exports Archives - Page 2 of 3 - The Automatic Earth

Large parts of the eurozone are slipping deeper into a deflationary trap despite negative interest rates and €1 trillion of quantitative easing by the ECB, leaving the currency bloc with no safety buffer when the next global recession hits. The ECB is close to exhausting its ammunition and appears increasingly powerless to do more under the legal constraints of its mandate. It has downgraded its growth forecast for the next two years, citing the uncertainties of Brexit, and admitted that it has little chance of meeting its 2pc inflation target this decade, insisting that it is now up to governments to break out of the vicious circle. Mario Draghi, the ECB’s president, said there are limits to monetary policy and called on the rest of the eurozone to act “much more decisively” to lift growth, with targeted spending on infrastructure.

“It is abundantly clear that Draghi is played out and we’re in the terminal phase of QE. The eurozone needs a quantum leap in the nature of policy and it has to come from fiscal policy,” said sovereign bond strategist Nicholas Spiro. Mr Draghi dashed hopes for an expansion of the ECB’s monthly €80bn programme of bond purchases, and offered no guidance on whether the scheme would be extended after it expires in March 2017. There was not a discussion on the subject. “The bar to further ECB action is higher than widely assumed,” said Ben May from Oxford Economics. The March deadline threatens to become a neuralgic issue for markets given the experience of the US Federal Reserve, which suggests that an abrupt stop in QE stimulus amounts to monetary tightening and can be highly disruptive.

The ECB has pulled out all the stops to reflate the economy yet core inflation has been stuck at or below 1pc for three years. Officials are even more worried about the underlying trends. Data collected by Marchel Alexandrovich at Jefferies shows that the percentage of goods and services in the inflation basket currently rising at less than 1pc has crept up to 58pc. This is a classic precursor to deflation and suggests that the eurozone is acutely vulnerable to any external shock. The figure has spiked to 67pc in Italy, and is now significantly higher that it was when the ECB launched QE last year. The eurozone should have reached economic “escape velocity” by now after a potent brew of stimulus starting last year: cheap energy, a cheaper euro, €80bn a month of QE, and the end of fiscal austerity. [..] “The euro is far stronger than they want, and stronger than the economy deserves, but they don’t know how to weaken it. This is exactly what happened to the Japanese,” said Hans Redeker, currency chief at Morgan Stanley.

Draghi’s starting to come down on Germany, but it’s too late: their exports just fell 10%.

• ECB Stands Pat on Stimulus as Draghi Defends Policy (WSJ)

The ECB left its €1.7 trillion stimulus unchanged at a policy meeting Thursday, brushing off concerns over economic shock waves from Britain’s vote to leave the EU and disappointing investors expecting the ECB to act again soon. The decision to stand pat, even as new forecasts showed the ECB missing its inflation target for years, underlines how central banks are approaching the limits of what they can achieve without support from other policy areas, notably governments. In China earlier this month, Group of 20 leaders warned that monetary policy alone can’t fix the world’s economic ills, and pledged to boost spending and adopt overhauls aimed at boosting growth.

At a news conference here, ECB President Mario Draghi said he was concerned about persistently low eurozone inflation, which has fallen short of the ECB’s near-2% target for more than three years. Fresh ECB staff forecasts, published Thursday, showed inflation rising very gradually, to 1.2% next year and 1.6% in 2018. Despite that, Mr. Draghi said policy makers didn’t even discuss fresh stimulus, and praised the effectiveness of the bank’s existing policy measures, which include negative interest rates and €80 billion a month of bond purchases. He also aimed an unusually direct rebuke at Germany, criticizing Berlin for not boosting spending to support the economy. “Countries that have fiscal space should use it,” Mr. Draghi said. “Germany has fiscal space.”

Germany looks a lot like Japan and China.

• German July Exports, Imports in Shock Plunge (Street)

German imports and exports unexpectedly shrunk in July, with a sharp export contraction causing a surprise narrowing in Germany’s trade balance. Federal Statistical Office data showed seasonally adjusted exports fell by 2.6% – analysts had expected about 0.3% growth – whereas imports fell by 0.7%, as against expectations for a 0.8% rise. On the year exports slumped by 10% and imports shriveled by 6.5%. The foreign trade balance shrunk to €19.4 billion from €21.4 billion in June, as against expectations for a balance of €22 billion. The Federal Statistical Office said the pace of German exports to other EU countries fell by 7% in July, while imports from the region fell by 4.5%. The falls were slightly narrower for trade with other eurozone countries.

German trade outside the 28-nation EU fared worse, with exports plunging by 13.8% and imports by 10.1%. Faltering German exports amid lackluster worldwide growth and emerging-market volatility has long been a drag on German growth. But the sharper-than-expected export fall challenges expectations of a second-half pickup in German trade with the rest of the world, and the surprise – albeit small -import decline suggests domestic demand isn’t robust enough to step into the breach. The trade data come in a week that the statistics office reported weaker-than-expected industrial output and manufacturing production for July. But the euro held firm against the dollar after the figures and was recently up 0.11% at $1.1272.

“..some time around 2019, China’s total Debt/GDP will be over 400%, an absolutely ridiculous number, and one which assures a banking, if not global, financial crisis.”

• Goldman Calculates True Growth Rate Of China’s Debt: 40% of GDP Per Year (ZH)

For a long time when it came to Chinese loan creation, analysts would only look at the broadest reported aggregate: the so-called Total Social Financing. And, for a long time, it was sufficient – TSF showed that in under a decade, China had created over $20 trillion in new loans, vastly more than all the “developed market” QE, the proceeds of which were used to kickstart growth after the 2009 global depression, to fund the biggest capital misallocation bubble the world has ever seen and create trillions in nonperforming loans. However, a problem emerged about a year ago, when it was revealed that not even China’s TSF statistic was sufficient to fully capture the grand total of total new loan creation in China.

[..] according to Goldman, “a substantial amount of money was created last year, evidencing a very large supply of credit, to the tune of RMB 25tn (36% of 2015 GDP).” This massive number was 9% higher than the TSF data, which implied that “only” a quarter of China’s 2015 GDP was the result of new loans. As Goldman further noted, the “divergence from TSF has been particularly notable since Q2 last year after a major dovish shift in policy stance.” In short, in addition to everything else, China has also been fabricating its loan creation data, and the broadest official monetary aggregate was undercutting the true new loan creation by approximately a third. The reason for this is simple: China does not want the world – or its own population – to realize just how reliant it is on creating loans out of thin air (and “collateralized” by increasingly more worthless assets), as it would lead to an even faster capital outflow by the local population sensing just how unstable the local banking system is.

Here is the good news: compared to late 2015, the record credit creation has slowed down fractionally, and the gap with the TSF total has shrunk. The smaller gap seems to be in line with recent reports that listed banks’ “investment receivables” expanded less rapidly in 2016 H1, and it might partly reflect the regulators’ tougher stance against shadow lending in recent months. And now, the bad news: this “tougher stance” has not been nearly tough enough, because as the following chart shows on a 1-year moving average, nearly 40% of China’s “economic growth” is the result of new credit creation, or in other words, new loans. What this really means, is that China’s debt/GDP, estimated most recently by the IIF at 300%…

… is now growing between 30% and 40% per year, when one accounts for the unaccounted for “shadow” credit conduits. Here is how Goldman concludes this stunning observation: “The PBOC appears to have shifted to a less dovish, though still supportive, policy bias in the last few months. However, given the prospective headwinds from slower housing construction and tighter on-budget fiscal stance in the coming months, there remains a clear need to sustain a high level of infrastructure investment, which is credit intensive, to achieve the minimum 6.5% full-year growth target. This poses constraints on how much further the PBOC can keep reining in credit, in our view.”

Translating Goldman, some time around 2019, China’s total Debt/GDP will be over 400%, an absolutely ridiculous number, and one which assures a banking, if not global, financial crisis.

The resounding success of globalization.

• China’s Reviving the American Heartland – One Low Wage at a Time (BBG)

For six years, the General Motors factory that used to make Chevy Trailblazers in Moraine, Ohio, sat abandoned, a rusting monument to the decline of the American auto industry. These days, the plant is humming again, fueled by a resurgent U.S. consumer – but now under Chinese management. On the shop floor, Chinese supervisors in sky-blue uniforms that carry the logo of the new owners, Fuyao Glass, teach American employees how to assemble windshields. Drive along Interstate 75, through America’s industrial heartland, and you’ll find no shortage of Chinese-owned firms like Fuyao. They’re setting up shop in states such as Ohio and Michigan, key voter battlegrounds in November, where traditional manufacturing has been hollowed out – in many cases, by trade. With China.

[..] Fuyao acquired roughly half the old GM plant in 2014, spending $450 million to buy and remodel it. For a company that started out as a small producer of covers for water-meters and is now the world’s second-biggest auto-glass supplier, the acquisition capped a decade-long push into U.S. markets. For the Dayton area, it meant employment: the city, hometown of the Wright brothers, was hit hard by the shutdown of the GM plant two days before Christmas in 2008. [..] “Hey, 1,700 jobs is 1,700 jobs,” said Shawn Kane, a 28-year-old chef shopping at the Kroger grocery store in Moraine last month. “At least it’s not sitting empty anymore.” They’re jobs that tend not to pay as well as factory work once did, though – and there probably aren’t as many of them.

To keep its production in the U.S. viable, Fuyao uses more automation than it does in China, said John Gauthier, president of Fuyao Glass America. “Our customers, all they care about is that their cost doesn’t increase,” he said. A line worker at Fuyao starts at $12 per hour, equivalent to an annual salary of about $25,000. GM workers at the old Moraine plant could make at least twice that, topped off by perks like defined-benefit pensions, according to union officials and former employees. “When you don’t have enough protections for American workers, and when you’ve got a globalized economy, this is what happens,” said Chris Baker, a 40-year-old sales rep based near Moraine. “This is the new normal. It’s very sad.”

WHen will they start buying people’s homes? Cars perhaps?

• Bank of Japan Risk: Running Out of Bonds to Buy (WSJ)

Japan’s central bank is facing a new problem: It could be running out of government bonds to buy. The Bank of Japan is snapping up the equivalent of more than $750 billion worth of government debt a year in an effort to spur inflation and growth. At that rate, analysts say, banks could run out of government debt to sell within the next 18 months. The looming scarcity is a powerful sign of the limits central banks face as they turn to ever-more aggressive means of stimulating their economies. The problem is mirrored in Europe, where self-imposed rules limit how many eurozone government bonds the ECB can buy from individual governments. Facing a diminishing supply of sovereign bonds, the ECB started buying corporate debt in June.

Some economists have even called for the ECB to start buying stocks. The central bank left its bond-buying program and interest-rate policy unchanged at its meeting Thursday. The Japanese central bank has fewer options if the country’s banks, which have to hold a certain amount of safe debt to use as collateral in everyday transactions, ever become unwilling to sell more of their holdings. Its most obvious alternatives—pushing rates deeper into negative territory or buying other types of assets—have practical limitations. Meanwhile, the BOJ’s economic goals remain out of reach: Inflation is stubbornly low, and the yen has strengthened about 18% this year.

Does nobody have any common sense down under?

• Australia, New Zealand Housing Booms Set Currencies On Course For Parity (BBG)

Housing booms in New Zealand and Australia could be putting the neighbors’ currencies on course to reach parity for the first time ever. Both nations have seen house prices surge in recent years, but the underlying causes are fundamentally different, according to Deutsche Bank analysis. Australia’s boom is largely home-grown, whereas New Zealand’s is being fueled by record immigration. That’s affecting the countries’ current accounts differently. While Aussies are feeling richer due to house-price gains, prompting them to spend more on imports and boosting their current account deficit, New Zealand is sucking more offshore capital into its housing market, narrowing its current account gap. Currencies are sensitive to trends in the current account – a country’s balance with the rest of the world – because they are a gauge of risk for investors.

“The nature of the real estate boom in Australia should have bearish currency implications because it leads to deterioration in the basic balance,” Robin Winkler, a London-based strategist for Deutsche Bank, said in a research note. “This is not the case in New Zealand and adds to our conviction that AUD/NZD should drop to parity.” The two currencies have never converged in the free-floating era that began in the 1980s. They came close in April last year, when the kiwi briefly reached 99.79 Australian cents or, to express it the other way, the Aussie dollar fell below NZ$1.01. The New Zealand dollar was worth 96.8 Australian cents at 12:35p.m. in Wellington Friday.

Burn baby burn.

• Coal Rises From the Grave to Become One of Hottest Commodities

For all the predictions about the death of coal, it’s now one of the hottest commodities in the world. The resurrection may have further to run. A surge in Chinese imports to compensate for lower domestic production has seen European prices jump to near an 18-month high, while Australia’s benchmark is set for the first annual gain since 2010. At the start of the year, prices languished near decade lows because of waning demand from utilities seeking to curb pollution and amid the International Energy Agency’s declaration that the fuel’s golden age in China was over. Now, traders are weighing the chances of extreme weather hitting major producers and China further boosting imports as factors that could push prices even higher.

“It’s a commodity that’s been on a slippery slide for the past four years and it’s making a remarkable recovery,” said Erik Stavseth, an analyst at Arctic Securities in Oslo, who’s tracked the market for almost a decade. “There’s a strong pulse.” What could light up the market further is the occurrence of a La Nina weather pattern later this year. Last time it happened in 2010 and 2011, heavy rains flooded mines in Australia and Indonesia, the world’s two largest exporters. While some meteorologists have toned down their predictions for the weather phenomenon forming, “another strong forecast” would cause prices to rise further, according to Fitch’s BMI Research.

Still don’t think I know what exactly the fraud was. Though I read the piece twice.

• Historic Tax Fraud Rocks Denmark As Loss Estimates Keep Growing (BBG)

About two weeks after Denmark revealed it had lost as much as $4 billion in taxes through a combination of fraud and mismanagement, the minister in charge of revenue collection says that figure may need to be revised even higher. Speaking to parliament on Thursday, Tax Minister Karsten Lauritzen said he “can’t rule out” that losses might be bigger than the most recent public estimates indicate. It would mark the latest in a string of revisions over the past year, in which Danes learned that losses initially thought to be less than $1 billion somehow ended up being about four times as big. The embarrassment caused by the tax fraud, which spans about a decade of successive administrations, has prompted Lauritzen to consider debt collection methods not usually associated with Scandinavian governments.

Denmark has long had one of the world’s highest tax burdens – government revenue as a percentage of GDP – and a well-functioning tax model is essential to maintaining its fabled welfare system. “We’re entertaining new ideas, considering more new measures,” Lauritzen told Bloomberg. Danish officials are now prepared to pay anonymous sources for evidence from the same database that generated the Panama Papers. Jim Soerensen, a director at Denmark’s Tax Authority, says the first batch of clues obtained using this method is expected by the end of the month.

Project Fear didn’t work in Britain either.

• Goldman Sachs Just Launched Project Fear in Italy (DQ)

Project Fear began two years ago in the run up to Scotland’s national referendum. It then spread to the rest of the UK in the lead up to this summer’s Brexit referendum. But it keeps on moving. Its latest destination is Italy, where the campaign to instill fear and trepidation in the hearts and souls of Italy’s voters was just inaugurated by the world’s most influential investment bank, Goldman Sachs. It just released a 14-page report warning about the potentially dire consequences of a “no” vote in Italy’s upcoming referendum on the government’s proposed constitutional reforms. The reforms seek, among other things, to streamline Italy’s government process by dramatically restricting the powers of the senate, a major source of political gridlock, while also handing more power to the executive.

The polls in Italy are currently neck and neck, though the momentum belongs to the reform bill’s opponents. If the Italian public vote against the bill, the response of the markets could be extremely negative, warns Goldman, putting in jeopardy the latest attempt to rescue Italy’s third largest and most insolvent bank, Monte dei Paschi di Siena. The rescue is being led by JP Morgan Chase and Italian lender Mediobanca, and includes the participation of a select group of global megabanks that are desperate to prevent contagion spreading from Italy’s banking system to other European markets, and beyond. In the event of a “no” vote, MPS’ planned €5 billion capital increase would have to be put on ice, while investors wait for the political uncertainty to clear before pledging further funds.

This being Italy, the wait could be interminable and the delay fatal for Monte dei Paschi and other Italian banks, Goldman warns. It also points out that Italy is the only European country where a substantial portion of its bank bonds are held in household portfolios (about 40% according to data from Moody’s, four times more than Germany and eight times more than France and Spain). In other words, things could get very ugly, very fast, if those bank bonds collapse! As for Italian government bonds and Europe’s broader debt markets, they would be insulated from any fallout by former Goldmanite Mario Draghi’s bond binge buying.

We are unstoppable.

• Humans Have Destroyed A Tenth Of Earth’s Wilderness In 25 Years (G.)

Humans have destroyed a tenth of Earth’s remaining wilderness in the last 25 years and there may be none left within a century if trends continue, according to an authoritative new study. Researchers found a vast area the size of two Alaskas – 3.3m square kilometres – had been tarnished by human activities between 1993 and today, which experts said was a “shockingly bad” and “profoundly large number”. The Amazon accounted for nearly a third of the “catastrophic” loss, showing huge tracts of pristine rainforest are still being disrupted despite the Brazilian government slowing deforestation rates in recent years. A further 14% disappeared in central Africa, home to thousands of species including forest elephants and chimpanzees.

The loss of the world’s last untouched refuges would not just be disastrous for endangered species but for climate change efforts, the authors said, because some of the forests store enormous amounts of carbon. “Without any policies to protect these areas, they are falling victim to widespread development. We probably have one to two decades to turn this around,” said lead author Dr James Watson, of the University of Queensland and Wildlife Conservation Society. The analysis defined wilderness as places that are “ecologically largely intact” and “mostly free of human disturbance”, though some have indigenous people living within them. The team counted areas as no longer wilderness if they scored on eight measures of humanity’s footprint, including roads, lights at night and agriculture.

Globalization Is Dead, But The Idea Is Not

Aug 102016

August 10, 2016 Posted by Raúl Ilargi Meijer at 2:31 pm Finance Tagged with: centralization, exports, globalization, Growth, imports, productivity, satisfying, Saxo, trade, zombie 8 Responses »

Dorothea Lange Youngest little girl of motherless family 1939

We can, every single one of us, agree that we’re either in or just past a -financial- crisis. But that seems to be all we can agree on. Because some call it the GFC, others a recession, and still others a depression. And some insist on seeing it as ‘in the past’, and solved, while others see it as a continuing issue.

I personally have the idea that if you think central banks -and perhaps governments- have the ability and the tools to prevent or cure financial crises, you’re in the more optimistic camp. And if you don’t, you’re a pessimist. A third option might be to think that no matter what central bankers do, things will solve themselves, but I don’t see much of that being floated. Not anymore.

What I do see are countless numbers of bankers and economists and pundits and reporters holding up high the concept of globalization (a.k.a. free trade, Open Society) as the savior of mankind and its economy.

And I’m thinking that no matter how great you think the entire centralization issue is, be it global or on a more moderate scale, it’s a lost case. Because centralization dies the moment it can no longer show obvious benefits for people and societies ‘being centralized’. Unless you’re talking a dictatorship.

This is because when you centralize, when you make people, communities, societies, countries, subject to -the authority of- larger entities, they will want something in return for what they give up. They will only accept that some ‘higher power’ located further away from where they live takes decisions on their behalf, if they benefit from these decisions.

And that in turn is only possible when there is growth, i.e. when the entire system is expanding. Obviously, it’s possible also to achieve this only in selected parts of the system, as long as if you’re willing to squeeze other parts. That’s what we see in Europe today, where Germany and Holland live the high life while Greece and Italy get poorer by the day. But that can’t and won’t last. Of necessity. It’s an inbuilt feature.

Schäuble and Dijsselbloem squeezed Greece so hard they could only convince it to stay inside the EU by threatening to strangle it to -near- death. Problem is, they then actually did that. Bad mistake, and the end of the EU down the road. Because the EU has nothing left of the advantages of the centralized power; it no longer has any benefits on offer for the periphery.

Instead, the ‘Union’ needs to squeeze the periphery to hold the center together. Otherwise, the center cannot hold. And that is something those of us with even just a remote sense of history recognize all too well. It reminds us of the latter days of the Roman Empire. And Rome is merely the most obvious example. What we see play out is a regurgitation of something the world has seen countless times before. The Maximum Power Principle in all its shining luster. And the endgame is the Barbarians will come rushing in…

Still, while I have my own interests in Greece, which seems to be turning into my third home country, it would be a mistake to focus on its case alone. Greece is just a symptom. Greece is merely an early sign that globalization as a model is going going gone.

Obviously, centralists/globalists, especially in Europe, try to tell us the country is an exception, and Greeks were terribly irresponsible and all that, but that will no longer fly. Not when, just to name a very real possibility, either some of Italy’s banks go belly up or the upcoming Italian constitutional referendum goes against the EU-friendly government. And while the Beautiful Brexit, at the very opposite point of the old continent, is a big flashing loud siren red buoy that makes that exact point, it’s merely the first such buoy.

But Europe is not the world. Greece and Britain and Italy may be sure signs that the EU is falling apart, but they’re not the entire globe. At the same time, the Union is a pivotal part of that globe, certainly when it comes to trade. And it’s based very much on the idea(l) of centralization of power, economics, finance, even culture. Unfortunately (?!), the entire notion depends on continuing economic growth, and growth has left the building.

Centralization/Globalization is the only ideology/religion that we have left, but it has one inbuilt weakness that dooms it as a system if not as an ideology. That is, it cannot exist without forever expanding, it needs perpetual growth or it must die. But if/when you want to, whether you’re an economist or a policy maker, develop policies for the future, you have to at least consider the possibility, and discuss it too, that there is no way back to ‘healthy’ growth. Or else we can just hire a parrot to take your place.

So here’s a few graphs that show us where global trade, the central and pivotal point of globalization, is going. Note that globalization can only continue to exist while trade, profits, benefits, keep growing. Once they no longer do, it will go into reverse (again, bar a dictator):

Here’s Japan’s exports and imports. Note the past 20 months:

Japan’s imports have been down, in the double digits, for close to 3 years?!

Next: China’s exports and imports. Not the exact same thing, but an obvious pattern.

If only imports OR exports were going down for specific countries, that’d be one thing. But for both China and Japan, in the graphs above, both are plunging. Let’s turn to the US:

Pattern: US imports from China have been falling over the past year (or even more over 5 years, take your pick), and not a little bit.

And imports from the EU show the same pattern in an almost eerily similar way.

Question then is: what about US exports, do they follow the same fold that Japan and China do? Yup! They do.

And that’s not all either. This one’s from the NY Times a few days ago:

And this one from last year, forgot where I got it from:

Now, you may want to argue that all this is temporary, that some kind of cycle is just around the corner and will revive the economy, and globalization. By now I’d be curious to see how anyone would want to make that case, but given the religious character of the centralization idea, there’s no doubt many would want to give it a go.

Most of the trends in the graphs above have been declining for 5 years or so. While at the same time the central banks in these countries have been accelerating their stimulus policies in ways no-one could even imagine they would -or could- just 10 years ago.

All of the untold trillions in stimulus haven’t been able to lift the real economy one bit. They instead caused a rise in asset prices, stocks, housing, that is actually hurting that real economy. While NIRP and ZIRP are murdering 95% of the people’s hope to retire when they thought they could, or ever, for that matter.

No, it’s a done deal. Globalization is pining for the fjords. But because it’s become such a religion, and because its high priests have so much invested in it, it’ll be hard to kill it off even just as an -abstract- idea. I’d say wherever you live and whenever your next election is, don’t vote for anyone who promotes any centralization ideas. Or growth. Because those ideas are all in some state of decomposing, and hence whoever promotes them is a zombie.

Lastly, The Economist had a piece on July 30 cheerleading for both Hillary Clinton and ‘Open Society’, a term which somehow -presumably because it sounds real jolly- has become synonymous with globalization. As if your society will be hermetically sealed off if you want to step on the brakes even just a little when it comes to ever more centralization and globalization.

The boys at Saxo Bank, Mike McKenna and Steen Jakobsen, commented on the Economist piece, and they have some good points:

Priced Out Of The ‘Open Society’

[..] The biggest problem facing globalism, however, is neither its hypocrisy nor its will-to-power – these are ordinary human failings common to all ideologies. Its biggest problem is much simpler: it’s very expensive. The world has seen versions of the wealthy, cosmopolitan ideal before. In both Imperial Rome and Achaemenid Persia, for example, societies characterised by extensive trade networks, multicultural metropoli and the rule of law (relative to the times) eventually succumbed to rampant inequality, inter-community strife, and expensive foreign wars in the case of Rome and a death-spiral of economic stagnation and constant tax hikes in the case of Persia.

That’s the center vs periphery issue all empires run into. US, EU, and all the supra-national organizations, IMF, World Bank, NATO, (EU itself), etc, they’ve established. None of that will remain once the benefits for the periphery stop. McKenna is on to this:

It seems near-axiomatic that, in the absence of the sort of strong GDP growth that characterised the post-World War Two era, the pluralist ideal might begin to show strains along the seams of its own construction. Such strains can be inter-ethnic, ideological, religious, or whatever else, but the legitimacy of The Economists’s favoured worldview largely came about due to the wealth and living standards it was seen to provide in the post-WW2 and Cold War era. Now that this is beginning to falter, so too are the politicians and institutions that have long championed it. In Jakobsen’s view, the rising tide of populist nationalism is in no way the solution, but it is a sign that globalisation’s elites have grown distant from the population as a whole.

I’d venture that the elites were always distant from the people, but as long as the people saw their wealth grow they either didn’t notice or didn’t care.

“The world has become elitist in every way,” says Saxo Bank’s chief economist. “We as a society have to recognise that productivity comes from raising the average education level… the key thing here is that we need to be more productive. If everyone has a job, there is no need to renegotiate the social contract.” Put another way, would the political careers of Trump, Le Pen, Viktor Orban, and other such nationalist leaders be where they are if the post-crisis environment had been one of healthy wage growth, inflation, an increase in “breadwinner” jobs, and GDP expansion?

Here I have to part ways with Steen (and Mike). Why do ‘we’ need to be more productive? Why do we need to produce more? Who says we don’t produce enough? When we look around us, what is it that tells us we should make more, and buy more, and want more? Is there really such a thing as “healthy wage growth”? And what says that we need “GDP expansion”?

Most people do not spend a great deal of time imagining ideal economic and political systems. Most just want to live satisfying lives among their friends and family, and to feel as if their leaders are doing all they can to enable such a situation. What matters are the data, and if these are not made to become more encouraging, calls for this particular empire’s downfall will come with the same fervour and the same increasing frequency that they have throughout history.

The problem is not that people are choosing the wrong system, it is that they are unhappy enough to want to change course at all. Unless the developed world can find a way to reform itself out of its present malaise, no amount of media-class vituperation over xenophobia, insularity or “the uneducated” will be sufficient to turn the tide.

McKenna answers my question, unwillingly or not. Because, no, ‘Most just want to live satisfying lives among their friends and family..’ is not the same as “they want GDP expansion”, no matter how you phrase it. That’s just an idea. For all we know, the truth may be the exact opposite. The neverending quest for GDP expansion may be the very thing that prevents people from living “satisfying lives among their friends and family”.

How many people see the satisfaction in their lives destroyed by the very rat race they’re in? Moreover, how many see their satisfaction destroyed by being on the losing end of that quest? And how many simply by the demands it puts on them?

The connection between “satisfying lives” and “GDP expansion” is one made by economists, bankers, politicians and other voices driven by ideologies such as globalization. Whether your life is satisfying or not is not somehow one-on-one dependent on GDP expansion. That idea is not only ideological, it’s as stupid as it is dangerous.

And it’s silly too. Most westerners don’t need more stuff. They need more “satisfying lives among their friends and family”. But they’re stuck on a treadmill. If you want to give your kids decent health care and education anno 2016, you better keep running to stand still.

Mike McKenna and Steen Jakobsen seem to understand exactly what the problem is. But they don’t have the answer. Steen thinks it is about ‘more productivity’.

And I think that may well be the problem, not the solution. I also think it’s no use wanting more productivity, because the economic model we’re chasing is dead and gone. A zombie pushing up the daisies.

But since it’s the only one we have, and even smart people like the Saxo Bank guys can’t see beyond it, it seems obvious that getting rid of the zombie idea may take a lot of sweat and tears and, especially, blood.

Debt Rattle August 8 2016

Aug 082016

August 8, 2016 Posted by Raúl Ilargi Meijer at 9:20 am Finance Tagged with: bonds, China, depression, exports, globalization, imports, oil, open society, steel, yields 6 Responses »

NPC Dr. H.W. Evans, Imperial Wizard 1925

• The US Market Has Been And Remains Today, The Last Ponzi Game Standing (Adler)

• Priced Out Of The ‘Open Society’ (McKenna)

• Shrinking Imports And Exports—A Far More Meaningful Counterpoint To BLS (Alh.)

• China’s July Exports, Imports Fall More Than Expected (R.)

• China Crude Imports Fall to 6-Month Low, Fuel Exports Surge (BBG)

• China’s Great River of Steel Swells as Trade Tensions Build (BBG)

• Draghi Jumps Brexit Hurdle to Find Oil Damping Price Outlook (BBG)

• Bond Market’s Big Illusion Revealed as US Yields Turn Negative (BBG)

• China’s Marshall Plan (BBG)

• Earnings Beats Are Concealing Bad Results (MW)

• We’re in a Low-Growth World. How Did We Get Here? (NYT)

• Musical Chairs in a Depression (Thomas)

Great piece from Lee Adler. “It’s abstract impressionism. It’s a joke.”

• The US Market Has Been And Remains Today, The Last Ponzi Game Standing (Adler)

I’m not here to argue whether the July report was lousy or not. The US economy may well be spawning big numbers of crappy low paying jobs. Withholding tax collections were huge in the last 4 weeks of July. We know that that didn’t come from big wage gains by existing workers. They’re running at about a 2.5% annual growth rate. So when tax collections increase by a significant margin over a similar period a year ago, it suggests that there were new jobs, maybe a lot of them. I’m also not here to argue that the headline number bears any semblance of reality. The headline number is the seasonally adjusted month to month gain in the estimated number of jobs. The whole process of seasonal adjustment is a bogus attempt to smooth a jagged trend with peaks and valleys into a continuous modified moving average.

The number is a fiction. Because it’s based on a moving average it has a built in lag, for which statisticians try to compensate with a bunch of statistical hocus pocus. That includes constantly revising the number based first on subsequent surveys, and then on benchmarking the data with actual tax collections in the 5 subsequent years. Not only is the number revised twice after the first month it’s issued, but it’s then fit to the curve of actuality for the next 5 years until the reading is finalized. July’s reading won’t be final until July 2021. The process is really “seasonal finagling.” It’s abstract impressionism. It’s a joke. What I have come to argue here is that the not seasonally adjusted (NSA) numbers, which I have always relied upon in my analysis of the jobs trend, is probably also a joke.

Look at this chart. Do those railroad tracks look like the real world to you, or are these some kind of computer generated auto-numbers that merely make a pretense of reality. Law of Large Numbers or not, I have never seen any other economic series behave with such regularity. This is a joke, a farce, a sham. But it doesn’t matter because the economy doesn’t matter. The world’s central banks have attempted, and largely succeeded, in rigging the financial markets. One of the consequences, intended or unintended, is that the bulk of the benefit of that rigging flows to the US financial markets. That has been so been since 2009. The US market has been and remains today, the Last Ponzi Game Standing. All roads lead to the US.

Saxo Bank’s Mike McKenna comments on an Economist cheerleading piece on ‘Open Society’, which somehow -presumably because it sounds positive- has become synonymous to globalization. McKenna’s conclusion: the world can’t afford globalization. Which is what I’ve been saying: without growth there can be no centralization. The Saxo boys seem to think that a return to growth is still possible/desirable. I think not.

• Priced Out Of The ‘Open Society’ (McKenna)

The biggest problem facing globalism, however, is neither its hypocrisy nor its will-to-power – these are ordinary human failings common to all ideologies. Its biggest problem is much simpler: it’s very expensive. The world has seen versions of the wealthy, cosmopolitan ideal before. In both Imperial Rome and Achaemenid Persia, for example, societies characterised by extensive trade networks, multicultural metropoli and the rule of law (relative to the times) eventually succumbed to rampant inequality, inter-community strife, and expensive foreign wars in the case of Rome and a death-spiral of economic stagnation and constant tax hikes in the case of Persia.

It seems near-axiomatic that, in the absence of the sort of strong GDP growth that characterised the post-World War Two era, the pluralist ideal might begin to show strains along the seams of its own construction. Such strains can be inter-ethnic, ideological, religious, or whatever else, but the legitimacy of The Economists’s favoured worldview largely came about due to the wealth and living standards it was seen to provide in the post-WW2 and Cold War era. Now that this is beginning to falter, so too are the politicians and institutions that have long championed it. In Jakobsen’s view, the rising tide of populist nationalism is in no way the solution, but it is a sign that globalisation’s elites have grown distant from the population as a whole.

“The world has become elitist in every way,” says Saxo Bank’s chief economist. “We as a society have to recognise that productivity comes from raising the average education level… the key thing here is that we need to be more productive. If everyone has a job, there is no need to renegotiate the social contract.” Put another way, would the political careers of Trump, Le Pen, Viktor Orban, and other such nationalist leaders be where they are if the post-crisis environment had been one of healthy wage growth, inflation, an increase in “breadwinner” jobs, and GDP expansion?

Globalization crashing head first into its inherent limits.

• Shrinking Imports And Exports—A Far More Meaningful Counterpoint To BLS (Alh.)

In the first six months of 2005, the US imported 27.2% more in Chinese goods than the first six months of 2004, and that was 28.8% more than the first six months of 2003. In the first six months of 2016, the US imported 6.5% less than the first six months of 2015, itself only 6.1% more than the first six months of 2014. The US actually imported slightly less from China so far this year than two years ago.

As we know very well from US production levels it’s not as if some native “buy American” grassroots opposition has successfully convinced American buyers to ditch the cheaper Chinese alternatives, redistributing “strong” consumer spending toward American products. There is much less goods being produced and traded with and within the United States – alarmingly so. Further, as you can see above and below, the timing of this most recent change from plain weakness to dangerous weakness is significant.

Starting September 2015, meaning dating back to August, US imports from China have dropped off a cliff. While year-over-year growth was slightly positive in September, it has been negative in every month since except February 2016 and that was due to calendar effects here and holiday weeks there (and was easily wiped out by the massive contraction in March). The mainstream reading of the payroll reports up to that point indicated that US demand would and should be nothing but strong. Instead, it has been much worse than it already was.

It isn’t just China that is feeling the increasing absenteeism of the US consumer. US imports from Europe contracted for the third straight month, where the -1.8% 6-month average is the lowest since 2010 and the initial recovery from the Great Recession. Imports from Japan were up for the first time in three months, but overall for the first half of 2016 are down nearly 5% in total.

But that’s only due to who does the ‘expecting’.

• China’s July Exports, Imports Fall More Than Expected (R.)

China’s exports and imports fell more than expected in July in a rocky start to the third quarter, suggesting global demand remains weak in the aftermath of Britain’s decision to leave the EU. Exports fell 4.4% from a year earlier, the General Administration of Customs said on Monday, while adding that it expects pressure on exports is likely to ease at the beginning of the fourth quarter. Imports fell 12.5% from a year earlier, the biggest decline since February, suggesting domestic demand remains sluggish despite a flurry of measures to stimulate growth. That resulted in a trade surplus of $52.31 billion in July, versus a $47.6 billion forecast and June’s $48.11 billion.

Trying to keep the teapots alive…

• China Crude Imports Fall to 6-Month Low, Fuel Exports Surge (BBG)

China’s crude imports fell to the lowest level in six months as demand from independent refineries eased. Net fuel exports surged to a record. The world’s biggest energy user imported 31.07 million metric tons of crude in July, according to data released by the General Administration of Customs on Monday. That’s about 7.35 million barrels a day, the slowest pace since January. Meanwhile, net fuel exports jumped to 2.49 million tons last month.

The nation’s appetite for overseas crude, which increased 14% in the first half year from the same period of 2015, may be weaker in the near term as insufficient infrastructure and scheduled maintenance at some independent refiners will likely hinder their crude purchases, BMI Research said in a report dated Aug. 4. “Teapots’ crude buying has slowed in the third quarter amid maintenance,” Amy Sun, an analyst with ICIS China, said before data were released. “Some plants have also seen their crude-import quotas filling up.”

They have no intention of halting this either.

• China’s Great River of Steel Swells as Trade Tensions Build (BBG)

There’s a river of steel flooding from China despite the best efforts of governments around the world to dam the flow from the world’s top producer, with data on Monday showing that overseas shipments held above 10 million tons in July. Sales increased 5.8% on-year to 10.3 million metric tons last month, compared with 10.9 million tons in June, according to China’s customs administration. Exports in the first seven months expanded 8.5% to 67.4 million tons, a record volume for the period. That’s in line with what South Korea, the world’s sixth-largest producer in 2015, makes in an entire year.

The robust export showing by China’s mills contrasts with the country’s broader performance last month, which fell in dollar terms, and risks further stoking trade tensions with partners from India to Europe after they imposed curbs to keep out the alloy. Premier Li Keqiang has defended the country’s growing presence in overseas steel markets, saying last month that overcapacity isn’t the fault of a single country. “Orders from abroad have held up relatively well as steelmakers in China have a cost advantage,” Dang Man, an analyst at Maike Futures Co. in Xi’an, said before the data. “Attention is still on global trade friction as the number of cases against Chinese exports is quite large.”

The graph illustrates one thing alright. Food, Alcohol and Tobacco prices rise only because of taxes. That suggests governments could get rid of deflation just by raising taxes. Which, really, is nonsense. Therefore, so is the graph and the methodology it is based on. Rising prices don’t equal inflation.

• Draghi Jumps Brexit Hurdle to Find Oil Damping Price Outlook (BBG)

Whenever Mario Draghi clears a hurdle on his path to higher inflation, a new one appears. Just as the 19-nation economy sends encouraging signals that challenges from Brexit to terrorism won’t derail the modest recovery, a new decline in oil prices is casting a shadow over an expected pick-up in inflation. With growth not strong enough to generate price pressures, the ECB president may have to revise his outlook yet again. Inflation remains far below the ECB’s 2% goal after more than two years of unprecedented stimulus and isn’t seen reaching it before 2018.

Staff will begin to draw up fresh forecasts in mid-August, and while officials are in no rush to adjust or expand their €1.7 trillion quantitative-easing plan in September, economists predict Draghi will have to ease policy before the end of the year. “Now that the euro-area economy seems to have shrugged off the Brexit vote, focus will again shift on inflation, against the background of those negative news from oil prices,” said Johannes Gareis, an economist at Natixis in Frankfurt. “Yes, the ECB has managed to dispel deflation fears, but all the uncertainty means inflation will stay lower for longer – and Draghi will have to take notice.”

Maybe Zimbabwe bonds still offer some yield?

• Bond Market’s Big Illusion Revealed as US Yields Turn Negative (BBG)

For Kaoru Sekiai, getting steady returns for his pension clients in Japan used to be simple: buy U.S. Treasuries. Compared with his low-risk options at home, like Japanese government bonds, Treasuries have long offered the highest yields around. And that’s been the case even after accounting for the cost to hedge against the dollar’s ups and downs – a common practice for institutions that invest internationally. It’s been a “no-brainer since forever,” said Sekiai, a money manager at Tokyo-based DIAM. That truism is now a thing of the past. Last month, yields on U.S. 10-year notes turned negative for Japanese buyers who pay to eliminate currency fluctuations from their returns, something that hasn’t happened since the financial crisis.

It’s even worse for euro-based investors, who are locking in sub-zero returns on Treasuries for the first time in history. That quirk means the longstanding notion of the U.S. as a respite from negative yields in Japan and Europe is little more than an illusion. With everyone from Jeffrey Gundlach to Bill Gross warning of a bubble in bonds, it could ultimately upend the record foreign demand for Treasuries, which has underpinned their seemingly unstoppable gains in recent years. “People like a simple narrative,” said Jeffrey Rosenberg at BlackRock. “But there isn’t a free lunch. You can’t simply talk about yield differentials without talking about currency differentials.”

Imagine the enormous amounts of debt that would be involved in this. Then look at China’s current debt. Then draw your conclusions. More globalization nonsense. The next Chinese bubble.

• China’s Marshall Plan (BBG)

China’s ambition to revive an ancient trading route stretching from Asia to Europe could leave an economic legacy bigger than the Marshall Plan or the EU’s enlargement, according to a new analysis. Dubbed ‘One Belt, One Road,’ the plan to build rail, highways and ports will embolden China’s soft power status by spreading economic prosperity during a time of heightened political uncertainty in both the U.S. and EU, according to Stephen L. Jen, CEO at Eurizon SLJ Capital, who estimates a value of $1.4 trillion for the project. It will also boost trading links and help internationalize the yuan as banks open branches along the route, according to Jen.

“This is a quintessential example of a geopolitical event that will likely be consequential for the global economy and the balance of political power in the long run,” said Jen, a former IMF economist. Reaching from east to west, the Silk Road Economic Belt will extend to Europe through Central Asia and the Maritime Silk Road will link sea lanes to Southeast Asia, the Middle East and Africa. While China’s authorities aren’t calling their Silk Road a new Marshall Plan, that’s not stopping comparisons with the U.S. effort to rebuild Western Europe after World War II. With the potential to touch on 64 countries, 4.4 billion people and around 40% of the global economy, Jen estimates that the One Belt One Road project will be 12 times bigger in absolute dollar terms than the Marshall Plan.

China may spend as much as 9% of GDP – about double the U.S.’s boost to post-war Europe in those terms. “The One Belt One Road Project, in terms of its size, could be multiple times larger and more ambitious than the Marshall Plan or the European enlargement,” said Jen. It’s not all upside. Undertaking an expansive plan like this one will inevitably run the risk of corruption, project delays and local opposition. Chinese backed projects have frequently run into trouble before, especially in Africa, and there’s no guarantee that potential recipient nations will put their hand up for the aid. In addition, resurrecting the trading route will need funding during a time of slowing growth and rising bad loans in the nation’s banks. Sending money abroad when it’s needed at home may not have an enduring appeal.

Still, at least China has a plan. “The fact that this is a 30-40 year plan is remarkable as China is the only country with any long-term development plan, and this underscores the policy long-termism in China, in contrast to the dominance of policy short-termism in much of the West,” said Jen. And that’s a win-win for soft power. “The One Belt One Road Project could be a huge PR exercise that could win over government and public support in these countries,” he said.

“The beat on earnings is due at least in part to negative earnings revisions heading into earnings season, similar to what we have seen for the last 29 quarters..”

• Earnings Beats Are Concealing Bad Results (MW)

Investors shouldn’t be fooled by this season’s “better-than-expected” earnings—they are still pretty bad. With nearly 90% of the S&P 500 companies having reported second-quarter results through Friday morning (437 out of 505), aggregate earnings-per-share for the group are on course to decline 3.5% from a year ago, according to FactSet. Many Wall Street strategists are pleased, because that is a lot better than expectations of a 5.5% decline on June 30, just before earnings reporting season kicked off. So are investors, as the S&P and Nasdaq Composite Index closed in record territory Friday, and the Dow Jones Industrial Average closed less than 0.3% away. But that is like saying you should be happy with the “D” you got, because it would really be a “B” if the teacher changed the scale to grade on a curve.

“The beat on earnings is due at least in part to negative earnings revisions heading into earnings season, similar to what we have seen for the last 29 quarters with aggregate upside to expectations,” Morgan Stanley equity strategists wrote in a recent note to clients. Earnings might be beating lowered expectations, but they are still worse than the aggregate FactSet consensus of a 3.1% decline at the end of the first quarter on March 31. It also means S&P 500 earnings will suffer the fifth-straight quarter of year-over-year declines, the longest such streak since the five-quarter stretch from the third quarter of 2008 through the third quarter of 2009, the heart of the Great Recession.

By fooling ourselves into thinking we’d never get there again?

• We’re in a Low-Growth World. How Did We Get Here? (NYT)

One central fact about the global economy lurks just beneath the year’s remarkable headlines: Economic growth in advanced nations has been weaker for longer than it has been in the lifetime of most people on earth. The United States is adding jobs at a healthy clip, as a new report showed Friday, and the unemployment rate is relatively low. But that is happening despite a long-term trend of much lower growth, both in the United States and other advanced nations, than was evident for most of the post-World War II era. This trend helps explain why incomes have risen so slowly since the turn of the century, especially for those who are not top earners. It is behind the cheap gasoline you put in the car and the ultralow interest rates you earn on your savings.

It is crucial to understanding the rise of Donald J. Trump, Britain’s vote to leave the European Union, and the rise of populist movements across Europe. This slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2% a year from 1947 through 2000 — but starting in 2001 has averaged only 0.9%. The economies of Western Europe and Japan have done worse than that. Over long periods, that shift implies a radically slower improvement in living standards. In the year 2000, per-person G.D.P. — which generally tracks with the average American’s income — was about $45,000.

But if growth in the second half of the 20th century had been as weak as it has been since then, that number would have been only about $20,000. To make matters worse, fewer and fewer people are seeing the spoils of what growth there is. According to a new analysis by the McKinsey Global Institute, 81% of the United States population is in an income bracket with flat or declining income over the last decade. That number was 97% in Italy, 70% in Britain, and 63% in France.

“Since 2007, the world has been in an unacknowledged depression.”

• Musical Chairs in a Depression (Thomas)

Economics is a bit like musical chairs. In a recession, the economy takes a hit and there are some casualties. Some players fail to get a chair in time and are out of the game. The game then goes on without them. The economy eventually recovers. But a depression is a different game entirely. Since 2007, the world has been in an unacknowledged depression. A depression is like a game of musical chairs in which ten children are walking around, but suddenly nine of the chairs are taken away. This means that nine of the children will soon be out of the game. But it also means that all ten understand that the odds of them remaining in the game are quite slim and that desperate times call for desperate measures. It’s time to toss out the rule book and do whatever you have to, to get the one remaining chair.

Of course, the pundits officially deny that we have even been in a depression. They regularly describe the world as “in recovery from the 2008–2010 recession,” but the “shovel-ready jobs” that are “on the way” never quite materialize. The “green shoots” never seem to blossom. So, what’s going on here? Depressions do not occur all at once. It takes time for them to bottom and, if an economy is propped up through economic heroin (debt), the Big Crash can be a long time in coming. In that regard, this one is one for the record books. As Doug Casey is fond of saying, a depression is like a hurricane. First there are the initial crashes, then a calm as the eye of the hurricane passes over, then, we enter the trailing edge of the other side of the hurricane.

This is the time when things really get rough—when even the politicians will start using the dreaded “D” word. We have entered that final stage, as the economic symptoms demonstrate, and this is the time when the game of musical chairs will evolve into something quite a bit nastier. In normal economic times, even including recession periods, we observe financial institutions maintaining their staunchly conservative image. For the most part, they deliver as promised. But, as we move into the trailing edge of the second half of the hurricane, we notice more and more that the bankers are rewriting the rule book in order to take possession of the wealth that they previously held in trust for their depositors.

And they don’t do this in isolation. They do it with the aid of the governments of the day. New laws are written in advance of the crisis period to assure that the banks can plunder the deposits with impunity. Since 2010, such laws have been passed in the EU, the US, Canada and other jurisdictions. Trial balloons have been sent up to ascertain to what degree they will get away with their freezes and confiscations. Greece has been an excellent trial balloon for the freezes and Cyprus has done the same for the confiscations. The world is now as ready as it’s going to be for the game to be played on an international level.

So what will it look like, this game of musical chairs on steroids? Well, first we’ll see the sudden crashes of markets and/or defaults on debts. Shortly thereafter, one Monday morning (or more likely one Tuesday after a long weekend) the financial institutions will fail to open their doors. The media will announce a “temporary state of emergency” during which the governments and banks must resolve some difficulties in order to “assure a continued sound economy.” Until that time, the banks will either remain shut, or will process only small transactions.

Debt Rattle April 22 2016

Apr 222016

April 22, 2016 Posted by Raúl Ilargi Meijer at 9:31 am Finance Tagged with: China, default, diesel, ECB, exports, Merkel, pensions, squid, steel, stocks, Turkey, yen 5 Responses »

Harris&Ewing Less taxes, more jobs, US Chamber of Commerce campaign 1939

• US Middle Class Flees The Stock Market (ZH)

• China Markets Send Ominous Signals as Global Stocks Rally (BBG)

• China Seizes Biggest Share Of Global Exports In Almost 50 Years (R.)

• China Risks Global ‘Steel War’ As Tempers Flare (AEP)

• Yen Falls By Most In 7 Weeks As BOJ Considers Negative-Rate Loans (BBG)

• Draghi Defies German Disfavor With Claim ECB Stimulus Works (BBG)

• Pension Cuts Loom For Millions of Dutch As Big Funds Struggle (DN)

• Eurozone Mess Can’t Be Fixed; It Can Only Be ‘Muddled Through’ (MW)

• US Regulators Line Up to Consider New Executive Compensation Proposal (WSJ)

• How Goldman Sachs’ Vampire Squid Became A Flattened Slug (Tett)

• Greek Talks With Lenders Fraught As Fears Grow Of Default (G.)

• The Real Reason Dilma Rousseff’s Enemies Want Her Impeached (Miranda)

• All Diesel Cars’ Emissions Far Higher On Road Than In Lab (G.)

• Mitsubishi Scandal Deepens After US Demands Test Data (G.)

• Why UK Landed Gentry Are So Desperate To Stay In The EU (G.)

• Angela Merkel Faces Balancing Act On Visit To Turkey (G.)

“..no matter how hard the Fed works to prop and boost the market, nearly half of Americans no longer have any faith left in what has become clear to most is just a tool to push some crooked, crony-capitalist policy, but mostly to make the richest even richer.”

• US Middle Class Flees The Stock Market (ZH)

Three recurring laments heard in the corridors of the Marriner Eccles building are why, with stocks at record highs after levitating in more or less a straight line for the past 7 years, i) has the economic recovery not been stronger, ii) has inflation not been higher, and iii) have consumer spending and sentiment never really recovered. A just released Gallup survey may have the answer. According to a poll of over 1,000 American adults, even with the Dow Jones industrial average near its record high, only slightly more than half of Americans (52%) say they currently have money in the stock market, matching the lowest ownership rate in Gallup’s 19-year trend.

The current figure is down slightly from 2014 and 2015, and continues a secular decline that started in 2007. But most troubling is that the generation which is expected to take over the stock ownership reins when the Baby Boomers start selling their equity holders, middle-class adults, especially those younger than 35, are the least likely to invest. As Gallup notes, “although Americans in all income groups are less likely to have stock investments now than before the Great Recession, middle-class Americans have been the most likely to flee the market” Gallup’s conclusion: “Fewer Americans – particularly those in middle-income families – are benefiting from the recent gains in stock values than would have been the case a decade ago.”

Which is the worst possible news for Janet Yellen, because no matter how hard the Fed works to prop and boost the market, nearly half of Americans no longer have any faith left in what has become clear to most is just a tool to push some crooked, crony-capitalist policy, but mostly to make the richest even richer.

Wobbly.

• China Markets Send Ominous Signals as Global Stocks Rally (BBG)

As equities climb around the world, Chinese traders aren’t celebrating. The Shanghai Composite Index has fallen 4.6% this week, the worst performance among 93 global benchmark gauges tracked by Bloomberg and the steepest decline since January. It’s not just the stock market. The yuan is trading around its lowest level against a basket of currencies since November 2014, while yields on corporate debt have risen for 10 of the past 12 days. Concern is mounting over rising credit defaults, while traders are also paring bets for more stimulus amid signs of stabilizing growth, according to Dai Ming at Hengsheng in Shanghai. A sudden 4.5% plunge by the benchmark equity gauge on Wednesday revived memories of January’s stomach-churning turmoil, when shares sank 23% over the course of the month. “People are still very skeptical, and with good reason,” said Hao Hong at Bocom International in Hong Kong.

International concern about the health of China’s economy has been fading from view as data showed an improving picture and volatility in its stock and currency markets waned. Wednesday’s equity tumble in Shanghai caused barely a ripple among global shares as international traders focused on surging commodity prices – spurred partly by expectations of higher Chinese demand. Questions are being asked about how long the Communist Party can keep pumping money into the economy to prop up growth. New credit topped $1 trillion in the first quarter, helping GDP to expand 6.7% – still the slowest pace in seven years. Much of that money flowed into the property market, spurring concerns of a bubble. “There’s still a lot of doubt over the sustainability of the turnaround in the Chinese macro numbers,” said Adrian Zuercher UBS’s wealth management unit. “It’s a very stimulus-driven rebound that we now see.”

“..the highest share any country has enjoyed since the United States in 1968.”

• China Seizes Biggest Share Of Global Exports In Almost 50 Years (R.)

Chinese exporters have found a silver lining in weak global demand by seizing market share from their competitors – good news for China but an expansion that is aggravating trade tensions. China’s proportion of global exports rose to 13.8% last year from 12.3% in 2014, data from the United Nations Conference on Trade and Employment shows, the highest share any country has enjoyed since the United States in 1968. The success belies widespread predictions rising costs for Chinese labor and a currency that has increased nearly 20% against the dollar in the last decade would cause China to lose market share to cheaper competitors. Instead, China’s manufacturing infrastructure built during the country’s industrial rise of recent decades is keeping exports humming and providing the basis for firms to produce higher-value products.

“China cannot be replaced,” said Fredrik Guitman, formerly China general manager for a Danish maker of silver products, adding that reliable delivery times were more important than price. “If they say 45 days, it will be 45 days.” Still, even as Chinese firms compete in more sophisticated product lines, they are unloading overstocked inventory from entrenched industrial overcapacity in sectors like steel, an irritant in global trading relationships. The United States and seven other countries this week called for urgent action to address a steel supply glut that many blame on China. At the same time, China’s imports from other countries fell sharply – down over 14% in 2015 – leading some economists to suggest China was deploying an “import substitution” strategy that is pushing foreign brands out of its domestic markets.

On Wednesday, Beijing rolled out fresh measures to support machinery exports, including tax rebates, and encouraged banks to lend more to exporters. Machinery and mechanical appliances make up the biggest portion of China’s exports. Such policies may not be welcomed in the United States, where Republican presidential hopeful Donald Trump has called for 45% tariffs on Chinese imports – a message that appears to resonate with American voters. The risk is that the Chinese firms successfully moving up the value chain will see their overseas profits destroyed by a trade war if Trump’s ideas find place in policy.

Risk it? War is on.

• China Risks Global ‘Steel War’ As Tempers Flare (AEP)

China is on a collision course with the world’s leading powers over excess steel output after it refused to sign up to an emergency global plan to cut capacity and eliminate subsidies. The clash comes as fresh data confirms fears that China is still cranking up production and even reopening shuttered plants supposedly due for closure, despite the massive glut on the world market. Chinese mills produced a record 70.65m tonnes in March, 51pc of global output and five times as much as the whole EU. “Just words from China are no longer good enough. It is now clear to everybody that the Chinese have no intention at all of changing the structure of their steel industry,” said Axel Eggert, head of the European steel federation Eurofer. “They refused even to accept basic principles. They don’t recognise the problem, and they are not looking for a compromise,” he said.

The world’s steel-making powers, led by the US, Japan and the EU, agreed to joint steps to tackle the crisis at special OECD summit in Brussels on Monday, but China’s name was conspicuously absent when the final document was released later. This renders the plan meaningless since China’s excesses capacity alone is 400m tonnes, greater than the entire production of Europe and North America. Officials were shocked by the tone of the encounter with the Chinese delegation. “It was eye-opening,” said one source. “The scale of the emergency in the sector means it is now life or death for many companies,” said Cecilia Malmstrom, the EU trade commissioner. Brussels has been slow to roll out anti-dumping sanctions, partly due to pressure from Britain and other states courting China for their own political reasons.

While the US has imposed penalties of 266pc on Chinese cold-rolled steel, the EU has acted more slowly and stopped at 13pc. But the mood is shifting. Mrs Malmstrom said there is no doubt that the surge in Chinese exports is the reason why steel prices have crashed by 40pc this year, insisting that it is imperative to “act quickly” before the crisis asphyxiates European industry. “The situation is putting hundreds of thousands of jobs in the EU at risk. It’s also undermining a strategic sector with importance for the wider economy,” she said. Emmanuel Macron, the French economy minister, said Europe can no longer tolerate the flood of Chinese supply. “You do not respect the rules of world trade. Your steel output is subsidised, and the excess capacity is dumped below cost. It is destroying our productive capacity, and it is unacceptable,” he said.

Anger is also rising on Capitol Hill, with mounting calls from the US Congress for a much tougher stand, a theme echoed daily on the presidential campaign trail. “The American steel industry faces the greatest import crisis in modern history,” said Tim Murphy, head of the Congressional steel caucus. “We’re at the tipping point, with US mills averaging only 70pc of capacity utilisation, a level that is simply not sustainable. We are in real danger of losing this industry and becoming dependent on foreign countries. We can’t let that happen.”

There’s no reason other than speculation and manipulation for the yen to be where it is.

• Yen Falls By Most In 7 Weeks As BOJ Considers Negative-Rate Loans (BBG)

The yen dropped the most in seven weeks after people familiar with the matter said that the Bank of Japan may consider helping financial institutions to lend by offering a negative rate on some loans. Japan’s currency slid against all except one of its 16 major counterparts after the people said a discussion on this may happen in conjunction with any decision to make a deeper cut to the current negative rate on reserves. The people asked not to be named as the matter is private. The BOJ meets April 27-28 to decide on its next policy move. “We thought they would be doing more quantitative easing but it looks like they may be doing more on the negative interest-rate front,” said Joseph Capurso at Commonwealth Bank of Australia.

That’s driving the move lower in the Japanese currency and “if delivered, you’ll get a temporary but significant spike up in dollar-yen. The yen dropped 0.8% to 110.30 per dollar as of 7:06 a.m. in London, the biggest decline since March 1. Japan’s currency weakened 0.9% to 124.68 per euro. Twenty three of 41 analysts surveyed by Bloomberg predict the BOJ will expand stimulus next week. Nineteen forecast the central bank will increase purchases of exchange-traded funds, eight expect a boost in bond buying and eight project the BOJ will lower its negative rate, the survey conducted April 15-21 shows.

Commonwealth Bank recommended buying the dollar against the yen through two-week options to take advantage of the diverging monetary policies of the Fed and the BOJ. National Australia Bank Ltd. said in a report it favors purchasing dollars at current levels before the BOJ meeting, targeting an appreciation to 113 yen. The Federal Open Market Committee meeting April 26-27 will also be closely watched for guidance on how soon U.S. policy makers will raise the benchmark rate after an increase at the end of last year. Traders have increased the odds of a Fed move by December to 63% from about 50% at the end of last week, according to data compiled by Bloomberg based on fed fund futures.

Isn’t it time to get serious yet?

• Draghi Defies German Disfavor With Claim ECB Stimulus Works (BBG)

Mario Draghi has two stubborn adversaries – low inflation everywhere, and low regard in Germany. He’s now extending his offensive on both fronts. A recovery in credit, and output proving resilient to global shocks, are buttressing the European Central Bank’s argument that the range of stimulus measures it bolstered only last month is working. On Thursday, the ECB president used that evidence to make ground against German critics who say he’s on the wrong track. After more than four years at the helm of the central bank, Draghi is still fielding persistent attacks from the ECB’s host country, where a public perception of him as a profligate Italian whose low interest rates are killing retirement savings has become part of the political furniture.

At a press conference in Frankfurt, he fumed that the more critics undermine his stimulus, the more of it he’ll have to do. “Impatience in the markets and in politics can come up like a geyser sometimes, but the ECB has to continue to be as steady as a rock,” said Torsten Slok at Deutsche Bank in New York. “The more it shows up in the data, the easier it is for them to say that their policies are working. The ECB is defending itself and making sure the arguments are solid.” The backdrop to Thursday’s policy meeting, where the Governing Council kept its interest rates on hold after cutting them to record lows in March, was colored by a row stepped up by Germany’s Wolfgang Schaeuble.

Draghi deployed a volley of arguments against the finance minister’s charge that ECB policies are contributing to the rise of anti-euro populism, and the broader assumption that savers are being penalized, adding that Schaeuble either “didn’t mean what he said or didn’t say what he meant.” “In fact real rates today are higher than they were about 20-30 years ago,” Draghi said. “But I’m aware that to explain real interest rates to savers may be difficult.” Draghi has been dogged by sniping in Germany since taking office, with the popular press often using his nationality as shorthand for a tendency to allow high inflation. In fact, he’s had the opposite problem, with price gains too far below the 2% goal for more than three years.

ZIRP and NIRP kill pensions sytems around the planet. And Draghi claims ‘ECB Stimulus Works’.

• Pension Cuts Loom For Millions of Dutch As Big Funds Struggle (DN)

The assets of the Netherlands’ four biggest pension funds have fallen again, making it more likely that millions of people will face pension cuts next year. By law, a pension fund must have a coverage ratio of 105%, meaning its assets outweigh its obligations by 5%. However, that of the massive civil service fund ABP has now gone down to 90.4%, a drop of seven%age points since the end of 2015. Health service fund Zorg & Welzijn and the two engineering funds also have a coverage ratio of around 90%. ‘Our financial position remains worrying,’ said ABP chairwoman Corien Wortmann-Kool. ‘We are heading to the danger zone and that means there is a real risk of a pension cut in 2017.’ ABP is one of the biggest pension funds in the world. The heads of the other three funds have made similar statements. If the pension funds have a coverage ratio of below 90% at the end of the year, they will have to cut pensions.

“..a joint currency that enabled its strongest member to execute a beggar-thy-neighbor mercantilist trade policy that penalized countries without the size or drive of Germany..”

• Eurozone Mess Can’t Be Fixed; It Can Only Be ‘Muddled Through’ (MW)

If you’re waiting for international policy makers to pull a rabbit out of the hat and solve the euro problem, stop holding your breath. After a generally a desultory meeting of the IMF in Washington last week, the prevailing pessimism about the future of the euro came grimly to the fore in one of the many meetings held on the sidelines of the semiannual IMF gathering. Two dozen policy makers convened by the Official Monetary and Financial Institutions Forum (OMFIF), a private London-based group, met this week to discuss the future of the European Union’s joint currency. The off-the-record discussion involved an international array of current and former government officials, central bankers, and private-sector financiers.

The verdicts ranged from “deeply pessimistic” to “not ready to give up” – perhaps the most optimistic assessment at the meeting – and the group in its assembled wisdom concluded that there are no realistic solutions and the only course of action they could see is “muddling through.” They rehearsed all the usual analysis of what went wrong – an attempted common currency without the underpinning of joint fiscal policy, a banking union, and most importantly, a political union with an institutional infrastructure for making decisions. Without this follow-through on the original plan for “an ever closer union,” the EU has stumbled along a path of “incompetence,” with individual countries acting only in their own interests.

Even the ECB, the only EU-wide institution that has shown itself capable of taking action in this environment, came in for criticism because its successive moves to ease the stress in the system left the political leaders off the hook in coming to terms with the underlying issues. And yet, participants noted, the European public seems reluctant to give up the euro. Not even Greece, which has suffered terribly in the straitjacket of a common currency with Germany, is willing to give it up. So the answer is muddling through. And muddling through is one thing Europeans excel at, even though it has brought mixed results. Europe, after all, muddled through the arms buildup in the early 20th century to World War I. It muddled through to the banking collapse of 1931 (which contributed more to the Great Depression in the U.S. than the 1929 stock market crash).

Then it muddled through into fascism and World War II. Rebuilding from the rubble of that conflict led to a relatively brief period of constructive behavior as the continent, shielded by the U.S. defense umbrella, built new democracies and an ever-widening free trade zone. As U.S. influence — and interest — waned, Europe began again to resort to muddling through as a way of coping with stress. It muddled through the crisis in Bosnia and genocidal conflict at its very doorstep, until the U.S. intervened and sorted things out. It muddled through into a joint currency that enabled its strongest member to execute a beggar-thy-neighbor mercantilist trade policy that penalized countries without the size or drive of Germany, slashing their standard of living and reducing whole swaths of the populations to penury. Then it muddled through into a refugee crisis that threatens the very fabric and identity of individual nations, giving rise to a xenophobic backlash that harkens back to the days of Depression and fascism less than a century ago.

Oh boy, are we getting tough or what?!

• US Regulators Line Up to Consider New Executive Compensation Proposal (WSJ)

Federal regulators are lining up to consider a new rule to rein in Wall Street’s executive compensation nearly a decade after the financial crisis. The National Credit Union Administration plans to meet Thursday, giving Wall Street banks, investors and others the first glimpse of the regulators’ latest effort to overhaul Wall Street pay rules for top executives. Next week, two other regulators are scheduled to consider the revised plan, according to a government notice posted Wednesday. The rule would require banks to retain much of an executive’s bonus beyond the three years already adopted by many firms, people familiar with the matter said. The board of the Federal Deposit Insurance Corp., led by Chairman Martin Gruenberg, will meet Tuesday to vet the compensation proposal.

The FDIC board also includes Comptroller of the Currency Thomas Curry. The Office of the Comptroller of the Currency will likely consider the proposal separately later the same day, according to a person familiar with the matter. On Thursday, the NCUA will release documents, including a roughly 250-page preamble to the joint rule, when the board meets at 10 a.m. EDT. It will also unveil rules specifically drafted for a handful of federally insured credit unions with $1 billion or more in assets, including the Navy Federal Credit Union and State Employees Credit Union. Six agencies have joint responsibility for rewriting the original government plan on Wall Street pay: the FDIC, the OCC, the NCUA, the Federal Reserve Board, the Securities and Exchange Commission and the Federal Housing Finance Agency.

All six are required to sign off on the draft measure before it can be released to the industry and the public for comment. Representatives from the Fed and SEC declined to comment on the timing of their meetings to consider the proposal. The FHFA plans to consider the proposal soon, according to a person familiar with the matter. The effort to complete the rule, which has been under way for five years, got a nudge from President Barack Obama last month at a White House meeting of top financial regulators. The president urged regulators to wrap up the executive compensation rule before he leaves office early next year. It is unclear whether the agencies will be able to coordinate their efforts and get the rule completed by then.

Little bit wishful thinking, perhaps, Gillian?!

• How Goldman Sachs’ Vampire Squid Became A Flattened Slug (Tett)

A decade ago, Goldman Sachs reported that its return on common shareholder equity had hit a dazzling 39.8%. It symbolised a gilded age: back in 2006, as markets boomed, the power — and profits — of big banks seemed unstoppable. How times change. This week, American banks unveiled downbeat results, with revenues for the biggest five tumbling 16% year-on-year. But Goldman was even weaker: net income was 56% lower, while return on equity, a key measure of profitability, was 6.4%, below even the sector average in 2015 of 10.3%. A bank which was once so adept at sucking out profits that it was called a “vampire squid” (by Rolling Stone magazine) is thus producing returns more commonly associated with a utility. The phrase “flattened slug” might seem appropriate.

Is this just a temporary downturn? Financiers certainly hope so. After all, they point out, this week’s results did feature some upbeat (ish) points. None of America’s banks actually blew up in the first quarter of the year, even though markets gyrated in dramatic ways; the post-crisis reforms have improved risk controls and reserves. Meanwhile, banking in America looks healthier than in Europe, where the reform process has been slower. Overall credit quality at American banks, outside the energy sector, does not seem alarming. Net interest margins are now increasing a touch, after several years of decline, because the Federal Reserve has raised rates. The last quarter’s results might have been depressed by temporary geopolitical woes, such as business uncertainty about Brexit, the American elections, oil prices and the Chinese economy.

Once this angst fades away later this year, returns may rebound; analysts expect the Goldman ROE, for example, to move towards 10% later this year. “The market feels a little fragile,” says Harvey Schwartz, its chief financial officer. “[But] it feels like that is behind us.” Perhaps. But even if this “optimism” is justified, nobody should ignore the cognitive shift. After all, a decade ago, an ROE of 10% was considered a disaster, not a relief, at Goldman Sachs. So perhaps the most important lesson from this week is this: if American regulators had hoped to make the banks look truly dull — not dazzling — in this post-crisis era, they are now succeeding better than anyone might have thought.

“If there is a haircut on bank deposits it will be the end and, so far, that is the only measure they haven’t taken. If Greece defaults it will be impossible to find oil, impossible to find medicines. And this time round everything seems possible.”

• Greek Talks With Lenders Fraught As Fears Grow Of Default (G.)

The Hilton hotel in Athens makes the perfect backdrop for high-intensity talks. Its ambience is subdued, its corridors hushed, its meeting rooms an oasis of tranquility. When Greece, in one of its many stand-offs with the international creditors keeping it afloat, finally won the right to conduct negotiations outside the confines of government offices, it seemed only natural that they should be held at the hotel. However, in recent weeks the talks have assumed an increasingly nervous edge. An economic review that should have been completed months ago has been beset by wrangling as Alexis Tsipras’s leftist-led government has argued with lenders over the terms of a bailout agreed last summer.

The €86bn rescue programme agreed in July 2015 – the debt-stricken country’s third in six years – followed months of high-octane drama that saw Athens being pushed to the brink of bankruptcy and euro exit. Now, less than a year later – and with a crucial meeting of eurozone finance ministers lined up for Friday – a sense of crisis has returned to Greece. With politicians indulging in the angry rhetoric that put Athens on a collision course with lenders last year, investors have begun to worry. Yields on government bonds have risen, protesters have taken to the streets, and “Grexit” – the catch-all word that so conjured up Greece’s battle with economic meltdown – is being murmured again.

Against a backdrop of maturing debt – the country must repay €5bn to the ECB and IMF in June and July – commentators have begun to talk in terms of fatal miscalculation. “History is made of accidents which were not the result of some secret plan, but a string of errors, human weaknesses and obsessions,” wrote Alexis Papahelas in the conservative daily Kathimerini. “Lets hope we will avoid that.” On the street, the uncertainty has not only had a deadening effect on an economy already battered by years of withering austerity; it has also created mounting anxiety among a populace that has seen per capita GDP levels drop by 28%, unemployment nudge 30%, more than one in four businesses close and poverty afflict one in three.

After defying the doomsayers, there are fears Europe’s most indebted country could now be heading towards a disorderly default. “There is no one I know who isn’t worried,” says Yannis Tsandris, a private sector retiree whose pension has been cut by almost a third. “If there is a haircut on bank deposits it will be the end and, so far, that is the only measure they haven’t taken. If Greece defaults it will be impossible to find oil, impossible to find medicines. And this time round everything seems possible.”

How peaceful do you think those Olympics are going to be?

• The Real Reason Dilma Rousseff’s Enemies Want Her Impeached (Miranda)

The story of Brazil’s political crisis, and the rapidly changing global perception of it, begins with its national media. The country’s dominant broadcast and print outlets are owned by a tiny handful of Brazil’s richest families, and are steadfastly conservative. For decades, those media outlets have been used to agitate for the Brazilian rich, ensuring that severe wealth inequality (and the political inequality that results) remains firmly in place. Indeed, most of today’s largest media outlets – that appear respectable to outsiders – supported the 1964 military coup that ushered in two decades of rightwing dictatorship and further enriched the nation’s oligarchs. This key historical event still casts a shadow over the country’s identity and politics.

Those corporations – led by the multiple media arms of the Globo organisation – heralded that coup as a noble blow against a corrupt, democratically elected liberal government. Sound familiar? For more than a year, those same media outlets have peddled a self-serving narrative: an angry citizenry, driven by fury over government corruption, rising against and demanding the overthrow of Brazil’s first female president, Dilma Rousseff, and her Workers’ party (PT). The world saw endless images of huge crowds of protesters in the streets, always an inspiring sight. But what most outside Brazil did not see was that the country’s plutocratic media had spent months inciting those protests (while pretending merely to “cover” them). The protesters were not remotely representative of Brazil’s population.

They were, instead, disproportionately white and wealthy: the very same people who have opposed the PT and its anti-poverty programmes for two decades. Slowly, the outside world has begun to see past the pleasing, two-dimensional caricature manufactured by its domestic press, and to recognise who will be empowered once Rousseff is removed. It has now become clear that corruption is not the cause of the effort to oust Brazil’s twice-elected president; rather, corruption is merely the pretext. Rousseff’s moderately leftwing party first gained the presidency in 2002, when her predecessor, Luiz Inácio Lula da Silva, won a resounding victory.

Due largely to his popularity and charisma, and bolstered by Brazil’s booming economic growth under his presidency, the PT has won four straight presidential elections – including Rousseff’s 2010 election victory and then, just 18 months ago, her re-election with 54 million votes. The country’s elite class and their media organs have failed, over and over, in their efforts to defeat the party at the ballot box. But plutocrats are not known for gently accepting defeat, nor for playing by the rules. What they have been unable to achieve democratically, they are now attempting to achieve anti-democratically: by having a bizarre mix of politicians – evangelical extremists, far-right supporters of a return to military rule, non-ideological backroom operatives – simply remove her from office.

Why bother with cheat software?

• All Diesel Cars’ Emissions Far Higher On Road Than In Lab (G.)

Diesel cars are producing many times more health-damaging pollutants than claimed by laboratory tests, with some emitting up to 12 times the EU maximum when tested on the road, according to a government investigation undertaken following the Volkswagen scandal. A Department for Transport (DfT) study of cars made by manufacturers such as Ford, Renault and Vauxhall found there was a vast difference in nitrogen oxide emissions measured in the laboratory and under normal driving conditions. Not a single car among 37 models tested against the two most recent nitrogen oxide emissions standards met the EU lab limit in real-world testing, with the average emissions being more than five times as high. However, the DfT said it had found no vehicles outside the VW group with systems in place to deliberately rig emissions figures.

Robert Goodwill, the junior transport minister, said: “Unlike the Volkswagen situation, there have been no laws broken. This has been done within the rules.” The minister denied that the findings meant the current emissions testing regime was a farce. “But certainly I am disappointed that the cars that we are driving on our roads are not as clean as we thought they might be. It’s up to manufacturers now to rise to the real-world tests and the tough standards we’re introducing,” he said. The DfT exercise was ordered after it emerged that Volkswagen had allegedly used technology to cheat emissions tests. It measured Nox, or nitrogen oxide emissions. Nitrogen oxide helps to form ozone smog that can badly affect people with chest conditions such as asthma.

The tests were carried out by a team led by Ricardo Martinez-Botas, professor of mechanical engineering at Imperial College London. Among the vehicles tested were 19 models that meet the latest Euro 6 limit of 80mg/km NOx emissions in laboratory tests. Euro 6 was introduced for all new cars sold after September last year. When driven in a real-world simulation of urban, rural and motorway travel, the average was nearer to 500mg/km, with some cars getting close to 1,100mg/km. Among the new models tested that are meant to comply with the Euro 6 standard were the Ford Focus, which had a real-world emission about eight times above the EU limit, the Renault Megane, whose emissions were more than 10 times higher, and the Vauxhall Insignia, almost 10 times higher.

Already “The scandal has wiped around 40% off Mitsubishi’s market value..”

• Mitsubishi Scandal Deepens After US Demands Test Data (G.)

The scandal engulfing Mitsubishi Motors has deepened, sending its shares to a new low after US authorities said they had requested information from the Japanese automotive group. Mitsubishi admitted this week that it manipulated test data to overstate the fuel efficiency of 625,000 cars and there are fears that more models may be involved. Government officials raided one of its offices on Thursday. The scandal has wiped around 40% off Mitsubishi’s market value, amounting to losses of $3.2bn over three days. The shares fell nearly 14% on Friday, following declines of 20% on Thursday, when they were suspended, and 15% on Wednesday. An official at the US National Highway Traffic Safety Administration told Reuters that the regulator had asked Mitsubishi for information on vehicles sold in the US.

Japanese government officials said Mitsubishi could be responsible for reimbursing consumers and the government if investigations conclude that the vehicles were not as fuel-efficient as claimed. Transport minister Keiichi Ishii told a news conference on Friday: “This is a serious problem that could lead to the loss of trust in our country’s auto industry.” He said he wanted Mitsubishi to examine the possibility of buying back affected cars. Internal affairs minister Sanae Takaichi said the government would also ask the carmaker to pay for any subsidies granted to consumers if its cars are found to fail fuel economy standards, Jiji news agency reported. Japanese media reported that Mitsubishi had submitted misleading mileage data on its i-MiEV electric car, which is also sold overseas. The previously disclosed models whose fuel economy readings Mitsubishi has admitted to manipulating are only sold in Japan – four of its mini-cars, two of which it manufactured for Nissan.

Subsidies.

• Why UK Landed Gentry Are So Desperate To Stay In The EU (G.)

The estate agent Carter Jonas established its reputation running the estates of the Marquess of Lincolnshire. “Some of the biggest property owners in the country are our loyal clients,” boasts its website. And, in a recent poll of these landowning clients, 67% of them said that Britain should stay in the EU. So why all this Euro-enthusiasm in the Tory heartlands and among the landed gentry? “Should the UK vote to leave the EU, the CAP subsidies will likely be reduced,” Tim Jones, head of Carter Jonas’s rural division, explained. Thank you, Tim, for putting it so clearly. We understand. A massive 38% of the entire 2014-20 EU budget is allocated as subsidies for European farmers. It is far and away the biggest item of euro expenditure, about €50bn a year.

If these billions were being used to prop up a heavy industry – steel, for example – then the neoliberals would be up in arms, complaining like mad that if an industry can’t cope with a free market then it should be left to die. Creative destruction, they call it. But, for some reason, when it comes to agriculture, different rules apply. Farms are not called “uneconomic” in the same way that pits and factories are. So every British household coughs up about £250 a year and hands it over to the EU, which hands it over to people like the Duke of Westminster – already worth £7bn himself. In 2011, the duke received £748,716 in EU subsidies for his various estates. So, too, Saudi Prince Bandar (he of the dodgy al-Yamamah arms deal), who pocketed £273,905 of EU money for his estate in Oxfordshire.

The common agricultural policy is socialism for the rich. It’s a mechanism to buttress the aristocracy – who own a third of the land in this country – from the chill winds of economic liberalism. So why are we hearing so little about all of this in the current debate over Europe? Because the right doesn’t want to worry its landowning friends and the left has somehow persuaded itself that the EU is a progressive force – so it suits no one’s purpose to raise this issue. Yet it’s a huge deal. For the European Union has become a huge and largely invisible way of redistributing wealth from the poor to the rich, subsidising lord so-and so’s grouse moor, while redundancies are handed out to workers at Port Talbot (whose jobs the government can’t help subsidise because of EU rules).

But even more problematic is the way our massively subsidised agricultural sector negatively affects farmers in the developing world. “Trade not aid” has been David Cameron’s repeated mantra for dealing with poverty in the developing world. But not only does the CAP subsidy to European farmers make it impossible for the unsubsidised African farmer to compete fairly in European markets, but it also creates situations where food is overproduced in Europe – remember butter mountains, milk lakes etc.

While this crazy barter goes on, the short stick is for the refugees.

• Angela Merkel Faces Balancing Act On Visit To Turkey (G.)

Angela Merkel is facing dual pressure to both raise freedom of speech issues and patch up fraying diplomatic relations with Turkey during a visit to Gaziantep province on Saturday. The issue of visa-free travel, one of the key elements of the month-old deal between the European Union and Turkey, is expected to be at the top of the agenda as the German chancellor visits the country alongside the European Council president, Donald Tusk, and European commission vice-president Frans Timmermans. On Tuesday, Turkey’s prime minister, Ahmet Davutoglu, threatened to pull out of the deal if no progress was made on the visa arrangement.

But in Germany, Merkel is under growing pressure to show more spine in her dealings with the Turkish government, after giving in to Recep Tayyip Erdogan’s request for the comedian Jan Böhmermann to be prosecuted for reading out a poem that insulted the president. In the run-up to Merkel’s Gaziantep trip, the secretary general of the Social Democrats, a junior party in the governing coalition, has called on Merkel to send out a “strong message on the issue of freedom of speech”. “Without this basic right, democracy does not work – the Turkish government too has to recognise that,” Katarina Barley told the newspaper Bild.

Coming on the anniversary of the foundation of Turkey’s parliament, and a day before many people commemorate the start of the Armenian genocide, secularists and minorities in Turkey too will hope for a signal against Turkey’s authoritarian turn from the German chancellor. The German government has so far refrained from providing details of the chancellor’s schedule during her trip. In recent days Merkel has been struggling to limit the damage caused by the Böhmermann affair. Even though the comedian is unlikely to face more than a financial penalty, the incident has taken its toll on the chancellor’s authority in the public eye, with her personal approval ratings dropping by over 10 percentage points in a recent poll.

In another poll, 66% of the German public said they disapproved of the chancellor’s decision to authorise criminal proceedings against the comedian. The justice minister Heiko Maas announced on Thursday that he would present a draft bill to abolish the law on “insulting a foreign head of state” that lies at the centre of the Böhmermann affair before the end of this week. Merkel had originally promised to abolish the law by January 2018. Were the relevant paragraph of the penal code scrapped before Böhmermann goes on trial, the chancellor would look even more exposed. Diplomatic ties between Germany and Turkey were further strained when the journalist Volker Schwenck of the public broadcaster ARD was detained at Istanbul airport on Tuesday morning and denied entry to the country. Schwenck had previously reported from rebel-held areas in northern Syria.

Debt Rattle February 18 2016

Feb 182016

February 18, 2016 Posted by Raúl Ilargi Meijer at 8:46 am Finance Tagged with: China, exports, Japan, negative rates, oil, QE, refugees, subprime, trade, yuan 2 Responses »

Russell Lee “Yreka, California, seat of a county rich in mineral deposits” 1942

• Negative Interest Rates A ‘Dangerous Experiment’, Warns Morgan Stanley (MW)

• Negative Interest Rates Are A ‘Gigantic Fiscal Failure’ (AEP)

• Japan’s Exports Drop Most Since 2009 as Sales to China Fall (BBG)

• Japan Shelves Plan to Let Pension Fund Directly Invest in Stocks (WSJ)

• China’s Banks May Be Getting Creative About Hiding Their Losses (BBG)

• China Central Bank Takes Another Step To Guide Interest Rates Lower (BBG)

• High Chance of China Hard Landing, Says Adviser to Japan’s Abe (BBG)

• Why the Chinese Yuan Will Lose 30% of its Value (CHS)

• China’s $600 Billion Subprime Crisis Is Already Here (BBG)

• Not Even a Wave of Oil Bankruptcies Will Shrink Crude Production (WSJ)

• Less Than 4% Of World Oil Supply In The Red At $35/b (Platts)

• Venezuela Lifts Gasoline Price by 6,200% and Devalues Currency by 37% (BBG)

• The Real Crisis is for Bank Bonds, Not Banks (WSJ)

• Fed’s Kashkari: 25% Capital Requirement May Be Right for Banks (WSJ)

• Banking Reform Is More Complex Than It Needs To Be (Chu)

• Italy Would Veto Any Cap On Banks’ Government Debt Holding (Reuters)

• German Central Bank Chief On Collision Course With Draghi Over QE (T.)

• Russia Sues Ukraine in London High Court Over $3 Billion Default (BBG)

• WikiLeaks Releases Classified Data On EU Military Op Against Refugee Flows (RT)

• European States Deeply Divided On Refugee Crisis Ahead Of Summit (Guardian)

“..the “ECB is ready to do its part” and would “not hesitate to act” to crisis-proof the eurozone.” You don’t crisis-proof by creating a crisis.

• Negative Interest Rates A ‘Dangerous Experiment’, Warns Morgan Stanley (MW)

After ECB chief Mario Draghi on Monday hinted more economic stimulus could be coming in March, expectations have risen that deposit rates will be pushed further into negative territory in a bid to fend off the impact from lower oil prices and world-wide economic jitters. While rate cuts usually are seen as a way to stimulate economic growth and weaken the currency, analysts at Morgan Stanley on Wednesday raised concerns that exactly the opposite would happen were the ECB to take rates even lower. Part of this is because investors already have rejigged their portfolios to account for the policy, they explained. Here’s the bank’s thinking:

“Further moves into negative rates will have much less of an impact on the euro, in our view, given that most of the portfolio adjustment is already complete. Rather, we are concerned it erodes bank profitability, creating other systemic risks,” they said in a note. “Could the most bullish ECB outcome be no rate cut?,” Morgan Stanley analysts asked. Calling negative interest rates a “dangerous experiment’, the economists argued such policy would erode bank profits 5%-10% and risk curbing lending across eurozone borders. European banks have already been off to a rough start to the year, down 21% on concerns about the fallout from negative rates, lackluster profits, tougher regulation and a slowdown in global growth. “The credit impulse has turned negative, new loan origination has slowed, and systemic stress in the financial system has risen,” the Morgan Stanley analysts said.

The comments come ahead of the ECB’s March 10 meeting, where investors increasingly are banking on some easing action. The central bank massively disappointed investors in December by introducing a smaller-than-expected rate cut and choosing not to pump more new money into the eurozone economy each month. But at the January meeting, Draghi opened the door for more easing if the economy and inflation showed no signs of improvement. Fast forward a few weeks, and markets have taken a serious beating as investors started to get really nervous about the impact of persistently low oil prices and a slowdown in the world economy.This didn’t go unnoticed by the ECB boss. At his quarterly hearing before the European Parliament on Monday he stressed the “ECB is ready to do its part” and would “not hesitate to act” to crisis-proof the eurozone.

Negative rates and the war on cash.

• Negative Interest Rates Are A ‘Gigantic Fiscal Failure’ (AEP)

[..] negative rates are a creeping threat to civil liberties since the only way to enforce such a regime over time is to abolish cash, for otherwise people will move their savings beyond reach. Mao Zedong briefly flirted with the idea during the Cultural Revolution in his bid to destroy every vestige of China’s ancient culture, but even he recoiled. The eurozone already plans to eliminate the €500 note – allegedly to hurt organized crime – and from there it is a slide down the scales to notes in daily use and then to curbs on quasi-money. It is a step to FDR’s gold embargo and Emergency Banking Act of 1933, when Americans were ordered to hand over their bullion or face 10 years in prison. One policymaker in Davos this year let slip that drastic action to scrap cash would be needed to fight a decade-long war against “secular stagnation” once rates test the limits of -1pc or -2pc.

The Bank of England’s Andrew Haldane floated the idea in a speech last September, suggesting that central banks may have to take radical action to circumvent the constraints of the “lower zero-bound”. Mr Haldane said NIRP reinforced by electronic money is a safer course than going down the “most slippery of slopes” by printing money to cover government spending. Here he is wrong. As Lord Turner argues, there is nothing inherently more slippery about direct monetary financing of fiscal stimulus than any other crisis measure. “Everything we are doing is risky,” he says. One can hardly claim that chronic use of QE to inflate asset prices and to stoke more credit is sound practice, or socially just. A monetary policy committee can calibrate what is judged to be the proper level of debt monetisation needed to avert deflation in exactly the same way as the MPC or the FOMC calibrate interest rates.

The money creation must be permanent to avoid “Ricardian Equivalence”, where people anticipate that more spending now merely mean more debt in the future. All debt accumulated by central banks under QE should be converted to perpetual non-interest bearing debt, and preferably burned on a pyre in public squares to the sound of trumpets to drive home the message that the debt has been eliminated forever. This will pre-empt the panic that might occur among investors and politicians should public debt ever cross some arbitrary totemic level. Any New Deal should be funded in the same way – partly or in whole – with the same vow that the debt will never be repaid. The money creation should continue at the therapeutic dose until the objective is achieved.

There is no technical objection to this form of “fiscal dominance”, as monetary guru Lars Svensson told the IMF forum. All that is missing is political will. Needless to say, the eurozone cannot venture down this path. Maastricht prohibits the ECB from overt financing of deficits and any such thinking in Frankfurt would lead to a court challenge and destroy German consent for monetary union. This augurs ill, because they will need it. Thankfully, those of us with our own currencies, central banks and fully sovereign governments always have the means to prevent the collapse of nominal GDP and to avert debt-deflation. We can run out of wit: we can never run out of monetary ammunition.

Japan exports to China down 18%. Japan imports also down 18%. World trade falls off a cliff.

More numbers:

January Exports from Asia’s Largest Economies

Singapore -9.9%
China -11.2%
Japan -12.9%
Taiwan -13%
Korea -18.5%
Indonesia -20.7%

• Japan’s Exports Drop Most Since 2009 as Sales to China Fall (BBG)

Japan’s exports fell for a fourth consecutive month and dropped the most since 2009, underscoring continued weakness in an economy that contracted in the final months of 2015. Exports to China, Japan’s largest trading partner, were down almost 18%, driving an overall decline of nearly 13% in the value of overseas shipments in January from a year earlier. Imports dropped 18%, leaving a 645.9 billion yen ($5.7 billion) trade deficit, the Ministry of Finance said on Thursday. Falling exports compound poor sentiment in Japan, where wage gains have stagnated, consumer prices are barely rising and households are reluctant to spend. This year stocks have plunged and the yen has gained more than 5% against the dollar amid concerns over China’s slowdown and U.S. growth.

This adds to worries about the seesawing nature of Japan’s economy between modest growth and contraction. “The environment for Japanese exports is looking bad as Japanese companies shift production abroad, the global economy slows and the yen strengthens,” said Yasunari Ueno at Mizuho. “It’s becoming clear that that there is no driver to support Japan’s economy.” While exports to China typically ease in the weeks before lunar new year holidays, and the break came earlier this year, shipments to Japan’s neighbor have dropped for six straight months. Part of the weakness in the export figure is also because Japanese companies received lower prices for sales of steel and chemical products amid the general downturn in commodity and energy markets, said Atsushi Takeda at Itochu in Tokyo.

By volume, exports fell 9.1% in January from a year earlier, the biggest drop since February 2013, while import volumes declined 5.1%. Earlier this week, GDP data showed the Japanese economy shrank an annualized 1.4% in the three months ended Dec. 31. After that, Nomura cut its forecast for Japan’s fiscal 2016 GDP to 1% from a previous projection of 1.4%. The firm sees a high chance that the Bank of Japan will expand monetary stimulus at its March meeting if the market turmoil continues. Itochu’s Takeda doesn’t think it is likely that Japan will fall into a recession though he said “there are growing downside risks to the economy.” “Should gains in the yen and declines in stocks continue, they may take a toll on capital spending, exports and consumption,” he said.

A sign of Abe’s waning clout?!

• Japan Shelves Plan to Let Pension Fund Directly Invest in Stocks (WSJ)

Japan’s government has put off a plan to let its $1.1 trillion public pension fund buy and sell stocks directly, following criticism that the move could lead to excessive state influence on the market. The decision dashes the hopes of the Government Pension Investment Fund’s chief investment officer and some foreign money managers who believed that a direct role in the stock market could make the fund a more effective investor and improve corporate governance in Japan. A committee in Prime Minister Shinzo Abe’s ruling Liberal Democratic Party decided Tuesday to postpone consideration of the issue for three years, said LDP lawmaker Shigeyuki Goto, the committee’s secretary-general. “There won’t be any in-house stock investing, but it remains to be debated in the future,” Mr. Goto said. “The stock issue was the biggest sticking point for those involved in the discussions.”

The GPIF currently outsources decisions on its nearly ¥60 trillion ($520 billion) stock portfolio to more than a dozen outside asset managers. It handles domestic bonds in-house. Mr. Abe’s government has pushed to make the GPIF a more sophisticated investor in line with its overseas peers. The fund has moved more money into stocks and foreign bonds. Yet opposition from business and union leaders shows concern about allowing too much change at the GPIF, whose investment decisions ultimately affect how much Japan’s pensioners can receive. Recent market turmoil has made the fund a politically sensitive subject. The GPIF was criticized by opposition politicians after losing nearly ¥8 trillion in the third quarter of 2015 as global stock prices fell, and it is expected to post more losses in the coming months.

Mr. Abe was asked about the issue in parliament Monday and responded, “If expected returns aren’t met, that will of course impact pension payments.” Japan’s leading business group, Keidanren, as well as Rengo, an umbrella group for labor unions, both opposed letting the fund directly invest in stocks. They expressed concern about the GPIF being used to influence management at Japanese companies by using its voting rights as a shareholder. “It’s a very serious issue if the GPIF were to become a direct shareholder,” said Keidanren official Susumu Makihara at a meeting to debate the change in January. He said “a massive state organization would become a market player” under the proposal and it wasn’t clear how it would use its clout at companies.

“We tend to think that the Chinese government is likely to provide support if there is any sign of a crisis.” Well, they would like to, but can they?

• China’s Banks May Be Getting Creative About Hiding Their Losses (BBG)

Chinese lenders are reacting to a regulatory crackdown on shadow financing by increasing activity in their more opaque receivables accounts, a practice Commerzbank estimates may result in losses of as much as 1 trillion yuan ($153 billion) over five years. Banks are increasingly using trusts or asset management plans to lend and recording them as funds to be received rather than as loans, which are subject to stricter regulatory oversight and capital limits. The German bank’s forecast is based on total outstanding receivables of around 11.5 trillion yuan. “Chinese banks haven’t provisioned for receivables and those are essentially riskier loans,” said Xuanlai He at Commerzbank. “The eventual losses will have significant impact on China’s economy because you could have contagion risk in banking sector.”

Official data show nonperforming loans at Chinese commercial banks jumped 51% last year to a decade-high of 1.27 trillion yuan amid a stock market rout and the worst economic growth in a quarter century. While Moody’s Investors Service doesn’t expect a banking crisis in China in the next 12 to 18 months, it said in a Jan. 26 note that it does see higher loan delinquencies, more defaults on corporate debt and some losses in wealth-management products. “The receivables portfolio in Chinese banks is opaque so we can’t make an assumption on the asset quality,” said Christine Kuo, analyst at Moody’s in Hong Kong. “Provisions for receivables are indeed very low compared to that for loans. We tend to think that the Chinese government is likely to provide support if there is any sign of a crisis.”

China CITIC Bank’s assets under receivables tripled to 900 billion yuan by June 30, from 300 billion yuan at the end of 2013, according to the bank’s financial statements. Concerns about Chinese banks’ creditworthiness are mounting with the cost of insuring Industrial & Commercial Bank of China’s debt against default reaching an all-time high of 199.5 basis points on Jan. 21. The bank’s 6% perpetual notes that count as Additional Tier 1 capital fell to a record low of 99.5 cents last Thursday. The securities traded at 102.5 cents on the dollar Wednesday. The yield spread on China CITIC’s $300 million 6% 2024 notes surged to a one-year high of 336 basis points over U.S. Treasuries Wednesday.

How afraid is Beijing of deflation? Apparently enough to blow another bubble.

• China Central Bank Takes Another Step To Guide Interest Rates Lower (BBG)

China’s central bank took another step to guide interest rates lower, offering to reduce the medium-term borrowing cost it charges lenders in the second such move this year. The People’s Bank of China has told banks it can provide cash through its Medium-term Lending Facility at 2.85% for six-month loans, down from 3%, according to a person with direct knowledge of the matter. The one-year borrowing rate would be eased to 3% from 3.25%, according to the person, who asked not to be identified because the plans aren’t public. Such a reduction would amount to a kind of monetary easing outside of traditional tools such as lowering benchmark lending or deposit rates or the reserve-requirement ratio for the biggest banks.

Overuse of RRR cuts may add too much pressure on short-term interest rates and would therefore be bad for stabilizing capital flows and the exchange rate, PBOC researcher Ma Jun said in a China Business News report published last month. “The PBOC is trying to find ways for monetary easing without making a high-profile interest-rate cut,” said Louis Kuijs at Oxford Economics in Hong Kong. “There’re likely to be more following steps in a similar direction, since a single move will not be enough to turn around the momentum of the economy.” China’s consumer price index climbed 1.8% in January from a year earlier, the National Bureau of Statistics said on Thursday. That was below the medium estimate of 1.9%.

The producer-price index fell 5.3%, extending declines to a record 47 months. “The data show that the economy is pretty weak,” said Larry Hu at Macquarie Securities in Hong Kong. The central bank is attempting to square the circle of supporting growth without using up limited monetary policy space or putting more downward pressure on the yuan, said Bloomberg Intelligence economist Tom Orlik. “That means more use of low-visibility instruments like the MLF to guide rates lower, rather than cuts in benchmark rates,” he said. “The trade off for low visibility, is the confidence boosting effect on the market is reduced.”

Very high.

• High Chance of China Hard Landing, Says Adviser to Japan’s Abe (BBG)

The chances are high China will have a hard landing, and it must undergo a severe adjustment period, an economic adviser to Japanese Prime Minister Shinzo Abe said. “There’s a high possibility of a hard landing in China” as its economy is oversupplied and adjusting demand and supply will cause a shock, Etsuro Honda said in an interview late Tuesday in Tokyo. The problem is more acute as “China can’t use monetary policy for quantitative easing as it has been used to stabilize its currency.” While officials from the IMF to the Bank of Japan have said China will avoid an economic crash, Honda’s comments echo concerns among investors about the direction of China’s economy.

A surprise currency devaluation, the slowest growth in a quarter century and perceived policy missteps are raising anxiety about the world’s second-largest economy. Unlike the idea of capital controls suggested by BOJ Governor Haruhiko Kuroda, Honda recommended China adopt a floating exchange rate system. Otherwise, China’s economy will suffer from a problem of oversupply for quite a while, he said. Honda, 61, is an academic and has been an adviser to Abe for the past three years. “I really don’t think that China’s economic fundamentals are good and it’s just real estate markets and stock markets that are panicking,” Honda said. “China has to go through massive structural reforms and its impact on other economies is quite large. That’s different from other nations.”

The yuan has turned toxic.

• Why the Chinese Yuan Will Lose 30% of its Value (CHS)

The U.S. dollar has gained over 35% against major currencies since 2011. China’s government has pegged its currency, the yuan (renminbi) to the USD for many years. Until mid-2005, the yuan was pegged at about 8.3 to the dollar. After numerous complaints that the yuan was being kept artificially low to boost Chinese exports to the U.S., the Chinese monetary authorities let the yuan appreciate from 8.3 to about 6.8 to the dollar in 2008. This peg held steady until mid-2010, at which point the yuan slowly strengthened to 6 in early 2014. From that high point, the yuan has depreciated moderately to around 6.5 to the USD. Interestingly, this is about the same level the yuan reached in 2011, when the USD struck its multiyear low.

Since 2011, the USD has gained (depending on which index or weighting you choose) between 25% and 35%. I think the chart above (trade-weighted USD against major currencies) is more accurate than the conventional DXY index. Due to the USD peg, the yuan has appreciated in lockstep with the U.S. dollar against other currencies. On the face of it, the yuan would need to devalue by 35% just to return to its pre-USD-strength level in 2011. This would imply an eventual return to the yuan’s old peg around 8.3–or perhaps as high as 8.7.

[..] Here’s the larger context of China’s debt/currency implosion. From roughly 1989 to 2014 -25 years- the “sure bet” in the global economy was to invest in China by moving production to China. This flood of capital into China only gained momentum as the yuan appreciated in value against the USD once Chinese authorities loosened the peg from 8.3 to 6.6 and then all the way down to 6 to the dollar. Every dollar transferred to China and converted to yuan gained as much as 25% over the years of yuan appreciation. Those hefty returns on cash sitting in yuan sparked a veritable tsunami of capital into China. Now that the tide of capital has reversed, nobody wants yuan: not foreign firms, not FX punters and not the Chinese holding massive quantities of depreciating yuan.

This is why “housewives” from China are buying homes in Vancouver B.C. for $3 million. That $3 million could fall to $2 million as the yuan devalues to the old peg around 8.3 to the USD. Who’s left who believes the easy money is to be made in China? Nobody. Anyone seeking high quality overseas production is moving factories to the U.S. for its appreciating dollar and cheap energy, or to Vietnam or other locales with low labor costs and depreciated currencies. For years, China bulls insisted China could crush the U.S. simply by selling a chunk of its $4 trillion foreign exchange reserves hoard of U.S. Treasuries.

Now that China has dumped over $700 billion of its reserves in a matter of months, this assertion has been revealed as false: the demand for USD is strong enough to absorb all of China’s selling and still push the USD higher. The stark truth is nobody wants yuan any more. Why buy something that is sure to lose value? the only question is how much value? The basic facts suggest a 30% loss and a return to the old peg of 8.3 is baked in. But that doesn’t mean the devaluation of the yuan has to stop at 8.3: just as the dollar’s recent strength is simply Stage One of a multi-stage liftoff, the yuan’s devaluation to 8 to the USD is only the first stage of a multi-year devaluation.

“China’s bad loans have grown 256% in six years even as their ratio to total lending dropped.”

• China’s $600 Billion Subprime Crisis Is Already Here (BBG)

Sorry, Kyle Bass, you’re a bit late to the game. The debt problem in China has already reached the proportions of the U.S. subprime mortgage debacle. Don’t worry, though: Chinese authorities are on the case – discussing reducing the required coverage for bad loans so that banks can keep booking profits and lending. Including “special-mention” loans, which are those showing signs of future repayment risk, the industry’s total troubled advances swelled to 4.2 trillion yuan ($645 billion) as of December, representing 5.46% of total lending. That number is already higher than the $600 billion total subprime mortgages in the U.S. as of 2006, just before that asset class toppled the world into the worst financial crisis since 1929.

The amount of loans classed as nonperforming at Chinese commercial banks jumped 51% from a year earlier to 1.27 trillion yuan by December, the highest level since June 2006, data from the China Banking Regulatory Commission showed on Monday. The ratio of soured debt climbed to 1.67% from 1.25%, while the industry’s bad-loan coverage ratio, a measure of its ability to absorb potential losses, weakened to 181% from more than 200% a year earlier. The news looks to have scared Chinese authorities into reacting. Note that they aren’t curbing the ability of Chinese banks to lend or asking them to write off bad credit. Instead they’re considering putting aside checks already in place that are aimed at ensuring the health of the financial system: by reducing the ratio of provisions that banks must set aside for bad debt, currently set at a minimum 150%.

Perhaps, they’re hoping banks will lend even more if they ease the rules. That’s one way to keep the ratio of nonperforming loans under control. As the denominator increases the ratio remains steady or even drops. The absolute number of bad loans, however, keeps swelling. Guess what? Banks are lending more. China’s new yuan loans jumped to a record 2.51 trillion yuan in January, the People’s Bank of China reported on Tuesday. Aggregate financing, the broadest measure of new credit, also rose to a record, at 3.42 trillion yuan. China’s bad loans have grown 256% in six years even as their ratio to total lending dropped. The true amount of debt that isn’t being repaid is open for debate.

One example of how the data can be distorted: Banks are making increasing use of their more opaque receivables accounts to mask loans and potential losses. Still, adding special-mention loans to those classed as nonperforming gives some measure of the size of the bad-debt problem. Unfortunately, the CBRC started to publish special-mention loan numbers only last year, so it’s hard to put them in historical context. The dynamic is clear. A splurge of new lending can help to dilute existing bad loans, but only at a cost. This is a game that can’t continue forever, particularly if credit is being foisted on to an already over-leveraged and slowing economy. At some point, the music will stop and there will have to be a reckoning. The longer China postpones that, the harder it will be.

Selling at a loss is often preferable over not selling at all, because of sunk costs or expected restart costs.

• Not Even a Wave of Oil Bankruptcies Will Shrink Crude Production (WSJ)

More than one-third of oil and natural-gas producers around the world are at risk of declaring bankruptcy this year, according to a new report from Deloitte. Oil prices have plunged from more than $100 a barrel in mid-2014 to about $30 a barrel today. Yet just 35 so-called exploration and production companies filed for bankruptcy between July 2014 and the end of last year, Deloitte says. Most producers managed to stay afloat by raising cash through capital markets, asset sales and spending cuts. Those options are running out.

The only moves left for most producers are dividend cuts and share buybacks, Deloitte says. The firm estimates that 175 companies, or 35% of the E&Ps listed world-wide, are in danger of declaring bankruptcy this year. The conundrum for many investors is that a slew of bankruptcies won’t necessarily shrink the global glut of crude. Companies need cash to repay their debts, so their existing wells are unlikely to stop operating throughout the bankruptcy process. In fact, those wells will probably be sold to better-financed buyers, who can afford to keep production going or even increase it.

“Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices.” (h/t ZH)

• Less Than 4% Of World Oil Supply In The Red At $35/b (Platts)

Fears of a deepening non-OPEC supply crunch in response to the latest oil price slump may be overdone as many producers are absorbing short-term losses in the hope of a price rebound, according a new study by research group Wood Mackenzie. Citing up-to-date analysis of production data and cash costs from over 10,000 oil fields, Wood Mac said it believes 3.4 million b/d, or less than 4% of global oil supply, is unprofitable at oil prices below $35/b. Even the majority of US shale and tight oil, which has been under the spotlight due to higher-than-average production costs, only becomes cash negative at Brent prices “well-below” $30/b, according to the study.

For many producers, being cash negative is not enough of an incentive to shut down fields as restarting flow can be costly and some are able to store output with a view to selling it when prices recover. “Curtailed budgets have slowed investment, which will reduce future volumes, but there is little evidence of production shut-ins for economic reasons,” Wood Mac’s vice president of investment research Robert Plummer said in a note. “Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices.” Even since oil prices began sliding in late 2014, there have been relatively few outright field production halts due to low prices, with only around 100,000 b/d shut in globally, according to the study.

Despite widespread fears of a major supply collapse, the US’ shale oil output since late 2014, sharp deflation in service sector costs and greater drilling efficiencies have seen shale oil output remain more resilient to lower prices than first thought. Wood Mac said falling production costs in the US over the last year have resulted in only 190,000 b/d being cash negative at a Brent price of $35/b. The latest study contrasts with a similar report from the research group a year ago when it estimated that up to 1.5 million b/d of output – focused in the US – was vulnerable to being shut in at $40/b Brent.

Count the failed states the west has created.

• Venezuela Lifts Gasoline Price by 6,200% and Devalues Currency by 37% (BBG)

Venezuela hiked gasoline prices for the first time in almost two decades and devalued its currency as President Nicolas Maduro attempts to address triple-digit inflation and the economy’s deepest recession in over a decade. The primary exchange rate used for essential imports, such as food and medicine, will weaken to 10 bolivars per dollar from 6.3, Maduro said in a televised address to the nation. The government will also eliminate an intermediate rate that last sold dollars for about 13 bolivars and improve an alternative “free-floating, complementary” market that trades around 203 bolivars per dollar. The devaluation will ease the drain on government coffers by giving state oil company Petroleos de Venezuela more bolivars for each dollar of oil revenue, while higher gasoline prices will reduce expenditure on subsidies.

At the same time, the devaluation will probably force the government to raise the cost of staple foods such as rice and bread that most of the country now depends on to eat. “Faced with a criminal, chaotic inflation induced a long time ago, we must act with the power of the state to control and regulate markets,” Maduro said below a portrait of South American independence leader Simon Bolivar. While Maduro’s measures may fall short of fully addressing Venezuela’s ailing economy, the announcements may “bring some relief that it’s something after months (years) of nothing,” Sibohan Morden at Nomura Securities said in a note to clients published prior to Maduro’s speech. “It is also important that Chavismo shifts toward pragmatism and finally realizes that the Bolivarian revolution has failed.”

Something had to change after the bolivar lost 98% of its value on the black market since Maduro took office in 2013. The government was hemorrhaging funds as it struggled to meet international debt obligations and maintain the supply of essential items amid the collapse in oil prices. By long subsidizing the cost of fuel, the government has ensured that Venezuelans enjoy the cheapest gasoline in the world. Gasoline prices on Thursday will leap more than 60-fold to 6 bolivars a liter from 9.7 centavos. That’s equal to about 11 U.S. cents per gallon using the weakest legal exchange rate of 202.94 bolivars per dollar, up from about 0.2 U.S. cents per gallon. The price of 91-octane gasoline will increase to 1 bolivar a liter from 7 centavos. Even after these increases, Venezuela still has the lowest gasoline prices in the world.

Then again, they’re not separate entities.

• The Real Crisis is for Bank Bonds, Not Banks (WSJ)

The fall from grace has been swift and hard. Buying high-yielding subordinated bank bonds that count toward Tier 1 capital was a hot trade in a world where investors were scrambling for yield. This is a case where markets have been their own worst enemy. European banks have been at the center of the recent market storm, with Deutsche Bank’s bonds particularly in focus. The move in prices has been big, even with a bounce in the last couple of days. Bank of America Merrill Lynch’s index of contingent capital bonds—popularly known as CoCos—has dropped 7.6% this year. Europe clearly has unresolved issues to address in its fragmented banking system. But this is hardly news. The issue lies more with the securities and the investors that hold them than the balance sheets of the banks that issued them.

The big risk that investors have woken up to isn’t that these bonds can be bailed-in if a bank hits trouble—it is that interest payments on them can be skipped under certain circumstances. In turn, falling prices have raised concerns that banks won’t exercise their option to redeem them at the first opportunity, requiring a further repricing downwards. That has upset the apple cart of what had become a so-called crowded trade—one that caught many investors’ imagination as central banks poured liquidity into markets. During the good times these instruments looked like more lucrative versions of safer, lower-yielding senior debt. But now their equity-like features have come to the fore. That is a big shift for holders to take on board and one that is unlikely to be reversed quickly.

In the meantime, it isn’t clear that there is a natural buyer for these securities. For those holders who wish to sell, that poses an immediate problem: there is no way out, and the turmoil may not be over yet. Longer term, the economics of these hybrid structures may depend on buyers seeing them as safe debt while issuers consider them as quasi-equity. If they are priced more like equity, they may not be so attractive to issuers. Regulators may have helped create an instrument that is only truly viable in fair-weather conditions.

Kashkari seems to go mostly for the shock effect, and turns opaque as soon as he’s called on his words.

• Fed’s Kashkari: 25% Capital Requirement May Be Right for Banks (WSJ)

Q: You talk about higher capital requirements. How high should they be?

MR. KASHKARI: I don’t have a number in my head. I’ve seen some proposals for a 25% capital requirement. So leverage ratios, effectively, just to keep it simple, you know, 4:1. You know, I think that’s a place we could discuss. I don’t have that – I don’t have a magic number yet. And also, importantly, we’re not suggesting that we at the Minneapolis Fed necessarily have all the answers. What we’re trying to do is launch a process where we can bring all of these ideas out from across the country and give them the serious analysis and consideration that I feel like they deserve.

Because when I look at the Dodd-Frank Act – and I was – I had already left government by then – but from the outside, it appeared that the more transformational solutions were just taken off the table – like, OK, that’s too bold; let’s keep the financial system roughly in its current form, and let’s make it safer and stronger. And that’s not an irrational conclusion for legislators to have drawn at that time, because we were – the recovery was still so unclear. But here we are, six years later, the economy is a lot stronger than it was coming out of the crisis. In my judgment, we still have the problem of too-big-to-fail banks, and now feels like the right time to look at this again.

That second graphic here is very scary. The UK banking sector is 480% of GDP. With a reserve requirement of 3%, tops.

• Banking Reform Is More Complex Than It Needs To Be (Chu)

“All that is necessary for the triumph of evil is that good men do nothing.” There’s some uncertainty over whether Edmund Burke actually made this observation. But, regardless of its provenance, the wisdom merits a tweak for our times. Today the necessary condition for vested interests to prevail over the public interest is that good men don’t understand what the hell is going on. Something has happened in the UK banking reform debate. Sir John Vickers, a central figure in the Government’s post-crisis financial overhaul, has questioned whether the Bank of England’s latest proposals to shore up the sector go far enough. Yet this debate is perfectly impenetrable to the non-expert. Read the exchanges between Sir John and the Bank and you will soon slip into a numbing bath of acronyms and jargon from which you will very likely not resurface any the wiser.

G-SIBs, D-SIBs, SRBs, RWAs, Tier 1, Basel III, CoCos … These names will float across your vision, like the members of the world’s most boring rap group. You will read about the appropriate threshold for the activation of “a risk-weighted SRB rate of 3%” and the relevance of “counter-cyclical buffers” and, you will, quite understandably, conclude there is something better you could be doing with your time. But ignore the detail. This complexity is the outcome of years, perhaps even decades, of horse trading between bank lobbyists, regulators and politicians from all around the world. As a non-expert you’re not supposed to be able to follow it. It hasn’t been designed to confuse ordinary people. That’s just a happy side-effect (as far as the banks are concerned).

So clear it from your mind. Focus, instead, on the essentials. Banks are not as complex as they are made out to be by bankers and regulators. A bank has a balance sheet just like any other business. On the asset side of the balance sheet are its loans to customers. On the liabilities side are the current account deposits of customers, plus borrowings from the wholesale capital markets and, most importantly of all, the equity of its investors. The liabilities of a bank fund its assets. Equity is what gets eaten into first when a bank makes losses. If the equity is all used up, the bank is bust. And as we saw in 2008, that can mean taxpayers forced to step in to stop these institutions collapsing and taking the entire economy down with them. That’s why regulators must make sure banks have a sufficiently large tranche of equity financing on their balance sheets.

In support of his case Sir John has chosen to cite the analysis of the respected independent expert in finance, Anat Admati of Stanford University. This is interesting. Ms Admati has recommended that a private bank’s equity cushion should be equivalent to between 20 to 30% of its assets. So what would you guess is the current level of equity for banks being targeted by the Bank of England? 15%? 10%? Try 3%. Or 4% at most. And even Sir John’s report, despite his complaints today, only wanted banks to hold equity worth a maximum of around 4% of assets. Consider what this means: it implies that a mere 3 or 4% fall in the value of a bank’s assets would bankrupt it – and government ministers and regulators would, once again, need to consider whether to step in. To state what should be obvious: that’s not very much. And that simple ratio – known as the “leverage ratio” – should be focus of debate.

Bye bye banking union. Renzi’s clear: clean up Deutsche first.

• Italy Would Veto Any Cap On Banks’ Government Debt Holding (Reuters)

Italy would oppose capping banks’ holdings of domestic sovereign bonds, Prime Minister Matteo Renzi said on Wednesday, throwing down the gauntlet to European policymakers who are considering a cap to strengthen the euro zone banking system. The European Commission plans to review the current rules on banks’ exposure to their home countries’ debt as a way to reduce the risk that wobbly public finances might pose to a national financial system. “We will veto any attempt to put a ceiling on government bonds in banks’ portfolios,” Renzi told the upper house Senate. The European Central Bank’s chief supervisor has proposed a limit on national sovereign debt holdings at 25% of a bank’s equity, but the ECB vice president favours a risk-weighted approach.

Bond markets in Italy and Spain would likely see the biggest impact among major euro zone countries if a cap were imposed, as banks in both countries hold piles of state-issued bonds. Around €405 billion ($451 billion), or 21.6% of all Italian government debt, is owned by its banks. The 41-year-old prime minister said Italy would take a firm line on the issue, adding: “Rather than worrying about government bonds in the banks we should be strong enough to say that (banks elsewhere in Europe) hold too many toxic assets.” Renzi, who has recently taken several swipes at Germany’s banking sector, mentioned the case of Deutsche Bank, which said last week it would buy back more than $5 billion in senior debt.

Plus ça change..

• German Central Bank Chief On Collision Course With Draghi Over QE (T.)

Germany’s powerful central bank chief has said quantitative easing is no longer appropriate for Europe, putting Berlin on a collision course with the ECB over expanding stimulus measures to revive the single currency area. Jens Weidmann, head of the Bundesbank and a member of the ECB’s governing council, said QE was “no longer necessary” for the eurozone, despite the widespread expectation that more stimulus will be announced as early as next month. However, Mr Weidmann defended the ECB’s bond-buying scheme – launched in March last year – at a hearing at the German Constitutional Court on Tuesday, arguing that it did not contravene the principles of the German constitution. But his resistance to expanding QE suggests the ECB’s hawkish members are hardening in their stance against expanding the stimulus programme from its current €60bn a month.

Crucially, Mr Weidmann will not be able to take part in the March vote under the ECB’s rotating voting rules. The Bundesbank chief’s position is in stark opposition to that of ECB president Mario Draghi, who has repeated the central bank’s willingness to “do its part” to revive inflation and growth in the bloc as turmoil has engulfed global markets this year. Draghi’s failure to ramp up QE in December sent markets into a tailspin and has helped European equities plunge by as much 13pc this year. Mr Weidmann was speaking as a witness in front of Germany’s powerful constitutional court in Karlsruhe on Tuesday. The court – which has the power to strike down EU laws it deems incompatible with Germany’s supreme federal constitutional law – was meeting to consider the legality of the ECB’s landmark Outright Monetary Transactions scheme (OMT), first announced in 2012.

Mr Weidmann has been a vociferous opponent of OMT, which acts as a financial backstop for the euro’s distressed debtors but has never been deployed, arguing that it represents the illegal financing of government debt. But he refrained from repeating his criticisms on Tuesday, saying only that the QE measures were less “problematic” than the more ambitious OMT. ECB board member Yves Mersch said OMT was devised to “confront an extraordinary crisis situation” when the future of the eurozone was in doubt. “This crisis situation was characterised by massive distortions of the government bond market that developed their own momentum,” said Mr Mersch. “This in turn led to a disruption of the monetary policy transmission mechanism, which posed a threat for price stability.” The German court is not expected to make a formal ruling until later in the year.

Ukraine has been turned into a failed state. Even if Russia wins in court, what are the odds it will ever be paid?

• Russia Sues Ukraine in London High Court Over $3 Billion Default (BBG)

Russia said it filed a lawsuit against Ukraine in the High Court in London after the government in Kiev defaulted on $3 billion in bonds. Cleary Gottlieb Steen & Hamilton was hired to represent the government in Moscow in a case that will seek to recover the principal in full, $75 million of unpaid interest and legal fees, Russian Finance Minister Anton Siluanov said on Wednesday. The filing comes after Germany attempted to mediate talks between the two former-Soviet neighbors to try to reach an out-of-court settlement. “I expect that the process in the English court will be open and transparent,” Siluanov said. “This lawsuit was filed after numerous futile attempts to encourage Ukraine to enter into good faith negotiations to restructure the debt.”

The case brings to a head a standoff between the two countries after Russia declined to take part in a $15 billion restructuring that Ukraine negotiated with its other Eurobond holders last year. Siluanov reiterated that Russia was demanding better treatment than private creditors, which include Franklin Templeton, and wants to be treated as a sovereign debtor. Russia has to pursue legal action against Ukraine in the U.K. because the bond was structured under English Law. President Vladimir Putin bought the debt in December 2013 to bail out his former Ukrainian counterpart and ally, Viktor Yanukovych, just months before he was toppled and Russia annexed Crimea. The notes were priced to yield 5%, less than half the rate on Ukrainian debt at the time.

The filing poses another obstacle to Ukraine’s government as it faces political infighting that’s threatening to sink the ruling coalition and further stall a $17.5 billion IMF lifeline that the country needs to stay afloat. The IMF warned last week the aid package risked failure if the government doesn’t kick start an overhaul of its economy.

The smugglers are by now better funded than the military.

• WikiLeaks Releases Classified Data On EU Military Op Against Refugee Flows (RT)

WikiLeaks has released a classified report detailing the EU’s military operations against refugee flows in Europe. It also outlines a plan to develop a “reliable” government in Libya which will, in turn, allow EU operations to expand in the area. The leaked report, dated January 29, 2016, is written by the operation’s commander, Rear Admiral Enrico Credendino of the Italian Navy, for the EU Military Committee and the Political and Security Committee of the EU. The document gives refugee flow statistics and details of performed and planned operation phases of the joint EU forces operating in the Mediterranean. The report also places pressure on the responsible EU bodies to help speed up the process of forming a “reliable” government in Libya, which is expected to invite EU forces to operate within its territorial waters, and later give permission to extend EU military operations onshore.

“Through the capability and capacity building of the Libyan Navy and Coastguard we will be able to give the Libyan authorities something in exchange for their cooperation in tackling the irregular migration issue. This collaboration could represent one of the elements of the EU comprehensive approach to help secure their invitation to operate inside their territory during Phase 2 activities,” the document states. Admiral Credendino writes that the task force is ready to proceed to phase 2B despite political and legal challenges: “…We are ready to move to phase 2B (Territorial Waters) where we can make a more significant impact on the smuggler and traffickers business model.” “However, in order to move into the following phases we need to have a government of national accord with which to engage.” “A suitable legal finish is absolutely fundamental to the transition to phase 2B (Territorial Waters) as without this, we cannot be effective.”

“Central to this and to the whole transition to phase 2B, is an agreement with the Libyan authorities. Ultimately they have the casting vote on the legal finish which will in turn drive the transition to phase 2B and the appetite for Member States to provide assets. As a European Union, we must therefore apply diplomatic pressure appropriately to deliver the correct outcome,” the document states. The leak comes less than five months after it was reported that Operation Sophia would consist of 22 member states and 1,300 personnel which would board and seize suspect vessels in the Mediterranean. However, the document notes that when the operation progresses into phases 2B and 3, “the smugglers will again most likely adapt quickly to the changing situation. The primary concern for smugglers will likely remain to avoid being apprehended so they can continue their illegal activities.”

The operation’s objective is primarily to disrupt smuggling routes by human traffickers, rather than to stop migration flows, according to the European Union Institute for Security Studies, which wrote in a document that the operation began on July 27, 2015. The Institute noted, however, that there is a “real uncertainty on whether the operation will ever be able – for either legal or political reasons – to get to the core of its mandate, i.e. neutralising the smuggling networks through deterrence or open coercion, both off the Libyan coast and onshore.” It went on to note that regardless of the operation’s support for EU member states, only “a very few” are likely to “have the skills and experience for such missions, let alone the will.” It also stressed that the operation cannot be a “solution” to the refugee crisis, and that “no one in Brussels is contending that it could.”

They can talk for years and still won’t agree. Sticks and carrots galore, but those don’t keep the EU together.

• European States Deeply Divided On Refugee Crisis Ahead Of Summit (Guardian)

Europe’s deep divide over immigration is to be laid bare at an EU summit in Brussels on Thursday, with German chancellor Angela Merkel struggling to salvage her open-door policy while a growing number of countries move to seal borders to newcomers along the Balkan routes. A dinner debate on the migration crisis on Thursday evening will do little to resolve the differences, senior EU officials predict. Donald Tusk, the president of the European council, has avoided putting any new decisions on the agenda in an attempt to avoid fresh arguments. The leaders of four anti-immigration eastern European countries met in Prague on Monday and demanded alternative EU policies by next month.

Their plan amounts to exporting Hungary’s zero-immigration razor-wire model to the Balkans, sealing Macedonia’s border with northern Greece, and bottling up the vast numbers of refugees in Greece unless they are deported back to Turkey. Merkel, by contrast, is to lead a rival meeting of leaders of 10 countries on Thursday in an attempt to invigorate a pact with Turkey, which is aimed at trading money and refugee quotas for Ankara’s efforts to minimise the numbers crossing the Aegean to Greece. Merkel’s plan hinges on EU countries volunteering to take in quotas of refugees directly from Turkey. But even among her allies – a so-called coalition of the willing – support for the policy is fading. Austria, which is hosting Thursday’s meeting at its embassy in Brussels, announced much stiffer national border controls this week.

It has also told Brussels and Balkan governments that it could close its borders within weeks. France, also part of the coalition, announced that it would not participate in any new quotas system. “You can’t have 20 [EU] countries refusing to take in refugees,” said a European commissioner. But senior officials in Brussels admit that there is now a solid majority of EU states opposing Merkel. In a pre-summit statement to parliament in Berlin on Wednesday, Merkel stoutly defended the policies that are under fire at home and across Europe. Despite the problems, she said, 90% of Germans continued to support taking in people fleeing war, terror and persecution. “I think that’s wonderful,” Merkel said.

Her speech dwelt overwhelmingly on the faltering pact with Turkey, struck in November. Ahmet Davutoglu, the Turkish prime minister, is to attend the mini-summit in Brussels. The issue at the EU summit, Merkel said, will be whether to press ahead with the Turkey pact or whether to concentrate on the closed scenario of more fences and quarantining Greece.

Everything’s Deflating And Nobody Seems To Notice

Oct 222015

October 22, 2015 Posted by Raúl Ilargi Meijer at 9:38 am Finance Tagged with: commodities, debt, deflation, deleveraging, exports, imports, oil, steel 11 Responses »

LIFE Freedom in peril 1941

Whenever we at the Automatic Earth explain, as we must have done at least a hundred times in our existence, that, and why, we refuse to define inflation and deflation as rising or falling prices (only), we always get a lot of comments and reactions implying that people either don’t understand why, or they think it’s silly to use a definition that nobody else seems to use.

-More or less- recent events, though, show us once more why we’re right to insist on inflation being defined in terms of the interaction of money-plus-credit supply with money velocity (aka spending). We’re right because the price rises/falls we see today are but a delayed, lagging, consequence of what deflation truly is, they are not deflation itself. Deflation itself has long begun, but because of confusing -if not conflicting- definitions, hardly a soul recognizes it for what it is.

Moreover, the role the money supply plays in that interaction gets smaller, fast, as debt, in the guise of overindebtedness, forces various players in the global economy, from consumers to companies to governments, to cut down on spending, and heavily. We are as we speak witnessing a momentous debt deleveraging, or debt deflation, in real time, even if prices don’t yet reflect that. Consumer prices truly are but lagging indicators.

The overarching problem with all this is that if you look just at -consumer- price movements to define inflation or deflation, you will find it impossible to understand what goes on. First, if you wait until prices fall to recognize deflation, you will tend to ignore the deflationary moves that are already underway but have not yet caused prices to drop. Second, when prices finally start falling, you will have missed out on the reason why they do, because that reason has started to build way before a price fall.

A different, but useful, way to define -debt- deflation comes from Andrew Sheng and Xiao Geng in a September 24 piece at Project Syndicate, China in the Debt-Deflation Trap:

The debt-deflation cycle begins with an imbalance or displacement, which fuels excessive exuberance, over-borrowing, and speculative trading, and ends in bust, with procyclical liquidation of excess capacity and debt causing price deflation, unemployment, and economic stagnation.

That’s of course just an expensive way of saying that after a debt bubble must come a hangover. And how anyone can even attempt to deny we’re in a gigantic debt bubble is hard to understand. Our entire economic system is propped up, if not built up, by debt.

The mention of the excess capacity that has been constructed is useful, but we’re not happy with ‘price deflation’, since that threatens to confuse people’s understanding, the same way terms like ‘consumer deflation’ or ‘wage inflation’ do.

Central banks can postpone the deflation of a gigantic debt bubble like the one we’re in, but only temporarily and at a huge cost. And it looks like we’ve now reached the point where they’re essentially powerless to do anything more, or else. We are inclined to point to August 24 as a pivotal point in this, the China crash where people lost faith in the Chinese central bank, but it doesn’t really matter, it would have happened anyway.

And today we’re up to our necks in deflation, and nobody seems to notice, or call it that. Likely because they’re all waiting for CPI consumer prices to fall.

But when you see that Chinese producer prices are down 5.9%, in the 43rd straight month of declines, and Chinese imports are down 20% (with Japan imports off 11%), don’t you hear a bell ringing? What does it take? If the dramatic fall in oil prices hasn’t done it either, how about steel? How about the tragedy British steel has been thrown in, how about the demise of Sinosteel even as China is dumping steel on world markets like there’s no tomorrow?

How about the reversal of funds that once flowed into emerging markets and are now flowing right back out?

Or how about major global banks, all of whom see their profits and earnings deplete, and many of whom are laying off staff by the thousands?

Wait, how about global wealth down by 5% since 2008 despite all the QE and ZIRP policies? And global trade off by -8.4% YoY?!

Here’s from Tyler Durden last week:

Credit Suisse’s latest global wealth outlook shows that dollar strength led to the first decline in total global wealth (which fell by $12.4 trillion to $250.1 trillion) since 2007-2008.

[..] from HSBC: “We are already in a global USD recession. Global trade is also declining at an alarming pace. According to the latest data available in June the year on year change is -8.4%. To find periods of equivalent declines we only really find recessionary periods. This is an interesting point. On one metric we are already in a recession. [..] global GDP expressed in US dollars is already negative to the tune of $1,37 trillion or -3.4%.

How about companies like Walmart and Glencore, just two of the many large entities that have large troubles? These are not individual cases, they are part of a global trend: deflation. As evidence also by the increase in US corporate downgrades and defaults:

Moody’s issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades. That’s the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession. Standard & Poor’s downgraded U.S. companies 297 times in the first nine months of the year…

Everything and everyone is overindebted. All of the above stats, and a million more, point to the beginning of a deleveraging of that debt, something that curiously enough hasn’t happened at all since the 2007/8 crisis. On the contrary, a massive amount of additional debt has been added to a global system already drowning in it. China alone added $20-15 trillion, and that kept up appearances.

But now China’s slowing down everywhere but in its official GDP numbers. And unless we build a base on the moon, there is no other country or region left that can take the place of China in propping up western debt extravaganza. This will come down.

The only way a system that looks like this could be kept running is by issuing more debt. But even that couldn’t keep it going forever. We all understand this. We just don’t know the correct terminology for what’s happening. Which is that debt that has been inflated to such extreme proportions, must lead to deflation, and do so in spectacular fashion.

As long as politicians and media keep talking about disinflation and central bank inflation targets, and all they talk actually about is consumer prices, we will all fail to acknowledge what’s happening right before our very eyes. That is, the system is imploding. Deflating. Deleveraging. And before that is done, there can and will be no recovery. Indeed, this current trend has a very long way to go down.

So far down that you will have a very hard time recognizing the world, and its economic system, on the other side of the process. But then again, you have a hard time recognizing the world for what it is on this side as well.

Debt Rattle October 17 2015

Oct 172015

October 17, 2015 Posted by Raúl Ilargi Meijer at 9:17 am Finance Tagged with: China, debt, deflation, EM, exports, immigration, living wage, manufacturing, poor, refugees, Turkey 3 Responses »

Wyland Stanley Indian guides and Nash auto at Covelo stables., Mendocino County CA 1925

• Last 30 Years Of Global Economic History Are About To Go Out The Window (Quartz)

• Nowhere in US Can A Single Adult Live On Less Than $14/Hr In 40-Hour Week (DK)

• US Manufacturing Falls for a Second Month (Bloomberg)

• US Export Industries Are Losing 50,000 Jobs A Month (Bloomberg)

• Wrath of Financial Engineering: It’s Now Eating into Earnings (WolfStreet)

• Megamergers Will Depend on Huge Amounts of Debt (Barron’s)

• China’s Exporters Downcast As Orders Slow, Costs Rise (Reuters)

• PBOC Data Suggest Capital Outflows Stayed Strong in September (Bloomberg)

• Good News Is Bad News for China (Bloomberg)

• Eurozone Inflation Confirmed At -0.1% In September (Reuters)

• Party Time Is Over For Norway’s Oil Capital – And The Country (Reuters)

• Africa’s Poor Grow By 100 Million Since 1990: World Bank (Reuters)

• Stress Building in Kenyan Credit Markets Spells Doom for Growth (Bloomberg)

• Ancient Rome and Today’s Migrant Crisis (WSJ)

• Immigrants To Account For 88% Of US Population Increase In Next 50 Years (Pew)

• Hungary Seals Border With Croatia to Stem Flow of Refugees (Bloomberg)

• Remote Greek Village Becomes Doorway To Europe (Omaira Gill)

• Turkey Pours Cold Water On Migrant Plan, Ridicules EU (AFP)

“..the story of fast Chinese growth—a story that has soothed investors and corporate managers around the world since the 1980s—is looking increasingly tough to square with the evidence. ..”

• Last 30 Years Of Global Economic History Are About To Go Out The Window (Quartz)

Over the last 30 years, a near constant flow of cash has inundated China and other emerging markets. It has lifted those economies, pulled hundreds of millions of people out of poverty, and dictated corporate expansion plans worldwide. That wave is now ebbing. This year will see the first net outflow of capital from emerging markets in 27 years, according to the Institute of International Finance, a trade group representing international bankers. The group expects more than $500 billion worth of cash previously invested in things like Chinese factories, Brazilian government bonds, and Nigerian stocks to cascade out of such markets this year. What’s going on? In a word: China. In a profound change of narrative for both the global economy and markets that are closely tied to it, the story of fast Chinese growth—a story that has soothed investors and corporate managers around the world since the 1980s—is looking increasingly tough to square with the evidence.

And it’s even tougher to imagine anything else like China—a billion new consumers joining the global economy—emerging any time soon. Of course, the slowdown in China isn’t confined to China. Over the last 30 years, countries worldwide have built their economies to service the needs of the People’s Republic. Brazil would be a case in point. The South American giant has done a brisk business digging up and selling China the iron needed to feed booming steel mills. (Brazil is the world’s second largest iron ore exporter, behind Australia.) But Chinese steel mills aren’t roaring like they used to. Crude steel production fell 2% during the first eight months of the year, a decline unprecedented in data going back roughly 20 years. As Chinese steel plants cooled, iron ore prices fell sharply. At roughly $55 a tonne, iron ore prices are down 60% from where they were at the end of 2013. And as prices for iron plummeted, so did revenues of big iron-ore exporters such as Brazil.

“..In no state is a living wage less than $14.26 per hour..”

• Nowhere in US Can A Single Adult Live On Less Than $14/Hr In 40-Hour Week (DK)

You read that right. Alliance for a Just Society just released a report. In it they looked at living expenses in every state, for singles as well as families. This is an attempt to figure out what a reasonable living wage would be. What’s a “living wage”? The study’s definition includes the ability to pay for luxuries items like housing, child care, utilities and savings. The conclusions, while known anecdotally by virtually every American (sans conservatives), are still chilling: Though $15 per hour is significantly higher than any minimum wage in the country, it is not a living wage in most states. A living wage was calculated for all 50 states and for Washington DC In 35 states and in Washington DC, a living wage for a single adult is more than $15 per hour. In no state is a living wage less than $14.26 per hour.

In fact, nationally, the living wage for a single adult is $16.87 per hour ($35,087 annually) – the weighted average of single adult living wages for all 50 states and Washington, D.C. Some of the people who have it the hardest? Childcare workers. In 2014, 582,970 people worked as child care providers at a median wage of $9.48 per hour. Let’s put it into perspective. According to the study, in order to get by on minimum wage as it is in each state right now, you would have to work an almost 111 hour week in Hawaii. You’d be better off in Virginia, where for $7.25 it would only take a touch over 103 hours a week to get by. IF YOU ARE SINGLE. If you’re a real lazybones or don’t like a little hard work, you can move to Washington or South Dakota where you only have to work for about 67 and half hours a week to get by.

Ominous.

• US Manufacturing Falls for a Second Month (Bloomberg)

Factory output fell in September for a second month as high inventories and lukewarm demand from overseas customers kept American producers bogged down. The 0.1% drop at manufacturers, which make up 75% of all production, followed a revised 0.4% decrease the prior month, a Federal Reserve report showed Friday. Total industrial production, which also includes mines and utilities, dropped 0.2%. A surge in the dollar since mid-2014 has made U.S. products more expensive in foreign markets at the same time the oil industry cuts back and companies contend with bloated stockpiles. Manufacturing’s woes are only partially being cushioned by steady purchases of automobiles that have led consumer spending in underpinning the economy.

“Manufacturing continues to be kind of soft,” said Joshua Shapiro at Maria Fiorini Ramirez in New York. “It’s a combination of weak foreign demand and inventories getting rebalanced. I’d expect another few months of flat-to-down manufacturing output.” Utility output climbed 1.3% for a second month as warmer September weather boosted demand for air conditioning. Mining production, which includes oil drilling, slumped 2%, the most in four months. Oil and gas well drilling decreased 4%. [..] manufacturing accounts for about 12% of the economy. The previous month’s reading was revised from a 0.5% drop.

“The drag from job losses in export industries will linger on for some time at least.” Considering export-oriented jobs are among the better paying ones, that’s a pretty sobering forecast.”

• US Export Industries Are Losing 50,000 Jobs A Month (Bloomberg)

Employment is taking a dive in industries that sell a lot of U.S.-made goods abroad, and things could get worse before they get better. The double whammy to exports from the stronger dollar and cooling overseas markets was bound to hit employment in the world’s largest economy. JPMorgan has put numbers to the damage. Export-oriented industries have been losing about 50,000 jobs a month for most of this year, after adding 9,000 a month on average in 2014, according to JPMorgan economist Jesse Edgerton. Recent manufacturing surveys hint the impact could worsen, and the employment erosion may extend into the first half of 2016, he predicts. In effect, that would mean private payrolls growth takes a step down to around 150,000 a month, from the booming 250,000-plus average of 2014.

“Employment is declining in industries exposed to exports, and we haven’t seen any sign the decline is slowing down,” Edgerton said. “The drag from job losses in export industries will linger on for some time at least.” Considering export-oriented jobs are among the better paying ones, that’s a pretty sobering forecast. U.S. jobs supported by goods exports, for example, pay as much as 18% more than the national average, according to government estimates. At a time of increased concern that growth is losing momentum, a strong labor market backed by jobs that pay well is key to sustaining consumer spending, the biggest part of the economy. Edgerton has pieced out the hit to employment, which isn’t easy to gauge from the Labor Department’s monthly payrolls report.

He developed a way to measure the share of each industry’s output that is exported, both directly and indirectly through sales to other industries that cater to overseas demand. Using that, he worked out how payrolls are faring in those businesses compared with counterparts that focus on the U.S. market. Trends in the top four industries with the largest export share — transportation equipment excluding motor vehicles; machinery; computer and electronic products; and primary metals — offer another reason for concern, Edgerton said. Payrolls have been slowing for decades in capital-intensive manufacturing businesses that dominate exports. So there’s little reason to expect export jobs will see a return to positive territory.

“..companies’ ability to pay these interest expenses, as measured by the interest coverage ratio, dropped to the lowest level since 2009. Companies also have to refinance that debt when it comes due.”

• Wrath of Financial Engineering: It’s Now Eating into Earnings (WolfStreet)

Companies with investment-grade credit ratings – the cream-of-the-crop “high-grade” corporate borrowers – have gorged on borrowed money at super-low interest rates over the past few years, as monetary policies put investors into trance. And interest on that mountain of debt, which grew another 4% in the second quarter, is now eating their earnings like never before. These companies – according to JPMorgan analysts cited by Bloomberg – have incurred $119 billion in interest expense over the 12 months through the second quarter. The most ever. With impeccable timing: for S&P 500 companies, revenues have been in a recession all year, and the last thing companies need now is higher expenses.

Risks are piling up too: according to Bloomberg, companies’ ability to pay these interest expenses, as measured by the interest coverage ratio, dropped to the lowest level since 2009. Companies also have to refinance that debt when it comes due. If they can’t, they’ll end up going through what their beaten-down brethren in the energy and mining sectors are undergoing right now: reshuffling assets and debts, some of it in bankruptcy court. But high-grade borrowers can always borrow – as long as they remain “high-grade.” And for years, they were on the gravy train riding toward ever lower interest rates: they could replace old higher-interest debt with new lower-interest debt. But now the bonanza is ending. Bloomberg:

As recently as 2012, companies were refinancing at interest rates that were 0.83 percentage point cheaper than the rates on the debt they were replacing, JPMorgan analysts said. That gap narrowed to 0.26 percentage point last year, even without a rise in interest rates, because the average coupon on newly issued debt increased. Companies saved a mere 0.21 percentage point in the second quarter on refinancings as investors demanded average yields of 3.12% to own high-grade corporate debt – about half a percentage point more than the post-crisis low in May 2013.

That was in the second quarter. Since then, conditions have worsened. Moody’s Aaa Corporate Bond Yield index, which tracks the highest-rated borrowers, was at 3.29% in early February. In July last year, it was even lower for a few moments. So refinancing old debt at these super-low interest rates was a deal. But last week, the index was over 4%. It currently sits at 3.93%. And the benefits of refinancing at ever lower yields are disappearing fast. What’s left is a record amount of debt, generating a record amount of interest expense, even at these still very low yields. “Increasingly alarming” is what Goldman’s credit strategists led by Lotfi Karoui called this deterioration of corporate balance sheets. And it will get worse as yields edge up and as corporate revenues and earnings sink deeper into the mire of the slowing global economy.

But these are the cream of the credit crop. At the other end of the spectrum – which the JPMorgan analysts (probably holding their nose) did not address – are the junk-rated masses of over-indebted corporate America. For deep-junk CCC-rated borrowers, replacing old debt with new debt has suddenly gotten to be much more expensive or even impossible, as yields have shot up from the low last June of around 8% to around 14% these days. Yields have risen not because of the Fed’s policies – ZIRP is still in place – but because investors are coming out of their trance and are opening their eyes and are finally demanding higher returns to take on these risks. Even high-grade borrowers are feeling the long-dormant urge by investors to be once again compensated for risk, at least a tiny bit.

More financial engineering to come:

• Megamergers Will Depend on Huge Amounts of Debt (Barron’s)

History doesn’t repeat, but it often rhymes, as Mark Twain may (or may not) have said. And one of those repetitions is the preponderance of megamergers and acquisitions late in economic expansions and bull markets, which are the results of confidence brimming over in C-suites and the sense that opportunities are endless. And so the announcement of not one but two megadeals—privately held Dell mating with data-storage outfit EMC, and Anheuser-BuschInBev linking up with fellow brewer SABMiller —provoked a spate of commentary that they represented some fin-de-cycle phenomenon. As usual, these nuptials are expected to produce that most desired benefit of such unions: often-elusive synergies. That’s mainly a euphemism for cost-cutting, largely through reduced head counts, rather than the rare phenomenon of one plus one adding up to three, something seen mainly in the consultant community, not the real world.

But what really drives deals isn’t so much what’s happening with companies’ stocks as with the credit markets. And the Dell-EMC and AB InBev-SABMiller nuptials, if approved by regulators, will be made possible by nearly $120 billion from the corporate bond and loan markets. The brewers’ $106 billion merger reportedly would involve some $70 billion of borrowing, including about $55 billion in bonds and the rest in loans. The $67 billion Dell-EMC deal, meanwhile, would be funded by $49.5 billion in debt, along with new common equity and cash in the coffers. If either of those financing plans come to fruition, they would eclipse the record set by Verizon, which issued $49 billion in bonds to fund its acquisition of Vodafone’s minority stake in Verizon Wireless. The question is whether there is any limit to what Carl Sagan would describe as the billions and billions that the credit markets can conjure. The answer may determine how long the deal making can continue.

The amount of overindebted overinvestment across China based on false expectations of growth will prove to be staggering and often deadly.

• China’s Exporters Downcast As Orders Slow, Costs Rise (Reuters)

Around two-thirds of exporters at China’s largest trade fair expect the slowdown in their markets to persist for at least six months, a Reuters poll has found, with the country expected to announce its weakest economic growth in decades early next week. Many economists expect data released on Monday to show China’s third quarter GDP dipped below 7%, the slowest rate since the global financial crisis. A weak showing could possibly prompt Beijing to take more steps to stimulate the economy. In the vast, booth-filled halls of the biannual Canton Fair on the banks of the Pearl River in Guangzhou this week, a poll of 103 mostly small to medium sized Chinese manufacturers found they expected orders to rise an average of 1.83% this year, though production costs were expected to rise 5.6% in the coming 12 months.

“I feel great pressure right now,” said Kelvin Qiu, the manager of a factory making heaters and radiators based in northeastern China. “I have around 40% less customers than before and the fair is quieter,” he said, comparing activity with the previous Canton fair in April. The Canton fair draws tens of thousands of Chinese exporters and foreign buyers into one gargantuan venue, and has long been regarded as barometer for an economy that has been the world’s biggest exporter since 2009. The poll’s results reflect a gathering pessimism in the export sector, a major driver of the world’s second largest economy. A similar Reuters survey in April had been more bullish, as it showed expectations that orders would rise 3.1%. Exports, however, fell 5.5% in August and 3.7% in September, reflecting anaemic global demand for China-made goods.

36% of exporters polled saying they expected a fresh wave of factory closures. 36% also said they expected an export rebound within 6 months, though 32% said the export slowdown would persist for over one year given continued weakness in core markets like Europe and the United States. Since the previous Canton Fair in April, China’s stock market crash and surprise currency depreciation have clouded the economic outlook, with Beijing taking a series of desperate measures – including interest rate cuts and ramped up fiscal spending – to galvanize growth. Its efforts have had limited success so far. China’s dominance as an exporter has been undermined by its previously strengthening currency, soaring labor costs, and a strategic shift by the authorities away from an excessive reliance on exports to domestic consumption.

Beijing in a bind.

• PBOC Data Suggest Capital Outflows Stayed Strong in September (Bloomberg)

Chinese financial institutions including the central bank sold a record amount of foreign exchange in September, a sign capital outflows were more severe last month than was previously thought. The offshore yuan fell to a two-week low. A gauge of their foreign-currency assets declined by the equivalent of 761.3 billion yuan ($120 billion), exceeding an August drop of 723.8 billion yuan, People’s Bank of China data showed Friday. China devalued its currency on Aug. 11 and concerns about further depreciation and slowing economic growth, coupled with the prospect of a U.S. interest-rate increase, are spurring outflows of funds.

“This shows although outflows probably did slow in September from August, they didn’t slow as much as previously expected,” said Chen Xingdong, chief China economist at BNP Paribas in Beijing. “If you look at commercial banks and the central bank as a unit, in August the central bank took more of the outflows and in September commercial banks took more.” Previous data showed the decline in the central bank’s foreign reserves moderated last month, giving rise to speculation that pressure for the yuan to weaken had eased from August. The holdings declined by $43.3 billion to $3.51 trillion, after sliding a record $93.9 billion the previous month, as the PBOC sold dollars to support China’s exchange rate.

This sounds like a death sentence: “..debt will increase to 254% of GDP in 2015, up from 248% last year.” 46% of GDP was investment, not production.

• Good News Is Bad News for China (Bloomberg)

On Monday, the Chinese government will once again try to convince the world its troubled economy is not that bad off after all. Third-quarter GDP data will be released, and whether the growth rate beats or misses consensus estimates, it’s likely to be touted by the government as proof of the economy’s continued resilience. No doubt that’ll help further calm investors, whose worst fears about China have ebbed recently. Overly bearish perceptions of China’s economy have become “thoroughly divorced from facts on the ground” proclaims the latest China Beige Book study. In a survey conducted in October by Bank of America-Merrill Lynch, only 39% of fund managers queried considered China the biggest “tail risk,” down significantly from 54% a month earlier.

Those investors shouldn’t get too comfortable. The panic that roiled global stock and currency markets over the summer may well have been overblown. But the real risks to China’s economic well-being are long-term, and they haven’t diminished. In fact, the strong growth rates could be setting the stage for a harder landing later. Even the regime agrees that China’s economy is seriously flawed. Excess capacity is rampant in steel, cement and other industries. Debt has risen to astronomical levels. The growth model China used during its hyper-charged decades — unleashing productivity by tossing its 1.3 billion poor workers into the global supply chain – has lost steam as costs rise and the workforce ages.

How well is China tackling these problems? Not very. Debt continues to rise even as growth slows. IHS Global Insight estimates debt will increase to 254% of GDP in 2015, up from 248% last year. In all-too-many sick industries, zombie companies are being kept afloat by creditors and the government. Deeper free-market reform is needed to spur entrepreneurship and innovation and better allocate financial resources to the most efficient companies. Yet despite much talk from President Xi Jinping and his Communist Party comrades, progress has been glacial. The government’s new plan to improve the performance of bloated state enterprises is underwhelming.

Authorities have done little to make the banking sector more commercially oriented or to open the economy to greater foreign competition or capital flows. The government’s heavy-handed intervention to quell a mid-summer stock market swoon was rightly seen a step backwards. Above all, the economy needs to “rebalance” away from its unhealthy reliance on investment – which according to Goldman Sachs’ Ha Jiming, totaled 46% of GDP last year, more than during Mao’s disastrous Great Leap Forward.

Bad data.

• Eurozone Inflation Confirmed At -0.1% In September (Reuters)

Annual inflation in the euro zone turned negative in September due to sharply lower energy prices, the EU’s statistics office confirmed on Friday, maintaining pressure on the ECB to increase its asset purchases to boost prices. Eurostat said consumer prices in the 19 countries sharing the euro fell by 0.1% in the year to September, dipping below zero for the first time since March, and confirming its earlier estimate. Compared to the previous month, prices were 0.2% higher in September. Eurostat said milk, cheese and eggs were cheaper, while heating oil and motor fuel stripped almost a full percentage point from the annual rate. Restaurants and cafes, vegetables and tobacco had the biggest upward impact.

Excluding the most volatile components of unprocessed food and energy – what the ECB calls core inflation – prices were 0.8% up year-on-year, slightly down from the previous reading of 0.9%. Month-on-month, they rose 0.4%. Long term inflation expectations have dropped to their lowest since February, before the ECB’s asset purchases started, as China’s economic slowdown, the commodity rout and paltry euro zone lending growth reinforce pessimistic predictions. Under its money-printing quantitative easing scheme, the ECB is buying government bonds and other assets to pump around €1 trillion into the economy, aiming to lift inflation towards its target rate of just under 2%.

Race to the bottom.

• Party Time Is Over For Norway’s Oil Capital – And The Country (Reuters)

In Norway’s oil capital Stavanger, house prices are falling, unemployment is rising and orders of champagne and sushi sprinkled with gold are down – a taste of things to come for the rest of the country as slumping crude prices hit the economy. The oil-producing nation used to be the exception in Europe. At the height of the financial crisis in 2009, unemployment reached just 2.7%; when other nations have had to cut welfare spending, Oslo could rely on its $856-billion sovereign wealth fund to plug any budget deficit. But now it is joining the rest of Europe in its economic slump as oil prices have halved. GDP growth is expected to stagnate at 1.2% in 2015 and 2016. And the government expects to make its first ever net withdrawal from the fund next year as state oil revenues decline with crude prices.

“It is a new era for the Norwegian economy. We are no longer in a league of our own,” Governor Oeystein Olsen said when the central bank unexpectedly cut rates to 0.75% on Sept. 24 to support a slowing economy. Business conditions for companies in Stavanger and the surrounding region got even worse in the third quarter and the weaker sentiment is spreading to firms outside the energy industry, a survey said in September. Demand is lower and profitability is down, it said. Boosting competitiveness has been the mantra of the right-wing minority government of Prime Minister Erna Solberg, which is proposing to cut corporate tax to boost firms’ international competitiveness. Norway as an exception was most on show in Stavanger, the country’s fourth-largest city, with its compact center of white wooden houses and oil industry ships anchored in the harbor. It enjoyed the good times more than anywhere else.

“Citizens of resource-rich countries tended to be less literate, live 4.5 years less and have higher rates of malnutrition among women and children than other African states..”

• Africa’s Poor Grow By 100 Million Since 1990: World Bank (Reuters)

The number of Africans trapped in poverty has surged by around 100 million over the past quarter century, the World Bank said on Friday, despite years of economic growth and multi-million dollar aid programs. The report’s figures, described as “staggering” by the bank’s Africa head Makhtar Diop, showed widespread malnutrition, and rising violence against civilians, particularly in central regions and the Horn of Africa. “It is projected that the world’s extreme poor will be increasingly concentrated in Africa,” Diop added in a foreword. A surge in population meant the proportion of Africans in poverty had actually fallen since 1990, but the actual numbers were up. In a major study of households taking stock of African economies and societies after two decades of relatively strong growth, the Bank said 388 million – 43% of the sub-Saharan region’s 900 million people – lived on less than $1.90 a day.

In 1990, at the start of the study period, the ratio was 56%, or 284 million. The findings present a mixed bag for countries that, on average, enjoyed economic growth of 4.5% over the last two decades, dubbed the era of ‘Africa Rising’ in contrast to the post-independence stagnation, war and decay that typified the 1970s and 1980s. A child born in Africa now is likely to live more than six years longer than one born in 1995, the study found, while adult literacy rates over the same period have risen 4 percentage points. However, the Bank defined Africa’s social achievements as “low in all domains” – for instance, tolerance of domestic violence in Africa is twice as high as other developing regions – and noted that the rates of improvement were leveling off.

“Despite the increase in school enrolment, today more than two out of five adults are unable to read or write,” the report said. “Nearly 2 in 5 children are malnourished and 1 in 8 women is underweight,” it continued. “At the other end of the spectrum, obesity is emerging as a new health concern.” Perhaps most disturbingly, the study presented more evidence of the ‘resource curse’ that afflicts states endowed with plentiful reserves of hydrocarbons or minerals, often the source of internal or external conflict, or corruption and government ineptitude. Citizens of resource-rich countries tended to be less literate, live 4.5 years less and have higher rates of malnutrition among women and children than other African states, the study found.

Weaker emerging markets will be hit hardest.

• Stress Building in Kenyan Credit Markets Spells Doom for Growth (Bloomberg)

Doubts are growing about Kenya’s ability to keep economic growth on the boil as it battles a plunging stock market, surging debt costs and a weaker currency. Kenyan shilling bonds have lost more money this month than the local securities of 31 emerging markets, while equities in East Africa’s largest economy dropped the most out of 93 global indexes. Efforts to stabilize the shilling have sucked liquidity out of foreign exchange and money markets, spurring a scurry for cash that is driving short-term borrowing costs higher just as the central bank takes over the management of two lenders. An economic expansion that outstripped peers in sub-Saharan Africa since 2011 is slowing as attacks by Islamist militants decimate Kenya’s tourism industry and a drought cuts exports of tea, the two largest sources of foreign exchange.

As President Uhuru Kenyatta’s administration ramps up spending on transport and energy projects to keep fueling growth, budget and current-account deficits are swelling and interest rates are rising. “It’s not looking like there will be an inflexion point for the better any time soon,” Bryan Carter at Acadian Asset Management, who cut all his Kenya bond holdings earlier this year, said by phone from Boston. “The currency looks overvalued.” Yields on short-term Treasury bills have surged above longer-dated bonds, an anomaly known as an inverted yield curve that signals investors are more concerned about near-term repayment risks than economic prospects further out. Rates on 91-day T-bills jumped to 21.4% at an auction on Oct. 8, a record high. That compares with yields of 14.6% on 21 billion shillings ($204 million) of bonds maturing in March 2025.

The inverted curve is “indicative of short-term funding stress in the economy, which is typically followed by a slowdown of credit growth and cyclical economic growth,” Chris Becker at Investec in Johannesburg, said in a note. The World Bank cut its estimate for 2015 growth in Kenya to 5.4% on Thursday, compared with a December forecast of 6%, saying volatility in foreign-exchange markets and the subsequent monetary policy response will curb output. Kenya’s shilling has weakened 12% against the dollar this year amid a rout in emerging-market currencies. The central bank’s Monetary Policy Committee countered by raising the benchmark rate 300 basis points to 11.5%. Investors have been unnerved by the seizure of two small banks in as many months. Regulators placed Imperial Bank under administration on Tuesday, the same day the closely held lender was due to start trading bonds on the Nairobi Securities Exchange.

Great historical perspective.

• Ancient Rome and Today’s Migrant Crisis (WSJ)

When ancient Romans looked back to their origins, they told two very different stories, but each had a similar message. One founder of the Roman race was Aeneas, a refugee from the losing side in the Trojan War, who endured storm and shipwreck around the Mediterranean before landing in Italy to establish his new home. The other was Romulus who, in order to find citizens for the little settlement he was building on the banks of the Tiber, declared it an “asylum” and welcomed any runaways and criminals who wanted to join. It was a remarkable story even in antiquity. Some of Rome’s enemies were known to have observed sharply that you could never trust men descended from a band of ruffians.

In the past 500 years, politicians in the West have often returned to ancient Rome and ancient Greece in search of models for their own decisions and policies (or, more often, for self-serving justifications). On questions of citizenship, they have found two wildly conflicting examples. The stories told by the democracy of ancient Athens were typical of the Greek cities. When they looked back to their origins, they imagined that the first Athenians sprang directly out of the soil of Athens itself. The difference was significant. The Athenians rigidly restricted the rights of citizenship, eventually insisting that people should have both a citizen father and a citizen mother to qualify. Ancient democracy came at a price: It was only possible to share political power equally if you severely limited those who were to be allowed to be equals and to join the democratic club.

That is a price that many European democracies are now wondering whether they must pay too. Rome was never a democracy in the Athenian sense. The Roman Empire, brutal as it could often be, was founded on very different principles of incorporation and of the free movement of people. Over the first thousand years of its history, from the eighth century B.C., it gradually shared the rights and protection of full Roman citizenship with the people that it had conquered, turning one-time enemies into Romans. That process culminated in 212 A.D., when the emperor Caracalla made every free inhabitant of the empire a citizen—perhaps 30 million people at once, the single biggest grant of citizenship in the history of the world.

When the Romans looked back to their beginnings, they saw themselves as a city of asylum seekers. John F. Kennedy, in his “Ich bin ein Berliner” speech in the middle of the Cold War, praised ideas of Roman citizenship as an inspiration for Western liberty. “Two thousand years ago,” he said, “the proudest boast was ‘civis Romanus sum’”: that is, “I am a Roman citizen.” He was referring to the freedoms guaranteed by citizen status, particularly rights of legal protection and, in the Roman context, immunity from particularly degrading forms of punishment, including crucifixion.

And a great future perspective.

• Immigrants To Account For 88% Of US Population Increase In Next 50 Years (Pew)

Fifty years after passage of the landmark law that rewrote U.S. immigration policy, nearly 59 million immigrants have arrived in the United States, pushing the country’s foreign-born share to a near record 14%. For the past half-century, these modern-era immigrants and their descendants have accounted for just over half the nation’s population growth and have reshaped its racial and ethnic composition. Looking ahead, new Pew Research Center U.S. population projections show that if current demographic trends continue, future immigrants and their descendants will be an even bigger source of population growth.

Between 2015 and 2065, they are projected to account for 88% of the U.S. population increase, or 103 million people, as the nation grows to 441 million. These are some key findings of a new Pew Research analysis of U.S. Census Bureau data and new Pew Research U.S. population projections through 2065, which provide a 100-year look at immigration’s impact on population growth and on racial and ethnic change. In addition, this report uses newly released Pew Research survey data to examine U.S. public attitudes toward immigration, and it employs census data to analyze changes in the characteristics of recently arrived immigrants and paint a statistical portrait of the historical and 2013 foreign-born populations.

More footage of razor wire and news of drowning children. Europe is completely lost.

• Hungary Seals Border With Croatia to Stem Flow of Refugees (Bloomberg)

Hungary will seal its border with Croatia from midnight on Friday, expanding one of the European Union’s toughest set of measures to stem the influx of refugees, Foreign Minister Peter Szijjarto said in Budapest. “This is the second-best option,” Szijjarto told reporters. “The best option, setting up an EU force to defend Greece’s external borders, was rejected in Brussels yesterday.” An EU summit on Thursday failed to reach a final agreement on recruiting Turkey to help control the flow of refugees as Russia’s bombing campaign in Syria threatens to push more people to seek safety. The bloc’s leaders also made little progress on how to redesign the system of distributing immigrants, forming an EU border-guard corps or on ensuring arrivals are properly processed.

Hungary has extended an existing barbed-wire fence on its border with Serbia to cover its frontier with Croatia. Prime Minister Viktor Orban warned this week that his government would complete the barrier if EU leaders fail to agree on closing the Greek border, the main entry point for Syrian and other Middle Eastern refugees into the 28-nation bloc. Croatia will now help transport migrants to its border with Slovenia, in agreement with its northwestern neighbor, Croatian Deputy Prime Minister Vesna Pusic told state TV late Friday. From Slovenia refugees are likely to travel to Austria and on to Germany. “Slovenia will not close its border unless Germany closes its border, in which case Croatia will be forced to do the same,” Pusic said. “We will discuss with Slovenia the number of people we can bring to them.”

More than 180,000 migrants have entered Croatia from Serbia since they started arriving in mid-September, according to police data. Most of them have since left the country to Hungary, while a minority entered Slovenia as they seek to reach western European countries. Several eastern European countries are trying to avoid hosting migrants and are against mandatory quotas for the distribution of refugees within the EU. More than 380,000 asylum seekers have crossed into Hungary from the western Balkans this year and the number may reach 700,000 by the end of 2015, government spokesman Zoltan Kovacs told reporters in Budapest on Friday. From Saturday, refugees won’t be able to enter Hungary from Croatia except at designated border crossings.

“..on an average day around 5,000 people make the crossing..” That’s 150,000 a month. 1.8 million a year. Just one border crossing.

• Remote Greek Village Becomes Doorway To Europe (Omaira Gill)

Idomeni is a small village sitting within comfortable walking distance of Greece’s border with Macedonia. The 2011 census put its population at just 154 inhabitants. The locals themselves tell you there is nothing remarkable about the place, except for the stream of refugees flocking to this outpost to cross into Macedonia. Yiannis Panagiotopoulos, an Athenian taxi driver recently ferried a newly arrived group of Syrians from Athens to Idomeni. “They were so well dressed. I asked for €1,000 expecting them to protest, and they immediately paid me in cash. The were Coptic Christians and said Saudi Arabia is giving each non-Muslim $2,000 and a smartphone to leave because they want Syria for Muslims only.” Everyone wants to get to Idomeni, and if you can’t afford a taxi, there are plenty of unofficial buses that’ll take you there for €35.

The buses are more or less an illegal operation. Certain cafes near Victoria Square sell the tickets for cash, no receipts, and the trip that should take five and a half hours ends up taking nine because of various meandering detours to avoid rumored police checkpoints. Along the way, service stations have bumped up their prices to cash in on this unexpected windfall. At one, hot meals carry a starting price of eight euros, an extortionate amount for crisis-era Greece. Sitting in the front of one such coach, crammed to the last seat as children sleep on coats laid in the aisle, was 34-year-old Yahyah Abbas from Aleppo in Syria. Before the war, he used to work in a cosmetics distribution company. Now, he said, there is nothing in Syria, “only the devil.” “Syria was the best country in the world. It was ruined by terrorists. I love Bashar al Assad, he is the best. But I cannot live in my country because of terrorists.”

[..] After months of chaos and violent scenes at the border this summer the operation at the border has now fallen into an efficient routine that works “most of the time,” Greek authorities say. The border with Macedonia opens every 15 minutes to accept a group of 50-80 people. When the buses finally arrive at Idomeni, they offload passengers at a rate relevant to the pace of the crossings. Greek police issue each bus load with a number for their group which represents the order in which they will cross. They estimate that on an average day around 5,000 people make the crossing. Volunteers meet the groups straight off the bus and direct them to food, water, toiletries, clothes and medical attention. Then, they wait in huge white UNHCR tents until their turn comes.

“They announce they’ll take in 30,000 to 40,000 refugees and then they are nominated for the Nobel for that. We are hosting two and a half million refugees but nobody cares..”

• Turkey Pours Cold Water On Migrant Plan, Ridicules EU (AFP)

The EUs much-hyped deal with Turkey to stem the flow of migrants looked shaky on Friday after Ankara said Brussels had offered too little money and mocked Europe’s efforts to tackle the refugee crisis. Just hours after the EU announced the accord with great fanfare at a leaders’ summit, Ankara said the plan to cope with a crisis that has seen some 600,000 mostly Syrian migrants enter the EU this year was just a draft. Cracks in the deal emerged as Bulgaria’s president apologised after an Afghan refugee was shot dead crossing the border from Turkey. In the latest in a series of jabs at Europe over the crisis, Turkish President Recep Tayyip Erdogan ridiculed the bloc’s efforts to help Syrian refugees and challenged it to take Ankaras bid for EU membership more seriously.

“They announce they’ll take in 30,000 to 40,000 refugees and then they are nominated for the Nobel for that. We are hosting two and a half million refugees but nobody cares,” said Erdogan. Turkish Foreign Minister Feridun Sinirlioglu then slammed an offer of financial help made by top European Commission officials during a visit on Wednesday, saying his country needed at least €3 billion in the first year of the deal. “There is a financial package proposed by the EU and we told them it is unacceptable,” Sinirlioglu told reporters, adding that the action plan is “not final” and merely “a draft on which we are working.” Under the tentative agreement, Turkey had agreed to tackle people smugglers, cooperate with EU border authorities and put a brake on refugees fleeing the Syrian conflict from crossing by sea to Europe.

In exchange, European leaders agreed to speed up easing visa restrictions on Turkish citizens travelling to Europe and give Ankara more funds to tackle the problem, although it did not specify how much. As he announced the agreement on Thursday night, European Council President Donald Tusk had hailed the pact as a “major step forward” but warned that it “only makes sense if it effectively contains the flow of refugees.” European officials said they were still waiting for concrete steps from Turkey and said that the €3 billion demanded by Ankara would be a problem for the EUs 28 member states. Even as the summit was underway, the volatile situation on the EUs frontier with Turkey exploded into violence with the fatal Bulgarian border shooting, which the UN refugee agency said was the first of its kind.

The victim was among a group of 54 migrants spotted by a patrol near the southeastern town of Sredets close to the Turkish border and was wounded by a ricochet after border guards fired warning shots into the air, officials said. The migrants were not armed but they did not obey a police order to stop and put up resistance, they said. Bulgarian president Rosen Plevneliev said he “deeply regrets” the shooting but said it showed the need for “rapid common European measures to tackle the roots of the crisis.” The death adds to the toll of over 3,000 migrants who have died while trying to get to Europe this year, most of them drowning in the Mediterranean while trying to sail across in rubber dinghies or flimsy boats.

Debt Rattle October 15 2015

Oct 152015

October 15, 2015 Posted by Raúl Ilargi Meijer at 9:04 am Finance Tagged with: carry trade, debt, deflation, exports, Glencore, inequality, refugees, selloff, VW, Walmart 1 Response »

DPC League Island Navy Yard, Philadelphia. USS Brooklyn spar deck 1898

• The Biggest American Debt Selloff In 15 Years (CNN)

• Inequality To Drive ‘Massive Policy Shift’: Bank of America (CNBC)

• At US Ports, Exports Are Coming Up Empty (WSJ)

• Consumers Shutting Down As US Economy Deflates (CNBC)

• The US Is Closer To Deflation Than You Think (CNBC)

• Walmart Share Plunge Wipes Out $21 Billion In Market Cap In One Day (USA Today)

• Wal-Mart Just Made Things Worse For Everybody Else (CNBC)

• The Chilling Thing Walmart Said About Financial Engineering (WolfStreet)

• Glencore Collapse Could Be Even Worse Than Feared (MM)

• Unwinding Of Carry Trade May Unmask China’s True Metal Demand (Bloomberg)

• VW: Secret Emissions Tool In 2016 Cars Is Separate From ‘Defeat’ Cheat (AP)

• VW Customers Demand Answers And Compensation Over Emissions Scandal (Guardian)

• Lavrov: Unclear What Exactly US Is Doing In Syria (RT)

• Two-Thirds Of British Hospitals Offer Substandard Care (Guardian)

• Assange ‘In Constant Pain’ As UK Denies Safe Passage To Hospital For MRI (RT)

• Will Trudeaumania Sweep Canada’s Liberals Into Power – Again? (Guardian)

• EU Need for Turkey to Halt Refugee Flow Collides With History (Bloomberg)

• Refugee Rhetoric Echoes 1938 Summit Before Holocaust: UN Official (Guardian)

• ‘Lesbos Is Carrying The Sins Of The Great Powers’ (ES)

This is not reversible.

• The Biggest American Debt Selloff In 15 Years (CNN)

China has been selling U.S. debt but it’s not alone. Lots of emerging markets like Brazil, India and Mexico are also selling U.S. Treasuries. Not that long ago all these countries were all huge buyers of U.S. debt, which is viewed as one of the safest places to park money. “Five or six years ago, the big concern was that China was going to own the United States,” says Gus Faucher, senior economist at PNC Bank. “Now the concern is that China is selling them.” Foreign governments have sold more U.S. Treasury bonds than they’ve bought in the 10 consecutive months through July 2015, the most recent month of available data from the Treasury Department. Just in the first seven months of the year, foreign governments sold off $103 billion of U.S. debt, according to CNNMoney’s analysis of Treasury Department data.

Last year there was an overall increase of nearly $45 billion. It’s a reality of the global economic slowdown. When commodity prices boomed a decade ago, emerging market countries took their profits and invested them in U.S. Treasury bonds and other types of assets that are similar to cash. Now that commodity prices are falling, countries that rely on commodities – Brazil, Mexico, Indonesia – just don’t have the cash they once did to invest in safe assets like U.S. Treasury bonds. “Slow growth means that they just don’t have the same appetite for dollars because they don’t have cash to put to work,” says Lori Heinel, chief portfolio strategist at State Street Global Advisors. “The bigger issue is ‘do they have the dollars flowing into the economies to keep investing in Treasuries?'”

Interesting thought on PQE. Too little too late though.

• Inequality To Drive ‘Massive Policy Shift’: Bank of America (CNBC)

Rising income inequality and a deflationary global economic picture are going to lead to big changes in 2016, according to one Wall Street forecast. Quantitative easing and zero interest rates are on their way out in the U.S., and Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, believes they will be replaced with massive infrastructure spending. The result would benefit Main Street more than Wall Street, which has had a banner seven-year run helped by historically easy Federal Reserve monetary policy. “If the secular reality of deflation and inequality is intensified by recession and rising unemployment, investors should expect a massive policy shift in 2016,” Hartnett said in a note to clients. “Seven years after the West went ‘all-in’ on QE and ZIRP, the U.S./Japan/Europe would shift toward fiscal stimulus via government spending on infrastructure or more aggressive income redistribution.”

A reversal in trend would have a substantial impact on investing. Investors should move to assets that benefit in reflationary times, like Treasury Inflation Protected Securities, gold (which Hartnett thinks will bottom in 2016), commodities and small-cap Chinese stocks, Hartnett said. TIPs have been around flat for the year, while gold has dropped nearly 2% and commodities overall are off nearly 13%. Easy-money measures have helped boost Wall Street, with the S&P 500 up about 200% since the March 2009 lows as companies have spent some $2 trillion on stock repurchases. Dividend payments also have soared during the period, with the second quarter’s $105 billion increase the biggest in 10 years, according to FactSet.

Asset returns have jumped while global economic growth has been anemic in what Hartnett called “the most deflationary expansion of all time.” GDP gains in the U.S. have averaged barely 2% during the post-Great Recession recovery, while some economists believe a global recession could hit in 2016. The clamor for some of that asset wealth to find its way into the larger economy is growing and giving rise, according to Hartnett, to populist presidential candidates like Donald Trump and Bernie Sanders in the U.S. and similar movements around the world. “Deflation exacerbates ‘inequality’ of income, wealth, profits, asset valuations,” Hartnett wrote. “The gap between winners and losers is being driven wider and wider by excess liquidity and technological disruption (trends synonymous with the 1920s, another period infamous for ‘inequality’).”

China exports fell 20%. US exports are pluning. See the trend.

• At US Ports, Exports Are Coming Up Empty (WSJ)

One of the fastest-growing U.S. exports right now is air. Shipments of empty containers out of the U.S. are surging this year, highlighting the impact the economic slowdown in China is having on U.S. exporters. The U.S. imports more from China than it sends back, but certain American industries—including those that supply scrap metal and wastepaper—feed China’s industrial production. Those exporters have suffered this year as China’s economy has cooled. In September, the Port of Long Beach, Calif., part of the country’s busiest ocean-shipping gateway, handled 197,076 outbound empty boxes. They accounted for nearly a third of all containers that moved through the port last month. September was the eighth straight month in which empty containers leaving Long Beach outnumbered those loaded with exports.

The empties are shipping out at a faster rate at many U.S. ports, particularly those closely tied to trade with China, while shipments of containers loaded with goods are declining as exporters find it tougher to make foreign sales. That’s at least partly because the strong dollar makes American goods more expensive. Normally, after containers filled with consumer goods are delivered to the U.S. and unloaded, they return to export hubs. There, they typically are stuffed with American agricultural products, certain high-end consumer goods and large volumes of the heavy, bulk refuse that is recycled through China’s factories into products or packaging. Last month, however, Long Beach and the Port of Oakland both reported double-digit gains in exports of empty containers.

So far this year, empties at the two ports are up more than 20% from a year earlier. Long Beach’s containerized exports were down 8.2% this year through September, while Oakland’s volume of outbound loaded containers fell 12.7% from a year earlier in the January-September period. “This is a thermometer,” said Jock O’Connell at Beacon Economics. “The thing to worry about is if the trade imbalance starts to widen.” Trade figures released Tuesday in Beijing underscored China’s faltering demand. China’s imports fell 20.4% year-over-year in September following a 13.8% decline in August. As of June, U.S. exports of scrap materials were down 36% from their peak of $32.6 billion in 2011.

This is what deflation truly is: “The math is pretty simple: A lack of purchasing power for consumers has led to a lack of pricing power for companies.”

• Consumers Shutting Down As US Economy Deflates (CNBC)

The math is pretty simple: A lack of purchasing power for consumers has led to a lack of pricing power for companies. When it comes to the U.S. economy big-picture outlook, the ramifications are more complicated, and not particularly pleasant. Wednesday’s producer price index reading, showing a monthly decline of 0.5%, demonstrates a larger problem: At a time when policymakers are hoping to generate the kind of inflation that would indicate strong growth, the reality is that deflation is looming as the larger threat. Declining prices often would be treated as a net positive by consumers, but income weakness is offsetting the effects. Even Wall Street is feeling the heat. Prices for brokerage-related services and financial advice dropped 4.3% in September, accounting for about a quarter of the entire slide for final demand services.

The prospects heading into year’s end are daunting. In addition to the punk PPI number, retail sales gained by just 0.1% in September. Excluding autos, gasoline and building materials, sales actually declined 0.1%. On top of that, the August retail numbers were revised lower, with the headline rate now flat from the originally reported 0.2% gain. On the same day as the two disappointing data releases, Wal-Mart warned that the weakness is likely to extend through its fiscal year, with sales expected to be flat. The warning sent its shares tumbling 9% in morning trade, the worst performance in 15 years. All in all, then, not a great environment in which to raise rates, which the Federal Reserve hopes to do before the end of the year.

“Consumers are growing increasingly uncertain regarding their future income streams and are less willing to finance today’s spending with the prospect of tomorrow’s improved, future earnings,” Lindsey Piegza, chief economist at Stifel Fixed Income, said in a note to clients. “With gasoline prices at multiyear lows, consumers should be spending gangbusters but they aren’t.” Wage growth remains elusive for most workers, with the average hourly earnings rising just 2.2% annually. Job growth has slowed as well, with average monthly nonfarm payroll additions in the third quarter down nearly 28% from the previous quarter. The data on the ground shoot holes in a number of theories that were expected to drive the economy, market behavior and Fed policymaking.

Prices rise only in the West.

• The US Is Closer To Deflation Than You Think (CNBC)

Deflation talk these days is mostly centered on the euro zone and parts of emerging markets, but the U.S. is dancing on the brink itself. In fact, if not for a comparatively high inflation rate in the Western quadrant, the U.S. itself actually would have had a negative consumer price index rating in August, driving its economy into the same deflationary malaise found in other slow-growth regions. Of the four Census regions, only the West had a positive CPI for August, according to the most recent figures from the Bureau of Labor Statistics. And it hasn’t just been a recent occurrence. “All price growth in the U.S. in the past eight months came from the West,” the St. Louis Federal Reserve said in a report on geographic inflation influences. Inflation in the West has been a full percentage point above the other three regions, all of which experienced deflation.

Excluding the West, the national rate of inflation as measured by the CPI would have been -0.19% in August, as compared to the already anemic national rate of 0.2%, according to the St. Louis Fed. (The September reading will be released Thursday morning.) Annualized inflation in the West was 1.3% in August. In the Northeast it was -0.1%, -0.2% in the South and -0.3% in the Midwest. Much of the deflationary pressure came through falling energy prices – down 9.5% annualized in the West, 14.5% in the Midwest, 18.3% in the East and 17.1% in the South. Low inflation, and the possibility of deflation, presents a daunting conundrum for Fed officials, who have dismissed falling energy prices as transitory despite the fundamental factor of slowing global demand.

Wall Street has been waiting all year for signs the U.S. central bank would start down the path to normalizing monetary policy by raising rates for the first time in more than nine years. However, liftoff has been delayed as the FOMC has fussed over when conditions will be ideal for the move. More hawkish members want to raise because they worry the Fed will be too late once inflation accelerates, while also citing the need simply to have wiggle room for policy accommodation that the Fed does not have as long as it keeps its key rate near zero. Futures traders do not believe the Fed will hike until March 2016.

The direct result of falling consumer spending.

• Walmart Share Plunge Wipes Out $21 Billion In Market Cap In One Day (USA Today)

The Waltons had a bad – and expensive – day. Retailing giant Walmart stunned investors Wednesday when it gave disappointing guidance for growth and profit, sending its stock down 10% to $60.03. The stock drop, which was the biggest in decades, instantly wiped out more than $21 billion in shareholder wealth. That drop was bad for anyone who owns shares of Walmart. But it was especially painful for the company’s top 10 shareholders, who collectively own two-thirds of Walmart’s outstanding stock and saw $14.7 billion in wealth vanish Wednesday. The dive in Walmart shares hurt some of the wealthiest people in America including Walton family members Alice, Jim, John and S. Robson. Famed investor Warren Buffett’s Berkshire Hathaway also is a huge owner of Walmart stock.

Each was on the front line for one of the biggest implosions of a blue-chip stock in recent years. Walton Enterprises, an investment vehicle controlled by several members of the Walmart family, suffered the biggest hit. This investment vehicle owns 1.4 billion shares of Walmart, or 44% of the total shares outstanding, S&P Capital IQ says. Its holdings took a $9.5 billion hit. When you Include the holdings of other Walton family-controlled entities, such as the 197 million shares owned by S. Robson Walton and another 194 million held in the Walton Family name, the day’s loss jumps to more than $12 billion. Buffett’s Berkshire Hathaway owns 60.4 million shares of Walmart and lost nearly $405 million.

Don’t think it’s just a “rich person’s problem,” either. Walmart’s drop hit many individual investors closer to home. Index fund behemoth Vanguard is the fourth largest owner of Walmart stock because Walmart’s huge market value makes it a key holding in many index funds, which are widely held by individual investors. Vanguard’s 98.6 million shares brought home a $660 million daily loss directly to Vanguard investors. The pain of owning a big chunk of a single stock became painfully clear again Wednesday – especially if your last name is Walton.

As the no. 1 drops, so must the smaller fish.

• Wal-Mart Just Made Things Worse For Everybody Else (CNBC)

Wal-Mart shares had their worst day in 15 years Wednesday, after the world’s largest retailer said sales will be flat in fiscal 2016, while its earnings will slide to between $4.40 and $4.70 a share — down from $4.84 last year. Shares of competitors including Target, Macy’s, Kohl’s and J.C. Penney fell in sympathy, as Wal-Mart said it would invest billions into price over the next two years. With Wal-Mart already undercutting much of its peers, the move will put added pressure on its competitive set, which is already struggling to grow sales against a backdrop of steep price cuts and rock-bottom starting prices. Deflation in the retail sector was one reason why the National Retail Federation said that holiday sales will increase 3.7% this year, representing a deceleration from 2014.

Analysts and brands alike have said the holiday shopping season is already shaping up to be cutthroat, as retailers will do almost anything to get consumers to spend in their stores. “It’s a never-ending battle to capture their share of the overall spend,” Steve Barr, U.S. retail and consumer leader at PricewaterhouseCoopers, said Tuesday. It’s easy to understand why Wal-Mart, once the undisputed leader in pricing, is putting such an emphasis on delivering the best value to shoppers. According to PwC’s holiday forecast, 87% of shoppers said price is the primary driver behind their holiday spending choices. This is even more pronounced among what the consulting firm has dubbed “survivalists,” those who earn an annual income of less than $50,000.

According to PwC, 90% of survivalists said price is the No. 1 factor behind their holiday purchase decisions. Separately, a study released by coupon website RetailMeNot found consumers said a discount has to offer more than 34% off to be deemed a good deal. “I think we’ll see individuals taking advantage of the fact that prices haven’t moved against them this year,” the NRF’s chief economist, Jack Kleinhenz, said on a call after the trade group’s sales forecast.

“The most chilling words in the news release? “These are exciting times in retail given the pace and magnitude of change.”

• The Chilling Thing Wal-Mart Said About Financial Engineering (WolfStreet)

Wal-Mart had a bad-hair day. Its shares plunged $6.71, the largest single-day cliff-dive in its illustrious history. They ended the day down 10%, at $60.02, a number first kissed in 2001. Shares are 34% off their peak in January. So it wasn’t just today. But Wal-Mart didn’t do anything that special at its annual investor meeting today. It announced big “capital investments,” (we’ll get to the quotation marks in a moment), a crummy outlook, and a huge share buyback program. All of which it has done many times before. Only this time, the outlook is even worse, but the promised share buybacks are even larger. Wal-Mart proffered its strategies on how it would try to boost revenue growth in an environment where its primary customers – the 80% that got trampled by the Fed’s policies – are struggling to make ends meet.

A problem Wal-Mart has had for years. The news release hints at these new initiatives, spells out costs, and forecasts the resulting earnings debacle. Wal-Mart will goose “capital investments” by $11 billion in Fiscal 2017, on top of the $16.4 billion it’s spending on “capital investments” in fiscal 2016. This will maul earnings per share. In 2017, they’re expected to drop 6% to 12%, when the analyst community had forecast an increase of 4%. But 2019 is back in the rosy scenario of earnings growth. These capital investments aren’t computers, buildings, or new shelves. They’re largely “investments in wages and training,” which isn’t a capital investment at all, but an ordinary expense. “75% of next year’s investment will be related to people,” CEO Doug McMillon clarified.

That’s why they’ll hit earnings right away. A true capital investment would be an asset that is depreciated over time, with little earnings impact upfront. So sales in fiscal 2016 would be flat, which Wal-Mart blamed on “currency exchange fluctuations.” Would that be the strong dollar? But sales were also flat for the prior three fiscal years when the dollar was weak. Don’t lose hope, however. In the future, starting in fiscal 2017, sales would edge up 3% to 4%. To accomplish this, management is now desperately praying for inflation. The most chilling words in the news release? “These are exciting times in retail given the pace and magnitude of change.”

Then there was the announcement of a $20-billion share buyback program. $8.6 billion remaining from the $15 billion buyback program authorized in 2013 would be retired. That $15-billion program was on top of $36 billion in buyback programs over the preceding four years. Buybacks is what Wal-Mart does best.

Derivatives.

• Glencore Collapse Could Be Even Worse Than Feared (MM)

“Editor’s Note: We’re sharing this update on Glencore’s collapse with you because it’s shaping up to be even worse than Michael originally thought. Glencore still poses a “Lehman Brothers”-level risk to the global economy – but it’s now clear the world’s biggest commodities trader is on the hook for hundreds of billions in “shadow debt” that it simply refuses to address. This crisis is one small step away from upending our financial system, so here’s what you need to know…”

A lot of powerful voices have joined me in warning about the potential threat that Glencore poses to global financial markets. Bank of America, for instance, has published a report on the true size of the fallout. As you’ll see in a moment, it’s staggering. But since we talked about Glencore late last month, something insane has happened: The stock has gone up. But not for any good reason. The company has not righted the ship. The surge is only due to short-sellers covering their positions. The ugly truth is, the company is still a “shining” example of exactly what’s wrong with these markets. And I fear individual investors will get caught in the mess and wiped out on a stock like this or some of the others around it. That’s why I want to call out the misapprehensions and lies that are causing this “fauxcovery” and show you what’s next.

Because it could end up even worse than I thought…Since hitting a low of £0.69 ($1.05) per share on Sept. 28, Glencore stock has doubled to £1.29 ($1.97) per share. Even its credit default swap spreads have recovered to 650 basis points from a panic peak of 900 basis points. To place the last point in context, however, markets are pricing the company like a weak single B credit instead of a CCC credit. So while the major credit rating agencies still consider Glencore an investment-grade company, the actual credit markets have a much dimmer view of its prospects. Naturally, the company is doing everything possible to calm markets. First, last week it took the unusual step of publishing a six-page “funding factsheet” designed to dispel market concerns about its liquidity and solvency.

This factsheet shed very little light on what is really going on at the company, however. It said virtually nothing about Glencore’s derivatives contracts, other than stating that its derivatives contracts were undertaken within “industry standard frameworks.” Here’s the thing – “industry standard frameworks” normally require companies to post additional cash collateral upon the loss of an investment-grade rating, so the company’s statement should not have made anybody feel better. That suggests to me that the rise in the company’s stock price was largely a matter of short covering, not investors suddenly deciding that everything is hunky-dory in the House of Glencore.

Remember the metals bought with stored and unpaid metals as collateral?

• Unwinding Of Carry Trade May Unmask China’s True Metal Demand (Bloomberg)

The great mystery of metals is the amount used to finance the Chinese carry trade, or collateral used to borrow cheap dollars to buy yuan-backed high-interest-carrying notes. The Bank for International Settlements says this trade may be $1 trillion to $2 trillion, tying up tens of millions of metric tons of iron ore, aluminum and other metals. About a year of global copper consumption (22 million mt) equals just 5% to 10% of the estimate. The true figure will determine real China metal demand and future inventory. The impact of the Chinese metal carry trade is in the distortion of the true underlying copper demand, and a buildup in the metal’s inventory, strictly for collateral in financing. China accounts for 46% of global copper demand, according to the Word Bureau of Metals Statistics.

One question analysts must ask: What if it’s just 35%? The potential stopping of this trade, and normalization of the distorted demand, will provide understanding of China’s true copper needs and their potential growth. Nickel prices have fallen by half since year-end 2013, when they surged after No. 1 global exporter Indonesia banned exports of nonprocessed ore. Inventories are near record levels. The likely culprits for the higher inventory and price crash are the large amounts of the metal held off exchanges because they were used as collateral in a carry trade that took advantage of China’s high interest rates. A warehouse scandal at the Qingdao complex prompted banks to call in these trades, pummeling nickel prices.

The lucrative practice of using commodities as collateral to make money from interest-rate differentials inside and outside of China, a practice known as the carry trade, could cause significant pressure on commodity markets, were the trade to unravel. The Bank for International Settlements says this trade exceeds $1.2 trillion worth of commodities and could reach $2 trillion. Any major change in the direction of this trade could flood the market with more supply.

Actually, it’s a second defeat device. And that means it’s company policy, not a freak incident involving only technicians.

• VW: Secret Emissions Tool In 2016 Cars Is Separate From ‘Defeat’ Cheat (AP)

US regulators say they have a lot more questions for Volkswagen, triggered by the company’s recent disclosure of additional suspect engineering of 2016 diesel models that potentially would help exhaust systems run cleaner during government tests. That’s more bad news for VW dealers looking for new cars to replace the ones they can no longer sell because of the worldwide cheating scandal already engulfing the world’s largest automaker. Depending on what the Environmental Protection Agency eventually finds, it raises the possibility of even more severe punishment. Volkswagen confirmed to AP on Tuesday that the “auxiliary emissions control device” at issue operates differently from the “defeat” software included in the company’s 2009 to 2015 models and revealed last month.

The new software was first revealed to EPA and California regulators on 29 September, prompting the company last week to withdraw applications for approval to sell the 2016 model cars in the US. “We have a long list of questions for VW about this,” said Janet McCabe at EPA. “We’re getting some answers from them, but we do not have all the answers yet.” The delay means that thousands of 2016 Beetles, Golfs and Jettas will remain quarantined in US ports until a fix can be developed, approved and implemented. Diesel versions of the Passat sedan manufactured at the company’s plant in Chattanooga, Tennessee, also are on hold. Volkswagen already faces a criminal investigation and billions of dollars in fines for violating the Clean Air Act for its earlier emissions cheat, as well as a raft of state investigations and class-action lawsuits filed on behalf of customers.

If EPA rules the new software is a second defeat device specifically aimed at gaming government emissions tests, it would call into question repeated assertions by top VW executives that responsibility for the cheating scheme lay with a handful of rogue software developers who wrote the illegal code installed in prior generations of its four-cylinder diesel engines. That a separate device was included in the redesigned 2016 cars could suggest a multi-year effort by the company to influence US emissions tests that continued even after regulators began pressing the company last year about irregularities with the emissions produced by the older cars.

VW has provided precious little info for its clients. That’ll backfire.

• VW Customers Demand Answers And Compensation Over Emissions Scandal (Guardian)

Nine out of 10 Volkswagen drivers in Britain affected by the diesel emissions scandal believe they should receive compensation, increasing the pressure on the carmaker as it attempts to recover from the crisis. Almost 1.2m diesel vehicles in Britain are involved in the scandal, out of 11m worldwide, and VW faces a hefty bill if it is forced to make payouts to motorists. The company has put aside €6.5bn (£4.8bn) to deal with the cost of recalling and repairing the affected vehicles, but it also faces the threat of fines and legal action from customers and shareholders. There is a growing frustration among VW drivers in the UK over the lack of information about how their vehicle will be repaired, according to the consumer watchdog Which?. VW has sent letters to affected customers, arriving this week.

However, the letters state that the company is still working on its plans and another letter will be sent when these are confirmed. Paul Willis, the managing director of VW UK, told MPs on Monday that the recall of vehicles may not be completed by the end of 2016 and that it was premature to discuss compensation. However a survey by Which? has found that nine out of 10 affected motorists want compensation. Richard Lloyd, the executive director of Which?, said: “Many VW owners tell us they decided to buy their car based on its efficiency and low environmental impact, so it’s outrageous that VW aren’t being clear with their customers about how and when they will be compensated.

“Volkswagen UK must set out an urgent timetable for redress to the owners of the affected vehicles. We also need assurances from the government that it is putting in place changes to prevent anything like this happening again.” In the wake of the scandal, 86% of VW drivers are concerned about the environmental impact of their car, while 83% questioned the impact on its resale value and 73% feared the performance of their vehicle would be affected. More than half of the VW customers said they had been put off from buying a VW diesel car in the future. A total of 96% stated that fuel efficiency was an important factor in buying the diesel vehicle, while 90% said it was the seemingly limited environmental impact. Both these issues are affected by the scandal.

“..it’s unclear “why the results of so many combat sorties are so insignificant.”

• Lavrov: Unclear What Exactly US Is Doing In Syria (RT)

The Russian Foreign Ministry has questioned the effectiveness of the US-led year-long air campaign in Syria, saying it’s unclear “why the results of so many combat sorties are so insignificant.” Failing to curb ISIS, the US has now “adjusted” its program. “We have very few specifics which could explain what the US is exactly doing in Syria and why the results of so many combat sorties are so insignificant,” Russian Foreign Minister Sergey Lavrov told Russian channel NTV. “With, as far as I know, 25,000 sorties they [US-led air campaign] could have smashed the entire [country of] Syria into smithereens,” the minister noted.

Lavrov questioned the Western coalition’s objectives in their air campaign, stressing that Washington must decide whether its aim is to eliminate the jihadists or to use extremist forces to pursue its own political agenda. “Maybe their stated goal is not entirely sincere? Maybe it is regime change?” Lavrov said, as he expressed doubts that weapons and munitions supplied by the US to the so-called “moderate Syrian opposition” will end up in terrorists’ hands. “I want to be honest, we barely have any doubt that at least a considerable part of these weapons will fall into the terrorists’ hands,” Lavrov said. American airlifters have reportedly dropped 50 tons of small arms ammunition and grenades to Arab groups fighting Islamic State (IS, formerly ISIS/ISIL) in northern Syria.

US officials assure concerned parties that the fighters have been screened and are really confronting IS. “We do not want the events, when [some countries] not only cooperated with terrorists but plainly relied on them, to happen again,” Lavrov said, recalling that the French, for instance supplied weapons to anti-government forces in Libya in violation of a UN Security Council resolution. Lavrov has called on the US to “transcend themselves” and decide what is more important, either “misguided self-esteem realization” or getting rid of the “greatest threat” that is challenging humanity.

Scary.

• Two-Thirds Of British Hospitals Offer Substandard Care (Guardian)

Two-thirds of hospitals are offering substandard care, according to the NHS regulator, which also warns that pressure to cut costs could lead to a further worsening of the health service in the coming years. The Care Quality Commission also said that levels of safety are not good enough in almost three-quarters of hospitals, with one in eight being rated as inadequate. In its annual report, the watchdog detailed examples including one hospital where A&E patients were kept on trolleys overnight in a portable unit and not properly assessed by a nurse; while in another, medicine was given despite the patient’s identity not being properly confirmed. In some care homes, residents either received their medication too late or were given too much of it, leading to overdoses.

Understaffing and money problems are already contributing to a situation where 65% of hospitals, mental health and ambulance services either require improvement or are providing inadequate care.Too many patients are already receiving care that is unacceptably poor, unsafe or highly variable in its quality, from staff who range from the exceptional to those who lack basic compassion, it adds. In the report, England’s health and social care regulator raises concerns that patients could suffer as the service seeks to make the £22bn of efficiency savings by 2020 that NHS England has offered and health secretary Jeremy Hunt is pressing it hard to start delivering. “The environment for health and social care will become even more challenging over the next few years,” it states. “Tensions will arise for providers about how to balance the pressures to increase efficiency with their need to improve or maintain the quality of their care”.

As much humanity as refugees receive. “They can guard the car with 10,000 police officers if they wish..”

• Assange ‘In Constant Pain’ As UK Denies Safe Passage To Hospital For MRI (RT)

The UK has refused to grant Julian Assange safe passage to a hospital for an MRI scan and diagnosis, WikiLeaks has said, adding that he has been in “severe pain” since June. Assange’s lawyer has accused the UK of violating his client’s basic rights. WikiLeaks said that the UK government refused to satisfy Assange’s request to visit a hospital unhindered after the Ecuadorian Embassy filed one on his behalf on September 30. An MRI was recommended by a doctor, Laura Wood, back in August, according to the statement read aloud at a press conference given by Ecuadorian Foreign Minister Ricardo Patino on Wednesday.

“He [Julian Assange] has been suffering with a constant pain to the right shoulder region…[since June 2015]. There is no history of acute injury to the area. I examined him and all movements of his shoulder (abduction, internal rotation and external rotation) are limited due to pain. I am unable to elicit the exact cause of his symptoms without the benefit of further diagnostic tests, [including] MRI,” Patino read, citing a letter from the doctor. The UK’s Foreign and Commonwealth Office (FCO) issued a reply stating that Assange could not be guaranteed unhindered passage for a more thorough medical diagnosis on October 12.

Patino has criticized the decision saying that “even in times of war, safe passage are given for humanitarian reasons.” The Ecuadorian Embassy asked the UK authorities to offer a safe passage for a few hours for Assange into a London Hospital “under conditions agreed upon by UK and Ecuador,” Patino said, according to the WikiLeaks press release. “They can guard the car with 10,000 police officers if they wish,” the FM stressed, according to the press-release.

If Canada elects Harper again, forget about the country.

• Will Trudeaumania Sweep Canada’s Liberals Into Power – Again? (Guardian)

In the longest official federal election period in the nation’s history, it now appears Liberal leader Justin Trudeau may well be the nation’s next prime minister, with polls showing him establishing a commanding lead over his rivals, and the trend continuing to grow. It’s a stunning development in an election that could be described as an epic cliffhanger. Many, if not most, Canadians are eager for a change from prime minister Stephen Harper and his Conservative government, but with two worthy and eager rivals – the New Democratic party’s Thomas Mulcair and the Liberal party’s Justin Trudeau – where those change-hungry voters will place their bet has been difficult to decipher. When Harper announced the campaign in early August, it was met with immediate cynicism.

The extended campaign time (79 days as opposed to what had been the standard 37 days) gave the Conservatives an immediate advantage, given that their financial war chest is considerably larger than that of the Liberals or NDP. The Conservative strategy seemed a sound one: let the two opposition parties battle it out while the ruling party would float as much advertising as possible, handily winning over another majority. But the ruling party has faced considerable obstacles, including an astonishingly embarrassing ongoing scandal involving appointees to the unelected Senate (the Canadian version of the House of Lords) and a flagging economy. Polls have indicated many Canadians want change.

Ironically enough, one of the main reasons Canadians may have shifted their allegiances to the Liberal party leader is precisely because of the most famous negative ad campaign of the election, paid for and put into heavy rotation by the Conservatives. The ad, first rolled out in May by the Conservatives, has a group of people looking over an application by Justin Trudeau for the PM’s job. Perhaps most striking for its laughably bad acting, the ad has people concluding Trudeau is a lightweight who is “just not ready” for the job, with one concluding “nice hair, though”.

The ad attempts to suggest that not only is Trudeau simply not ready but voting for him is tantamount to a risky foray into untested waters, given the turbulent global economy and nagging threats of terror (the Cons have been playing both up at every turn). But a funny thing happened on the way through this fear-mongering: by just about any standards, Trudeau has run an excellent campaign. In late August he unveiled a campaign promise to invest billions of dollars in Canada’s roads, bridges, public transit and other public facilities. He suggested these were all necessary investments, which would help to stimulate the moribund economy, and went one step further, suggesting if he formed government, he would be open to deficit spending – moderate deficits, he cautioned, which would be over by 2019.

Europe has it coming.

• EU Need for Turkey to Halt Refugee Flow Collides With History (Bloomberg)

The EU needs Turkey more than ever to halt the flow of refugees from the Middle East – and has little to offer in return. With its decade-old bid to join the 28-nation union stalled, Turkey will be the topic without being at the table at a summit of EU leaders Thursday in Brussels. On the same mission, Angela Merkel plans to travel to Istanbul on Sunday to meet Turkish leaders. Relations have been all downhill since EU membership talks with Turkey began in 2005, years before civil war in neighboring Syria sent refugees streaming toward Europe. Turkey is stymied in part by Cyprus, its Mediterranean rival, and an anti-expansion mood in northern Europe. Meantime, a blossoming Turkish economy fed the sense that the country of 77 million could get along fine on its own.

“Many people in the EU are regretting the unproductive approach they had to the accession negotiations with Turkey, blocking the process and creating a deep sense of resentment in Ankara,” said Amanda Paul, an analyst at the European Policy Centre in Brussels. “If it were going along normally, it would be easier to reach this sort of agreement with Turkey.” Contacts are so strained that after President Recep Tayyip Erdogan went to Brussels on Oct. 5 to consider an “action plan” on migration, Turkish officials said the plan wasn’t discussed. EU Commission President Jean-Claude Juncker’s spokesman downgraded it to “an accord in principle to undertake a process.”

After Syria descended into war in 2011, European governments were content to let neighboring states such as Turkey, Lebanon and Jordan cope with the refugee influx. Only once Turkey amassed 2.2 million and they started heading northwest did European leaders wake up, finding themselves in the biggest refugee crisis since World War II. Germany, with a population of 81 million, is being roiled by this year’s expected arrival of at least 800,000 refugees, which is causing strains in Merkel’s governing coalition. “Turkey fears that even more refugees will come because the fighting in Syria isn’t letting up,” Merkel said Wednesday in a speech in eastern Germany. “I will fly to Turkey on Sunday to see how we can help on the ground so Turkey’s burden is shouldered more widely.”

“It’s just a political issue that is being ramped up by those who can use the excuse of even the smallest community as a threat to the sort of national purity of the state..”

• Refugee Rhetoric Echoes 1938 Summit Before Holocaust: UN Official (Guardian)

The dehumanising language used by UK and other European politicians to debate the refugee crisis has echoes of the pre-second world war rhetoric with which the world effectively turned its back on German and Austrian Jews and helped pave the way for the Holocaust, the UN’s most senior human rights official has warned. Zeid Ra’ad Al Hussein, the UN high commissioner for human rights, described Europe’s response to the crisis as amnesiac and “bewildering”. Although he did not mention any British politicians by name, he said the use of terms such as “swarms of refugees” were deeply regrettable. In July, the UK prime minister, David Cameron, referred to migrants in Calais as a “swarm of people”.

At this month’s Conservative party conference, the home secretary, Theresa May, was widely criticised for suggesting that mass migration made it “impossible to build a cohesive society”. In an interview, the high commissioner said the language surrounding the issue reminded him of the 1938 Evian conference, when countries including the US, the UK and Australia refused to take in substantial numbers of Jewish refugees fleeing Hitler’s annexation of Austria on the grounds that they would destabilise their societies and strain their economies. Their reluctance, Zeid added, helped Hitler to conclude that extermination could be an alternative to deportation.

Three-quarters of a century later, he said, the same rhetoric was being deployed by those seeking to make political capital out of the refugee crisis. “It’s just a political issue that is being ramped up by those who can use the excuse of even the smallest community as a threat to the sort of national purity of the state,” he said. “If you just look back to the Evian conference and read through the intergovernmental discussion, you will see that there were things that were said that were very similar.”

“..there are cases of Afghan children drowning off Greece that would touch the public deeply if publicised..”

• ‘Lesbos Is Carrying The Sins Of The Great Powers’ (ES)

Four rubber boats arrive in an hour, 40 to 50 people in each. One man nudges his two-year-old daughter towards me while he fetches his son. I try to soothe her tears. While two French doctors attend the injured, most of the new arrivals seem in good health and high spirits. Many of them, with their fashionable sportswear and smart backpacks, could be day-trippers. But it feels very different as night falls and the coach bearing me and my fellow Startup Boat activists — young volunteers trying to find tech and strategic solutions to the problems posed by the refugee crisis — takes us past a crowd of 150. None of the promised buses have arrived to take them to refugee camps at Moria and Karatape, 20 miles away.

Welcome to Lesbos, where in recent weeks 1,500-3,000 people — predominantly Syrians, then Iraqis and Afghans — have arrived daily, paying traffickers €1,200 for the short passage from Turkey. The former military camp at Moria has an official capacity of 410 but at times has housed 1,000, with hundreds camped outside. Karatape, set up specifically for Syrians, can take 1,000. While we were on Lesbos, a 24-hour period when police were off duty left Karatape at twice capacity, and food stores exhausted. The situation, says Lesbos mayor Spyros Galinos, is like “a bomb in my hands”. “I believe Lesbos is carrying the sins of great powers,” he says. “If this dot on the map could manage to accommodate such high numbers, all member states can help us.”

The problems extend beyond Syrian refugees. In Athens, young Afghan Mohammad Mirzay tells me why EU nations have made a “big mistake”, allowing Syrians the right to remain, however many countries they have travelled through, but not extending this to others. The Taliban are persecuting the Hazaras, he says, while there are cases of Afghan children drowning off Greece that would touch the public deeply if publicised. He takes me to Galatsi Olympic Hall, a venue at the 2004 Games, now designated a safe house. Families are camped in the fetid space. “Why should we be divided?” says Mirzay. “We should push in altogether. We should support ‘human’.”

Debt Rattle April 13 2015

Apr 132015

April 13, 2015 Posted by Raúl Ilargi Meijer at 10:16 am Finance Tagged with: Australia, BIS, China, collapse, copper, exports, Greece, housing bubble, London, New Zealand, oil 3 Responses »

George N. Barnard Nashville, Tennessee. Rail yard and depot. 1864

• China’s March Exports Shrink 15% Year-on-Year In Shock Fall (Reuters)

• China’s March Exports Come In Far Worse Than Expected (WSJ)

• China’s Trade Collapse Raises Fears Of Growth Slowdown (Telegraph)

• World Bank Warns Of Hit To Australia As Chinese Growth Falters (AAP)

• China’s Stock Surge May Very Well End In Tears (MarketWatch)

• The $9 Trillion Short That’s Seen Sending the Dollar Even Higher (Bloomberg)

• Saudi Arabia’s Plan to Extend the Age of Oil (Bloomberg)

• Greece May Have Blown Best Hope Of Debt Deal (Reuters)

• Greece Defends Bailout Tactics As Latest Deadline Looms (Guardian)

• UK Economy Poised To Welcome ‘Deflation’ For First Time Since 1960 (Guardian)

• Sales Of London Luxury Homes Drop 80% In One Year (FT)

• Quarter Of World’s Copper Mines Operating At A Loss (Reuters)

• Bundesbank Tells German Heta Creditors To Expect 50% Loss (Bloomberg)

• Sweden Confirms Mystery ‘Russian Sub’…Was In Fact A Workboat (RT)

• Default In Ukraine ‘Virtual Certainty’: S&P Cuts Rating To ‘CC’ (RT)

• Protests Across Brazil Seek Ouster Of President (AP)

• Auckland Housing Bubble ‘Floats Off Into Its Own Orbit’ (Hickey)

• 40% Of Houses In Auckland Are Bought By Investors (Interest.co.nz)

• New Zealand PM Denies There Is A Housing Bubble (NZ Herald)

• The Shadowy History of the Secret Bank that Runs the World (LeBor)

15% is a devastating number. But they’re just going to announce 7% GDP growth no matter what.

• China’s March Exports Shrink 15% Year-on-Year In Shock Fall (Reuters)

China’s export sales contracted 15% in March while import shipments fell at their sharpest rate since the 2009 global financial crisis, a shock outcome that deepens concern about sputtering Chinese economic growth. The tumble in exports – the worst in about a year – compared with expectations for a 12% rise and could heighten worries about how a rising yuan CNY=CFXS has hurt demand for Chinese goods and services abroad, analysts said. In a sign that domestic demand was also tepid, imports into the world’s second-biggest economy shrunk 12.7% last month from a year ago, the General Administration of Customs said on Monday. That was the biggest slump in imports since May 2009, and compared with a Reuters poll forecast for a 11.7% drop.

“It’s a very bad number that was much worse than expectations,” Louis Kuijs, an economist at RBS in Hong Kong, said in reference to the export data. “It leads to warning flags both on global demand and China’s competitiveness.” Buffeted by lukewarm foreign and domestic demand, China’s trade sector has wobbled in the past year on the back of the country’s cooling economy, unsettling policymakers. Chinese Vice Premier Wang Yang was quoted by Xinhua state news agency as saying earlier this month that authorities must act to arrest China’s export slowdown lest it further dampens economic growth.

“The fall defied the expectations of economists who said exports usually rebound after the Lunar New Year..”

• China’s March Exports Come In Far Worse Than Expected (WSJ)

China’s exports fell sharply in March while imports slumped once again, suggesting to economists that the world’s second largest economy is being hit with sluggish demand at home and abroad. The nation’s exports slid 15% from a year earlier in March while imports dropped 12.7%, according to data released Monday by the General Administration of Customs. “Domestic demand is still sluggish,” said Kevin Lai, economist at Daiwa Capital. “Other than the U.S., the export situation isn’t looking very strong.” The fall defied the expectations of economists who said exports usually rebound after the Lunar New Year, which fell in February this year. In February, customs data showed exports up 48.3% from a year earlier while imports were down 20.5%.

Exports are no longer the big engine for the Chinese economy that they once were but the absence of growth in that once-critical area is a further drag on already weak growth. China’s economy posted growth of 7.4% last year, its slowest pace in 24 years, and the government has set an even lower target of about 7% growth for this year. Beijing has used a host of targeted measures to boost the economy, ranging from increased infrastructure spending and reductions in electricity tariffs to two cuts in interest rates to lower the cost of borrowing for domestic companies.

Data for the first quarter are due to be released Wednesday, and many economists project growth at less than 7% from a year earlier. Economists expected an increase of about 10% for exports in March and a drop of 12% for imports, according to a poll of analysts by The Wall Street Journal. China posted a trade surplus of 18.16 billion yuan in March, or about $2.93 billion, well below the $60.6 billion surplus in February.

“..concerns about the state of the global recovery..” No kidding.

• China’s Trade Collapse Raises Fears Of Growth Slowdown (Telegraph)

China’s exports fell by a spectacular 15pc in March reviving fears of a slowdown in the world’s second largest economy. Trade data showed imports also fell by 12pc year-on-year, resulting in a sharp drop in the country’s trade surplus and leading to concerns economic growth will register a significant slowdown when figures are released on Wednesday. China’s economy has been in the throes of a managed slowdown in the last few years. Beijing has set a target of 7pc GDP growth in 2015 as the country seeks to move towards a more sustainble rate of growth. GDP expanded by 7.4pc in 2014, its slowest rate of output growth in nearly a quarter of a century.

The Australian dollar, which is closely linked to the trade fortunes of the Chinese economy, fell to a six-year low on the back of the news. A significant brake on Chinese growth could now “ripple out across the globe,” said Michael Hewson of CMC Markets. “These data misses raise concerns that not only is the Chinese economy failing to rebalance with demand remaining low, but also the global economy’s demand for Chinese exports is also falling back raising concerns about the state of the global recovery as well,” said Mr Hewson. The sluggish numbers come despite stimulative action from China’s central bank to cut interest rates, and ease bank reserve targets.

Australia already knows.

• World Bank Warns Of Hit To Australia As Chinese Growth Falters (AAP)

A Chinese economic slowdown will hit Australia as iron ore prices tumble, the World Bank has said. The bank said Australia’s growth pace had deteriorated sharply since the first quarter of 2014 as declining prices for export commodities depressed mining investment and weakened the Australian dollar. The warning came as poor Chinese trade figures underlined the continued slowdown in the world’s second-largest economy. Exports were down 14.6% in March from a year ago while imports fell 12.3% on the same measure. The Australian dollar fell more than half a US cent to hover around the US76c mark. The World Bank predicted that a further slowdown in China, Australia’s biggest trading partner, would affect Australia and its neighbours.

The bank’s east Asia and Pacific economic update said: “The significant negative impact on Australia and New Zealand, among the world’s largest commodity suppliers, would lead to indirect spillovers on the Pacific Island countries, given their tight links through trade, investment and aid.”. China’s growth pace in 2014 was the weakest since 1990 but the World Bank said things were set to get worse – just a month after the Chinese government cut its growth target to 7%. Chinese growth would ease from 7.4% in 2014, to 7.1% in 2015, 7% in 2016 and 6.9% in 2017.

China is a major buyer of Australian iron ore, which is used to make steel. The World Bank said: “In China, as it shifts to a consumption-led, rather than an investment-led, growth model, the main challenge is to implement reforms that will ensure sustainable growth in the long run.” Sudhir Shetty, the World Bank’s chief economist for east Asia and the Pacific region, said many risks remained for east Asia Pacific region “both in the short and long run”. The gloomy prediction comes as the treasurer, Joe Hockey, forecast the iron ore price dropping to $35 a tonne, which could see commonwealth revenue fall $25bn over four years.

Again: they’re just going to say 7% growth no matter what.

• China Growth Last Quarter Seen Worst Since Global Recession

While the central bank has cut interest rates twice in the last six months to cushion a slowdown, rising bad debts and a crackdown on shadow lending are making banks reluctant to lend to smaller firms. “It’s a structural problem that can’t be quickly addressed,” said Zhao Yang, the Hong Kong-based chief China economist at Nomura. “China’s financial system is not friendly to private businesses, and for the central bank, it has few short-term options but to cut required reserve ratios or benchmark interest rates further.” The benchmark one-year lending rate in China is now 5.35%, versus near-zero levels in the U.S., euro zone and Japan. The Wenzhou Private Finance Index, a measure of non-bank lending rates among private companies, is around 20%. State-owned enterprises, traditionally with easier access to credit, have seen output weighed by a restructuring drive and crackdown on corruption and pollution.

That leaves People’s Bank of China Governor Zhou Xiaochuan juggling financial reforms to try to steer toward a more market-driven economy with the need to ensure growth doesn’t slow too fast. GDP data scheduled for Wednesday will probably show the economy expanded 7% in the first quarter from a year earlier, according to the median estimate of 38 economists in a Bloomberg survey as of April 10. That would be the slowest pace since the first quarter of 2009, when China was hit by the global financial crisis, prompting then Premier Wen Jiabao to unleash a massive stimulus package that featured a record credit boom. To achieve this year’s growth target of about 7%, current Premier Li Keqiang may need to add policy support, something he flagged last month he stood ready to do. The consumer-prices index held steady at a 1.4% increase in March from a year earlier, giving room to act.

Fighting in the streets more likely.

• China’s Stock Surge May Very Well End In Tears (MarketWatch)

Once dismissed as a “ghost train,” the trading scheme — known variously as the “new China through train” or Shanghai-Hong Kong Stock Connect — roared to life last week, helping send the Hang Seng Index HSI, +2.22% to a seven-year high. But this awakening brings not just welcome stock gains, but also fear of a rerun of the euphoric boom and bust of 2007, when a previous through-train plan was announced, only to be later shelved. This time, a possible bust may also challenge the Hong Kong dollar’s currency peg. Unlike the failed 2007 scheme, the new Stock Connect was designed to limit exuberant cross-border money flows, as it operates under a closed loop.

That may be easier said than done. Hong Kong holds a unique position as the first and only stop for mainland Chinese who want to buy foreign equities. This will not be lost on global funds which may want to hitch a ride on this through train, even if it is a roller coaster. All signs suggest the trading scheme will be extended. Hong Kong’s political leader, Chief Executive C.Y. Leung, has been quick to laud the “win-win” of deepening cooperation with Shanghai. Already, it is expected daily trading limits — 10.5 billion yuan ($1.69 billion) going south, and 13 billion yuan going north — will be expanded. Many were caught unaware by the by speed of the post-Easter-holiday surge in southbound investment. As these quotas were filled for the first time, the benchmark Hang Seng Index finished the week up 7.9%.

One explanation for the rush south was a new insurance-investment policy, which allows Chinese mutual funds to participate in the Stock Connect. Another is an inevitable catch-up, with the A-share (Shanghai) rally spilling into H-shares (Hong Kong) as mainland investors come south to pick up bargains. (See previous column on the divergence between the two markets.) Yet turnover figures suggest the Hang Seng Index’s surge past the 27,000 mark cannot be a result of the Stock Connect alone. On Thursday, for instance, volume reached a record 293.9 billion Hong Kong dollars ($37.9 billion), three times normal levels. Analysts are offering different explanations for the surge. Bank of America writes that we are witnessing a “Keynes beauty contest,” in which the jump in money flows is likely driven by some investors anticipating other investors’ reaction to government policy.

“Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years..”

• The $9 Trillion Short That’s Seen Sending the Dollar Even Higher (Bloomberg)

Investors speculating the dollar rally is fizzling out may be overlooking trillions of reasons why it will keep on going. There’s pent-up demand for the U.S. currency that will underpin years of appreciation because the world is “structurally short” the dollar, according to investor and former International Monetary Fund economist Stephen Jen. Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years, data from the Bank for International Settlements show. In addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand. The dollar’s share of global foreign reserves shrank to a record 60% in 2011 from 73% a decade earlier, though it has since climbed back to 63%.

So, the short-term ebbs and flows caused by changes in Federal Reserve policy or economic data releases may be overwhelmed by these larger forces combining to fuel more appreciation, according to Jen, the London-based co-founder of SLJ Macro Partners LLP and the former head of currency research at Morgan Stanley. “Short-covering will continue to power the dollar higher,” said Jen, who predicts a 10% advance in the next three months to 96 cents per euro. “The dollar’s strength is not just about cyclical factors such as growth. The recent consolidation will likely prove to be temporary.” The U.S. currency was at $1.0593 per euro at 12:09 p.m. in Tokyo. The last time it traded at 96 cents was June 2002.

Most strategists and investors agree on the reasons for the dollar’s advance versus each of its major counterparts during the past year: the prospect of higher U.S. interest rates while other nations are loosening policy. Bloomberg’s Dollar Spot Index, which tracks the U.S. currency against 10 major peers including the euro and yen, has surged 20% since the middle of 2014. The gains stalled recently, sending the index down more than 3% in the three weeks through April 3, as Fed officials tempered investors’ expectations about the pace of rate increases.

“Demand will peak way ahead of supply..”

• Saudi Arabia’s Plan to Extend the Age of Oil (Bloomberg)

Last fall, as oil prices crashed, Ali al-Naimi, Saudi Arabia’s petroleum minister and the world’s de facto energy czar, went mum. He still popped up, as is his habit, at industry conferences on three continents. Yet from mid-September to the middle of November, while benchmark crude prices plunged 21% to a four-year low, Naimi didn’t utter a word in public. For 20 years, Bloomberg Markets reports in its May 2015 issue, the world’s $2 trillion oil market has parsed Naimi’s every syllable for signs of where supply and prices are heading. Twice during previous routs—amid the Asian financial crisis in 1998 and again when the global economy melted down 10 years later—Naimi reversed oil’s free fall by orchestrating production cutbacks among members of OPEC. This time, he went to ground.

At the cartel’s semiannual meeting on Nov. 27 in Vienna, Naimi shot down proposed output reductions supported by a majority of the 12 members in favor of a more daring strategy: keep pumping and wait for lower prices to force high-cost suppliers out of the market. Oil prices fell a further 10% by the end of the next day and kept going. Having averaged $110 a barrel from 2011 through the middle of 2014, Brent crude, the global benchmark, dipped below $50 in January. “What they did was historic,” Daniel Yergin, the pre-eminent historian of the oil industry, told Bloomberg in February. “They said: ‘We resign. We quit. We’re no longer going to be the manager of the market. Let the market manage the market.’ That’s when you got this sort of shocked reaction that took prices down to those levels we saw.”

Naimi, 79, dominated the debate at the November meeting, according to officials briefed on the closed-door proceedings. He told his OPEC counterparts they should maintain output to protect market share from rising supplies of U.S. shale oil, which costs more to get out of the ground and thus becomes less viable as prices fall. In December, he said much the same thing in a press interview, arguing that it was “crooked logic” for low-cost producers such as Saudi Arabia to pump less to balance the market. Supply was only half the calculus, though. While the new Saudi stance was being trumpeted as a war on shale, Naimi’s not-so-invisible hand pushing prices lower also addressed an even deeper Saudi fear: flagging long-term demand.

Naimi and other Saudi leaders have worried for years that climate change and high crude prices will boost energy efficiency, encourage renewables, and accelerate a switch to alternative fuels such as natural gas, especially in the emerging markets that they count on for growth. They see how demand for the commodity that’s created the kingdom’s enormous wealth—and is still abundant beneath the desert sands—may be nearing its peak. This isn’t something the petroleum minister discusses in depth in public, given global concern about carbon emissions and efforts to reduce reliance on fossil fuels. But Naimi acknowledges the trend. “Demand will peak way ahead of supply,” he told reporters in Qatar three years ago. If growth in oil consumption flattens out too soon, the transition could be wrenching for Saudi Arabia, which gets almost half its gross domestic product from oil exports.

“There’s just no appetite in the euro zone for a grand bargain to take over Greece’s debt to the IMF and the ECB.”

• Greece May Have Blown Best Hope Of Debt Deal (Reuters)

Even if it survives the next three months teetering on the brink of bankruptcy, Greece may have blown its best chance of a long-term debt deal by alienating its euro zone partners when it most needed their support. Prime Minister Alexis Tsipras’ leftist-led government has so thoroughly shattered creditors’ trust that solutions which might have been on offer a few weeks ago now seem out of reach. With a public debt equivalent to 175% of economic output and an economy struggling to pull out of a six-year depression, Athens needs all the goodwill it can summon to ease the burden. It owes 80% of that debt to official lenders after private bondholders took a hefty writedown in 2012.

Since outright debt forgiveness is politically impossible, the next best solution would be for Greece to pay off its expensive IMF loans early, redeem bonds held by the ECB and extend the maturity of loans from euro zone governments to secure lower interest rates for years to come. “This step would save Greece’s budget billions of euros, while reforming the Troika arrangement, eliminating the IMF’s and the ECB’s financial exposure to Greece,” said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics, who advocates such an arrangement. It would lower the effective interest rate on Greek debt to less than 2%, far less than Athens was paying before the euro zone debt crisis began in 2009, and radically reduce the principal amount to be repaid over the next decade, giving Greece fiscal breathing space to revive its economy.

And unlike ideas floated by Greek Finance Minister Yanis Varoufakis to swap euro zone loans for GDP-linked bonds and ECB holdings with perpetual bonds, paying out the IMF and the ECB early would be legal and supported by precedent. But if the economics make sense for Greece, the politics no longer add up for its partners. A euro zone official said there had been exploratory talks with the previous conservative-led Greek government about such a plan last year, before then Prime Minister Antonis Samaras chose to bring forward an election he lost rather than complete a bitterly unpopular bailout program. “Now it’s a political non-starter,” said a euro zone official. “There’s just no appetite in the euro zone for a grand bargain to take over Greece’s debt to the IMF and the ECB.”

“..the newspaper will have difficulty justifying its headline and the content of its article.”

• Greece Defends Bailout Tactics As Latest Deadline Looms (Guardian)

Greece has denied being intransigent in its dealings with eurozone officials, ahead of another crucial week for the cash-strapped country. Greece’s finance ministry dismissed on Sunday a report by a German newspaper which reported that eurozone officials were “disappointed” by Greece’s failure to come up with plans for economic reforms at last week’s talks in Brussels. The mood between Greece’s leftist government and its eurozone partners has remained tense during negotiations to determine whether or not the country qualifies for further financial aid from international lenders. Frankfurter Allgemeine Sonntagszeitung (FAS) cited officials at last week’s meeting as saying they were shocked by the lack of progress, and that the new Greek representative just asked where the money was – “like a taxi driver” – and insisted his country would soon be bankrupt.

Eurozone officials disagreed with this assessment, saying Athens was still able to meet its international obligations, and regarded its ability to pay public sector wages and pensions as a domestic problem, according to the report. They deplored Greece’s unwillingness to discuss cuts to public sector pensions. The finance ministry in Athens hit back on Sunday, saying: “When the readers of FAS read the minutes … the newspaper will have difficulty justifying its headline and the content of its article. Such reports undermine the negotiation and Europe.” Greece made a €450m loan repayment to the International Monetary Fund last week. A further €747m payment is due on 12 May. There are fears that Athens could run out of cash in coming weeks. It needs to pay out more than €1.5bn of social security payments for April this week.

IMF managing director Christine Lagarde said last week that talks between Greece and its creditors had been “difficult on almost a daily basis”. She added: “What really matters now is for Greece and the three institutions to get on with the work so we can identify together the measures that will take Greece out of the very bad economic situation it could be in if those measures are not taken.” A meeting of deputy finance ministers – called the Euro Working Group – last Thursday gave Athens six working days to come up with a convincing economic reform plan before eurozone finance ministers meet on 24 April to decide whether to unlock €7.2bn of bailout funds. Greece has been on the verge of bankruptcy since 2009 and has depended on rescue loans totalling €240bn from the EU and IMF to stay afloat.

“..describing the falling oil price as “unambiguously good” for the economy…”

• UK Economy Poised To Welcome ‘Deflation’ For First Time Since 1960 (Guardian)

Britain could fall into deflation this week for the first time in more than half a century, the result of an escalating supermarket price war and falling energy prices. Inflation, as measured by the consumer prices index, fell to zero in February for the first time since comparable records began in 1989. Estimates from the Office for National Statistics suggested that it was the lowest reading since 1960. The statistics office will release the latest inflation figures, for March, on Tuesday morning. City economists say it is going to be a close call between a zero reading and a 0.1% dip. Petrol prices rose 3.6% last month, reflecting a rebound in global oil prices, which is expected to push up the inflation rate by 0.1 %age points.

This will be offset, however, by the 5% cut in gas prices by British Gas, Britain’s largest energy supplier, and low food price inflation. Fierce competition from discount chains has forced the major supermarket groups to slash prices on basic items such as bread, with the discounter Aldi overtaking Waitrose to become the UK’s sixth-largest grocer recently. Alan Clarke, an economist at Scotiabank, said: “While food price deflation of close to 4% year on year may sound extreme, this represents something of a relief after years of rapid price increases. More specifically, over the seven years between 2007 and 2013, the average annual pace of increase in food price inflation was 5% per year. Enjoy the cheap food and fuel while it lasts!”

Even if the UK avoids deflation in March, it will probably enter a period of falling prices at some point soon – following in the footsteps of other countries. Eurozone inflation has been negative since December, and the US rate turned negative in January before recovering to zero in February. There is no reason to panic, according to the Bank of England and City analysts. They claim any period of UK deflation is likely to prove temporary, unlike the deflationary spiral in Japan, where people have lived with falling prices for two decades. Bank of England governor Mark Carne, has sought to allay fears that Britain faces a 1930s-style deflationary spiral, describing the falling oil price as “unambiguously good” for the economy. An oil glut pushed the price of Brent crude, the international benchmark, down by more than 50% from last summer to a six-year low earlier this year.

“It is like the 1970s again, when waves of wealthy people left Britain and it was a disaster..”

• Sales Of London Luxury Homes Drop 80% In One Year (FT)

Wealthy foreigners are shunning London’s luxury housing market following Labour’s announcement that it will end their “non-dom” status if it wins the UK’s general election, according to estate agents. Property deals have begun to fall through in the days since Ed Miliband laid out his plans, they revealed, with some foreign residents also putting their homes up for sale and fleeing the UK. The announcement, combined with Labour’s plan to introduce a mansion tax on high-value homes, has led many foreigners to conclude that the UK is no longer an attractive and reliable home for the rich, agents said. During the past two years Conservative chancellor George Osborne has also made tax changes that have increased the burden on the affluent.

The introduction of capital gains tax on the proceeds of property sales came into force on April 6 and is believed by agents to have contributed to owners’ jitters. Ed Mead, a director of Douglas & Gordon estate agents, said his company had carried out 37 valuations in the past month for owners of high-end homes who were thinking of selling up, when the normal level is about six. “It is like the 1970s again, when waves of wealthy people left Britain and it was a disaster,” Mr Mead said. Sales of homes worth more than £2m have dropped by 80% in the past year, according to Douglas & Gordon.

Commodities are a disaster across the board.

• Quarter Of World’s Copper Mines Operating At A Loss (Reuters)

Nearly a quarter of the world’s major copper mines are running in the red, even after producers including Codelco and BHP Billiton engage in their deepest cost-cutting in years, according to a Reuters analysis. A 17% slump since last July has pushed copper futures on the London Metals Exchange to under $6,000 a ton, the lowest since 2009, is the first major test of producers’ margins since the global economic crisis, forcing a new reckoning after five years of relatively consistent profitability. Codelco, the Chilean state miner that produces about 8% of the world’s copper, will review the cost reduction plan at its Salvador mine as it prepares to restart operations there after torrential rains shuttered the complex in March, said a source close to the state-run miner.

The company has an ambitious target to slash total costs by as much as $1 billion this year. Salvador produced copper at a cost of some $11,439 per tonne in the fourth quarter last year, the highest out of 91 mines analyzed by Thomson Reuters unit GFMS as part of its Copper Mine Economics database. The mines account for more than two-thirds of global output, and almost a quarter of them had production costs late last year above current prices. The GFMS analysis, which is based on quarterly and semi-annual filings by 26 mining companies, gives the deepest insight yet into the voracious pace of cost-cutting by miners late last year as the sell-off in copper quickened, a hot topic at CRU Copper’s conference in Santiago this week.

Austria’s pulling off quite a feat. In almost total silence.

• Bundesbank Tells German Heta Creditors To Expect 50% Loss (Bloomberg)

German banks should expect to lose at least half of their investments in bonds of Austrian bad bank Heta Asset Resolution and make the appropriate provisions, the Bundesbank director responsible for bank supervision said. “I think this situation has to be taken seriously by the German banks,” Andreas Dombret, also a member of the board of the ECB’s Single Supervisory Mechanism, said in an interview in Johannesburg on Friday. “It’s advisable and recommendable to take provisions on this, and if I were to put a number on this I would say it should be a minimum of a 50% provision for potential losses.” German lenders and insurers have emerged as the biggest creditors of the bad bank set up after the collapse of Hypo Alpe-Adria-Bank, with about €7.1 billion at risk.

Heta was taken over last month by Austrian regulators, who ordered a debt moratorium and said they will impose losses on creditors to fund the bank’s wind-down. Bayerische Landesbank, a former owner of Hypo Alpe, has the biggest exposure among German banks, as around €2.4 billion of loans to the former subsidiary weren’t repaid. Commerzbank, Deutsche Pfandbriefbank, NordLB, and a German unit of Dexia all own Heta debt. While BayernLB has said it will set aside provisions equal to about half of what Heta owes it, Dombret’s recommendation goes further than some of the disclosed provisions other banks have made. Deutsche Pfandbriefbank said it wrote down its €395 million investment by €120 million, or 30%. Austria’s Hypo NOE Gruppe Bank said it provisioned its €225 million holding by “about a quarter.”

“The massive hunt was used by the Swedish Defense Ministry to justify a six billion kronor ($696 million) hike in defense spending..”

• Sweden Confirms Mystery ‘Russian Sub’…Was In Fact A Workboat (RT)

The unknown foreign vessel the Swedish Navy searched for near Stockholm last autumn was actually a “workboat,” a senior navy official says. Local media had alleged a hunt was on to try and find a Russian submarine, which was believed to be in the area. Swedish Rear Admiral Anders Grenstad told the Swedish TT news agency on Saturday that what was thought to be a vessel or a foreign submarine was actually just a “workboat.” The Swedish Navy changed the wording from “probable submarine” to “non-submarine” when referring to the reconnaissance mission connected to the unidentified vessel spotted in the Stockholm archipelago. The massive hunt was used by the Swedish Defense Ministry to justify a six billion kronor ($696 million) hike in defense spending between 2016 and 2020.

The drama started after an amateur photograph of an alleged underwater vessel of unidentified origin was sent to the ministry. The man who took the photo raised the alarm because he thought he saw the object surface and disappear again. Sweden undertook an intense one-week search in late October, looking for possible “foreign underwater activity” near Stockholm. During the operation, the Swedish Navy reportedly used over 200 troops, helicopters, stealth ships and minesweepers to search the waters of the Baltic Sea. During the search, the Swedish media exaggerated the story, claiming country’s navy was looking for a submarine in the Baltic Sea, which allegedly belonged to Russia.

Meanwhile, naval officials from Sweden and Russia maintained there was no substance to the reports, which was confirmed by Grenstad. “From the information we have, we cannot draw the same conclusion as the media that there is a damaged U-boat. We have no information about an emergency signal or the use of an emergency channel,” the navy official said. A full report of the search operations will be published later this spring, the Swedish newspaper Svenska Dagbladet reported.

“Ukraine’s total debt is estimated at $50 billion, and it has to service about $10 billion of that debt this year..”

• Default In Ukraine ‘Virtual Certainty’: S&P Cuts Rating To ‘CC’ (RT)

Standard & Poor’s has downgraded Ukraine’s long-term foreign currency sovereign credit rating to CC, a notch lower than the previous CCC- level. A default on Ukraine’s foreign-currency debt is a “a virtual certainty,” according to the agency. The ratings agency has said that the outlook remains negative. Ukraine’s foreign currency rating is the world’s second worst, behind Argentina which has a rating of ‘SD’. It is still ahead of Venezuela, which S&P has assigned a ‘CCC’ rating. “The negative outlook reflects the deteriorating macroeconomic environment and growing pressure on the financial sector, as well as our view that default on Ukraine’s foreign currency debt is virtually inevitable,” the ratings agency said in a statement.

Ukraine’s total debt is estimated at $50 billion, and it has to service about $10 billion of that debt this year, including corporate and sovereign loans and bonds. It will receive about $40 billion in IMF loans in the next four years, as well as separate loan guarantees from the US, Europe, and other allies. Public sector debt rose to 71% of Ukraine’s gross domestic product, and is due to rise to 94% of GDP in 2015, according to the National Bank of Ukraine.

Paying back debt is becoming more difficult for Ukraine as the national currency, the hryvnia, continues to plummet in value. It was the worst performing currency in 2014, and lost more than 34% on February 5, when the Central bank said it could no longer support the beleaguered currency. On February 5 the currency hit a historic low of 24.5 per 1 USD, and at the time of publication has only recovered slightly, to 23.4 versus the US dollar. Officially, foreign currency reserves stood at $5.6 billion at the end of March, compared to the $36 billion level in 2011.

Rousseff had better wisen up and leave. But that would open her up to prosecution.

• Protests Across Brazil Seek Ouster Of President (AP)

Nationwide demonstrations calling for the impeachment of President Dilma Rousseff swept Brazil for the second day in less than a month, though turnout at Sunday’s protests appeared down, prompting questions about the future of the movement. A poll published over the weekend suggested the majority of Brazilians support opening impeachment proceedings against Rousseff, whose second term in office has been buffeted by a corruption scandal at Brazil’s largest company, oil giant Petrobras, as well as a stalled economy, a sliding currency and political infighting. Only 13% of survey respondents evaluated Rousseff’s administration positively.

Sunday’s protests, which took place in cities from Belem, in the northern Amazonian rainforest region, to Curitiba in the south, were organized mostly via social media by an assortment of groups. Most were calling for Rousseff’s impeachment, but others’ demands ranged for urging looser gun control laws to a military coup. While last month’s protests drew substantial crowds in several large cities, Sunday’s turnout was lackluster. In Rio, several thousand people marched along the golden sands of Copacabana beach, many dressed in the yellow and green of the Brazilian flag. The March 15 protest, by contrast, drew tens of thousands. In the opposition stronghold of Sao Paulo, about 100,000 people marched on the city’s main thoroughfare, according to an estimate by the respected Datafolha polling agency.

The crowd was less than half the size of last month’s demonstration here, when more than 200,000 people turned out, making it the biggest demonstration in Sao Paulo since 1984 rallies demanding the end of the military dictatorship. “I was on the avenue on March 15 and without a doubt, today’s demonstration was much smaller,” said Antonio Guglielmi, a 61-year-old sales representative for construction materials company, vowing, “I will keep coming back to demonstrations like this one — big or small — because it is the best way for us to make our voices heard and demand an end to the Dilma government and the PT and end to corruption. The country cannot go on like this.”

New Zealand’s set to land very hard.

• Auckland Housing Bubble ‘Floats Off Into Its Own Orbit’ (Hickey)

If you are reading this and you don’t own Auckland property, then it would be a good idea not to read any further because it will probably ruin your Sunday. Figures released this week by Barfoot & Thompson, Auckland’s biggest real estate agency group, confirmed everyone’s worst fears (or biggest hopes if they owned property in the city). Auckland’s housing market has officially floated off its New Zealand moorings into its own orbit. The Reserve Bank can now have no doubts or caveats around the seasonality or size of the trend — the housing market in New Zealand’s biggest city is booming. The average three bedroom house price on the isthmus of Auckland that used to be the old Auckland Council rose over NZ$1 million for the first time in March.

The average house price in West Auckland rose 20.5% over the last year to NZ$632,032. Barfoot sold 420 homes worth more than NZ$1 million each in the 31 days of March, while selling just 300 homes for less than NZ$500,000. Barfoot’s agents would have collected almost NZ$1 million of commissions each day in March as they sold over NZ$1.2 billion worth of houses over the month. Auckland house prices are now rising at double digit rates on an annual basis, while the rest of the country is growing at less than 5%, or not at all. Even in Christchurch, house price inflation is subdued as a wall of new houses hits the market to soak up demand and replace quake-damaged buildings. Prices are still falling in some regional cities where populations and work are drying up.

Unfortunately for the Reserve Bank, taxpayers outside of Auckland and Auckland’s renters, there is no relief in sight. Net migration is rollicking along at record highs and at least half of new migrants end up in Auckland, or just as importantly, aren’t leaving Auckland. Longer term fixed mortgage rates are low and falling. Employment growth is strong and rental property investors are stocked up with plenty of fresh equity to gear up with much bigger and often interest-only mortgages. New mortgage lending is growing at over 20% per year.

Bubbles have their own dynamics. Politicians won’t touch them.

• 40% Of Houses In Auckland Are Bought By Investors (Interest.co.nz)

All we are hearing is about supply and what’s being done there, through such strategies as the Auckland Housing Accord. In his Radio NZ interview the PM banged on and on about what the Government is doing to help supply. There’s two issues here: One, it will take years not months to ramp up the supply of Auckland housing. Two, the Government and other politicians can happily talk and talk and talk about supply because it’s essentially a positive thing to talk about. We’ll build houses, and we’ll create jobs and people will have places to live. Marvellous. But, dear politicians, there’s another side to this and it’s the side you don’t want a bar of because if you are seen to be doing anything about this, well, then it would be negative. Yes, I’m talking about demand.

Reserve Bank Governor Graeme Wheeler recently suggested that about 40% of houses in Auckland were being bought by investors. Now, whatever you want to say about Auckland’s perceived housing supply shortage, if 40% of the available houses are being bought as investments then clearly there’s a hell of a demand issue as well. But what’s the Government doing about that? They could immediately do something about about the high levels of immigration that have seen a net 55,000 people arrive in New Zealand – about 25,000 of them in Auckland – in the past 12 months. They could do something to limit the numbers of offshore-based investors buying properties by introducing a rule that any overseas buyer of a house has to come and actually live in the house, or alternatively that offshore investors must build new houses.

They could introduce capital gains tax on investment properties. They won’t. Why not? Because these things would be unpopular. It’s much easier to talk about building new houses than any measures that might discourage investors from pumping more and more money into the inflated Auckland market. So, we’ll keep talking and talking and talking about supply. And who knows, if enough people believe the mantra then maybe there really will be a whole lot more houses built in Auckland eventually – possibly just in time to coincide with a global event that sees our 40% of investor-buyers take fright of the housing market and disappear overnight.

But of course. With exports plunging, the housing bubble is what keeps up appearances.

• New Zealand PM Denies There Is A Housing Bubble (NZ Herald)

Prime Minister John Key has again denied there is a housing crisis or bubble developing in Auckland, despite figures from Barfoot and Thompson last week showing average prices hitting record highs of over NZ$1 million in the old Auckland Council area of the isthmus and the Government itself seeing a supply shortage in Auckland of more than 20,000 dwellings. Key told Morning Report the current double-digit price rises were not sustainable, but the Government had already taken action to free up land supply in Auckland and that restricting migration would frustrate employers looking for skilled staff. “In the end, it’s not sustainable for house prices to rise 10-12-13% per year. The only answer to that is to do what what we’re doing, which is allocate new land and build more houses,” he said, adding continued inflation “forever” at that level would lead to a “bubble”, although he denied it was currently a bubble.

He said the Government’s moves to introduce Special Housing Areas to circumvent the Metropolitan Urban Limit would add new housing supply to the market and slow that double-digit house price inflation, although this would take time while the necessary infrastructure and housing was built. He would not give a time-frame for the supply-driven slowdown in Auckland house price inflation, but “sooner as opposed to later is my guess.” Key referred to the recent supply-driven slowdown in Christchurch house price inflation and downplayed suggestions of tightening migration rules, saying the Government would have to reduce the numbers coming in for skilled occupations and for construction if it was to use the migration lever.

Must read.

• The Shadowy History of the Secret Bank that Runs the World (LeBor)

The world’s most exclusive club has eighteen members. They gather every other month on a Sunday evening at 7 p.m. in conference room E in a circular tower block whose tinted windows overlook the central Basel railway station. Their discussion lasts for one hour, perhaps an hour and a half. Some of those present bring a colleague with them, but the aides rarely speak during this most confidential of conclaves. The meeting closes, the aides leave, and those remaining retire for dinner in the dining room on the eighteenth floor, rightly confident that the food and the wine will be superb. The meal, which continues until 11 p.m. or midnight, is where the real work is done. The protocol and hospitality, honed for more than eight decades, are faultless. Anything said at the dining table, it is understood, is not to be repeated elsewhere.

Few, if any, of those enjoying their haute cuisine and grand cru wines— some of the best Switzerland can offer—would be recognized by passers-by, but they include a good number of the most powerful people in the world. These men—they are almost all men—are central bankers. They have come to Basel to attend the Economic Consultative Committee (ECC) of the Bank for International Settlements (BIS), which is the bank for central banks. Its current members [ZH: as of 2013] include Ben Bernanke, the chairman of the US Federal Reserve; Sir Mervyn King, the governor of the Bank of England; Mario Draghi, of the ECB; Zhou Xiaochuan of the Bank of China; and the central bank governors of Germany, France, Italy, Sweden, Canada, India, and Brazil. Jaime Caruana, a former governor of the Bank of Spain, the BIS’s general manager, joins them.

In early 2013, when this book went to press, King, who is due to step down as governor of the Bank of England in June 2013, chaired the ECC. The ECC, which used to be known as the G-10 governors’ meeting, is the most influential of the BIS’s numerous gatherings, open only to a small, select group of central bankers from advanced economies. The ECC makes recommendations on the membership and organization of the three BIS committees that deal with the global financial system, payments systems, and international markets. The committee also prepares proposals for the Global Economy Meeting and guides its agenda.

Debt Rattle New Year’s Eve 2014

Dec 312014

December 31, 2014 Posted by Raúl Ilargi Meijer at 11:40 am Finance Tagged with: Africa, boom and bust, cartel, commodities, ebola, exports, Greece, oil, OPEC 1 Response »

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

• US Opening Door to More Oil Exports Seen Foiling OPEC Strategy (Bloomberg)

• The Market Chart Of The Year: Nope, It’s Not Oil (CNBC)

• Commodities Head for Record Losing Run on Oil to Dollar (Bloomberg)

• As Oil Prices Fall, Alaska Governor Halts Project Spending (AP)

• Falling Energy Costs And Economic Impacts (STA)

• Chart Shows How US Drillers Respond To Oil Price Drop (MarketWatch)

• Chinese Stocks, Dollar And Debt The Stars Of 2014 (Reuters)

• We’re Not Communists, Greek Opposition Insists (CNBC)

• ‘Snap Elections Will Be Decisive For Greece’s Eurozone Future’ (Guardian)

• Europe Deflation Fears Back After Weak Spain, Greece Data (CNBC)

• Will the Real Angela Merkel Please Stand Up? (Bloomberg)

• Obama Suggests Putin ‘Not So Smart’ (BBC)

• China Factory Activity Shrinks (BBC)

• Japan Is Writing History As A Prime Boom And Bust Case (Grass)

• The Rigging Triangle Exposed: The JPMorgan-BP-BOE Cartel (Zero Hedge)

• BP Probes In-House Foreign Exchange Traders (FT)

• The Prison State of America (Chris Hedges)

• Recolonizing Africa: A Modern Chinese Story? (CNBC)

• Ebola Wrecks Years Of Aid Work In Worst-Hit Countries (Reuters)

• Protecting Money or People? (James K. Boyce)

• Goodbye To One Of The Best Years In History (Telegraph)

Hilarious. Flood the markets even more, bring down the price further, and then find you can’t make any money with your exports. And stop talking about OPEC ‘strategy’ already. Start thinking about US strategy.

• US Opening Door to More Oil Exports Seen Foiling OPEC Strategy (Bloomberg)

The Obama administration’s move to allow exports of ultralight crude without government approval may encourage shale drilling and thwart Saudi Arabia’s strategy to curb U.S. output, further weakening oil markets, according to Citigroup Inc. A type of crude known as condensate can be exported if it is run through a distillation tower, which separates the hydrocarbons that make up the oil, according to U.S. government guidelines published yesterday. That may boost supplies ready to be sold overseas to as much as 1 million barrels a day by the end of 2015, Citigroup analysts led by Ed Morse in New York said in an e-mailed report. Saudi Arabia led the Organization of Petroleum Exporting Countries to maintain its production quota at a meeting last month even as a shale boom boosted U.S. output to the highest in more than three decades. That prompted speculation OPEC was willing to let prices fall to force some companies with higher drilling costs to stop pumping.

“U.S. producers are under the gun to reduce capital expenditures given lower prices,” Citigroup said in the report. “Now an export route provides a new lease on life that can further weaken crude oil markets and throw a monkey wrench into recent Saudi plans to cripple U.S. production.” Current U.S. export capacity is at about 200,000 barrels a day, which could be expanded to 500,000 a day by the middle of 2015, according to the bank. While the guidelines on the website of the Commerce Department’s Bureau of Industry and Security are the first public explanation of steps companies can take to avoid violating export laws, they don’t mean an end to the ban on most crude exports, which Congress adopted in 1975 in response to the Arab oil embargo. “While government officials have gone out of their way to indicate there is no change in policy, in practice this long-awaited move can open up the floodgates to substantial increases in exports by end-2015,” Citigroup said.

The U.S. produces about 3.81 million barrels a day of light and ultralight crude, according to the bank. West Texas Intermediate in New York dropped as much as 1.4% today to $53.38 a barrel, down 46% this year. Brent, the global marker crude, slid 1.8% to $56.87 in London, bringing losses in 2014 to 48%. Both benchmark grades are headed for the biggest annual slump since 2008. Oil producers have been testing the prohibition on crude exports as U.S. output surged amid technological advances that have opened up shale rock formations to development in Texas, North Dakota and elsewhere. The government earlier this year signaled a new way to export oil by approving permits for Pioneer and Enterprise to sell processed condensate. The guidelines seek to clarify how the Commerce Department will implement export rules and follow a “review of technological and policy issues,” Eric Hirschhorn, the under secretary for industry and security, said in a statement.

“This time though it’s not about a flight to safety. Investors are flocking to the dollar because they like it. The U.S. economy has outperformed and American assets are in vogue.”

• The Market Chart Of The Year: Nope, It’s Not Oil (CNBC)

There are many strong contenders to be the chart of the year. Some point to oil prices, which shockingly plunged 50% in a matter of months. Others would look to the S&P 500, which exploded higher for a third year in row and has closed at a record high 53 times (so far), more than 20% of 2014’s trading days. They’re each compelling stories, but neither is as impactful nor as important as the breakout of the U.S. dollar. Presenting the chart of 2014: the broad trade-weighted dollar. The trade-weighted dollar tracks the U.S. greenback’s value against a basket of other currencies, representing both developing and emerging markets. It’s a broader measure than the regularly cited dollar index and the best indication of how a strong dollar hurts American companies that do business overseas.

The broad trade-weighted dollar is up 9% this year, now at the highest point since March 2009, when financial crisis fears had risk-averse investors pouring into the U.S. currency. It’s well above its average historical price over the last 15 years and now just 3.6% away from reaching those crisis highs. This time though it’s not about a flight to safety. Investors are flocking to the dollar because they like it. The U.S. economy has outperformed and American assets are in vogue. The move has been absolutely stunning. Break apart the trade-weighted dollar into individual pairs – the currency has strengthened nearly 12% against the euro this year, 13% against the yen and 18 to 19% against the Norwegian and Swedish currencies. The move is more dramatic when weighed against the trouble spots of 2014. The dollar has gained 44% versus the Russian ruble and 24% versus the Argentine peso. In fact, the U.S. greenback has strengthened against all developed and emerging currencies in the past 12 months.

“The rise of the U.S. dollar in 2014 is remarkable both by its intensity and weak support from expectations of Fed tightening,” according to Sebastien Galy, FX strategist at Societe Generale. “It tells us much about the intensity with which other central banks have tried to weaken their currencies,” he said. In other words, it’s not just a story of U.S. economic strength in the face of global weakness, but also the contrast to major central banks seeking to weaken their own currencies in the name of growth and export competitiveness. That trend should continue in the new year and ultimately fuel more worrisome trade tensions.

“The odds are that the U.S. dollar strength can go much further than currently expected, similarly the odds of … trade barriers are steadily rising,” Galy warned. As if that wasn’t enough, expectations that the Fed will begin to raise interest rates in the second half of 2015 have many believing the dollar has plenty of room to run. “The strength of the U.S. labor market and U.S. economy are making the Fed more confident that it can begin to raise rates next year,” wrote Lee Hardman, currency strategist at Bank of Tokyo Mitsubishi in a note after the last Fed meeting in mid-December. “The market is still not convinced that the Fed will tighten even at that more modest pace … leaving scope for U.S. short rates to continue to increase in the year ahead, supporting a stronger U.S. dollar.” Beyond the stunning breakout of the buck, the move is significant because the dollar is the backbone of the global financial system. It influences prices of all major commodities, the largest and most liquid debt and equity markets, and the world’s largest economy.

Much more to come.

• Commodities Head for Record Losing Run on Oil to Dollar (Bloomberg)

Commodities headed for the biggest annual loss since the global financial crisis in 2008, retreating for a record fourth year, as a global glut spurred a rout in oil prices and a stronger dollar cut the allure of raw materials. The Bloomberg Commodity Index dropped to the lowest level since March 2009 earlier today. It’s lost 16% this year, with crude, gasoline and heating oil the biggest decliners. A fourth year of losses would be the longest since at least 1991. Energy prices retreated in 2014 as a jump in U.S. drilling sparked a surge in output and price war with OPEC, which chose to maintain supplies to try to retain market share. The dollar climbed to the highest level in more than five years as a U.S. recovery spurred speculation that the Federal Reserve will start to raise borrowing costs next year. Commodities are set for a volatile year in 2015, with crude oil poised to extend its slump, according to Australia and New Zealand Bank.

“What we’re seeing is that supplies from North America have really outpaced worldwide demand growth and as a result, we have a supply glut,” Andy Lipow, president of Lipow Oil, said by phone. “And that of course has put pressure on prices over the last several months. And as a result, it’s dragging down commodities indexes as well.” Brent for February settlement traded at $57.01 a barrel on the London-based ICE Futures Europe exchange, with rice 49% lower this year. West Texas Intermediate dropped 1.1% to $53.55 a barrel on the New York Mercantile Exchange. Gasoline sank 49% this year. A slowdown in China also hurt demand for raw materials as policy makers grappled with a property slowdown, and data today showed a factory gauge at a seven-month low in December. The world’s biggest user of metals is headed for its slowest full-year economic expansion since 1990. China’s central bank cut interest rates last month for the first time since 2012.

Bring back Sarah!

• As Oil Prices Fall, Alaska Governor Halts Project Spending (AP)

With oil prices dropping, Alaska Gov. Bill Walker has halted new spending on six high-profile projects, pending further review. Walker issued an order Friday putting the new spending on hold. He cited the state’s $3.5 billion budget deficit, which has increased as oil prices have dropped sharply. With oil prices now around a five-year low, officials in Alaska and about a half-dozen other states already have begun paring back projections for a continued gusher of revenues. Spending cuts have started in some places, and more could be necessary if oil prices stay at lower levels. How well the oil-rich states survive the downturn may hinge on how much they saved during the good times, and how much they depend on oil revenues.

Some states, such as Texas, have diversified their economies since oil prices crashed in the mid-1980s. Others, such as Alaska, remain heavily dependent on oil and will have to tap into sizeable savings to get by. The projects Walker halted spending on include a small-diameter gas pipeline from the North Slope, the Alaska Dispatch News reported. The other projects are the Kodiak rocket launch complex, the Knik Arm bridge, the Susitna-Watana hydroelectric dam, Juneau access road and the Ambler road. “The state’s fiscal situation demands a critical look and people should be prepared for several of these projects to be delayed and/or stopped,” Walker’s budget director Pat Pitney said in an email.

According to Walker’s order, the hold on spending is pending further review. The administration intends to decide on project priorities near the start of Alaska’s legislative session Jan. 20, and no later than a Feb. 18 legal budgeting deadline, Pitney said. State lawmakers have final authority to decide whether the projects should continue to be funded, Pitney said. Contractually required spending and employee salaries will continue. Walker’s order asks each agency working on the projects to stop hiring new employees, signing new contracts and committing any new funding from other sources, including the federal government. The action follows a letter sent Tuesday by the state Legislature’s Republican leadership, who urged the governor to immediately cut spending levels in light of the budget crunch.

Why is this so hard to understand?

• Falling Energy Costs And Economic Impacts (STA)

“If you repeat a falsehood long enough, it will eventually be accepted as fact.” In the financial markets and economics it is a common occurrence that the media and commentators will latch on to a statement that supports a cognitive bias and then repeat that statement until it is a universally accepted truth. When such a statement becomes universally accepted and unquestioned, well, that is when I begin to question it. One of those statements has been in regards to plunging oil prices. The majority of analysts and economists have been ratcheting up expectations for the economy and the markets on the back of lower energy costs. The argument is that lower oil prices lead to lower gasoline prices that give consumers more money to spend. The argument seems to be entirely logical since we know that roughly 80% of households in America effectively live paycheck-to-paycheck meaning they will spend, rather than save, any extra disposable income. As an example, Steve LeVine recently wrote:

“US gasoline prices have dropped for more than 90 straight days. They now average $2.28 a gallon, which is remarkable considering that just a few months ago, some of us were routinely paying $4 and sometimes close to $5. Not so coincidentally, the US economy surged by 5% last quarter, and does not appear to be slowing down. “

If you read the statement, how could one possibly disagree with such a premise? If I spend less money at the gas pump, I obviously have more money to spend elsewhere. Right? The problem is that the economy is a ZERO-SUM game and gasoline prices are an excellent example of the mainstream fallacy of lower oil prices.

Example:
• Gasoline Prices Fall By $1.00 Per Gallon
• Consumer Fills Up A 16 Gallon Tank Saving $16 (+16)
• Gas Station Revenue Falls By $16 For The Transaction (-16)
• End Economic Result = $0

Now, the argument is that the $16 saved by the consumer will be spent elsewhere. This is the equivalent of “rearranging deck chairs on the Titanic.” Increased consumer spending is a function of increases in INCOME, not SAVINGS. Consumers only have a finite amount of money to spend.

If you ask me, if there’s one thing this chart shows, it’s how much further the rig count has to fall.

• Chart Shows How US Drillers Respond To Oil Price Drop (MarketWatch)

It’s no surprise that the number of U.S. oil rigs moves up and down with the price of oil, but the chart above offers an interesting glance at the relationship. Baker Hughes on Monday said the total number of U.S. rotary rigs fell by 35 to 1,840 in the week ended Dec. 26, the fifth consecutive weekly decline, bringing the total to its lowest level since April. “If OPEC’s goal is to slow U.S. oil production by dumping cheap oil into our market, they are having some success,” said Phil Flynn, senior market analyst Price Futures in Chicago. OPEC in November accelerated oil’s free fall when it refrained from cutting crude production. Saudi Arabia’s oil minister said earlier this month that a plunge to as low as $20 wouldn’t be enough to prompt a production cut.

The move has been described as a price war aimed primarily at North American shale producers, who had responded to high oil prices by ramping up production in recent years at a breakneck clip. Oil’s slide, which has seen Nymex futures, the U.S. benchmark, fall 50% from their June high above $107 to trade at five-and-a-half year lows below $54 a barrel, has been the fastest since 2008. That means rig counts will continue to decline, but the impact on supply will likely take “weeks if not months” to be reflected in hard production figures, said analysts at Commerzbank.

“Europe’s government bond markets all closed on Tuesday after another stellar year that has seen Italian and Spanish borrowing costs hit record lows and unglamorous but ultra-safe German debt enjoy its strongest year in six.”

• Chinese Stocks, Dollar And Debt The Stars Of 2014 (Reuters)

Chinese and U.S. stocks headed the list of 2014 top performers while markets elsewhere ended the year on Wednesday on a cautionary note as worries about Greece’s future served as an excuse to take profits. The U.S. dollar lost a little of the recent gains that have made it the year’s star major currency, but European bonds yields scored all-time lows following a shockingly sharp fall in Spanish inflation on Tuesday. European stocks had a steady start as they wrapped up a year that has seen a 3.5% rise for the region as a whole but also sharp divergence, with near 30% losses for debt-strained Greece and Portugal. The stand-out global equity performer has been China, where the CSI300 index looked set to end 2014 with gains of nearly 50%.

Almost all of China’s rise came in the last couple of months, as hopes for more aggressive policy stimulus to counter its economic slowdown boosted banks and brokerages. Featuring on Wednesday were hefty gains for China’s biggest train makers, China CNR and CSR Corp, after they confirmed a $26 billion merger. “China stocks have done really well this year and the dollar move has also been very interesting,” said Alvin Tan, an FX strategist at Societe Generale in London. “It barely moved against the other major currencies in the first of the year and all the big gains came in the second half.” Trade elsewhere was thinned by holidays in Japan, Thailand, South Korea and the Philippines, while many markets in Europe were either shut or finishing early.

Europe’s government bond markets all closed on Tuesday after another stellar year that has seen Italian and Spanish borrowing costs hit record lows and unglamorous but ultra-safe German debt enjoy its strongest year in six. Among the scraps of news in Europe, two polls in Greece published late on Tuesday showed the anti-bailout party Syriza’s lead over the ruling conservatives had narrowed. The dollar was on track to end 2014 with a gain of 12% against a basket of major currencies, its best performance since 2005, and anticipated U.S. interest rate hikes may strengthen its appeal in the new year. It eased against the safe haven yen to stand at 119.64 from Tuesday’s peak of 120.69, as futures prices pointed to small gains for Wall Street when trading resumes following its 13% jump to an all-time high this year. The euro was undermined by sliding European yields amid intense speculation the European Central Bank will have to start buying government bonds to avert deflation. The single currency was stuck at $1.2154 having touched a 29-month trough of $1.2123.

But it’s how they’ll be portrayed.

• We’re Not Communists, Greek Opposition Insists (CNBC)

Accusations that Greece’s far-left opposition party Syriza is “worse than communism” are propaganda, its head of economic policy insisted on Tuesday, arguing instead that the party would solve Greece’s “humanitarian crisis” if it came to power in January. Speaking to CNBC on Tuesday, John Milios said Syriza planned to stabilize Greece’s society and boost the economy. “We have to combat first the humanitarian crisis, people who don’t have the necessities — houses, food or the money for transportation,” he said. “We are confident that if we do this the economy will start to stabilize and the present turmoil will be past.” Greece’s political establishment was thrown into chaos on Monday, when its parliament’s failure to elect a president triggered an early general election – something that credit ratings agency Fitch warned on Tuesday would increase the risks to the country’s credit worthiness.

Anti-austerity Syriza appears confident that it can win the forthcoming election in January, however. Opinion polls released late on Monday showed Syriza had a 3% lead over Prime Minister Antonis Samaras’ party, although the lead has narrowed of late. But although attractive to voters, the party does not appear to be popular within the investment community. In November, an email written by Joerg Sponer, an investment analyst at Capital Group, was leaked in which he said Syriza’s policies were “worse than communism.” Sponer reportedly wrote the email after attending a conference in London in which Milios presented the party’s economic manifesto. But Milios was quick to defend his policies, saying that such comments were “government propaganda.” “This saying that we are worse than communists was not something that represented the whole climate of discussions in London. I think this… had to do with the present government and to do with propaganda,” he told CNBC Europe’s “Squawk Box” on Tuesday.

Investors are particularly concerned that a Syriza-led government could result in the undoing of the austerity policies implemented under Samaras’ present government. The party has always said it would “tear up” the tough conditions of Greece’s bailout, which were required by the troika of international creditors, the EU, IMF and ECB. The Athens stock exchange fell up to 10% on Monday, before paring some losses, and was trading 0.3% lower on Tuesday. Meanwhile, Greece’s borrowing costs remained above 9.5%. With a public debt to GDP ratio of 175.5%, the country has the highest debt in the euro zone, but Greece’s politicians are keen to calm European lenders that Greece isn’t about to default – or leave the single currency union.

Start the horror campaign.

• ‘Snap Elections Will Be Decisive For Greece’s Eurozone Future’ (Guardian)

Next month’s snap elections in Greece will be decisive for the country’s future in the eurozone, the prime minister, Antonis Samaras, said on Tuesday after requesting parliament’s dissolution. “People don’t want these elections and they aren’t necessary,” the beleaguered leader told the nation’s outgoing head of state Karolos Papoulias. “They are happening because of party self-interest … and this struggle will determine whether Greece stays in Europe.” Signalling market concerns, credit rating agency Fitch said prolonged political uncertainty could “increase the risks to Greece’s creditworthiness”. The country was forced into holding early elections after parliament failed on Monday to endorse Stavros Dimas, the government’s candidate for president.

With the debt-burdened country dependent on international rescue funds, officials said the radical left main opposition Syriza party would “pay a heavy price” for triggering the elections after joining forces with the far-right Golden Dawn to block Dimas from becoming president. Late on Monday the IMF said it would suspend aid instalments until after the 25 January poll. “People will punish those who have triggered this unnecessary turmoil, because it is obvious that Syriza has no solution [to economic problems]. It neither says where it will find the money, nor will it find the money,” said government spokeswoman Sophia Voultepsi, referring to the party’s pledge of wide-ranging social benefits if it wins power.

On the back of popular discontent over gruelling austerity, the price of €240bn (£188bn) in aid, Syriza has led polls since European elections in May. But the gap has narrowed since Samaras gambled by bringing forward the presidential election. An opinion poll on Tuesday showed a 3% lead for Syriza over Samaras’ New Democracy party. This followed the Greek finance minister Gikas Hardouvelis’ warning of economic sanctions by the European Central Bank if the anti-austerity Syriza won. Analysts predicted that Samaras, who has better personal ratings than Syriza’s leader, Alexis Tsipras, could win the elections yet.

Deflation is a fact, not a fear.

• Europe Deflation Fears Back After Weak Spain, Greece Data (CNBC)

Fears of deflation in the euro zone were heightened once again on Tuesday, after both Spain and Greece reported worse-than-expected price declines. A flash reading for consumer price index (CPI) inflation in Spain showed that prices fell by 1.1% year-on-year in December. This was below forecasts of a 0.7% drop, and followed November’s decline of 0.5%. Analysts said this month’s fall was mainly driven by weakening oil prices which could mean that other large euro zone members fall victim to deflation soon. “With a Spanish reading this low, euro area inflation might well turn negative as early as December,” said Robert Kuenzel, director of euro area economic research at Daiwa Capital Markets, in a research note on Tuesday.

Meanwhile, data out from Greece showed that producer prices declined 2.3% year-on-year in November way below October’s 0.9% fall. Consumer prices in the country fell by 1.2% in the same period. Kuenzel told CNBC that the producer price drop in Greece was worse than he expected, and was “one of the largest fall we have seen for years.” “As producer prices are more energy price-sensitive, this is still not out of line with today’s downside Spanish CPI surprise, even though that was numerically smaller,” he said via email. Brent crude oil prices fell to a 5-1/2-year low under $57 per barrel on Tuesday, extending losses into a fourth trading session. Oxford Economics has warned that a multitude of European countries face deflation next year if oil prices remain below $60, including the U.K., France, Switzerland and Italy.

Bloomberg has it all upside down.

• Will the Real Angela Merkel Please Stand Up? (Bloomberg)

If anything is certain about the new year, it is that much of the world’s stability and economic health will depend on what is done, or not done, in Europe. And what happens in Europe will depend, in large part, on German Chancellor Angela Merkel. Merkel’s leadership in 2014 was a curious mixture of boldness and timidity. It fell to her, more than any other European leader, to confront Russian President Vladimir Putin. And her efforts are what secured the unanimity among the European Union’s 28 fractious nations that was needed to impose meaningful economic sanctions to deter further Russian aggression in Ukraine. Regardless of whether those sanctions ultimately succeed, they have already served an important purpose by helping to hold the EU – with its Russophile Italians and Austrians, its Russophobe Poles and Balts – together.

As helpful as Merkel has been with Russia, however, she has so far only harmed efforts to address the faltering European economy. In 2015, as new elections in Greece bring fresh turmoil, she will need to apply some of the clarity and decisiveness she has showed in dealing with Putin to the euro zone. On both fronts, next year will be harder. Europe’s Russia challenge will get tougher, because the pressure to repeal sanctions will rise. The current measures against Russia begin to expire in March, and many European leaders will be looking for reasons not to renew them as long as something resembling a cease-fire is in place; the reduction in lending, investment and sales to Russia has hurt the European economy as well as the Russian one. Yet until there is a more meaningful settlement that ensures Putin can’t continue his semi-covert war in Ukraine, sanctions need to stay.

As for the EU, new forces for disunion will emerge. U.K. Prime Minister David Cameron will be pushing for changes in the way the bloc works that help him persuade Britons to vote against leaving it. Merkel will need to simultaneously rein Cameron in and convince other EU leaders that it would be in their interests, too, to return some powers to national governments. At the same time, the euro crisis threatens to heat up again. The favorite to win early elections in Greece next month, the neo-Marxist Syriza party, says it will refuse to carry out the further austerity measures required for the country’s remaining bailout funds. Syriza also promises to roll back economic reforms that were put in place under the terms of the country’s 240 billion euro loan program, as well as to demand a restructuring of the country’s enormous public debt. Europe’s banking system may not be as vulnerable to a Greek default as it once was, but markets have been jittery at the revived possibility of a Greek exit from the euro.

So far, Merkel has resisted relenting on austerity policies for Greece. She has been unwilling to stimulate demand in the euro area, either by boosting investment in Germany’s own low-growth economy or by letting the European Central Bank engage in large-scale quantitative easing. She should not wait for the dawn of a new government in Greece to change course on all fronts. Otherwise, Merkel may end next year not as the German leader who held Europe together, but as the one who put such strain on Europe’s currency and democracies that they began to break apart.

Sure, Barry …

• Obama Suggests Putin ‘Not So Smart’ (BBC)

President Barack Obama has said Vladimir Putin made a “strategic mistake” when he annexed Crimea, in a move that was “not so smart”. Those thinking his Russian counterpart was a “genius” had been proven wrong by Russia’s economic crisis, he said. International sanctions had made Russia’s economy particularly vulnerable to changes in oil price, Mr Obama said. He also refused to rule out opening a US embassy in Iran soon. “I never say never but I think these things have to go in steps” he told NPR’s Steve Inskeep in the Oval Office. Mr Obama was giving a wide-ranging interview with NPR shortly before leaving for Hawaii for his annual holiday. He criticised his political opponents who claimed he had been outdone by Russia’s president.

“You’ll recall that three or four months ago, everybody in Washington was convinced that President Putin was a genius and he had outmanoeuvred all of us and he had bullied and strategised his way into expanding Russian power,” he said. “Today, I’d sense that at least outside of Russia, maybe some people are thinking what Putin did wasn’t so smart.” Mr Obama argued that sanctions had made the Russian economy vulnerable to “inevitable” disruptions in oil price which, when they came, led to “enormous difficulties”. “The big advantage we have with Russia is we’ve got a dynamic, vital economy, and they don’t,” he said. “They rely on oil. We rely on oil and iPads and movies and you name it.”

“There’s still bit of way to go before we see the Chinese economy reviving ..”

• China Factory Activity Shrinks (BBC)

China’s manufacturing activity shrank for the first time in seven months in December, a private survey showed on Wednesday. The final HSBC/Markit Purchasing Managers’ Index (PMI) was at 49.6, just below the 50 level that separates growth from contraction in the sector. The reading was slightly higher than an initial “flash” number of 49.5 released earlier this month. But, the result was still down from a final reading of 50 in November. The most recent data paints an even weaker picture of the slowing Chinese economy, which has been heralded as the “factory of the world”. New factory orders contracted for the first time since April. The economic data also backs the series of surprising moves by its government to boost growth in the past two months.

In November, the country’s central bank unexpectedly cut interest rates to 2.75% for first time since 2012 in an attempt to revive the economy. Whether the world’s second biggest economy will be able to reach its growth target of 7.5% after not missing the mark for 15 years has economists questioning if more needs to be done by policymakers. While the downbeat data is not a surprise considering the preliminary reading released earlier this month, Ryan Huang, market strategist at broker IG Asia said it just adds more pressure on Beijing to introduce more measures. “There’s still bit of way to go before we see the Chinese economy reviving,” he told the BBC. “They [the central bank] have been doing [banks’] reserve requirement ratio cuts, loan to deposit ratios have been lowered to help lending conditions – we’ll probably see more of this happening.”

Boom and bust and basket.

• Japan Is Writing History As A Prime Boom And Bust Case (Grass)

Recently, we wrote a paper about the dynamics behind the boom and bust cycles, based on the view of the Austrian School (the Austrian Business Cycle Theory, or ABCT). The key takeaway was that central banks don’t help in smoothing the amplitude of the cycles, but rather are the cause of cycles. Business cycles are a direct result of excessive credit flow into the market, facilitated by an intentionally low interest rate set by the government. The problem with ongoing monetary policies is that the excessive money supply sends the wrong signals to the market, which ultimately leads to misallocation of investments or ‘malinvestments’.

On the one hand, entrepreneurs invest more and increase the depth of the production process. On the other hand, consumers spend more as saving becomes unattractive. When the excess products created through the cheap money-induced investments reach the market, consumers are unable to buy them due to the lack of prior savings. At this point the bust occurs. It is key to understand that by manipulating interest rates (particularly by lowering them), central banks create bubbles that end in busts. Japan is an excellent case study depicting the scenario discussed by the Austrian Business Cycle Theory (ABCT). In this article, we will examine the course of the economic and monetary situation in Japan from the ABCT’s point of view.

The latest quarterly GDP release in Japan was a real disaster. Economists had forecast a GDP growth between 2.2% and 2.5% but the result was a contraction of 1.6% on an annualized basis (i.e., -0.5% on a quarterly basis). That comes after a quarter in which GDP had already fallen 7.3% on an annualized basis (i.e., -1.9% on a quarterly basis). The money printing frenzy has taken gigantic proportions, and the (lack of) effectiveness of the excessive money creation is visible in the charts. The first chart below shows the annual monetary base expansion (the black line) since 1990. The GDP year-on-year growth is shown in the green line. Notice how the monetary base had exploded in 2013 but the steepness of the rise was slightly reduced in 2014. Even with this slight pull back in monetary growth, the GDP growth is truly collapsing.

The Bloomberg piece is in yesterday’s Debt Rattle. Zero Hedge has a go at digging deeper.

• The Rigging Triangle Exposed: The JPMorgan-BP-BOE Cartel (Zero Hedge)

The name Dick Usher is familiar to regular readers: he was the head of spot foreign exchange for JPMorgan, and the bank’s alleged chief FX market manipulator, who was promptly fired after it was revealed that JPM was the bank coordinating the biggest FX rigging scheme in history, as initially revealed in “Another JPMorganite Busted For “Bandits’ Club” Market Manipulation.” Subsequent revelations – which would have been impossible without the tremendous reporting of Bloomberg’s Liam Vaughan – showed that JPM was not alone: as recent legal actions confirmed, virtually every single bank was also a keen FX rigging participant. However, the undisputed ringleader was always America’s largest bank, which would make sense: having a virtually unlimited balance sheet, JPM could outlast practically any margin call, and make money while its far smaller peers were closed out of trades… and existence.

But while the past year revealed that FX rigging was a just as pervasive, if not even more profitable industry for banks than the great Libor-fixing scandal, the conventional wisdom was that it involved almost exclusively bankers at the largest global banks including JPM, Goldman, Deutsche, Barclays, RBS, HSBC, and UBS. Now, courtesy of some more brilliant reporting by Vaughan, we can finally link banks with the other two facets of what has emerged to be an unprecedented FX-rigging “triangle” cartel: private sector companies that have no direct banking operations yet who have intimate prop trading exposure, as well as central banks themselves. By “banks” we, of course, refer to the ringleader itself: JP Morgan, and its former head of spot forex trading in London, Dick Usher. As for the company that benefited from its heretofore secret participation in the biggest FX rigging scandal in history, it is none other than British Petroleum.

We learn about all this thanks to a story that begins with, of all thing, a story about freshwater fishing at a lake in Essex called “Wharf Pool.” As Bloomberg reports, “an hour away by train, in London’s financial district, the lake’s owners ply their trade. Wharf Pool was purchased for about 250,000 pounds ($388,000) in 2012 by Richard Usher, the former JPMorgan Chase & Co. trader at the center of a global investigation into corruption in the foreign-exchange market, and Andrew White, a currency trader at oil company BP Plc. ” The plot thickens: was there more than a passing connection between the head FX trader at JPM and White “who’s known in the market as Tubby, is one of half a dozen spot currency traders working for British Petroleum (BP) in London. He and his colleagues, most of them ex-bankers, decide which firms will carry out their foreign-exchange transactions. That makes them prized clients for banks seeking a slice of the business and a glimpse into potentially market-moving trades. Passing on information was a way to curry favor.”

In short, a typical Over The Counter relationship between a banker and a buyside client, one which is largely unregulated and where the bank hopes to be able to frontrun the client’s orders by providing the client with confidential market moving information, thus generating more business with the client in the future. In this case, however, the buyside client was not a typical hedge fund, but the FX trading group at one of the world’s largest energy companies: a group which trades enormous amounts of FX every single day, both with intent to hedge, and to generate a profit.

Because BP had no idea!

• BP Probes In-House Foreign Exchange Traders (FT)

BP is investigating whether in-house financial traders at the oil and gas group were involved in a foreign exchange manipulation scandal that has led regulators to levy $4.3 billion in fines on six banks. The UK group launched an internal review of its currency trading operations in London last year when regulators first started probing banks over their foreign exchange activities. A person familiar with the situation said the inquiry was “ongoing”. Additional questions about the potential involvement of BP’s traders in alleged attempts to rig the world’s $5.3 trillionn-a-day forex markets have been prompted by a Bloomberg report that bank employees tipped off the oil and gas group ahead of some big currency trades.

Bloomberg cited three undated messages sent to BP’s traders by the powerful network of senior foreign-exchange traders calling themselves “The Cartel” at four banks — JPMorgan, Barclays, UBS and Citigroup. It said BP was given “valuable information” about planned currency trades “sometimes hours before they happened”. But it could not be determined whether any BP employees acted on any information received. BP is not being investigated by financial regulators, said people familiar with the situation. But the report raises uncomfortable questions for the group at a time when it is being scrutinised as part of the European Commission probe into potential price fixing in oil markets.

Familiar topic, good story.

• The Prison State of America (Chris Hedges)

Prisons employ and exploit the ideal worker. Prisoners do not receive benefits or pensions. They are not paid overtime. They are forbidden to organize and strike. They must show up on time. They are not paid for sick days or granted vacations. They cannot formally complain about working conditions or safety hazards. If they are disobedient, or attempt to protest their pitiful wages, they lose their jobs and can be sent to isolation cells. The roughly 1 million prisoners who work for corporations and government industries in the American prison system are models for what the corporate state expects us all to become. And corporations have no intention of permitting prison reforms that would reduce the size of their bonded workforce. In fact, they are seeking to replicate these conditions throughout the society.

States, in the name of austerity, have stopped providing prisoners with essential items including shoes, extra blankets and even toilet paper, while starting to charge them for electricity and room and board. Most prisoners and the families that struggle to support them are chronically short of money. Prisons are company towns. Scrip, rather than money, was once paid to coal miners, and it could be used only at the company store. Prisoners are in a similar condition. When they go broke—and being broke is a frequent occurrence in prison—prisoners must take out prison loans to pay for medications, legal and medical fees and basic commissary items such as soap and deodorant. Debt peonage inside prison is as prevalent as it is outside prison.

States impose an array of fees on prisoners. For example, there is a 10% charge imposed by New Jersey on every commissary purchase. Stamps have a 10% surcharge. Prisoners must pay the state for a 15-minute deathbed visit to an immediate family member or a 15-minute visit to a funeral home to view the deceased. New Jersey, like most other states, forces a prisoner to reimburse the system for overtime wages paid to the two guards who accompany him or her, plus mileage cost. The charge can be as high as $945.04. It can take years to pay off a visit with a dying father or mother.

Fines, often in the thousands of dollars, are assessed against many prisoners when they are sentenced. There are 22 fines that can be imposed in New Jersey, including the Violent Crime Compensation Assessment (VCCB), the Law Enforcement Officers Training & Equipment Fund (LEOT) and Extradition Costs (EXTRA). The state takes a percentage each month out of prison pay to pay down the fines, a process that can take decades. If a prisoner who is fined $10,000 at sentencing must rely solely on a prison salary he or she will owe about $4,000 after making payments for 25 years. Prisoners can leave prison in debt to the state. And if they cannot continue to make regular payments—difficult because of high unemployment—they are sent back to prison. High recidivism is part of the design.

The gift that never stops giving.

• Recolonizing Africa: A Modern Chinese Story? (CNBC)

China, one of the world’s largest ’emerging’ investors, is ramping up investment in Sub Saharan Africa as it searches for natural resources, but whether the benefits are mutually beneficial is questionable. China’s economic growth has been a key narrative in the story of economic miracle over the past two decades. (Its foreign direct investment) FDI in particular has played a prominent role in economic interactions with many developing countries. Once a major recipient of FDI, it’s now one of the largest ’emerging’ investors, especially in Sub Saharan Africa countries, it has investments being in Nigeria, Sudan, South Africa and Angola among others.

The Asian economic super power is in pursuit of oil, gas, precious metals and mining to diversify its energy resource import’s pool; it requires other resources to sustain its manufacturing capabilities. Africa can offer all of these things to the world’s second largest economy: about 40% of global reserves of natural resources, 60% of uncultivated agricultural land, a billion people with rising purchasing power and a potential army of low-wage workers. Like many emerging markets, African countries are one of the fastest growing markets and profitable outlets for exported manufactured goods. In the past, the U.K. and France were the prime trade partners for Africa, however, today, China is Africa’s top bi-lateral trading partner with trade volume exceeding $166 billion. Between years 2003 and 2011, its FDI in the continent has increased thirty fold from $491 million to $14.7 billion.

This is more than just a trend. Not a long time ago, China eyed areas in Africa where resources were abundant and easy to extract. It focused on resource-rich countries such as Algeria, Nigeria, South Africa, Sudan and Zambia. Today, Sino-African investment focus has become broader. China is branching out into non-resource-rich investments, focusing on countries such as Ethiopia and Congo. Higher margins have attracted many state-owned enterprises and private companies to compete on gaining dominion in the vast continent. Oil, gas, metals and minerals constitute three-quarters of African-exports to China. Chinese Imports to Africa are more diverse, mostly comprised of manufactured goods.

The impact of Ebola will take us completely back to it being a basket case ..”

• Ebola Wrecks Years Of Aid Work In Worst-Hit Countries (Reuters)

Ebola is wrecking years of health and education work in Sierra Leone and Liberia following their civil wars, forcing many charity groups to suspend operations or re-direct them to fighting the epidemic. More than a decade of peace and quickening economic growth had raised hopes that the nations could finally reduce their dependency on foreign aid and budgetary support; now Ebola has undermined those achievements, charity workers and officials say. “The impact of Ebola will take us completely back to it being a basket case,” said Rocco Falconer, CEO of educational charity Planting Promise in Sierra Leone. “The impact on some activities have been simply catastrophic.”

The two countries worst hit by Ebola have struggled to recover from the wars that raged through the 1990s until early in the 21st century, killing and maiming tens of thousands, and devastating already poor infrastructure. In Sierra Leone, aid made up one-fifth of economic output in 2010, according to officials, though this had been shrinking as growth accelerated thanks to a boom in the country’s commodities exports. Britain and the European Union are the main donors with funds directed to health, education and social assistance. But Planting Promise’s experience typifies the problems of non-government organisations (NGOs) since Ebola hit West Africa, infecting more than 20,000 people and killing nearly 8,000.

It had spent six years in Sierra Leone developing farms and using the profits to fund local schools. The project had just become self-financing for the first time when the outbreak was detected in March. After that, things fell apart. Planting Promise was forced to withdraw its expatriate staff in June and the following month it closed its five primary schools where nearly 1,000 pupils had studied. It has also shut down its food processing factory. Though sales have dived, it continues to pay about 120 staff, eating into its reserves. This has forced the group to return “cap in hand” to donors to ask for more money, Falconer said.

MUST. READ.

• Protecting Money or People? (James K. Boyce)

The latest round of international climate talks this month in Lima, Peru, melting glaciers in the Andes and recent droughts provided a fitting backdrop for the negotiators’ recognition that it is too late to prevent climate change, no matter how fast we ultimately act to limit it. They now confront an issue that many had hoped to avoid: adaptation. Adapting to climate change will carry a high price tag. Sea walls are needed to protect coastal areas against floods, such as those in the New York area when Superstorm Sandy struck in 2012. We need early-warning and evacuation systems to protect against human tragedies, such as those caused by Typhoon Haiyan in the Philippines in 2013 and by Hurricane Katrina in New Orleans in 2005.

Cooling centers and emergency services must be created to cope with heat waves, such as the one that killed 70,000 in Europe in 2003. Water projects are needed to protect farmers and herders from extreme droughts, such as the one that gripped the Horn of Africa in 2011. Large-scale replanting of forests with new species will be needed to keep pace as temperature gradients shift toward the poles. Because adaptation won’t come cheap, we must decide which investments are worth the cost. A thought experiment illustrates the choices we face. Imagine that without major new investments in adaptation, climate change will cause world incomes to fall in the next two decades by 25% across the board, with everyone’s income going down, from the poorest farmworker in Bangladesh to the wealthiest real estate baron in Manhattan. Adaptation can cushion some but not all of these losses.

What should be our priority: reduce losses for the farmworker or the baron? For the farmworker, and a billion others in the world who live on about $1 a day, this 25% income loss will be a disaster, perhaps the difference between life and death. Yet in dollars, the loss is just 25 cents a day. For the land baron and other “one-percenters” in the U.S. with average incomes of about $2,000 a day, the 25% income loss would be a matter of regret, not survival. He’ll find a way to get by on $1,500 a day. In human terms, the baron’s loss pales compared with that of the farmworker. But in dollar terms, it’s 2,000 times larger.

Here’s what increasing debt can give you – until it no longer can.

• Goodbye To One Of The Best Years In History (Telegraph)

Newspapers can seem like a rude intrusion into the Christmas holidays. We celebrate peace, goodwill and family – and then along come the headlines, telling us what’s going wrong in the world. Simon and Garfunkel made this point in 7 O’Clock News/Silent Night, a song juxtaposing a carol with a newsreader bringing bad tidings. But this is the nature of news. Whether it’s pub gossip or television bulletins, we’re more interested in what’s going wrong than with what’s going right. Judging the world through headlines is like judging a city by spending a night in A&E – you only see the worst problems. This may have felt like the year of Ebola and Isil but in fact, objectively, 2014 has probably been the best year in history.

Take war, for example – our lives now are more peaceful than at any time known to the human species. Archaeologists believe that 15% of early mankind met a violent death, a ratio not even matched by the last two world wars. Since they ended, wars have become rarer and less deadly. More British soldiers died on the first day of the Battle of the Somme than in every post-1945 conflict put together. The Isil barbarity in the Middle East is so shocking, perhaps, because it comes against a backdrop of unprecedented world peace. We have recently been celebrating a quarter-century since the collapse of the Berlin Wall, which kicked off a period of global calm.

The Canadian academic Steven Pinker has called this era the “New Peace”, noting that conflicts of all kinds – genocide, autocracy and even terrorism – went on to decline sharply the world over. Pinker came up with the phrase four years ago, but only now can we see the full extent of its dividends. With peace comes trade and, ergo, prosperity. Global capitalism has transferred wealth faster than foreign aid ever could. A study in the current issue of The Lancet shows what all of this means. Global life expectancy now stands at a new high of 71.5 years, up six years since 1990. In India, life expectancy is up seven years for men, and 10 for women. It’s rising faster in the impoverished east of Africa than anywhere else on the planet. In Rwanda and Ethiopia, life expectancy has risen by 15 years.

This helps explain why Bob Geldof’s latest Band Aid single now sounds so cringingly out-of-date. Africans certainly do know it’s Christmas – a Nigerian child is almost twice as likely to mark the occasion by attending church than a British one. The Ebola crisis has led to 7,000 deaths, each one a tragedy. But far more lives have been saved by the progress against malaria, HIV and diarrhoea. The World Bank’s rate of extreme poverty (those living on less than $1.25 a day) has more than halved since 1990, mainly thanks to China – where economic growth and the assault on poverty are being unwittingly supported by any parent who put a plastic toy under the tree yesterday.

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