Feb 152018
 
 February 15, 2018  Posted by at 11:08 am Finance Tagged with: , , , , , , , , , , , ,  


Grete Stern Sueño No. 1: Artículos eléctricos para el hogar 1949

 

Global Debt Crisis II Cometh (Goldcore)
The % Puzzle Coming Together (Northman)
Trump Surprises Democrats, Supports 25 Cent Federal Gas Tax Hike (ZH)
Household Debt Is China’s Latest Time Bomb (BBG)
China’s Currency Policy May Be Facing a New Chapter (BBG)
Angela Merkel Pays a Steep Price to Stay in Power (BBG)
Meth, the Forgotten Killer, Is Back in America. And It’s Everywhere. (NYT)
German Cities To Trial Free Public Transport To Cut Pollution (G.)
Who Keeps Britain’s Trains Running? Europe (NYT)
Europe’s Poverty Time Bomb (PS)
Erdogan’s Chief Advisor: US Has Plan To Make Greece Attack Turkey (K.)
Greece Looks at USA to Calm Down Turkey (GR)

 

 

There is no escape. No matter what anyone says about recovery etc., the piper will come calling.

Global Debt Crisis II Cometh (Goldcore)

• Global debt ‘area of weakness’ and could ‘induce financial panic’ – King warns
• Global debt to GDP now 40 per cent higher than it was a decade ago – BIS warns
• Global non-financial corporate debt grew by 15% to 96% of GDP in the past six years
• US mortgage rates hit highest level since May 2014
• US student loans near $1.4 trillion, 40% expected to default in next 5 years
• UK consumer debt hit £200b, highest level in 30 years, 25% of households behind on repayments

The ducks are beginning to line up for yet another global debt crisis. US mortgage rates are hinting at another crash, student debt crises loom in both the US and UK, consumer and corporate debt is at record levels and global debt to GDP ratio is higher than it was during the financial crisis. When you look at the figures you realise there is an air of inevitability of what is around the corner. If the last week has taught us anything, it is that markets are unprepared for the fallout that is destined to come after a decade of easy monetary policies. Global debt is more than three times the size of the global economy, the highest it has ever been. This is primarily made up of three groups: non financial corporates, governments and households. Each similarly indebted as one another.

Debt is something that has sadly run the world for a very long time, often without problems. But when that debt becomes excessive it is unmanageable. The terms change and repayments can no longer be met. This sends financial markets into a spiral. The house of cards is collapsing and suddenly it is revealed that life isn’t so hunky-day after all. Rates are set to rise and as they do they will spark more financial shocks, as we have seen this week. Mervyn King, former Governor of the Bank of England, gave warning about global debt levels earlier this week: “The areas of weakness in the current system are really focused on the amount of debt that exists, not just in the U.S. and U.K. but across the world,” he said on Bloomberg Radio last Wednesday. “Debt in the private sector relative to GDP is higher now than it was in 2007, and of course public debt is even higher still.”

Read more …

When you see US debt is out of hand, don’t stop there. All global debt is.

The % Puzzle Coming Together (Northman)

The US is drowning in debt and as long as rates are low it’s all fun and giggles, but there is a point where it cramps on growth and the simple question is when and where. In recent weeks we have had a nasty correction coinciding with technical overbought readings and both bonds and stocks testing 30 year old trend lines. In the meantime we continue to get data that keeps sending the same message: It’s a debt bonanza that keeps expanding and is unsustainable. Janet Yellen a few months ago said the debt to GDP ratio keeps her awake at night. Yesterday the Director of National Intelligence came out and described the national debt on an unsustainable path and a national security threat. This is literally where we are as a nation.

What’s Congress’s and the White House’s response? Spend more and blow up the deficit into the trillion+ range heading toward 2-3 trillion. What is there to say but stand in awe at the utter hubris that is being wrought. Last night the Fed came out with the latest household debt figures and it’s equally as damning, record debt and ever more required to keep consumer spending afloat:

The non-mortgage piece is particularly disturbing:

Higher interest rates will ultimately trigger the next recession as the entire debt construct will be weighted down by the burdens of cost of carry. And today’s inflation and correlated weakening retail sales data suggested that there’s price sensitivity already at these, historically speaking, still very low rates. The Fed may find itself horribly behind the curve and this will have consequences.

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Makes a lot of sense. Therefore not going to happen.

Trump Surprises Democrats, Supports 25 Cent Federal Gas Tax Hike (ZH)

President Trump surprised a group of lawmakers during a Wednesday meeting at the White House by repeatedly mentioning a 25-cent-per-gallon increase on federal gasoline and diesel tax in order to help pay for upgrading America’s crumbling infrastructure by addressing a serious shortfall in the Highway Trust Fund, which will become insolvent by 2021. The tax increase was first pitched by the U.S. Chamber of Commerce in January, while the White House had originally been lukewarm towards the idea. The federal gasoline and diesel tax has been at 18.4 and 24.4-cents-per-gallon respectively since 1993, with no adjustments for inflation. It currently generates approximately $35 billion per year, while the federal government spends around $50 billion annually on transportation projects.

Senator Tom Carper (D-DE), the top Democrat on the Senate Environment and Public Works Committee, seemed pleasantly surprised at Trump’s repeated mention of the tax as a solution to pay for upgrading American roads, bridges and other public works. “While there are a number of issues on which President Trump and I disagree, today, we agreed that things worth having are worth paying for,” Carper said in a statement. “The president even offered to help provide the leadership necessary so that we could do something that has proven difficult in the past.” Rep. Peter DeFazio (D-OR) – the top Democrat on the House Transportation and Infrastructure Committee was also present at the meeting, in which he says President Trump told lawmakers he would be willing to increase federal spending beyond the White House’s $200 billion, 10-year proposal. “The president made a living building things, and he realizes that to build things takes money, takes investment,” DeFazio said.

[..] Republican leaders have already rejected the idea, however, along with various other entities tied to billionaire industrialists Charles and David Koch. [..] Republican Senator Chuck Grassley (R-IA) doesn’t think the gas tax has any chance of even coming up for a vote in the Senate. “He’ll never get it by McConnell,” said Grassley, referring to Senate Majority Leader Mitch McConnell.

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Bloomberg always has graphs for everything. But now that I would like to see how fast personal debt has grown in China, nada. Still, this is a whole new thing: Chinese never used to borrow, and now it’s the new national pastime.

Household Debt Is China’s Latest Time Bomb (BBG)

For years, economists and policymakers have hailed the propensity of Chinese to save. Among other things, they’ve pointed to low household debt as reason not to fear a financial crash in the world’s second-biggest economy. Now, though, one of China’s greatest economic strengths is becoming a crucial weakness. Over the past two weeks, as they’ve held their annual work meetings, China’s various financial regulatory bodies have raised fears that Chinese households may be overleveraged. Banking regulators sound especially concerned, and understandably so: Data released Monday showed that Chinese households borrowed 910 billion renminbi ($143 billion) in January – nearly a third of all RMB-denominated bank loans extended that month.

While too much can be made of the headline number – lending is always disproportionately large in January, and bank loans are rising as regulators crack down on more shadowy forms of financing – the pace of growth for household debt is worrying. Between January and October last year, according to recent data from Southwestern University of Finance and Economics, Chinese household leverage rose more than eight percentage points, from 44.8% to 53.2% of GDP – a record increase. By contrast, between 2009 and 2015, households had added an average of just three percentage points to their debt-to-GDP ratio each year, and that includes a large jump of 5.5 percentage points in 2009 as banks ramped up lending in response to the global financial crisis. Before 2009, household debt levels had hovered around 18% of GDP for five years.

In other words, the debt burden for Chinese consumers has nearly tripled in the past decade. Part of that rapid debt expansion has been deliberate. China’s government has encouraged increased borrowing and spending on items like cars and houses, to boost both consumption and investment. At the G-20 summit in February 2016, China’s sober central bank chief Zhou Xiaochuan remarked that rising household leverage had “a certain logic to it.” Most worryingly, though, skyrocketing home prices seem to be driving much of the increase in household debt. Higher mortgage rates – and, especially, government policy – have compounded the problem. In order to slow rising prices, officials have raised down-payment requirements, pushed banks to slow mortgage lending and placed administrative restraints on purchases. That’s led buyers to borrow from different, often more expensive, channels.

Read more …

Beijing’s dilemma: allowing capital outflows (a no-no) would bring down the yuan (a yes please). Ergo: they can achieve what they want by allowing what they can’t afford to let happen.

China’s Currency Policy May Be Facing a New Chapter (BBG)

In the fraught history of Chinese currency policy, a new chapter could be looming this year as authorities consider the consequences of a yuan that’s testing its strongest levels since mid-2015. After successfully shutting off potentially destabilizing capital outflows and putting a floor under the yuan, policy makers may now have the luxury of looking at relaxing some of the strictures on domestic money. But China watchers warn that any moves are likely to be gradual and calibrated, given the turmoil of 2015 – when a sliding yuan spooked global markets. “Big changes in the capital account are less likely, but some slight easing can be expected,” said Xia Le at Banco Bilbao Vizcaya Argentaria in Hong Kong. Policy makers have put a priority on deleveraging, “which is likely to cause instability,” he said – all the more reason to go cautiously on cross-border flows.

The yuan has strengthened 2.6% this year, after posting its first annual gain in four years in 2017. While no officials have clearly signaled an intent to relax controls, recent comments and moves hint at the potential for modification of the one-way capital account opening that China has been pursuing since 2016 – in which it has encouraged inflows but not outflows. The State Administration of Foreign Exchange, which oversees foreign-exchange reserves, said last week it sees more balanced capital flows. Pan Gongsheng, the director of SAFE, said last week that there will be a “neutral” policy in managing cross-border transactions. In a free trade zone in Shenzhen, near Hong Kong, officials have revived a program allowing for overseas investment that was suspended in 2015. Authorities in January removed a “counter-cyclical” factor from the daily fixing of the yuan, a move seen to let the market take more of a role.

Any return to the sustained appreciation the yuan saw over the decade to 2015 could hurt Chinese exporters’ profits – just as big companies face challenges from the leadership’s drive to reduce excess credit and cut back polluting industries. Yet the disorderly moves that followed 2015 efforts to promote international use of the yuan serve as a warning against any sudden lifting of barriers to capital outflows. “A degree of undershooting” in the dollar against the yuan “is probably necessary to provide reformists in China’s policy circle a window of opportunity to lobby for more capital account liberalization,” analysts led by David Bloom, global head of currency strategy at HSBC in London, wrote in a recent report.

Read more …

Merkel should have stepped down. This can only end in chaos.

Angela Merkel Pays a Steep Price to Stay in Power (BBG)

Angela Merkel once claimed she had bested Vladimir Putin during their first meeting in the Kremlin, employing what she said was an old KGB technique: staring at the Russian leader in silence for several long minutes. As the sun rose over a frigid Berlin on Feb. 7, the German chancellor’s rivals from the Social Democratic Party used the same tactic. This time, Merkel blinked. Merkel and her team had spent the previous day and night at the headquarters of her Christian Democratic Union locked in tense negotiations with the SPD leadership. The SPD had issued an ultimatum that broke with long-standing protocol of German coalition-building: Off the bat, they demanded three key posts, including the finance and foreign ministries, power centers from which the SPD planned to set the government’s agenda, especially on Europe.

An earlier attempt at an alliance with the Greens and the Free Democrats had failed. A second collapse in talks, more than four months after the September election, threatened to sweep out the governing elite, including the chancellor who has dominated German politics for 12 years. As delegates were summoned back to the CDU building, they could barely believe what Merkel and her party’s Bavarian sister group, the Christian Social Union, had negotiated. With so much at stake, she surrendered the portfolios for finance, foreign affairs, and labor to the Social Democrats (though the deal still needs to be approved by the SPD’s 464,000 members). CDU lawmaker Olav Gutting captured the mood with gallows humor. “Puuuh! At least we kept the Chancellery!” he tweeted Wednesday. On Sunday, Merkel took to the airwaves to explain her position. “It was a painful decision,” she told the ZDF television network. “But what was the alternative?”

Read more …

The New York Times making the case for Trump’s border wall?

Meth, the Forgotten Killer, Is Back in America. And It’s Everywhere. (NYT)

The scourge of crystal meth, with its exploding labs and ruinous effect on teeth and skin, has been all but forgotten amid national concern over the opioid crisis. But 12 years after Congress took aggressive action to curtail it, meth has returned with a vengeance. Here in Oregon, meth-related deaths vastly outnumber those from heroin. At the United States border, agents are seizing 10 to 20 times the amounts they did a decade ago. Methamphetamine, experts say, has never been purer, cheaper or more lethal. Oregon took a hard line against meth in 2006, when it began requiring a doctor’s prescription to buy the nasal decongestant used to make it. “It was like someone turned off a switch,” said J.R. Ujifusa, a senior prosecutor in Multnomah County, which includes Portland. “But where there is a void,” he added, “someone fills it.”

The decades-long effort to fight methamphetamine is a tale with two takeaways. One: The number of domestic meth labs has declined precipitously, and along with it the number of children harmed and police officers sickened by exposure to dangerous chemicals. But also, two: There is more meth on the streets today, more people are using it, and more of them are dying. [..] In the early 2000s, meth made from pseudoephedrine, the decongestant in drugstore products like Sudafed, poured out of domestic labs like those in the early seasons of the hit television show “Breaking Bad.” Narcotics squads became glorified hazmat teams, spending entire shifts on cleanup. In 2004, the Portland police responded to 114 meth houses. “We rolled from meth lab to meth lab,” said Sgt. Jan M. Kubic of the county sheriff’s office. “Patrol would roll up on a domestic violence call, and there’d be a lab in the kitchen. Everything would come to a screeching halt.”

[..] But meth, it turns out, was only on hiatus. When the ingredients became difficult to come by in the United States, Mexican drug cartels stepped in. Now fighting meth often means seizing large quantities of ready-made product in highway stops. The cartels have inundated the market with so much pure, low-cost meth that dealers have more of it than they know what to do with. Under pressure from traffickers to unload large quantities, law enforcement officials say, dealers are even offering meth to customers on credit. In Portland, the drug has made inroads in black neighborhoods, something experienced narcotics investigators say was unheard-of five years ago.

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Will they sponsor this in Greek cities too?

German Cities To Trial Free Public Transport To Cut Pollution (G.)

“Car nation” Germany has surprised neighbours with a radical proposal to reduce road traffic by making public transport free, as Berlin scrambles to meet EU air pollution targets and avoid big fines. The move comes just over two years after Volkswagen’s devastating “dieselgate” emissions cheating scandal unleashed a wave of anger at the auto industry, a keystone of German prosperity. “We are considering public transport free of charge in order to reduce the number of private cars,” three ministers including the environment minister, Barbara Hendricks, wrote to EU environment commissioner Karmenu Vella in the letter seen by AFP Tuesday. “Effectively fighting air pollution without any further unnecessary delays is of the highest priority for Germany,” the ministers added.

The proposal will be tested by “the end of this year at the latest” in five cities across western Germany, including former capital Bonn and industrial cities Essen and Mannheim. The move is a radical one for the normally staid world of German politics – especially as Chancellor Angela Merkel is presently only governing in a caretaker capacity, as Berlin waits for the centre-left Social Democratic party (SPD) to confirm a hard-fought coalition deal. On top of ticketless travel, other steps proposed Tuesday include further restrictions on emissions from vehicle fleets like buses and taxis, low-emissions zones or support for car-sharing schemes. Action is needed soon, as Germany and eight fellow EU members including Spain, France and Italy sailed past a 30 January deadline to meet EU limits on nitrogen dioxide and fine particles.

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Never sell your basic needs to foreigners.

Who Keeps Britain’s Trains Running? Europe (NYT)

The privatization of public services “was one of the central means of reversing the corrosive and corrupting effects of socialism,” Margaret Thatcher wrote in her memoirs. “Just as nationalisation was at the heart of the collectivist programme by which Labour governments sought to remodel British society, so privatisation is at the centre of any programme of reclaiming territory for freedom.” Those sentiments fueled a sell-off that put nearly every state-owned service or property in Britain on the auction block in the final decade of the 20th century, eventually including the country’s expansive public transportation infrastructure. Enshrined by parliamentary acts under Mrs. Thatcher and implemented by her two immediate successors, John Major, a Conservative, and Tony Blair of New Labour, the gospel of privatization was embraced by leaders around the world, notably including Mrs. Thatcher’s closest overseas ally, President Ronald Reagan.

In the realm of transportation, that gospel was soon betrayed by its own chief disciples. Put simply, there were few private-sector buyers with the expertise and deep pockets necessary to maintain control of a transit system that serves approximately seven billion passengers per year. With minimal transparency, operational ownership of the network of train and bus lines that crisscross the 607-square-mile sprawl of Greater London, linking it to the far-flung corners of Britain, was peddled in bits and pieces by the British state or acquired in corporate takeovers. But the new bosses were not private, business-savvy British firms. By 2000, the masters of British public transit — thanks to a scheme that was intended to replace state waste and sloth with soundly capitalist business principles — were foreign governments, most of them members of the European Union.

In short, the privatization devolved into a de facto re-nationalization — but under the direction of foreign states — that somehow went largely unnoticed. It now poses a startling and unprecedented dilemma thanks to Brexit, which will soon divorce Britain from the state bureaucracies beyond the English Channel that literally keep its economy in motion. The largest single stakeholder and operator in British transit is the Federal Republic of Germany [..] Germany is followed closely in the ranks of British transit bosses by France, proprietor of the London United bus system, among many other holdings. Its iconic red double-deckers openly announce themselves as the property of the RATP Group (Régie Autonome des Transports Parisiens), the state-owned Paris transport company, and are emblazoned with its logo of a zigzagging River Seine flowing through an abstract representation of the French capital.

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As EU growth is at 10-year highs, boomers keep it all to themselves.

Europe’s Poverty Time Bomb (PS)

The poor don’t often decide elections in the advanced world, and yet they are being wooed heavily in Italy’s current electoral campaign. Former Prime Minister Silvio Berlusconi, the leader of Forza Italia, has proposed a “dignity income,” while Beppe Grillo, the comedian and shadow leader of the Five Star Movement, has likewise called for a “citizenship income.” Both of these proposals – which would entail generous monthly payments to the disadvantaged – are questionable in terms of their design. But they do at least shed light on the rapidly worsening problem of widespread poverty across Europe. Poverty represents an extreme form of income polarization, but it is not the same thing as inequality. Even in a deeply unequal society, those who have less do not necessarily lack the means to live a decent and fulfilling life.

But those who live in poverty do, because they suffer from complete social exclusion, if not outright homelessness. Even in advanced economies, the poor often lack access to the financial system, struggle to pay for food or utilities, and die prematurely. Of course, not all of the poor live so miserably. But many do, and in Italy their electoral weight has become undeniable. Almost five million Italians, or roughly 8% of the population, struggle to afford basic goods and services. And in just a decade, this cohort has almost tripled in size, becoming particularly concentrated in the country’s south. At the same time, another 6% live in relative poverty, meaning they do not have enough disposable income to benefit from the country’s average standard of living.

The situation is equally worrisome at a continental level. In the EU in 2016, 117.5 million people, or roughly one-fourth of the population, were at risk of falling into poverty or a state of social exclusion. Since 2008, Italy, Spain, and Greece have added almost six million people to that total, while in France and Germany the proportion of the population that is poor has remained stable, at around 20%. In the aftermath of the 2008 financial crisis, the probability of falling into poverty increased overall, but particularly for the young, owing to cuts in non-pension social benefits and a tendency in European labor markets to preserve insiders’ jobs. From 2007 to 2015, the proportion of Europeans aged 18-29 at risk of falling into poverty increased from 19% to 24%; for those 65 and older, it fell from 19% to 14%.

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“..Greece is no match for Turkey’s might. It would be like a “fly picking a fight with a giant..” What will the world do when the fighting starts? It could at any moment now.

Erdogan’s Chief Advisor: US Has Plan To Make Greece Attack Turkey (K.)

The chief advisor to Turkish President Recep Tayyip Erdogan has told Turkey’s TRT channel that he is “in no doubt” that the US has a plan to make Greece attack Turkey while its military is engaged in Syria. Turkey’s response, Yigit Bulut said, will be tough, adding that Greece is no match for Turkey’s might. It would be like a “fly picking a fight with a giant,” he said and warned that terrible consequences would follow for Greece. Bulut made similar comments earlier in the month referring to Imia over which Greece and Turkey came close to war in 1996. “We will break the arms and legs of any officers, of the prime minister or of any minister who dares to step onto Imia in the Aegean,” Bulut said.

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It may take Putin to halt Erdogan. But he will expect a reward for that.

Greece Looks at USA to Calm Down Turkey (GR)

Greece is expecting the US administration to intervene and de-escalate the crisis with Turkey over the Imia islets, according to diplomatic sources in Athens. The Greek government is hoping that US Secretary of State Rex Tillerson, who is currently in Ankara for an official visit, will persuade the Turkish leadership to tone down its actions in the Aegean. The US Ambassador to Greece Geoffrey R. Pyatt will also be in Ankara and will brief Tillerson about recent developments. On Monday night, a Turkish patrol boat rammed into a Greek coast guard vessel near Imia, in the most serious incident between the two NATO allies in recent years. The two countries went almost to war in 1996 over sovereignty of Imia islets (Kardak in Turkish).

A confrontation was avoided then largely due to the intervention of Washington. The Department of State issued a statement on Tuesday stressing that Greece and Turkey should take measures to reduce the tension in the region. On Wednesday, Greek defense minister Panos Kammenos briefed Greece’s NATO allies on the incident at Imia and presented audiovisual material that prove Turkey’s provocation. “The Imia islets are Greek, the Greek Coast Guard and Navy are there and we will not back down on issues of national sovereignty for any reason. We ask our allies in the EU and NATO to adopt a clear stance,” he told AMNA. He also said that it was inconceivable that Turkey, a NATO ally, behaved like this toward another ally, in this case Greece.

Read more …

May 022017
 
 May 2, 2017  Posted by at 9:00 am Finance Tagged with: , , , , , , , , , ,  


Grand Central Station NY WWII

 

Trump Weighs Breaking Up Wall Street Banks, Raising Gas Tax (BBG)
Life After Oil Makes Real Estate Canada’s New Economic Crutch (BBG)
How Did Home Capital Get Into Trouble? (BBG)
China Leverage Rising At ‘Alarming Pace’: Central Bank Official (R.)
UBS, BNP, RBS Get Subpoenas in US Treasuries Probe (BBG)
The US Health Care Industry Is Bound To Collapse Soon (NYP)
Exhaustion Gaps and the Fear of Missing Out (John Hussman)
Barack Obama Cashes In, But Harry Truman And Jimmy Carter Refused (IC)
The Sound of One Wing Flapping (Jim Kunstler)
Emmanuel Macron Has Taken French Voters For Granted. Now He Risks Defeat (G.)
How Juncker’s Downing Street Dinner Turned Sour (G.)
Greece Reaches Deal With Creditors To Pave Way For Bailout Talks (G.)
Greece: Any Better Times Or More Pitfalls Ahead? (LSE)

 

 

Don’t hold your breath for breaking up banks. Gas tax is more interesting: keep oil prices low and off you go. Could be a huge source of revenue, and Trump needs a few of those.

Trump Weighs Breaking Up Wall Street Banks, Raising Gas Tax (BBG)

President Donald Trump said he’s actively considering a breakup of giant Wall Street banks, giving a push to efforts to revive a Depression-era law separating consumer and investment banking. “I’m looking at that right now,” Trump said of breaking up banks in a 30-minute Oval Office interview with Bloomberg News. “There’s some people that want to go back to the old system, right? So we’re going to look at that.” Trump also said he’s open to increasing the U.S. gas tax to fund infrastructure development, in a further sign that policies unpopular with the Republican establishment are under consideration in the White House. He described higher gas taxes as acceptable to truckers – “I have one friend who’s a big trucker,” he said – as long as the proceeds are dedicated to improving U.S. highways.

During the presidential campaign, Trump called for a “21st century” version of the 1933 Glass-Steagall law that required the separation of consumer and investment banking. The 2016 Republican Party platform also backed restoring the legal barrier, which was repealed in 1999 under a financial deregulation signed by then-President Bill Clinton. A handful of lawmakers blame the repeal for contributing to the 2008 financial crisis, an argument that Wall Street flatly rejects. Trump couldn’t unilaterally restore the law; Congress would have to pass a new version. Trump officials, including Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn, have offered support for bringing back some version of Glass-Steagall, though they’ve offered scant details on an updated approach. Both Mnuchin and Cohn are former bankers who worked for Goldman Sachs.

Read more …

A deeply unstable economy.

Life After Oil Makes Real Estate Canada’s New Economic Crutch (BBG)

Two things happened last week that were a reminder of just how vital real estate has become to Canada’s economy. On Friday, Statistics Canada released GDP data that showed February was a banner month for sectors linked to housing. The real estate industry, residential construction, financial and legal services generated a combined 0.5% increase in output, the biggest one-month gain since 2014. Without those, the overall economy would have contracted slightly in February. A day earlier, the Ontario government released a budget that projects land transfer taxes will surpass C$3 billion ($2 billion) in the current fiscal year, from C$1.8 billion three years ago. For the province, it’s the difference between a balanced budget and a deficit.

Measures of housing’s contribution to the economy are imprecise, but estimates largely put the direct contribution in excess of 20%. It’s much more than that once you add all the indirect effects, with benefits spread widely from lawyer fees to government revenue and increased retail purchases through so-called wealth effects as rising home equity values prompt households to ramp up consumption. The big worry is that Canada has moved from a reliance on oil to a reliance on real estate. The influence of housing on the economy is so pervasive that it won’t take much of a slowdown to act as a major drag on the economy, said Mark Chandler, head of fixed-income research at RBC Capital Markets in Toronto.

“You don’t need a collapse in house prices, you don’t need housing starts to be cut in half for weaker real estate sector to have a significant effect on GDP and incomes,” Chandler said. RBC’s ballpark estimate is that a 10% decline in national home prices would knock a full percentage point off growth. A Toronto Dominion Bank report from 2015 found the housing wealth effect has been responsible for about one-fifth of all growth in consumption since 2001. “A lot of the strength we have seen in consumption is housing related,” said Brian DePratto, the economist who wrote the 2015 report. If you strip out the direct and indirect impact from housing on the economy, “you are talking about a much lower trend pace of growth.”

Read more …

Subprime.

How Did Home Capital Get Into Trouble? (BBG)

The world is suddenly paying attention to Home Capital, the tiny Canadian mortgage lender that’s on the ropes. The stock is plunging, it faces a run on deposits and regulators are probing management’s disclosure of fraudulent mortgages. Its troubles are raising questions: Is this an isolated case of a struggling mortgage company, or early signs of cracks forming in Canada’s red-hot housing market?

1. How did Home Capital get into trouble? It started in 2014 when the company, formed 31 years ago by Gerald Soloway, failed to screen a pile of questionable mortgages brought in by outside brokers. Some 45 brokers falsified income information on borrowers, prompting Home Capital to cut ties with them, leading to a drop in new business. This eventually led to an investigation by the Ontario Securities Commission, which said on April 19 that Home Capital had misled investors by not disclosing the fraud until five months after they became aware of the problem.

2. Will Home Capital fail? There are plenty of signs of stress. The stock has plunged almost 75% this year, cutting its market value to about C$515 million, from C$3.5 billion in 2014. Most pressing is the run on deposits. Customers pulled C$1.5 billion from high-interest savings accounts in four weeks, cutting the balances to C$500 million. The company has another C$13 billion in GICS. As these 30- and 60-day deposits come due, more withdrawals may follow. Without a deposit base, Home Capital can’t fund new mortgages. Home Capital hired investment bankers for a possible sale, though there is likely as much interest in the loan book as the company itself. Commercial banks may be interested, precluding any need for a government bailout. Financial regulators say they are watching closely.

3. Will this fallout spread to other lenders? Possibly. Home Capital competes with other companies in the so-called alternative mortgage space. They cater to small-business owners, new immigrants and other people who can’t get mortgages from the big commercial banks. It’s a niche segment but growing, accounting for almost 13% of the market. Unlike in the U.S. housing crash when loan defaults soared, there is little evidence of faulty loans so far. Home Capital’s delinquency rate, for example, was just 0.20% as of February. Still, shares of rivals First National and Equitable have been dragged lower by the Home Capital woes as investors fear contagion.

Read more …

Beijing sends a lot of signals, but it cannot make good on them without risking the economy, and everybody knows it. It’s all based on the idea that a centralized economy can be forced into a smooth descent, but that’s just a fallacy.

China Leverage Rising At ‘Alarming Pace’: Central Bank Official (R.)

China’s level of leverage is rising at an “alarming pace”, particularly in the finance sector, a senior central bank official said in a commentary, amid growing concern by the country’s senior leaders over financial security. The official Xinhua news agency on Monday cited Xu Zhong, head of the People’s Bank of China’s research bureau, as saying the country needed to deleverage at a “proper pace” to reduce financial sector debt and avoid systemic financial risk. “China’s overall leverage level is reasonable but is rising at an alarming pace, especially in the financial sector,” Xu said. The original commentary was published in business journal Caijing Magazine. Xu said high levels of stimulus spending from government paired with poor corporate management and financial supervision were key factors causing rising levels of leverage, Xinhua said.

He added the government should stick to “prudent and neutral” monetary policy, reduce emphasis on economic growth targets, and improve corporate governance so authorities did not have to step in so frequently to help companies out. “Financial security is achieved via reforms, not bail-outs,” Xinhua reported Xu as saying. Last week President Xi Jinping called for increased efforts to ward off systemic risks and help maintain financial security. Analysts say financial risk and asset bubbles pose a threat to the world’s second-largest economy if not handed well. Former Chinese finance minister Lou Jiwei also said last month that high leverage was the biggest risk facing China’s economy because debt has piled up despite government efforts to deleverage. The Bank for International Settlements warned last year that excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years.

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Well, maybe they’ll get serious because it’s about Treasuries this time, and foreign banks. Then again, these are primary dealers in Treasuries.

UBS, BNP, RBS Get Subpoenas in US Treasuries Probe (BBG)

Federal prosecutors have subpoenaed several banks as part of a criminal investigation into possible manipulation of the U.S. Treasuries market, according to people familiar with the matter. The Justice Department issued subpoenas last month to banks including UBS, BNP Paribas and the Royal Bank of Scotland seeking information on the $14 trillion market, said two people, who asked not to be named because the investigation is confidential. U.S. authorities have been examining the U.S. Treasuries market for roughly two years. In November 2015, Goldman Sachs disclosed that U.S. authorities had sought information related to its trading of when-issued securities, which are among the least transparent instruments in the world’s largest debt market. When-issued securities act as placeholders for bills, notes or bonds before they’re auctioned. The instruments change hands over the counter, with lifespans of just days. There’s scant public information on trading volumes or the market’s biggest players.

[..] The Justice Department in late 2015 asked about when-issued securities as part of broader requests for documents it sent to most or all of the roughly two dozen primary dealers in U.S. Treasuries, a person familiar with the matter told Bloomberg News at the time. UBS, BNP Paribas and RBS are primary dealers in U.S. Treasuries. Authorities haven’t accused any of the banks of wrongdoing. Trading of these instruments is also the subject of several lawsuits against primary dealers filed since July 2015. In them investors allege that traders at global banks colluded to artificially inflate the price of the when-issued securities, which allow the banks to sell U.S. debt before they own it. Then they bought the debt at auctions for an artificially suppressed price, unfairly profiting at investors’ expense, the lawsuits contend. The banks are scheduled to file motions to dismiss those lawsuits once the lead counsel for the plaintiffs is chosen.

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Increased health care spending presumably adds to GDP, so why worry?

The US Health Care Industry Is Bound To Collapse Soon (NYP)

As industry spending and debt servicing rage out of control, health care is ranked as the No. 1 US “systemic recession risk” in a new report. The sums at stake are staggering: Spending in the sector accounted for $3.3 trillion in 2015, and is 18% of the US economy today. The industry generates 16% of private sector jobs nationwide, up from 10% in 1990. US health care spending is forecast to grow by an average 5.6% annually in the coming decade, according to a report by the Center for Medicare and Medicaid Services (CMS), a projection based on no changes out of Washington and in the Affordable Care Care through 2025. Meanwhile, national spending on health care is forecast to outpace US GDP growth by 1.2%. CMS has estimated that spending will comprise 19.9% of GDP by 2025, up from 17.8% in 2015.

“There’s no question that rising health care costs are hurting our overall economy,” said New York-based financial adviser Michael Mondiello. “With consumer spending accounting for some 70% of economic activity, the more we spend on health care, the less we have to purchase other things like a vacation or to save for retirement.” [..] The first murmurs of early trouble may have been detected. “Companies in the health care sector are starting to lay people off,” said John Burns, CEO of John Burns Real Estate Consulting.. [..] “Health care companies borrowed too much money, and have grown their debt faster than their revenue, so you have to have a pullback.”

[..] In a report published by Burns, health care is identified as the largest systemic risk to the economy, of the three sectors Burns examined, which also included technology and automotive. The conventional wisdom points to US demographic trends, and an aging population, as supportive of the long-term strength, but the report shows industry growth has surpassed what is sustainable:
• Health care company debt is up 308% since 2009.
• The number of hospitals in health systems has expanded by 26% since 1999.
• The yearly medical costs for a family of four have jumped 189% since 2002, from $9,000 to $26,000.
“It could be like a Lehman Brothers scenario, where a couple of big health care companies take the economy down,” Burns told The Post.

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As usual, a long essay from John. A few bites:

Exhaustion Gaps and the Fear of Missing Out (John Hussman)

To offer a sense of the market return/risk profile that has typically been associated with exhaustion gaps at overvalued, overbought, overbullish extremes, the chart below shows the maximum gain and maximum loss in the market as measured from each instance to the subsequent bear market low. Multiple exhaustion gaps in the same market cycle are depicted separately. I recognize that my regular comments about the likelihood of the S&P 500 losing half or more of its value over the completion of this cycle may seem preposterous. A review of market history may help to understand these expectations, which are consistent with both the valuation evidence later in this comment, and with the outcomes that have typically completed prior speculative market cycles.

Two caveats are important here. First, given the simplicity of the conditions that define an exhaustion gap above, and their reliance on daily market behavior, it’s not clear that investors should wait for such gaps in future market cycles if other danger signs are already present. The best way to view these exhaustion gaps, I think, is that they represent points, late in a bull market cycle, where investors become overwhelmed by fear of missing out (FOMO), leaving a lopsided equilibrium where the remaining pool of potential buyers evaporates and the pool of potential sellers becomes saturated. Conversely, it seems likely that simple daily signals like the exhaustion gaps above could be misleading in the future, if more robust measures still indicate persistent risk-seeking among investors.

As a reminder of where market valuations stand, based on what actually works across market cycles, the chart below presents several of the most historically reliable equity valuation measures we track. We can form expectations about the likely range of market losses over the completion of this cycle by asking what amount of retreat would be required to bring these measures to either: a) the highest level of valuation reached at any previous bear market low, or b) the historical norm of each measure. Emphatically, these estimates do not assume that valuations will move below their historical norms at the next bear market low (as they did, in fact, as recently as the 2009 low). The smallest expected loss estimate comes in at -45.6%, while the largest loss estimate (taking each measure to its respective historical norm) is -62.1%. The average range of estimated market losses is -47.7% to -60.1%, while the median range is -45.6% to -62.0%.

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I think I already know which way Trump will lean.

Barack Obama Cashes In, But Harry Truman And Jimmy Carter Refused (IC)

It used to be the norm for presidents to retire to ordinary life after their stint in the White House — just ask Harry Truman. When the Democratic president was getting ready to leave the White House in 1953, he was approached by many employers. The Los Angeles Times noted that if he was “unemployed after he leaves the White House it won’t be for lack of job offers … but [he] has accepted none of them.” One of those job offers was from a Florida real estate developer, asking him to become a “chairman, officer, or stockholder, at a figure of not less than $100,000” — the sort of position that is commonplace today for ex-politicians. Presumably, had Truman taken the position, it would have been a good deal for both parties: the president’s prestige and connections would also enrich the company.

Truman declined. “I could never lend myself to any transaction, however respectable, that would commercialize on the prestige and dignity of the office of the presidency,” he wrote of his refusal to influence-peddle. Although he had access to a small pension from his military service, Truman had little financial support after leaving office. He moved back into his family home in Independence, Mo., and insisted on being treated like anyone else. He would tell people not to call him “Mr. President,” and settled on a fairly ordinary routine once he was back in Independence. He would take a morning walk through the town square. He kept an office nearby where he would answer mail from Americans. He chose to engage with just about anyone who walked into his office — not only people who wrote him big checks, or invited him onto their private yachts and private islands.

“Many people,” he once said, “feel that a president or an ex-president is partly theirs — they are right to some extent — and that they have a right to call upon him.” Indeed, his office number was even listed in a nearby telephone directory. He eventually agreed to write a memoir for Life magazine, but it was a lengthy project that provided far from luxurious stipends. Truman’s modest life post-presidency moved Congress in 1958 to establish a pension system that provides an annual cash payout as well as expenses for an office and staff. Gerald Ford nevertheless shattered precedent when he joined the boards of corporations such as 20th Century Fox, hit the paid speech circuit, and was made an honorary director by Citigroup.

But his successor, Jimmy Carter, who grew up in a modest home in Plains, Georgia, did not follow Ford’s example. He refused to become a professional paid speaker or join corporate boards. He moved back to Plains, and was welcomed home by a crowd of neighbors and supporters. He quickly made himself busy as a nonprofit founder and a volunteer diplomat. He did make money post-presidency — but by serving ordinary people, not elites. He wrote dozens of best-selling books bought by millions of people across the world — the post-presidency equivalent of small donors. Carter explained his thinking to the Guardian in 2011, telling them that his “favorite president, and the one I admired most, was Harry Truman. When Truman left office he took the same position. He didn’t serve on corporate boards. He didn’t make speeches around the world for a lot of money.”

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“Rest easy America… oh, and buy every dip.”

The Sound of One Wing Flapping (Jim Kunstler)

And suddenly the storms of early Trumptopia subside, or seem to. The surface of things turns eerily placid as the sweets of May sweep away the toils of an elongated mud season. Somebody stuffed Kim Jong Un back in his bunker with a carton of Kools and the Vin Diesel video library. France appears resigned to Hollandaise Lite in the refreshing form of boy wonder Macron. It’s been weeks since The New York Times complained about the Russians stealing Hillary’s turn as leader of the free world. We’re given to understand that Congress managed overnight to cook up a spending bill that will avert a Government shut-down until September. Rest easy America… oh, and buy every dip.

A calm surface is exactly what Black Swans like to land on, though by definition we will not know they’re out there until our reveries are broken by the sound of wings flapping. Some kind of dirty bird showed up on Canada’s thawing pond last week when that country’s biggest home loan lender suffered a 60 percent pukage of shareholder equity and had to be bailed out — not by the Canadian government directly, but by the Ontario Province’s Health Care Workers Pension Fund, a neat bit of hocus pocus that amounts to a one-year emergency loan at ten percent interest. If that’s a way for insolvent public employee pension plans to find enough “yield” to meet their obligations, then maybe that could be the magic bullet for the USA’s foundering pension funds.

The next time Citibank, Goldman Sachs, JP Morgan, and friends get a case of the Vapors, let them be bailed out by the Detroit School Bus Drivers’ Pension Fund at ten percent interest. That ought to work. And let Calpers take care of Wells Fargo. The situation across Western Civilization is as follows: virtually every major financial institution has become a check-kiting operation or a Ponzi scheme, and we’ve reached the point where they can only pretend to be rescued. Bailout or not, the Toronto-based Home Capital Group is still stuck with shit-loads of non-performing sub-prime mortgage loans — its specialty — and Canada’s spectacular real estate bubble has hardly begun to pop. The collateral is starting to turn, like dead meat in the May sunshine, and the odium will waft across the border.

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“It is truly astonishing that the man who inspired (as personal secretary) and implemented (as finance minister) the policies of President François Hollande could be branded as something radically new.”

Emmanuel Macron Has Taken French Voters For Granted. Now He Risks Defeat (G.)

The rise of Macron is characteristic of the age of spin doctors: it illustrates both their power and their limits. It is truly astonishing that the man who inspired (as personal secretary) and implemented (as finance minister) the policies of President François Hollande could be branded as something radically new. To achieve this feat, spin doctors resorted to celebrity-building in ways previously unknown in French political life. Macron was new because he was young and handsome, and because he had never been elected before. He appeared repeatedly on the front pages of Paris Match with his wife, whose name is chanted by his supporters at his rallies. In the final weeks of the campaign Macron was so careful not to expose the true nature of his programme (which amounts to little more than the unpopular liberalism-cum-austerity implemented by Hollande) that his speeches degenerated into vacuous exercises in cliche and tautology.

The strategy worked up to a point: he qualified for the second round. Yet its limits are also clear. Last spring, France saw nationwide protests against the labour laws that Macron had largely designed. The opposition was not only to their content, but also to the manner in which they were passed: the government bypassed a parliamentary vote. During these demonstrations police used high levels of violence, yet Macron never uttered a word to calm things down. He has already announced that he would resort to governing by decree if needed, and it is easy to anticipate increased social tensions by the autumn. To those who would oppose him, Macron would answer that he is implementing the programme on which he was elected. Theoretically, Macron should defeat Le Pen hands down. The problem is that the meaning of such a result would be unclear: how many would have voted for him, and how many against her?

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The EU can do what it wants with the UK, because whatever it is, the Brits will blame each other for anything that goes wrong. No need for divide and conquer, there’s a hopeless divide already; Brussels can focus on conquer.

How Juncker’s Downing Street Dinner Turned Sour (G.)

The meeting last Wednesday started with a kiss on the cheek, gratefully immortalised by the photographers on Downing Street’s pavement. It ended with a withering putdown: “I’m leaving Downing Street 10 times more sceptical than I was before,” Juncker told his host. It is said that the talks started pleasantly enough. During half of an hour of chit-chat in an anteroom, before taking their place at the dinner table, May told Juncker that she didn’t want just to talk Brexit during the evening but there were other matters of world affairs to discuss. “Like what?”, Juncker asked. In fact, little else seemed to be on the prime minister’s mind. Juncker did have a topic to raise though, and the issue at hand may just explain some of the current iciness between the two leaders.

That very morning the EU should have been shuffling around its money to deal with issues such as the migration crisis, which could not have been expected a few years ago when the bloc’s budget had been set. But on Monday morning Juncker had been made aware of an email from the UK’s permanent representative in Brussels explaining that because a general election had been announced, the British government couldn’t give its support to any changes in how the EU was going to spend its cash. Juncker smelled mischief – maybe it was a way to show the EU what trouble Britain could cause if it didn’t get its way? “What on earth is all this supposed to mean?” he is said to have asked May. Perhaps you won’t be able to talk about Brexit then, he queried, when May explained the rules of purdah, under which governments in an election are to avoid binding the hands of the next administration.

[..] it was the substance of the talks that were to cause Juncker the most unease. And it was Juncker’s despair that got to his colleagues. This was the man who through the trickiest of negotiations had always seen a path through. But when presented with May’s insistence that EU citizens in the UK would be treated in the future like any other foreign national, that trade talks needed to start before the issue of Britain’s divorce bill was settled or her claim that technically the UK owed nothing at all to the union, his lack of optimism for the future became clear. “Theresa May started by stating that the UK wanted to discuss first future arrangements, then article 50 stuff,” one source with knowledge of the dinner said.

“It felt to the EU side like she does not live on planet Mars but rather in a galaxy very far away.” She was “deluded” and appeared to be “living in a parallel universe”, Juncker told the German chancellor, Angela Merkel, in a phone call said to have taken place just moments after the delegation left Downing Street.

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Absolute insanity: “..pensions are to be cut by 9% on average..”

Greece Reaches Deal With Creditors To Pave Way For Bailout Talks (G.)

Greece has reached a preliminary deal with its creditors that should pave the way for long-awaited debt relief talks, the Greek finance minister said on Tuesday. “The negotiations are concluded,” Euclid Tsakalotos told reporters, according to state agency ANA. After overnight talks, Tsakalotos said a “preliminary technical agreement” had been achieved ahead of a 22 May meeting of eurozone finance ministers, which is required to approve the deal. Tsakalotos added he was “certain” that the agreement would enable Greece to secure debt relief measures from its creditors, which he has said is vital to spearhead recovery in the country’s struggling economy. A compromise is required to unblock a tranche of loans Greece needs for debt repayments of €7bn ($7.6bn) in July.

Under pressure from its creditors – the EU, ECB and the IMF – the government agreed earlier this month to adopt another €3.6bn in cuts in 2019 and 2020. Athens conceded fresh pension and tax break cuts in return for permission to spend an equivalent sum on poverty relief measures. A government source on Tuesday said pensions are to be cut by 9% on average, ANA said. The measures are to be approved by parliament by mid-May. However, prime minister Alexis Tsipras has said he will not apply these cuts without a clear pledge later this month on debt-easing measures for Greece. Athens also hopes to be finally allowed access to the ECB’s QE asset purchase programme, to help its return to bond markets.

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So many numbers it’s easy to forget this is about people.

Greece: Any Better Times Or More Pitfalls Ahead? (LSE)

In 2015, Greece, an EU state member since 1981 with a population of 10,846,979 people, recorded the highest level of GGD (General Government Gross Debt to GDP ratio) in the EU-28, at 176.9%. Concerning the volume index of GDP per capita in PPS (Purchasing Parity Standards) we find Greece’s GDP per capita dropped from 4% lower than the EU-28 average in 2004 to 29% lower in 2015. However, GDP is a measure of a country’s economic activity, and therefore it should not be considered a measure of a country’s well-being. If we take the AIC (Actual Individual Consumption) per capita in PPS (Purchasing Power Standard) as a better indicator to describe the material welfare of households, Greece showed an AIC index per capitalower by some 19% than the EU-28 average in 2015. Labour productivity per hour worked expressed in US $ (which means GDP per hour worked expressed in US $) was estimated among the lowest in the EU-28, at $32 in 2015.

Curiously, Greece has the highest average hours worked per year in the EU-28, at 2,042 hours, its average hourly labour cost is among the lowest in the EU-28, at €14.5, its average annual wages at US $25,211 and unemployment rate of 24.90%. 43% of pensioners live on €660/month on average, and many Greek pensioners are also supporting unemployed children and grandchildren. [..] Unemployment is a tragedy for Greece. The highest jobless rate was recorded in 2014, at 27.8%. The current level of unemployment, the highest in the EU, is about 24%. Unemployed workers between 45 and 64 years of age (currently almost one in three unemployed, around 347,400 people, whereof 280,000 are long-term unemployed, in 2009 they were one in five, or 99,000 people)- , and young unemployed people aged 15-24 (close to 50% of the total) are the most adversely affected demographics.

According to ELSTAT (Hellenic Statistical Authority) – GSEE (General Confederation of Greek Workers), nine out of ten Greeks without job do not receive unemployment benefits and 71.8-73.8% (around 807,000 people) of all unemployed (1,124,000 people) have been out of work for more than twelve months, while only 1.5% of them receive the 700 euro/month applicable to the long-term registered unemployed. In the last quarter report for 2016, ELSTAT shows that the amount of Greeks facing long-term unemployment has risen some 146% (from 327,700 to 807,000 people) over the 6-year period. Additionally, there are 350,000 Greek families without a single member working, and unemployment has led some 300,000 highly skilled professionals and workers to leave the country.

[..] According to a study carry out by the Cologne Institute of Economic Research, poverty rate in Greece increased by 40% from 2008 to 2015, the largest increase among EU countries. A new multidimensional poverty index was used to calculate poverty, which is not based on income alone but on other factors such as the deprivation of material goods, quality of education, underemployment and, access to healthcare. In 2015, according to Eurostat, more than one in three residents of Greece experienced conditions of poverty and/or social exclusion. The percentage of those within this group had risen from 29.1% in 2008 to 35.7% in 2015, or 3.8 million people. 21.4% of the Greek population are living below the national poverty line (with an income less than 60 % of the national average), 22.2 % are severely materially deprived,

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