Feb 162017
 
 February 16, 2017  Posted by at 10:31 am Finance Tagged with: , , , , , , , , ,  2 Responses »
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Pablo Picasso Femme 1930

 

 

Great read from Ed. “..while Brazil and Greece faced the same type of downturn in dollar terms — about 45% in GDP per person — Brazilian living standards only deteriorated about 2%, compared to 26% in Greece.” Good part on Dutch elections too.

Europe’s Delusional Economic Policies (Edward Harrison)

This chart encapsulates the narrative in Matt’s post – namely that Greece has underperformed other emerging market crisis countries on post-crisis growth. Here’s how Matt put it: Greece had a very different post-crisis experience: it never recovered. By contrast, all the other countries were well past their pre-crisis peak after this much time had elapsed. On average, Argentina, Brazil, Indonesia, Thailand, and Turkey have outperformed Greece by more than 40 percentage points after nine years. The reasonable question is why. Matt answers that in the paragraph before, saying: “But unlike those countries, Greece lacked the ability to use the exchange rate as a shock absorber. So while Brazil and Greece faced the same type of downturn in dollar terms — about 45% in GDP per person — Brazilian living standards only deteriorated about 2%, compared to 26% in Greece. The net effect is that Greece had a relatively typical crisis in dollars but an unprecedently painful one in the terms that matter most”.

My view is that what we are seeing, therefore, is the difference monetary sovereignty can make in post-crisis recovery because the currency does a lot of the heavy lifting. And this is true for developed economies as well. For example, we saw the UK and Sweden recover after a housing bubble and EMU turmoil in the early 1990s in part because of currency depreciations. But of course, Greece doesn’t have its own currency so the currency can’t depreciate. Greece must use the internal devaluation route, which makes its labor, goods and services cheaper through a deflationary path – and that is very destructive to demand, to growth, and to credit. This, in my view, accounts for much of Greece’s underperformance relative to emerging market crisis countries.

In response to my tweet on Greece, Danish economist Lars Christensen pointed out to me that he had compared Greece to Turkey in 2015 and Greece came out poorly too. And his post noted that: “14 years later Turkey is still in many ways politically dysfunctional – in fact it has gotten worse in recent years – there has been rumours of plans of military coups, there has been major corruption scandals even involving the Prime Minister (now president Erdogan) and the governing AKParty and lately the civil war in Syria has created a massive inflow of refugees and increased tensions with Turkish Kurdish population.” Translation: it’s not about reforms, people. It’s about growth. And the euro – and the policies tied to membership – is anti-growth, particularly for a country like Greece that is forced to hit an unrealistic 3.5% primary surplus indefinitely. And there will be no debt forgiveness either, as the IMF has said is necessary.

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The WaPo takes a break from its political campaign and shows it still has at least one person left who can write an actual -and execellent- report.

Austerity Was A Bigger Disaster Than We Thought (WaPo)

We now take a break from your regularly scheduled scandals to bring you some not-so-breaking news: austerity was as big a disaster as its biggest critics said it was. That, at least, is what economists Christopher House and Linda Tesar of the University of Michigan and Christïan Proebsting of the École Polytechnique Fédérale de Lausanne found when they looked at Europe’s budget-cutting experience the last eight years. It turns out that cutting spending right after the worst crisis in 80 years only led to a lower GDP and, in the most extreme cases, higher debt-to-GDP ratios. That’s right: trying to reduce debt levels sometimes increased debt burdens. Other than that, how was the policy, Mrs. Lincoln? But let’s back up a minute. This isn’t something that’s always true. In fact, it almost never used to be.

Cutting spending, you see, shouldn’t be a problem as long as you can cut interest rates too. That’s because lower borrowing costs can stimulate the economy just as much as lower government spending slows it down. What happens, though, if interest rates are already zero, or, even worse, you’re part of a currency union that means you can’t devalue your way out of trouble? Well, nothing good. House, Tesar and Proebsting calculated how much each European economy grew — or, more to the point, shrank — between the time they started cutting their budgets in 2010 and the end of 2014, and then compared it with what actually realistic models say would have happened if they hadn’t done austerity or adopted the euro.

According to this, the hardest-hit countries of Greece, Ireland, Italy, Portugal and Spain would have contracted by only 1% instead of the 18% they did if they hadn’t slashed spending; by only 7% if they’d kept their drachmas, pounds, liras, escudos, pesetas and the ability to devalue that went along with them if they hadn’t become a part of the common currency and outsourced those decisions to Frankfurt; and only would have seen their debt-to-GDP ratios rise by eight percentage points instead of the 16 they did if they hadn’t tried to get their budgets closer to being balanced. In short, austerity hurt what it was supposed to help, and helped hurt the economy even more than a once-in-three-generations crisis already had.

[..] the euro really has been a doomsday device for turning recessions into depressions. It’s not just that it caused the crisis by keeping money too loose for Greece and the rest of them during the boom and too tight for them during the bust. It’s also that it forced a lot of this austerity on them. Think about it like this. Countries that can print their own money never have to default on their debts — they can always inflate them away instead — but ones that can’t, because, say, they share a common currency, might have to. Just the possibility of that, though, can be enough to make it a reality. If markets are worried that you might not be able to pay back your debts, they’ll make you pay a higher interest rate on them — which might make it so that you really can’t. In other words, the euro can cause a self-fulfilling prophecy where countries can’t afford to spend any more even though spending any less will only make everything worse.

That’s actually a pretty good description of what happened until the ECB belatedly announced that it would do “whatever it takes” to put an end to this in 2012. Which was enough to get investors to stop pushing austerity, but, alas, not politicians. It’s a good reminder that you should never doubt that a small group of committed ideologues can destroy the economy. Indeed, it’s the only thing that ever has. That’s true whether you’re talking about the European politicians who pushed for the creation of the euro itself – they ignored the economists who warned them that it might turn out just as badly as it has – or the ones who pushed for austerity a few decades later. After all, it shouldn’t have been a surprise that trying to balance your budget when interest rates were zero would end badly.

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What’s lacking in Europe is self-reflection. Maybe that’s because it has no flexibility in its policies. But that still doesn’t make Malloch wrong.

‘The European Project Has Failed’ – Trump EU Envoy Pick Malloch (Exp.)

Donald Trump’s likely EU ambassador has launched a blistering attack on the “undemocratic” bloc and its “elitist” leaders.In comments that will terrify Brussels, Ted Malloch said the EU had become “bloated” by bureaucracy and “anti-Americanism”. And he called for member states to hold their own Brexit-style referendums – which could spark the break-up of the union. It comes after Mr Trump hailed Brexit as a “blessing to the world” and said the UK would be far stronger outside the bloc. Mr Malloch, who is the President’s pick to become Washington’s envoy to Brussels, made the comments in The Parliament magazine.

He said: “Put the EU to a referendum vote in every member country. “It is time for greater scepticism and realism about the European Union and its not so hidden agenda and ever closer union.” He added: “The failure of the European integration project should by now be self-apparent to everyone. “This is simply not something Churchill or Roosevelt would countenance. “The European Union has become undemocratic and bloated by both bureaucracy and rampant anti-Americanism.” He said: “We want democracy and accountability, while the EU is intrinsically undemocratic and unaccountable. “So should the US continue to promote such a damaged European model, which is alien to our own traditions? Is it not working against US interests to do so?”

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It may be an option considered fleetingly, but that’s it.

Greece ‘May Ditch Euro In Favour Of The Dollar’ – Malloch (Ind.)

The man tipped to be Donald Trump’s ambassador to the European Union has said that Greece is contemplating leaving the euro in favour of the US dollar. According to the transcript of a translated interview with Greek local online news site ekathimerini.com, Professor Ted Malloch claimed Greek economists are looking into taking on the US banknotes if the country turns its back on the European single currency in a move that he said would “freak out” Germany. He said: “I know some Greek economists who have even gone to leading think tanks in the US to discuss this topic and the question of dollarisation. “Such a topic of course freaks out the Germans because they really don’t want to hear such ideas.”

Mr Malloch added that a “Grexit” would be the best options for Greek people as the current situation is “unsustainable”. Mr Malloch, a strident Brexiteer, has indicated he is no fan of Brussels on several occasions. Earlier this month, in an interview with Bloomberg, Mr Malloch said that he didn’t want to speak on behalf of the Greek people but “I think there is probably – from an economist’s perspective – a very strong reason for Greece moving away from the euro.” Last month, Mr Malloch said the euro “could collapse” in the next 18 months. “The one thing I would do in 2017 is short the euro,” he said. “I think it is a currency that is not only in demise but has a real problem and could in fact collapse in the coming year, year and a half,” he added.

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‘He will die in jail’:

US Intelligence Community Ready To ‘Go Nuclear’ On Trump (RawS)

U.S. national security officials are reportedly ready to “go nuclear” after President Donald Trump’s latest attack on the intelligence community. In a series of tweets on Tuesday and Wednesday, Trump insisted that the “real scandal” was not that former National Security Adviser Michael Flynn lied about his contact with Russia. Instead, the president blasted what he said were “un-American” leaks that led to Flynn’s ousting.On Wednesday, former NSA intelligence analyst John Schindler provided some insight into the reaction of national security officials. “Now we go nuclear,” he wrote on Twitter. “[Intelligence community] war going to new levels. Just got an [email from] senior [intelligence community] friend, it began: ‘He will die in jail.’” “US intelligence is not the problem here,” Schindler added in another tweet. “The President’s collusion with Russian intelligence is. Many details, but the essence is simple.”

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No matter where you stand, this must be of concern. A state within the state is not what the founders had in mind.

Spies Keep Intelligence From Donald Trump on Leak Concerns (WSJ)

U.S. intelligence officials have withheld sensitive intelligence from President Donald Trump because they are concerned it could be leaked or compromised, according to current and former officials familiar with the matter. The officials’ decision to keep information from Mr. Trump underscores the deep mistrust that has developed between the intelligence community and the president over his team’s contacts with the Russian government, as well as the enmity he has shown toward U.S. spy agencies. On Wednesday, Mr. Trump accused the agencies of leaking information to undermine him. In some of these cases of withheld information, officials have decided not to show Mr. Trump the sources and methods that the intelligence agencies use to collect information, the current and former officials said.

Those sources and methods could include, for instance, the means that an agency uses to spy on a foreign government. A White House official said: “There is nothing that leads us to believe that this is an accurate account of what is actually happening.” A spokesman for the Office of Director of National Intelligence said: “Any suggestion that the U.S. intelligence community is withholding information and not providing the best possible intelligence to the president and his national security team is not true.” Intelligence officials have in the past not told a president or members of Congress about the ins and outs of how they ply their trade. At times, they have decided that secrecy is essential for protecting a source, and that all a president needs to know is what that source revealed and what the intelligence community thinks is important about it.

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Fewer reserve requirements means less Treasury appetite.

How Trump Could Trigger A Massive Wave Of Selling In The Treasury Market (CNBC)

Since the financial crisis, banks have been stockpiling Treasurys because they qualify as “safe” assets that count toward required regulatory capital levels. U.S. commercial banks now hold $2.4 trillion in government debt and agency securities, more than double the total from nine years ago, according to the St. Louis Fed. But House Republicans – with the support of the administration – are pushing to roll back parts of the Dodd-Frank regulations that were put in place after the 2008 financial crisis. That means banks could get a reprieve from those capital level requirements, and they could reduce their Treasury holdings as a result. In a report, RBC managing director and banking analyst Gerard Cassidy calculates the 24 largest bank holding companies already hold $100 billion in excess capital, with Citigroup and JPMorgan Chase having the highest dollar amount.

As regulation eases, the capital that was once used as a large cushion against a future recession could be funneled into stock buybacks. Those Treasury-heavy portfolios “will certainly be the source of cash to use to buy back stock,” Cassidy wrote in an e-mail to CNBC. Banks have already been slowly selling off the debt, which causes yields to rise. Between the middle of 2013 and 2014, Bank of America’s holdings of U.S. Treasurys grew from $2.9 billion to $58 billion. At the end of 2016, that figure had dropped to $48 billion, according to the bank’s earnings. Wells Fargo’s $26 billion Treasury balance in September is down nearly 30% from a year ago. Not all banks break out the specific balance, but the totals as of the third quarter of 2016 range from $23 billion (Morgan Stanley) to $111 billion (Citigroup).

But banks are just one source of possible selling en masse. China is a creditor of a different magnitude: The country held $1.05 trillion in Treasurys as of November, down by $215 billion from a year earlier. It dumped $41 billion in U.S. debt in October alone, a move that relinquished its ranking as the largest foreign creditor to the United States. One reason for the country selling U.S. debt previously was its need to raise cash to prop up its currency, the yuan, after years of seeking to devalue it to make its exports more attractive. Its intervention in the currency markets led President Donald Trump, while campaigning, to label China a currency manipulator and threaten a 45% tariff on products made in China but sold in the United States.

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Interesting phenomenon, but the writers have a hard time explaining.

Houses as ATMs No Longer (NYFed)

Housing equity is the primary form of collateral that households use for borrowing. This makes it a potentially important source of consumption funding, especially for younger households. In a previous post we showed that owner’s equity in residential real estate has finally, thanks to increasing home prices, rebounded to and essentially re-attained its 2005 peak level. Yet in spite of a gain of more than $7 trillion in housing equity since 2012, so far homeowners haven’t been tapping this equity at anything like the pace we witnessed during the housing boom that ended in 2006. In this post, we analyze the changes in equity withdrawal.

The blue line in the chart below shows total owner’s equity in real estate from the Flow of Funds—this is the same series as in our previous post. It shows a dramatic rebound in aggregate home equity over the last several years. The red line shows the combination of two ways that households can withdraw equity—assuming they have some—without selling the house: they can originate a junior lien against the property or they can refinance using a cash-out refinancing of an existing first-lien mortgage. The series in the chart, which we have shown in an earlier post on household debt, captures both of these, while excluding the equity withdrawal associated with selling a home.

The first observation that’s striking about the chart is the dramatic change in borrower behavior with respect to home equity. During the boom between 2000 and 2006, household equity and its extraction were both rising rapidly. From 2003 to 2007, homeowners were extracting more than $350 billion per year, resources that were available for use in a variety of purposes from home improvement to consumption. The second major point of the chart is the effect of the housing and financial crises. Beginning in 2008, equity extraction began to decline quickly and was hovering around zero by 2010, where it remained through 2012. The virtual elimination of equity withdrawal was a big contributor to the household deleveraging that ultimately shaved more than $1.5 trillion from household debt. It also likely contributed to the sharp decline of consumption during the Great Recession and its subsequent sluggish recovery.

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Looks dangerous. Fighting bubbles with bigger bubbles is always a bad idea.

Fed Frets about $2 Trillion Commercial Real Estate Bubble (WS)

Boom and bust: that’s the material CRE is made of. We had seven years of boom, and now the Fed is worried about the bust. Yellen didn’t mention CRE in her prepared testimony on Tuesday before the Senate Committee on Banking, Housing, and Urban Affairs. But it featured in the twice-yearly report that the Fed delivered to Congress in support of Yellen’s testimony. And it wasn’t the first time that it was mentioned in these twice-yearly reports – but the fifth time in a row. In its February report two years ago, the Fed first pointed at “valuation pressures” in CRE. And warnings about CRE have appeared since then in every report, twice a year, with growing sharpness, including in the report issued in June 2016, which warned that “valuations in the CRE sector appear increasingly vulnerable to negative shocks….”

Other Fed governors have also warned about the CRE boom and a potential bust, particularly Boston Fed governor Eric Rosengren, who was gazing with amazement at a stunning crane forest in his own city. What concerns the Fed about CRE aren’t the valuations per se, but the fact that the sector is highly leveraged, and that when prices collapse, which they tend to do, the collateral value gets crushed, and banks are left to twist in the wind. That’s what happened during the Financial Crisis. Just how badly can prices get crushed? The national averages hide the drama that happens on the ground in particular cities. But even these national averages still show enough drama, as per data from the Green Street Commercial Property Price Index. The index shows that overall prices across the major markets in the nation plunged nearly 40% during the Great Recession and have since more than doubled:

So that’s why the Fed is fretting about it. This time around, the Fed report said: “Commercial real estate (CRE) valuations, which have been an area of growing concern over the past year, rose further, with property prices continuing to climb and capitalization rates decreasing to historically low levels.” Then the report discusses the debt that nurtured this boom to these heights. This debt has ballooned to $1.98 trillion, and is now 14% higher than during the crazy peak of the prior bubble that collapsed with such spectacular results:

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All of a sudden Hamon has 38%?! Oh wait, the numbers don’t add up at all. More countries should discuss their colonial past- and present.

France’s Colonial Past Muscles Into Presidential Race (AFP)

French presidential frontrunner Emmanuel Macron drew a storm of criticism Wednesday after calling France’s colonisation of Algeria a “crime against humanity”. In a TV interview in Algiers this week, the centrist said French actions in Algeria, which achieved independence in 1962 after eight years of war, were “genuinely barbaric, and constitute a part of our past that we have to confront by apologising”. His visit also included a stop at the Martyrs’ Memorial in Algiers, saying he wanted to promote a “reconciliation of memories” between the two countries. His rivals on the right for the French presidency – due to be decided in a first round election in April and a run-off between the two top candidates in May – pounced on the comments.

Les Republicans candidate Francois Fillon on Wednesday denounced what he called “this hatred of our history, this perpetual repentance that is unworthy of a candidate for the presidency of the republic”. Wallerand de Saint-Just, an official in Marine Le Pen’s far-right National Front party, accused Macron of “shooting France in the back”, while Gerald Darmanin, an ally of ex-president Nicolas Sarkozy, tweeted “Shame on Emmanuel Macron for insulting France while abroad”. It was the not the first time Macron, who currently leads the polls for the two rounds of voting in April and May, has touched on the livewire issue. “Yes, there was torture in Algeria, but there was also the emergence of a state, or wealth, of a middle class,” he told the magazine Le Point in October.

“This is the reality of colonialism. There are elements of civilisation and elements of barbarism.” And Fillon has been tripped up by his own comments on French colonialism. In August, he drew claims of trying to sanitise history, claiming that “France is not guilty of having wanted to share its culture with the peoples of Africa”. Macron remains the frontrunner in the presidential race, with 39% of those surveyed in the latest survey by pollsters Ipsos giving him a favourable opinion. In the poll released by the magazine Le Point on Wednesday, Macron was followed by Socialist candidate Benoit Hamon, with 38%, while Fillon tumbled 18 percentage points to 25%, just behind Le Pen, on 26%.

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One step away from a formal investigation. Does he really want it that bad?

French Prosecutor Keeps Fillon Fake Work Probe Open (R.)

France’s financial prosecutor announced on Thursday that an investigation into fake work allegations surrounding presidential candidate Francois Fillon would remain open, in a new blow to the ex-prime minister’s campaign. A three week-old scandal over hundreds of thousands of euros in taxpayers’ money which his wife was paid for work she may not have done has cost conservative Fillon his status as favorite to win the French presidency in May. “It is my duty to affirm that the numerous elements collected (by investigators) do not, at this stage, permit the case to be dropped,” prosecutor Eliane Houlette said in a statement, after receiving an initial police report on the subject.

The prosecutor did not announce any further steps, but among the choices before it are dropping the case, taking it further by appointing an investigating magistrate, or sending it straight to trial. Fillon, 62, has said he would step down should he be put under formal investigation, but his camp has also challenged the legitimacy of the probe. The first round of the election is less than 10 weeks away.

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Nov 282016
 
 November 28, 2016  Posted by at 8:38 am Finance Tagged with: , , , , , , , , , , , ,  Comments Off on Debt Rattle November 28 2016
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NPC Hendrick Motor Co., Carroll Avenue, Takoma Park, Maryland 1928


US Shoppers Spend 3.5% Less Over Holiday Weekend (R.)
Some Of The Biggest UK Banks May Not Clear New Public Stress Tests (BBG)
China’s Bad Banks Serve Zombies, Not Investors (BBG)
PBOC Deputy Governor Talks Up Yuan Strength (CNBC)
Modi’s Rural Supporters May Not Hang On Much Longer (BBG)
India’s Modi Calls For Move Towards Cashless Society (R.)
Greek Banks Call For Taxing Cash Withdrawals (Kath.)
Trump Faces Dilemma As US Oil Reels From Record Biofuels Targets (R.)
Oil Trades Near $46 Amid Skepticism OPEC to Reach Output Deal (BBG)
Fillon Would Beat Le Pen in Both Rounds of Election – Polls (BBG)
Renzi Faces Pressure To Stay In Office As Italy Referendum Defeat Looms (R.)
Recount: Losers Who Won’t Lose (Mehta)

 

 

There’ll be a deluge of data on this coming out where everyone can find their favorite numbers. Everybody happy!

US Shoppers Spend 3.5% Less Over Holiday Weekend (R.)

Early holiday promotions and a belief that deals will always be available took a toll on consumer spending over the Thanksgiving weekend as shoppers spent an average of 3.5% less than a year ago, the National Retail Federation said on Sunday. The NRF said its survey of 4,330 consumers, conducted on Friday and Saturday by research firm Prosper Insights & Analytics, showed that shoppers spent $289.19 over the four-day weekend through Sunday compared to $299.60 over the same period a year earlier. The survey found that 154 million people made purchases over the four days, up from 151 million a year ago. However, there was a 4.2% rise in consumers who shopped online and a 3.7% drop in shoppers who purchased in a store.

The U.S. holiday shopping season is expanding, and Black Friday is no longer the kickoff for the period it once was, with more retailers starting holiday promotions as early as October and running them until Christmas Eve. NRF Chief Executive Officer Matt Shay said the drop in spending is a direct result of the early promotions and deeper discounts offered throughout the season. “Consumers know they can get good deals throughout the season and these opportunities are not a one-day or one-weekend phenomenon and that has showed up in shopping plans,” he said. Shay said more 23% of consumers this year have not even started shopping for the season, which is up 4% from last year and indicates those sales are yet to come. The NRF stuck to its forecast for retail sales to rise 3.6% this holiday season, on the back of strong jobs and wage growth.

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That graph is full-tard baseless and ridiculous.

Some Of The Biggest UK Banks May Not Clear New Public Stress Tests (BBG)

The Bank of England added a new, higher bar to its third round of public stress tests. Some of the U.K.’s biggest banks will scrape through; others may not clear it. The seven major British lenders tested will probably beat the lowest measures of strength required to pass the annual BOE health check when it is released Wednesday, Autonomous Research aid in a note this month. RBS and Barclays risk a “soft fail” of tougher thresholds set for lenders deemed to be integral to the global banking system, they said. HSBC and Standard Chartered’s results may be rattled by a Chinese recession scenario.

Each bank now must top its individual hurdle rate and a new threshold, called the systemic reference point, that takes into account the potential global repercussions if the lender collapses. Firms that fall short of either measure will have to boost their capital ratios, though the BOE will force them to take “less intensive” action if they only miss the SRP. “With bank investing these days, you need to be more cognizant of the economy, the rate environment and crucially of the regulator,” especially if one bank does much worse than its peers in a stress test, said Barrington Pitt Miller at Janus Capital in Denver.

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It’s what they’re for.

China’s Bad Banks Serve Zombies, Not Investors (BBG)

China’s zombie companies can rest easy. It’s a shame the same can’t be said for investors in the nation’s banks.The big five lenders, starting with Agricultural Bank of China, plan to set up bad banks that will convert soured debt to equity. Agricultural Bank, Industrial & Commercial Bank of China, Bank of China, China Construction Bank and Bank of Communications will fork out 10 billion yuan ($1.5 billion) each to establish the asset-management companies, Caixin magazine reported. That banks are forging ahead with debt-to-equity swap plans, albeit via asset-management firms they happen to own, is great news for all those struggling steel and construction companies facing potential closure.

State Council guidelines issued last month indicate that zombie corporations – those ailing state firms plagued by overcapacity – can’t count on bailouts, but it’s difficult to determine which ones are actually destined for the scrapheap.The nation’s top lenders, also all backed by Beijing, are unlikely to want to be seen as responsible for mass unemployment by refusing to rescue companies, no matter how dire their situation. In fact, those companies may have an even better chance of getting capital infusions, considering financial institutions will probably be keen to use their investment-banking units to help monetize equity assets.On the face of it, bank investors might also feel relieved that lenders are farming out bad debt to distinct vehicles.

Using an asset-management company should ensure that the equity resulting from the bad-debt switch doesn’t sit on a bank’s balance sheet. That will help lenders conserve precious capital: Had the equity been on their books, they would have had to apply a risk weighting of 400%, and get special approval from the State Council. Structuring it this way will also allow banks to maintain their much-coveted dividends. But dig a bit deeper and you realize this isn’t a scenario that will necessarily play out well, and not just because equity stakes, even those held at arm’s length, are inherently riskier than loans.For one, how will these asset-management firms be funded long term?

The answer is probably by the banks themselves.According to the State Council, the debt-to-equity swaps can be financed by “social capital,” a catch-all phrase that generally includes high-yielding wealth-management products. Those investment structures come with an implicit guarantee from the banks that issue them, as lenders have found in the past when they’ve had to rescue funds in trouble. It’s ironic that just as authorities have been trying to rein in shadow banking, the debt-to-equity swap plan provides an added reason to gorge.

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They even push up the yuan a tad to coincide with the publication of the remarks. All under control.

PBOC Deputy Governor Talks Up Yuan Strength (CNBC)

Comparing the yuan’s recent moves against the dollar misses the currency’s underlying strength of the against a more appropriately watched basket, People’s Bank of China (PBOC) Deputy Governor Yi Gang said in remarks released on Chinese state-run media at the weekend. In a question-and-answer format interview with Xinhua news agency that was posted on the central bank’s website, Yi said the yuan remained a strong and stable currency in the global monetary system, while noting concerns about a slide against the dollar after Donald Trump’s victory in the Nov. 8 presidential election. The yuan plunged to eight-and-a-half year lows versus the dollar last week.

On Monday, the PBOC set the yuan’s central parity rate against the dollar at 6.9042, stronger than the 6.9168 level set on Friday. “Referencing the yuan against a basket of currencies can better reflect the overall competitiveness of a country’s goods and services,” Yi said. Given that economic structures, cycles and interest rate policies differed in various countries, fixating on a single currency was not suitable and may cause the yen to be “over-managed,” he added. Yi said the yuan’s movements were due to domestic factors in the U.S., as they reflected the rise of the greenback on the back of improvements in the U.S. economy and inflation, alongside expectations of a quickening in the pace of Federal Reserve interest rate hikes.

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By now it’s time to wonder how massive the protests will be, and where Modi’s reaction will lead.

Modi’s Rural Supporters May Not Hang On Much Longer (BBG)

The most ardent supporters of Prime Minister Narendra Modi’s surprise currency withdrawal are those you’d least expect: India’s rural poor, who are suffering the most with the prolonged cash shortages. But the backing of many from India’s villages – based on a belief that Modi’s actions will even out the scale of inequality and reduce corruption – may be short-lived. The jury is still out on the political and economic impact of the decision to target unaccounted cash. And it will be another two months before the government releases inflation, industrial production and growth figures – key areas that may be affected by the prime minister’s shock move on Nov. 8 to ban high-denomination notes, taking out 86% of circulating currency.

Meanwhile, five states, including the most populous state of Uttar Pradesh, will go to elections, leaving the ruling Bharatiya Janata Party vulnerable to a voter backlash if one of its major support bases sees no benefit from the demonetization process. To intensify the campaign against the note ban, several opposition parties called for nationwide protests on Monday, saying the process is a political move dressed up as a fight against corruption. It is not clear whether demonetization will eliminate so-called black money, or who will pay the price if it fails, said Arati Jerath, a New Delhi-based author who has written about Indian politics for about four decades. It will take at least another three weeks to gauge the economic and political impact, she said.

Jerath points to the public reaction to Indira Gandhi’s decision to impose a state of emergency in 1975 as an example of how quickly the tide of public opinion can change. Initially people supported the emergency, welcoming improvements in law and order and the punctuality of government officials. Later they turned against Gandhi when they realized its negative effects, particularity arbitrary abuse of power by bureaucrats, she said. If the Modi government fails to address concerns around cash withdrawals and the situation worsens, there could be food shortages, farmers’ distress, layoffs, rising unemployment and a slowdown of the economy. “At the moment people are patient, they are really giving it a chance, waiting and watching,” said Jerath. “If the situation does not improve by the middle of next month, there will be a backlash against demonetization.”

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Yeah. Have them all drive Teslas too, right?

India’s Modi Calls For Move Towards Cashless Society (R.)

Indian Prime Minister Narendra Modi on Sunday urged the nation’s small traders and daily wage earners to embrace digital payment channels, as a cash crunch following the government’s surprise ban on high-value bank notes drags on. Modi, speaking in his monthly address on national radio, said the government understands that millions have been affected by the ban on 500-rupee and 1000-rupees notes, but defended the action. The government says the bank-note ban announced on Nov. 8 is aimed at cracking down on corruption, people with unaccounted wealth, and counterfeiting of notes.

“I want to tell my small merchant brothers and sisters, this is the chance for you to enter the digital world,” Modi said speaking in Hindi, urging them to use mobile banking applications and credit-card swipe machines. “It’s correct that a 100% cashless society is not possible. But why don’t we make a beginning for a less-cash society in India?,” Modi said. “We can gradually move from a less-cash society to a cashless society.” More than 90% of consumer purchases in India are transacted in cash, Credit Suisse estimates. While a smartphone boom and falling mobile data prices have led to a surge in digital payments in recent years, the base still remains low. Modi urged technology-savvy young people to spare some time teaching others how to use digital payment platforms.

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Pushing plastic. A new global sport.

Greek Banks Call For Taxing Cash Withdrawals (Kath.)

Banks are proposing that the government take a series of measures to combat tax evasion, which are centered around reducing the use of cash in favor of increasing online transactions. The proposal that stands out concerns the taxing of cash withdrawals. As bank executives say, cash is easily channeled to the so-called shadow economy, so imposing a tax on withdrawals would drastically reduce transactions in cash and therefore the illegal economy as well.

Lenders are also asking for the compulsory use of cards or other online means for all transactions concerning professions where there are strong indications of tax evasion or cash is used as the main means of payment. Credit and debit cards as well as the new technologies that allow for contactless transactions, such as cell phone apps, should be possible to use even for the smallest transactions, from the purchase of a newspaper to buying a bus ticket, banks argue. The illegal economy in Greece is estimated at some €40 billion every year, with state coffers losing out on tax revenues of around €15 billion per annum.

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Pitting real bad policy vs really really bad.

Trump Faces Dilemma As US Oil Reels From Record Biofuels Targets (R.)

The Obama administration signed its final plan for renewable fuel use in the United States last week, leaving an oil industry reeling from the most aggressive biofuel targets yet as President-elect Donald Trump takes over. The Renewable Fuel Standard (RFS) program, signed into law by President George W. Bush, is one of the country’s most controversial energy policies. It requires energy firms to blend ethanol and biodiesel into gasoline and diesel. The policy was designed to cut greenhouse gas emissions, reduce U.S. reliance on oil imports and boost rural economies that provide the crops for biofuels. It has pitted two of Trump’s support bases against each other: Big Oil and Big Corn.

The farming sector has lobbied hard for the maximum biofuel volumes laid out in the law to be blended into gasoline motor fuels, while the oil industry argues that the program creates additional costs. Balancing oil and farm interests is likely to prove a challenge for Trump, who has promised to curtail regulations on the oil industry but is already being reminded by biofuels advocates of the importance of the program to the American Midwest, where he received strong support from voters on Nov. 8. Oil groups are renewing their calls to change or repeal the program following Wednesday’s announcement, when the Environmental Protection Agency (EPA) set record mandates for renewable fuels – for the first time hitting levels targeted by Congress nearly a decade ago.

The EPA plan is “completely detached from market realities and confirms once again that Congress must take immediate action to remedy this broken program,” said Chet Thompson, President of the American Fuel and Petrochemical Manufacturers, in a statement. It is unclear what Trump’s plans for the program will be and his transition team did not respond to Reuters’ requests for comment. Both camps are expecting an administration receptive to their demands, though both have expressed concern and uncertainty over Trump’s plans for the program, according to experts, industry and political sources.

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Pump baby pump.

Oil Trades Near $46 Amid Skepticism OPEC to Reach Output Deal (BBG)

Oil halted declines near $46 amid skepticism over OPEC’s ability to reach an agreement to cut output and as representatives prepare to meet Monday amid last-minute negotiations over the deal the group aims to formalize Wednesday. Futures were little changed in New York after earlier falling as much as 2% and dropping 4% on Friday. Saudi Arabia for the first time on Sunday suggested OPEC doesn’t necessarily need to curb output and pulled out of a scheduled meeting with non-member producers, including Russia. OPEC will hold an internal meeting in Vienna Monday to resolve its differences, and as part of the final push to reach an agreement, oil ministers from Algeria and Venezuela are heading to Moscow to get the group’s biggest rival on board.

OPEC is heading into the final stretch before its November 30 meeting to adopt a deal first floated in September to collectively reduce output. Saudi Arabia, the group’s de facto leader, is seeking to reverse the pump-at-will policy it supported in 2014 and is now pushing members to agree how they will individually shoulder the first production cuts in eight years. Saudi oil minister Khalid Al-Falih said the oil market will recover in 2017 even without cuts. “The market is currently quite pressured by the uncertainties raised from various reports, including Saudi Arabia pulling out of Monday’s talks with non-OPEC nations,” Seo Sang-young at Kiwoom Securities said by phone. “It’s also highly suspicious whether OPEC will keep its promises even if it achieves an accord because the members are constantly raising production.”

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Wanna bet?

Fillon Would Beat Le Pen in Both Rounds of Election – Polls (BBG)

Francois Fillon, the former prime minister who won the French Republican presidential nomination Sunday, would beat National Front leader Marine Le Pen in both rounds of a presidential election, two polls showed. In a scenario where incumbent Francois Hollande is running along with former Economy Minister Emmanuel Macron, Fillon would win the first round with 32% of the vote against 22% for Le Pen and 8% for Hollande, according to a poll by Odoxa for France 2 television. In the run-off two weeks later, he would defeat Le Pen 71% to 20%. A Harris Interactive poll showed Fillon winning the first round with 26% support compared with 24% for Le Pen and 9% for either Hollande or Manuel Valls as leader of the Socialists. The same survey showed him winning against Le Pen in the second round 67% to 33%.

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“What needs to be considered… is what is good for the country.” Translation: what is good for the incumbent class.

Renzi Faces Pressure To Stay In Office As Italy Referendum Defeat Looms (R.)

When a handful of European leaders met Barack Obama in Berlin this month to say their goodbyes, Italian Prime Minister Matteo Renzi informed the group that he may well lose power before the U.S. president. While Obama leaves office on Jan. 20, Renzi has promised to resign if he does not win a Dec. 4 referendum on constitutional reform, opening the way for renewed political instability in the eurozone’s third largest economy. “I have no desire to hang around if I lose,” Renzi told the gathering, according to a diplomatic source who was at the low-key Nov. 18 meeting. Opinion polls now predict Renzi’s defeat, in what would be the third big anti-establishment revolt by voters this year in a major Western country, following Brexit and the U.S. election of Donald Trump.

Pressure is mounting on Renzi to drop his threat and instead agree to remain in power to deal with the fallout from a ‘No’ vote, including the risk of a fullblown banking crisis. Obama himself said in October that Renzi should “hang around for a while no matter what” and a number of businessmen and senior government officials contacted by Reuters said they feared the worst if the prime minister abandoned his post. “My personal opinion is that Renzi should stay,” Industry Minister Carlo Calenda said in an interview on Friday. “What needs to be considered… is what is good for the country.” The Italian president could appeal to Renzi’s sense of responsibility and ask him to seek a new mandate from parliament. His response might depend on the size of any defeat, with one advisor saying the 41-year-old premier could quit politics altogether if he suffers a huge snub next Sunday.

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Is it really that hard to throw out Soros?

Recount: Losers Who Won’t Lose (Mehta)

President-elect Trump won 306 electoral votes versus Hillary Clinton’s 232 (24% less electoral votes). Similar to 2000, the surrendering party then reversed course and put the nation through a recount, just for the sake of it. What are the odds that such an exercise here would yield successful for Ms. Clinton? Based on statistical randomness of re-assessing voter intent, the chance of Hillary emerging as the victor is far less than 10%. Anything can happen, but these lean odds do not rise to the level of putting our peaceful democracy into the hands of a temptuous recount scheme every time a stung party loses (let alone misleadingly blame it on something else from Russia’s Putin, to sexism, to “in hindsight the popular vote would be reasonable”, to FBI Director Comey).

All Americans should instead focus on how the 6 states that flipped this election, were all economically ignored and all flipped to Donald Trump. The only viable path for a Hillary Clinton victory at this stage is to astoundingly uncover a wide-spread (across three states) fraud. And that’s equally unlikely, since the basis for the voting aberrations occurred in less populated counties and anyway the three states employ three different voting mechanisms, so the fraud would have had to somehow occur through different transmission vehicles (paper voting, and electronic voting) and we would require a speedy judicial resolution for states such as Pennsylvania that sidestepped back-up recordings from their direct voting equipment.

We should note the following statistical facts about the electoral vote in the three recount states:
10 votes, Wisconsin (Trump leads by 0.9 %age points)
20 votes, Pennsylvania (Trump leads by 1.1 %age points)
16 votes, Michigan (Trump leads by 0.2 %age points)

Given that Mr. Trump won by 74 electoral votes, Ms. Clinton would need to flip all three states noted above, in order to liquidate this deficit (i.e., >74/2 = >37 votes). The leads described above however, among 4.4 million voters from these three states, is highly statistically significant on a state-level (and certainly when all three states are combined). It would be remarkably unlikely that we would arbitrarily second-guess every one of these millions of voters’ intents and, convert any (certainly let alone all) of these three states.

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