It’s never easy to gauge what exactly is happening in China, or why the CCP Politburo takes the decisions it does. Today, or overnight, is no exception to that. However, one thing that appears certain, but which I don’t see reflected in all the analyses, is that Beijing pushing the value of the renminbi (yuan) down below 7 to the USD in one fell swoop, is a major setback for Xi Jinping and his government.
Yes, China may have given up hope of reaching positive conclusions in its trade talks with the US. And yes, some may think, even in China itself, that devaluing the currency is a tool that can be useful in a potential currency war. But there’s another side to this coin. It’s not even about the value itself, or the change in it, it’s the heavy-handed way it’s executed.
China wants, and desperately needs too, for the yuan to be a force in global financial markets. In very simple terms this is true because if it then wants to buy something, it can simply print the money for it. But only about 1% of global trade today is executed in yuan. That is not nearly enough. It means China needs dollars and euros, all the time. And devaluing the yuan means the country needs even more of those.
You’d almost think: why would you want to do that? What are the long-term prospects for a move like this? You’re telling forex markets that the value of the yuan is not trustworthy, because if Xi or the PBOC decides in the next five minutes that it should go up or down by 10% or 20%, they can do it. The Fed and ECB also have tools to manipulate their currencies (re: interest rates), but none of that magnitude.
The crux of the dilemma probably lies in the Belt and Road Initiative (BRI), which I’ve been saying for years is just China’s way to sell its overcapacity and overproduction abroad. Sure, there may be loftier goals, and surely in the glitzy brochures, but the fact remains that China has tried to be an economic miracle, doing in 10 years what took the US a century, and it never slowed down its growth, at least not voluntarily, even if that might have been a wise move.
Already lately, purchases by Chinese citizens and companies of real estate and businesses abroad have been curtailed, and not a little bit, by Beijing. There’s no better way to convince Chinese people of the miracle’s success than to let them travel the world and spend there, but that, too, may well soon be cut. It kills foreign reserves.
If Beijing could charge participating countries in the Belt and Road Initiative in yuan, and they could pay for the overcapacity’s steel and cement and what not in yuan, that could be a game-changing program for the entire planet. But these countries have no reason to hold yuan, other than the BRI itself. And they, too, were watching the overnight move above 7 and must have thought: let’s be careful now.
And to top it all off, China right now needs for these countries to pay in dollars instead of yuan, because its foreign reserves are shrinking so fast. It’s Catch-22 all the way down. China’s need for dollars goes against everything BRI stands for.
Could the move hurt the US as well? Absolutely. But the long-term view behind the tariffs, and the talks China appears to have lost faith in, is to move the US away from its near all-encompassing addiction to Chinese production, and to move at least some of that production back home. Problem of course is, that is precisely what China’s miracle growth has been built on.
If the US starts bringing production home, who is Beijing going to sell its (over-)production to? Yes, I hear you, to the BRI countries. But there it runs into the currency problems mentioned before. To Europe? The top of that trade route is also behind us. Europe will have to follow the US to an extent, and also bring factories back to the continent (and not just to Germany either).
China could perhaps sell more than it does today to Russia. But that country still does produce a lot of things, and has been forced to be much more self-sufficient due to US and EU sanctions. It’s also a mighty small market compared to 350 million North Americans and 500 million Europeans, who are on average much richer than your average Russian to boot.
There is a way for China to make the yuan more important in global trade (but devaluation is definitely not that way): Beijing could let go of its central and total control over the value of its currency, and let forex markets figure it out. That would give traders -and everyone else- faith in the value. Problem with that is, this is not how central control communist governments think.
Beijing wants both: central total control AND a prominent place in world trade. And it may take them a long time to figure out that is not going to happen, unless of course they first conquer the entire world militarily. That is not an option, at least not for the foreseeable future. Come see me next century.
It wouldn’t be the first time for me to say I can see China retreat into itself, into its own borders and culture and market (1.3 billion people!). If the Communist Party wants to remain in power, and there’s no doubt it does, this may be only possible choice going forward. If growth has indeed left the miracle -as many observers think-, it can implode in very rapid succession. And even if growth hasn’t yet evaporated, it may well very soon. Without the growth, there is no miracle anymore.
And if China can no longer grow its exports, its domestic growth will also become a thing of the past. Domestic consumption can only grow as long as exports do too. Seen from that angle, the problems with trade and the currency look downright ominous. If you need dollars that badly, and you notice that you’re already getting fewer of them, not more, you’re in trouble.
Devaluing your currency may afford you some temporary respite, but it can’t possibly solve your troubles. It can make them much worse though.
I think China has wanted too much too fast, got carried away and forgot to take care of a few potential barriers to its growth, in particular the standing its currency had and still has in the world, and the grinding need for dollars that stems from it. And the Communists have no answer to this problem.
Fifteen years ago, I wrote a little book, entitled Globalization and its Discontents, describing growing opposition in the developing world to globalizing reforms. It seemed a mystery: people in developing countries had been told that globalization would increase overall wellbeing. So why had so many people become so hostile to it? Now, globalization’s opponents in the emerging markets and developing countries have been joined by tens of millions in the advanced countries. Opinion polls, including a careful study by Stanley Greenberg and his associates for the Roosevelt Institute, show that trade is among the major sources of discontent for a large share of Americans. Similar views are apparent in Europe.
How can something that our political leaders – and many an economist – said would make everyone better off be so reviled? One answer occasionally heard from the neoliberal economists who advocated for these policies is that people are better off. They just don’t know it. Their discontent is a matter for psychiatrists, not economists. But income data suggest that it is the neoliberals who may benefit from therapy. Large segments of the population in advanced countries have not been doing well: in the US, the bottom 90% has endured income stagnation for a third of a century. Median income for full-time male workers is actually lower in real (inflation-adjusted) terms than it was 42 years ago. At the bottom, real wages are comparable to their level 60 years ago.
The effects of the economic pain and dislocation that many Americans are experiencing are even showing up in health statistics. For example, the economists Anne Case and Angus Deaton, this year’s Nobel laureate, have shown that life expectancy among segments of white Americans is declining. Things are a little better in Europe – but only a little better. [..] .. if globalization is to benefit most members of society, strong social-protection measures must be in place. The Scandinavians figured this out long ago; it was part of the social contract that maintained an open society – open to globalization and changes in technology. Neoliberals elsewhere have not – and now, in elections in the US and Europe, they are having their comeuppance.
The main point of my 1999 book with Jeff Williamson was that globalisation produces both winners and losers, and that this can lead to an anti-globalisation backlash. We argued this based on late-19th century evidence. Then, the main losers from trade were European landowners, who found themselves competing with an elastic supply of cheap New World land. The result was that in Germany and France, Italy and Sweden, the move towards ever-freer trade that had been ongoing for several years was halted, and replaced by a shift towards protection that benefited not only agricultural interests, but industrial ones as well. Meanwhile, across the Atlantic, immigration restrictions were gradually tightened, as workers found themselves competing with European migrants coming from ever-poorer source countries.
While Jeff and I were firmly focused on economic history, we were writing with an eye on the ‘trade and wages’ debate that was raging during the 1990s. There was an obvious potential parallel between 19th-century European landowners, newly exposed to competition with elastic supplies of New World land, and late 20th-century OECD unskilled workers, newly exposed to competition with elastic supplies of Asian, and especially Chinese, labour. In our concluding chapter, we noted that economists who base their views of globalisation, convergence, inequality, and policy solely on the years since 1970 are making a great mistake. The globalisation experience of the Atlantic economy prior to the Great War speaks directly and eloquently to globalisation debates today – and the political lessons from this are sobering.
“Politicians, journalists, and market analysts have a tendency to extrapolate the immediate past into the indefinite future, and such thinking suggests that the world is irreversibly headed toward ever greater levels of economic integration. The historical record suggests the contrary.” “Unless politicians worry about who gains and who loses,î we continued, ìthey may be forced by the electorate to stop efforts to strengthen global economy links, and perhaps even to dismantle them … We hope that this book will help them to avoid that mistake – or remedy it.”
To better understand the July Jobs report, one has to understand the seasonal adjustments that the Bureau of Labor Statistics employs. Nonfarm payroll jobs added in July on a seasonally adjusted basis were +255,000 in July. But the raw or NON seasonally adjusted numbers were -1,030,000 jobs. Or 1.03 million jobs lost.
Notice in the above chart that you get big downward dips in the nonfarm payroll numbers in January and July. And it repeats every year. For January, this is the release of seasonal employment for the holidays. For July, this is the transformation to summertime employment, mostly for teachers. Local government education NSA fell by -1,093,000 in July. Total PRIVATE jobs added amounted to +85,000. So, the BLS smoothes the data using Seasonal Adjustments since January temporary workers being terminated or teachers not working during the summer is hardly newsworthy or surprising. Food and drinking services actually fell by -35,000 jobs added. Bartender blues. The bottom line is that the July jobs report was all about teachers going on summer break and low wage jobs being added.
China’s foreign exchange reserves fell to $3.20 trillion in July, central bank data showed on Sunday, in line with analyst expectations. Economists polled by Reuters had predicted reserves would fall to $3.20 trillion from $3.21 trillion at the end of June. China’s reserves, the largest in the world, fell by $4.10 billion in July. The reserves rose $13.4 billion in June, rebounding from a 5-year low in May. China’s gold reserves rose to $78.89 billion at the end of July, up from $77.43 billion at end-June, data published on the People’s Bank of China website showed. Net foreign exchange sales by the People’s Bank of China in June jumped to their highest in three months, as the central bank sought to shield the yuan from market volatility caused by Brexit.
China’s foreign exchange regulator recently said China would be able to keep cross-border capital flows steady given its relatively sound economic fundamentals, solid current account surplus and ample foreign exchange reserves. China’s foreign reserves fell by a record $513 billion last year after it devalued the yuan currency in August, sparking a flood of capital outflows that alarmed global markets. The yuan has eased another 2% this year and is hovering near six-year lows, but official data suggests speculative capital flight is under control for now, thanks to tighter capital controls and currency trading regulations. However, economists are divided over how much money is still flowing out of the country via other channels, with opaque policymaking and some inconsistency in the data raising suspicions that the fall in the yuan may be masking capital outflow pressure.
[..] And that’s where Bitcoin has the problem, in that very existence of the blockchain: The first relates to the ongoing legal recourse rights of Bitfinex victims. Even though they may have lost their right to pursue Bitfinex for compensation, they are still going to be entitled to track the funds across the blockchain to seek recourse from whomsoever receives the bitcoins in their accounts. That’s good news for victims, but mostly likely very bad news for bitcoin’s fungible state and thus its status as a medium of exchange.
Just one successful claim by a victim who tracks his funds to an identifiable third party, and the precedent is set. Any exchanges dealing with bitcoin in a legitimate capacity would from then on be inclined to do much stronger due diligence on whether the bitcoins being deposited in their system were connected to ill-gotten gains. This in turn would open the door to the black-listing of funds that can not prove they were originated honestly via legitimate earnings. Of course, people should not steal things. And yet for a currency to work it has to be possible to take the currency at its face value. Thus it may well be that the bank robber paid you for his beer with stolen money but you got it fair and square and thus the bank doesn’t get it back as an when they find out.
Another way to put this is that the crime dies with the criminal. And yet the blockchain upends all of that. Because every transaction which any one bitcoin has been involved in is traceable. I’ve said before that bitcoin has significant economic problems associated with it. The most important being that it is a deliberately deflationary currency which is a really, really, terrible idea. But the more we wander through the actual use in the real world of this idea the more we find other problems with it. As here, that blockchain, the basic defining point of bitcoin in the first place, making it something which isn’t going to work well as a currency over time. Because that very blockchain means that we’ll not be able to make the necessary compromises about justice in favour of efficiency in the event of crime.
The schadenfreude of Bitcoin enthusiasts over Ethereum’s recent troubles ended abruptly last week. A major Bitcoin exchange, Bitfinex, was hacked and nearly 120,000 BTC (around $60m) was stolen. The price of Bitcoin promptly crashed, and Bitfinex was forced to suspend trading. Suddenly, Ethereum was not the only basket case cryptocurrency around. It appears that Bitfinex’s security was seriously compromised. Customer coins were held in individual wallets secured with a 2 of 3 multisig arrangement: keys were held by Bitfinex itself and Bitgo, a professional custodian and signatory, with a third (backup) key held in secure offline storage. Customers could not withdraw funds from the wallets until any borrowings had been cleared. It was, if you like, a form of escrow. And it should have been secure.
But it wasn’t. Somehow, the hacker managed to gain access to hundreds of customer wallets. Not only did the hacker gain access to the wallets, he/she also overrode Bitgo’s withdrawal limits. It was a well-planned and comprehensive security breach by someone who knew exactly what they were doing. Funds were moved to thousands of addresses over a short period of time. Bitfinex, it seems, was powerless to stop it. This is one of the largest Bitcoin heists ever, dwarfed only by Mt. Gox in 2014. It is comparable in size to Ethereum’s DAO theft only a couple of weeks ago. And it is going to result in a lot of people losing a lot of money. All of Bitfinex’s customers, in fact. The company has announced a haircut of 36.067% across the board:
“After much thought, analysis, and consultation, we have arrived at the conclusion that losses must be generalized across all accounts and assets. This is the closest approximation to what would happen in a liquidation context. Upon logging into the platform, customers will see that they have experienced a generalized loss percentage of 36.067%. In a later announcement we will explain in full detail the methodology used to compute these losses.” Although the loss is estimated as the amount the customers would receive if the company were liquidated, this is a bail-in. Bitfinex has no plans to cease trading: “We intend to come online within 24-48 hours with limited platform functionality. Additional announcements will be made as we progressively enable more platform features and return to full operations.”
Two billion dollars, the estimated cost of this year’s presidential election, is big money, but it is not huge money. Two billion is one-tenth of NASA’s annual budget, one-twentieth of the Harvard endowment, one-thirtieth of the personal wealth of Warren Buffett. Buffett is number two on the 2015 Forbes list of 106 Americans who hold personal fortunes of $5 billion or more, the Club of 106. These billionaires are rich enough to pay for the campaigns of both Hillary Clinton and Donald Trump and still have $3 billion left over. A lot of the money in Club 106 is family money. The Club includes two Kochs, four Waltons, three Marses, two Newhouses, and three Ziffs. Donald Trump was also born into big money. With a supposed net worth of $4.5 billion, he is brushing up against the velvet rope outside of Club 106.
The Clintons, both born to families with ordinary incomes, are now worth around $110 million, which puts them way off from Club 106 and pretty far from you and me as well. In the political off-season the Clintons have borrowed private jets from friends and relied on book advances and speaking fees to maintain two residences, to summer in East Hampton, and reportedly to help their daughter and son-in-law purchase a $10 million Manhattan apartment. The Obamas will soon be devising their own approach to making their way in a billionaire’s world with a mere $20 million. At least four of the members of Club 106 (Buffett, the Kochs, Bloomberg) have openly voiced their thoughts on who should be president.
Five members (Soros, Simons, Cohen, Ellison, Bloomberg) are among the top 25 donors to the outside groups that have poured tens of millions of dollars into the campaign. Seven members (Bezos, Zuckerberg, Page, Brin, Murdoch, the Newhouses, Bloomberg) own large media and internet companies — Amazon, the Washington Post, Facebook, Google, Fox News, the New York Post, the Wall Street Journal, Condé Nast, Bloomberg — with the power to shape public opinion. (By way of disclosure, an eighth member, Pierre Omidyar, founded The Intercept’s parent company, First Look Media.)
For the Club of 106, elections are a game they can easily afford to play.
Off-the-plan buyers of Australian apartments are in crisis as tough new borrowing rules mean thousands of investors who have paid a deposit are struggling to complete their purchases, according to local and overseas mortgage brokers and financiers. Shanghai-based financiers claim their Chinese clients’ funding from Australian banks has been frozen and they face foreclosure – or usurious interest rates – from private financiers. Australian financiers claim their local clients, many of them Asian, have had their settlements deferred by three months to find alternative funding. “All the deals have been frozen,” said Mark Yin, an agent with Shanghai-based Home Tree Group, about his Shanghai clients’ funding with Australian banks. “We are now looking for finance all over the world.”
Mr Yin said this represented nearly 100 per cent of his clients who were waiting for properties to be completed in Australia and that most of the apartments were in the Melbourne CBD. Melbourne-based Marshall Condon, CEO of mortgage broker Neue Black and who also has off-shore and local Asian investors, added: “In the next three to 12 months, many investors will be applying for funding to complete their deals, however, they will be become increasingly concerned as they discover funding is limited.” Billions of dollars has been invested in tens-of-thousands of high-rise apartments that are reshaping the skylines of the nation’s major capitals, particularly Melbourne, Sydney and Brisbane. Most have been sold off-the-plan, which means purchasers buy off the blueprint with a deposit and complete when it is built, which requires a second valuation and financing commitment by the lender.
Several weeks after the US government finally released a redacted version of the secret “28 pages”, which confirmed Saudi Arabia’s key role behind the September 11 attack, even as both the Obama administration and Saudi Arabia claimed no such connection exists (when it clearly did for anyone who actually read the disclosure), a trail has now emerged linking the recent surge in deadly terrorist attacks in Germany to Saudi Arabia. According to Der Spiegel, both the terrorist from the Wurzburg train axe attack, and the Ansbach suicide bomber who blew up an explosive-filled backpack, had multiple chat contacts with persons in Saudi Arabia.
As a result, Reuters adds, Saudi authorities are now in contact with their German colleagues, responding to these potentially explosive new findings which once again implicate the Saudi state with more state-sponsored terrirms, and show at least two attackers were in close contact via a chat conversation with possible Islamic State backers from Saudi Arabia. Traces of the chat, which investigators have been able to reconstruct, indicate that both men were not only influenced by but also took instructions from people, as yet unidentified, up until the attacks, the report said. It may not come as a surprise that the state exposed as facilitating and coordinating the September 11 terrorist attack, and which admitted to have created the Islamic States (with US knowledge), is now trying to provoke a terrorist backlash in Europe too.
Recall that after the Iraqi city of Mosul fell to a lightning Isis offensive in 2014, the late Prince Saud al-Faisal, then the Saudi foreign minister when speaking to John Kerry admitted that “Daesh [Isis] is our [Sunni] response to your support for the Da’wa” — the Tehran-aligned Shia Islamist ruling party of Iraq. One can only speculate what Saudi Arabia is “responding” to with the recent surge in European terrorist attacks. For now, however, the all too “generous” Saudi government has “offered to help German investigators find those behind Islamist bomb and ax attacks in July”, Spiegel adds. We can only imagine how accurate Saudi “findings” will be, especially if – like in the case of Sept 11 – those involved include members from the very top of Saudi power echelons.
The Obama administration announced on Monday the beginning of US air strikes in Libya against ISIS targets, marking the fourth country the United States is currently bombing with the goal of “degrading and destroying” the terror group. A campaign that began two years ago this Sunday has now, 50,000 bombs and 25,000 dead ISIS fighters later, expanded to a whole new continent. You’d hardly notice, however, if you followed US media. While the air strikes themselves were reported by most major outlets, they were done so in a matter-of-fact way, and only graced the front pages of major American newspapers for one day.
[..] The question pundits should be asking themselves is this: Had Obama announced on August 7, 2014, that he planned on bombing four countries and deploying troops to two of them to fight a war with “no end point,” would the American public have gone along with it? Probably not. To authorize his perma-campaign, Obama’s administration has dubiously invoked the 15-year-old, one-page Authorization for Use of Military Force, passed three days after 9/11. The president has to do this, the White House and friendly media claim, because Congress “refuses” to act to authorize the war (notice that’s a rubber-stamp question of when, not if). But such apologism largely rests on a tautology: Congress doesn’t have a sense of urgency to authorize the war because the public doesn’t, and the public doesn’t because the media have yawned with each new iteration.
What’s lacking is what screenwriters call “an inciting incident.” There’s no clear-cut moment the war is launched, it just gradually expands, and because media are driven by Hollywood narratives, they are victims to the absence of a clear first act. This was, to a lesser extent, the problem with the last bombing of Libya, in 2011. What was pitched to the American public then was a limited, UN-mandated no-fly zone to protect civilians (that even the likes of Noam Chomsky backed), which quickly morphed, unceremoniously, into all-out, NATO-led regime change three weeks later. Then, as now, there was no public debate, no media coming-to-Jesus moment. Obama just asserted the escalation as the obvious next step, and almost everyone just sort of went along—an ethos summed up in Eric Posner’s hot take at Slate the day after Obama expanded the ISIS war to Syria: “Obama Can Bomb Pretty Much Anything He Wants To.”
I just listened to Obama give Washington’s account of the situation with ISIL in Iraq and Syria. In Obama’s account, Washington is defeating ISIL in Iraq, but Russia and Assad are defeating the Syrian people in Syria. Obama denounced Russia and the Syrian government—but not ISIL—as barbaric. The message was clear: Washington still intends to overthrow Assad and turn Syria into another Libya and another Iraq, formerly stable and prosperous countries where war now rages continually. It sickens me to hear the President of the United States lie and construct a false reality, so I turned off the broadcast. I believe it was a press conference, and I am confident that no meaningful questions were asked.
If Helen Thomas were still there, she would ask the Liar-in-Chief what went wrong with Washington’s policy in Iraq. We were promised that a low-cost “cakewalk” war of three or six weeks duration would bring “freedom and democracy” to Iraq. Why is it that 13 years later Iraq is a hellhole of war and destruction? What happened to the “freedom and democracy?” And the “Cakewalk”? You can bet your life that no presstitute asked Obama this question. No one asked the Liar-in-Chief why the Russians and Syrians could clear ISIL out of most of Syria in a couple of months, but Washington has been struggling for several years to clear ISIL out of Iraq. Is it possible that Washington did not want to clear ISIL out of Iraq because Washington intended to use ISIL to clear Assad out of Syria?
No one asked the Liar-in-Chief why Washington sent ISIL to Syria and Iraq in the first place, or why the Syrians and Russians keep finding US weapons In ISIL’s military depots, or why Washington’s allies were funding ISIL by purchasing the oil ISIL is stealing from Iraq. It seems to be the case that ISIL originated in the mercenaries that Washington organized to overthrow Gaddafi in Libya and were sent to Syria to overthrow Assad when the UK Parliament refused to participate in Washington’s invasion of Syria and the Russians put a stop to it.
More U.S. companies have defaulted on their debt this year than issuers from any other country or region, S&P analysts led by Diane Vazza wrote in a Dec. 24 report. As of last week, 111 companies worldwide had defaulted on their obligations, the highest tally since 2009 when the the figure hit 242 for the same period. About 60% of this year’s global defaults have come from U.S. borrowers, Vazza wrote, up from 55% a year ago, when 33 of 60 defaulters were American. After the U.S., companies from emerging markets were the second-largest defaulters, accounting for 23% of the pool, which is a smaller share than last year, according to S&P data. Plummeting oil prices and speculation about how the Federal Reserve’s plan to tighten monetary policy would affect corporate borrowing costs has made companies more vulnerable, Vazza wrote.
“The current crop of U.S. speculative-grade issuers appears fragile, and particularly susceptible to any sudden, or unanticipated shock,” she wrote. Arch Coal was the most recent addition to the list, having its credit rating downgraded to “speculative default” by Standard & Poor’s last week after the coal producer missed about $90 million in interest payments and exercised a 30-day grace period with the holders of some of its notes. Looking ahead, S&P expects the U.S. corporate default rate will rise to 3.3% by September 2016 from 2.5% a year earlier. The bulk of the failures will come from companies in the oil and gas sector, which accounted for about a quarter of this year’s defaults. Since 1981, the average default rate for global speculative-grade companies is 4.3%, Vazza said.
We woke up this morning to find oil prices weighing on the market… again… with China suffering the biggest losses. Oil prices have already kept stocks at bay in the best time of the year. Funny how this “Santa Claus” rally that I predicted wouldn’t happen this year, didn’t. The last time was in 2007 and 2008 – the last years the stock market crashed. I’ve been looking at how low oil prices will be the first trigger in the next crisis. Although it helps consumers a bit, low prices kill the $1 trillion QE-driven fracking industry that’s been such a stalwart of this bubble economy. And it’s already causing junk bonds to fall further in value, as energy-related bonds have been as high as 20% of that market recently. But the second and biggest trigger I’ve been warning about is China’s unprecedented real estate bubble collapsing…
Recall the Japanese at the top of their stock and real estate bubble in 1989. They were buying real estate hand-over-fist, from Pebble Beach to Rockefeller Center to London. Then, after bidding them up, they ended up selling those holdings at big losses. The Chinese make the Japanese look prudent! Chinese buyers are bidding up the high end of the top coastal cities in English-speaking countries like they’ll never go down and like they can’t get enough. We’re talking Sydney, Melbourne, Brisbane, Auckland, Singapore, San Francisco, L.A., Vancouver, Toronto, New York, London… These markets are considered “Teflon-proof.” They’re not! In fact, they’re some of the greatest bubbles that exist today. China’s leading cities – like Shanghai, Beijing and Shenzhen – are up 700% or more since 2000!
Guess what happens when the bubble wealth in real estate that has built up in China finally collapses? So does the capacity of the more affluent Chinese to buy real estate around the world. And these are the guys who have by-and-large been driving this global real estate bubble at the margin on the high end! Bear in mind that Chinese real estate has been slowing and prices falling for over a year. That is precisely why China’s stock market bubbled up 160% in less than one year. When Chinese investors realized they could no longer make easy money in the real estate bubble, they turned to stocks. And after the dumb money piled in, the Shanghai Composite stock index fell 42% in just 2.5 months!
Now that the year is almost over, it’s time to reflect on 2015. BI reached out to the brightest minds on Wall Street to get their thoughts on what just happened. Hopefully, they’ll help us get a better handle on what is about to happen in 2016. Charlene Chu, of Autonomous Research, is widely considered one of the most brilliant China analysts in the world. So we asked her to send us a chart that helped her make sense of the world in 2015. Naturally it’s about China. “The chart below highlights the growth problem China is grappling with. In our view, a broken growth model lies at the core of China’s financial sector issues,” she wrote in an email to Business Insider. “This chart comes directly from official data, which is not adjusted in any way. Secondary industry comprises about 40-45% of GDP. As the title says, nearly half of China’s economy is already experiencing a very hard landing. This will likely intensify in 2016, which will weigh on global growth and add to corporate debt repayment problems.”
CEIC and the National Bureau of Statistics; Charlene Chu, Autonomous Research
In China, GDP is classified into three industries, primary (agriculture), secondary (manufacturing and construction), and tertiary (services). This slowdown in the secondary industry is part of China’s intentional shift toward an economy focused on services and consumer consumption rather than manufacturing. Chu’s point is that it’s happening harder and faster than anyone thought it would. All of this became all too apparent in 2015. This year China experienced two mainland stock market crashes, it devalued its currency, and once booming sectors of the economy — like exports and property — slowed sharply. In response, the government loosened monetary policy and enacted stimulus measures. The measures have had a limited impact, however, indicating that more structural measures will be needed to remedy the situation. Chu expects this slowdown to continue through 2016, affecting markets around the world.
China’s central bank has suspended at least three foreign banks from conducting some foreign exchange business until the end of March, three sources who had seen the suspension notices told Reuters on Wednesday. Included among the suspended services are liquidation of spot positions for clients and some other services related to cross-border, onshore and offshore businesses, the sources said. The sources, speaking on condition that the banks were not named, said the notices sent to the affected foreign banks by the People’s Bank of China (PBOC) gave no reason for the suspension. The sources said the banks might have been targeted due to the large scale of their cross-border forex businesses.
“This is part of the PBOC’s expedient means to stabilize the yuan’s exchange rate,” said an executive at a foreign bank contacted separately. China has taken a slew of steps to keep the yuan stable since it devalued the currency in August. The latest move comes just three months since the PBOC ordered banks to closely scrutinize clients’ foreign exchange transactions to prevent illicit cross-border currency arbitrage, which takes advantage of the different exchange rates the yuan fetches in offshore and onshore markets. The spread has been growing since the August devaluation, which makes it increasingly difficult for the bank to manage its currency and stem an outflow of capital from its slowing economy.
The yuan has come under renewed pressure since late November amid speculation that Beijing would permit more depreciation after the IMF announced the currency’s admission into the fund’s basket of reserve currencies. The onshore yuan traded in Shanghai has lost 1.44% of its value since the end of November, and has repeatedly hit 4-1/2 year lows. The offshore market has traced a similar pattern. The Hong Kong-traded offshore yuan hit an intraday low of 6.5965 on Wednesday morning, its weakest since late September 2011.
U.S. steelmakers battered by plunging prices have been quick to blame a flood of cheap Chinese shipments. But with imports nearing four-year lows, another culprit is emerging: the energy collapse. Foreign steel coming into the U.S. dropped 36% in November from a year ago, according to U.S. Census Bureau data. That’s with domestic prices at the weakest in at least nine years and new taxes on products from six countries deemed to be unfairly priced. Yet U.S. mills have idled the most capacity since the financial crisis, operating at just 61% in the week ending Dec. 21. Helping explain the capacity decline is a drop in demand for steel pipes and drill bits used in the energy industry after the price of oil plunged 66% in the past 18 months. Previously, sales of high-margin products to oil and gas companies had helped shield U.S. mills from sluggish growth in construction and other industries.
“I don’t think imports are the only problem,” domestic mills face, Timna Tanners at Bank of America said in an interview Tuesday. “Nobody really expected oil to stay as low as it did as long as it has.” An important result of the energy collapse for steel consumption is that inventories held by steel and energy companies take longer to deplete as demand falls, exacerbating the decline in consumption, Tanners said. “Domestic mills in 2014 charged a price that was much higher than the rest of the world and that drew imports,” she said. “The domestic mills can complain that it’s unfairly traded, but there are factors outside of that that have nothing to do with fairness.” The price of hot-rolled steel coil, a benchmark product, has dropped 38% this year, according to The Steel Index, a trade publication that surveys buyers and sellers.
In Kern County, California, one of the nation’s biggest oil producers, tumbling energy prices have wiped more than $8 billion from its property-tax base, forcing officials to tap into reserves and cut every department’s budget. It’s only getting worse. The county of 875,000 in the arid Central Valley north of Los Angeles may face another blow in January, when it reassess the oil-rich fields that line the landscape. Last year’s tax bills were based on crude selling for $54 a barrel. It finished Monday at less than $37.
“We may never go back to $99 a barrel, but we were good at $54,” said Nancy Lawson, assistant administrative officer of Kern County, which includes the city of Bakersfield. “If it keeps going down and stays down we may have to look at more cuts in the next budget.”
As the price of crude falls for a second year, marking the steepest decline since the recession, the impact is cascading through the finances of states, cities and counties, in ways big and small. Once flush when production boomed, some governments in major energy producing regions are facing a new era of unwelcome austerity as wells are shut – along with the tax-revenue gushers they spouted. Alaska, Louisiana and Oklahoma have seen tax collections diminished by the rout, which has put pressure on credit ratings and led investors to demand higher yields on some securities. In Texas, the largest producer, the state’s sales-tax revenue dropped 3% in November from a year earlier as the energy industry exerted a drag on the economy.
Further west, Colorado’s legislative forecasters on Dec. 21 estimated that the state’s current year budget will have a shortfall of $208 million, in part because of the impact of lower commodity prices. In North Dakota, tax collections have trailed forecasts by 9% so far for the 2015-2017 budget. “The longer it goes the more significant it gets,” said Chris Mier at Loop Capital Markets in Chicago.
Oil-rich Gulf sheikhdoms are being forced to raid their sovereign wealth funds to shore up their budgets. With U.S. crude oil prices falling below $40 per barrel in December, they have no choice but to reach into these rainy-day savings. For now, they can hold on to some of their trophy assets, like strategic investments in Volkswagen or Barclays. But if crude prices keep tumbling, a fire sale will be hard to avoid. During the most recent energy boom, the six members of the Gulf Cooperation Council – including Saudi Arabia, Qatar and Kuwait – amassed sovereign funds worth more than $2.3 trillion. These assets have traditionally comprised a mix of debt and other securities, in addition to influential stakes in some of the world’s biggest companies such as Glencore, VW and Barclays.
Large chunks of this cash are now being repatriated back to the region to finance widening budget deficits, which this year are expected to be in the region of 13% of GDP in the GCC. Should oil prices average $56 per barrel next year, then GCC states would need to liquidate some $208 billion of their overseas assets, or just below 10% of their sovereign fund holdings, based on a Breakingviews analysis of their fiscal break-even costs. But if oil prices fall to $20 a barrel, as Goldman Sachs has warned, the GCC states may have to sell $494 billion worth of booty to make up the budgetary shortfalls based on forecast fiscal costs for their oil production in 2016. This is provided they maintain the lavish rates of public spending that the region’s populations have become accustomed to.
At that rate of divestment these sheikhdoms – which pump about a fifth of the world’s oil – would almost drain their funds entirely by 2020. The Saudi Arabian Monetary Agency – which also acts as the country’s central bank – has already started to sell down some of its foreign assets, while money managers are reporting growing redemptions from other funds in the region. Gulf rulers have so far resisted any temptation to jettison their most treasured assets, which in many cases have granted them board seats atop some of the world’s leading companies. As oil keeps falling, even these investment jewels will come up for grabs.
A global oil price rout will bring an end to the era of Saudi Arabian largesse, as crude prices have tumbled to 11-year lows. “The era of material overspending is likely firmly behind us”, said Jean-Michel Saliba, an economist at Bank of America. A brutal sell-off in commodity prices has taken its toll on the Gulf state, which has been dependent on oil for more than three-quarters of its revenues. “Fiscal space is likely tight,” Mr Saliba said, in the wake of a historic budget for the Saudi regime. Officials have been forced to report a record budget deficit of 367bn riyals (£66bn) this year, up from 54bn riyals the previous year. While the deficit was smaller than anticipated, at 15pc of Saudi’s GDP, rather than the 20pc anticipated by economists, Mr Saliba warned that the government’s official figures have been prone to revision in the past, and have “tended to be revised upwards mid-way through the following year”.
Policymakers now plan to slash the deficit to 327bn riyals in 2016, by cutting back spending from 975bn riyals to 840bn riyals. The budget “is a significant one for the Saudi Arabian economy,” explained Mr Saliba. The country’s leadership, painfully reliant on oil, have failed to diversify the Saudi economy. The kingdom’s 2016 budget “likely markets the end of material overspending practices given tighten controls”, as the price of a barrel of Brent crude has tumbled from $115 (£77) in July 2014 to just $36 in recent days. “Budget execution will now be paramount,” said Mr Saliba. The new Saudi budget revealed plans to throttle investment spending. However, officials intend “only to slow the growth in recurring expenditure”, the Wall Street bank explained, rather than planning to cut it outright. The small non-oil parts of the economy will find themselves constrained by plans to cut public spending growth, preventing Saudi Arabia from rebalancing away from the commodity that until now has kept it wealthy.
The most destructive oil crash in a generation is giving ship owners a billion-dollar windfall. With OPEC abandoning output limits in a drive for market share, ships that carry as much as 2 million barrels a trip are in demand to haul crude from the Middle East to Asia and North America. While oil prices fell about 35% in 2015, average earnings for these carriers jumped to $67,366 a day, the most since at least 2009, according to Clarkson, the world’s largest shipbroker. “The stars are aligned for us right now,” Nikolas Tsakos, CEO of Tsakos Energy Navigation, said in an interview at Bloomberg’s New York offices, adding that falling oil prices will likely stimulate demand and cargoes next year. Tanker analysts are predicting the rate boom will persist for many of the same reasons oil forecasters are bearish.
OPEC shows no sign of reversing its market strategy, and Iran has outlined plans to ramp up its exports once economic sanctions against the country are lifted. At the same time, the U.S. just repealed a four-decades old limit on its exports. With on-land inventories already at record levels, this could mean more barrels will eventually be stored on ships, further increasing profit, said Tsakos. The biggest tanker operators who manage fleets from Europe are Euronav, based in Antwerp, Belgium, DHT, Frontline, which runs Norway-born billionaire John Fredriksen’s tanker fleet, and Tsakos Energy in Greece. All have seen their shares rise this year while most energy producers have fallen. “We are benefiting from what is currently a challenging environment for the energy sector,” said Svein Moxnes Harfjeld, joint CEO for DHT. “We expect 2016 to be a rewarding year.”
The Caribbean island of Puerto Rico — the largest United States “territory” — is broke, and a human calamity is unfolding there. Unless a constructive course of political action is found in 2016, Puerto Rican migration to the 50 states will rival the scale of the 1930s Dust Bowl exodus from Oklahoma, Arkansas, and other climate-devastated states. With public debt service (principal plus interest) projected to reach nearly 40% of government revenue in 2016, Puerto Rico needs a new set of economic policies. But austerity will not work; this must be an investment-led recovery, with official measures oriented toward boosting growth by reducing the cost of doing business. The question is whether Puerto Rico will have that option.
Much of its $73 billion debt has been issued by government corporations. But, though federal law allows such municipal debt to be restructured under Chapter 9 of the bankruptcy code in all 50 states, this does not apply to U.S. territories like Puerto Rico. As a result, a protracted series of confusing legal battles and selective defaults looms. The cost of essential infrastructure services — electricity, water, sewers, and transportation — will go up while quality declines. One response has been to demand further belt-tightening, for example, in the form of wage reductions and health care cuts. But residents of Puerto Rico are also U.S. citizens and they vote with their feet — the population has fallen from 3.9 million to 3.5 million in recent years as talented and energetic people have moved to Florida, Texas, and other parts of the mainland.
The more creditors insist on lower living standards and higher taxes, the more the tax base will simply leave the island — causing bondholders’ losses to rise. Disorganized defaults by public corporations will make it hard for any part of the private credit system to function. Leading conservatives in the U.S. — including at the Hoover Institution — have long argued in favor of using established bankruptcy procedures when large financial firms fail. The same logic applies here: A judge can remove any doubt that actual insolvency exists, while also ensuring that credit remains available during a restructuring. During that process, a judge can rely on precedent and ensure fairness across creditor classes based on the precise terms under which loans were obtained.
Marc Faber recommends Treasuries and says the U.S. is at the start of an economic recession, clashing with Federal Reserve Chair Janet Yellen’s view that things are improving. “Ten-year U.S. Treasuries are quite attractive because of my outlook for a weakening economy,” Faber, the publisher of the Gloom, Boom & Doom Report, said on Monday. “I believe that we’re already entering a recession in the United States” and U.S. stocks will fall in 2016, he said. Yellen raised interest rates this month for the first time in almost a decade and said Americans should take the decision as a sign of confidence in the U.S. economy. Analysts differ over whether the Fed’s decision to increase its benchmark came at the right time because the inflation rate is stuck near zero even as gross domestic product expands.
The benchmark U.S. 10-year note yield rose 2 basis points, or 0.02 percentage point, to 2.25% as of 8:31 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.25% security due in November 2025 fell 6/32, or $1.88 per $1,000 face amount, to 99 31/32. Treasuries have returned 1.1% in 2015, down from 6.2% last year, based on Bloomberg World Bond Indexes. U.S. economic growth slowed to an annualized 2% rate last quarter from 3.9% in the previous three months, the Commerce Department said Dec. 22. The last time the economy was in a recession was December 2007 until June 2009, according to the National Bureau of Economic Research. “While things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement,” Yellen said Dec. 16 after the Fed increased its benchmark rate by a quarter percentage point.
Banca Monte dei Paschi di Siena agreed to sell non-performing loans with a book value of about €1 billion to Epicuro SPV, a company backed by affiliates of Deutsche Bank, as the world’s oldest bank seeks to shore up its finances. Most of the loans became non-performing before 2009, the Italian bank said in a statement on Monday. The deal will have a negligible impact on Monte Paschi’s earnings and be completed by the end of the year. The portfolio is composed of almost 18,000 borrowers. CEO Fabrizio Viola is bolstering the bank’s finances by reducing risk and divesting assets after tapping investors twice in less than two years. In June, Monte Paschi sold €1.3 billion of non-performing loans to Cerberus Capita and Banca Ifis.
The portfolio sale is consistent with Monte Paschi’s 2015 to 2018 business plan, which forecasts as much as €5.5 billion of NPL disposals, according to a note from brokerage Fidentiis, which has a sell rating on the bank’s shares. The Siena, Italy-based lender said Dec. 16 that it will restate its financial accounts to comply with a request from Italy’s stock-market watchdog Consob that the bank change how it booked a transaction with Nomura. Consob asked the bank to amend its 2014 and first-half accounts to reflect the deal dubbed Alexandria should be treated as a credit-default swap instead of a repurchase agreement.
Milan prosecutors found new information this year as they investigated the transaction, which the former management had used to hide losses, the bank said, citing Consob’s request. The restatement should have a positive impact of €714 million before taxes on 2015 results, while it will be neutral on capital. Monte Paschi has been engulfed by legal probes into former managers who had covered losses with the Nomura transaction and a similar deal with Deutsche Bank. The lender is now seeking a buyer to help restore profit as bad loans mount.
When the populist Five Star Movement burst into Italian politics in 2009 during the financial crisis, it was defined by uncompromising protests and the burly, sardonic figure of its leader, the comedian Beppe Grillo. But the Five Star Movement is now attempting to change its face from that of one of Europe s most eccentric -even clownish political parties. The transformation aims to achieve what seemed like a fantasy only a year ago: to govern the country and challenge the centre-left government led by prime minister Matteo Renzi. Mr Grillo, 67, has removed his name from the party logo, signalling that he may soon step aside. His most likely heir is Luigi Di Maio, a 29-year-old smooth-talking Neapolitan with polished looks, tight-fitting dark suits and moderate tones.
The perception of the movement has changed, Mr Di Maio tells the FT. At the beginning there was the idea that this was a protest movement .. “But we crashed through that wall. We want to govern”. The odds of that happening are increasing. The Five Star Movement is now Italy s second party. After trailing Mr Renzi s Democratic party by nearly 20 percentage points a year ago, recent polls suggest the margin has shrunk to about 5 percentage points, 32% to 27%. The Five Star Movement is certainly in the best shape of all of Renzi’s challengers, and he is scared of them, says Gianfranco Pasquino, a professor of political science at SAIS-Europe in Bologna. That the Five Star Movement even has a shot at threatening Mr Renzi says much about the waning political momentum suffered by the 40-year former mayor of Florence, who took office in February 2014 amid high hopes that he could transform Italy.
The economy is growing again after years of stagnation and recession. But the gains have not been broadly felt. “People are discouraged, disappointed and still angry”, Roberto D Alimonte, a political-science professor at Luiss university in Rome, says. The recovery has not filtered down. Mr Di Maio has certainly been honing his message against the prime minister. “Renzi seemed like a new face but it didn’t take much to understand that he was moving in the direction of the same old way of governing this country”, he says. But convincing Italians that the Five Star Movement is a credible alternative remains a tall order since many still see it as a party of pure obstruction and opposition. Mr Grillo’s best known political slogan when he launched the movement was “vaffanculo”, an earthy expletive aimed at the establishment. And he has refused to consider being part of any coalition government.
A pre-2015 Trump fantasy was probably something like romping with models after simultaneously winning the Nobel Prizes for Peace, Literature and Physics (they love me in Sweden – scientists were amazed by the size of my skyscraper!). He almost certainly would have been grossed out by a Ghost-of-Christmas-Future-style image of his 2015 self being feted by crowds of rifle-toting white power nerds. But shortly after Trump jumped into the race, he stumbled onto a secret: whenever he blurted out forbidden thoughts about race, ethnicity or gender, he was showered with the attention he always craved. A sizable portion of the country seemed appalled at the things he said. But at the same time he was suddenly attracting huge and adoring crowds at down-home sites like Bluffton, South Carolina and Mobile, Alabama, pretty much the last places you’d ever expect the Trump brand to take off.
Trump had spent his entire career lending his name to luxury properties that promised exclusivity and separation from exactly the sort of struggling Joes who turned out for these speeches. If you live in a Trump building in a place like the Upper West Side, it’s supposed to mean that you’re too cosmopolitan, stylish, and successful – too smart-set – to mix with the rabble. But the rabble – white, working-class, rural, despising exactly those big-city elites who live in Trump’s buildings – turned out to be Trump’s base. They’re the people who hooted and hollered every time he said something off-color about Muslims or Mexicans or Asians (“We want deal!” Trump snickered earlier this year, in a Chinese-waiter voice) or “the blacks.” It was a bizarre marriage, but it made sense from from a clinical point of view. Attention is attention.
Patient with narcissistic personality disorder discovers massive source of narcissistic supply, so he sets about securing its regular delivery. So one comment about Mexicans turned into another about Megyn Kelly’s “wherever,” which turned into a call for a Black Lives Matter protester to be “roughed up,” which turned into an insane slapstick routine about a Times reporter with arthrogryposis, and so on. By December, you had to check Twitter every few hours just to see which cultural taboo Trump was stomping on now. The presidential campaign Trump began as just the latest in a long line of zany self-promotional gambits has now turned into the long-delayed other shoe dropping from the American civil rights movement. This goofball billionaire mirror-gazer has unleashed a half-century of crackpot grievances about the post-civil rights cultural landscape that a plurality of seething white people felt they never had permission to air, until he came along.
“Turkey has gone from being viewed by Western government officials, media and academics as an influential, moderating force for regional stability and economic growth, to a tacit supporter, if not outright sponsor, of international terrorism.”
When the Syrian civil war broke out in 2011, Turkey was one of the earliest countries to invest heavily in the overthrow of the Assad regime. Despite a decade of warming relations with Syria, President Recep Tayyip Erdogan was making a bid to become the region’s dominant power. The situation in Syria has since changed dramatically—but the Erdogan strategy has not. The result is that Turkey has become a barrier to resolving the conflict. It wages war on the Syrian Kurds, Islamic State’s most effective opponents. And the country now plays host to an elaborate network of jihadists, including ISIS. Early on, Turkey wanted to foster a Sunni majority government in Syria, preferably run by the local branch of the Muslim Brotherhood.
This would deprive Turkey’s two historical rivals, Russia and Iran, of an important client state, while allowing it to gain one of its own. The plan was simple and elegant. But the Assad regime proved more resilient than expected, and the West refused to intervene and deliver a coup de grâce. So-called moderate Syrian rebels have either been sidelined by Islamist militants, or revealed to have been Islamist militants themselves. Thanks to Islamic State, the war has spread to engulf half of Iraq. And yet, as a global consensus solidified about the importance of defeating ISIS, Turkey has continued to play the game as if it were 2011. This summer, for example, the Erdogan government came to an important agreement to let the U.S. use two of its air bases for strikes against ISIS.
Yet Turkey has used the same bases to attack Kurdish forces in Iraq and Syria. The Erdogan government remains more concerned with limiting the power of the Kurds in Syria than with defeating ISIS. Turkey has gone from being viewed by Western government officials, media and academics as an influential, moderating force for regional stability and economic growth, to a tacit supporter, if not outright sponsor, of international terrorism. It is also viewed as a dangerous ally that risks plunging NATO into an unwanted conflict with Russia. When Russian President Vladimir Putin labeled the Erdogan government “accomplices of terrorists” after its fighter planes downed a Russian jet on Nov. 24, he was bluntly rewording an accusation that has been made repeatedly, but more diplomatically, in the West.
The accusation: Turkey allows oil and artifacts looted by Islamic State to flow across its border in one direction, while foreign jihadists, cash and arms travel in the other. Speaking last year of the porous Turkey-Syria border, Vice President Joe Biden let slip, in a moment of candor, that the biggest problem the U.S. faced in confronting ISIS was its own allies. More recently, on Nov. 27, a senior Obama administration official described the situation to this newspaper as “an international threat, and it’s all coming out of Syria and it’s coming through Turkish territory.”
Inflation will hit 44pc in Ukraine this year, as the embattled economy has seen prices soar amid economic collapse. Consumer prices have hit eye-watering levels in 2015, according to the country’s central bank governor. Inflation averaged 24.9pc in 2014. Valeria Gontareva, of the National Bank of Ukraine, said authorities were aiming to get inflation to around 5pc by 2019. The war-torn economy, which has been plunged into crisis following conflict with neighbouring giant Russia, will also start to gradually lift capital controls as it begins to receive disbursements of bail-out cash from international lenders, said Ms Gontareva. Ukraine is set to receive around $9bn in rescue cash in 2016, including $4.5bn from the IMF, $1.5bn from the EU, and $1bn loan guarantee from the United States, which will be released in the first quarter of next year.
The economy has also lumbered under capital controls which limit the purchasing of foreign exchange in a bid to protect the collapsing value of the hryvnia. Bail-out cash will also help boost Ukraine’s dwindling foreign exchange reserves, which have steadily grown over the last months to stand at $13.3bn in December. Ukraine has been locked in a stalemate with Moscow over the repayment of a $3bn bond. Kiev defaulted on the debt earlier this month after Russian authorities refused to take part in a private sector debt haircut. The issue has also stoked tensions with the IMF, which changed its lending rules to continue providing aid to governments who fall into arrears. But Ukraine’s central bank chief said there was now no “hindrance” to the release of IMF aid to the country in 2016. “The IMF mission has agreed everything, they don’t need to come to Kiev anymore.”
EU border agency Frontex said Tuesday it had started to deploy 293 officers and 15 vessels on Greek islands to help Athens cope with the massive influx of migrants to its shores. The guards “will assist in identifying and fingerprinting of arriving migrants, along with interpreters and forged document experts,” Frontex said in a statement. “The number of border guards deployed will gradually increase to over 400 officers as well as additional vessels, vehicles and other technical equipment,” it added. More than one million migrants and refugees have landed in Europe this year, with more than 800,000 coming via Greece. At least 3,692 have died attempting to reach Europe across the Mediterranean, according to the International Organization for Migration (IOM).
Municipal authorities in Athens are bracing for a cold snap at the end of the week and are opening emergency shelters for the capital’s homeless. Heated halls will be open to vulnerable groups from 10 a.m. on Wednesday at 35 Alexandras Avenue and at the indoor gymnasium opposite 165 Pireos Street. They will remain open until the cold snap ends, which is expected to happen on the weekend. The National Meteorological Service on Tuesday said that temperatures in the capital are expected to drop on Thursday and Friday to nighttime lows of below 0 degrees Celsius (32 Fahrenheit), with a chance of snow in northern parts. The cold weather is also expected to grip other parts of the country, particularly in the north, where authorities are also taking steps to provide warm spaces for vulnerable groups.
While the religious leaderships of Christian Europe went to pains to remind their faithful in their Christmas messages that Christ and his family were also refugees, Europe’s political leadership did not appear particularly moved – even less so great chunks of the societies that shape the contradictory and self-seeking face of Europe. The fact is that gray is about the most hopeful color that this part of the bloc can be colored, and it has covered much of its area. This is evidenced by elections and public opinion polls in France, Austria, the Czech Republic, Slovakia, the Netherlands and of course Greece, where the rot of racism from the far-right part of those nations is marring the heartfelt expressions of solidarity from so many other members of their societies.
This is also confirmed by the spike in hate attacks: Molotov cocktails launched at refugee camps, anti-refugee rallies, attacks on foreigners, sacred sites and symbols of non-Christian religions, enthusiasm for fences and barricades etc. This gray rot is insidious and threatens to swallow up all that is bright and gives birth to the solidarity shown toward migrants and refugees by those who have chosen to take action in the face of intolerance: people who act in the proper Christian spirit even if they are atheists, agnostics or of another faith. In an atmosphere where consumption fever and the commercialized “Christmas spirit” leaves little room for the true spirit of giving without expecting anything in return to flourish, the symbol of Christ as the political refugee becomes inert.
You cannot use him as a paradigm because he too will become another irritating figure without a home, someone belonging to a bygone era, unwanted and shunned. The fugitive Christ is born and dies every day in the faces of the children that drown in the Aegean or in the waters off Italy, Spain and France. He dies every day in front of the walls of a West that knows how to create wave upon wave of refugees through its cold, calculating actions but is indifferent to helping the victims.
The human mind cannot predict divine will. But maybe it is not blasphemous to speculate that if the Son of God were at Stephansplatz in Vienna last week – during the time of the year meant to celebrate his birth – and seen the disgusting performance of hate staged by far-right “thespians” (men in hoods posing as jihadists, beheading Europeans holding signs welcoming refugees), he would have been unable not to utter the words: “I was a stranger, and ye took me not in: naked, and ye clothed me not.”
For the first time this year, Japan’s stock market is wilder than China’s. As the Topix index plunged 16% from mid-August through Tuesday, short-term volatility jumped to the highest since the aftermath of the 2011 earthquake. The Japan equity measure then soared 6.4% Wednesday, making its price swings more exaggerated than those on the Shanghai Composite Index for the first time since December, data compiled by Bloomberg show. “As it continues to be more volatile, gradually some investors and traders will move to the sidelines to sit back and watch because they view the markets as too dangerous,” said Andrew Clarke at Mirabaud Asia. “And they are correct – just lately Asian markets, especially China, Hong Kong and Japan, have been behaving like casinos.”
For most of the year, Japanese equity investors enjoyed market calm as corporate-governance improvements and a decoupling of stocks from the yen helped the Topix to an eight-year high. Then China’s unexpected yuan devaluation on Aug. 10 spurred a global selloff and upended investment strategies in Tokyo: the correlation between Japan’s equities and currency has soared, while the Topix has been among the world’s worst performing stock measures.
The risk China’s economy enters deflation is growing, data suggested on Wednesday, as signs emerge that some foreign central banks are increasingly worried about the impact falling Chinese prices and a weaker yuan could have on their economies. New Zealand’s central bank governor Graeme Wheeler said that China’s surprise devaluation of the yuan, or renminbi, last month had left them concerned about the risk they may let it slide further. “We’ve seen authorities basically say they want to stabilize the renminbi, but if there were to be a very substantial depreciation in the renminbi it would certainly export deflation around the rest of the world, so everybody is looking closely at China,” he said at a press briefing following an interest rate cut in New Zealand.
The deflation threat was underlined by data showing that Chinese manufacturers cut prices at their fastest rate in six years, with the producer price index (PPI) down 5.9% in August from a year earlier, though consumer prices are rising for now. A growing worry for overseas central banks like the Reserve Bank of New Zealand (RBNZ) is that falling Chinese factory gate prices coupled with a weaker yuan mean the price of exports from China will fall sharply, feeding downward price pressures into their economies. Wheeler’s comments came despite attempts by Chinese policymakers to reassure global markets that the yuan will remain stable and China’s economic growth, whilst slowing, is still set to be around 7% this year.
“The RBNZ…verbalised it but this is probably an underlying concern shared by policymakers around the region,” said Sim Moh Siong, foreign exchange strategist at Bank of Singapore. Wheeler said his central bank’s view is that the Chinese economy is actually growing somewhere between “5-6.5% at this point”, a rare public comment by a central bank governor suggesting that China’s growth is below where the country’s policymakers say it is. The slide in Chinese factory prices is not yet feeding into the consumer price index (CPI), which posted a rise of 2% in August from a year earlier, though the National Bureau of Statistics flagged that last month’s gains were mainly due to soaring food prices, not an improvement in economic activity. “The risk for China is still deflation, not inflation,” said Kevin Lai at Daiwa.
“They have gone from a credible peg that cost them almost nothing to a weak peg that nobody believes and that is costing them more than $10bn a day to defend. They’re paying huge sums for something they had for free just a few weeks ago..”
China has tightened its capital controls, in a sharp reversal of its market liberalising rhetoric, as it struggles to contain the fallout from last month’s devaluation of the renminbi. The August 11 devaluation unleashed turmoil on global stock markets and policy confusion at home, forcing the central bank to spend up to $200bn to support the currency. The prospect of an interest rate rise in the US has further encouraged capital flight. The State Administration of Foreign Exchange (Safe), the unit of the People’s Bank of China in charge of managing the currency, has in recent days ordered financial institutions to step up checks and strengthen controls on all foreign exchange transactions, according to people familiar with the matter and an official memo seen by the Financial Times.
The Safe has ordered banks and financial institutions to pay particular attention to the practice of over-invoicing exports, used to disguise large capital outflows. The administration confirmed the existence of the memo, but declined to comment further. China has long imposed limits on the amount of foreign exchange that can be bought or sold by individuals and companies, but those controls have broken down somewhat in recent years as the renminbi has become more widely used around the world. Wang Tao, chief China economist at UBS, said the government had been expected to tighten some FX controls. But she added that relying on them exclusively to protect the renminbi “will not be viable over the long term and hence is unlikely to be pursued by China’s central bank for long”.
The policy reversal comes after China’s central bank drew heavily on its vast foreign exchange reserves to prevent the renminbi falling dramatically against the dollar in the wake of the technical devaluation last month. Although still the largest in the world, its reserves fell by the biggest amount on record in August, dropping $94bn to about $3.56tn. For the first time since it began internationalising its currency a few years ago, the central bank has also been intervening heavily in the offshore renminbi market to narrow the gap between the onshore (CNY) and offshore (CNH) exchange rates.
Analysts and people familiar with the matter say Beijing has spent up to $200bn defending the currency, but the net impact on the reserves is disguised by fluctuating valuations of reserve assets and other inflows into the reserves. “They have gone from a credible peg that cost them almost nothing to a weak peg that nobody believes and that is costing them more than $10bn a day to defend. They’re paying huge sums for something they had for free just a few weeks ago,” said one person with close ties to China’s central bank. Within the government, the decision to move on the currency so soon after the bursting of an enormous stock market bubble is now widely regarded as a policy misstep.
Citigroup Inc. is sounding the alarm bells for the world economy. In an analysis published late on Tuesday, chief economist Willem Buiter said there is a 55% chance of some form of global recession in the next couple of years, most likely one of moderate depth and length. Unlike the U.S.-driven international slumps of the past two decades, this one will be generated by sliding demand from emerging markets, especially China, which has surged in size to become the world’s No. 2 economy. “The world appears to be at material and rising risk of entering a recession, led by EMs and in particular by China,” wrote Buiter, a former U.K. policy maker. Among reasons for worry is his view that in reality China is already growing closer to 4% than the government’s goal of about 7% targeted for this year.
A shallow recession would likely occur if expansion slowed to 2.5% in the middle of next year and stayed there, he said. Other emerging markets such as Brazil, South Africa and Russia are already in trouble while developed economies are still lackluster. Commodity prices, trade and inflation remain sluggish and corporate earnings are slowing. Buiter is a frequent outlier. Counterparts at Goldman Sachs and JPMorgan are playing down the risk posed by China to rich economies, while those at SocGen said this week that they envisage just a 10% chance of a new global recession with cheap oil providing a buffer against the emerging market weakness. In July 2012, Citigroup was warning of a 90% chance Greece would leave the euro only to be proved wrong.
In the case of China, Buiter reckons it’s facing a “high and rapidly rising risk of a cyclical hard landing” given excess capacity and debts in key sectors as well as corrections in the markets for stocks and real estate. He worries the policy response to fading demand will fall short with debts limiting the scope for monetary policy to help even as the central bank cuts interest rates and tells banks they can hold less cash. Authorities are reluctant to let the yuan fall too far after August’s devaluation or to race to the rescue with fiscal policy. Indeed, PBOC governor Zhou Xiaochuan said last weekend he sees no reason for the yuan to decline further in the long run. As for the advanced economies, Buiter said China’s woes could infect them via declines in trade given it accounted for 14.3% of global commerce in 2013. China unloading some of its $6 trillion of foreign assets such as U.S. Treasuries could also roil international financial markets, while the dollar could surge as investors seek a safe haven.
The good news: the collapse in global market cap since May of 2015 is not the worst ever. The bad news: the $9 trillion drop in combined market cap between the MSCI All World index and Chinese stocks, is the second highest ever, surpassed only by the $13 plunge in global market capitalization in late 2008. Wait, $9 trillion? Yes: for all the focus on the modest correction in the S&P500, what most have forgotten is that in addition to the US, various other development markets, not to mention emerging markets, have lost trillions and trillions in value since their May peaks.
According to SocGen calculations, there has been a $1 trillion drop in emerging markets, a $4 trillion decline in development equity markets, and let’s not forget, the bursting of the Chinese stock bubble, which from a peak market capitalization of $10 trillion in early June, or about the same as China’s GDP, has lost some $4 trillion, since despite the Chinese government’s increasingly more desperate and futile attempts to reflate the bubble. Combining all this, SocGen summarizes, “we are looking at an overall $US9 trillion loss of market capitalisation in less than 3 months! To put that number in context the most severe loss in market capitalisation over 3 months during the 2008/09 financial crisis was $12.8 trillion.” The drop is almost the same as China’s $10 trillion GDP (and likely well higher if one uses credible calculations).
But that’s not the worst news. As SocGen’s Andrew Lapthorne suggests, “such a decline in market values will impact implied leverage calculations and as such all eyes should now be on credit markets. Asian credit is already reacting to the price declines, with the likes of the Markit iTraxx Asia ex Japan CDS index moving significantly wider. However there has, as yet been no significant de-rating of credit in the likes of the US.” [..] Lapthorne’s conclusion… “US corporates also have an insatiable appetite for more debt, with non-financials raising a further $450bn over the past year, according to their latest report and accounts. Why do they need to borrow so much? Well to buy back their own market capitalisation of course!“
Investment in U.K. North Sea oil and gas projects could drop as much as 80% by 2017 as the collapse in crude prices forces the industry to cut back. Capital investment across the industry of 14.8 billion pounds ($22.8 billion) last year will probably decline by 2 billion to 4 billion pounds annually to 2017, Oil & Gas U.K., an industry lobby group, said in its annual economic report Wednesday. “This great industry of ours is facing very challenging times,” Deirdre Michie, Oil & Gas U.K.’s chief executive officer, said in a statement. “Exploration for new resources has fallen to its lowest level since the 1970s” and few new projects are gaining approval from “hard-pressed” companies, she said.
The decline in crude prices of more than 50% over the past year has forced the oil industry to review projects and reduce operating costs. The U.K. North Sea is one of the world’s most expensive areas to operate and resources that were first tapped in the 1960s are depleted. Employment supported by the industry has shrunk by 15% since last year and the lobby group predicts more reductions. “Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices,” Michie said. “A continued low oil price will inevitably cause companies to reflect on the long-term viability of their assets.”
About 140 fields will stop producing over the next five years as low oil prices accelerate decommissioning efforts in the region, Wood Mackenzie said in a report. Five fields have already been retired earlier than expected this year and not even a rebound of prices to $85 a barrel would prevent further closures, it said. The Edinburgh-based energy consultant expects 38 new fields will come online over the same period and another 17 new projects to be approved. Spending on decommissioning old fields will increase by over 50% to 2019 and overtake spending on the development of new fields the same year, it said.
The European Union is fracturing along multiple lines of cleavage, torn by an emerging Kulturkampf over migrant flows before it has overcome the bitter conflict at the heart of monetary union. “The bell tolls, the time has come,” said Jean-Claude Juncker, the head of the European Commission, in his State of the Union speech. “We have to look at the huge issues with which the European Union is now confronted. Our Union is not in a good situation,” he said. Perhaps it would be churlish to point out that the cause of this near existential breakdown is a series of moves that have his fingerprints all over them:
The fateful decision to launch the euro at Maastricht in 1991 without first establishing an EU political union to make it viable, and to do this despite crystal-clear warnings from experts within the Commission and the Bundesbank that it would inevitably lead to a crisis – the “beneficial crisis” as the EMU enthusiasts mischievously supposed. The escalating treaties of Amsterdam, Nice and Lisbon, each concentrating power further in the hands of a deformed institutional system, sapping at the parliamentary lifeblood of the ancient nation-states that can alone be the fora of authentic democracy in Europe. Above all, to destroy trust by overruling the categorical “No” of French and Dutch voters to the European Constitution in 2005, and bringing back the same treaty by executive Putsch, with a disgusted but complicit British prime minister signing the document in a side-room in Lisbon safely screened from the cameras.
One might have thought that the proper conclusion to draw is that the EU can only save itself at this stage by abandoning the Monnet method of treaty-creep and reflexive attempts to force integration beyond proper limits, and retreat instead to the surer ground of bedrock nation states wherever possible. But no, Mr Juncker wishes to invoke treaty powers to force countries to accept 160,000 refugees by a quota, whether or not they agree with his solutions, or indeed whether or not they think it is highly dangerous given the state of total war that now exists between Western liberal civilisation and Jihadi fundamentalism. [..]
By invoking EU law to impose quotas under pain of sanctions, Brussels has unwisely brought home the reality that states have given up sovereignty over their borders, police and judicial systems, just as they gave up economic sovereignty by joining the euro. This comes as a rude shock, creating a new East-West rift within European affairs to match the North-South battles over EMU. With certain nuances, the peoples of Hungary, Slovakia, the Czech Republic, Poland and the Baltic states do not accept the legitimacy of the demands being made upon them.
Britons hate immigrants; Britons need immigrants. History has resolved this paradox through occasional charitable outbursts, when the country’s natural defences are besieged by desperate people seeking shelter. Charity conquers aversion, and the nation has always grown stronger in consequence. The European commission president, Jean-Claude Juncker, welcomed the fact today that Europe was currently seen as “a place of refuge and exile, a beacon of hope and haven of stability”. That should be source of pride, not fear. He is right. Yet to him the Syrian refugees were a political test for the European Union, a test it was failing. Along the frontiers of Greece and Germany, the refugees were not a test. They were a human tide pleading for help – and help now.
Britain has no excuse for turning its back on this plea, least of all when its politicians are playing macho by bombing the refugees’ country of origin. It is sickening at such a time to hear the House of Commons told of “heads not hearts policy … a matter of causes not symptoms … doing more to topple Assad … getting others to pull their weight”. The British have been exemplary hosts to those in distress. The Jews expelled by Edward I began to return under Cromwell, much to the City of London’s gain. The Huguenots of the 16th and 17th centuries landed at Dover, like the Syrians on Lesbos. Britons donated a vast sum, of £50,000, to help them, worth some £8bn today. The refugees were so popular that towns such as Colchester begged for more.
Responses in the 19th century to famine in Ireland and the eastern European pogroms were not so welcoming, but refugees were not turned away. In just two years, during 1846 to 1848, Liverpool took in an astonishing 500,000 people from Ireland. Half a century later, in 1914, 700,000 European Jews were estimated to have found sanctuary in London’s Whitechapel and Manchester’s Strangeways and Red Bank neighbourhoods. There were some riots, but no one quibbled over numbers, or talked of heads not hearts. The flows continued. Government statistics found 25,000 Germans, 15,000 Belgians, 12,000 French and 10,000 Norwegians in wartime Britain. Postwar Poland saw a Syrian-scale exodus, with 8 million fleeing the country.
By the 1950s there were 35,000 Poles registered in London, producing no fewer than 50 Polish newspapers. These flows were overtopped by hundreds of thousands of Asians from the subcontinent and East Africa from the 1960s onwards. In 1972 Britain took in 27,000 Ugandan Asians virtually overnight. The result was nothing but benefit to the British economy. Indeed, the chief argument against accepting so-called economic migrants is that it is an economic sanction on the country of origin.
It is not that the West, or America in particular, is responsible for everything that befalls our awful world. Readers sometimes make it known that they assume this to be the ruling view in this column. But they are grossly unfair and must be corrected: The West, and American in particular, is responsible for almost everything now going wrong across the planet. This is no kind of default political position. It is a detached observation—the kind most Americans dread most. There is not much case for objecting to this thought. Since Columbus hit the rocks in Hispaniola, and da Gama anchored off the Malabar Coast six years later, the West has insisted on leading all the rest. By and large, the world as we have it—defiled, disorderly, violent—is our world.
We Westerners have known best for half a millennium, and our leaders do not take orders—or even suggestions—from anybody. Whatever you see out your window or across any ocean is the doing of those we are content to leave in charge. You may not yet realize that you are reading a column about the migrant crisis in Europe. But it is always best to begin at the beginning. Syrians, Iraqis, Libyans, Afghans, South Asians—one way or another, directly or indirectly, immediately or at a slight remove, they are all victims of the policies through which the Western powers have sought over centuries to impose their will upon weaker people they thought worth disrupting, subjugating and exploiting.
I hope some photographers win press prizes this year for the images coming out of the crisis zones. For me they produce a very weird mixture of sorrow and shame, and I know I am not alone in either case. All those lives interrupted, ruined or lost altogether: Who cannot be moved? But it is only the honest among us who can then admit that every picture coming from a Mediterranean beach or a highway in Hungary is a mirror a migrant holds up to us.
And we – in this critical hour in the history of our continent, in the history of the EU, in the story of what was once called “Christendom” – we failed the Great Test. Our state-of-the-art nations did not want these wretched people. They became bloodsuckers, human mosquitoes, people-smugglers, a “swarm”. And if the rags of our integrity as human beings have been salvaged these past few weeks, this is due to the dour, rather sour Protestant ethics of an east German hausfrau who history may (or may not, for let us remember her people’s grandfathers for whom my Dad was supposed to shoot his own refugees) say has saved our soul.
But if our generosity stretched that far in welcoming Belgian refugees in the First World War, Jewish refugees before the Second World War, Germans afterwards, Hungarians fleeing the 1956 uprising, even a few Chernobyl survivors (some soon to die), they usually had two things in common. They were white – or as near as much as makes no difference – and they were European and – or as near as much as makes no difference – were from our monotheistic world. The Bosnian refugees of the early 1990s were mostly Muslim, of course, but they looked like and were Europeans, and their version of Islam was for us picturesque rather than religious: snow-covered mosques rather than hot Kabaas, a whiff of eastern cuisine washed down with slivovica, Ramadan-and-one-for-the-road.
But these chaps today, camping opposite Dover, for example, as my Dad’s racist friends used to say, were “black as the ace of spades”. Or a bit black. Or brown. Even the Ethiopian Christians – who passed the Christianity test – failed the colour bar. That is why, I fear, we wept for poor Aylan al-Kurdi. His Muslim religion (such as he would have understood it at that age) was cancelled out by his Kurdish origin – the Kurds being a brave warrior people whom we regularly admirer, support and usually betray. We mourned for him not just because he was an innocent three-year old but because he was a white innocent three-year old. Only one more remark remains to me, and I say it now for the first time in my life, as the son of a father who fought the Kaiser’s arms on the Somme, and of a mother who repaired radios on damaged Spitfires during the Second World War. Thank God for Germany.
Faced with the largest migration of displaced people since the end of World War II, the European Union proposed to redistribute 160,000 refugees across the bloc, in a move bound to challenge countries with scant experience accommodating newcomers. The EU has sputtered in previous attempts to craft a coherent approach to the crisis amid competing national interests and insistence by some countries -particularly in the poorer East- that accepting refugees must be voluntary. But support for the burden-sharing plan was growing, propelled by public outcry after 71 migrants were found dead in a truck in Austria last month and images of a drowned 3-year-old Syrian boy in Turkey went viral last week.
The new plan still has to be approved by a so-called qualified majority of EU governments, in which bigger countries have weightier votes. With the four largest countries involved -Germany, France, Spain and Italy- in favor, the odds that the proposal would be adopted are growing. In presenting the plan Wednesday, European Commission President Jean-Claude Juncker acknowledged that it wouldn’t go far enough to address the massive flow of migrants to the continent. The plan is Mr. Juncker’s second attempt to help Greece, Italy and Hungary, the three countries on the front line of the crisis.
“I do believe that given the gravity of the situation we face, this proposal is quite modest,” Mr. Juncker said at a news conference, adding that nearly 500,000 people have made their way to Europe in the past year. He added that while the number of incoming refugees and migrants may be “frightening” for some Europeans, they represent only 0.11% of the total EU population, dwarfing the efforts made by Lebanon, Turkey and Jordan, where a total of four million Syrians have found refuge. Mr. Juncker pointed out that earlier, more modest plans were rejected by EU leaders, saying that if “we had taken decisions back then, perhaps we would have saved a lot of lives.”
“Thank you. Mr Juncker you’ve simply got this wrong. “As I warned you in April, the European Common Asylum Policy sets its terms so wide that to say that anyone who sets a foot on EU soil can stay, I said it would lead to a flow of biblical proportions and indeed that is what we are beginning to see and that’s been compounded by Germany last week saying that basically anyone can come. It is a bit too late now to draw up a list of countries from whom can stay and can’t stay. All they have to do, as they’re doing, is to throw their passports in the Mediterranean and say they’re coming from Syria. As we know the majority of people that are coming and the Slovak Prime Minister has been honest enough to say so, the majority that are coming are economic migrants.
“In addition we see as I warned earlier evidence that ISIS are now using this route to put their jihadists on European soil. We must be mad to take this risk with the cohesion of our societies. If we want to help genuine refugees, if we want to protect our societies, if we want to stop the criminal trafficking gangs from benefitting as they are, we must stop the boats coming as the Australians did and then we can assess who qualifies for refugee status.
“I noted your comments because there is a referendum coming in the United Kingdom. I look forward to seeing you in the UK, I know you intend to spend tens of millions of pounds of British tax payers money telling us what we should think. I have a feeling that the British people will warm to you on a personal level but to suggest that getting rid of a few EU regulations is going to change our minds, sorry unless you give Mr Cameron back control and discretion over our borders the Brits will over the course of the next year, vote to leave.”
In a new development in Europe’s escalating refugee crisis, Denmark has cut off all rail links to Germany. The country’s government is trying to stop migrants and refugees on their way to Sweden. On Wednesday (Sep.9), Danish police halted at the border two trains coming from Germany to Denmark carrying 200 migrants, reports the BBC. Authorities said that passengers refused to leave the trains because they did not want to be registered as refugees in Denmark, but rather in Sweden.
Denmark’s center-right government has recently cut benefits for asylum seekers, and has been “promoting” its new strict regulations on refugees in Middle Eastern newspapers, in attempt to stop people from coming. Earlier on the same day, Danish police also closed down a highway after 300 migrants were forced off a train and began to make their way across the country on foot. More than 1,200 migrants and refugees have crossed the border between Denmark and Germany in recent days, according to the BBC. Both countries belong to the Schengen zone of passport-free travel, but according to EU law, the scheme can be suspended in extraordinary circumstances.
The refugees arrive exhausted in Germany, are greeted and fed by waiting volunteers, then whisked away to reception centres around the country. It all seems as smooth as the assembly line in a BMW factory. Behind this efficient welcome for asylum seekers, though, are scenes of chaos and confusion as Germany’s famous orderliness is overwhelmed and officials scramble to keep up with the waves of newcomers spilling in from the Middle East. Standard procedures like identification and registration are forgotten as most newcomers – Syrians, Iraqis, Afghans and any number of other nationalities – pass through cities like Munich on their way to a hoped-for new life elsewhere. “People who arrive in Munich don’t get registered here at all – they’re distributed all over Germany,” said Christoph Hillenbrand, senior administrator of the Upper Bavaria district around Munich.
Officials are buying so many bunk beds for refugee centres that local supplies are often exhausted and orders are made all the way to China. “IKEA can’t keep up with the demand,” he added, referring to the furniture chain store from Sweden. Newcomers are told to register for refugee benefits at their final destinations within five days, but there is no way to check if they do it. Of about 25,000 arrivals over the weekend, only around 2,000 have stayed in Munich, he added. Officials estimate almost 40% of those arriving this year come from the Balkans and most will be denied asylum, unlike Syrians deemed worthy of protection from their civil war.
With deflation entrenched, its industrial base shrinking and a tough new bailout to service, Greece’s economy is heading for another fall with even those of its citizens lucky enough to be in work poorer than at any time since 2001. [..] The economy grew 0.9% between April and June – the only full quarter in office for Tsipras’s government – as consumer spending rose and exports edged up. But economists say GDP will soon go back into reverse. “We expect the economy to shrink (this year) by a bit less than 2%,” Angelos Tsakanikas, economist at IOBE think tank said, after data on Wednesday showed industrial output fell for the second month running in July and August marked the 30th straight month of year-on-year deflation.
Among factors impacting growth, capital controls were imposed in July, when the banks also stayed shut for a week, and the bailout will come with fresh taxes and pension cuts. “Private consumption was a driver behind the growth in the second quarter, helped by tourism … There was also sporadic spending due to fears of haircuts on deposits related to a possible Grexit,” IOBE’s Tsakanikas said. With the danger of an exit from the eurozone and of a possible overnight devaluation averted for now, Greeks will be less inclined to splash out on consumer goods, especially given salaries are at a 14-year low.
Having risen year-on-year in the previous three quarters, the Greek wage index fell in the second quarter to 85.2, its lowest level since the same quarter of 2001, statistics office data showed on Tuesday. After minimal growth in the third quarter, Tsakanikas expects the economy to contract again in the fourth, and further declines are widely predicted for 2016. That signals a return to a recession that ran from 2008 and 2014 and augurs badly for an unemployment rate that, at 25% in May, is already the highest in Europe. “There is no job creation … The jobless rate will rise after the seasonal boost from tourism fades,” Tsakanikas said, predicting a rise to 28% – a tenth of a percentage point above the record high reached in September 2013.
Who do you call on for €7 billion at short notice to tide over a country like Greece for a month? That was the dilemma euro-area policy makers faced in July as they raced to complete a bailout for Greece and prevent the country from defaulting on the ECB. With time against them, the European Commission’s financial mechanics hit upon a novel solution, without breaking any of the rules shielding taxpayers from losses. While financial markets were used to fund Greece’s bridge loan, the sole investor for the temporary injection was the euro area’s own firewall, according to two people familiar with the matter, who spoke on the condition of anonymity.
The European Stability Mechanism, at that point barred from lending directly to Greece, financed the EU cash advance through a private placement for the Greek bridge loan, the people said. Greece then paid back the short-term funding in August, once its €86 billion ESM bailout was approved. “It highlights just what a political animal the ESM is,” said Jacob Funk Kirkegaard of the Peterson Institute for International Economics in Washington. “That they don’t talk about it is probably because they don’t want to have a debate about just how flexible in practice the ESM is, because there may be other times in the future when people would like to call upon that flexibility to be used.”
When asked Tuesday about the bridge financing, the ESM press office said it doesn’t communicate pro-actively about its investment strategy. The decision to make the private placement to the bridge loan was in keeping with investment policies, which focus on capital preservation and require the fund to invest only in high-quality assets, the Luxembourg-based firewall said. “The proposal by the EC to invest in a short-term transaction in the name of the EU was seen as a good investment opportunity by the ESM investment and treasury department,” the ESM said. “The investment is fully compliant with the ESM existing investment guidelines.”
Brazil’s sovereign rating was cut to junk by Standard & Poor’s, taking away the investment grade the country enjoyed for seven years, as President Dilma Rousseff’s struggles to shore up fiscal accounts amid a faltering economy. The country’s rating was reduced one step to BB+, with a negative outlook, S&P said in a statement after markets closed. Brazil’s largest U.S. exchange-traded fund tumbled 6.6% in late trading along with American depositary receipts for Petrobras, the state-controlled oil company. The downgrade, and S&P’s warning that another cut is possible, puts pressure on the economic team led by Finance Minister Joaquim Levy to win passage of measures that would shore up the country’s fiscal situation by cutting spending or raising taxes.
Rousseff has been unable to find support for her initiatives amid an investigation into corruption at the state-controlled oil company that allegedly occurred while she was its chairman, sending her popularity to a record low and generating calls for her impeachment. “The downgrade could be a wakeup call but the political situation is so bad that it’s difficult to resolve, so its a dark path ahead,” Daniel Weeks, the chief economist at Garde Asset Management, said from Sao Paulo. “Markets will take this as a negative, and it will probably drag down emerging markets at a global level.” Brazil’s government said in August it forecasts a fiscal deficit in 2016 of 30.5 billion reais ($7.9 billion), or about 0.5% of gross domestic product. That compares with a targeted surplus of 2% at the beginning of this year and a revised objective of 0.7% announced in July. The country’s gross debt as a percentage of its economy climbed to 65% in July from 51% at the end of 2011.
At least 15,000 British children are growing up as “Skype kids” because an immigration income threshold does not allow both of their parents to live together in Britain, a children’s commissioner report has found. The research, by the Joint Council for the Welfare of Immigrants (JCWI) and Middlesex University, shows that thousands of British families have been affected by a Home Office minimum income threshold of £18,600 a year for sponsoring a foreign spouse to live in the UK, which was introduced in 2012. The report, Family Friendly?, says the introduction of the £18,600 threshold has resulted in separation for thousands of British families in which one parent is not entitled to live in the UK.
Most of the children – 79% in the survey – affected by the changes are themselves British citizens, and many have suffered distress and anxiety as a result of separation from a parent. The research confirms that the £18,600 minimum income threshold for a UK citizen to bring a foreign spouse or partner from outside Europe to live in Britain on a family visa would not be met by almost half of the adult population. “The threshold is too high and is discriminatory. British citizens who have lived and worked abroad and formed long-term relationships abroad are particularly penalised and find it very difficult to return to the UK,” says the report, published on Wednesday.
Anne Longfield, the children’s commissioner for England, said there was a wealth of evidence indicating that children were far more likely to thrive when raised by parents in a warm, stable and loving family environment. “I am therefore very concerned that the immigration rules introduced in July 2012 actively drive families apart, and leave British children able to communicate with one parent only via Skype,” said Longfield.
The Critical Realist movement, developed by Tony Lawson at Cambridge University, argues against the use of mathematics in economics. I argue that their critique is directed at the abuse of mathematics by Neoclassical economists, rather than the proper use of mathematics per se. In this brief talk–where for some reason my webcam was as static as a Neoclassical model – I explain that my 1995 complex systems model of Minsky – led to a prediction from the properties of the model that could never have been made verbally–and which turned out to be accurate. It is also derived from a set of identities, so while it can be incomplete, it cannot be a mis-specification, as is the case with so many Neoclassical models.
Gold first caught Ron Barbala’s eye in 2008. With the housing values plummeting and the stock market cratering, the Phoenix engineer felt betrayed by the economy, which increasingly he considered little more than a mirage. “The standard American method of investing, all of it”, he said. “I’d had it”. Desperate for something of value he literally could put his hands on, he began acquiring gold and silver bullion. “Its value is in its physicality”, Barbala said. “It just is.” Over the next several years, Barbala bought more than $100,000 worth of precious metals through a little-known downtown Austin company. Started in 1999, Bullion Direct began as an online virtual trading floor where thousands of customers could buy and sell precious metals to each other, with the company taking a cut of each sale.
Later, it began selling the metals to customers directly. It also stored the commodities for those who requested it such as Barbala with the glittering coins and bars kept safely in individual piles for each investor in an old bank vault in its Lavaca Street offices. At least that s what everyone thought. By the time auditors and lawyers got access to Bullion Direct s 14th-floor offices six weeks ago, there were only a handful of gold and silver coins in an office safe. A second vault it had recently rented held only slightly more. An estimated $30 million in cash, metal bullion and valuable coins, meanwhile, had vanished. The cumulative weight of the unaccounted for metal is the equivalent of dozens of standard-sized gold bullion bars and hundreds of silver ones. Also missing are an estimated 1,400 ounces of platinum and palladium.
In recent weeks, as thousands of investors in Texas and across the country have absorbed their bad fortune, there has been no shortage of theories where the precious commodities went — including whether they ever existed at all. The one person who knows for sure, company founder and owner Charles McAllister, recently moved from Wimberley to Alabama. Officials say that while he is being cooperative, many basic questions about the missing fortune remain unanswered.
“The war in Syria is a business in which the Italian government is participating and it is destroying millions of lives including people who are displaced, fleeing or dead.” “With more than 220 thousand victims, 3.5 million refugees and 12 million displaced people, of whom half are children, Syria is a country that no longer exists.”
For years, ltaly has been in the top ten countries in the world for manufacturing weapons. These are sold to countries at war, especially to Africa and the Middle East. Italy is the top European country selling weapons to Syria: since 2001, Syria purchased weapons under license from Europe to a value of €27,700,000. Of this, the value of weapons coming from our country is nearly €17,000,000. Meanwhile, the United States is arming and training the “moderate“ rebels and now ISIS fighters have rifles bearing the inscription: “Property of US Govt“. Someone’s playing games. The war in Syria is a business in which the Italian government is participating and it is destroying millions of lives including people who are displaced, fleeing or dead.
Does the government want to make a contribution to reducing the number of refugees coming from the countries at war? It has to immediately block the export of weapons to countries in the theatre of war and bring in a foreign policy that is not subject to the interests of the USA. Below is the first part of the reconstruction of Syria’s civil war with the responsibilities and the interests of the international players. In the last few days, the photo of little Aylan, who drowned in Turkey, has jolted our emotions and our consciences. And it has once more turned the spotlight onto a war that the world has forgotten. With more than 220 thousand victims, 3.5 million refugees and 12 million displaced people, of whom half are children, Syria is a country that no longer exists.
The NGOs on the ground are talking about a crisis that is worse than the second world war. We are not just looking at a simple theatre of war. Syria is not a new Kosovo or another Afghanistan, but a conflict that is wider and more complex, that is hosting scores of other micro-conflicts. It’s almost impossible to give a simple account of the last few years, but we have a moral duty to try to do so, so that we can understand the rights and wrongs of one of the worst wars of this century. In order to understand the causes that have facilitated the rise of “Islamic State” in Syria, we need to take a few steps back. At the end of 2011, it was the Syrian army that defeated the anti-government rebels, but at the beginning of January, other parallel and autonomous groups popped up.
Among these was the Al-Nusra Front that came into being on 23 January 21012. It was initially composed of members of the Iraqi branch of al Qaeda (Islamic State of Iraq) that was fighting the American presence in the country. It was the first time that there was the creation of a rebel cell clearly inspired by principles of radical Islam. The strategy of suicide attacks generally using car bombs, started off in the Al-Midan neighbourhood of Damascus on 6 January 2012 with the death of 26 people including many civilians. At the end of March 2012, the total deaths in Syria rose to 10,000 and the veil of hypocrisy fell on the rebels – the ones strongly supportred by the United States and the European Union.
Of the demonstrations out in the streets, there’s just a vague memory. Now there’s open warfare. It’s very violent and it’s between factions. In 2013, what many people had feared up until then, actually happened: the Syrian crisis went across the border with Iraq where the power vacuum left by the withdrawal of the USA troops, opened up the way to horrors that took us back to the previous decade. Armed men with their faces covered retook control of the cities of Fallujah and Ramadi, cities that had already experienced brutal urban warfare in 2004 and 2007. The militia with Abu Bakr al Baghdadi are the ones fighting under the flag of ISIL (Islamic State of Iraq and the Levant) or ISIS (Islamic State of Iraq and Syria).
Fascinating to watch the IMF as it fronts for the U.S. Treasury and international lenders in the Greek and Ukrainian debt crises. In the former, the fund pins the Syriza government to the wall because it dares to represent its electorate. In the latter, it stands by the Poroshenko government because it has no intention of representing anybody other than banks, corporations and the global strategy set. “Fascinating” is one word for this and it holds. “Greed in action” is three but they do a better job. Coincidentally enough, both the Greek and Ukrainian cases now near their respective denouements. Miss this and you miss a singularly plain display of power, the way it works and what it works for in the early 21st century.
Athens has debt payments of €1.6 billion due in June and must make them if it is to receive a further tranche of European and IMF funding. This is essential if Greece is to recover—not from the 2008 financial crash and its economic fallout, which was long ago absorbed, but from the recovery program the fund and the EU imposed in 2012. That is textbook neoliberalism, naturally, and the results are before us. PM Alexis Tsipras calls it “a humanitarian crisis,” and I have heard no one dare counter him on the point. The Kiev government owes international bondholders $35 billion, and $23 billion of it is also due in June. Slightly different situation here: Ukraine, too, needs to shake loose I.M.F. and European funds to revive an economy even worse than Greece’s, but this is not about ameliorating any kind of social crisis.
It is about inducing one, in effect, so the neoliberalization process can be completed and working people in Ukraine are made properly, structurally desperate. It is highly unlikely you will read about these two crises in the same news report—this would be asking too much of media committed to conveying disembodied data without context so that readers and viewers cannot understand what they are (not) being told. Let us, then, treat Greece and Ukraine together. It is where the fascination comes in.
Yes, the new behavioral economics is Wall Street’s secret mind-control brainwashing machine. Call it behavioral economics, psychology of investing, the new science of irrationality, it is Wall Street’s most powerful weapon because you can’t see it. They even try to make you think they’re helping you. Bull. Behavioral economists used to be guardians of America’s 95 million Main Street investors, with an aura of integrity, professionals with a fiduciary responsibility. No more. They’re the investors’ enemy, working for Wall Street banks, for Washington politicians, operating in the shadows, like the NSA, developing tools and technologies to secretly control data, manipulate the brains of savers, voters, taxpayers and investors.
Don’t believe me? At first, I couldn’t believe the con game. Back in 2002 when Princeton psychologist Daniel Kahneman won the Nobel Prize in Economic Sciences we were hopeful. He disproved Wall Street’s oldest fraud, the myth of the “rational investor.” We cheered. Kahneman’s research that proved investors were never rational .. are in fact irrational .. always have been irrational .. and we always will be irrational. At first we assumed humans can change – we can still educate ourselves to be more rational. We even assumed Wall Street’s behavioral economists would help us become “less irrational.”
Fat chance. Since then, behavioral economists have been capitalizing on their newfound power to get personally richer: Getting research grants, speaking fees, university professorships and, of course, consulting contracts with Wall Street banks, Corporate America and Washington politicians. What did we get? In recent years many of their books resemble high school level self-help “Psych 101” books with cute titles like “Freakonomics,” “Nudge,” “Sway,” “Animal Spirits,” “Blink,” “Blunder,” “Beyond Greed & Fear,” “Predictable Irrational,” all cleverly packaged for mass-market consumption, all with implied promise that their book will make you less irrational, ready to beat the Wall Street casino.
The world’s largest economy hit a bigger ditch in the first quarter than initially estimated, held back by harsh winter weather, a strong dollar and delays at ports. GDP in the U.S. shrank at a 0.7% annualized rate, revised from a previously reported 0.2% gain, according to Commerce Department figures issued Friday in Washington. The median forecast of 84 economists surveyed by Bloomberg called for a 0.9% drop. By contrast, the report also showed incomes climbed, fueling the debate on whether GDP is being underestimated. A swelling trade gap subtracted the most from growth in 30 years as the appreciating dollar caused exports to slump while imports rose following the resolution of labor disputes at West Coast ports.
Federal Reserve officials are among those who believe the setback in growth will be temporary, helping explain why they are considering raising interest rates this year. “The numbers show the economy literally collapsed last quarter, but we know there were a lot of special factors,” Jim O’Sullivan at High Frequency Economics said before the report. O’Sullivan was the top forecaster of GDP in the past two years, according to Bloomberg data. “There’s a good chance we’ll see a second-quarter bounce back.” Economists’ forecasts ranged from a decline of 1.2% to an increase of 0.2%. The GDP estimate is the second of three for the quarter, with the third release scheduled for June, when more information becomes available. The economy grew at a 2.2% pace from October through December.
For a few months in mid/late 2014 there was some concern among those who still don’t get that in this New Paranormal market the only real buyers are central banks, that while the stock market kept on rising, and rising, NYSE margin debt was flat, and in fact the total amount of purchases on margin at the end of 2014 was nearly the same to those in January. Meanwhile the S&P 500 had soared to recorder highs. A few things here: first, as we explained one year ago, in a world in which levered purchases take place via such shadow banking conduits as repo and primary broker arrangements, margin debt has become an anachronism from a bygone generation in which there wasn’t $2.5 trillion in Fed reserves supporting the market, and is now almost entirely meaningless.
But for those who still cling on to margin debt as indicative of anything, the latest NYSE report should provide some comfort: finally the long-awaited breakout in participation has arrived, and after stagnating for over a year, investors – mostly retail – are once again scrambling to buy stocks on margin, i.e., using debt, and as of April 30, the amount of margin debt just hit a new all time high of $507 billion, $30 billion more than the month before, and nearly 50% higher than the last bubble peak reached in October 2007.
It’s not just margin debt that hit a record high. Investor net worth, which is the inverse, or investor cash and credit balances less total margin debt, just dropped to ($227 ) billion, a new record low, meaning not only is the amount of investors leverage at an all time high, but investor net worth is also at an all time low.
The U.S. economy has fallen into negative territory three times since the current recovery began in mid-2009, a dubious feat that last occurred more than a half a century ago. What’s to blame for the most up-and-down recovery since the mid-1950s? Serious flaws in how GDPis calculated is one prime suspect. The government’s GDP report appears to have underestimated growth in the first quarter for decades, a problem that has become even more acute. At the same time GDP probably has overstated growth in the second and third quarters, so the underlying U.S. growth rate is probably the same. “The evidence of a seasonal quirk in the first-quarter GDP growth figures is pretty overwhelming,” said Paul Ashworth at Capital Economics. The second culprit – and evident ring leader – is the U.S. economy itself.
Bad policy, back luck or whatever you call it, the economy is no longer growing as fast as it used to. So any time there’s a temporary dip in economic activity because of poor weather, spiking oil prices or some other major event, it’s no surprise that GDP might show a contraction. The U.S. has grown at a mediocre 2.2% annual pace since the first full year of recovery in 2010. That’s just two-thirds as fast as the economy has grown since the government began keeping track in early 1930s. The less the economy grows, the easier it is for quarterly GDP to slip into the red from time to time, especially if some sort of “shock” occurs. The first-quarter suffered from several of them: unusually harsh weather, a dockworker’s strike, a soaring dollar that undercut U.S. exports and a drop in business investment tied to plunging oil prices.
Of course, such shocks are nothing new, and the economy in the past has shown more resistance to them. The U.S. did not experience a single negative quarter, for example, during the last three major economic expansions: the early 2000s, the 1990s and the 1980s. You have to go a lot further back to the weak 1973-75 expansion to find another episode of a quarterly contraction in a recovery phase. Another one occurred in the short-lived 1958-1960 recovery. The last U.S. recovery to include three negative quarters like the current one was from 1954 to 1957. Yet there is one big difference compared to today: the economy back then expanded by leaps and bounds. The U.S. grew at a 3.8% rate during the “Eisenhower recovery” following the end of the Korean War. And the fastest quarter of growth nearly reached 12% — more than twice as strong as the best quarter in the latest recovery.
Take a look around the world and it’s hard not to conclude that the United States is a superpower in decline. Whether in Europe, Asia, or the Middle East, aspiring powers are flexing their muscles, ignoring Washington’s dictates, or actively combating them. Russia refuses to curtail its support for armed separatists in Ukraine; China refuses to abandon its base-building endeavors in the South China Sea; Saudi Arabia refuses to endorse the U.S.-brokered nuclear deal with Iran; the Islamic State movement (ISIS) refuses to capitulate in the face of U.S. airpower. What is a declining superpower supposed to do in the face of such defiance?
This is no small matter. For decades, being a superpower has been the defining characteristic of American identity. The embrace of global supremacy began after World War II when the United States assumed responsibility for resisting Soviet expansionism around the world; it persisted through the Cold War era and only grew after the implosion of the Soviet Union, when the U.S. assumed sole responsibility for combating a whole new array of international threats. As General Colin Powell famously exclaimed in the final days of the Soviet era, “We have to put a shingle outside our door saying, ‘Superpower Lives Here,’ no matter what the Soviets do, even if they evacuate from Eastern Europe.”
Strategically, in the Cold War years, Washington’s power brokers assumed that there would always be two superpowers perpetually battling for world dominance. In the wake of the utterly unexpected Soviet collapse, American strategists began to envision a world of just one, of a “sole superpower” (aka Rome on the Potomac). In line with this new outlook, the administration of George H.W. Bush soon adopted a long-range plan intended to preserve that status indefinitely. Known as the Defense Planning Guidance for Fiscal Years 1994-99, it declared: “Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union.”
H.W.’s son, then the governor of Texas, articulated a similar vision of a globally encompassing Pax Americana when campaigning for president in 1999. If elected, he told military cadets at the Citadel in Charleston, his top goal would be “to take advantage of a tremendous opportunity – given few nations in history – to extend the current peace into the far realm of the future. A chance to project America’s peaceful influence not just across the world, but across the years.”
Before Piketty, there was Atkinson. The subject of inequality is now, perhaps indelibly, associated with the young French economist who burst into the public arena last year and became an unlikely bestselling author across the Anglophone world. But Thomas Piketty himself drew heavily on the work of a British economist – a debt the Frenchman readily admits. “Tony Atkinson is the godfather of historical studies of income and wealth,” he enthused last year. It’s no exaggeration. Sir Anthony Atkinson has been researching inequality since the 1960s and published his first major book on the subject in 1978, when Mr Piketty was still at primary school. The Atkinson index of inequality is named after him. Some scholars expect him to be awarded the Nobel economics prize at some stage.
And now the 70-year-old London School of Economics professor has produced another tome on the subject, Inequality: What can be done?. Yet for all the book’s scholarly virtues and for all the esteem in which Sir Anthony is held within the profession, it seems unlikely it will sell as many copies as Mr Piketty’s blockbuster Capital in the 21st Century. Lightning, after all, rarely strikes twice in the same spot. When I meet Sir Anthony to discuss his latest work, I ask whether it rankles to see another, much more junior colleague become the celebrated face of the subject. Sitting in his rather spartan office just off Lincoln Inn’s Fields, he smiles at the suggestion: “Not at all. He [Piketty] is an amazing character. He’s very inventive. I think he’s managed to present the issue in a way that’s attracted a lot of attention.”
Nevertheless, Sir Anthony stresses that, much as he shares Mr Piketty’s concerns about the level of income inequality across much of the developed world, his own book has a different emphasis. “I think what I would have done differently is discuss more what we can do about it [inequality],” he says. He certainly doesn’t duck the challenge of coming up with constructive policy ideas. The final chapter of his book is overflowing with ideas on how to reduce inequality back to where it stood before what he calls the great “inequality turn” of the early 1980s, when Margaret Thatcher’s government entered office.
“If you ain’t cheating, you ain’t trying” were the words of one trader working in the foreign exchange market. They belie an attitude that was widespread among traders in this market between 2009 and 2013. Cheating was simply a normal part of a trader’s day job. In fact, not cheating would be to shirk your duties. Widespread cheating in the foreign exchange market has turned out to be very costly indeed. In the past six months, six large banks around the world have paid out US$10 billion in fines over the manipulation of the global foreign exchange market. There have also been fines levied against banks for manipulating other over-the-counter markets such as LIBOR, the ISDAfix and the gold market.
In addition there have been fines for other bad behaviour by banks like money laundering, their role in the sub-prime mortgage crisis, violating sanctions, manipulation of the electricity market, assisting tax evasion, and mis-selling payment protection insurance. This brings the total amount of fines which banks have paid since 2008 to over US$160 billion. To put this in context, this is more than what the UK government spent on education last year. As the cost of misbehaviour mounts, banks are under increasing pressure to clean up their act. Despite widespread public cynicism, much has already changed within the banking sector. Banks have beefed up their risk function and increased oversight of traders.
They have also changed the “tone from the top”. Senior managers of the boom years who promoted a hard-driving, risk-taking culture have largely been replaced by bankers who talk more about ethics, careful risk management and serving the customer. A new legal regime has been put in place to hold senior bank employees personally responsible for wrong-doings on their watch. Banks are required to hold more equity on their balance sheets. There have been new laws which change the way bankers are paid, to emphasise long-term performance rather than short-term risk taking. Riskier trading and investment banking operations are being ring fenced from their more staid retail banks.
All these changes might be making bankers safer, but will they do anything to make the markets which they operate within any less likely to reward bad behaviour? We usually assume a market like foreign exchange emerges from millions of individual decisions. Changing this might sound impossible. But each of these decisions are made within a particular set of constraints. These constraints are the product of deliberate policy design choices. Changing behaviour in a market like foreign exchange involves looking carefully at the design of the market and asking whether this actually does the job it is supposed to do. As it currently stands, the foreign exchange market seems to be designed to create opportunities for bad behaviour..
Greece’s government is confident of reaching a deal with its creditors this week and is open to pushing back parts of its anti-austerity program to make that happen, the country’s interior minister said Saturday. Greece and its EU/IMF creditors have been locked in talks for months on a cash-for-reforms deal and pressure is growing for a deal, since Athens risks default without aid from a bailout program that expires on June 30. “We believe that we can and we must have a solution and a deal within the week,” Interior Minister Nikos Voutsis, who is not involved in Greece’s talks with the lenders, told Skai television. “Some parts of our program could be pushed back by six months or maybe by a year, so that there is some balance,” he said.
He did not elaborate on what parts of the ruling Syriza party’s anti-austerity program could be pushed back, but the comments suggested a greater willingness to compromise on pre-election pledges. Prime Minister Alexis Tsipras stormed to power in January on promises to cancel austerity, including restoring the minimum wage level and collective bargaining rights. The government earlier this week said it hoped for a deal by Sunday, though international lenders have been less optimistic, citing Greece’s resistance to labor and pension reforms that are conditions for more aid. Voutsis said Athens and its partners agreed on some issues, such as achieving low primary budget surpluses in the first two years.
But they still disagreed on a sales tax, with Greece pushing so any VAT hikes will not burden lower incomes. “A powerful majority in the political negotiations has showed respect for the fact that there can’t be further austerity strategies for the Greek issue, the Greek problem and the Greek people,” he said. [..] In an interview with Realnews newspaper published on Saturday, Economy Minister George Stathakis said Athens had no alternative plan. “The idea of a Plan B doesn’t exist. Our country needs to stay in the eurozone but on a better organized aid program,” he said. Stathakis was confident a deal will be reached. “Otherwise, mainly Greece but the European Union as well will step into unchartered waters and no-one wants that.”
Cash-strapped Greece could avoid paying back the IMF on June 5 and win more time to negotiate a funding deal without defaulting if it lumps together all IMF repayments due in June and pays them at the end of the month, officials said on Tuesday. Greece has to repay the IMF €300 million on June 5, the first of four instalments due in June that total €1.6 billion. Cut off from markets, Athens has said it will not be able to make the June 5 payment without new loans from the euro zone, which insists it can only lend Greece more if the country agrees to reforms that would make its debt sustainable. “There is the possibility of putting together several payments that Greece would need to make to the IMF in the course of June and then just make one payment,” a senior euro zone official close to the talks with Athens said.
A second official close to the talks also acknowledged that possibility. “That’s basically a technical treasury exercise and they could tell the IMF that this is how they want to do it and the IMF would probably have to be OK with that,” the first official said. But the officials noted that Greece could only use such a trick if there was a credible prospect of a funding deal that could be communicated to markets and its citizens. Otherwise, the missed payment could trigger market panic and a bank run in Greece. “So they would get a few extra weeks. But unless there is some perspective how they would deal with this full payment, it would be a risky thing for the Greeks to do. And the consequences would be unpredictable,” said the first official. “People could want to withdraw their savings and who knows what Greece would have to do.”
Game theorists know that a Plan A is never enough. One must also develop and put forward a credible Plan B – the implied threat that drives forward negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis, knows this very well. As the Greek government’s anointed “heavy,” he is working Plan B (a potential exit from the eurozone), while PM Alexis Tsipras makes himself available for Plan A (an extension on Greece’s loan agreement, and a renegotiation of the terms of its bailout). In a sense, they are playing the classic game of “good cop/bad cop” – and, so far, to great effect. Plan B comprises two key elements.
First, there is simple provocation, aimed at riling up Greek citizens and thus escalating tensions between the country and its creditors. Greece’s citizens must believe that they are escaping grave injustice if they are to continue to trust their government during the difficult period that would follow an exit from the eurozone. Second, the Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option. Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital.
Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts), draining liquidity from their country’s banks. Other eurozone central banks are thus forced to create new money to fulfill the payment orders for the Greek citizens, effectively giving the Greek central bank an overdraft credit, as measured by the so-called TARGET liabilities. In January and February, Greece’s TARGET debts increased by almost €1 billion per day, owing to capital flight by Greek citizens and foreign investors.
At the end of April, those debts amounted to €99 billion. A Greek exit would not damage the accounts that its citizens have set up in other eurozone countries – let alone cause Greeks to lose the assets they have purchased with those accounts. But it would leave those countries’ central banks stuck with Greek citizens’ euro-denominated TARGET claims vis-à-vis Greece’s central bank, which would have assets denominated only in a restored drachma. Given the new currency’s inevitable devaluation, together with the fact that the Greek government does not have to backstop its central bank’s debt, a default depriving the other central banks of their claims would be all but certain.
Shanghai’s stock market just experienced a Wile E. Coyote moment. For weeks, investors had been chasing higher and higher returns. On Wednesday, however, they suddenly looked down to find their road had disappeared. The realization came courtesy of China’s central bank, which had decided to drain cash from the financial system, and jittery brokerages, which had just tightened lending restrictions. That one-two punch didn’t just send Chinese stocks down 6.5%, the most in four months. It also raised existential questions about one of modern history’s greatest asset bubbles. And it is a bubble. The 127% gain in the Shanghai Composite Index over the past year defies financial gravity.
It’s been driven not by optimism about China’s economic fundamentals or corporate earnings, but record growth in margin debt. Such lending — fueled by speculation that the People’s Bank of China will soon cut interest rates and reduce lenders’ reserve requirements — exceeded $322 billion as of May 27, five times the level of a year earlier. And that’s just the official tally: China’s shadow banking system is estimated to have created $20 trillion of credit since Lehman Brothers went bankrupt in 2008. What makes China’s bubble unique is the government’s direct role in creating it, feeding it and now managing it. Last August, for example, as the Chinese stock market threatened to sag, state-run media started prodding the Chinese public to pile their life savings into shares.
During a single week in August 2014, Xinhua News Agency put out eight features espousing the wisdom and patriotism of owning equities. Beijing also reduced trading fees and allowed individuals to open as many as 20 accounts. The implicit message was that the Communist Party could and would protect stock investments, if need be. The plan succeeded beyond Beijing’s wildest expectations, leaving it with an epic challenge: How do you deflate a giant bubble without enraging the masses or losing control of the economy?
Christine Lagarde’s people say China’s currency is no longer undervalued. Jacob Lew’s argue it still is. There’s a lot at stake in the debate: The yuan can’t gain status as a global currency reserve if China is thought to be manipulating its value. So who should we believe, the head of the IMF or the U.S. Treasury Secretary? It’s worth asking Ben Bernanke. Now that the former Fed chairman is in the private sector, he can say what he really thinks — and, as he pointed out in a recent speech in Seoul, it’s not wise to ignore political factors when managing the rise of the Chinese economy. Bernanke argued that if Washington had heeded IMF requests to allow China to play a larger role in global institutions, Beijing wouldn’t now be creating the $100 billion Asian Infrastructure Investment Bank, which threatens to undermine the existing global financial system.
It’s worth extending Bernanke’s point to the yuan debate. Japan’s yen is down 30% since late 2012 (hitting a 12-year low this week) while the yuan has risen during the same period. So the IMF has good reason to contradict America’s assessment and bolster China’s case for reserve currency status. But there are two further reasons why the IMF must stand firm, no matter what U.S. officials and lawmakers say. First, China might go it alone. As Bernanke points out, the West is playing hardball with Beijing at its own risk. The AIIB is already diminishing the relevance of the World Bank and Asian Development Bank. What’s to keep Beijing, flush with $3.7 trillion of reserves, from now opening its own bailout fund for governments facing balance-of-payments shortfalls? China proposed a similar idea during the region’s 1997 economic crisis.
Although the idea died a quick death at that time amid fears the IMF and U.S. Treasury would lose influence, it might attract more interest now – especially if China promises to demand less austerity from needy countries like Greece. “If the IMF were to sidestep the explicitly stated desire of China’s government,” says Eswar Prasad of Cornell University in Ithaca, New York, “it would create more bad blood in an already contentious relationship regarding currency matters.” He worries it would “crystallize emerging market policymakers’ concerns that the IMF remains an institution run by and for the benefit of advanced economies.” That would encourage nations to rally around Beijing’s alternative lending institutions, and could deal a fatal blow to the post-World War II global financial architecture.
Second, Chinese economic reform is accelerating. Bernanke is right that the yuan has a ways to go before it can become a major reserve player. But a new Swift study shows the yuan is Asia’s most-active currency for payments to China and Hong Kong and number five globally. Convertible or not, the yuan is too big to ignore. In that sense, its inclusion in the IMF’s special drawing rights system – along with the dollar, euro, yen and pound – is a matter of when, not if.
France’s far-right National Front party has called for an in/out referendum on the EU at the same time as the UK holds its vote. Florian Philippot, an MEP and the party’s deputy head, wrote on Thursday (28 May) that president Francois Hollande should “follow the British example” and “follow the calendar outlined by our neighbours across The Channel”. “The time has come to ask everybody in Europe Yes or No – if they want sovereignty to decide on their own future”. He added that British PM David Cameron, who is currently on a tour of European capitals to sound out feeling on a renegotiation of EU powers, “with this referendum … has put himself in a powerful position to demand real reforms”.
He also said that if Hollande declines to do it, the National Front will put an in/out EU vote “at the heart” of its 2017 presidential election campaign. Speaking on BFM-TV earlier in the week, Philippot noted that his party wants a “referendum republic”, in which average people can trigger a popular vote on any subject if they file more than 500,000 signatures. He cited Switzerland as a model and listed French membership in Nato, in the Schengen passport-free area, and the EU-US free trade treaty as other potential votes. For its part, French daily Le Figaro, in an Ifop poll published on Friday, said 62% of French people would vote No to the EU constitution again if they were asked the same question as 10 years ago.
Italy helped rescue a total of more than 3,300 migrants trying to cross the Mediterranean on Friday, the country’s coastguard has said. In one operation, 17 bodies were found on three boats. Another 217 people who were on board were rescued.
The coastguard said distress calls were made from 17 different boats on Friday. The International Organization for Migration (IOM) says at least 1,826 people have died trying to cross the Mediterranean so far in 2015. It represents an almost 30-fold increase on the same period last year, the IOM says. The Corriere della Serra newspaper said (in Italian) that most of the rescues on Friday took place close to the Libyan coast.
Irish, German and Belgian ships took part in the rescue, the newspaper said. The UN estimates that at least 40,000 people tried to cross the Mediterranean between the start of the year and late April. The rise has been attributed to chaos in Libya – the staging post for most crossings – as well as milder weather. Many migrants are trying to escape conflict or poverty in countries such as Syria, Eritrea, Nigeria and Somalia. On Thursday, the charity Medecins sans Frontieres reported that a 98-year-old Syrian man had been rescued from a boat, having travelled by sea from Egypt for 13 days. He was taken to Augusta in Sicily.
A study says Germany’s birth rate has slumped to the lowest in the world, prompting fears labour market shortages will damage the economy. Germany has dropped below Japan to have not just the lowest birth rate across Europe but also globally, according to the report by Germany-based analysts. Its authors warned of the effects of a shrinking working-age population. They said women’s participation in the workforce would be key to the country’s economic future. In Germany, an average of 8.2 children were born per 1,000 inhabitants over the past five years, according to the study by German auditing firm BDO with the Hamburg Institute of International Economics (HWWI). It said Japan saw 8.4 children born per 1,000 inhabitants over the same time period.
In Europe, Portugal and Italy came in second and third with an average of 9.0 and 9.3 children, respectively. France and the UK both had an average of 12.7 births per 1,000 inhabitants. Meanwhile, the highest birth rates were in Africa, with Niger at the top of the list with 50 births per 1,000 people. Germany’s falling birth rate means the percentage of people of working age in the country – between 20 and 65 – would drop from 61% to 54% by 2030, Henning Voepel, director of the HWWI, said in a statement (in German). Arno Probst, a BDO board member, said employers in Germany faced higher wage costs as a result. “Without strong labour markets, Germany cannot maintain its economic edge in the long run,” he added. Experts disagree over the reasons for Germany’s low birth rate, as well as the ways to tackle the situation.
Chuck Blazer was a powerful figure in international soccer, and he enjoyed the trappings that came with the role: two apartments at Trump Tower in Manhattan, expensive cars, luxury properties in Miami and the Bahamas. But for all of Mr. Blazer’s lavish living, he did not file personal income tax returns. And in August 2011, Steve Berryman, an IRS agent in Los Angeles, opened a criminal investigation. Thousands of miles away in New York, two FBI agents, Jared Randall and John Penza, were working on an investigation of their own, one that had spun off an unrelated Russian organized-crime case in December 2010. The agents on opposite sides of the country were looking at some of the same people.
In December 2011, news reports revealed that the FBI was asking questions about FIFA, global soccer’s governing body, and the California investigators called New York. The two agencies joined forces, setting in motion the sprawling international case that led to the arrests of top soccer officials this week. The investigation, which involved coordination with police agencies and diplomats in 33 countries, was described by law enforcement officials as one of the most complicated international white-collar cases in recent memory. Fourteen people have been indicted in bribery and kickback schemes linked to corruption in the highest echelons of FIFA. And United States authorities say more charges are all but certain.
“I’m fairly confident that we will have another round of indictments,” said Richard Weber, the chief of the I.R.S. unit in charge of criminal investigations. The American government’s aggressive move shocked the soccer world and led to questions about whether the United States had set out on a mission to topple the leadership of FIFA, which has long been troubled by allegations of corruption. But officials at the Justice Department, the F.B.I. and the I.R.S. said the impetus was criminal activity and organized crime that just happened to occur in the soccer world. “I don’t think there was ever a decision or a declaration that we would go after soccer,” Mr. Weber said. “We were going after corruption.” He added, “One thing led to another, led to another and another.”
Still, investigators quickly realized the potential scope of their case. By the time the F.B.I. and the I.R.S. teamed up, an undercover sting operation by the British newspaper The Sunday Times had revealed corruption in FIFA’s highest ranks. Reporters around the globe followed with articles about whether soccer’s top officials could be bought. “We always knew it was going to be a very large case,” Attorney General Loretta E. Lynch said.
Billionaires and politicians gathering in Switzerland this week will come under pressure to tackle rising inequality after a study found that – on current trends – by next year, 1% of the world’s population will own more wealth than the other 99%. Ahead of this week’s annual meeting of the World Economic Forum in the ski resort of Davos, the anti-poverty charity Oxfam said it would use its high-profile role at the gathering to demand urgent action to narrow the gap between rich and poor. The charity’s research, published today, shows that the share of the world’s wealth owned by the best-off 1% has increased from 44% in 2009 to 48% in 2014, while the least well-off 80% currently own just 5.5%. Oxfam added that on current trends the richest 1% would own more than 50% of the world’s wealth by 2016.
Winnie Byanyima, executive director of Oxfam International and one of the six co-chairs at this year’s WEF, said the increased concentration of wealth seen since the deep recession of 2008-09 was dangerous and needed to be reversed. In an interview with the Guardian, Byanyima said: “We want to bring a message from the people in the poorest countries in the world to the forum of the most powerful business and political leaders. “The message is that rising inequality is dangerous. It’s bad for growth and it’s bad for governance. We see a concentration of wealth capturing power and leaving ordinary people voiceless and their interests uncared for.”
Oxfam made headlines at Davos last year with a study showing that the 85 richest people on the planet have the same wealth as the poorest 50% (3.5 billion people). The charity said this year that the comparison was now even more stark, with just 80 people owning the same amount of wealth as more than 3.5 billion people, down from 388 in 2010. Byanyima said: “Do we really want to live in a world where the 1% own more than the rest of us combined? The scale of global inequality is quite simply staggering and despite the issues shooting up the global agenda, the gap between the richest and the rest is widening fast.”
Fevered rallies and dramatic falls go with the territory of investing in mainland China. But even by Shanghai’s wild standards, Monday’s plunge was one to remember. By the close of trading, the Shanghai Composite had tumbled 7.7% — its biggest fall in five years — erasing all its January gains. Having been the best performing market in the world last year, China’s volatile streak has been swiftly exposed once more. The immediate trigger was a move by the China Securities Regulatory Commission (CSRC) to clamp down on margin lending at the big brokerages, which all saw their stocks down by the daily limit of 10%. Borrowing to invest in equities has been a key driver of Shanghai’s charge upwards, with margin financing almost tripling between June and December to hit Rmb767bn ($124bn) last week.
Hong Hao, strategist at Bank of Communications, described the curb on margin trading as a “nasty surprise”, and one that could send the market into a tailspin. “With less incremental liquidity flow into stocks and damped sentiment, the market will correct in the near term, and the move can be violent,” Mr Hong wrote in a note to clients. Separately on Friday, the banking regulator issued draft rules that would limit the use of intercompany loans. Loans between non-financial companies, in which a bank serves as intermediary, have exploded in recent years, with new loans hitting Rmb2.5tn in 2014. Local media reports say some of those funds have flowed into the stock market. The question now facing investors is whether the market can bounce back quickly without more credit-fuelled speculation.
Many remain bullish, seeing the new regulations as simply a stress test for the market. Jin Mi at China Merchants Securities, a top 10 brokerage by assets, said the CSRC was sending “a warning to the market against excessive optimism”. “Almost no investors believe this is the end of the party,” he wrote in a report. Many analysts believe Shanghai’s bull run is a government-induced phenomenon, designed to give Chinese savers an alternative to the wobbly housing market or risky shadow banking products . That has drawn in millions of retail punters, who have been opening new trading accounts at a record pace. “The government has been urging people to buy stocks, which gives people a sense of a put on the market,” says David Cui, strategist at Bank of America Merrill Lynch.
The surprise move by Switzerland to scrap its currency ceiling against the euro last week is a reminder there can be unexpected collateral damage from central banks waging currency wars. As markets digest last week’s turmoil, expect focus to turn to other fault lines on the global currency map. Here China stands out, as like the Swiss, it runs an implicit currency peg that is becoming increasingly painful to maintain. Due to its longstanding crawling peg to the U.S. dollar, the yuan has increasingly found itself pulled higher against just about every major currency. The world’s largest exporter has already had to endure two years of aggressive yen devaluation since the introduction of Abenomics and its accompanying quantitative easing. Now comes a new front, as the ECB looks ready to green-light its own QE next week. The move by Switzerland also means the Swiss National Bank ceases its purchases of euros needed to maintain its peg, again meaning the euro will all but certainly head lower.
Further currency strength is likely to be distinctly unwelcome for the Chinese economy. Later this week, gross domestic product figures for 2014 are widely expected to show growth at its slowest pace in 24 years if, as some predict, the government’s 7.5% annual growth target is missed. This comes at the same time that the economy is flirting with outright deflation and amid a new trend of foreign capital exiting China. Last week’s currency ructions present a new headwind to growth as exports will be harder to sell across Europe, China’s second biggest market after the U.S. The other danger looming for China is that a strong currency exacerbates deflationary forces. Producer prices have been falling for almost three years, and the plunge in crude-oil prices adds a further disinflationary bent. The property market looks as if it could also push prices decisively lower. Prices of new homes in big cities fell 4.3% in December from a year earlier, according to new government data released over the weekend.
The difficulty for Beijing is that these external movements in currencies are outside its control. If moves to depreciate the euro trigger another round of competitive deprecations, just how much more yuan appreciation can China withstand? While the policy actions of both the Swiss and European central banks last week appear quite different, they share a common feature: Both acted with reluctance only when the pain became too much to bear. The reason deflation is public enemy No. 1 for central banks is that debt becomes much harder to service and can stall growth and employment as consumers put off purchases and business put off investment. China certainly has debt levels that would make deflation worrisome. Total debt levels are now estimated to be in excess of 250% of GDP. Lower-than-expected bank loan growth in December also suggests demand in the economy is already weak.
Chinese brokerages’ shares plunged after the securities regulator suspended three of the biggest firms from adding margin-finance and securities lending accounts for three months following rule violations. Citic Securities, the nation’s biggest broker, fell 14% as of 9:35 a.m. in Hong Kong. Haitong Securities and Guotai Junan Securities were among others whose shares tumbled. The trio were suspended after letting customers delay repaying financing for longer than they were supposed to, the China Securities Regulatory Commission said on its microblog on Jan. 16, without giving more details. Regulators may have been concerned that stock gains, partly driven by margin financing, are too rapid, according to Hao Hong, a strategist at Bocom International in Hong Kong.
The move came after the Shanghai Composite Index surged 63% in six months and brokers including Citic and Haitong announced plans to raise more money to lend to clients.“Brokerage shares are likely to get hit,” Hong said before the market opened today. “After all, margin financing is one of the reasons for people to be bullish on brokerage stocks, and these stocks have run particularly hard.” Citic and Haitong, the nation’s biggest brokers by market value, announced plans for share sales that will help fund an expansion of businesses including margin financing. Those two and Guotai Junan were the three largest by assets in a 2013 ranking by the Securities Association of China. “The regulators are doing this to cool down the stock market,” said Castor Pang, head of research at Core-Pacific Yamaichi in Hong Kong. “Stock market sentiment will definitely go down.”
China’s biggest brokerages are getting squeezed on two fronts as regulators curb loans to equity traders. Not only does the three-month ban on new margin-trading accounts at Citic Securities and Haitong Securities reduce their potential earnings from lending to clients, it also curbs one of the biggest buyers of the firms’ own shares: margin traders. The brokerages are among the top five holdings of investors using borrowed money, according to Shao Ziqin, analyst for Citic, who cited calculations as of Jan. 15. Of the top 20, six were brokers and seven were banks. They all plunged today as the Shanghai Composite Index headed for the biggest drop since 2008. “Bank and brokerage stocks will definitely be the hardest hit since leveraged funds helped to push up their share prices in the first place,” said Zhang Yanbing, an analyst at Zheshang Securities in Shanghai.
Investors borrowed 32.6 billion yuan ($5.2 billion) to buy Citic Securities shares as of Jan. 15, accounting for about 3% of outstanding margin loans, according to Shao, who cited Wind Information data. Haitong purchases had attracted 14.8 billion yuan of margin loans. The total amount of shares purchased on margin has surged more than tenfold in the past two years to a record 1.1 trillion yuan, or about 3.5% of the nation’s market capitalization. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a broker. The loans are backed by the investors’ equity holdings, meaning that they may be forced to sell when prices fall to repay their debt. Citic Securities said in an e-mail that its operations remain unchanged, including a plan to sell shares via a private placement in Hong Kong.
While shares of both brokerages tumbled by the daily 10% limit in mainland trading today, they’re still sitting on gains of more than 100% in the past 12 months. That compares with a 56% increase in the Shanghai Composite. Brokerage shares will remain under pressure in the next few days, according to Ryan Huang at IG Ltd. Regulators are concerned the world-beating gains in the country’s equity market have been too fast, he said. Citic and Haitong let customers delay repaying financing for longer than they were supposed to, the China Securities Regulatory Commission said on its microblog Friday, without giving more details. Guotai Junan Securities was also suspended from adding margin accounts, while the regulator punished nine other securities companies for offenses including allowing unqualified investors to open margin finance and securities lending accounts.
China’s new home prices fell significantly in December for a fourth straight month even as year-end sales volumes surged – a somber omen for fourth-quarter 2014 economic growth data due out later in the week. Sunday’s gloomy National Burea of Statistics’ data foreshadowed weak economic figures set for Tuesday, with expansion expected to slow to 7.2%, the weakest since the depths of the global financial crisis. Falling property prices are likely to keep pressure on policymakers to head off a sharper slowdown this year. The expected slowdown in growth of the world’s second-largest economy, from 7.3% in the July-September quarter, means the full-year figure would undershoot the government’s 7.5% target and mark the weakest expansion in 24 years.
If the GDP data proves worse than expected, some analysts say the People’s Bank of China could cut interest rates further or lower reserve requirement ratios (RRR) for all banks. A reserve ratio cut would give banks greater capacity to lend, but many market watchers question if they would be willing to increase their exposure as economic conditions deteriorate. With real-estate investment accounting for about 15% of China’s GDP growth, a 9% decline in new floor space under construction in the first 11 months of 2014 could take a heavy toll. “We expect China’s GDP growth to slow further in 2015 to 6.8%, as the ongoing property downturn leads to further weakness in construction and industrial production, and related investment,” Tao Wang, China economist at UBS, wrote in a note.
As Europe grapples with terrorism and Switzerland scrapped a currency peg, the troubles of a Chinese developer that’s never reached $3 billion in market value became something investors from New York to London couldn’t ignore. A missed $23 million interest payment by Kaisa earlier this month puts it at risk of being the first Chinese real estate company to default on its dollar-denominated bonds. That may signal deeper risks for China’s already fragile and corruption-prone property market, which according to World Bank estimates accounts for about 16% of economic growth. Chinese companies comprised 62% of all U.S. dollar bond sales in the Asia-Pacific region ex Japan last year, issuing $244.4 billion of the $392.5 billion total, Bloomberg data show.
BlackRock, the world’s biggest asset manager, owned Kaisa’s 8.875% securities due 2018 and the ones the subject of the missed coupon payment, the 10.25% 2020s, its latest filing on Jan. 14 shows. Funds managed by JPMorgan, Fidelity and ING also held some of Kaisa’s debt at the end of October, according to filings. Kaisa’s woes began late last year when the government in Shenzhen, less than 15 from Hong Kong, blocked approvals of its property sales and new projects in the city. It’s also being probed over alleged links to Jiang Zunyu, the former security chief of Shenzhen who was taken into custody as part of a graft probe, two people familiar with the matter said last week, asking not to be named because the connection hasn’t been made public.
Kaisa missed an interest payment due Jan. 8 on its $500 million of 2020 bonds. The notes were sold to investors at par, or 100 cents on the dollar, in January 2013. In December, when some of Kaisa’s projects were blocked and key executives quit, the debentures lost 40.1%. They continued to fall in January, slumping to 29.901 cents on the dollar on Jan. 7, a record low, however have since recovered to trade at about 34.6 cents. Concern is mounting that increasing financial stress among builders could spill over into a broader credit crisis in China. New-home prices fell in 65 of the 70 cities monitored in December and were unchanged in four, the National Bureau of Statistics said in a statement yesterday. Shenzhen recorded higher prices, the first city to see an increase in four months.
Loan investors are shunning Chinese property developers amid speculation the government will target more builders after pledging to step up anti-graft probes. Loans from Shimao Property, Country Garden, Evergrande Real Estate and Greentown China, maturing within four years are at levels that indicate impending stress, according to offered prices compiled by Bloomberg from two traders. President Xi Jinping last week said there’ll be no let-up in his “fierce and enduring” battle against corruption, which has already embroiled thousands of senior officials. Kaisa, a homebuilder based in the southern city of Shenzhen, roiled credit markets after founder Kwok Ying Shing quit as chairman Dec. 31, triggering a loan default.
“There’s selling pressure coming from people who want to trim their portfolios to better manage any outsized concentration in developers,” Andrew Tan at Nomura in Singapore, said by phone on Jan. 15. “I haven’t seen such a big motivation to sell in Chinese property loans for some time.” Shimao’s June 2018 loans are currently pricing at about 90 cents on the dollar, with offers at between 85 and 95 cents, compared with 92 cents in December and 96 cents in November, according to two people familiar with the matter.
Country Garden’s December 2018 loans were also offered in the 88 cents to 95 cents range, versus about 95 cents a month ago, two traders said. Offers on Evergrande’s first-lien loan and Greentown’s loan signaled a 5-cent weakening from their levels in December, they said. While China’s banking system outlook is stable, asset quality metrics will likely deteriorate in the coming 12 to 18 months, in line with slower economic growth, Moody’s Investors Service said in a report today. Problem loans from the real-estate sector may start increasing from a small base if the property market downturn continues, it said.
Five months ago, Hao Liwei was living the good life, funded by a 36% annual return on a property investment. Then her nightmare began. Interest payments ceased in August and attempts to recover her money failed. Her home town, the steel-production city of Handan, 450 kilometers (280 miles) southwest of Beijing in Hebei province, was grappling with plunging demand for steel and plummeting prices. Economic growth slumped to 5.5% in the first nine months of last year, from 10.5% in 2012. “The sky collapsed and I thought of killing myself,” said Hao, 40, now a taxi driver. “It was just like a dream: I had everything but when I woke up it was all gone.”
Hao is among the collateral damage as China reins in years of debt-fueled investment-led growth that’s evoked comparisons to the period preceding Japan’s lost decades. As policy shifts China toward greater consumption and innovation-led growth, Handan’s reliance on the steel industry for expansion has left it among cities feeling the brunt of adjustment pain. “Steel towns have been decimated many times before, in Pittsburgh, in the U.K., in France, in Belgium,” said Junheng Li, founder of researcher JL Warren Capital in New York. “Handan has a choice: cling to steel and suffer an inexorable decline or invest in the future, wherever it may be.”
Handan’s woes deepened in September, when local authorities sent work teams into 13 property developers to contain risks after a failure to repay funds raised illegally from the public sparked panic, Xinhua News Agency reported. Thirty-two homebuilders had raised a combined 9.3 billion yuan ($1.5 billion) in illegal fundraising or high-return deposits, causing police to detain 94 people, Xinhua reported. In freezing, pollution-darkened air that exceeded the World Health Organization’s safety limit by more than 14 times, Wu Ren waited last week outside a property development in downtown Handan in hope of recovering funds he invested in a developer named Century in Gold. Wu, in his mid-40s, said he invested 500,000 yuan for a return exceeding 18% a year. The developer’s boss disappeared in August, he said.
The European Central Bank has limited options left to counter long-term stagnation in the euro zone, ECB Governing Council member Ewald Nowotny was quoted as saying in an interview published on Monday. The ECB faces a crucial test of its resolve to do “whatever it takes” to preserve the euro when it decides this week on buying government bonds to combat deflation and revive the economy. Asked to what extent the ECB’s arsenal was exhausted and what it could still do, Nowotny told Austrian newspaper Tiroler Tageszeitung: “Our possibilities are limited.” He did not elaborate. Inflation in the euro zone is well below the ECB’s mid-term target of just under 2% but Nowotny said he did not expect a protracted period of deflation.
“We had negative inflation rates in December and perhaps we will have them in the first months of this year, but I do not believe we can expect deflation for 2015 overall. But the margin of safety has become smaller,” he was quoted as saying in the interview. Asked if it would be difficult to pull out of deflation if it set in, he said yes. “We see the danger from Japan, which for two decades has low growth, low inflation and low interest rates, thus long-term stagnation. For Europe, lasting low growth is not a (desired) prospect,” he said. “That would be linked to massive negative effects on the labor market. And it would certainly have dangerous political and social impact.”
The $400 million of cumulative losses that Citigroup, Deutsche Bankand Barclays are said to have suffered from the Swiss central bank’s decision to end the cap on the franc may be followed by others in coming days. “The losses will be in the billions — they are still being tallied,” said Mark T. Williams at Boston University. “They will range from large banks, brokers, hedge funds, mutual funds to currency speculators. There will be ripple effects throughout the financial system.” Citigroup, the world’s biggest currencies dealer, lost more than $150 million at its trading desks, a person with knowledge of the matter said last week. Deutsche Bank lost $150 million and Barclays less than $100 million, people familiar with the events said..
Marko Dimitrijevic, the hedge fund manager who survived at least five emerging-market debt crises, is closing his largest hedge fund, which had about $830 million in assets at the end of the year, after losing virtually all its money on the SNB’s decision… FXCM, the largest U.S. retail foreign-exchange broker, got a $300 million cash infusion from Leucadia after warning that client losses threatened its compliance with capital rules. FXCM, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million by customers. Shorting the franc was a popular trade and most firms would leverage their positions some 20 times or more, said Williams, who consults for hedge funds.
With such leverage a 5% move against the position wipes out all the value, yet the trades were seen as relatively low-risk by models used by financial institutions because volatility of the franc was reduced by the SNB’s cap, he said. Citigroup had reported an average total trading value-at-risk, a measure of how much the company could lose in trading in one day, of $105 million in the third quarter, of which $32 million was attributed to foreign-exchange risks. Deutsche Bank’s so-called stressed value-at-risk, which measures possible daily losses in market turmoil, averaged 109 million euros ($126 million) in the first nine months, with 27 million euros related to foreign-exchange risks.
Swiss banks, which haven’t announced any losses so far, will probably also suffer in the longer term, said Arturo Bris, a professor at IMD business school. “The negative effects for the Swiss banks come in two ways,” Bris said. “First, it will reduce the flow of assets from the outside and will encourage the exit of Swiss money to other countries. Secondly, they will be hurt by the negative impact on the Swiss economy.” Pain from wrong-way bets may not be limited to just the financial industry. “We’re just hearing about financial institutions now,” Philip Guarco at JPMorgan Private Bank, said in an interview on Bloomberg TV. “Remember what happened back in 2009, when the dollar rallied? You actually had major corporates in Mexico and Brazil, where the treasury departments were taking positions in FX. So we haven’t heard the end of it yet.”
The Swiss central bank is ready to intervene in the currency markets again to weaken the franc if necessary, the bank’s head said, just two days after the removal of a cap on the franc triggered a surge in the currency’s value. Swiss National Bank President Thomas Jordan said the central bank was forced to scrap its policy of keeping minimum exchange rate of 1.20 Swiss francs a euro due to divergent economic developments and mounting risk from its euro-buying operations. The bank will continue to monitor the situation and act if necessary, Mr. Jordan said in an interview with Swiss newspaper Neue Zuercher Zeitung.
“We have said goodbye to the minimum exchange rate,” Mr. Jordan said in the interview published Saturday. “But we will continue to consider the exchange-rate situation in our decisions and intervene in the foreign-exchange market if necessary.” The SNB’s surprise decision on Thursday to ax the minimum exchange rate roiled markets and caused the Swiss franc to gain around 30% at one stage before settling 15% higher against the euro to trade near one Swiss franc to the euro, from around 1.20 before the announcement. The Swiss stock market swooned and shares in companies such as food giant Nestlé and pharmaceuticals maker Novartis had billions wiped from their values as shareholders sought to cash in on the sudden appreciation of the currency.
Stocks in some Swiss companies including watchmaker Swatch slumped as analysts reduced their sales and profit forecasts as a result of the franc’s rise. The higher value of the Swiss franc reduces the value of sales made in the eurozone, which accounts for more than half of its exports. The minimum exchange rate had been in place since September 2011 and was intended to head off deflation and protect the competitiveness of Swiss companies. Mr. Jordan said the franc remains “greatly overvalued.” He said he expects negative interest rates introduced by the SNB to make the franc less attractive, but ruled out introducing capital controls to further weaken demand for the currency.
While a record amount of ink has been spilled praising the benefits of plunging crude price on the US consumer, so far this has manifested merely in soaring consumer confidence, if not in an actual boost to retail sales. In fact, as the Census Bureau reported last week, December retail sales were the biggest disappointment and suffered the steepest monthly drop since the polar vortex.
It appears that instead of doing what so many economists thought, and immediately using their “savings” to boost discretionary income, households are either i) saving the lower gas price windfall (and considering the unprecedented savings rate revision gimmick used by the US Department of Commerce to boost Q3 GDP to 5.0% this is completely understandable), or ii) as we explained some time ago, instead of spending on discretionary purchases, households are forced to spend more on far less pleasant, if just as GDP-boosting staples, such as soaring health insurance premiums courtesy of Obamacare (those who benefit from Obamacare most likely don’t have any work commute-related expenditures in the first place). Less has been written about the adverse side-effects of plunging oil, even though by now even the most “undisputed” permabulls have been forced to admit that the imminent collapse in capital spending is truly “unprecedented”, a phrase Goldman uses in the chart below.
So what does plunging CapEx actually mean for the economy, aside from a substantial haircut to 2015 GDP, and what other areas of the economy will be affected by the Saudi Arabian scorched earth war on the US shale industry? First, we look at the impact of plunging crude on non-residential construction and specifically physical structures, which is where roughly 90% of energy capex is — namely outlays for exploration and wells. Spending there tracked an annualized rate of $140bn in the first three quarters of 2014, a sum that accounts for a whopping 30% of total non-residential private fixed investment in structures, or about a 1% of GDP. So what about residential construction?
Oil producers reluctant to curb output even as prices tumble to five-and-a-half year lows don’t need to guess what the future holds. They can ask a miner. In coal to iron ore markets, suppliers have raised volumes even as prices slumped, boosting global gluts and jeopardizing profits as the most dominant players seek to maintain revenue and squeeze out higher cost rivals. Prices of thermal coal, used to generate electricity, and metallurgical coal, a key ingredient in steel, have tumbled more than half since 2011 on supply additions and slowing demand in China, the biggest commodities consumer. With OPEC insistent that it won’t curb crude output, and U.S. production rising to its fastest weekly pace in more than 30 years, oil markets may be in line for similar prolonged pain.
“If OPEC every now and again looks over their shoulder at what is happening in other commodities you’d think it would be a warning,” said David Lennox at Fat Prophets. OPEC, which pumps about 40% of the world’s oil, agreed to maintain its production target at 30 million barrels a day at a Nov. 27 meeting in Vienna. The group is wagering that U.S. shale drillers will be first to curb output as prices drop, echoing a strategy played out by the largest miners. “The current prices are not sustainable,” Suhail Al Mazrouei, energy minister of OPEC member the United Arab Emirates said Jan. 14 in Abu Dhabi. “Not for us but for the others.”
Iron ore producers who predicted a swift exit by higher cost suppliers as their commodity entered a bear market last March were caught out as curbs to global output proved slower than anticipated, Nev Power, CEO of Australian iron ore producer Fortescue said in October. Coal exporters, too, have kept increasing supply as prices slid. Global output rose about 3% between 2011 and 2013 as prices declined, according to World Coal Association data. In Australia, the biggest exporter of metallurgical coal, production is forecast to rise again in the year to July, according to the nation’s government. “Oil will have more similarities to both thermal and metallurgical coal,” Morgan Stanley analyst Joel Crane said. “Those prices have been weakening for more than three years now, yet we’ve seen very little in terms of shutdowns.”
Energy companies aren’t finished shedding jobs due to crude oil prices that are half what they were about six months ago, the world’s biggest oil-field-services provider warned soon after disclosing 9,000 job cuts. Paal Kibsgaard, chief executive of Schlumberger, said on Friday U.S. oil producers that focus on shale fields are worse off than rivals elsewhere because of their higher costs. “The new oil prices are clearly going to test the resilience of several North American land producers going forward,” he said, citing “their ability to get financing, their ability to continue to drive efficiencies and reduce costs and their ability to maintain production at current levels.”
Some of the largest U.S. oil-and-gas producers have cut 2015 capital spending budgets by 20% or more. Investment bank Cowen said international firms would cut spending by 20% this year and by another 10% in 2016. Schlumberger, Halliburton and Baker Hughes will need to shrink further as clients demand price cuts and dial back spending on wells, Mr. Kibsgaard said while discussing quarterly earnings for his firm that fell 82% on more than $1 billion in charges including those related to downsizing. The three companies help energy producers drill and frack their wells.
The Bank of Japan’s (BOJ) massive asset purchase program has put government bond yields on a relentless slide into negative territory, and while some analysts insist a U.S. rate hike will reverse the trend later this year, others expect a slide into unchartered territory. “Yields have fallen so low that analysts no longer have any historical risk models to fall back on,” said Shinichi Tamura, Barclays’ Japan bank analyst, noting that rates strategists are going on blind faith that yields will stop falling. Japan’s short-term yields, of less than three years, turned negative last year, and last week the 5-year Japanese government bond (JGB) slipped close to zero several times. As of Monday morning Asian time, the yield was quoted at 0.018%, up from 0.005 basis points after market close on Thursday.
Most worrying, Tamura said, is the flattening of the yield curve with long-term government bond yields also on a relentless downward trend. On Monday morning, the 10-year was quoted at 0.242 basis points — above the historical low of 0.228% hit early last Friday -, and the 30-year is at 1.105%. “Bond investors are uncomfortable with what they see as an abnormal situation,” said Mana Nakazora, chief credit analyst at BNP Paribas. If the current levels hold, the price of new corporate bonds will be benchmarked against negative government bond yields. So, “they can’t see where they are going to secure returns after 2015 and beyond, or when the BOJ will end the current round of quantitative easing and stop buying up JGBs.”
Banks in Scandinavia are joining the Danish government in trying to persuade offshore investors that the Nordic country isn’t about to copy Switzerland and drop its euro peg. SEB, the Nordic region’s largest currency trader, said it’s been fielding calls from hedge funds wondering whether Denmark might be next after the Swiss National Bank shocked markets by exiting a three-year-old euro cap on Jan. 15. Economy Minister Morten Oestergaard a day later sought to silence doubts surrounding Denmark’s currency peg, which he said remains “secure.”
Carl Hammer, chief currency strategist at SEB in Stockholm, says he’s been trying to make clear to callers that it’s “highly unlikely” Denmark will alter its exchange-rate regime. Speculation Denmark will follow the SNB has forced bankers across Scandinavia to provide offshore investors with a crash course in Danish monetary policy. Hedge funds calling SEB, Danske Bank and other Nordic banks have been urged to consider that Denmark’s peg has existed for more than three decades and is backed by the European Central Bank, unlike the SNB’s former system. “Obviously, we think it’s completely unrealistic” that Denmark will abandon its peg, Jan Stoerup Nielsen, an economist at Nordea Markets in Copenhagen, said by phone. “But that doesn’t seem to be stopping the speculation.”
Greece’s anti-bailout Syriza party is solidifying its opinion poll lead over the ruling conservatives eight days before the country’s election, a survey on Saturday. The survey by pollster Kapa Research for Sunday’s To Vima newspaper showed the radical leftists’ lead widening to 3.1%age points from 2.6 points in a previous poll earlier in the month. The national vote on Jan. 25 will be closely watched by financial markets, nervous that a Syriza victory might trigger a standoff with Greece’s European Union and IMF lenders and unleash a new financial crisis.
The survey, conducted on Jan. 13-15, showed that Syriza, which is running on a pledge to end austerity policies and renegotiate the country’s debt, would win 31.2% of the vote if the election was held now, versus 28.1% for Prime Minister Antonis Samaras’ New Democracy conservatives. The centrist party To Potami (River) ranked third with 5.4%. The leading party must generally receive between 36 and 40% of the vote to win outright, though the exact threshold depends on the share of the vote taken by parties that fail to reach a 3% threshold to enter parliament. The electoral system automatically gives the winning party an extra 50 seats to make it easier to form a government.
“.. such attempts coupled with the apparent provocation (similar to the situation with the Malaysian Boeing and the incident with a bus in Volnovakha) come, as a rule, on the eve of the European Union and other Western states meetings”
Kiev resumed its military assault in eastern Ukraine on Sunday despite receiving a proposal Thursday night from the Russian president that both sides of the conflict withdraw their heavy artillery, Putin’s press secretary said. “In recent days, Russia has consistently made efforts to mediate the conflict. In particular, on Thursday night, Russian President Vladimir Putin sent a written message to Ukrainian President Poroshenko, in which both sides of the conflict were offered a concrete plan for removal of heavy artillery. The letter was received by President of Ukraine on Friday morning,” president’s press secretary, Dmitry Peskov, said as cited by RIA Novosti news agency. “The latest developments in Ukraine connected with the renewed shelling of populated areas in the Donetsk and Lugansk regions cause grave alarm and put in jeopardy the peace process based on the Minsk memorandum,” Putin’s letter reads.
Putin suggested the immediate withdrawal of artillery with a caliber more than 10mm to the distance defined by the Minsk agreements.Russia is ready to monitor the fulfillment of these moves jointly with the OSCE, the letter concludes. However, Peskov stressed, the Ukrainian leader rejected the plan without offering alternatives and “moreover started military actions all over again,” resulting in an “absolute degradation of the situation in the southeast of Ukraine.” Russia’s Foreign Ministry accused Kiev of using the ceasefire to “regroup its forces, trying to take a course for further escalation of the conflict with a purpose to ‘settle’ it in a military way.” “We are deeply concerned by the fact that the Ukrainian side continues to increase its military presence in the southeast of the country in violation of the Minsk agreements,” the ministry said in a statement. [..]
Russia has expressed readiness “to use its influence on militia” in southeast Ukraine so they voluntarily agree to withdraw heavy armament from the frontline, so that its geographic coordinates correspond to Kiev’s demands “to avoid more victims among the civilian population.” The Foreign Ministry has linked the deadly attacks in Donetsk and Kiev’s “massive fire” order with the upcoming EU Foreign Affairs Council meeting on January 19. It has noted that “such attempts coupled with the apparent provocation (similar to the situation with the Malaysian Boeing and the incident with a bus in Volnovakha) come, as a rule, on the eve of the European Union and other Western states meetings, which deal with the situation in Ukraine.”
The reported theft by Chinese hackers of blueprints for the US’s F-35 Joint Strike Fighter amounted to 50 terabytes of classified information, documents leaked by NSA whistleblower Edward Snowden have revealed. The hackers are believed by many US officials to be affiliated with the Chinese government. The humiliating 2007 incident saved China “25 years of research and development,” according to a US military official cited by The Washington Post in a 2013 article covering the breach. Previous media reports said “several terabytes” of data was stolen, but according to the new documents published by the German magazine Der Spiegel last week, the actual amount was far higher, at 50 terabytes –the equivalent of five Libraries of Congress.
The data – reportedly used by China to build their own advanced fighter jets – includes detailed engine schematics and radar design. F-35 blueprints are just a fraction of what Chinese hackers have allegedly stolen from the Pentagon’s data vaults over the years. The reported haul includes some two dozen advanced weapon systems, including the AEGIS Ballistic Missile Defense System, Littoral Combat Ship designs and emerging railgun technology, a classified report revealed in 2013.
The Earth is on its way to become inhabitable owing to the increased use of artificial fertilizers like phosphorus and nitrogen which are exceeding the planetary boundaries. The fact has been confirmed by the director of the Center for Limnology at the University of Wisconsin, Madison, Professor Stephen Carpenter who also stated that “We’re running up to and beyond the biophysical boundaries that enable human civilization as we know it to exist.” At the beginning of Holocene period, the Earth was a much better place to live owing to the human activities that led to refined developments in social, political and religious aspects. Carpenter commented “Everything important to civilisation took place prior to 1914.”
Some of the best things then included development of agriculture, the rise and fall of the Roman Empire and the Industrial Revolution and following that era the human activities began the destruction of Earth. Prof. Carpenter and his team carried out a research regarding the impacts of carbon-driven global warming, including biodiversity loss and sea level rise. Explaining their findings the researchers stated “We’ve (people) changed nitrogen and phosphorus cycles vastly more than any other element. (The increase) is on the order of 200 to 300%. In contrast, carbon has only been increased 10 to 20% and look at all the uproar that has caused in the climate.” They also highlighted the unnecessary use of artificial fertilizers for boosting agriculture in the US as the land is already rich in nutrients.
Excessive use of fertilizers on a land already rich in nutrients is causing negative impacts and is pushing the civilization beyond safe boundaries. Some countries have land rich in nitrogen and phosphorous while many others have soil lacking these elements and they face difficulty in growing food without artificial fertilizers. Carpenter said “We’ve got certain parts of the world that are over polluted with nitrogen and phosphorus, and others where people don’t even have enough to grow the food they need.” To avoid upsetting the ecosystem, he has advised industrial farmers to cut down the overuse of phosphorus and nitrogen. He added “It might be possible for human civilization to live outside Holocene conditions, but it’s never been tried before. We know civilization can make it in Holocene conditions, so it seems wise to try to maintain them.”
The Federal Reserve is still on track for a potential mid-year interest-rate increase, a top Fed official said on Friday, citing strong U.S. economic momentum and a falling unemployment rate. “There is no need to rush to raise rates; at the same time we want to make sure that we appropriately act in a way that we don’t get behind the curve,” San Francisco Federal Reserve Bank President John Williams told reporters at the bank’s headquarters. “If the forecast evolves the way I expect, six months from now or whatever – middle of this year – I think we’ll have a better position to understand either well we need to wait longer, or maybe it’s we could act now.”
Fed officials are grappling with when to gradually wean the U.S. economy from more than six years of near-zero interest rates, now that unemployment has fallen and economic growth looks solidly above its long-term trend. But inflation has been undershooting the Fed’s 2% target, and some gauges suggest the inflation outlook is falling. That has prompted a few Fed officials to argue the Fed should defer any rate hikes until next year. “At some point you just have to give in to the data,” and respond to too-low inflation with stimulus, not tightening, Minneapolis Fed President Narayana Kocherlakota said on Friday. St. Louis Fed President James Bullard took the opposite view in a separate appearance in Chicago, saying while inflation is low, it is not low enough to justify keeping borrowing costs at zero.
Williams, who unlike Bullard and Kocherlakota votes this year on Fed policy and whose views are seen as centrist, acknowledged that dropping inflation expectations are a “negative signal,” but only about global growth prospects. Low yields on U.S. Treasuries, often tied to expectations for slowing future domestic growth, are “not about the U.S. economy and the Federal Reserve” but mostly reflect weakness in Europe and elsewhere, he said. “I don’t agree that it is sending a negative signal about the U.S. economy,” he said, forecasting GDP growth of 2.5% to 3% this year. While he does not expect inflation to be back up to 2% by the time the Fed raises rates, the inflation-subduing effects of falling oil prices should subside in six to 12 months, and it should begin to turn up as labor market slack declines further. “The U.S economic underlying momentum is really very good,” Williams said.
For three years, the Swiss National Bank successfully sat on its currency, selling the franc whenever it threatened to appreciate too much for the comfort of Swiss exporters. Yesterday, it tore up that policy, inciting the equivalent of a riot in the currency market and trashing retail brokerages from New York to New Zealand. While victims of the turmoil ponder whether Swiss policy makers are irresponsible or just incompetent, the scale of the damage is a timely reminder that contagion is always unpredictable, that markets always overshoot, and that traders, when they smell profit, can outgun central banks. Currency analysts all seem to assume that the Swiss central bank, after abandoning its €1.20 euro, expected its currency to settle at about €1.10 or even €1.15. Instead, the franc is trading at parity with the euro – a stunning blow for exporters. If the central bank thought that simultaneously cutting its deposit rate to -0.75% would deter franc purchasers – SNB President Thomas Jordan called negative rates “a very strong instrument” – it was badly mistaken.
Jordan also said markets “tend to strongly overreact” to surprises, and that the situation would “correct itself over time.” Maybe. But as of today, abandoning the cap rather than, say, adjusting the level seems to have been a wild miscalculation. And it contains a lesson for both U.S. and European policy makers. By the third quarter of this year, the Federal Reserve’s 0.25% interest rate is expected to at least double, according to economists surveyed by Bloomberg News. The Fed already has an idea of what the market impact will be: The so-called taper tantrum in May 2013, when then Fed Chairman Ben Bernanke first suggested the U.S. bond-purchase program would be scaled back, saw the yield on the 10-year Treasury jump half a percentage point in four weeks to end the month at 2.13%.
There’s a risk, though, that this time, having flagged the prospect of a change so far in advance, policy makers will be complacent about the probable market reaction. That’s what happened in 2008 when Lehman Brothers went bust. Treasury officials convinced themselves that the financial crisis had been rumbling on long enough for participants to have shielded themselves against the collapse of a big firm; instead, their earlier decision to contribute $29 billion to JPMorgan’s rescue of Bear Stearns had created a false sense of security about how far the government would go to support the financial system.
It’s easy to see why the Swiss National Bank’s surprise decision to abandon the cap on the franc versus the euro wreaked havoc on currency markets. You just have to look at data from the U.S.’s largest derivatives exchange. Speculators using futures to wager the franc would weaken versus the dollar had more than $3 billion worth of such bets as of Jan. 13, according to Bloomberg calculations based on Commodity Futures Trading Commission data. The SNB’s decision two days later to drop the cap sparked a rush for the exit as the franc surged 21% versus the greenback. “This move was so large that it would have gone through anybody’s reasonable stop level,” Robert Sinche, a strategist at Amherst Pierpont Securities LLC in Stamford, Connecticut, said by phone. “You have to believe a lot of what went on yesterday and somewhat today has been short covering. There is still a whole bunch of reckoning to still go on.”
Short covering is when traders try to buy back a security whose price is climbing after they sold it short, wagering the price would fall. Non-commercial accounts held a net short position on the franc versus the dollar of 26,444 contracts just before the SNB decision, the most since May 2013, according to CFTC data based on transactions on the CME exchange. With a contract valued at 125,000 Swiss francs ($122,537) on Jan. 13, the value of the position was $3.24 billion. The Swiss currency climbed more than 15% on Jan. 15 against all of the more-than 150 currencies tracked by Bloomberg. Dealers in London at banks including Deutsche Bank, UBS and Goldman Sachs battled to process orders after the SNB made its announcement in Zurich scrapping the three-year-old cap designed to stem the Swiss franc’s appreciation against the euro.
Haruhiko Kuroda’s monetary “bazooka” just got outgunned by the Swiss. Since April 2013, Japan’s central banker has been pumping trillions of dollars into the economy in an attempt to generate 2% inflation. But in a mature, aging economy like Japan’s, the effort is 95% about confidence. In order to “drastically convert the deflationary mindset,” as Kuroda puts it, the Bank of Japan must transform sentiment among households and businesses. Kuroda’s massive bond purchases mean little if the Japanese don’t trust that better days lay ahead. The Swiss National Bank’s move to abandon the franc’s cap against the euro may have blown a hole in Kuroda’s strategy.
By reneging on a promise made time and time again that he wouldn’t ditch the policy, SNB President Thomas Jordan “has undermined the credibility of central banks,” says Simon Grose-Hodge of LGT. Now, at central banks around the globe, he adds, “the unthinkable is entirely possible. You can’t rule anything out.” Even if the BOJ issues another blast of quantitative-easing after its two-day policy meeting next week, the question is how effective the move would be. Kuroda’s Oct. 31 shock-and-awe stimulus announcement worked for a time by bolstering perceptions that steady inflation was within reach. But this time, with even Economy Minister Akira Amari admitting “it will probably be difficult” for the BOJ to succeed, markets are likely to be more skeptical of the bank’s staying power.
Even aside from the Swiss decision, Kuroda has had trouble with signaling – what bankers call “open-mouth operations.” Understanding how minutely markets scrutinize their every word and deed, officials in Washington and Frankfurt have learned to use that obsessive attention to their advantage. In an April 2013 study, Federal Reserve Bank of San Francisco economists Michael Bauer and Glenn Rudebusch found “signaling effects are larger in magnitude and statistical significance” than investors appreciate. Former Fed Chairman Ben Bernanke’s skillful use of verbal winks, nods and innuendo to lead expectations helps explain why QE worked better in the U.S. than Japan.
Switzerland’s central bank officials have just eaten their words, risking lingering indigestion in financial markets. Just three days after Swiss National Bank (SNBN) Vice President Jean-Pierre Danthine called the franc cap a “pillar” of monetary policy, the SNB yesterday dropped the minimum exchange rate of 1.20 per euro. The shock abandonment of the SNB’s primary policy of the past three years may now leave investors warier of taking officials’ words at face value, according to economists including Karsten Junius, chief economist at Bank J. Safra Sarasin. By scrapping one tool, the franc cap, SNB President Thomas Jordan risks blunting the effects of another. “The SNB’s credibility has suffered a bit,” said Junius, a former economist at the International Monetary Fund.
“Statements will get read in the future with a bit more caution. Verbal interventions will hardly work any more.” The central bank’s regular pledge to defend the franc cap with “utmost determination” had become part of the institution’s brand, not least because of the success of that policy in protecting the country’s domestic economy. “They’ve lost part of their credibility, I think, ”Han De Jong, chief economist at ABN Amro told Angie Lau on Bloomberg TV. “Whatever they will say, markets will not trust them very much.” George Buckley at Deutsche also argues the SNB’s words are hard to reconcile with the SNB’s new policy stance. “Their commentary now means nothing,” he said. “This is not utmost determination, is it?”
Bank of England Governor Mark Carney has suffered similar criticism. He was labeled an “unreliable boyfriend” by one U.K. lawmaker last year for giving conflicting messages on the possible timing of interest-rate increases in the U.K. SNB President Jordan yesterday defended his surprise move, saying that a tool like the cap would always need to be abandoned unexpectedly. Anatoli Annenkov at SocGen agrees. “It’s something we aren’t used to anymore because most central banks are talking about warning markets, improving communication, not surprising anymore,” Annenkov said by phone from London. “But in such circumstances, there’s basically no other way to do this. Markets would have speculated, positioned themselves beforehand.”
Leucadia gave FXCM a $300 million cash infusion, extending a lifeline to the currency brokerage hobbled by the Swiss central bank’s decision to let the franc trade freely against the euro. Leucadia, which owns New York-based investment bank Jefferies Group, extended FXCM a two-year, $300 million senior secured term loan with an initial coupon of 10%, according to a statement Friday. The transaction allows FXCM, the largest U.S. retail foreign-exchange broker, to “continue normal operations,” according to the statement. Shares of New York-based FXCM had tumbled as much as 92% to 98 cents Friday morning before they were halted. After the Leucadia deal was released, FXCM’s stock rebounded to $4.44 as of 5:40 p.m. New York time. That’s still down from the prior day’s closing price of $12.63.
Leucadia Chief Executive Officer Richard Handler has prior experience saving imperiled financial firms. Before Leucadia purchased the business, he ran Jefferies when the company was part of a group that bailed out Knight Capital Group Inc., which teetered on the brink of collapse after bombarding markets with errant trades in August 2012. FXCM had warned Thursday that client losses due to the Swiss National Bank’s action threatened the broker’s compliance with capital rules. The company, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million by clients.
FXCM, the brokerage facing a shortfall of nearly a quarter-billion dollars after highly-leveraged investors made losing bets on the Swiss franc, pushed back against U.S. regulatory efforts that likely would have left it less vulnerable. In 2010, the Commodity Futures Trading Commission sought to force individual investors trading currencies to give their broker 10 cents in capital to back every $1 in positions. The regulator failed to accomplish that amid pressure from New York -based FXCM and other brokers, meaning only 2 cents must be pledged. The agency’s proposal would “have a devastating impact on the retail forex industry,” Drew Niv, FXCM’s chief executive officer, wrote in a March 2010 letter to the CFTC that was signed by eight other executives at currency dealers.
The industry relies on “electronic systems” to liquidate customer trades and protect against “currency fluctuations in the market,” they said in the letter, which is posted on the CFTC’s website. FXCM’s retail clients suffered big losses Thursday after the Swiss National Bank let the franc float freely against the euro. The franc surged as much as 41%. FXCM warned that client losses threatened the broker’s compliance with capital rules. The largest U.S. retail foreign-exchange broker, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million by clients. The CFTC, the main U.S derivatives regulator, is reviewing the situation at FXCM, Steve Adamske, a CFTC spokesman, said earlier.
The National Futures Association is in touch with the firm and CFTC, according to Karen Wuertz, an NFA spokeswoman. Leucadia, owner of Jefferies, said in a statement Friday that it will provide $300 million in cash to FXCM to enable the brokerage to meet regulatory capital requirements and continue normal operations. Shares of New York-based FXCM had tumbled as much as 92% Friday morning before they were halted, pending an announcement. Leucadia shares climbed 0.9% to $21.84 as of 12:24 p.m. in New York, when trading was halted. The client losses are shining a spotlight on U.S. regulators’ oversight of retail currency trading and whether they stopped short of necessary curbs to protect customers. In contrast to other markets, investors buying stock with borrowed money must put up at least 50% of the purchase price under Federal Reserve rules.
Larger drillers outspent their cash flows from production by 112% and smaller to midsize drillers by a breathtaking 157%, Barclays estimated. But no problem. Wall Street was eager to supply the remaining juice, and the piles of debt on these companies’ balance sheets ballooned. Oil-field services companies, suppliers, steel companies, accommodation providers… they all benefited. Now the music has stopped. Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under. California Resources, for example. This oil-and-gas production company operating exclusively in oil-state California, was spun off from Occidental Petroleum November 2014 to inflate Oxy’s share price. As part of the financial engineering that went into the spinoff, California Resources was loaded up with debt to pay Oxy $6 billion. Shares started trading on December 1.
Bank of America explained at the time that the company was undervalued and rated it a buy with a $14-a-share outlook. Those hapless souls who believed the Wall Street hype and bought these misbegotten shares have watched them drop to $4.33 by today, losing 57% of their investment in seven weeks. Its junk bonds – 6% notes due 2024 – were trading at 79 cents on the dollar today, down another 3 points from last week, according to S&P Capital IQ LCD. Others weren’t so lucky. Samson Resources is barely hanging on. It was acquired for $7.2 billion in 2011 by a group of private-equity firms led by KKR. They loaded it up with $3.6 billion in new debt and saddled it with “management fees.” Since its acquisition, it lost over $3 billion, the Wall Street Journal reported. This is the inevitable result of fracking for natural gas whose price has been below the cost of production for years – though the industry has vigorously denied this at every twist and turn to attract the new money it needed to fill the holes.
Having burned through most of its available credit, Samson is getting rid of workers and selling off a chunk of its oil-and-gas fields. According to S&P Capital IQ LCD, its junk bonds – 9.75% notes due 2020 – traded at 26.5 cents on the dollar today, down about 10 points this week alone. Halcón Resources, which cut its 2015 budget by 55% to 60% just to survive somehow, saw its shares plunge 10% today to $1.20, down 85% since June, and down 25% since January 12 when I wrote about it last. Its junk bonds slid six points this week to 72 cents on the dollar. Hercules Offshore, when I last wrote about it on October 15, was trading for $1.47 a share, down 81% since July. This rock-bottom price might have induced some folks to jump in and follow the Wall-Street hype-advice to “buy the most hated stocks.” Today, it’s trading for $0.82 a share, down another 44%. In mid-October, its 8.75% notes due 2022 traded at 66 cent on the dollar. Yesterday they traded at 45.
U.S. drillers have taken a record number of oil rigs out of service in the past six weeks as OPEC sustains its production, sending prices below $50 a barrel. The oil rig count has fallen by 209 since Dec. 5, the steepest six-week decline since Baker Hughes began tracking the data in July 1987. The count was down 55 this week to 1,366. Horizontal rigs used in U.S. shale formations that account for virtually all of the nation’s oil production growth fell by 48, the biggest single-week drop. Analysts including HSBC say the decline shows that OPEC is winning its fight for market share and slowing the growth that’s propelled U.S. production to the highest in at least three decades. OPEC’s decision not to curb its output amid increasing supplies from the U.S. and other countries has driven global oil prices down 58% since June.
“OPEC’s strategy is working, and it will be obvious in U.S. production by midyear when growth from shale plays will come to a halt,” James Williams, president of energy consulting company WTRG in London, Arkansas, said by telephone Friday. “You can imagine the impact on any industry from a 50% impact on sales.” “Prices are being forced toward levels that would force outright shut-ins in high-cost areas, mainly in Canada and the U.S.,” Societe Generale SA (GLE) analysts including Mark Keenan, its head of commodities research for Asia in Singapore, said in a research note Jan. 14. The slump in oil rigs has yet to stop the unprecedented growth in U.S. oil production, which added 60,000 barrels a day in the week ended Jan. 9 to 9.19 million, Energy Information Administration data show. That’s the most in weekly data since at least 1983.
Jim Chanos, head of the world’s largest short-selling hedge fund, told CNBC on Friday he’s been short major oil companies for a couple years because the North American shale explosion has been “uneconomic for drillers.” “The fracking and shale revolution was propelling us to be the largest oil producer in a way that I thought was uneconomic and still is uneconomic for the drillers. But it was going to be enough supply to really disrupt the markets,” he said. Big oil companies like Exxon Mobil and Royal Dutch Shell are finding their business models challenged, he added, “because the days of finding cheap oil is over.” The founder of Kynikos Associates, with $3 billion in assets under management, has been betting against the economic situation in China for some time now. “We came across China because of our work in the mining sector in 2009.”
Chanos has also been short Caterpillar—saying the company is finding two out of its three business streams severely challenged: mining and now energy. Last year, he said mining was the sole troublemaker, but now with oil prices falling the heavy equipment marker is coming under even more pressure. He first disclosed his short position in Caterpillar at the CNBC and Institutional Investor Delivering Alpha conference in July 2013. Last month, Chanos told CNBC that 2014 was a better year for short sellers than 2013. But he said Friday that calling Kynikos the biggest short seller is damning with faint praise. “It’s sort of like being called the toughest guy in France. It’s been tough for five years.” “We’ve been saying for a year now to clients,” he added, “the risks are certainly rising and have been rising.”
The theory goes that commodity prices move in “supercycles” or bursts of phenomenal surges, followed by longer, less-exciting periods. As such, a barrel of oil at $50 is, well, normal. Many people think the oil price has crashed, but it has just gone back to its long-term historical trend, according to Ruchir Sharma at Morgan Stanley. That makes a barrel of oil at around $50 just about right based on a 100-year inflation-adjusted average, said Sharma. “The price of oil is returning to normal in its long-term 100-year history,” Sharma said in an interview from New York. “We tend to have a short memory and we tend to forget that the price of oil breached the $50 a barrel level only a decade ago.” Brent crude oil futures, which trade in London and are used as a benchmark to set prices for more than half of the world’s oil, reached a record of $139.83 a barrel on June 30, 2008, according to data compiled by Bloomberg. By Jan. 13, the price had plunged 67% to $46.59.
“At times like these, it’s good to step back and look at the bigger picture, look at what it has done through a long history,” he said. The supercycle surge in oil prices was kicked off by China’s emergence as an industrialized economy and net oil importer in the middle of the 1990s. In 1995 it imported 343,000 barrels a day, according to BP data. In 2013, it bought 5.7 million barrels a day. The nation is now the world’s biggest energy consumer and the second-biggest oil user. “China’s oil imports took off around 2003 and it emerged as a big factor in the market,” Thina Saltvedt at Nordea Bank said in a Jan. 13 phone interview. There’s a long time lag in oil between investments and new supply and it can take 10 years, sometimes 15 years, to balance the market and match it with demand, said Saltvedt. China is structurally changing its economy from big, energy-intensive industry to less so. India or perhaps Africa will start to take over the role China has played, said Saltvedt.
ECB President Mario Draghi briefed German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble on quantitative-easing plans under which national central banks would buy bonds issued by their own country, Spiegel magazine reported. The plan, which tries to avoid a transfer of risk between member states, envisages purchases in line with the ECB’s capital key with a limit of 20% to 25% of each country’s debt, Spiegel said in an article published yesterday, without saying where it got the information. Greece would be excluded from the program because its bonds don’t fulfill the necessary quality criteria, the magazine said. Klaas Knot, governor of the Dutch central bank, told Spiegel that no “concrete proposal” has yet been made. The Governing Council will meet on Jan. 22 in Frankfurt to set monetary policy.
Officials presented various forms of quantitative easing to the council at a Jan. 7 meeting, and Draghi signaled in an interview with Die Zeit that the ECB is ready to take a decision as early as next week. Officials have courted the German public in a flurry of interviews, arguing that more stimulus is needed to fend off deflation in the 19-nation currency region. Knot said in the Spiegel interview that he sees no sign households are postponing spending, which Draghi has pointed to as one indicator of deflation. Knot also signaled a preference for measures that limit risk-sharing. “If each central bank was only buying debt of its own country, the danger of an unwanted redistribution of financial risk would be lower,” he said. “We have to avoid that decisions are taken through the back door of the ECB balance sheet that have to continue to be reserved for elected politicians in euro-area countries.”
Eurozone officials discussed on Thursday extending Greece’s bailout program by up to six months more to allow time for talks with any new government in Athens on closing the current bailout and on what should replace it. The current bailout, which has already been extended by two months, runs out at the end of February. Athens had hoped to replace it with an Enhanced Conditions Credit Line from the eurozone bailout fund that it would never have to use. “There will have to be an extension beyond February. It will be inevitable,” one eurozone official with knowledge of thetalks said. “It could be six months more.” The extension would have to be requested by the new Greek government that emerges after elections on Jan. 25. But with Greek borrowing costs skyrocketing on uncertainty about policy after the elections, Athens looks set to need further euro zone support and a credit line for insurance purposes only may not be enough, euro zone officials said.
Also, without another program, under which Greece gets cheap euro zone loans or access to a credit line in exchange for reforms, the European Central Bank said it could not provide liquidity to the Greek banking sector. No decisions were taken and the issue is likely to be further discussed at the next meeting of euro zone finance ministers on Jan. 26, a day after the Greek vote. “The ECCL is for a country which has in principle market access, and the ECCL is an insurance policy to calm any remaining doubts in the market,” a second eurozone official said. “With some goodwill you could say that towards the end of last year, this could apply to Greece. Now with the uncertainty, stress on the financial system, Greek long-term yield going beyond 10% – all that makes it much less obvious Greece qualifies for an ECCL,” the official said.
[..] many retail traders found their trading accounts completely wiped out, being on the wrong side of a trade that couldn’t be liquidated fast enough to preserve their capital. Trading in currency markets at the retail level, with these types of brokerages, centers on the use of one of the biggest double-edged swords in financial markets: leverage. In other words, borrowed funds that are used to amplify potential returns but can also exacerbate the potential losses of trading positions. In the world of retail foreign exchange trading, use of leverage is key. Here’s how it works: Let’s say you want to take a $10,000 position in terms of Swiss francs. Under current regulatory guidelines in the U.S., you are mandated to keep at least $200 in your account in order to support that position. That’s because there’s a mandated minimum margin requirement of 2% for retail forex markets.
In other words, you can only have a position that’s 50 times greater than the equity in your margin account. If the value of your position grows because of market movements, there is no issue. But if your position loses value to a point where you no longer meet minimum margin requirements, your broker will liquidate assets to help assure that you don’t lose more money than you put into the account. The reason why some retail foreign exchange brokerages have gone bankrupt, and others are in severe distress, has to do with how those margin accounts were maintained during the SNB’s shock move. Certain accounts with losing positions weren’t able to be liquidated quickly enough before they went into deficit. That left some brokers responsible for the debit balances in client margin accounts. If those debit balances were high enough, that could cripple the capital position of these retail brokerages. At that point, a handful of things can happen.
For one, the broker can request the client to add enough funds to bring their account back into good standing. Or, the broker is left holding the bag on client losses, perhaps with only legal recourse to try to recover those losses. According to Forex.com, which is a retail foreign exchange broker and is owned by publicly traded Gain Capital, the company does “reserve the right to hold clients responsible for large debit balances and in special circumstances.” Its website also encourages clients to manage use of leverage carefully, since use of more leverage increases risk. Bottom line, the pain of the SNB’s removal of its currency peg hit numerous parts of the market, and will lead to outsized financial losses for the big guys and the little guys. On a relative basis, retail traders may feel more pain than their bigger counterparts. The recent market action serves as a potent reminder of just how dangerous leverage can be when price action moves swiftly, and without warning.
“The End of Banking” is an important book about finance. Jonathan McMillan, the nom de plume taken by an investment banker and a macroeconomist, provides a holistic and compelling explanation of the crisis of 2008. The authors predict a repeat, barring a revolution in finance. McMillan, as the co-authors can be called, defines banking as the private sector creation of money from extending credit. Loans create deposits – private money. The monetary liabilities are distinct from the physical or electronic money which comes out of central banks. The book’s central argument is that private money creation is impossible to control in the digital age. Until computers became widespread in the 1970s, banks could keep track of borrowers. But with electronic systems, transactions became more complex as lenders repackaged loans. Financial assets were spread across myriad interlocking chains of balance sheets, both of traditional banks and so-called shadow banks, which have grown into a $35 trillion monster in the United States and European Union.
The illustration of how balance sheets multiply and money grows in “The End of Banking” is illuminating. The focus is on how computing permitted massive regulatory arbitrage. “Over the last 40 years, IT has turned the stick [of capital requirements] into a toothpick.” Financial watchdogs are alert to shadow banking’s risks, but their efforts to bring non-regulated firms into a defined perimeter are akin to using a net to gather water. Thanks to electronic bookkeeping, firms can shift balance sheets out of the authorities’ purview at the tap of a button. Whether to prevent runs on banks or to firm up the financial stability of quasi-banks, weak governments have steadily extended guarantees to bigger portions of the private sector. McMillan has a solution. It starts with an accounting distinction.
Bank assets would be classified either as real, in other words claims on physical or distinct immaterial objects; or as financial, assets which appear as liabilities on the balance sheet of some other institution. Next, regulators would ensure that financial assets were 100%-backed by common equity. And lastly, in a combined regulatory and accounting change, the value of a company’s real assets would have to be greater or equal to the value of the total of its liabilities. This final fix is where the book goes beyond previous proposals to mend finance through concepts such as narrow- or limited-purpose banking. The implication of McMillan’s recommendation is that many derivatives, for which a counterparty’s losses could be infinite, would be banned. What’s more, the intended application to financial and non-financial companies alike would include shadow banking, addressing the so-called “boundary problem” of regulation that other approaches to improve the system fail to solve.
Asia is battling not one but three demons. The unholy trinity of debt, deflation and demographics threatens to sap the region’s growth potential. Fending off the challenge requires central banks to cut borrowing costs. But they are reluctant to do so when U.S. interest rates are poised to rise. That could turn out to be a huge error. Consider the debt overhang. Taken together, the private sector in Asia-Pacific now owes 1.5 times the region’s combined annual output, according to the Bank for International Settlements. As a big chunk of the borrowing is in the opaque shadow banking system, particularly in China, the debt could be even larger. Either way, servicing the loans requires incomes to increase quickly. Yet, real GDP growth is slowing almost everywhere in the region. The threat of slowly rising consumer prices slipping into outright deflation is making things worse. Producer prices are sliding across Asia-Pacific.
Falling energy costs provide a convenient excuse for margin-starved employers to skimp on pay hikes, just as they did in the late 1980s. That makes the situation harder for borrowers in Malaysia, Korea, Thailand and Singapore, all of which have high household leverage. Persistent lowflation will leave borrowers with higher debt burdens than they expected. Demographics aren’t helping. Japan, China, South Korea, Singapore and Thailand are ageing rapidly. Relatively young countries like Indonesia, Vietnam and the Philippines drag down the average age. Even so, the region will have more middle-aged people than youngsters by 2020. This will present Asian nations with the same problem that has plagued advanced nations: a savings glut. As those looking to invest for retirement outnumber those borrowing to buy new homes and start new businesses, market interest rates could fall.
Saudi Arabia has been constructing a 600-mile East-West barrier on its Northern Border with Iraq since September. The main function of the barrier will be keeping out ISIS militants, who have stated that among their goals is an eventual takeover of the Muslim holy cities of Mecca and Medina, both of which lie deep inside Saudi territory, according to United Press International. This past week, a commander and two guards on the Saudi-Iraq border were killed during an attack by Islamic State militants, the first direct ground assault by the group on the border. “It is the first attack by Islamic State itself against Saudi Arabia and is a clear message after Saudi Arabia entered the international coalition against it,” Mustafa Alani, an Iraqi security analyst with close ties to Saudi Arabia’s interior ministry, told Reuters.
The Saudi “Great Wall” as it’s being dubbed by some media outlets, will be a fence and ditch barrier that features soft sand embankments that is designed to slow down infiltrators on foot and are too step to drive a tired-vehicle up, according to the Telegraph of London. It will have 40 watchtowers and seven command and control centers complete with radar that can detect aircraft and vehicles as far away as 22 miles as well as day and night camera installations. The barrier system will have five layers of fencing, complete with razor wire and underground motion sensors that trigger a silent alarm. The 600-mile structure will be patrolled by border guards and 240 rapid response vehicles. The Saudis sent 30,000 soldiers to patrol the border in July 2014 after ISIS forces swept into western Iraq and Iraqi guards on the Saudi border fled.
“While Poroshenko was pretending his heart bled for French cartoonists, the civilians targeted for extermination by his government were bleeding literally: dozens, including children, have been killed in renewed shelling of Donetsk by Kiev’s military that weekend. ”
Though US pundits have been the loudest in calling for another war on terror, American officials were nowhere to be seen on the Sunday march. Only the US Ambassador attended the event, while President Obama, Vice President Biden, or even top diplomat John Kerry was conspicuously absent. The highest-ranking US official in Paris was Attorney General Eric Holder, who had announced his resignation in September 2014. The leaders that did attend weren’t above using the march for their own political purposes. Israeli Prime Minister Benjamin Netanyahu came to the march, even though the French government asked him not to. Turkey’s Prime Minister Ahmet Davutoglu also attended, but as soon as he returned, President Recep Erdogan publicly declared the massacre a French false-flag operation, for which the mayor of the Turkish capital Ankara, Melih Gokcek, blamed the Israeli Mossad.
Perhaps the most hypocritical of all was the Kiev junta, whose leader, Petro Poroshenko, hastened to Paris to claim he too was a victim of terrorism , even as his forces restarted the terror shelling of civilians in dissenting Donetsk. Poroshenko paraded before the cameras, dutifully made accusations of yet another Russian invasion, again accused Russia of being behind the downing of flight MH17, and begged for money from the West to bail out his bankrupt government, and fund another military expedition against the civilians of Donetsk and Lugansk. While Poroshenko was pretending his heart bled for French cartoonists, the civilians targeted for extermination by his government were bleeding literally: dozens, including children, have been killed in renewed shelling of Donetsk by Kiev’s military that weekend.
Among them was a boy of eight named Vanya, who lost his legs, a hand and an eye to Kiev’s humanitarian bombs. When critics of the junta’s campaign of artillery terrorism posted news of this on Twitter with the hashtag #IamVanya, Russophobic trolls quickly responded with displays of hatred. Hypocrisy is the order of the day in the West. Frenchmen and other NATO-sphere subjects are supposed to simultaneously champion free speech and crack down on offensive speech; profess love of Islam and endless tolerance, while their governments sponsor Islamic terrorists in places like Libya, Syria, Iraq or the Balkans; and protest the murder of innocents while backing Kiev’s regime doing precisely that, in the name of – you guessed it – fighting terrorism.
Of course, NATO’s puppets in Kiev have the perfectly rational explanation why it’s different when they kill: their victims are “subhumans”, as US-backed PM Arseny Yatsenyuk once put it. The same man, during his visit to Germany just a day after the Charlie Hebdo massacre, claimed that Russia had invaded Ukraine and Germany in WW2. His German hosts, normally sensitive to pro-Nazi rhetoric, chose to remain silent.
SPIEGEL: Michael Sergeyevich, few contributed more to ending the Cold War than you. Now it is returning as a result of the Ukraine crisis. How painful is that?
Gorbachev: It gives one a feeling of déjà-vu. Perhaps that would even make a good headline for this interview: Everything appears to be repeating itself. There was a time for building a Wall and a time for tearing it down. I’m not the only person to thank for the fact that this wall no longer exists. (Former Chancellor) Willy Brandt’s Ostpolitik was important, as were the protests in Eastern Europe. Now, new walls are being built and the situation is threatening to escalate. I do, in fact, see all the signs of a new Cold War. Things could blow up at any time if we don’t act. The loss of trust is disastrous. Moscow no longer believes the West and the West doesn’t believe Moscow. That’s terrible.
SPIEGEL: Do you think it is possible there could be another major war in Europe?
Gorbachev: Such a scenario shouldn’t even be considered. Such a war today would inevitably lead to a nuclear war. But the statements from both sides and the propaganda lead me to fear the worst. If one side loses its nerves in this inflamed atmosphere, then we won’t survive the coming years.
SPIEGEL: Aren’t you overstating things a bit?
Gorbachev: I don’t say such things lightly. I am a man with a conscience. But that’s the way things are. I am truly and deeply concerned.
SPIEGEL: The new Russian military doctrine labels NATO’s eastern expansion and the “reinforcement of NATO’s offensive capabilities” as one of the primary threats facing Russia. Do you agree?
Gorbachev: NATO’s eastward expansion has destroyed the European security architecture as it was defined in the Helsinki Final Act in 1975. The eastern expansion was a 180-degree reversal, a departure from the decision of the Paris Charter in 1990 taken together by all the European states to put the Cold War behind us for good. Russian proposals, like the one by former President Dmitri Medvedev that we should sit down together to work on a new security architecture, were arrogantly ignored by the West. We are now seeing the results.
Last year was the hottest in earth’s recorded history, scientists reported on Friday, underscoring scientific warnings about the risks of runaway emissions and undermining claims by climate-change contrarians that global warming had somehow stopped. Extreme heat blanketed Alaska and much of the western United States last year. Several European countries set temperature records. And the ocean surface was unusually warm virtually everywhere except around Antarctica, the scientists said, providing the energy that fueled damaging Pacific storms. In the annals of climatology, 2014 now surpasses 2010 as the warmest year in a global temperature record that stretches back to 1880.
The 10 warmest years on record have all occurred since 1997, a reflection of the relentless planetary warming that scientists say is a consequence of human emissions and poses profound long-term risks to civilization and to the natural world. Of the large inhabited land areas, only the eastern half of the United States recorded below-average temperatures in 2014, a sort of mirror image of the unusual heat in the West. Some experts think the stuck-in-place weather pattern that produced those extremes in the United States is itself an indirect consequence of the release of greenhouse gases, though that is not proven. Several scientists said the most remarkable thing about the 2014 record was that it occurred in a year that did not feature El Niño, a large-scale weather pattern in which the ocean dumps an enormous amount of heat into the atmosphere.
Longstanding claims by climate-change skeptics that global warming has stopped, seized on by politicians in Washington to justify inaction on emissions, depend on a particular starting year: 1998, when an unusually powerful El Niño produced the hottest year of the 20th century. With the continued heating of the atmosphere and the surface of the ocean, 1998 is now being surpassed every four or five years, with 2014 being the first time that has happened in a year featuring no real El Niño pattern. Gavin A. Schmidt, head of NASA’s Goddard Institute for Space Studies, said the next time a strong El Niño occurs, it is likely to blow away all temperature records.
Decreasing oil prices are “inevitable” and the chance they will exceed $100 per barrel is “unlikely” the Russia’s Finance Ministry said. However, the Russian budget can withstand lower prices. “The market is biased in favor of excess supplies. That is why price reduction is inevitable; it will have a structural character. We are unlikely to see prices higher than $100 per barrel in the near future,” Maksim Oreshkin, the head of the Russian Finance Ministry’s strategic planning department told RBC TV in an interview. “In general, the current downward price movement is structural. Investments in oil production have increased dramatically in the past ten years,” Oreshkin said. Russian officials have stressed there will be no sharp rise in Russia’s budget deficit, but the country’s largest bank, Sberbank, says an oil price of $104 is required to balance the 2015 budget. A drop of prices to $80 per barrel could cost Russia 2% of GDP.
The weak ruble will be a buffer to lower oil prices, since costs are in rubles, but revenue in dollars. “The ruble is down which allows Russia to maneuver a bit by making some extra cash from oil sales, since those are done in dollars,” RT correspondent Egor Piskunov reported from Moscow. The Russian state budget is based on oil prices of $96 per barrel, which both Brent and WTI crude fell below in previous days. Last week prices hit a 4-year low, with Brent futures reaching a critical point of $84 per barrel. Just months ago, at the height of the Iraq turmoil, Brent was trading at $116 per barrel. WTI crude, the main North American blend, hit a four-year low dropping below $80 Thursday. Both blends have been falling for the last four months.
American drivers are almost giddy over gasoline prices that are now below $3 a gallon in some areas. Investors, however, might want to check themselves, says David Bianco, Deutsche Bank’s top equity strategist. Light, sweet crude traded on the New York Mercantile Exchange has plunged from around $107 a barrel in June to test two-year lows near $80 a barrel. The collapse has prompted Bianco and his team to cut their forecast for S&P 500 fourth-quarter earnings per share by 50 cents to $30.50 and to drop their forecast for full-year 2015 earnings by $3 to $123 a share. That still points to 2015 earnings per share growth of around 4% on expectations global growth will remain underpinned by U.S. growth, which will be enhanced, in part, by stronger consumption aided by cheaper oil. But lower oil prices (Deutsche Bank is now penciling in a 2015 average price of $85 a barrel), will weigh heavily on the energy sector, Bianco said in a note.
Deutsche Bank slashed its forecast for fourth quarter energy earnings by nearly 10% — accounting for almost all of the cut in the bank’s estimate of fourth quarter S&P 500 EPS. Deutsche now sees energy earnings falling 10% in 2015 as well, versus an earlier forecast for a fall of 2%. While it’s no surprise that the energy sector will bear the brunt, plunging oil is also bad news for the industrials and materials sectors. They’ll suffer as energy firms reduce capital spending in the U.S. and worldwide, Bianco says, noting that a third of S&P 500 capital spending comes from the energy sector. Meanwhile, the boost to consumer sector earnings from the lower oil price is small, Bianco says. So is the S&P 500 in danger of suffering a “profit recession?” Probably not, but much depends on the oil price, Bianco writes. He notes that since 1960 there have been only 10 instances when there was a fall in trailing fourth-quarter earnings per share.
Oil futures have been on a torrid plunge in recent weeks, touching lows below $80 per barrel. Great news for airlines, right? Maybe not. For roughly the past 35 years, inexpensive jet fuel has routinely served as a siren call to airline executives. Cheap fuel spurs more flights and wild grabs for whatever business looks attainable in the travel market. Marginal routes become profitable with lower fuel prices, which, in turn, bolsters the argument that new flights can boost revenues with little cost. Cheap fuel also lets an airline experiment more radically with flight schedules in the bid to swipe market share from rivals. “If it keeps trending lower, it totally changes the economics of the industry again,” says Seth Kaplan, managing partner of Airline Weekly, an industry journal. With oil cheaper, Kaplan predicts that many airlines will probably fly their planes in off-peak periods because of the low costs associated with those extra flights. A few additional flights on the weak travel days of Tuesday and Saturday could return to some schedules.
This possibility has some Wall Street analysts in a tizzy, concerned that if oil stays cheap enough for long enough, lower prices will cause airlines to backslide on their new-found religion against deploying too much capacity. “We feel like this industry needs an oil spike now more than ever,” Wolfe Research analyst Hunter Keay wrote last week in a client note. “[C]apacity discipline of late (from some) seems theoretical at best.” Brent crude, the energy index most airline executives monitor for its correlation to jet fuel, has declined 22% this year; settling Friday at $86; a day earlier, the Brent Index scored a four-year-low, under $83. This constitutes a sharp reversal from recent years: After oil spiked to nearly $150 per barrel in July 2008, U.S. airlines radically restructured to try to cope with oil at whatever price it may be. That effort has left high or low oil prices much less important—quick swings either way are now the enemy—while turning expensive oil into somewhat of a barrier for new flying.
Following the most turbulent period for U.S. bonds in more than three years, the top strategists are looking less at jobs and manufacturing and more at the price of oil for clues as to what lies ahead. Treasuries gyrated last week, with yields on benchmark 10-year notes at one point falling below 2% for the first time since June 2013, as a tumble in crude sparked concern that the global economy was on the verge of entering a deflationary spiral. Bond traders who wagered that the trillions of dollars in cash pumped into the financial system by major central banks would cause runaway inflation were forced to reverse those bets.
The moves were the latest shock in a year of surprises in the bond market. The consensus estimate among the more than 60 strategists surveyed by Bloomberg in January was for yields to rise in 2014. Instead, they fell. One of the few to get it right was FTN Financial, and its analysts say even after the rally yields are not far from fair value because cheaper energy prices will help curb gains in consumer prices. “There’s a fundamental series of questions about where we go from here,” Jim Vogel, head of interest-rate strategy at Memphis-based FTN, said in an Oct. 16 telephone interview. Vogel, who added that the 21% drop in oil prices since June “took people by surprise,” sent a note to clients last week recommending they “watch for stability in oil positions,” and noting the “strong ties” between the cost of the commodity and the government’s consumer price index.
“Markets are slowly coming to grips with reality is not going to be as easy as everybody thought,” Peter Schiff tells CNBC’s Rick Santelli, noting the pick up in volatility across asset classes recently. What The Fed clearly does not understand, Schiff blasts, is that “you cannot end quantitative easing without plunging the US into a severe recession.” Because of the Fed’s extreme monetary policy and the mal-investment that flows from it, Schiff says, “The US economy is more screwed up now than it’s ever been in history.” Most prophetically, we suspect, Santelli agrees that “a messy exit is a given,” and Schiff believes they know that and that is why QE4 is coming simply “because it hasn’t worked and they can’t admit it’s been a dismal failure.”
Federal Reserve policy makers are missing a key element as they assess the health of the labor market: data that includes whether those who are employed are overqualified for their job or would like to work more hours. As a result, the “significant underutilization of labor resources” that Fed officials highlighted last month as they renewed a pledge to keep interest rates low for a “considerable period” is probably even more severe than currently estimated. And the information gap means policy makers may have more difficulty gauging the right moment to raise rates off zero. “We have more slack than the official statistics suggest,” said Michelle Meyer, a senior U.S. economist at Bank of America in New York. “Because it’s difficult to measure underutilization, there’s still a lot of uncertainty as to how much slack remains, which means there’s uncertainty as to the appropriate stance of monetary policy.”
The Labor Department can put its finger on how many people are working part-time because full-time jobs aren’t available, or how many are so discouraged that they’re not even looking for employment. Other forms of underemployment — for example the graduate with an English degree who’s working as a barista –are harder to pinpoint though just as important in trying to measure whether the labor market has improved. The data shortfall sparked a discussion at a Peterson Institute for International Economics conference last month in Washington. Erica Groshen, commissioner of the Bureau of Labor Statistics, asked what additional data would be needed to help quantify labor-market slack. Betsey Stevenson, a member of President Barack Obama’s Council of Economic Advisers, pointed out that while it was possible with current data to determine whether people working less than 35 hours a week are underutilized, those putting in a longer workweek fall off the radar.
The BLS considers anyone working at least 35 hours a week to be full-time. The Census Bureau, which surveys households to get the information needed for the Labor Department to crunch the monthly jobs data, doesn’t ask full-timers whether they’d prefer a different job or additional hours. As far as anyone knows, those workers are fully employed and content.
China’s economy grew last quarter at its slowest pace since the depths of the global financial crisis, raising concerns over global growth prospects and increasing the likelihood Beijing will introduce broader stimulus measures. Gross domestic product in the world’s second-largest economy expanded 7.3% in the third quarter from the same period a year earlier, its weakest performance since the first quarter of 2009, when growth was just 6.6%. But unlike then, when the economy was in freefall as a result of the global financial crisis originating in the US, China’s growth problems this time are largely homegrown. The latest quarterly reading means China’s economy this year is almost certain to register its slowest annual pace since 1990, when the country faced international sanctions in the wake of the 1989 Tiananmen Square massacre.
A correction in China’s property sector, the most important driver of the economy for much of the past decade, is the biggest drag on growth and most analysts expect things to get worse, given huge oversupply across the country. Investment in real estate in the first nine months continued to expand but at a slower pace, rising 12.5% over the same period last year, compared with an increase of 13.2% in the first eight months. Housing sales fell in the first nine months of this year by 10.8% compared with the same period in 2013, suggesting that the property investment slowdown has further to go. Other monthly data released on Tuesday, including industrial production and consumer retail sales, showed a mild rebound in September compared with the previous two months but most analysts expect the slowdown to continue. By the end of September, Chinese factory gate prices had been in deflationary territory for 32 consecutive months, the longest period of producer price inflation in the country in the modern era.
China’s growth will slow sharply during the coming decade to 3.9% as its productivity nose dives and the country’s leaders fail to push through tough measures to remake the economy, according to a report expected to come out Monday. Such an outcome could batter an already fragile global recovery. But the report by the business-research group the Conference Board also finds that multinational companies in China would benefit. Lean times would give foreign firms more local talent to choose from. Foreign companies and investors could also expect “more hospitable” treatment from Communist Party and government officials and a wider selection of Chinese firms they could acquire, according to the report, which was shared with The Wall Street Journal. Foreign companies should realize that China is in “a long, slow fall in economic growth,” the report said. “The competitive game has changed from one of investment-driven expansion to one of fighting for market share.”
Officials representing China’s State Council, or cabinet, referred questions to its National Bureau of Statistics, which didn’t respond. Senior officials of the Communist Party are gathering in Beijing for a major policy meeting that opens Monday and is expected to discuss the slowdown. The Conference Board forecasts that China’s annual growth will slow to an average of 5.5% between 2015 and 2019, compared with last year’s 7.7%. It will downshift further to an average of 3.9% between 2020 and 2025, according to the report. The outlook for the world’s second-largest economy is one of the most important factors affecting the global economy. For the 30 years through 2011, China grew at an average annual rate of 10.2%, a record unmatched by any major nation since at least World War II. That growth lifted hundreds of millions of Chinese out of poverty and turned the country into a major market for commodity producers in Asia, Latin America and the Middle East, and consumer and capital-goods makers from the U.S., Europe and Japan.
“Debt gets more expensive over time, because consumer spending power declines. When prices and corporate revenue fall for a sustained period of time, wages inevitably go down, too. That makes fixed-rate debt more expensive, because you have less money instead of more to make the same regular payments.”
If the price of a car or an iPhone drops, that’s usually good news for consumers. So it might be puzzling that investors and economists suddenly seem freaked out about the possibility of deflation, or a sustained drop in the level of all prices, on average. Deflation was a concern back in 2010 and it’s a fresh worry now as oil prices plunge, the stock market wavers and consumers put spending plans on hold. The paradox of deflation is that falling prices on a few items can generally be good for consumers, leaving more money in their pockets for other things. But falling prices on too many things can have ruinous effects on the economy that are hard to reverse. Japan suffered nearly two decades of deflation starting in the early 1990s, and deflation helped prolong the Great Depression in the 1930s. When all prices fall, consumers have a strong incentive to put off purchases – after all, everything will probably be cheaper tomorrow.
Some purchases are hard to delay – food, medical care, gasoline to get to work. But a lot of the things we buy can wait, which is why sales of cars, clothing, and appliances drop sharply when times get tough. In an economy like ours – in which consumer spending accounts for about 70% of total GDP – a powerful incentive to postpone purchases can be disastrous. When spending drops, so does corporate revenue, raising pressure to cut costs, which leads to layoffs and other personnel cutbacks. Companies are likely to freeze salaries or even cut pay for those workers remaining. Dwindling income makes consumers even more leery about spending money, worsening the whole cycle. The other mechanism for deflationary ruin is debt. One big reason lending helps the economy grow is inflation—most loans become easier to pay back over time, because the principal doesn’t grow but income used to pay it down does.
We typically think of inflation as a rise in prices, but it’s usually accompanied by an increase in workers’ wages as well, and as long as wage increases exceed price hikes, ordinary people get ahead. Home buyers, for instance, often “grow into” a mortgage that might seem onerous at first, because their income climbs as they progress through their careers. The mortgage payments on a fixed-rate loan, by contrast, remain constant. So in a typical economic environment, you gradually earn more income to make the same payment every month.
Deflation creates the opposite phenomenon: Debt gets more expensive over time, because consumer spending power declines. When prices and corporate revenue fall for a sustained period of time, wages inevitably go down, too. That makes fixed-rate debt more expensive, because you have less money instead of more to make the same regular payments. The mismatch affects companies and even governments the same way it does consumers, causing cash-flow shortages, liquidity problems and bankruptcy. Each of these ugly outcomes reinforces the others, making a deflationary spiral very hard to pull out of.
The Islamic State is earning about $2 million a day, or $800 million a year, selling oil on the black market, IHS Inc. estimated. The terrorist group is producing 50,000 to 60,000 barrels a day, according to an e-mailed release today from the Englewood, Colorado-based information company. It controls as much as 350,000 barrels a day of capacity in Iraq and Syria. Extremist groups typically reply on foreign donations that can be squeezed by sanctions, diplomacy and law enforcement. By tapping the region’s oil wealth, Islamic State, the group that beheaded American journalist James Foley, resembles the Taliban with oil wells. “This is financing and fueling a lot of their activities, military and otherwise,” Bhushan Bahree, a co-author of the report, said today in an interview. “For argument’s sake, let’s say their capacity were cut by half. They’ll still have $400 million coming in. This is many times more than any other source of funding we know of.”
Islamic State consumes about half its production and sells the rest for $25 to $60 a barrel, according to the report. That estimate is in line with those of U.S intelligence officials and anti-terrorism finance experts. Bombing oil-field pump stations may be the best way to cut off the flow of oil since they are stationary and difficult to replace, Bahree said. U.S.-led air strikes haven’t eliminated truck-mounted refineries that Islamic State uses to produce fuel for its war machines and to supply civilians within the territory it controls. Trafficking has encouraged middlemen to buy crude and smuggle it into Turkey, Jordan or Iraq, where it is blended with other oil and sold to unsuspecting buyers, according to the report. “It is very hard to intercept,” Bahree said. “There has probably been smuggling of all sorts of things in this place for thousands of years.” When Iraq’s regional Kurdish government tried to police long-established smuggling routes along a 1,000-kilometer (621-mile) border with what is now Islamic State territory, traffickers found new ones, he said.
Gyrations in financial markets are giving rise to a plaintive cry from investors: Prices are getting more volatile because new regulations are making big banks less willing to buy when others want to sell. Actually, if that’s what’s happening, it would be no bad thing. Following last week’s selloff, investors are complaining about a lack of liquidity, the ability to buy and sell assets (particularly bonds) without moving prices too much. The problem, they say, is that big U.S. banks are pulling back from market making — the buying and selling of assets to meet clients’ needs. They blame the shift on new regulations such as higher capital requirements and the Volcker rule, which aims to limit speculative trading at banks.
Investors are right that something has changed. The big banks are holding much smaller inventories of corporate bonds than they did before the 2008 crisis. In fact, dealers were net sellers of junk bonds in recent weeks, suggesting that they weren’t, in the aggregate, helping clients to unload. From the point of view of an overextended investor needing to sell, this reduction in liquidity can be scary. That said, it’s unclear that regulation is the primary cause. Banks were cutting their inventories long before Congress passed the Dodd-Frank financial reform law in 2010. And liquidity always disappears in bad times, no matter how abundant it seems in good times. Market makers are no more willing to buy than anybody else when prices appear to be in free fall. Last week’s volatility hit some securities, such as U.S. Treasury bonds, to which the Volcker rule doesn’t even apply.
The cost for banks to settle probes into allegations traders rigged foreign-exchange benchmarks could hit as much as $41 billion, Citigroup analysts said. Deutsche Bank is seen as probably the “most impacted” with a fine of as much as 5.1 billion euros ($6.5 billion), Citigroup analysts led by Kinner Lakhani said yesterday, estimating the Frankfurt-based bank’s settlements could reach 10% of its tangible book value, or its assets’ worth. Using similar calculations, Barclays could face as much as 3 billion pounds ($4.8 billion) in fines and UBS penalties of 4.3 billion Swiss francs ($4.6 billion), they wrote in a note first sent to clients on Oct. 3. Authorities around the world are scrutinizing allegations that dealers traded ahead of their clients and colluded to rig currency benchmarks. Regulators in the U.K. and U.S. could reach settlements with some banks as soon as next month, and prosecutors at the U.S. Department of Justice plan to charge one by the end of the year, people with knowledge of the matter have said.
The Citigroup analysts made their calculations using a Sept. 26 Reuters report that the U.K. Financial Conduct Authority settlements could include fines totaling about 1.8 billion pounds. They derived their estimates for how high fines could go in other investigations from that baseline, using banks’ settlements in the London interbank offered rate manipulation cases as a guide. “Extrapolating European and, more importantly, U.S. penalties from a previous global settlement suggests to us a total potential global settlement on this key issue,” they said in the note. U.K. authorities will probably account about $6.7 billion of fines across all banks, according to the Citigroup analysts. Other European investigations will account for $6.5 billion. Penalties in the U.S. cases could be about four times greater, hitting $28.2 billion.
A costly legal battle between Goldman Sachs and the Libyan sovereign wealth fund could have more permanent repercussions for the global banking industry, experts have told CNBC. The Libyan Investment Authority has accused Goldman of misleading it and taking advantage of its lack of financial knowledge to make “substantial” profits on a series of derivative trades back in 2008. The bank denies the allegations and a full hearing has been touted to begin in early 2016 after a preliminary hearing was completed earlier in the month. The LIA claims the disputed derivative trades in early 2008 cost $1 billion, and carried a high degree of risk, but lost a substantial amount of value by the end of the year and expired “worthless” in 2011. Court documents allege that Goldman made profits of $350 million were made and a witness statement from a lawyer working for the LIA claims that the usual disclaimers – called non-reliance agreements – were sent after the trades were made and were never signed.
Satyajit Das, an expert on financial derivatives and risk management, told CNBC via telephone that the case has the potential to get “extremely ugly”. “This could be messy for Goldman Sachs and for a whole range of other banks,” he said, adding that this would bring up the issue of opaqueness with these sorts of trades. “It could lead to an investigation into the selling practices at banks and the types of financial products they offer.” Beyond the prospect of an investigation, industry experts are also forecasting further regulation of the complex derivatives market. Anat Admati, a professor of finance and economics at Stanford Graduate School of Business welcomed any new regulation in this space. Without commenting on this particular case, she said that investments in derivatives can be easily misunderstood by untrained investors.
The Bank of England apologised last night after a crucial payments system collapsed, forcing Mark Carney to launch an urgent investigation following the delay of hundreds of thousands of payments, including for homebuyers waiting for money to be transferred to pay for their new homes. The Bank of England governor promised a “thorough, independent review” after MPs demanded answers into how the system which processes payments worth an average £277bn a day had failed for nearly 10 hours. An 88-year-old woman in Sheffield was among those caught up in the collapse of the behind-the-scenes payment mechanism, which failed to open at 6am and remained shut until 3.30pm – usually the cut-off point for money to be transferred for house sales.
The Bank of England did not admit the shutdown had taken place for more than five hours after the system had been due to open, and was later forced to extend opening hours by four hours to 8pm to clear the backlog of 143,000 payments. More than 10 hours after first admitting to the problem with the clearing house automated payment system (Chaps) the Bank of England eventually apologised “for any problems caused by the delays to the settlement system”. While Chaps was down, there were fears that homebuyers and sellers around the country would be left unable to complete purchases on time and that big businesses, which also use the system, would fail to make payments. Only weeks ago the Bank said it had a new contingency plan for the collapse of the payments system. The Bank of England will subject the system to additional monitoring when it reopens at 6am on Tuesday.
Banks must change the way employees are compensated and take other steps to fix a corporate culture that encourages misdeeds or face being broken up, said William C. Dudley, president of the Federal Reserve Bank of New York. If bad behavior persists, “the inevitable conclusion will be reached that your firms are too big and complex to manage effectively,” Dudley told industry leaders in a speech yesterday at the New York Fed. “In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.” Dudley’s comments, which follow bank scandals involving Libor and foreign exchange trading, were made at a closed-doors workshop attended by senior bankers at the New York Fed on reforming Wall Street culture and behavior.
Large U.S. banks were widely blamed for taking too much risk leading up to the 2008 financial crisis, which triggered the worst economic downturn since the Great Depression. Lawmakers have since enacted a major overhaul of the rules designed to prevent banks becoming “too big to fail.” Dudley said it was fair to question if the “sheer size, complexity and global scope of large financial firms today have left them ‘too big to manage.’” Barclays Plc Chairman David Walker, who also addressed the gathering, separately said banks should be allowed to overhaul their own culture, rather than have regulators do it for them. Dudley, who has had to defend the New York Fed recently against allegations it was too soft on big Wall Street firms, suggested a number of ways to better align bank employee incentives with the interests of the general public. These include deferred compensation plans that switch emphasis to debt, rather than equity, and a centralized, industry-wide registry for tracking individual offenses.
Like a driver obeying the commands of a GPS system even as passengers shout that the car is clearly headed toward a ditch, IBM’s chief executive officer, Ginni Rometty, has followed the profit “roadmap” laid out by her predecessor. The company was going to reach $20 in adjusted earnings per share by 2015, damn it, even as nine straight quarters of sinking revenue made that an increasingly untenable feat of financial engineering. IBM laid off workers, fiddled with its tax rate, took on debt, and bought back a staggering number of its own shares to make the math work, even as all that left the company less able to compete with the likes of Amazon.com and Google in cloud computing.
Today Rometty finally abandoned “Roadmap 2015,” announcing that IBM cannot hit the target after all. IBM also said it will pay a chipmaker called GlobalFoundries $1.5 billion to take its chip division off its hands, while also taking a $4.7 billion charge. And IBM reported its third-quarter results—a 10th consecutive period of falling sales, marked by weaker performance in growth markets. “We are disappointed in our performance,” Rometty said in a statement. “We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry.” In response, shares of IBM were down more than 7% on Monday morning, Oct. 20.
A paucity of policy options has increased central banks’ reliance on so-called forward guidance, where policy makers telegraph likely future actions. There are two components to forward guidance. First, it communicates clear policies to which the central bank is committed. Second, the commitment is over a medium- to long time horizon. But forward guidance suffers from a number of weaknesses. A fresh batch of eurozone data out next week is likely to confirm that the economy is slowing, with both consumer confidence and flash PMIs forecast to have slumped in October. In the U.K., third-quarter GDP figures and minutes from the Bank of England’s latest policy meeting will give more clues on the health of the country’s economy.
First, a focus on any single or a narrowly based set of indicators is problematic. The Federal Reserve’s commitment to accommodative monetary policy, for example, was based on a target unemployment rate. A single indicator such as unemployment is not meaningful. It can be affected by participation rates or the definition of employment. Levels can be affected by unexpected disruptions including a government shutdown, strikes or natural catastrophes. What is relevant is the nature of employment, such as part- or full-time, and the type of job or income levels. The composition of unemployment, temporary or long-term, age and skill levels of the unemployed, also may be pertinent.
In Japan, meanwhile, the Bank of Japan’s policy targets 2% inflation. It is not entirely clear which inflation indicator is the most relevant. Core inflation ignores the effect of volatile food and energy prices, which are very relevant to Japan. Inflation in domestic goods or imported inflation, such as the result of currency movements, may have different policy implications. Forward guidance relies on the accuracy of forecasts. It implies an automatic rule-based central banking response, which could lead to a sudden and sharp change in interest rate or monetary policy. In reality, guidance is highly conditional. Environmental changes can negate any earlier policy commitment. The Fed, for instance, was forced to clarify that its unemployment target was merely a non-binding indicator. The most damning problem, as Citibank Chief Economist Willem Buiter has argued, is that central bankers have “no skin in the game.” Central banks do not stand to make or lose money from their forward commitments. Central bankers’ tenure or remuneration is also not linked to outcomes.
Moscow and Kiev have confirmed the price of Russian gas to Ukraine until the end of March at $385 per 1,000 cubic meters, according to both Ukrainian President Petro Poroshenko and Russian Foreign Minister Sergey Lavrov. “We have agreed on a price for the next 5 months, and Ukraine will be able to buy as much gas as it needs, and Gazprom is ready to be flexible on the terms,” Lavrov said Monday at a public lecture. Russia’s foreign minister dispelled rumors of two separate prices, one for winter and one for summer. “At the Europe-Asia summit in Milan, there was no talk of summer or winter gas prices, but just about the next 5 months,” the foreign minister said. Included in the $385 price is a $100 discount by Russia. Ukraine is still insisting on a further discount, asking for $325 for ‘summer prices’ after the 5-month winter period.
“We talked about how there should be two prices, like how the European spot market has two prices, a winter price when demand is high, and summer when demand is low. Our joint proposal with the EU was the following: $325 per thousand cubic meters in the summer and $385 per thousand cubic meters in the winter,“ Poroshenko said in an interview on Ukrainian television Saturday. President Poroshenko and Russian President Vladimir Putin reached a preliminary agreement in Milan on Friday for the winter period, but Russia won’t deliver any gas to its neighbor without prepayment.
Gas talks are expected to continue Tuesday in Berlin between the energy ministers of Russia, Ukraine, and the EU. On September 26, the three energy ministers agreed to provide 5 billion cubic meters to Ukraine on a “take-or-pay” contract, to help the country survive the winter months. The so-called winter plan is contingent on Ukraine starting to repay at least $3.1 billion worth of debt to Gazprom. Ukraine is still looking for funding to pay for the gas supplies as well as its $4.5 billion arrears to Russia’s state-owned gas company. Moscow reduced the debt from $5.5 billion to $4.5 billion, calculating in the discount of gas, Putin said on Friday.
Three months ago, the CEO of Total, Christophe de Margerie, dared utter the phrase heard around the petrodollar world, “There is no reason to pay for oil in dollars”. Today, RT reports the dreadful news that he was killed in a business jet crash at Vnukovo Airport in Moscow after the aircraft hit a snow-plough on take-off. The airport issued a statement confirming “a criminal investigation has been opened into the violation of safety regulations,” adding that along with 3 crewmembers on the plane, the snow-plough driver was also killed.
Mises explained that socialism discourages production while it increases demand. Why produce only to be forced to share with others when one can demand to share in the production of others without regard to having previously produced something of value to those same others? Eventually all altruism vanishes in a sea of cynicism and nothing is produced for anyone to share. The result is a tragedy of the commons fed by moral hazard and socialism. Today we see the above destructive economic forces at work in NATO expansion. When the Soviet Union disintegrated in 1990, the reason for NATO’s existence vanished.
But rather than declare NATO to have been a success in deterring war in Europe, possibly disbanding the alliance and building a new Concert of Europe that would include Russia, NATO bureaucrats set about to expand the alliance to the east. Whereas the Concert of Europe after the Napoleonic Wars had quickly embraced France as an important member, NATO expanded to isolate Russia by absorbing its former satellite nations. The last NATO expansion prior to the disintegration of the Soviet Union had occurred in 1982 when Spain joined the alliance. At that point in time NATO was composed of sixteen nations. Starting in 1999 twelve countries have joined NATO, ten of them former members of the Warsaw Pact.
The other two, Slovenia and Croatia, were previously part of Yugoslavia, officially a non-aligned nation, but a communist dictatorship all the same. With the possible exception of Poland, none of these new members contribute much to the alliance’s military capability, meaning that the older members are shouldering their security burden. Naturally expanding NATO to the east has resulted in isolating and antagonizing Russia, who feels its security threatened. So, NATO has succumbed to the socialist phenomenon by adding new members who demand security without much of an obligation and to the moral hazard phenomenon by adding new members whose territories could be used to house American nuclear weapons, a situation that may yet provoke a major world crisis with Russia, which is precisely what NATO was formed to avoid.
The discovery of a tiny species of human 10 years ago has transformed theories of human evolution. The claim is made by Prof Richard Roberts who was among those to have published details of the “Hobbit”. The early human was thought to have lived as recently as 20,000 years ago and so walked the Earth at the same time as our species. The Hobbit’s discovery confirmed the view that the Earth was once populated by many species of human. It’s a far cry from the old view of a linear progression from knuckle-dragging ape-like creatures to upright modern people. Prof Roberts says the discovery of a completely different species of human on the Indonesian Island of Flores that lived until relatively recently, “put paid to this cosy status quo in one fell swoop”. “It surpassed anything else I’d been involved with because it just kept running. People kept on talking about it and it became part of popular culture and a sign of a new view of anthropology. The days of the old linear models of anthropology were gone.
Dr Henry Gee, the manuscript editor who decided to publish the paper in the journal Nature, said that it gradually dawned on him just how important the discovery was. “It is the biggest paper I have been involved with,” he told BBC News.The publication of the discovery on the Indonesian Island of Flores in October 2004, caused a sensation. The news that another species of human walked among us until relatively recently stunned the world. There were even questions about whether the Hobbit, named Homo floresiensis, still existed somewhere on the island. Perhaps there were other species of humans in other very remote parts of the world yet to be discovered?There are many puzzles that remain about the Hobbit. The female skeleton was 1m (3ft) high and was a very primitive form of human. Her brain was about the size of a chimpanzee, yet there is evidence that she used stone tools.