Rosneft gave it the prospect of actual recognized fossil fuel reserves, something BP, like all western oil behemoths, has far too little of. Exxon, too, has Rosneft deals, as does Norway’s Statoil, both for Arctic drilling projects. Shell, though Sakhalin developement(s), may well be the largest foreign investor in Russia.

At some point Big Oil will need to write down reserves; at some point their shares will fall for real. That sanctions originating in western anti-Putin sentiments may accelerate the process is something that, I’m not even sorry to say it, amuses me.

To get some perspective on the whole story, here are a few principle ideas it is based on. The west – US and EU – tries to squeeze Russia, and Rosneft. The west also – so far – seems to think this would surprise Putin and hurt his plans. Many people for instance claim that he will lose popularity at home if his economy takes a southbound turn.

Me, I’m not so sure. I think Putin must have seen all of this coming from a long time and a long distance away. The US keeps trying to pull him into proxy wars, but he’s not biting (which is why they turn to unsubstantiated claims).

Russian speaking Ukrainians are getting killed by the dozen with western support, and he must detest that. But sending in his troops would be just what the west wants, and it would lead to far more bloodshed. As long as he and his people officially stay on sovereign Russian soil, he’s OK.

As for economic sanctions, Russia is not that vulnerable. While the US tries to break the bond between Russia and Europe, Russia can try the same for the bond between US and EU. What’s more, Putin knows the ‘leadership’ in Brussels is not overly competent, and dreams away in grand visions of power, of an equal partnership with their American friends. Vladimir V. knows the US has no intention of granting Brussels any such power.

The sanctions will eventually lead to either a break between US and EU -because European business interests get hurt too much -, or – more likely for now – it will lead to $200 a barrel oil, huge increases in EU heating costs and a sharp dip in the euro that will make that $200 a lot more still.

Putin’s fine either way. Sell 50% less to Europe at 100% higher prices, why not? Let’s see EU member Slovakia send Russian gas back to Ukraine – or however that reverse flow is supposed to work -. Putin can simply cut overall gas delivery to Europe by 25%, and 50% if they try it again. There’s no love lost between Putin and Europe in the aftermath of the crash and the things that have been said about him.

And I think Vladimir must know how the US feels about this. Washington sees the advantages of making Europe their bitch, pardon my French. With half of the old world in the cold come winter, the US can greatly enhance its influence there. The Americans think that with their domestic shale wealth – they’re wrong, but they think it -, $200 a barrel oil in international markets would suit them just fine for a while.

As I said last week, we have entered the next phase in the energy equals power battle, and we entered it for good. This should be evident from looking at the sanctions and the Yukos case, and the fall-out this will have on western oil companies. You can be a big wig in Brussels and feel nice about yourself negotiating punishments for Vladimir V. Putin, but that doesn’t mean you’re ready to play with the big boys. And from here on in, it’s a big boys game only.

Note: Holland announced today that 195 of the 298 people who died in the MH17 crash had the Dutch nationality; some had dual citizenship. The one person they added to the list was a 2-year old girl. Isn’t that just the saddest thing on the planet? And then the US and EU have the audacity to play a propaganda war over that, blaming people for killing that little girl without any proof? Also, finally, 12 days after the crash, the Dutch government is calling on Ukraine to stop the fighting on the crash site and let forensic experts do their job. President Poroshenko has promised for while that they would. But nothing changed. There are still dozens of bodies and body parts decomposing in the fields. Best remember who your friends are. Same question again: who’s commanding that army?

But hey, stock markets are up … What more can we ask for?

‘Yukos Is Insignificant, There Is A War Coming In Europe’ (FT)

Beleaguered shareholders of Yukos could scarcely have imagined when they launched arbitration in 2005 they would one day be awarded $50bn in damages – nor that the ruling would be released into the febrile atmosphere that exists between Russia and the west today. The award is a landmark not just for its size – 20 times the previous record for an arbitration ruling. The tribunal also found definitively that Russia’s pursuit of Yukos and its independently-minded main shareholder, Mikhail Khodorkovsky, a decade ago was politically motivated. Through inflated tax claims, the ruling said, senior officials set out to destroy Russia’s then biggest oil company, transfer its assets to a state-controlled competitor – Rosneft – and put Mr Khodorkovsky in jail. “The tribunal confirmed what the [Yukos shareholders] have been saying all along,” said Tim Osborne, director of GML, the Yukos holding company. [..]

Just six months ago, say legal experts, Russia still seemed interested in being part of international “clubs” like the Organisation for Economic Co-operation and Development, the group of mainly rich countries. As the Ukraine crisis worsens, protecting its international reputation no longer seems a priority. “If one were to be quite cynical, I think the reputational consequences for Russia [of not paying] will be very limited indeed, because they have already been through a lot of things,” said Loukas Mistelis, director of the School of International Arbitration at Queen Mary University of London. “I think they would be prepared to take quite a bit of risk.” [..]

Emmanuel Gaillard of Shearman & Sterling, which represented the Yukos claimants, said he was confident of eventually “piercing the veil” around assets of Russian state companies such as Rosneft, the oil company, and the natural gas monopoly, Gazprom. He added that the principle that state-controlled businesses could be a kind of proxy for the state was already inherent in sanctions over Ukraine against companies such as Rosneft – which has been targeted by the US. But if Russian state businesses find themselves hit both by western sanctions and attempts to seize assets by Yukos shareholders, relations between the Kremlin and the west could sour further. One person close to Mr Putin said the Yukos ruling was insignificant in light of the bigger geopolitical stand-off over Ukraine. “There is a war coming in Europe,” he said. “Do you really think this matters?”

Read more …

BP: Russia Still Key As Production Set To Dip (CNBC)

BP, the U.K. oil giant, announced a 34% rise in profits Tuesday – but its results highlighted concerns over its important Russian joint venture. The company’s 19.75% stake in Rosneft is regularly cited as one of the most lucrative deals which could be threatened if sanctions imposed against Russia in the light of the Ukrainian crisis escalate. The company confirmed these concerns in the statement accompanying its second-quarter results: “If further international sanctions are imposed on Rosneft or new sanctions are imposed on Russia or other Russian individuals or entities, this could have a material adverse impact on our relationship with and investment in Rosneft, our business and strategic objectives in Russia and our financial position and results of operations.”

BP also warned that third-quarter production would be lower than the second quarter, blaming seasonal slowing. Output from the Gulf of Mexico helped push overall underlying production of oil and gas, excluding Russia, up by over 3% compared to a year earlier. The company also hiked its provision for litigation related to the Gulf of Mexico oil by $260 million, bringing the total potential bill for the accident to $43 billion.

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BP Warns On Russia Sanctions Despite Rosneft Profits (Guardian)

BP has earned bumper profits from its stake in the Kremlin-controlled oil company Rosneft since the start of the year, but warned investors that it could be hurt by western sanctions against Russia. The FTSE 100 company, which owns one fifth of Russia’s largest oil company, made $1.6bn (£950m) from Rosneft in the first six months of 2014, an 80% increase on last year. On top of this BP was paid a $700m dividend from Rosneft in July. But with the European Union poised to announce tougher sanctions against Russia, BP acknowledged that its reputation was at stake over its ties with the Russian state oil giant. “Further economic sanctions could adversely impact our business and strategic objectives in Russia, the level of our income, production and reserves, our investment in Rosneft and our reputation,” the company said. Earlier this month the United States added Rosneft to its sanctions list and EU is expected to approve a ban on the export of advanced technology that could be used to drill for oil in Russia.

Igor Sechin, the chairman of Rosneft and a close friend of President Vladimir Putin, has been on the US sanctions list since April. As EU leaders have struggled to keep a united front amid the conflict in eastern Ukraine, BP has stuck to a business-as-usual policy with Russia. In May BP and Rosneft struck a deal to exploit shale reserves in the Urals at a ceremony attended by Putin at the St Petersburg Economic Forum, a Russian Davos that was shunned by many other western business leaders. BP’s exposure to Russia was highlighted on Monday when a tribunal in the Hague ruled that Rosneft had been the prime beneficiary from a “devious and calculated expropriation” by the Russian government against Yukos, once Russia’s largest private oil company, broken up by the Russian government after its boss fell foul of Putin. Rosneft went on to acquire Yukos’s prime assets at rock-bottom prices. Shareholders have vowed to pursue Rosneft for a $50bn damages claim and indicated they may also pursue BP.

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Ambrose gets a lot wrong here.

BP’s Faustian Pact With Russia Goes Horribly Wrong With Yukos Verdict (AEP)

The Permanent Court of Arbitration in The Hague has thrown the book at the Russian state, or more specifically at Vladimir Putin and his Soliviki circle from the security services. The $51.5bn ruling against the Kremlin unveiled this morning has no precedent in international law. The damages are 20 times larger than any previous verdict. Lawyers for the Yukos-MGL-Khodorkovsky team tell me that they cannot pursue the foreign bond holdings of the Russian central bank if the Kremlin refuses to pay up when the deadline expires on January 15, as seems likely. Moscow has already dismissed the case as “politically motivated”. Nor can they go after embassies and other sovereign assets that enjoy diplomatic immunity, though they are eyeing a list of Russian state targets that slipped through the net. What they can certainly do – and have every intention of doing – is attacking the assets of state-owned companies that act as instruments of the Russian government.

Above all, they intend to pursue Rosneft, the venture built from the expropriated assets of Yukos. That means they also intend to pursue BP (indirectly), since BP owns a fifth of Rosneft shares as a legacy from the TNK-BP debacle. Rosneft is the world’s biggest traded oil company with production of 4m barrels a day. It is run by Mr Putin’s close friend Igor Sechin, a former KGB operative in Africa, a loyalist in Mr Putin’s political machine in St Petersburg, and the architect of Russia’s energy strategy for the last decade. The Court’s ruling made it clear that Rosneft is not a commercial company with a (passive) state shareholder. It said the Rosneft was “the vehicle” used to expropriate Yukos and has acted as an instrument of the state. Mr Putin himself said at the time that the purpose was to reverse the giveaway privatisation of Russia’s natural resources and sovereign heirlooms in the bandit era of the 1990s. “The State, resorting to absolutely legal market mechanisms, is looking after its own interest,” he said.

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US Says Russia Tested Cruise Missile, Violating Treaty (NY Times)

The United States has concluded that Russia violated a landmark arms control treaty by testing a prohibited ground-launched cruise missile, according to senior American officials, a finding that was conveyed by President Obama to President Vladimir V. Putin of Russia in a letter on Monday. It is the most serious allegation of an arms control treaty violation that the Obama administration has leveled against Russia and adds another dispute to a relationship already burdened by tensions over the Kremlin’s support for separatists in Ukraine and its decision to grant asylum to Edward J. Snowden, the former National Security Agency contractor. At the heart of the issue is the 1987 treaty that bans American and Russian ground-launched ballistic or cruise missiles capable of flying 300 to 3,400 miles. That accord, which was signed by President Ronald Reagan and Mikhail S. Gorbachev, the Soviet leader, helped seal the end of the Cold War and has been regarded as a cornerstone of American-Russian arms control efforts.

Russia first began testing the cruise missiles as early as 2008, according to American officials, and the Obama administration concluded by the end of 2011 that they were a compliance concern. In May 2013, Rose Gottemoeller, the State Department’s senior arms control official, first raised the possibility of a violation with Russian officials. The New York Times reported in January that American officials had informed the NATO allies that Russia had tested a ground-launched cruise missile, raising serious concerns about Russia’s compliance with the Intermediate-range Nuclear Forces Treaty, or I.N.F. Treaty as it is commonly called. The State Department said at the time that the issue was under review and that the Obama administration was not yet ready to formally declare it to be a treaty violation.

In recent months, however, the issue has been taken up by top-level officials, including a meeting early this month of the Principals’ Committee, a cabinet-level body that includes Mr. Obama’s national security adviser, the defense secretary, the chairman of the Joint Chiefs of Staff, the secretary of state and the director of the Central Intelligence Agency. Senior officials said the president’s most senior advisers unanimously agreed that the test was a serious violation, and the allegation will be made public soon in the State Department’s annual report on international compliance with arms control agreements. “The United States has determined that the Russian Federation is in violation of its obligations under the I.N.F. treaty not to possess, produce or flight test a ground-launched cruise missile (GLCM) with a range capability of 500 kilometers to 5,500 kilometers or to possess or produce launchers of such missiles,” that report will say.

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US Looks to Quash Nuclear Treaty Lawsuit (Santa Barbara Independent)

Federal attorneys have made their first big move to dismiss a lawsuit that alleges the United States, along with eight other countries, has violated a 46-year-old treaty to dismantle its nuclear arsenal. The lawsuit was filed in April — in U.S. Federal Court as well as in the International Court of Justice in The Hague, Netherlands — by the the tiny Pacific nation of the Marshall Islands, which the U.S. bombarded with nuclear weapons tested between 1946 and 1958. Marshall Islands officials maintain that radioactive fallout from the tests sickened citizens and rendered some territories unlivable.

“Our people have suffered the catastrophic and irreparable damage of these weapons,” said Marshall Islands Foreign Minister Tony de Brum in May, “and we vow to fight so that no one else on Earth will ever again experience these atrocities.” The Treaty on the Non-Proliferation of Nuclear Weapons (NPT) was signed in 1968 and mandates that the United States, Russia, United Kingdom, France, China, Israel, India, Pakistan, and North Korea “pursue negotiations in good faith” to end the nuclear arms race “at an early date and to work toward worldwide nuclear disarmament.”

Attorneys for the Marshall Islands – and with the law firm Keller Rohrback LLP, which has an office in Santa Barbara and specializes in constitutional and treaty law – argue that the countries have instead increased and modernized their nukes over the decades. Santa Barbara’s Nuclear Age Peace Foundation (NAPF) is a consultant to the Marshall Islands on the legal and moral issues involved in the case, which has received attention all over the globe and the support of Nobel Prize winners. In the fed’s Motion to Dismiss, the government claims the lawsuit should be thrown out because of procedural and jurisdictional issues. “The U.S.… does not argue that the U.S. is in compliance with its NPT disarmament obligations,” the NAPF explained in a prepared statement. “Instead, it argues in a variety of ways that its non-compliance with these obligations is, essentially, justifiable, and not subject to the court’s jurisdiction.”

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Very good point.

Fed Creates Asset Bubbles To Paper Over Decline In Quality Of Life (Phoenix)

Many commentators have previously argued that the Fed is too dumb or too inept to identify of categorize asset bubbles. By focusing on the Fed’s mental acuity, these commentators are overlooking a key factor: the Fed WANTS asset bubbles. The reason for this? Asset bubbles, at least according to the Fed’s models, will paper over the steady decline in quality of life that began in the US roughly 50 years ago. This fact is staring everyone in the face, though few people make it explicit. Back in the 1950s, the average American family had one working parent and was able to get by just fine. Today, most families have two working parents, sometimes working more than two jobs and they’re still not able to live a stable life. Indeed, a 2012 study by NYU Professor Edward Wolff found that the median net worth of American households was at a 43-YEAR LOW. The average American in the 21st century was in worse shape than his 1970s counterpart. This process began to accelerate in the late ‘90s. Indeed, looking at real media household income, one can see clearly that things have generally been downhill for nearly 20 years now.

It is not coincidence that the Fed began blowing serial bubbles starting in the late ‘90s. The Fed is aware on some level that quality of life in the US has fallen. The Fed’s answer, rather than focus on items that it doesn’t understand (job growth, income growth, etc.) was to blow bubbles to paper over this decline. This is why we’ve had bubble after bubble after bubble in the last 15 years. The Fed doesn’t have a clue how to create jobs or boost incomes. Why would it? Most of the Fed’s Presidents are academics with no real world business experience. Instead, the Fed believes in the “wealth effect” or the theory that when housing prices or stock prices soar, people feel wealthier and so go out and spend more money. This theory is baloney. People spend based on their incomes, NOT the value of their homes or portfolios.

After all, both assets only convert into actual cash once the owner sells the asset. Anyone who goes out and spends more money because their home went up in value will only end up with credit card debt, which combined with their mortgage, puts an even greater strain on their financial resources. The Fed wants asset bubbles because they hide the rot within the US economy. If the Fed didn’t raise stock or housing prices, people might actually start to wonder… “hey, why is my life getting more and more difficult despite the fact that I’m working all the time?” The Fed wants bubbles. So we’re doomed to keep experiencing them and the subsequent crashes.

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Agree.

Housing Bubble May Pop Entire U.K. Economy (Bloomberg)

You may not want to bring this up at any London dinner parties, but there are tentative signs that the bubble in U.K. housing prices that’s helped boost the economic recovery by underpinning consumer confidence may be running out of puff. Given the British obsession with home ownership, any evidence of real-estate deflation will complicate the Bank of England’s efforts to nudge borrowing costs higher. July marked the first month of no growth in London house prices since December 2012, according to figures last week from research company Hometrack Ltd. A different gauge showed the slowest pace of London gains in 15 months in June, according to the Royal Institution of Chartered Surveyors. And today, Lloyds Banking Group’s mortgage-lending unit reported that only five% of people say the coming year is a good time to buy a home, a 29-point drop in just three months.

With earnings still in the dumps – wages grew just 0.3% in May, while annual inflation was 1.5% – houses are becoming less and less affordable, hence the U.K. central bank’s imposition of new rules on mortgage lending in recent months. Some 71% of U.K. couples with at least one child own their own homes, rising to 80% for childless couples; U.S. home ownership is 65%, while in the euro region the rate is about 67%. Prices in the futures market suggest investors are currently less concerned about the Bank of England’s appetite for interest-rate increases than they were five weeks ago, when Mark Carney first raised the prospect of a shot across the bows of the monetary-policy landscape.

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How much longer till Nippon sinks into the ocean?

Japan’s Retail Sales Drop in Challenge to Abe Reflation (Bloomberg)

Japan’s retail sales fell more than forecast in June, capping a weak quarter that challenges Prime Minister Shinzo Abe’s bid to reflate the economy while heaping a heavier tax burden on consumers. Sales dropped 0.6% from a year earlier, the trade ministry said in Tokyo today, steeper than a median forecast for a 0.5% decline in a Bloomberg News survey. In the second quarter, sales slumped 7% from the previous three months. Prime Minister Shinzo Abe is counting on consumers to bear a higher sales levy even as the Bank of Japan drives the cost of living upward with record monetary easing. The risk is that spending fails to regain vigor, sapping strength from an economy lacking support from exports.

“The government and the BOJ say the economy is recovering from the slowdown after the sales-tax increase, but it’s too early to tell,” said Koya Miyamae, senior economist at SMBC Nikko Securities Inc. in Tokyo. “There’s a chance consumption will remain below year-earlier levels in the July-September quarter.” Abe’s effort to stoke a sustained recovery in domestic demand is running up against a failure of companies to pass along record cash holdings in the form of higher wages that could help households cope with rising prices and the heavier tax burden.

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China Trade Numbers Still Don’t Add Up Post-Fake Exports (Bloomberg)

China’s trade numbers still don’t add up. A discrepancy between Hong Kong and Chinese figures for bilateral trade remains even after a crackdown last year on Chinese companies’ use of fake export-invoicing to evade limits on importing foreign currency. China recorded $1.31 of exports to Hong Kong in June for every $1 in imports Hong Kong tallied from China, for a $6.4 billion difference, based on government data compiled by Bloomberg News. Analysts offered at least three possible explanations for the gap, including differences in how China and Hong Kong record trade in goods that pass through the city, as well as a persistence in fraud at a lower level. Any discrepancies make it tougher to gauge the impact of global demand on a Chinese economy that’s projected for the slowest growth in 24 years. “Sporadic fake exports certainly still exist,” said Hu Yifan, chief economist at Haitong International Securities Co. in Hong Kong.

The longer the data gap remains at this level, the more likely it’s a permanent fixture: “If the ratio stays at 1.3 throughout the year, I think that’s consistent,” Hu said. Distortions in China’s trade data have abated since the State Administration of Foreign Exchange started a campaign in May 2013 to curb money flows disguised as trade payments. The initial crackdown may have failed to eliminate deception. SAFE said in December that it would boost scrutiny of trade financing and that banks should prevent companies from getting financing based on fabricated trade. The State Administration of Taxation said earlier this month that it found instances of fraudulent exports used to obtain tax rebates by some companies. “You can’t exclude the possibility that capital flows are being disguised as exports” in the China-Hong Kong figures, said Yao Wei, China economist at Societe Generale SA in Paris. “As the capital account becomes more open, the flows will show up in the places they should.”

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Mind you: ‘Unexpectedly’.

Pending Sales of U.S. Existing Homes Unexpectedly Decrease (Bloomberg)

Fewer Americans than forecast signed contracts to buy previously owned homes in June, a sign residential real estate is struggling to strengthen. The index of pending home sales declined 1.1% from the month before after rising 6% in May, figures from the National Association of Realtors showed today in Washington. The median forecast of 39 economists surveyed by Bloomberg projected sales would rise 0.5%. Limited availability of credit and sluggish wage growth are making it harder for prospective buyers to take the plunge, threatening to throttle the pace of the housing recovery.

Continued gains in employment and a bigger supply of available homes will be needed to help accelerate the industry’s progress, which Federal Reserve Chair Janet Yellen has said is lackluster. “Unfortunately, I don’t see much of an acceleration in housing demand going forward until we get a significant improvement in the labor market and the income part of it in particular,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who forecast a 1% decrease in pending sales. “An uneven recovery in the housing market is really one of the biggest concerns of the Fed.”

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Short on moral values. Not uncommon among the rich.

Qatar World Cup Migrant Workers Not Paid For A Year (Guardian)

Migrant workers who built luxury offices used by Qatar’s 2022 football World Cup organisers have told the Guardian they have not been paid for more than a year and are now working illegally from cockroach-infested lodgings. Officials in Qatar’s Supreme Committee for Delivery and Legacy have been using offices on the 38th and 39th floors of Doha’s landmark al-Bidda skyscraper – known as the Tower of Football – which were fitted out by men from Nepal, Sri Lanka and India who say they have not been paid for up to 13 months’ work. The project, a Guardian investigation shows, was directly commissioned by the Qatar government and the workers’ plight is set to raise fresh doubts over the autocratic emirate’s commitment to labour rights as construction starts this year on five new stadiums for the World Cup.

The offices, which cost £2.5m to fit, feature expensive etched glass, handmade Italian furniture, and even a heated executive toilet, project sources said. Yet some of the workers have not been paid, despite complaining to the Qatari authorities months ago and being owed wages as modest as £6 a day. By the end of this year, several hundred thousand extra migrant workers from some of the world’s poorest countries are scheduled to have travelled to Qatar to build World Cup facilities and infrastructure. The acceleration in the building programme comes amid international concern over a rising death toll among migrant workers and the use of forced labour.

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The Agricultural Holocaust Explained: GMOs (Natural News)

Here are the top 10 ways GMOs threaten us all:

#1) Every grain of GM corn contains poison
#2) GMOs have never been safety tested for human consumption
#3) GMOs transform farming freedom into farming servitude
#4) GMOs run the very real risk of runaway self-replicating genetic pollution and ecocide
#5) GMO agriculture is breeding a new generation of chemical-resistant superweeds
#6) GMOs may have long-term unintended consequences on the environment
#7) GMOs collapse biodiversity
#8) GMOs put control over the food supply into the hands of profit-driven corporations
#9) GMOs may be harming pollinators
#10) The kind of scientists who collaborate with biotech companies are the most dishonest, corrupt and unethical scientists in our world

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I’m shocked!

UK Bee Research Funded By Pesticide Manufacturers (Guardian)

Criticial future research on the plight of bees risks being tainted by corporate funding, according to a report from MPs published on Monday. Pollinators play a vital role in fertilising three-quarters of all food crops but have declined due to loss of habitat, disease and pesticide use. New scientific research forms a key part of the government’s plan to boost pollinators but will be funded by pesticide manufacturers. UK environment ministers failed in their attempt in 2013 to block an EU-wide ban on some insecticides linked to serious harm in bees and the environmental audit select committee (EAC) report urges ministers to end their opposition, arguing there is now even more evidence of damage. Millions of member of the public have supported the ban.

“When it comes to research on pesticides, the Department of Environment, Food and Rural Affairs (Defra) is content to let the manufacturers fund the work,” said EAC chair Joan Walley. “This testifies to a loss of environmental protection capacity in the department responsible for it. If the research is to command public confidence, independent controls need to be maintained at every step. Unlike other research funded by pesticide companies, these studies also need to be peer-reviewed and published in full”. The EAC report found: “New studies have added weight to those that indicated a harmful link between pesticide use and pollinator populations.” Walley said: ”Defra should make clear that it now accepts the ban and will not seek to overturn it when the European commission conducts a review next year.” She added that ministers should make it clear that attempts to gain “emergency” exemptions, as pesticide-maker Syngenta did recently, will be turned down.

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No more hobbits.

New Zealand Dramatic Ice Loss Causes Severe Decline Of Glaciers (Guardian)

New Zealand’s vast Southern Alps mountain range has lost a third of its permanent snow and ice over the past four decades, diminishing some of the country’s most spectacular glaciers, new research has found. A study of aerial surveys conducted by the National Institute of Water and Atmospheric Research (Niwa) discovered that the Southern Alps’ ice volume has shrunk by 34% since 1977. Researchers from the University of Auckland and University of Otago said this “dramatic” decrease has accelerated in the past 15 years and could lead to the severe decline of some of New Zealand’s mightiest glaciers. Glaciers, made up of ice that collects above the permanent snowline, have their size and shape altered by various conditions, such as temperature, wind and rainfall.

The Niwa data shows that New Zealand’s glaciers experienced three growth spurts during the 1970s and 1980s due to a change in the Pacific climate system that generated more wind. But since that wind circulation has returned to its previous state, rising global temperatures have caused the glaciers to retreat dramatically. About 40% of the recorded ice loss has been in the dozen largest New Zealand glaciers, including the Tasman, Murchison and Maud glaciers. These huge slabs of ice and snow, supported by rock, take many years to respond to changing temperatures but are now collapsing, according to researchers. “We are losing the bottom half of these large glaciers as they sink into lakes,” Trevor Chinn, a glaciologist at Niwa, told Guardian Australia. “We are also losing access to the upper glaciers. We used to be able to walk up them but it’s much harder now because the ridges are turning into gravel cliffs and they collapse.

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“With global carbon emissions already too high because of fossil-fuel use, he says, “why do we have to look for more?”

For New Zealand Town, Oil Brings Debate Over Economy, Environment (WSJ)

A government push to lure oil companies to New Zealand offers the promise of diversifying the country’s economy, long dependent on wool and, more recently, Hobbit-inspired tourism. But in the university town of Dunedin, the oil push has also locked residents in a debate over how to balance economic gains with environmental consequences. Local business leaders welcome the boats that have been prospecting offshore over the past few years. “It would be a real boon to have an industry that would be able to employ a lot of people,” says Peter Brown, the head of Dunedin’s port. Business from exploration vessels is “massive for us,” says Nicky Gibbs, who runs a business supplying boats from a quay-side warehouse here. “Our income will at least double in any month that you have them here.”

But ecotourism entrepreneurs and environmental activists say looking for oil undermines New Zealand’s work to conserve land and reduce carbon emissions, especially because the country itself has scant demand for new oil and gas sources. “You’d have to have rocks in your head” to believe petroleum prospecting is good for Dunedin ecotourism, says Lisa King. For three generations, her family has brought tourists to see endangered yellow-eyed penguins that nest on their 1,500-sheep farm. Driving a 1980s-vintage bus atop a bluff where penguins nest in the scrub below, Ms. King’s brother Brian McGrouther says watching helicopters fly to exploration ships “right out there on the horizon” this year unsettled him. An oil spill off the coast could hurt the birds or the already-waning fish populations they depend on for food. “Our community has concerns around risk,” says Dunedin Mayor Dave Cull. With global carbon emissions already too high because of fossil-fuel use, he says, “why do we have to look for more?”

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Jun 262014
 
 June 26, 2014  Posted by at 3:40 pm Finance Tagged with: , ,  4 Responses »


Dorothea Lange Oklahoma drought refugee family near Lordsburg, New Mexico May 1937

I had seen the reports on Italy and Britain preparing to add heroin and hookers to their GDP, but I had put that down to some kind of desperate quirkiness. Now, though, I heard today that this is actually due to an EU directive, and the number crunchers at Eurostat demand countries obey this newfound accounting magic trick.

Even saw someone claim that the reason behind it is that since drugs and prostitution are deemed legal in the Netherlands, both are already part of GDP there, and that to make the numbers compatible, other countries should add them as well. Because, obviously, it’s much easier to add to GDP numbers that are nothing but guesswork in the first place (apparently, police files are used), in 27 different countries, than to subtract them in one …

Governments will do anything to make GDP numbers look better, and it’s a miracle – or a testament to their intelligence – that none of them tried this one ages ago, in one form or another. And the moral highground knights who say one should not add the disease that is addiction, to positive GDP numbers, if only because it is damaging and grossly expensive to society, may well be right in that claim, but they forget that those negative and expensive consequences all boost GDP numbers just as much.

Medical treatment, insurance claims paid out for breaking and entering, the decay of entire neighborhoods, you name it, they count it as positive. Want to help the economy? Drive your car into a wall; or better yet, a schoolbus. Any real patriot should be on crack. Uncle Sam wants you! The essence is, in case this has still not trickled through, that destruction makes up a core – and huge – part of GDP.

What Europe can do, America can do better, of course, though adding prostitution to GDP in the bible belt or in Utah may not be all that easy to do. But who needs it? Q1 GDP, as you probably know, was revised downwards to -2.96%, and that was a classic case of the thrown towel. Once it was obvious it would be negative, as was made clear in last month’s second revision to -1.0% , it didn’t matter much anymore how negative it would get. And that awakens the bit of creativity that exists among the data driven government crowd.

Whereas Obamacare numbers were initially used to make Q1 look less bad, they were now simply taken out, so Q1 got really ugly, but because of that Q2 can truly shine. Or so they think. I said yesterday that Q2 will be announced next month as +2-2.5%, but Tyler Durden may well be right, and it may be even higher, though I doubt they’ll go for Durden’s 5% estimate, or even Goldman’s 4%. Look, they don’t need to, the difference between -2.96% and + 3% is already big enough to create some stunning headlines with.

Still, the government is stretching it now in their faith of what they can make people believe. This graph Durden posted just baffles the mind. We understand what goes on, even if there’s no explanation forthcoming, and we understand that Obamacare was launched on January 1, and all sorts of things changed, but if you look at the differences here, and you realize that what you see is the discrepancy between this month’s final revision and last month’s second one, which came almost 2 full months after Q1 closed, you’d be inclined to ban the Department of Commerce ‘figure’ heads from ever coming near a calculator again.

Another thing Durden rightly points to is the marginal utility of debt, or the amount of GDP growth generated by an increase in debt. For Q1, US federal debt rose by $250 billion, while GDO dropped by $74 billion. in other words, debt doesn’t just not buy growth any longer, it actually diminishes it. This is not a new stat, and even China’s marginal utility of debt has been inching close to zero for a while now, and I’m sure there’ll be all sorts of explanations offered that why this was a one-off etc., but glancing over the revised numbers from the past 4 years, you can’t help thinking that this is what is meant but the Fed “pushing on a string”.

Q4 2013 is generally seen as quite good, but that’s just because federal; debt rose most in those 4 years, and still GDP rose by less than a third of the additional debt. Again, plenty explanations will be offered by pundits and bankers and statisticians, but if you simply add up all the differences between the added debt per quarter and the GDP growth it engendered, you must conclude you’re watching a losing game. And I know the guys in the Keynes jerseys will keep claiming it will get better, but they’ve been getting their asses kicked by the numbers since 2008 now, and, I have no doubt, longer than that. Despite the fact that, to stay in a soccer metaphor, they have the referees – the government number bureaus – in their corner. But then take one good look at this:

One last number from yesterday that I don’t think has gotten anywhere near enough attention is US exports, which were down a stunningly whopping 8.9%. That screams: how ugly would you like it? Like healthcare stats, something may have been moves forward to Q2 for that as well, but really, how bad was that winter? Were the ports all frozen solid that nothing could be shipped out? What happened there? And, perhaps more importantly, what will that number be for Q2? Will the figureheads be bold enough to come up with a, say, +5% export print, a 13.9% difference? And what will the explanation offered for that difference be?

We’ve entered Sillyland when it comes to GDP numbers, and governments are pretty desperately trying to figure how far they can go when it comes to making themselves and their stats look better than either really are. For now, they can rely on downward revisions of initially trumped up numbers, revisions that lag daily events by so much nobody cares anymore when they’re released. Even if longer term stats look absolutely awful, the focus will always be on tomorrow, not yesterday. Once you know how the human mind works, you use that knowledge to your advantage, right?

I’ll leave y’all with a question then: how do you think the US economy will overcome an 8.9% plunge in exports? Or a -2.96% GDP drop? What will go through your head when in a few weeks time the media will be filled with rosy and sunny and glorious data on how well “we” are doing?

Will today’s awful numbers still be right there in the front of your mind for comparison, or will they have faded? Q1 is almost 3 months ago, it’s so far in the past our propensity to filter out negative information has already done its job. That’s what your government counts on. Is your tolerance for deceit in numbers exhausted yet, or will you be easy prey once again?

Hey! We’re making history! Rejoice!

US Economy’s Stumble In First Quarter Historic (MarketWatch)

The U.S. economy contracted by 2.9% in the first quarter, marking the biggest drop since early 2009 when the Great Recession was winding down, according to newly revised government figures. The chief reason: Americans spent less than originally assumed, mainly on health care. A bigger drop in U.S. exports, higher imports and a smaller buildup in inventories also contributed to the steeper decline in gross domestic product. The economy previously was estimated to have shrunk 1% in the first three months of the year, a period marked by unusually harsh winter weather that clogged roads, closed workplaces and kept many employees and shoppers home. How bad was the first quarter? The decline was the biggest during a prolonged expansionary phase in the economy since the end of World War II.

The revised GDP report briefly stunned Wall Street and clearly unsettled the White House. President Obama’s chief economic adviser, Jason Furman, cast doubt on the report and argued the economy is much stronger than the first-quarter contraction implied. Investors, for their part, shrugged off the backward-looking report. The economy appears to have rebounded in the second quarter and economists polled by MarketWatch predict growth will turn positive again, with a 3.8% increase. The deep drop in GDP from January to March largely stems from lower consumer outlays. The government marked down the increase in consumer spending—the main engine of U.S. economic activity—to a meager 1% in the first quarter from 3.1%.

For the most part, the reduced spending reflected lower medical costs. The Bureau of Economic Analysis originally assumed that the introduction of Obamacare would boost health-care spending in the first three months of the year. Yet health-related spending actually fell by $6.4 billion instead of rising by $39.9 billion as previously estimated, according to the revised data . As a result, consumer spending on services rose just 1.5% and not a heady 4.3%. And spending on everyday goods such as groceries or personal-care items fell slightly instead of increasing. The decline in U.S. exports, meanwhile, was even sharper at 8.9% and imports rose 1.8%, which was more than twice as high as previously reported. A bigger trade deficit is a drag on U.S. growth.

What’s more, the increase in business inventories was marked down to $45.9 billion from $51.6 billion. The production of goods for later sale is a plus for GDP, but restocking of warehouse shelves took place at less than half the rate in early 2014 compared with the third and fourth quarters of last year. Final sales of U.S. produced goods and services, meanwhile, was reduced to show a 1.3% decline instead of a 0.6% increase.

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In Q1, +$250 Billion In Federal Debt Bought -$74 Billion In GDP (Zero Hedge)

As everyone knows by now, in Q1 the US economy “grew” (we use the term loosely because the correct term is shrank) by the lowest amount in Q1 since 2009. More to the point, the -2.9% collapse in GDP was the 17th worst quarterly print in US history.

That much is largely known by now. What may not be known is that while there has been at least one quarter in the past 5 years in which the US economy shrank on a CAGR basis (at least until a new and improved definition of GDP revises that away) since 2009 there has never been a quarter in which the economy shrank sequentially in nominal terms. Which is what it did in Q1, when it declined by $74 billion. Which brings us to the topic of marginal utility of debt, extensively covered here in the past. In brief, it describes how much in “economic growth” every dollar in federal debt buys. The bad news: in Q1, US total Federal debt rose by $250 billion, to a record (duh) $17.6 trillion. This debt “bought” a negative $74 billion in GDP, which declined to $17.0 trillion. Said otherwise, this was the first quarter since the end of the recession when debt rose (by a whopping amount), and when GDP declined sequentially in nominal terms.

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And they’re not kidding.

Goldman Boosts Q2 GDP Forecast Due To Collapse In Q1 GDP (Zero Hedge)

“…we think that Q1 GDP was an aberration, and is not representative of the strengthening underlying trend in US growth.” There is nothing we can add to such brilliant weatherman insight as what Jan Hatzius from Goldman just unleashed on the unwitting muppets (all of whom can’t wait for Goldman’s second above-consensus GDP forecast to pan out… unlike the last time in 2010). In brief: Goldman just boosted their Q2 tracking GDP from 3.8% to 4.0% because Q1 GDP imploded. And scene.

Bottom Line: Q1 GDP was revised down even more than expected, mainly due to lower-than-expected healthcare spending. The May durable goods report was a bit weaker than expected, although inventories rose more than expected. We increased our Q2 GDP tracking estimate by two-tenths to 4.0%.

1. Q1 GDP was revised to -2.9% in the third estimate (vs. consensus -1.8%), from -1.0% previously. The downward revision was concentrated in two categories: healthcare spending subtracted 1.2 percentage points (pp) relative to the second estimate, while net exports subtracted 0.6 pp. All other components of GDP combined contributed a further one-tenth to the revision. We had anticipated downward revisions to both healthcare spending and net exports—in particular in light of the weak healthcare numbers in the Q1 Quarterly Services Survey – but the extent of these revisions was larger than we expected.

2. Headline durable goods orders fell 1.0% in May (vs. consensus flat). Within the typically volatile categories, a large decline in defense orders (-31.4%) and a modest decline in non-defense aircraft (-4.0%) pulled down the headline figure. Core capital goods orders rose 0.7% (vs. consensus +0.5%) and core capital goods shipments—used by the Commerce Department to calculate the equipment investment component of the GDP report—rose 0.4% (vs. consensus +1.0%) in May. Growth in durable manufacturing inventories grew 1.0% in May and was revised up two-tenths to 0.3% in April.

3. We increased our Q2 GDP tracking estimate by two-tenths to 4.0%.

Baghdad Bob is spinning in his grave.

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Look at the revision in that chart. It’s insanely beyond all comprehension.

The Reason For The Total Collapse In Q1 GDP Is … To Boost Q2 (Zero Hedge)

Remember back in April, when the first GDP estimate was released (a gargantuan by comparison 0.1% hence revised to a depression equivalent -2.9%), we wrote: “If It Wasn’t For Obamacare, Q1 GDP Would Be Negative.” Well, now that GDP is not only negative, but the worst it has been in five years, we are once again proven right. But not only because GDP was indeed negative, but because the real reason for today’s epic collapse in GDP was, you guessed it, Obamacare. Turns out this number was based on … nothing. Because as the next chart below shows, between the second and final revision of Q1 GDP something dramatic happened: instead of contributing $40 billion to real GDP in Q1, Obamacare magically ended up subtracting $6.4 billion from GDP. This, in turn, resulted in a collapse in Personal Consumption Expenditures as a percentage of GDP to just 0.7%, the lowest since 2009!

Don’t worry though: this is actually great news! Because the brilliant propaganda minds at the Dept of Commerce figured out something banks also realized with the stub “kitchen sink” quarter in November 2008. Namely, since Q1 is a total loss in GDP terms, let’s just remove Obamacare spending as a contributor to Q1 GDP and just shove it in Q2. Stated otherwise, some $40 billion in PCE that was supposed to boost Q1 GDP will now be added to Q2-Q4. And now, we all await as the US department of truth says, with a straight face, that in Q2 the US GDP “grew” by over 5% (no really: you’ll see).

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Mob rules.

Dark Pool Greed Drove Barclays to Lie to Clients (Bloomberg)

Barclays was so bent on lifting its private trading venue to the upper ranks of Wall Street dark pools that it lied to customers and masked the role of high-frequency traders, according to New York’s attorney general. Barclays falsified marketing materials to hide how much high-frequency traders were buying and selling, according to a complaint filed today by Eric Schneiderman. Barclays runs one of Wall Street’s largest dark pools, a private trading venue where investors can trade stocks mostly anonymously. Schneiderman has taken a leading role in seeking to reform how equities trade in the $23 trillion U.S. stock market, examining whether exchanges and dark pools give unfair perks to high-frequency traders. His suit against Barclays says clients such as institutional investors were the losers, led to believe they were safe from predators on a trading venue where aggressive trading strategies were in fact encouraged.

“This is obviously a breach of confidence, a breach of trust,” said Joe Saluzzi, co-head of equity trading at Themis Trading in Chatham, New Jersey. “It’s pretty obvious at this point that the SEC needs to come in, it needs to know what’s going on actually inside these boxes. Barclays – are they the only ones? We don’t know. I don’t know.” In a statement, Mark Lane, a spokesman for London-based Barclays said: “We take these allegations very seriously. Barclays has been cooperating with the New York Attorney General and the SEC and has been examining this matter internally. The integrity of the markets is a top priority of Barclays.”

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How Barclays Got Caught Red-Handed With “Pernicious HFT Fraud” (Zero Hedge)

First it was gold, now it is HFT – poor Barclays just can’t get away with any market rigging crime these days. Remember when in the aftermath of the most recent Michael Lewis-inspired HFT scandal, one after another HFT and Dark Pool exchange swore up and down they know, see, hear and certainly trade no predatory algo evil? Turns out they lied, as usual. As was reported earlier, the NY AG just charged Barclays with fraud (or rather, as Schneiderman called it repeatedly “pernicious fraud”) for not only misrepresenting the nature of its dark pool to clients, but also exposing them to numerous “toxic” and predatory HFT algos – another word for algos which frontran orderflow either within the Barclays dark pool, Barclays LX – arguably the second largest venue in the US second only to Credit Suisse’ Crossfinder – or on different lit and unlit venues as soon as they had seen the flow as indicated by Barclays.

As Bloomberg explains, “Barclays Plc was so bent on lifting its private trading venue to the upper ranks of Wall Street dark pools that it lied to customers and masked the role of high-frequency traders, according to New York’s attorney general.”

Barclays falsified marketing materials to hide how much high-frequency traders were buying and selling, according to a complaint filed today by Eric Schneiderman. Barclays runs one of Wall Street’s largest dark pools, a private trading venue where investors can trade stocks mostly anonymously.

Here Bloomberg goes so far as to give “critics” like us credit for something we have said since 2009:

Schneiderman’s action will fortify a suspicion common among critics of dark pools and high-frequency firms, which have proliferated in the past decade with advances in computer power and efforts to spur competition among U.S. trading venues. Namely, that in the rush to attract traders to their markets and boost profits, the venues have catered to computerized market makers to the detriment of individuals.

Actually, replace “fortify” with “confirm.” Because what the Scheinderman action proves without doubt is that in order to generate ever-bigger trading revenue profits and to pull as much activity from lit exchanges, big banks and all other exchanges for that matter, would gladly sell order flow of traditional clients to HFTs in order to allow frontrunning of their orders. In exchange for this Barclays et al (yes, every other dark pool out there does the same) would be compensated handsomely from the same HFTs that make money without taking any risk, as all they do is simply frontrun legitimate orders.

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If you don’t stop it, who will?

Big Housing Doles Out Big Election Cash (MarketWatch)

The housing market is in better shape than it was two years ago, but major issues are still in flux, and industry participants are placing large bets on favored congressional candidates ahead of the November election. Housing groups have already spent millions of dollars this election season, and check-writing is sure to ramp up over coming months. Given the partisan gridlock in Congress, one might wonder why the industry would bother to invest so much in lawmakers who may accomplish very little. The answer is simple: advocates must use every opportunity to promote their position. “A trade group representing an industry cannot be caught on the sidelines and unprepared,” said Brian Gardner, an analyst at Keefe, Bruyette & Woods. “Groups and advocates want to be proactive and always try to build political capital, even when the prospects of legislation are low.”

The major looming political issue for the housing industry is mortgage-finance reform, including what to do with federally controlled giants Fannie Mae and Freddie Mac, which back about six-in-10 new mortgages. Much of the housing industry wants Congress to retain some place for the government in the mortgage marketplace, while encouraging greater private investment. Other priorities for the housing industry are whether tax reform will hit the mortgage-interest deduction, terrorism-risk insurance, flood insurance, immigration, and other issues.

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Where the real power resides.

House Passes Bill To Weaken Dodd-Frank, Deregulate Wall Street (HuffPo)

The U.S. House of Representatives on Tuesday passed a financial deregulation package that would benefit the Koch brothers and the nation’s largest banks by a vote of 265-143. The legislation would significantly weaken elements of the 2010 Dodd-Frank financial reform law dealing with derivatives – the complex products at the heart of the 2008 meltdown. Many components of the bill approved Tuesday had previously passed the House with bipartisan support. However, Democratic backing had been weakest on the most controversial measure, which allows U.S. firms to skirt domestic regulations on some derivatives by conducting trades through offshore affiliates in other major financial centers.

Republicans were almost uniform in their support, with Rep. Walter Jones (N.C.) the lone GOP holdout. Democratic opposition was broad, with only 46 Democrats voting in support — a marked change from several recent House votes on Wall Street deregulation that have drawn substantial backing from dozens, and in some cases an overwhelming majority, of House Democrats. The White House issued a formal statement last week saying that it “strongly opposes” the legislation that passed Tuesday. The bill includes several separate deregulatory measures sought by the largest Wall Street banks and the Koch brothers, who control significant financial and energy derivatives operations. Americans for Financial Reform, the premier policy analysis organization among bank watchdogs, advocated strongly against the bill alongside consumer groups and the AFL-CIO.

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Funny.

New Home Sales Soar To Reach Housing Depression Lows (Lee Adler)

New home sales soared in May to 49,000 units, reaching the level reached at the bottom of the 1987-91 real estate depression as well as to the level of May 2008, near the bottom of the worst US economic depression since the 1930s. Mainstream conomic pundits and financial media personalities were ecstatic. After all it’s not often that a sector as important as housing is to the US economy recovers from nearly non-existent all the way back to previous depression levels. It’s even more impressive considering that there are 29 million more US households than in 1991. What a great moment for the US economy! Congratulations to the housing industry and especially to the Fed for a job well done, and to the US financial media for doing its usual fine job of keeping great data like this in perspective.

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China will find much more, or already has; thing is we won’t know: to what extent can we trust Chinese government reports?

China Finds $15 Billion of Loans Backed by Falsified Gold Trades (Bloomberg)

China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, adding to signs of possible fraud in commodities financing deals. Twenty-five bullion processors made a combined profit of more than 900 million yuan by using the loans to take advantage of the difference between onshore and offshore interest rates, and the appreciation of Chinese currency, according a report on the National Audit Office’s website. China is the biggest producer and consumer of gold.

Public security authorities are also probing alleged fraud at Qingdao Port where the same stockpiles of copper and aluminum may have been pledged multiple times as collateral for loans. As much as 1,000 tons of gold may be tied up in financing deals in China, in which commodities including metals and agricultural products are used to get credit amid restrictions on lending, according to World Gold Council estimates through 2013. “This is the first official confirmation of what many people have suspected for a long time — that gold is widely used in Chinese commodity financing deals,” said Liu Xu, a senior analyst at Capital Futures Co. in Beijing. “Any scaling back by banks of gold-backed financing deals might lead to a short-term reduction in Chinese imports and also spur some sales by companies looking to repay lenders.”

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Let’s hope so.

Britain and Europe Are Heading for a Divorce (Bloomberg)

The Juncker affair is only partly Cameron’s fault. Although he picks the wrong fights and his manner is grating, there’s a deeper problem that the other EU governments seem incapable of recognizing. Juncker illustrates it perfectly. Cameron was tactically inept, but he’s right on the merits of the appointment: Juncker’s accession would move the EU two strides further in the wrong direction. First, Juncker is a federalist, a believer in the “ever closer union” inscribed in EU treaties. As head of the European Commission — the union’s powerful executive branch — he’ll be in a good spot to advance that purpose. He’ll be deaf to the idea that Europe needs more “subsidiarity” (the principle that powers that don’t need to be centralized shouldn’t be) and hence to Britain’s main preoccupation.

Second, his appointment would be a coup for the European Parliament. Under current rules, national governments decide who leads the commission, and the understanding has been that this choice is made by consensus (that is, unanimously). The parliament, which wants Juncker, has no more than an advisory role. Yet it’s being allowed to insist on Juncker, despite the misgivings of other leaders, and even though that overrides Britain’s tacit veto. It’s a perfect example of the very syndrome that infuriates Brits: the unlegislated drift of power from national governments to EU institutions. And it comes — in the name of EU democracy, mind you — after EU-wide elections in which parties opposed to that drift made great gains.

As a result, Cameron’s difficulties over Europe are rapidly compounding. His position requires him to argue that Europe is reformable; Europe is telling the world it isn’t. How many of these rebuffs can Cameron absorb before he has to acknowledge that the U.K.’s choice is not between a new, less centralized union and divorce, but between divorce and the union as it is (only more so)? In effect, he’s already cast aside the argument that Britain has a compelling interest in remaining an EU member on almost any terms. If he believed that, he wouldn’t have promised a referendum in the first place.

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Anyone know the French word for crack?

France Refuses to Include Drugs and Prostitution in Its GDP (Slate)

The government of France has just made what on the face of it appears to be a nonannouncement announcement: It will not include illegal drugs and prostitution in its official calculation of the country’s gross domestic product. What made the announcement odd was that it never has included such activities, nor have most countries. Nor do most governments announce what they do not plan to do. (“The U.S. government has no intention of sending a man to Venus.”) Yet the French decision comes in the wake of significant pressure from neighboring countries and from the European Union to integrate these activities into national accounts and economic output. That raises a host of questions: Should these activities be included, and if those are, why not others? And what exactly are we measuring – and why?

Few numbers shape our world today more than GDP. It has become the alpha and omega of national success, used by politicians and pundits as the primary gauge of national strength and treated as a numerical proxy for greatness or the lack thereof. Yet GDP is only a statistic, replete with the limitations of all statistics. Created as an outgrowth of national accounts that were themselves only devised in the 1930s, GDP was never an all-inclusive measure, even as it is treated as such. Multiple areas of economic life were left out, including volunteer work and domestic work. Now Eurostat, the official statistical agency of the European Union, is leading the drive to include a host of illegal activities in national calculations of GDP, most notably prostitution and illicit drugs.

The argument, as a United Nations commission laid out in 2008, is fairly simple: Prostitution and illicit drugs are significant economic activities, and if they’re not factored into economic statistics, then we’re looking at an incomplete picture—which in turn will make it that much harder to craft smart policy. Additionally, different countries have different laws: In the Netherlands, for instance, prostitution is legal, as is marijuana. Those commercial transactions (or at least those that are recorded and taxed) are already part of Dutch GDP. Not including them in Italy’s or Spain’s GDPs can thus make it challenging to compare national numbers. That is why Spain, Italy, Belgium, and the U.K. have in recent months moved to include illegal drugs and nonlicensed sex trade in their national accounts.

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Being a pundit is so much easier if you just repeat what others tell you.

Why Financial Reporters Are Clueless (Stockman)

This morning’s Q1 GDP revision might have been a wake-up call. After all, clocking in a -2.9% – cold winter or no – it was the worst number posted since the dark days of Q1 2009. Well, actually, it was the fourth worst quarterly GDP shrinkage since Ronald Reagan declared it was morning again in American 30 years ago. Stated differently, 116 of the 120 quarterly GDP prints since that time have been better. Even when you adjust for the Q1 inventory “payback” for the bloated GDP figures late last year, real GDP still contracted at a -1.2% annually rate.

Still, within minutes of the 8:30AM release, the Wall Street Journal’s news update did not fail to trot out the “do not be troubled” mantra. Not only did “…early second-quarter data indicates the economy has improved this spring as warmer weather helped release some pent-up demand” , but the reader was also advised in a declarative sentence that the US economy’s real growth capacity is far higher, implying that Q1 results were some kind of freakish aberration:

…growth over the first six months of the year likely fell below….. the U.S. economy’s longer term growth rate of just over 3%.

Well, here’s real GDP since the turn of the century. The average real growth rate is about 1.8%—-barely half the cited figure. So where does the 3% growth rate for “potential GDP” come from, then? The answer is that it’s Keynesian writ, and the pretext for the Fed’s endless monetary “accommodation”. But doesn’t an actual 14-year trend trump theories that have become self-evidently irrelevant and macro-models that have been chronically wrong? In fact, the 3% potential GDP growth narrative is mocked by the fundamental arithmetic of true economic growth – which is to say, labor hour gains and capital investment.

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Always useful.

The Pocket Guide To Understanding The Different Schools Of Economics (Chang)

From the man who brought you “the shortest economic textbook in the world“; and “13 things Economists won’t tell you“, here is Ha-Joon Chang’s ultimate pocket guide to the differences (and similarities) between all the economic schools of thought.
As Chang discusses in his new book,

Despite what the experts want you to believe, there is more than one way of ‘doing’ economics People have been led to believe that, like physics or chemistry, economics is a ‘science’, in which there is only one correct answer to everything; thus non-experts should simply accept the ‘professional consensus’ and stop thinking about it. Contrary to what most economists would have you believe, there isn’t just one kind of economics – Neoclassical economics. In fact there are no less than nine different kinds, or schools, as they are often known. And none of these schools can claim superiority over others and still less monopoly over truth. I accept that being suddenly asked to taste nine different flavours of ice cream when you had thought that there was only one plain vanilla can be quite overwhelming. In order to help, the simple table below should help you overcome your initial fear.

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Nice.

The Psychology of Never Saying “No” (Colas)

“Never tell your CEO ‘No’.” I heard that bit of wisdom today from a veteran investor relations professional. He was speaking at a conference about the role of IR in the capital markets and inside of corporations, and he paused for effect after he said it. He clearly wanted the audience to know he was passing along an important corporate life lesson, and he wanted to make sure we all heard him. At first blush, it seemed like something that a typical business/political animal might say. Someone, perhaps, who had fought all the usual wars inside large enterprises and come out victorious. Or at least not been fired.

As he spoke further, however, it became clear that he was not espousing the kind of Yes-man obsequious behavior we all take as a sign of both a broken corporate culture and personal weakness. Far from it, in fact. It is part of the IR professional’s job to deliver tough news to the company’s C-level officers. You just never use the word “No” as you dish out the tough love. That was his message. A quick review of the psychological literature on the word “No” explains the wisdom of his warning. Essentially, when a human being hears the word, they begin to shut down. The need for approval is so deeply ingrained in our inherently social natures that the word “No” conjures up early childhood memories of parental control and lack of approval. If this all feels a little Freudian, fear not – the data exists to back up these observations.

A study in the journal Emotion (Alia-Klein, Goldstein, and Volkow 2007) explains some of how this works. The researchers put 23 healthy adult males in a Functional Magnetic Resonance Imaging (fMRI) machine, which records regional brain activity, and exposed the subjects to repeated vocalizations of the words “Yes” and “No”. A summary of their findings and interpretations follow here:

The hypothesis tested was that humans learn the meanings of “Yes” and “no” very early in life, while their brains are still developing. As such these words acquire special emotional and motivational meaning. The word “No” is especially powerful, since it means the listener is unlikely to get what they want right away. By asking the subjects to press a button immediately upon hearing the two words, researchers found that the subjects process the word “Yes” more quickly than the word “no”. The difference is small – 78 milliseconds on average, or just shy of a tenth of a second – but it is measurable and consistent.

The brain scans show that that both words “Light up” parts of the brain that house emotion, showing that both “Yes” and “No” have special significance. The researchers also asked the subjects of the study to rate the words for their emotional significance, and the responses confirmed that both carry a lot of baggage. Other words used in the study, like “Up” and “Ten” did not elicit such responses.

Psychological research into the power of negative emotional stimulus supports this small word’s outsized power on our psych. A few other related studies on stimulus like facial expression – because who says “No” with a smile? – support the argument that “No” means trouble.

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Interview.

David Stockman on the Fed and War -and More- (Stockman)

David Stockman, budget director under Ronald Reagan, talks about the relationship between the Fed and war; his candid assessment of Reagan; his conversion away from leftism; and his current assessment of the economy.

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Too many “leaders in that commission, who’ve made careers out of pushing the ocean to the brink in the first place.

Report Warns World’s Oceans Pushed To Brink Of Collapse (Globe&Mail)

Former world leaders and ministers from countries around the globe say human activity has put the world’s oceans on a dangerous trajectory of decline and it is time to impose governance on the unclaimed high seas. The Global Ocean Commission, a body of 18 prominent former politicians and heads of major international organizations, released a report after 18 months of investigation that calls for a five-year “rescue package” for the 64% of the world’s oceans that lie outside national jurisdiction. Canada is represented on the commission by former prime minister Paul Martin, who was asked to be part of the initiative by commission co-chair Trevor Manuel, the former finance minister of South Africa. Mr. Martin said in an interview that it will not be easy to convince countries to take steps that will cause short-term economic pain, but those steps are necessary in the long term to protect regional stability, food security and the integrity of the oceans which the report calls “the kidney of the planet.”

“Inevitably, when you are dealing with the global commons,” Mr. Martin said, “the right thing to do becomes in the economic interests of everybody.” In the report, a copy of which was obtained by The Globe and Mail, the commissioners say human beings rely on the oceans for clean air, climate stability, rain and fresh water, transport, energy, food and livelihoods. But overfishing, pollution, habitat destruction, acidification and other human activities are pushing the ocean system to the point of collapse, they say. The report makes eight recommendations, including a call for a new agreement under the United Nations Convention on the Law of the Sea that would impose international governance on the massive expanse of unclaimed waters threatened by “benign neglect by the majority and active abuse by the minority.”

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My bet: they’ll get it.

Syngenta Seeks Emergency Exemption To Use Banned Toxin On UK Crops (Guardian)

Almost one-third of all oilseed rape in the UK could be treated with a banned insecticide if the government grants an “emergency” exemption to the pesticide manufacturer Syngenta, it has emerged. The agro-chemical company’s neonicotinoid pesticide was given a three-year ban by the European Union in 2013 due to research linking it to serious harm in bees. The news of Syngenta’s application comes a day after an international scientific review concluded there was “clear evidence of [neonicotinoid] harm sufficient to trigger regulatory action”. Neonicotinoids are the world’s most widely used insecticide and the panel said contamination was so pervasive it threatened global food production. “Syngenta has made this emergency use application on behalf of UK farmers for a limited use of neonicotinoid seed treatment in two specific contexts where alternative approaches are not effective and a danger to production exists,” said a company spokesman.

He noted that the application was supported by the government’s Advisory Committee on Pesticides (ACP), which confirmed the criteria for authorisation had been met. “Given this assessment we urge the government to support farmers and allow limited use this season.” Syngenta argues that seed treatments with neonicotinoids are needed to protect rape sown by mid-August from aphid damage and crops in areas where flea beetle pressure is historically high. It says there are no available alternatives. The exemption would allow up to 186,000 hectares of oilseed rape – 30% of the total crop area – to be planted with seeds treated with the insecticide. Bayer, another major neonicotinoid manufacturer, is not applying for an exemption.

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May 262014
 
 May 26, 2014  Posted by at 3:29 pm Finance Tagged with: , ,  3 Responses »


Arthur Rothstein Texas Panhandle dust bowl Summer 1936

The headlines speak of an earthquake. But just about absolutely everyone who’s been shaken manages to declare victory, including incumbents who have lost, which is the majority of them, in some cases painfully. And European stocks are rising too, in some cases to all time highs. It all adds up to a perfect illustration of the absurd bizarro Europe has become.

Despite the huge surge in anti-EU sentiments, Brussels claims that because pro-EU parties still have a majority in the European parliament, the people of Europe have voted for the EU. There are a few problems with that claim that they would rather not discuss. Almost two thirds of eligible voters did not vote, attendance was as low as 18% in Czech and 13%(!) in Slovakia. It’s safe to assume a larger number of non-voters are not pro-EU (there’s a difference between anti and not-pro) than the number who are. Not pro-EU voters often have the problem that there are no parties to vote for that they like in other issues than being euroskeptic. In a democratic system, that’s a dangerous gap and a big political deficit.

The picture painted by the establishment is that only “extreme” (i.e. nazi) elements oppose what the EU has become. This is what you might call ‘useful nonsense’. As is the claim that “you can’t be against Europe, because you are Europe”. As if Europeans have no right not to like what the EU has become. Still, many people would rather stay home than vote for a Farage or a Le Pen, even though they’re the only voice in their countries that share their opinion on Europe. When you add it all up, it’s safe to assume there are many more euroskeptics than the elections appear to show.

There are also big differences between the euroskeptics, who therefore don’t – and can’t – form a “block” in the parliament the way the established parties do (for some reason, you need parties from 7 different countries to cooperate to be recognized as a block). For instance, Farage refuses to discuss forming a block that Le Pen is part of. What all of this means is that the center-right EPP block is still the biggest, which is readily spun into a positive development, even though it lost 62 of its seats, plummeting from 274 to 212:

With partial results and exit polls suggesting that the centre-right EPP had claimed 212 seats in the European Parliament to 185 Socialists, Jean-CLaude Juncker, the former prime minister of Luxembourg, was presented as the next president of the EU executive by jubilant party supporters. “As lead candidate of the largest party, I have won the election,” he told reporters in the Parliament hemicycle. “The EPP has got a clear lead, a clear victory.”

You lose 22% of your seats and declare victory. It fits perfectly into the overall messages emanating from the parties, and it would be funny if it had no consequences. Both the French and Greek winners (right wing Le Pen and left wing Tsipras) have urged for early elections to be held in their respective countries. Don’t count on it. Le Pen called for the French parliament to be dissolved, and PM Manuel Valls described his country’s vote as very serious, before, about two seconds later, announcing tax breaks, presumably in an attempt to stem the bleeding.

French President Hollande’s Socialist party suffered a huge and bitter defeat, and there are crisis talks in Paris today, undoubtedly in a room so full of spin doctors cabinet ministers will have a hard time finding a seat. How legitimate and credible is a President with only 14% of the vote, with Le Pen getting 25%? Nevertheless, Valls said Hollande and the Socialist government were elected for a five-year term with a specific “road map”, and they’re not going to change that. Not even if 6 out of every 7 French(wo)men who did bother to vote are against them. You got to love democracy. It’s as if ‘democracy’ means everyone is free to make up their own definition of the term, and all definitions are equally valid.

In fact, most incumbent governments have lost, and, spinning aside, need to address the issue of their legitimacy in a serious fashion, but are for now mostly stuck in “well, we’re still sitting here and what are you gonna do about it?” mode. That is as curious as it is dangerous, but the how and why may not be apparent if and when an economic recovery is plucked out of the hat. It’s when that doesn’t happen that the dangerous part begins. With distortions such as Italian and Spanish bonds selling at about the prices as US Treasuries, things may seem to be picking up, but that won’t last.

And the autostrada may now seem free and open for Mario Draghi to come with stimulus measures, but not so fast. The big winners of these elections are, with perhaps one or two exceptions, not in favor of going about things the ECB way. Nigel Farage’s victory puts more pressure on Cameron’s Conservatives to finally get serious about renegotiating the terms under which the UK is part of the EU. Tsipras’ victory means that Greek eurozone membership is by no means assured, and may only be salvable through monetary policies which other EU nations cannot accept. Or another coup.

The best hope for Brussels’ bureaucrats may be to hope that everything will disappear from people’s minds and attention spans, but without substantial economic improvements that is not likely. Why would the people in Greece, Italy and Spain keep on believing that staying in the EU is a better option than leaving, if that leaves them with sky high unemployment numbers and crumbling health care systems? Moreover, what exactly do the Greeks have to say in Brussels? Not much. And that is a problem that many EU nations have: who defends their specific needs and wishes if and when these don’t sync with those of larger nations?

Because the appropriation of seats in the European parliament has been set up with a system of “degressive proportionality”, which means the larger the state, the more citizens are represented per MEP, It’s not even as bad for the Greeks as it could have been. Degressive proportionality means Malta with 400,000 people has 6 seats, or one seat per 67,000, while Germany with 82.5 million citizens has 99 seats, i.e. one seat per 859,000. That’s nice, but in the end Germany wins. the Greeks may look “proportionally advantaged”, but their 21 seats are less the 26 Marina le Pen picked up last night, and much less than Angela Merkel’s 30.

Germany has a total of 96 seats in the 766 total parliament, France has 74, and Greece their 21. And the “membership will make us rich” story Greece was fed has already lost most of its luster lately, while the Germans and French who outnumber the Greeks by more than 8 to 1 in the EU have done very little to lift the unemployment burden in Athens. Instead, the troika continues to force them to sell their assets, like for instance 110 of their best beaches, to the world’s elite in the name of “development”.

If Greece leaves the eurozone, returns to the drachma – and devaluates it – and negotiates, or simply declares, inevitable defaults on parts of its debt, does anyone believe it could possibly fare worse than it does now? Athens can’t get out of where it is today because it has no say in how that could be achieved. The ultimate insult added to the grave injury the EU has turned out to be for the Greeks is that they’re not even their own boss anymore. Instead, they’re mere servants to a bunch of autocrats and bureaucrats who are selling off their land and their treasures from under their feet. I don’t know about you, but I’d rather be poor and independent.

Perhaps Greece can adopt some elements of the election program of the German satire party simple named ‘Die Partei’, which even won a seat (yeah, that’s what it’s come to). They intend to rotate that one seat between members, a new one every month, who will then be eligible to be placed on a 6-month retainer. “We’ll ‘squeeze the EU the way a small Mediterranean nation does'”. Other points from Die Partei’s campaign: build a wall around Switzerland, abolish Daylight Savings Time, and maximize personal wealth at $1 million, the rest to be divided amongst the poor. They now have a seat in the European Parliament. How fitting is that?

Eurosceptic ‘Earthquake’ Rocks EU Elections (BBC)

Eurosceptic and far-right parties have seized ground in elections to the European parliament, in what France’s PM called a “political earthquake”. The French National Front and UK Independence Party both performed strongly, while the three big centrist blocs in parliament all lost seats. The outcome means a greater say for those who want to cut back the EU’s powers, or abolish it completely. But EU supporters will be pleased that election turnout was slightly higher. It was 43.1%, according to provisional European Parliament figures. That would be the first time turnout had not fallen since the previous election – but would only be an improvement of 0.1%.

“The people have spoken loud and clear,” a triumphant Marine Le Pen told cheering supporters at National Front (FN) party headquarters in Paris. “They no longer want to be led by those outside our borders, by EU commissioners and technocrats who are unelected. They want to be protected from globalisation and take back the reins of their destiny.” Provisional results suggested the FN could win 25 European Parliament seats – a stunning increase on its three in 2009. The party also issued an extraordinary statement accusing the government of vote-rigging.

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EU Protest Parties’ Surge Posing Threat From U.K. to Greece (Bloomberg)

Protest parties racked up gains across the 28-nation European Union in elections to the bloc’s Parliament, turning the assembly designed to unite Europe into an echo chamber for politicians who want to tear it apart. The anti-establishment wave hit hardest in France, Greece and the U.K., undermining the leaders of those countries and making it more difficult to steer the EU as a whole. In all, anti-establishment parties won 30% of the Europe-wide vote, up from 20% in the current Parliament, according to official EU projections late yesterday. Political forces suspicious of the U.S. made inroads across the continent, threatening to snag trans-Atlantic trade talks the EU hopes will spur an economy struggling with the after-effects of the euro debt crisis.

The U.K. Independence Party, which wants to yank Britain out of the EU, won the election in Britain, beating Prime Minister David Cameron’s Conservatives into third place. The protest vote “will have a huge impact on the parties and policies back home,” said Pieter Cleppe, head of the Brussels office of U.K.-based think tank Open Europe. “They will make it harder to centralize powers in the EU, especially when it comes to managing the euro crisis.” National winners included Marine Le Pen, head of France’s anti-immigration National Front; Alexis Tsipras, head of Greece’s anti-austerity Syriza party; and Nigel Farage, UKIP leader. With most of the seats declared in Britain, UKIP had 27.5% of the vote, the main opposition Labour Party 25%, the Conservatives 24%, the Greens 8% and Deputy Prime Minister Nick Clegg’s Liberal Democrats 7%.

United mainly by opposition to European unity, the motley collection of protest movements shows no signs of agreeing on a policy program. Instead, their aim was to make life harder for people who weren’t on the ballot: leaders of national governments. European Central Bank President Mario Draghi said the election showed that voters were looking for answers to the “thorny questions” of economic growth and employment. “Sustainable growth and jobs are vital to continue European integration, which is, let’s never forget, the best guarantor of peace,” Draghi said at an event yesterday in Sintra, Portugal. In France, the National Front picked up 25%, estimates by TNS Sofres, Ipsos and Ifop showed. The breakthrough dealt a further blow to President Francois Hollande, the least popular leader in France’s modern history. Le Pen’s party has cashed in on discontent with an economy that has barely grown in two years.

Proclaiming “politics of the French, for the French, with the French,” Le Pen said the election was a “humiliation” for Hollande. She called on him to dissolve the French parliament and submit to new national elections — an appeal that was dismissed by Hollande’s camp. Jean-Luc Melenchon, leader of France’s Left Front, said the result was a “volcanic eruption” accompanied by “lots of acid rain.” “It’s a disaster,” he said on France 2 television. “I feel sorry for my country tonight.” Voters in Greece, the first debt-crisis victim, handed first place to Syriza, a party which chafed at the budget cuts demanded by German-led creditors in exchange for international financial aid. Preliminary results gave it 26.5%. Prime Minister Antonis Samaras’s New Democracy party trailed with 23.3%.

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What can he do, even if we’d want to?

Poroshenko Wins Ukraine Vote With Russia Ready for Talks (BW)

Billionaire Petro Poroshenko won Ukraine’s presidential election, handing him the task of stemming deadly separatist violence that’s threatened to rip the former Soviet republic apart. Poroshenko got 53.8% of yesterday’s vote with 63.6% of ballots counted, according to the Election Commission in Kiev. Ex-Prime Minister Yulia Tymoshenko was second of the 21 candidates with 13.1%. Russia said it’s ready for talks with Poroshenko, though warned him against renewing a push against rebels who curbed voting in the easternmost regions. Poroshenko is faced with a shrinking economy and a pro-Russian separatist movement that’s captured large swathes of the Donetsk and Luhansk regions. President Vladimir Putin, who doesn’t recognize the government in Kiev, has pledged to work with the winner. The U.S and its allies said they’d tighten sanctions against Russia if voting was disrupted.

Poroshenko’s victory “marks an important step forward in resolving the political crisis that’s gripped the country,” Neil Shearing, chief emerging-markets economist at London-based Capital Economics Ltd., said today in an e-mailed note. “However, the challenges remain daunting.” Poroshenko’s win is “strongly” positive for bond markets in Ukraine and Russia, Vladimir Miklashevsky, a strategist at Danske Bank, said by phone. The yield on Ukraine’s dollar debt due 2023 fell for a ninth session, dropping one basis point, or 0.01 percentage point, to a seven-week low of 9.02%. It’s returned 7.8% this month, the most among 56 nations Bloomberg tracks.

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Scary.

Ukraine: From Tragedy To Farce (RT)

Petro Poroshenko, the Ukrainian oligarch known as the Chocolate King, is the presidential candidate who is expected to save Ukraine from the abyss and deliver his country to Washington, Brussels, and the IMF. Judging by polling numbers, he is quite likely to be elected by those who plan to vote (and millions in the east and south say they won’t). Legally speaking, this election has no legitimacy. Ukraine’s constitutional order was destroyed on the night of the coup. Since then the country has been governed by a rump parliament, political parties not supporting the undemocratic government physically attacked, and presidential candidates intimidated. Poroshenko is set to be president, but this will hardly address Ukraine’s daunting problems.

Poroshenko’s biggest political problems will not be the protesters in the east and south, nor will it be Russia. Ukraine’s next president will have to immediately deal with what western governments and media are reluctant to talk about: the nature of the political forces currently running Ukraine. Poroshenko did back the protests on the Maidan, but not all protesters on the Maidan supported Poroshenko. It is doubtful groups like Right Sector and Svoboda will simply change or drop their ultranationalist and racist views to please an opportunist oligarch like Poroshenko. The most likely outcome is probably the following: either Poroshenko attempts to appease their leaders with the trappings of power and wealth (and dilute whatever power he will have as president), or he will have to guard against still another Maidan uprising backed by the likes of Right Sector and Svoboda. Neither outcome bodes well for Ukraine.

If Poroshenko continues the violent assault on the east and south he will demonstrate he is not president of all Ukrainians. But if he does reach out to the east and south, the radicals of the coup will be watching closely. Again, this is a lose-lose outcome for Ukraine. This is probably most tragic outcome of the forced collapse of the constitutional order – unelected radicals, racists, and ordinary thugs have been allowed to become important elements of the Ukrainian political landscape. Ukraine and the rest of the world have Washington to thank for this sad state of affairs. Let us now turn to Russia and the Kremlin’s view of Ukraine. Putin is not backing down or looking for a way out. Far from it. Ever since this artificial crisis began, Russia has been watching – and it continues to watch. Putin’s attitude regarding the May 25 presidential vote is one of indifference at best. Russia cannot stop the vote. But if Poroshenko can, somehow and in some way, prove himself as a leader of all the people, then Moscow has every interest in engaging the next Ukrainian president. But for reasons expressed above, this is hardly going to be the case.

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But what can he do?

Mario Draghi Warns of Euro Zone Deflation (NY Times)

The president of the European Central Bank acknowledged on Monday that there is a risk that the euro zone could become caught in a downward spiral of falling prices, a “classic deflationary cycle” that would require large-scale purchases of bonds or other assets to reverse. Mario Draghi, the central bank’s president, stopped short of specifying what action the bank might take in response to such a risk when it meets on June 5. Expectations that the bank will do something are high following a flurry of statements in recent weeks by Mr. Draghi and by other members of the E.C.B.’s governing council indicating that they are prepared to take further steps to stimulate the struggling euro zone economy.

Mr. Draghi said that members of the governing council, many of whom are gathered here for a conference, are still debating what would be the right response to a combination of falling prices, tight bank credit, and uneven growth. All agree that the central bank must try to push inflation, currently at an annual rate of 0.7%, back toward the official target of just below 2%. But Mr. Draghi also spoke in unusually direct language about the risk that the euro zone could sink into deflation, when expectations of falling prices cause people to delay purchases, which in turn undercuts corporate profits and makes businesses reluctant to hire. Deflation, which has afflicted Japan for years, is considered particularly pernicious because it is very difficult for policy makers to reverse.

“What we need to be particularly watchful for at the moment is the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries,” Mr. Draghi said, according to a text of his remarks. A “too prolonged” period of inflation below current expectations, Mr. Draghi said, “would call for a more expansionary stance, which would be the context for a broad-based asset purchase program.” Many economists have urged the central bank to emulate the United States Federal Reserve and buy large quantities of government bonds and other assets to pump money into the economy. But most analysts do not expect the European Central Bank to begin an asset program when it meets next week. More likely, analysts say, would be a cut of the benchmark interest rate to 0.15% from 0.25%, coupled with a so-called negative deposit rate which would charge lenders for parking money at the central bank.

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Yay! Get a mortgage!

UK Interest Rates Could Rise Sooner Than Spring 2015: BOE Deputy (Guardian)

UK interest rates could start rising sooner than next spring, but “in baby steps”, and are likely to settle at about 3% in a few years’ time, the Bank of England’s outgoing deputy governor predicted. It will take three to five years for borrowing costs to rise to about 3%, Charles Bean said, but below the average of 5% seen in the decade before the financial crisis. The main UK interest rate has been held at 0.5%, a historic low, since March 2009, and the central bank’s governor, Mark Carney, has indicated that rates will not rise until next year. Carney surprised the City when he played down calls for an early increase to rein in the booming housing market when the Bank released its quarterly inflation report in mid-May. “We should remember the economy has only just begun to head back to normal,” he cautioned then.

Financial markets have priced in a rate rise in March or April 2015, although a move seems more likely in an inflation report month – February or May – when the Bank can use its latest economic forecasts to explain the rationale for an increase. Bean, who is leaving the Bank at the end of June after 14 years, told BBC Radio 4’s The World This Weekend programme that raising borrowing costs “a bit earlier” than expected would enable the Bank to do it more gradually to minimise the economic pain. He said: “There’s a case for moving gradually because we won’t be quite certain about the impact of tightening the bank rate given everything that has happened to the economy. “It might not operate in quite the same way as it did before the crisis. So that’s an argument if you like for being a little bit cautious, moving in baby steps to avoid making mistakes. If you want to pursue that strategy you need to start taking those baby steps a bit earlier, otherwise you end up being behind the curve.”

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Once more.

US April New Home Sales Up 2K From March, But Down 5% Y/Y (Stockman)

Undoubtedly the Cool-Aid drinkers on Wall Street and at the Fed were encouraged that good weather has got everything back on track. The morning headline from Census was that new home sales were up 6.4% from March. Let’s see. There are about 130 million housing units in the USA and in good years we used to build about 1.5-2.0 million new units. But thanks to the long Greenspan housing boom from 1994-2007, the nation is now saddled with massive excess supply and has nearly 20 million vacant units. So home builders have been slow to translate the Fed’s cheap money into new starts because the demand just isn’t there to absorb the existing enormous surplus.

Compounding the slump is the fact that new household formation rates have dropped into the sub-basement of historical experience—coming in at about 500K annually in recent years compared to 1.5-2.0 million in pre-crisis times. The reason the data is in the sub-basement, of course, is that the kids are still in mom and dad’s basement, surviving on student loans and hamburger flipping gigs a few hours per week. So it is not surprising that new housing starts and new home sales have the trend profiles shown below. Needless, to say these graphs do depict a “new normal”, not the same old same old business cycle recovery that the Fed and its acolytes keep espying just around the corner.

So that gets us to the April new home sales numbers that got the algos all jiggy, including carbon-unit type algos like Joe LaVorgna, Deutschebank’s chief economist and stock tout, who mustered the following:

“Apr new home sales rebounded strongly (433k vs. 407k), providing further evidence that housing is recovering from Q1 weather-related weakness”.

Yes, Joe, actual monthly sales in April came in at 41,000 compared to 39,000 in March. That’s a gain of 2K that requires a Wall Street microscope to ascertain, but then it was also a 2K drop from the 43K new homes sold last year. Might the more relevant point here be that new homes sales are still bumping along a mighty historic bottom; that the beginning of interest rate normalization has already put the kibosh on the tepid recovery that had been underway; and that $3.5 trillion of Fed money printing since September 2008 has done far more for the Wall Street gamblers who speculate in homebuilder stocks than for the Main Street homebuilders and tradesman who actually build them. Never have the 19 unelected bureaucrats who inhabit the Eccles Building wreaked more havoc with what used to be a prosperous American economy. And then they have the audacity to proclaim progress in making everything better!

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Everything You Think About The Housing Market Is Wrong (Salon)

(Excerpted from “Other People’s Houses: How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business”)

The news cameras kept recording after the power failed. Complete darkness. Then a heavy red curtain was swept aside, allowing a bit of sunlight to stream into the woodpaneled hearing room. This natural illumination had a strange effect on Alan Greenspan, the day’s first witness. He was seated before the Financial Crisis Inquiry Commission (FCIC), a ten-member panel of private citizens appointed by Congress to examine the causes of the financial and economic crisis. By that day, in April 2010, the FCIC had already conducted several hearings and public meetings. Greenspan had spent much of the morning before the power outage in a defensive mode, denying that, as chairman of the Fed for nearly two decades, he had the tools to predict or prevent the subprime mortgage meltdown and the connected global financial crisis.

Yet he had admitted to the panel: “I was right 70% of the time, but I was wrong 30% of the time. And there are an awful lot of mistakes” over the years. Now, in the semidarkness, Greenspan retreated a bit. He responded to a question about whether he believed there still was excessive debt in the banking system with a nod, a gesture not captured on the official record. The commissioner who posed the question remarked that he saw Greenspan nod. An audience member said he had not nodded. Greenspan sat silently, not offering to clarify. Minutes later, the hearing adjourned and the witness departed.

That was classic Greenspan: bright moments of clarity followed by obfuscation and retreat. Eighteen months earlier in October 2008, in his most candid moment, he told a congressional subcommittee that he had found “a flaw” in his entire system of thought. He had adhered for decades to a particular view of how markets operated, only to discover several decades later he’d been very wrong. Yet the question for the panel that April morning was whether the crisis could have been avoided. At the hearing, Greenspan explained that the origination of subprime mortgages had posed no problems between 1990 and 2002. In that early era, he said, it was a contained market, but then things changed. It was the expansive sale of adjustable rate subprime mortgages, followed by the securitization of these mortgages, and the transformation of those securities into collateralized debt obligations (CDOs) that caused problems.

There was a huge demand from Europe for CDOs backed by such mortgages, thus fueling increasingly higher-risk originations. Greenspan also made it clear that without “adequate capital and liquidity,” the “system will fail to function.” He called for additional equity capital (less borrowing relative to assets held). He said he now realized that our banking system had been undercapitalized for forty to fifty years. But in 2011, when it came time to require banks to have greater equity capital, he publicly denounced “an excess of buffers” in an op-ed in the Financial Times. Seeming to forget the savings and loan (S&L) crisis of just twenty years earlier, he asked: “How much of its ongoing output should a society wish to devote to fending off once-in-50 or 100-year crises?” This was Greenspan, light and dark.

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The less fear in the markets, the more there is to be afraid of.

Low VIX Sparks Volatile Debate (WSJ)

Many market watchers have been scratching their heads over low readings in the CBOE Volatility Index. The VIX, often called the market’s “fear index,” continued to slide ahead of the holiday weekend, briefly touching 11.46 in recent trading, its lowest intraday level since March 2013. Investors and market watchers are at odds over what factors are driving ultra-low volatility and what it might portend for the markets. Optimists point out that the VIX is rightly at a multi-year low given that the S&P 500 is repeatedly carving out fresh all-time highs. The VIX measures the prices investors pay for options as insurance on S&P 500 stock portfolios. Short term, some point to lighter stock-trading volumes and the predictable lull in risk-taking that occurs before holiday weekends. People have less risk, so there’s little need to hedge that risk, they say.

Pessimists contend that a low VIX reading demonstrates that investors have let their guard down, dropping demand for S&P 500 stock-portfolio insurance just when they may need it. “The low VIX says to me that people are kind of complacent,” says Brian Overby, options analyst at brokerage TradeKing. “I find that odd considering that over the last couple months we’ve been trading sideways.” Most ominously, some say that the VIX isn’t the best place to look for fear right now since its tie to the S&P means it doesn’t capture recent declines in faster-moving corners of the stock market, or the rush into Treasury bonds in 2014. Take the Russell 2000 Index of small-cap stocks: While the S&P 500 is sitting near its all-time high, the Russell 2000 has dropped 7.6% from its own record high in March. An options-based volatility reading on the iShares Russell 2000 IndexIWM shows considerably more alarm than for the S&P 500, according to data from LiveVol.

Jonathan Krinsky, MKM Parners’ chief market technician, noted on Thursday that cases when small-caps plunge while large caps remain unstressed are exceedingly rare. He found just two instances over the past 20 years when the VIX marked fresh 52-week lows at the same time that the Russell 2000 traded below its so-called 200-day moving average—a long-term pivot point watched by market technicians. On Thursday, the signals aligned for a third time, but the Russell 2000 broke back above that threshold on Friday. Both previous times it’s happened—in 2000 and 2004—the VIX shot sharply higher over the following three months.

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Let’s hope this gets real.

Explosive Claims On JP Morgan Conduct (SMH)

A technical support person who worked for JP Morgan in Australia claims the bank regularly misled its New York parent and the US Federal Reserve by failing to report losing trades. The explosive allegations are contained in a submission by the person to the Senate inquiry into the performance of the Australian Securities and Investments Commission. BusinessDay has met the person and agreed to allow him to remain anonymous. He appears to be credible. The person complained to ASIC and later went to work for the regulator, but he said the regulator failed to investigate his claims. A spokesman for JP Morgan denied the allegations. “The claims are false and misleading,” he said.

In his submission, published by the inquiry, the person said he was employed at the Sydney office of JP Morgan between 2004 and 2007. He worked for a team involved in the post-trade management of the bank’s OTC (over the counter) equity derivative business for the Asia-Pacific region. In 2007, before the global financial crisis, he became increasingly concerned by “certain practices that appeared to circumvent regulatory commitments and risk management expectations,” he said. These included:

• Misleading reports being provided to head office and the Federal Reserve Bank of New York on the number of outstanding trades.

• Trades not being booked into the system until they were ”in-the-money”.

• Trades not booked into systems and only being tracked by paper-based legal agreements, which would be ”torn up” if required, thereby leaving no trace.

• Bypassing or attempting to bypass the opinions of in-house lawyers to complete work faster, even if this resulted in incorrect legal agreements being signed by the traders and sent to other major banks as final confirmation of the terms of the trade.

The person said he sought to discuss his concerns with lower and middle management but was warned that “front office would get rid of me if I persisted”. JP Morgan’s ‘Worldwide Rules of Conduct’ state: ‘The most important rule is also the most general: never sacrifice integrity, or give the impression you have, even if you think that it would help JP Morgan Chase’s business’. “In support of this policy, I lodged a complaint with senior management fully expecting to be able to discuss all my concerns and receive guidance from the relevant departments, including legal and compliance. This did not occur and instead I immediately stopped being paid.”

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Remember (Zero Hedge)

On a weekend so full of memories, we thought it appropriate to remember what was promised so many years ago from our central-planning overlords. All that printed money, all those bailouts, all those promises and Bernanke’s statement that “Fed actions did not favor Wall Street over Main Street…” and this is what we end up with… “not” all time highs in what really matters… Remember – Bernanke told us “The US economy is heading back to a full recovery” – then a few months later explained that interest rates would not normalize in his lifetime…

Just don’t tell Obama (or the Democrats who have been told not to mention the ‘recovery’), or the record number of middle-aged people living with their parents, or the almost imperceptible rise in the employed population since QE began…

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Bill Black all the way!

Bill Black: “The Bank Robbers’ Weapon Of Choice Is Accounting” (Zero Hedge)

William Black’s no-nonsense simplification of the fraud that we call a financial system is both addictive in its clarity and stunningly concerning in its scale. Having exposed Tim Geithner as perhaps the worst Treasury secretary ever, and that “banks have blood on their hands,” the following brief discussion of ‘how to rob a bank – from the inside’ is crucial to comprehend that nothing has changed and to make matters worse, after 2009’s ‘reforms’, “the weapon of choice remains accounting” as no one knows what it occurring behind the scenes of the banks…

In the US, our regulators have publicly embraced a “too big to prosecute” doctrine. We are restraining, underfunding and dismantling regulatory oversight in the interests of short-term stability for the status quo. Which as a criminologist, Black knows with certainty creates an environment where bad actors will act in their self-interest with assumed (and likely real, at this point) impunity.

If you can steal with impunity, as soon as you devastate regulation, you devastate the ability to prosecute. And as soon as that happens, in our jargon, in criminology, you make it a criminogenic environment. It just means an environment where the incentives are so perverse that they are going to produce widespread crime. In this context, it is going to be widespread accounting control fraud. And we see how few ethical restraints remain in the most elite banks. You are looking at an underlying economic dynamic where fraud is a sure thing that will make people fabulously wealthy and where you select by your hiring, by your promotion, and by your firing for the ethically worst people at these firms that are committing the frauds.

And so you have one of the largest banks in the world, HSBC, being the key ally to the most violent Mexican drug cartel, where they actually did so much business together that the drug cartel designed special boxes to put the cash in that they were laundering that fit exactly into the teller windows so that there would be no delay. This is the efficiency principle of drug laundering. So these banks figuratively have the blood of over a thousand people on their hands. They are willing to fund people that murder and torture and behead folks. And they are willing to do that year after year, despite warnings from the regulators that they are doing this. And the regulators are not willing to actually take serious action until there has been “true devastation.”

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Fear! Fear!

UK Finance Ministry Warns On Scottish Independence Costs (Reuters)

Britain’s finance ministry stepped up its attack on the Scottish government’s independence plans on Monday, saying it had not fully budgeted for setting up a new administration that could cost Scottish taxpayers over 1.5 billion pounds ($2.5 billion). People in Scotland vote on September 18 on whether to end a 307-year union with England and split from the rest of the United Kingdom. Britain’s finance ministry has repeatedly argued that Scots would be financially worse off after independence.

On Monday, it said setting up the new public bodies such as a Scottish tax authority, financial regulator and benefits system would cost each Scottish household a minimum of 600 pounds, and potentially much more. “The Scottish government is trying to leave the UK, but it won’t tell anyone how much the set-up surcharge is for an independent Scotland,” deputy finance minister Danny Alexander said. He is due to present a more detailed breakdown of the Westminster government’s estimates of the costs of Scottish independence and Scotland’s budget deficit on Wednesday. The Scottish government dismissed the report as “deeply flawed”.

The British finance ministry said new institutions would cost Scotland at least 1% of its annual economic output – or 1.5 billion pounds – based on estimates made when the Canadian province of Quebec voted on independence. The actual cost could be far higher. New Zealand, which has a similarly sized population and economy to Scotland, was currently spending 750 million pounds on a new tax system alone, while a new Scottish benefits system would cost 400 million pounds, the finance ministry said. A bill of 2.7 billion pounds was possible if the Scottish government pressed ahead with plans for 180 new public bodies, the finance ministry said, based on a cost of 15 million pounds for each new policy department. But the Scottish government said in a statement many of the public bodies which would be needed by an independent Scotland already existed and would be able to take on new functions.

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Piketty Rejects ‘Ridiculous’ Allegations of Data Flaws (Bloomberg)

Thomas Piketty rejected allegations that data behind his best-selling book on inequality are flawed as fellow economists spoke up in his defense. Piketty, the French economist whose book “Capital in the Twenty-First Century” has transformed the debate on the causes and consequences of disparities in income and wealth, called a Financial Times analysis of his statistics “just ridiculous.” He added in an e-mail to Bloomberg News that “there’s no mistake or error” in his work. The newspaper’s economics editor, Chris Giles, wrote last week that figures underpinning the 696-page book contain unexplained statistical modifications, “cherry picking” of sources and transcription errors. He said the mistakes undermine Piketty’s conclusion that wealth inequality in Europe and the U.S. is moving back toward levels last seen before World War I.

After correcting for the alleged errors, two of the book’s “central findings — that wealth inequality has begun to rise over the past 30 years and that the U.S. obviously has a more unequal distribution of wealth than Europe — no longer seem to hold,” according to Giles. Economists disputed that assertion. Scott Winship, a fellow at the New York-based Manhattan Institute for Policy Research, said the newspaper’s allegations aren’t “significant for the fundamental question of whether Piketty’s thesis is right or not.” James Hamilton, an economics professor at the University of California, San Diego, said there’s “abundant evidence” of widening inequality “from a good many sources besides Piketty.”

Piketty, a 43-year-old professor at the Paris School of Economics, examined centuries of data on countries including the U.S., Sweden, France and the U.K. to show that returns on capital in excess of economic growth lead to widening disparities in wealth. One “serious discrepancy” Giles said he found was in Piketty’s data on the U.K. While Piketty cited a figure showing the top 10% of its population held 71% of national wealth, a survey by the country’s Office for National Statistics put the figure at 44%.

The survey cited by Giles “is based upon self-reported data and is very low quality,” Piketty said in his e-mail. Other economists agreed. “The FT seems to take that survey as gospel, and I think that’s a mistake,” said Gabriel Zucman, an assistant professor at the London School of Economics whose research focuses on global wealth, inequalities and tax havens. “Anybody involved in this literature knows that survey data can massively underestimate wealth inequality. In this case, that is exactly what is happening.”

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May 192014
 
 May 19, 2014  Posted by at 7:11 pm Finance Tagged with: , , , ,  4 Responses »


Jack Delano Young Negro farm laborer, Stem, North Carolina May 1940

There are two elections coming up this week that have the potential to shake up a lot of things, not least of all the global financial markets, both in their own way and for their own reasons. First of all, the May 22-25 European parliament elections, which as far as I’m concerned should simply be declared illegal in at least a few of the 28 EU member countries they’re held in. I find it unbelievable, and I even tend to find it scary, that not one respected member of the respected press has paid any attention to the story that emerged during the course of last week and that I described this way on Friday:

Europe Imitates The Fall Of The Roman Empire

First, there was a passage from Tim Geithner’s new book. Then, there was a 3-part series ‘How The Euro Was Saved’ by Peter Spiegel for the Financial Times. Together, they deliver the following storyline: EU leaders refused to let Greece have a referendum on its bail-out, and toppled PM Papandreou to kill it. Then, afraid that Italian PM Berlusconi would make good on his threat to return to the lira if they stuck to their bail-out conditions, they toppled him. What this means to Europeans is that if they elect a government for their country, and it subsequently falls out of favor with Brussels, they can expect to see it overthrown, and likely have it replaced by a technocrat handpicked by the EU leadership (as happened in Greece and Italy). Ergo: Europe is not a democracy, and pretending otherwise is foolish. Democratic elections in member states are merely empty lip service exercises, because on important topics governments of member states have no say.

In fact, the only journalist who did pick up on it was Ambrose Evans-Pritchard, also on Friday, and while I understand people’s reservations concerning Ambrose, please don’t forget this: as it became known that the EU leadership has no scruples when it comes to bringing down elected governments of member states, AEP was the only one writing for the mainstream media who brought this ultimate betrayal of European democracy, and hence of all European voters, to light.

EU Officials Plotted IMF Attack To Bring Rebellious Italy To Its Knees (AEP)

The revelations about EMU skulduggery are coming thick and fast. Tim Geithner recounts in his book Stress Test: Reflections on Financial Crises just how far the EU elites are willing to go to save the euro, even if it means toppling elected leaders and eviscerating Europe’s sovereign parliaments. The former US Treasury Secretary says that EU officials approached him in the white heat of the EMU crisis in November 2011 with a plan to overthrow Silvio Berlusconi, Italy’s elected leader. “They wanted us to refuse to back IMF loans to Italy as long as he refused to go,” he writes. Geithner told them this was unthinkable. The US could not misuse the machinery of the IMF to settle political disputes in this way. “We can’t have his blood on our hands”.

This concurs with what we knew at the time about the backroom manoeuvres, and the action in the bond markets. It is a constitutional scandal of the first order. These officials decided for themselves that the sanctity of monetary union entitled them to overrule the parliamentary process, that means justify the end. It is the definition of a monetary dictatorship. Mr Berlusconi has demanded a parliamentary inquiry. “It’s a clear violation of democratic rules and an assault on the sovereignty of our country. The plot is an extremely serious news which confirms what I’ve been saying for a long time,” he said.

This is no trifle matter, even though one may get that idea because of the deafening silence we’ve been blinded with so far on this topic. As I write, it scares me anew. In three days, elections begin for a region that holds 500 million people. But there is a tiny group, largely unelected, in Europe’s capital Brussels, that find they have the moral right to handpick their favorites and topple non-favorites who were elected in democratic elections. If it reminds me of one thing, it’s how Salvador Allende lost the power his people voted him into, and lost his life, in Chile in 1972, because the CIA and Milton Friedman’s Chicago Schoolboys wanted someone else, who would serve THEIR purpose, not that of the people. That is what happened in both Greece and Italy, and we can now prove it.

And no, there were no bombs and machine gun heli’s involved this time around, but that’s not where we should put the dividing line. A coup is a coup. And any coup in an ostensibly democratic nation is a crime that the perpetrators need to be dragged in front of a judge and jury for, if not court-martialed. Yeah, well, that sounds lovely, but not a word was said or written. I looked earlier today, and there was only one reference I could find, in the English edition of Greek paper Ekathimerini in which Evangelos Venizelos, finance minister under Papandreou, the Greek PM who was ousted under EU auspices because he wanted the Greek people to decide in a referendum whether they wanted Troika austerity or not, an event in which Venizelos did not play a clean role at all, that same Venizelos who is now leader of PASOK, the party that held power for decades but is presently scraping the voters barrel in polls for this week elections, said:

Barroso did not choose PM, says PASOK chief

“Mr Barroso did not have the main role in the discussion and the process,” said the PASOK chief. “Whoever says this does not have an understanding of the international balance of power and of the roles that EU figures have.” Venizelos also said that Papademos had not been first choice to become interim prime minister. Before he was sworn in on November 11, Parliament Speaker Filippos Petsalnikos and PASOK veteran Apostolos Kaklamanis had been suggested for the role, Venizelos claimed. However, Venizelos defended the decision not to proceed with a referendum, which eurozone leaders insisted should only be on whether Greece should remain in the euro. The PASOK leader suggested that proceeding with the vote would have led to a flight of deposits. “Did anyone want the banks to collapse the next day and the country to default?” he said.

Hmm, Evangelos. That’s how we decide these matters, is it? Maybe the question should be: did anyone want democracy? Because if they did, that was no longer an option, was it? How on earth can someone who’s the leader of a party that’s part of a democratic system, and who apparently hopes to be elected as the leader of a democratic nation, defend the toppling of his former boss in such a way? What the f**k is wrong with you? And what the f**k is wrong with all the journalists who have undoubtedly read the accounts of both the Berlusconi and the Papandreou coups, and decided not to write one single word about them while there are elections in just 3 days in which voters are fooled into thinking their vote counts for something?

Parties that are critical of the EU, if not downright against it, may win large victories in France, Holland, the UK, Finland, Norway, Italy and perhaps more countries. We’ll know by Sunday. But what will that mean? The entire mainstream storyline is HOW are we going to do Europe, not IF we’re going to do it. How fast are we going to hand over ever more powers to a cabal of career “civil servants” who have shown they are more than willing to sweep aside any actually elected politician from any of the 28 EU nations who dare stand in their way, and in the way of their dreams of what Europe should be, damn the people, and damn the democratic process?! Maybe this will give everyone a pause for thought:

Greek Selloff Shows Rush for Exit Recalling Crisis

Bondholders in Europe just got a wakeup call. After a four-month rally in euro-region debt, yields on Italian and Spanish bonds had their biggest one-day jump in almost a year last week as a selloff that started in Greece spread. With bids evaporating and prices sliding, traders poured into derivatives as they rushed to protect against losses. Italy’s and Spain’s bonds extended that slump today. [..]

The risk is that speculative traders, who bought debt on the assumption the European Central Bank would support the market, may try to flee at the same time if the outlook darkens. “You only know how wide the door to the exit is when there are a few of you trying to push through at the same time,” Michael Riddell, fund manager at M&G Group, which oversees $417 billion, said on May 16. “I don’t think liquidity has been that great in peripherals at any stage.”

Prices plunged in the wake of opinion polls suggesting the nation’s governing coalition was losing support before local-government votes and European Parliament elections on May 25. Prime Minister Antonis Samaras’s coalition partner Pasok, which dominated Greece’s politics for three decades, was ranked sixth in a poll with 5.5% as voters blamed the party for the country’s economic meltdown. The first round of local and regional elections in Greece ended yesterday with no single party winning enough support to declare a decisive victory. In Italy, Prime Minister Matteo Renzi’s party is facing its first elections since coming to power three months ago, risking a voter backlash amid a sluggish economy and a corruption scandal in Milan.

How much irony is there in thinking that the financial markets are the only hope left for European voters? Democracy is Europe is roadkill until those responsible for toppling Papandreou and Berlusconi have been thrown out, the system has been restructured to ensure no such things can happen again, and the appropriate courts have passed judgment on the guilty parties. None of those things are going to happen, the same old clique that executed the coups will start divvying up the cushy jobs come Sunday night if they haven’t already, and that can only mean one thing: the old continent is morally going going gone. And it’s not just the politicians, or whatever the proper term is for Brussels career wankers, it’s just as much an indictment of the entire world press.

I was going to cover the Ukraine elections this weekend too, but I’ll do that later in the week, Europe’s “monetary dictators” got me riled up plenty for now. And that goes for the entire press corps too. What a bunch of useless parakeets.

Over-Heating Stock Markets Raise Crash Fears (Telegraph)

Global equity markets are over-heating, the UK’s top professional investors’ body has warned, raising fears that “vulnerable” stocks are poised for a crash. The number of investors who think the world’s leading stock markets such as the S&P 500 and the FTSE 100 are overvalued has reached its highest level yet, according to a survey of professional money managers completed by the CFA Society of the UK. The survey offers a rare insight into the thinking of the investment community, which manages billions of pounds on behalf of pension funds and households. It revealed that 49pc of the 530 stocks experts now believe that developed equity markets are overvalued – signalling rising fears of a correction – up from 39pc just three months earlier.

The number of money managers that felt there were further gains to be made in stock markets fell to its lowest level reported, at just 16pc, down from 50pc at the start of last year. “With both the FTSE and S&P indices hovering around record highs, our data suggests that investors should perhaps be cautious about reaching for yield in developed market equities when investment professionals view that yield premium as vulnerable,” said Will Goodhart, CFA Society chief executive. The UK’s blue chip index soared to a 14-year high last week and markets in the US have gone into uncharted territory.

Goldman Sachs expects the S&P 500 to fall during the next three months from highs of 1,877.9 at the end of last week. “The return potential for the US market is dampened by limited room for valuation and margin expansion given the strong recovery we have seen already,” said the investment bank’s portfolio strategy team. Investors are driving share prices higher in the belief that companies listed in developed markets will benefit as the US and UK economies return to growth, said Dr Stephen Barber, political economist from London South Bank University. “Markets are discounting mechanisms and they are pricing a fairly optimistic view of growth in the both the US and the UK,” he said. “However, the markets can’t price in the fact that these views could be wrong.”

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Nasdaq, Russell 2000, all’s tumbling but Dow and S&P. Mom and Pop, check your six.

Wall of Worry Rebuilt as Nasdaq Rout Sends Cash to 2-Year High (Bloomberg)

Investors are losing their nerve in the stock market amid selling that has sent some industries down the most since 2008. In the past, that’s been a signal to buy. Global money managers raised cash holdings to a two-year high this month and say America is the worst place to invest, a Bank of America Corp. survey published last week shows. Investors have pulled about $10 billion from funds that buy U.S. equity this month, set for the biggest outflows since August, according to data compiled by Bloomberg and the Investment Company Institute.

After embracing stocks last year for the first time since the bull market began, individuals are showing signs of reverting to the skepticism that led them to pull more than $400 billion from mutual funds from 2009 through 2012. While hedge fund manager David Tepper says caution is appropriate now, others consider the lack of exuberance a healthy sign that sets the stage for more gains. “Walls of worry are everywhere,” Robert Doll, who helps oversee $118 billion as chief equity strategist at Nuveen Asset Management in Chicago, told Tom Keene and Michael McKee on Bloomberg Radio’s “Surveillance” on May 14. “This is the least believed bull market that I’ve ever seen. From here it’s earnings, it’s fundamentals, it’s can the economy grow? And my guess is the answer to that question is yes.”

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Ouch! Didn’t see this one coming, did you?

Highway Trust Fund: The Next Big American Economic Crisis (BI)

On Wednesday, President Barack Obama gave his first formal warning about this impending self-inflicted disaster — the Highway Trust Fund, a transportation and infrastructure fund financed by gasoline taxes, is set to run out by the end of the summer. Thus far, Congress has not come up with a solution, and both sides are beginning to dig in. By July, thousands of projects and contracts could be put on hold amid the uncertainty — right in the middle of summer construction season. In one economic analysis released last week, the Obama administration warned 700,000 jobs tied to the fund and its uncertain future are at stake. “Right now, there are more than 100,000 active projects paving roads and rebuilding bridges, modernizing our transit systems,” Obama said Wednesday in remarks near the Tappan Zee Bridge in Tarrytown, New York, where a $3.9 billion effort to replace the current aging structure is underway.

“States might have to choose which ones to put the brake on. Some states are already starting to slow down work because they’re worried Congress won’t untangle the gridlock on time. And that’s something you should remember every time you see a story about a construction project stopped, or machines idled, or workers laid off their jobs.” The fundamental problem is that gasoline taxes alone are no longer enough to finance the Highway Trust Fund, due to declining fuel use across the U.S. However, neither the White House nor Congress wants to raise those taxes, and there is a disagreement about how to fill the fund without them. Simply put, spending on transportation and infrastructure now exceeds gas taxes taken in. During recent testimony before the Senate Finance Committee, Joseph Kile, the assistant director for microeconomic studies at the congressional budget office, laid out two politically painful potential solutions — either cut spending in the fund’s two accounts by 30% and 65%, or raise the gas tax by 10 to 15 cents per gallon.

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Good research project. Pity the NYT reports on it.

House of Debt: The Case Against the Financial Rescue (NY Times)

Atif Mian and Amir Sufi are convinced that the Great Recession could have been just another ordinary, lowercase recession if the federal government had acted more aggressively to help homeowners by reducing mortgage debts. The two men — economics professors who are part of a new generation of scholars whose work relies on enormous data sets — argue in a new book, “House of Debt,” out this month, that the government misunderstood the deepest recession since the 1930s. They are particularly critical of Timothy Geithner, the former Treasury secretary, and Ben Bernanke, the former Federal Reserve chairman, for focusing on preserving the financial system without addressing what the authors regard as the underlying and more important problem of excessive household debt. They say the recovery remains painfully sluggish as a result.

At stake in their debate with Mr. Geithner, whose own account of the crisis was published last week – in a book called “Stress Test” – is not just the judgment of history but also the question of how best to prevent crises. “Our point is very simple,” said Mr. Mian, a professor at Princeton. “Bernanke won. We did save the banks. And yet the United States and Europe both went through terrible downturns.” The focus on preserving banks, he said, “was an insufficient mantra.”Mr. Sufi, at the University of Chicago, said in a separate interview that he was baffled by claims that the government’s efforts were successful. “If you actually look at the argument that people like Mr. Geithner make, they almost always point to financial metrics like risk spreads and interest rates,” he said. “But if you look at the real economy, it just tends to come out in our favor.” Millions of Americans remain unemployed almost five years after the formal end of the recession.

Christina Romer, who led President Obama’s Council of Economic Advisers during the recession, said the research by Mr. Mian and Mr. Sufi had convinced her that she and other administration officials underestimated the importance of helping homeowners. But she said Mr. Mian and Mr. Sufi, in turn, had underestimated both the economic impact of the financial crisis and the effectiveness of the government’s response.

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“123% of almost nothing isn’t much. ”

And They Call This A Recovery? (Lee Adler)

By now you have heard about Friday’s blockbuster housing starts numbers that blew out conomists’ expectations. Here’s the actual, not seasonally adjusted data. Total starts in April came in at 94,900. That was the strongest April performance since the top of the housing bubble. April starts have risen 123% from the April 2009 low. That sounds impressive, but 123% of almost nothing isn’t much. Percentages don’t mean much in this market. The whole numbers are more illustrative. Total starts have soared by that percentage because an abominable total of only 42,500 units were built in April 2009. Compare that with the nearly 185,000 units built in April 2005 at the peak of the housing bubble. The current level of starts is just over half that number.

The gain in single family starts was less robust, hitting 60,100. That was 8.7% better than last April’s 55,300 units and it’s up a booming 72% from the 2009 low. But that’s only an increase of 25,000 from the tiny number of starts in April 2009, 35,000. Compare the current number with April 2006 when 135,000 units were started. So is the housing market really booming? It’s all a matter of perspective. Total starts are still down 49% from the April 2005 level. Single family starts are still down a whopping 60% from the extremes of the bubble in April 2005 (when I put my house up for auction and successfully sold it in 2 weeks). And the “recovery,” such as it is, may be about to run into real trouble. It’s about supply and demand. They have been growing in tandem, but not this month. In March single family sales fell, but starts rose sharply in both March and April. The divergence creates a record oversupply in the single family market.

The last time sales fell while starts were still rising was in 1986, at the onset of a six year housing recession that few recall because the more recent one was so much worse. But those of us who were working in the housing industry then certainly remember it. It was a disaster. Homebuilders were dropping like flies as sales dried up and prices fell. Maybe the March sales downtick was an aberration due to the weather, as many have claimed. [..] If the March decline was not an aberration and sales do not rebound, the housing industry could be ready to tank again. Not that it ever recovered. New home sales and starts are still approximately 30% below where they were at the bottom of the 1986-92 housing recession. And they call this recovery?

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Recovery!

America’s Homeless: The Rise Of Tent City, USA (CNN)

Homeless encampments known as “tent cities” are popping up across the country. Formed as an alternative to shelters and street-living, these makeshift communities are often set up off of highways, under bridges and in the woods. Some have “mayors” who determine the rules of the camp and who can and can’t join, others are a free-for-all. Some are overflowing with trash, old food, human waste and drug paraphernalia, others are relatively clean and drug-free. The National Law Center on Homelessness & Poverty documented media accounts of tent cities between 2008 and 2013, and estimated that there are more than 100 tent communities in the United States – and it says the encampments are on the rise.

“[T]here have been increasing reports of homeless encampments emerging in communities across the country, primarily in urban and suburban areas and spanning states as diverse as Hawaii, Alaska, California, and Connecticut,” the organization’s study states. Tent cities are most common in areas where shelter space is scarce or housing unaffordable. Yet, many people say they choose to live in a tent even when shelter is an option. And they do so for one big reason: freedom. Shelters typically have strict rules: many require guests to check in and out at certain times that can conflict with work schedules and they often don’t allow couples to stay together. Drug and alcohol use is also prohibited, and some people don’t qualify for the subsidies they need to stay in a shelter because of a prior jail time (for certain crimes), or other reasons. “Shelter is one step away from jail,” said Dave, who lived in a tent city in Camden, N.J., that CNNMoney visited.

The NLCHP found that of the more than 100 camps, only eight were actually considered legal. Ten tent cities weren’t officially recognized, but the city or county wasn’t doing anything to get rid of them. The vast majority of encampments, however, have been shut down and occupants have been evicted. One of the most recent evictions took place in Camden, N.J., this week, when the state, county and city joined forces to shut down multiple tent cities and kick out the residents. While the county worked with the occupants to find them somewhere to go, Camden’s shelters were already full and many people ended up on the streets Instead of evicting people from tent cities, the NLCHP says the root of the issue – unaffordable housing – needs to be addressed.

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The bad loan percentage must be beyond comprehension.

Nomura Warns Of Chinese Post-Bubble Bad Loans (MarketWatch)

Nomura argues — in a new report — there are now many similarities between China’s property market today and Japan’s two decades ago. The obvious parallel is the scale of the property boom. Both Japan and China let property lending race ahead of GDP growth and experienced overheating economic activity, coupled with aggressive bank lending. But perhaps the most important similarity between these two property markets is behavioral: an institutional failure to publicly face up to an ugly bad-loan situation as the market reversed. In Japan’s case, a weak regulatory regime and lax accounting meant there was an unwillingness to impose discipline, and no financial institutions were forced into bankruptcy.

Although direct lending to real estate at the time was less than 20% of the nation’s total loan portfolio, over the next decade Japan’s banks eventually wrote off a cumulative 25% of all outstanding loans, according to Nomura estimates. This period gave rise to Japan’s “zombie banks,” which took much of the blame for the country’s infamous “lost decade” of growth. Likewise in China today, there is widespread skepticism that Chinese banks are revealing anything close to a true picture of their non-performing loans. Between loans regularly rolled over, murky lending to well-connected state-owned entities and the explosion in shadow banking, it all contributes to a similarly opaque environment. Recognizing bad debts effectively becomes a political compromise. Nomura estimates half of Chinese banks’ loans books include some sort of property collateral.

Another similarity they highlight is the levels of hubris. Back then, Japan was the “next big thing” in the global economy — the world’s largest creditor nation, collecting accolades for everything from its economic performance to its corporate management ethos. China meanwhile has been told it is only a matter of time before it overtakes the U.S. to become the world’s largest economy, and it could even one day see the yuan usurp the greenback as the world’s reserve currency. Perhaps then, we shouldn’t worry about ghost cities of uninhabited investment properties, since they will eventually fill up, and all those problematic loans will take care of themselves. The worst Beijing appears to countenance is that GDP growth will slow to 7%.

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Tick tick tick goes da bomb.

China Home Price Growth Slows In More Cities Even As Curbs Ease (Bloomberg)

China’s new-home prices rose in April in the fewest cities in a year and a half as developers offered discounts and the economy slowed, prompting the easing of property curbs in some places. Prices last month climbed in 44 of the 70 cities tracked by the government compared with 56 in March. That was the fewest metropolitan areas with price gains since October 2012 when increases were recorded in only 35 on a monthly basis. After four years of government restrictions to cool the housing market, home sales and property construction are sliding and have become a drag on the country’s economy, which recorded its slowest growth in six quarters in the first three months of the year. The central bank on May 13 called on the biggest lenders to accelerate the granting of mortgages as developers including China Vanke Co. and Greentown China Holdings Ltd. cut property prices to lure homebuyers.

“China’s property market is on a very dangerous brink,” Xu Gao, Beijing-based chief economist at Everbright Securities Co., who formerly worked at the World Bank, said in a phone interview yesterday. “Concerns about the slowing market led to weakening prices and sales, which turned into a vicious circle.” Home-price growth moderated both in first-tier and less affluent cities. Prices in Beijing rose 0.1% from March, the National Bureau of Statistics said in a statement yesterday, the slowest since September 2012, while Shanghai prices increased 0.3%, the smallest gain since November 2012. The eastern city of Hangzhou had the largest decline in April among cities tracked, with prices falling 0.7% from a month earlier.

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Hmm. China has no strategic reserve. So-so story by Ambrose.

China Steps Up Speed Of Oil Stockpiling As Tensions Mount In Asia (AEP)

China is stockpiling oil for its strategic petroleum reserve at a record pace, intervening on a scale large enough to send a powerful pulse through the world crude market. The move comes as tensions mount in the South China Sea, and the West prepares possible oil sanctions against Russia over the crisis in Eastern Ukraine. Analysts believe China is quietly building up buffers against a possible spike in oil prices or disruptions in supply. The International Energy Agency (IEA) said in its latest monthly report that China imported 6.81m barrels a day in April, an all-time high. This is raising eyebrows since China’s economy has been slowing for months, with slump conditions in the steel industry and a sharp downturn in new construction.

The agency estimates that 1.4m b/d was funnelled into China’s fast-expanding network of storage facilities, deeming it “an unprecedented build”. Shipments were heavily concentrated at Chinese ports nearest the new reserve basins at Tianjin and Huangdao. “We think this is a big deal,” said one official. China accounts for 40% of all growth in world oil demand, so any serious boost to its strategic reserves tightens the global supply almost instantly and pushes up the spot price. Michael Lewis, head of commodities at Deutsche Bank, said Chinese officials at Beijing’s Strategic Reserve Bureau are playing the oil market tactically, or “buying the dips” in trader parlance. They add to stocks whenever Brent crude prices fall to key support lines, as occurred earlier this Spring. This is currently around $105.

“It’s is very similar to what they have been doing with copper. Whenever it drops below $7,000 (a tonne), they see it as a buying opportunity. They do the same with agricultural commodities,” he said. China is putting a floor of sorts underneath the global oil market, calling into question predictions by the big oil trading banks that prices will deflate this year as more crude comes on stream from Libya, Iraq, and Iran, and as the US keeps adding supply shale. The strategic buying could go on for a long time since China is rapidly expanding its reserve capacity from 160m barrels to 500m by 2020, with sites scattered across the country. [..] China has stocks to cover 46 days of imports compared to 209 for the US, based on estimates from last year. India is acutely vulnerable to any disruption with just 12 days cover. The minimum safe threshold for OECD states is deemed to be 90 days.

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The pipeline’s not there yet. Who’ll fork over the $30 billion or so?

Gazprom To Sign Monumental Gas Deal With China (RT)

Gazprom, Russia’s largest natural gas producer, and China National Petroleum Corporation (CNPC) are set to sign a gas deal that will send 38 billion cubic meters of natural gas a year eastward to China s burgeoning economy, starting in 2018. The timing is almost flawless as Russia is looking to shield itself from Western sanctions by pivoting towards Asia, and China desperately needs to switch from dirty coal to more environmentally friendly natural gas. The arrangements on export of Russian natural gas to China have nearly been finalized. Their implementation will help Russia to diversify pipeline routes for natural gas supply, and our Chinese partners to alleviate the concerns related to energy deficit and environmental security through the use of clean fuel, President Vladimir Putin said.

The deal has been on the table for over 10 years, as Moscow and Beijing have negotiated back and forth over price, the gas pipeline route, and possible Chinese stakes in Russian projects. The gas price is expected to be agreed at between $350-400 per thousand cubic meters. Of course Russia wants to sell gas and resources at the highest possible prices. But because of the sanctions from European partners, we need to find a partner that can buy our gas long-term, which is why at the moment China looks very attractive to us, Aleksandr Prosviryakov, a partner at Lakeshore International, a Moscow-based asset management firm, told RT at a Confederation of Asia Pacific Chambers of Commerce and Industry (CACCI) in Moscow ahead of the big meeting on Tuesday.

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Nervous friends.

Russia-China Ties At Highest Level In History – Putin (RT)

Transcript of Vladimir Putin’s interview with Chinese Central Television, Xinhua news agency, China News Service, The People’s Daily, China Radio International, and Phoenix Television.

Q: China is consistently making progress towards the “Chinese dream”, i.e. a great national rebirth. Russia has also set a goal of restoring a powerful state. How, in your opinion, could our countries interact and help each other in fulfilling these tasks? What areas can be prioritised in this regard?

VP: Promotion of friendly and good-neighbourly partnership relations is fully consistent with the interests of both Russia and China. We do not have any political issues left which could impede the enhancement of our comprehensive cooperation. Through joint efforts, we have established a truly exemplary collaboration, which should become a model for major world powers. It is based on respect for the fundamental interests of each other and efficient work for the benefit of the peoples of our two countries. Russia and China successfully cooperate in the international arena and closely coordinate their steps to address international challenges and crises. Our positions on the main global and regional issues are similar or even identical.

It is encouraging that both sides are willing to further deepen their cooperation. Both Moscow and Beijing are well aware that our countries have not exhausted their potentials. We have a way to go. The priority areas of collaboration at the current stage include the expansion of economic ties and cooperation in science and high-technology sector. Such pooling of capacities is very helpful in fulfilling the tasks of domestic development of our countries.

Q: Cooperation between China and Russia has been steadily increasing, but uncertainties in global economy persist. The emerging markets are faced with new challenges and slowdown of economic growth. How can our two countries help each other to counter these challenges? How can we ensure steady increase of mutual trade and reciprocal investments?

VP: In the context of turbulent global economy, the strengthening of mutually beneficial trade and economic ties, as well as the increase of investment flows between Russia and China are of paramount importance. This is not just a crucial element of socioeconomic development of our countries, but a contribution to the efforts aimed at stabilising the entire global market. Today, Russia firmly places China at the top of its foreign trade partners. In 2013, the volume of bilateral trade was close to $90 billion, which is far from being the limit. We will try to increase trade turnover to $100 billion by 2015 and up to $200 billion by 2020.

Our countries successfully cooperate in the energy sector. We steadily move towards the establishment of a strategic energy alliance. A large scale project worth over $60 billion is underway to supply China with crude oil via the Skovorodino-Mohe pipeline. The arrangements on export of Russian natural gas to China have been nearly finalised. Their implementation will help Russia to diversify pipeline routes for natural gas supply, and our Chinese partners to alleviate the concerns related to energy deficit and environmental security through the use of “clean” fuel.

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This was clear 10 years ago.

‘F-35 Joint Strike Fighter A $400 Billion Boondoggle’ (Telegraph)

Britain’s long-delayed £70 million stealth fighter may need to be cancelled because of its poor performance, according to an analysis by a senior American air force officer. The F-35 Joint Strike Fighter being built for British and US forces is based on outdated ideas of air warfare, it is claimed. The aircraft could be unable to evade enemy radar and be too expensive for long campaigns. The critique in the US Air Force’s own journal concludes that the new fighter may even have “substantially less performance” than some existing aircraft. Britain is preparing to buy at least 48 of the Lockheed Martin aircraft to replace its scrapped Harrier jump jets; the US military is expected to order more than 2,400. The £235 billion programme is the most expensive weapons system in history at a time when defence budgets on both sides of the Atlantic are being cut.

The analysis in the Air and Space Power Journal states: “Even if funding were unlimited, reasons might still exist for terminating the F-35. “Specifically, its performance has not met initial requirements, its payload is low, its range is short, and espionage efforts by the People’s Republic of China may have compromised the aircraft long in advance of its introduction.” Advances in Russian and Chinese radar defences mean it is not clear the stealth technology will still work, the analysis warns. “These facts make the risk calculation involved with prioritizing stealth over performance, range, and weapons load out inherently suspect – and the F-35 might well be the first modern fighter to have substantially less performance than its predecessors.” The author, Col Michael Pietrucha, suggests the F-35 programme should be put on hold and the US Air Force should instead look at a mix of fighters for the future.

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“A breakdown suggested fears of a nation-wide housing bubble are misplaced … “ Geez kiddo’s, really?

Average UK House Prices Jump $15,000 In Five Weeks (Telegraph)

The price of an average home increased by nearly £10,000 between April and May, the biggest month-on-month cash increase ever recorded. Figures from Rightmove, the property website, showed house prices jumped by nine% over the past year, pushing up the value of an average home to record levels. The news came as the Bank of England said that people could be stopped taking out mortgages worth many times their salary to buy new homes to cool the market. Asking prices for homes in England and Wales increased by 3.6% or £9,409 – outstripping the previous record of £8,310 in October 2012 – between April 6 and May 10. The increase – the biggest since Rightmove started to collect house price information in 2001 – in the figures means that this month the average property is on sale at a new record high of £272,003.

A breakdown suggested fears of a nation-wide housing bubble are misplaced, with London leading the way with a 16.3% year-on-year increase, compared with a more modest 4.9% in the rest of the country. The average asking price in the city is up by nearly £80,000 so far in 2014, or £4,405 a week, compared with £1,521 a week for the rest of the country. The figures emerged after Mark Carney, the Bank of England’s Governor, said he was considering capping the size of mortgage ratios to salaries to control the market. The Bank was also watching to see if the Government’s Help to Buy scheme – in which the Government gives people taxpayers’ money to cover deposits on homes worth up to £600,000 – was fuelling the increase.

In March the Bank warned that mortgages larger than four times borrowers’ incomes accounted for the highest share of new home since 2005. Mr Carney suggested that the Bank could impose a new “affordability test” for borrowers as well as reining in Help to Buy. He told Sky News’ Murnaghan programme: “We could do more, we could take steps around affordability to test whether or not individuals can test mortgages at much higher interest rates. “We could limit amounts of certain types of mortgages that banks could undertake, we could provide advice – the Chancellor has asked us if we would provide advice on changing the terms of Help to Buy – all those things are possibilities and we will consider them all.”

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Now you know where QE is going. Not you.

10 Biggest Banks’ Commodities Revenue Rises 26% (Bloomberg)

Commodities revenue at the 10 largest investment banks rose to a two-year high in the first quarter even as companies from JPMorgan to Barclays shrank operations, according to analytics company Coalition Ltd. Raw-materials revenue at Goldman Sachs, Morgan Stanley (and the other companies making up the top 10 banks jumped 26% to $1.8 billion, the highest since the first three months of 2012, Coalition said in a report today. Only commodities showed growth as revenues in other areas from rates to emerging markets declined, the report showed. “The cold winter in North America created volatility and had a positive impact on U.S. power and gas revenues,” London-based Coalition said. “Additionally, investor product performance recovered from a very low base as client activity levels showed some improvement.”

The banks’ employees in commodities declined 9% from last year to 2,098 people, Coalition estimated. Barclays said last month it plans to withdraw from most of its global raw-materials activities, and Deutsche Bank and Bank of America are pulling back as well. JPMorgan and Morgan Stanley are selling units. Goldman Sachs said last month its revenues from commodities were “significantly higher” in the first quarter and Morgan Stanley reported a “strong” performance. Natural gas futures traded in New York touched a five-year high in February amid freezing weather in the U.S. [..] Commodities revenue at the 10 largest banks fell 18% last year amid reduced volatility, Coalition said in February. The Standard & Poor’s GSCI gauge of 24 raw materials had its first drop in five years in 2013 as gold fell the most since 1981 and corn, arabica coffee and wheat slid at least 20%. The GSCI index rose 3.4% so far this year.

Politicians and regulators have pressed banks to cut back their commodities activities. The Federal Reserve has said it’s considering new limits on trading and warehousing of physical commodities. Policy makers are seeking comment on ways to restrict ownership and trading of commodities such as oil, gas and aluminum by deposit-taking banks. New global capital rules also increased the cost to banks of holding commodities. Morgan Stanley still expects to complete the sale of a physical oil business to OAO Rosneft amid U.S. sanctions of Russian leaders, Porat said April 17. JPMorgan agreed in March to sell its physical commodities business to Mercuria Energy Group Ltd. for $3.5 billion. Deutsche Bank is cutting about 200 raw-materials jobs after deciding last year to exit dedicated energy, agriculture, dry-bulk and industrial-metals trading. Bank of America said in January it would dispose of its European power and gas inventory as opportunities shrink and increasing regulation curbs trading.

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EU’s Voters Will Do Little To End The Crisis (Guardian)

Europe goes to the polls this week and the mood is sour. It is sour among voters and it is sour in the markets, where the sell-off at the end of last week was prompted by fears that the election results would open a new chapter in the eurozone crisis. That looks all too likely. Despite all the bullish talk in recent months, the problems of the eurozone have not gone away. The single currency’s weaker members, such as Greece, Spain and Italy, found it easier for a while to sell their bonds at lower interest rates. But that was largely due to the generosity of the Federal Reserve, which flooded the global economy with dollars through its quantitative easing programme.

The QE injection was a godsend to the eurozone, which has so far – but perhaps not for much longer – scorned the idea of turning on the electronic printing presses. US dollars found their way through the global financial system into European bond markets, and this allowed Mario Draghi, the president of the European Central Bank (ECB), to say he would do whatever it took to save the euro, without actually having to back his words with action. This new version of the postwar Marshall plan bought the eurozone some time. What it didn’t do, however, was change the core economic problem of the eurozone’s weak periphery. They are not growing nearly fast enough to prevent their debts becoming more onerous. Generalised austerity has made matters worse, as has the ECB’s lack of sufficient offsetting action.

Unemployment is high and voters are sick of austerity. It would be a mistake though to imagine that much, or indeed anything, will change as a result of the elections to the European parliament. There will be a lot of talk about how Europe needs to deliver for its people, and that will be it. Mainstream parties with their mainstream thinking will still be in charge and life will go on as before. As a result, Europe will condemn itself to an even longer period of economic stagnation, mass unemployment and austerity. Extremism will flourish. There is an alternative to this depressing scenario. Admit that it was a mistake of historic proportions to use the euro as a way of advancing the cause of ever closer union. Accept that and it is possible to avoid Europe becoming the new Japan.

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Greek Government At Risk From EU Elections (Ekathimerini)

Prime Minister Antonis Samaras has convinced investors to buy the story of Greece’s recovery. Now he has to persuade voters. The premier heads into elections for the European Parliament on May 25 on the back of the Greece’s first bond auction in four years and with the economy poised to return to growth later this year. With more than half the country’s youth still without work, polls suggest voters aren’t ready to credit Samaras for the changes just yet. “The euro crisis seems to be over but its causes have not withered away,” said former Prime Minister Costas Simitis of PASOK, the socialist party that dominated Greek politics for three decades. “High unemployment and uncertainty fuel euro-skepticism, while member-states become increasingly reluctant to cede more power to European institutions,” he added, in a written response to questions.

Four years and three prime ministers after Greece’s then premier, George Papandreou, requested an international bailout in return for budget cuts and an economic overhaul that cost him his job, political instability still haunts Greece. That threatens to undo the coalition led by Samaras’s New Democracy and unravel the fragile progress toward stability he has achieved. While New Democracy trails SYRIZA, the opposition group that rejected the terms of the bailout packages, the bigger threat to the government may be the collapse in support for Samaras’s coalition partner PASOK. Papandreou’s PASOK, which dominated Greek politics for three decades, plunged to sixth place with just 5.5 percent of the vote in a recent poll as voters blame the party for the country’s economic meltdown.

Samaras’s governing coalition has 152 lawmakers in the country’s 300-seat legislature. The prospect of the 27 PASOK lawmakers withdrawing their support could deter the foreign investors helping to fuel the recovery, according to Megan Greene, chief economist at Maverick Intelligence and a columnist with Bloomberg View. “If there were snap elections and investors were spooked by the prospect of SYRIZA being the negotiator for Greece, it could really hurt the Greek recovery because it’s so fragile,” she said in a telephone interview.

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The ones who already make more than $25 voted it down for the rest. It’s called democracy.

Swiss Reject World’s Highest Minimum Wage of $25 Per Hour (Bloomberg)

Swiss voters rejected the world’s highest national minimum wage, striking down a proposal for an hourly rate of 22 francs ($25). The initiative was opposed by 76.3% of voters, the government in Bern said yesterday. Polls, including one by gfs.bern, forecast that outcome. “It’s a strong sign to Switzerland as a center of employment,” Economy Minister Johann Schneider-Ammann said at a news conference in Bern. “Accepting the initiative would have led to job cuts in economically weak, rural areas.” With income inequality growing among developed economies, minimum wages are on the table in other countries as well.

In the U.K., Prime Minister David Cameron has increased it to £6.5 ($10.9) per hour, while in the U.S., President Barack Obama is pushing for an increase in the $7.25-an-hour federal minimum to $10.1. In Germany, Chancellor Angela Merkel’s cabinet backed a national minimum of €8.50. Rejection of the Swiss measure, which called for a full-time worker to be paid at least 4,000 francs a month, breaks with a series of plebiscites — including ones on excessive executive compensation and immigration — that companies said make Switzerland a less desirable place to do business. “People are again saying they don’t want the state to meddle,” Swiss trade association director Hans-Ulrich Bigler said. “It’s a vote of confidence by the people in the economy.”

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Higher and higher.

Record High Radiation In Seawater Off Fukushima Plant (Japan Times)

Radiation has spiked to all-time highs at five monitoring points in waters adjacent to the crippled Fukushima No. 1 power station, plant operator Tokyo Electric Power Co. said Friday. The measurements follow similar highs detected in groundwater at the plant. Officials of Tepco, as the utility is known, said the cause of the seawater spike is unknown.Three of the monitoring sites are inside the wrecked plant’s adjacent port, which ships once used to supply it. At one sampling point in the port, between the water intakes for the No. 2 and No. 3 reactors, 1,900 becquerels per liter of tritium was detected Monday, up from a previous high of 1,400 becquerels measured on April 14, Tepco said.

Nearby, also within the port, tritium levels were found to have spiked to 1,400 becquerels, from a previous high of 1,200 becquerels. And at a point between the water intakes for the No. 1 and No. 2 reactors, seawater sampled Thursday was found to contain 840 becquerels of strontium-90, which causes bone cancer, and other beta ray-emitting isotopes, up from a previous record of 540 becquerels. At two monitoring sites outside the port, seawater was found Monday to contain 8.7 becquerels and 4.3 becquerels of tritium. The second site was about 3 km away.

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