Aug 042017
 
 August 4, 2017  Posted by at 1:26 pm Finance Tagged with: , , , , , ,  7 Responses »
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William Blake Europe Supported by Africa and America 1796

 

Earlier this week I was struck by the similarities and differences between two graphs I saw float by. And the thought occurred that they are as scary as they are interesting. The graphs show eerily similar trends. And complement each other. The first graph, which Tyler Durden posted, shows productivity, defined as more or less the same as GDP per capita. It goes all the way back to 1790 and contends that 2017 productivity is about back to the level it was at in 1790. In the article, Tyler suggests a link with the amount of time people spend on Instagram et al, but perhaps there is something more going on.

That is, America and Western Europe exported almost their entire manufacturing capacity to China etc. And how can you be productive if you don’t manufacture anything? Yeah, I know, ‘knowledge economy’ and ‘service economy’ and all that, but does anyone still really believe those terms? Sure, that may have worked for a while as others were still actually making stuff (and nobody really understood the idea anyway), but it’s a sliding scale. As productivity plunged, so did GDP per capita. We can all wrap our heads around that.

America’s Productivity Plunge Explained

For the first time since the financial crisis, US multifactor productivity growth turned negative last year, mystifying economists who have struggled to find something to blame for the fact that worker productivity is declining despite a technology boom that should make them more efficient – at least in theory. To be sure, economists have struggled to find explanations for the exasperating trend, with some arguing that the US hasn’t figured out how to properly measure productivity growth correctly now that service-sector jobs proliferate while manufacturing shrinks. But what if there’s a more straightforward explanation? What if the decline in US productivity measured since the 1970s isn’t happening in spite of technology, but because of it?

To wit, Facebook has just released user-engagement data for its popular Instagram photo-sharing app. Unsurprisingly, the data show that the average user below the age of 25 now spends more than 32 minutes a day on the app, while the average user aged 25 and older. The last time Facebook released this data, in October 2014, its users averaged 21 minutes a day on the app. According to Bloomberg, “time spent is an important metric for advertisers, which like to hear that users are browsing an app beyond quick checks for updates, making them more likely to run into some marketing.” Maybe they should matter more to economists, too.

 

When asking the question “What if the decline in US productivity measured since the 1970s isn’t happening in spite of technology, but because of it?”, a next question should be: what is the technology used for? And if the answer to that is not “for making things”, then what do you think could its effect on productivity could possibly be?

Tyler took that graph from an article posted August 22, 2015, also on Zero Hedge, by Eugen Bohm-Bawerk, who at the time had some interesting things to say about it:

Productivity In America Now On Par With Agrarian Slave Economy

[..] it is time to take a closer look at productivity measured in terms of GDP per capita. While this is not an entirely correct way to measure productivity, it does adhere to new classical growth model theories which posit that in a developed economy, reached steady state, the only way to increase GDP per capita is through increased total factor productivity. In plain English, growth in GDP per capita equals productivity growth. The reason we use this concept instead of more advanced productivity measures is to get a long enough time series to properly understand the underlying fundamental forces driving society forward.

In our main chart we have tried to see through all the underlying noise in the annual data by looking at a 10-year rolling average and a polynomial trend line. In the period prior to the War of 1812 US productivity growth was lacklustre as the economy was mainly driven by agriculture and slaves (slaves have no incentive to work hard or innovate, only to work just hard enough to avoid being beaten). From 1790 to 1840 annual growth averaged only 0.7%. As the first industrial revolution started to take hold in the north-east, productivity growth rose rapidly, and even more during the second industrial revolution which propelled the US economy to become the world largest and eventually the global hegemon [..]

Adjusting for the WWII anomaly (which tells us that GDP is not a good measure of a country’s prosperity) US productivity growth peaked in 1972 – incidentally the year after Nixon took the US off gold. The productivity decline witnessed ever since is unprecedented. Despite the short lived boom of the 1990s US productivity growth only average 1.2% from 1975 up to today. If we isolate the last 15 years US productivity growth is on par with what an agrarian slave economy was able to achieve 200 years ago.

[..] With hindsight we know that finance did more harm than good so we can conservatively deduct finance from the GDP calculations and by doing so we essentially end up with no growth per capita at all over a timespan of more than 15 years! US real GDP per capita less contribution from finance increased by an annual average of 0.3% from 2000 to 2015. From 2008 the annual average has been negative 0.5%!

In other words, we have seen a progressive (pun intended) weakening of the US economy from the 1970s and the reason is simple enough when we know that monetary policy broken down to its most basic is a transaction of nothing (fiat money) for something (real production of goods and services). Modern monetary policy thereby violates the most sacred principle in a market based economy; namely that production creates its own demand. Only through previous production, either your own or borrowed, can one express true purchasing power on the market place.

The central bank does not need to worry about such trivial things. They can manufacture the medium of exchange at zero cost and express purchasing power on the same level as the producer. However, consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption. Do this on a grand scale, over a long period of time, even a capital rich economy as the US will eventually be depleted. Capital per worker falls relative to competitors abroad, cost goes up and competitiveness falls (think rust-belt). Productive structures cannot be properly funded and the economy must regress to align funding with its level of specialization.

Eugen gets close to what I said earlier about productivity. That is, you have to make stuff, to manufacture things, in order to have, let alone grow, productivity (aka GDP per capita). An economy based -too heavily- on services and finance is not going to do it for you. Because “the most sacred principle in a market based economy” is that “production creates its own demand.”

Now, combine that graph with the next one, from Lance Roberts, which unmistakably depicts the same trendline, though on a different -shorter- time scale. Lance’s graph shows more or less the same as Tyler’s, if you allow me that freedom, namely: GDP per capita growth equals productivity equals GDP growth, but it adds a crucial component (unless you ask someone like Paul Krugman): debt.

Together, the graphs show how we have ‘solved’ the issue of falling growth and productivity: with debt. It doesn’t get simpler than that. We exported our productive capacity to China, and now we can only afford to buy their products -which are mostly inferior in quality to what our ancestors once made- by getting into -more- debt. Big simplification, granted, but we’re doing broad strokes here.

 

 

All this is simple enough for a 6-year old to grasp. It’s actually likely easier for them than for most trained economists. Problem is, the 6-year olds are probably busy on Instagram. Tyler’s right on that one. But then, at least they’re not stuck in outdated modelling.

Ergo: we have a precipitous decline in productivity, which also translates into a decline in GDP. Even if we come up with all sorts of accounting tricks to hide this fact. And what do we do, or rather, what have we done? Enter central banks, stage right. That second graph inevitably raises the question: Without all the debt, where would the growth rate stand today? And I know what you want to say, because just like you, I am afraid to ask.

We’ve used all those trillions in new debt to, as far as productivity is concerned, run to not even stand still: productivity (GDP per capita) continues to decline despite all the debt. Why is that? Well, Bohm-Bawerk answers that question earlier: “.. consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption.” In other words, as I said before, if you don’t use it to actually make things, you’re basically just burning it. Plus, in the process, as we see ever clearer in the effects of QE, you can grossly distort an economy, by blowing bubbles, propping up zombies etc.

Things would look different if we used the “zero cost money” for production instead of consumption. But that’s not what the central bank money is used for at all. The net effect of all that debt, be it QE or new mortgage debt, is less than zero. Quite a bit less, actually. How do we solve that problem? The answer is deadly simple, though not easy to put into practice: start making stuff again! Or put it this way: debt must be used to raise production, not consumption.

 

 

Apr 022017
 
 April 2, 2017  Posted by at 2:29 pm Finance Tagged with: , , , , , , , , , ,  Comments Off on The American Dream, Twice Removed
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Vincent van Gogh Corridor In The Asylum 1889

 

Nicole Foss is in Christchurch, New Zealand right now for the Living Economies Expo, and sent me, I’m still in Athens, Greece, a piece written by yet another longtime Automatic Earth reader, Helen Loughrey (keep ’em coming!), who describes her efforts trying to find a rental home in Fairfield County, Connecticut.

The first thing that struck me is how effortless and global sending information has become (category things you know but that hit you anyway occasionally, which is a good thing). The second is that the fall-out of the financial crisis has followed the same path as the information ‘revolution’: that is, it’s spreading faster than wildfire.

And I can’t avoid linking that to earlier periods of American poverty (see the photos), times in which ‘leaders’ thought it appropriate to let large swaths of the population live in misery, so everyone else would think twice about raising their voices. A tried and true strategy.

But of course there are large differences as well today between the likes of Greece and Connecticut. In Athens, there’s a poverty problem. In Fairfield County, there’s a (fake) ‘wealth problem’. Ever fewer people can afford to buy a home, so the rental market is ‘booming’ so much many can’t even afford to rent.

We can summarize this as ‘The Ravages Of The Fed’, and its interest rate policies. Or as ‘The Afterburn of QE’. That way it’s more obvious that this doesn’t happen only in the US. Every country and city in the world in which central banks and governments have deliberately blown real estate bubbles, face the same issue. Toronto, Sydney, Hong Kong, Stockholm, you know the list by now.

Helen’s real-life observations offer a ‘wonderful’ picture of how the process unfolds. The demise of America comes in small steps. But it’s unstoppable. The same is true for every other housing bubble. When no-one can afford to buy a home anymore but a bunch of Russians and Chinese, rental prices surge. And then shortly after that the whole thing goes up in smoke.

Here’s Helen:

 

 

Helen Loughrey: I am getting a reminder about class systems and downward social drift while searching for a rental in Fairfield County, Connecticut.

First of all, I realize I am extremely lucky to be able to afford a home at all. More and more Americans increasingly cannot. I am very aware that my current socioeconomic status could be gone in an instant. And so I am more inclined to notice class issues. There, but for the grace of GDP, go I.

And as one who studies the economy, I know we are all destined to go ‘there’ in the not-so-distant future. Owners are downsizing to become tenants, occupancy rates may rise to depression era levels, and homelessness will continue to rise up through the social fabric like water wicking up a paper towel.  

This week, I rejected an unoccupied split level rental for the dilapidated condition of the heavily scuff-marked and dingy old wall paint and dirty carpets and peeling deck paint. The house screamed “I do not care about my tenants’ quality of life.” I told my real estate agent that it indicated the landlord would not be responsive to tenant needs. He replied, “Well, after all, it’s a *rental*.”

And that statement in its conventional wisdom summed up class assumptions: buyers deserve better than renters. Yet landlords expect renters to deposit $8,000 to $10,000 of their savings, to maintain excellent credit ratings, to pay more than they would for a monthly mortgage, and to increase payments over time by $100/month every year without commensurate capital improvements to maintain the quality of the premises.

I replied, “Well, renters are people too.” I was facing the fact that despite having been a conscientious homeowner and model tenant, I had lost significant socioeconomic status by becoming a renter.

 

Another anecdote: Our current rental is likewise being shown to potential tenants. This week an until-recently wealthy, brand new divorcée with a pre-teen visited while I was here. She needs to switch her daughter from private school to the public schools and to quickly obtain a separate town residence in order to register her daughter. 

I spiffed up the place for my landlord, put fresh flowers on every table, and told the prospect how marvelous it was to raise our daughter in this school district with the backyard pool available to her new friends, how the third bedroom was a cozy office/family room. She listened politely but she visibly recoiled at the drop in living standards that comes with renting after a divorce. Welcome to the Greenwich renters club, my dear.

 


Arthur Rothstein Low-cost housing. Saint Louis, Mo. 1936

 

I remember despairing in our 2013 rental search that we would not find a decent home by the time we had to register our daughter in the Greenwich school system. We had compromised on this residence. Granted, the New York regional prices are stratospheric compared to our southern Maryland experience. You must DOUBLE your housing costs and even then you get much less square footage for the money.

Second, even though Greenwich is notoriously about rich and famous estates in “back country”, nevertheless like any city there are a lot more resident middle class people in average homes and even less well-off poor living in lower quality public housing apartment complexes.

The options in our price range were deplorable when we arrived here. So we paid a lot more than we thought we could afford only to share a portion of a 1950’s era non-updated house with the resident owner living in the in-law apartment.

I tried not to compare it to the larger modern house we had owned in Maryland but on my depressed days, I let my mind wander through our old home for old times’ sake. (But even there during the real estate boom years, I remember thinking we could not afford to buy again in our own neighborhood.)

In 2013 we had offered less than the listed price for our current Greenwich rental but past the top of our affordability. We rationalized that there was a swimming pool bonus for our daughter to invite new friends over. Our offer was accepted. We incorrectly assumed that over the years, the monthly rent would not rise much.

The list price should have been a clue to us that the landlord would attempt to increase the price back to their higher monthly income expectations. Plus the landlord retired from his job and took out a home equity loan a year later.  

 


G. G. Bain Eviction in an East Side neighborhood of New York 1908

 

Four years later, the time has come for us to balk at any further increases. This 3 bedroom 2 bath “tear-down” house apartment now is listed at $5500 and in three years the landlord likely expects rent creep to provide the $6000 they want in monthly income. Well, good luck to the next tenant. So we are house-hunting again. We no longer require the public school system,  but since we are paying cash now for college, our options are still limited. (I could write another essay about skyrocketing college costs.)

We recently concluded that we are now priced-out of the Greenwich rental market for what we are seeking: my husband needs a home office. I want to get moving finally on a productive food garden and starting a Permaculture Design school home business.

Convincing a potential landlord to allow me to convert costly wasteful lawn space into productive perennial food garden space; and to accept all my pets, a well behaved 6 pound lapdog plus 24,000 to 140,000 honeybees …. does not endear me to the real estate agents here. (I could write another essay on entitled and controlling listing agents.)

Other factors also place upward pressure on rental pricing: The sales market is in a longterm slump. Fewer potential buyers qualify to enter the market because they have recently lost their life savings in the housing slump themselves or they are too young to have acquired any.

Bank lenders expect larger down payments than in the recent past, amounts which I expect will be forfeited to the banks anyway when the economy tanks and more “homeowners” are thrown out of work. (Tanked economy, thanks in part to those same banks betting their depositors money in declining real estate.)

Renters risk losing their deposits to unscrupulous thieving landlords but nothing beats a thieving bankster. That down payment you saved? Kiss it goodbye, you are very likely never getting it back. And banksters know this. It is why they demand high down payments.

They’re counting on the eventuality that a good portion of current mortgagees will have to forfeit in a depressed economy. But you would not know there is a sales market slump, let alone another looming crash, by reading glowing real estate -sponsored newspaper articles. It is no wonder many  sales are for cash not lien, to wealthy foreign buyers.

 


Carl Mydans Kitchen of Ozarks cabin purchased for Lake of the Ozarks project, Missouri 1936

 

Anyone buying housing today should expect an asset value loss to occur when the real estate market adjusts downward again. (Which is another reason we are not buying in this market.) However sellers, listening to advice from hopeful real estate agents and pollyannish economists, are holding out for *higher* prices to return.

They eventually remove their properties from the sales market in order to rent them after they still cannot find a buyer even though dropping the price continuously for two years. And because fewer people can afford buying than renting, the price of rentals is rising now while the price of real estate is dropping.

Landlords who are strapped with high mortgages from the boom years, and other landlords who may have owned their older houses outright but then took out home equity loans to finance eventual roofing or HVAC expenses, and even to afford replacement cars or family vacations, are placing expectations on their tenants to provide the income to pay for those bank loans.

Meanwhile town zoning laws still prevent the tenant cost savings of subletting; and prevent owners from contracting with simultaneous multiple tenants. Yet the pool from which to draw tenants who can afford a whole house or 3/4 of one is still shrinking.

Renters like us may eventually opt (and perhaps should be opting now) for smaller square footage multiple family apartment complexes. (But no food gardening amenities? Rental managers take note.) Whole houses, with high mortgages to cover, will remain vacant and become foreclosed.

And I get it, owning a mortgaged property is also costly. But while renters are seeing standards of living drop now, so too will landlords when their properties sit vacant due to aggregate inability of renters’ incomes to afford to support the mortgaged landlords in the manner to which they had once become accustomed.

There will be a resurgence in foreclosures. And then, if they are lucky to still have a job income, we’ll also welcome them to the renters club.

 

Jan 202017
 
 January 20, 2017  Posted by at 10:02 am Finance Tagged with: , , , , , , , , ,  3 Responses »
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Unknown Masterpiece 2016-7

Trump’s Tweets Are Little Different From FDR’s Fireside Chats (MW)
Fortress Washington Braces For Anti-Trump Protests, New Yorkers March (R.)
Executive Actions Ready To Go As Trump Prepares To Take Office (R.)
Mnuchin Says Long-Term Strength of US Dollar Is Important (BBG)
German Opposition Leader Calls For Security Union With Russia, End Of NATO (DW)
The ‘Ever Closer European Union’ Principle Is “Buried And Gone” (MT)
Chinese Growth Slips To 6.7% In 2016, The Slowest For 26 Years (AFP)
China GDP Beats Expectations But Debt Risks Loom (R.)
There’s an Unexplained $9 Billion Gap in India’s Cash Supply (BBG)
Amazon Is Going To Kill More American Jobs Than China Did (MW)
Stiglitz Tells Davos Elite US Should “Get Rid Of Currency” (Black)
US Government Caught Massively Fabricating Student Loan Default Data (ZH)
EU Migration Commissioner Urges NGOs To Manage Funds With Transparency (KTG)

 

 

Nice angle. Circumventing the press is nothing new.

Trump’s Tweets Are Little Different From FDR’s Fireside Chats (MW)

Donald Trump, arguably, has already changed the office of the presidency forever, with his prolific tweets, some of which, at least in the lead-up to his Friday inauguration, have endorsed specific companies, lashed out at impersonations and in some case even laid the groundwork for complex policies. Cabinet appointees have found themselves walking back his remarks with some regularity this week. Some observers embrace the transparency of the unfiltered Trump experienced on Twitter. The public wasn’t ruffled one bit when a newly elected Trump’s staff blew off the protocol for press pool reports and end-of-day signoffs. Trump’s delivery mechanism may be relatively new, but the motivation isn’t.

Circumventing the press, and even the carefully crafted press release, is a presidential tack that can be traced as far back as Franklin Delano Roosevelt’s “fireside chats,” which leveraged the radio medium to deliver Roosevelt directly into American living rooms, said Andrew Card, in an MSNBC interview. Card, White House chief of staff to the second President Bush, also served in the administrations of Ronald Reagan and George H.W. Bush. FDR delivered his first radio address on March 12, 1933, in the middle of the crisis of confidence over the U.S. banking system. The intent? Reassure the public as if the president had stopped by personally. It was only after the broadcast’s relative success that they eventually earned the “fireside chat” familiarity. Trump’s tweets are the president-elect’s way to get closer to Americans, too, said Card. And that’s not without risk. Trump’s words represent “empathy” but don’t always reflect “judgment,” said Card.

Read more …

Are they all protesting the same thing? Where were they 8 years ago?

Fortress Washington Braces For Anti-Trump Protests (R.)

Washington turned into a virtual fortress on Thursday ahead of Donald Trump’s presidential inauguration, while thousands of people took to the streets of New York and Washington to express their displeasure with his coming administration. Some 900,000 people, both Trump backers and opponents, are expected to flood Washington for Friday’s inauguration ceremony, according to organizers’ estimates. Events include the swearing-in ceremony on the steps of the U.S. Capitol and a parade to the White House along streets thronged with spectators. The number of planned protests and rallies this year is far above what has been typical at recent presidential inaugurations, with some 30 permits granted in Washington for anti-Trump rallies and sympathy protests planned in cities from Boston to Los Angeles, and outside the U.S. in cities including London and Sydney.

The night before the inauguration, thousands of people turned out in New York for a rally at the Trump International Hotel and Tower, and then marched a few blocks from the Trump Tower where the businessman lives. The rally featured a lineup of politicians, activists and celebrities including Mayor Bill de Blasio and actor Alec Baldwin, who trotted out the Trump parody he performs on “Saturday Night Live.” “Donald Trump may control Washington, but we control our destiny as Americans,” de Blasio said. “We don’t fear the future. We think the future is bright, if the people’s voices are heard.” In Washington, a group made up of hundreds of protesters clashed with police clad in riot gear who used pepper spray against some of the crowd on Thursday night, according to footage on social media. The confrontation occurred outside the National Press Club building, where inside a so-called “DeploraBall” event was being held in support of Trump, the footage showed.


JFK inaugural parade 1961

Read more …

Nice detail: “Trump plans on Saturday to visit the headquarters of the CIA in Langley, Virginia…”

Executive Actions Ready To Go As Trump Prepares To Take Office (R.)

Donald Trump is preparing to sign executive actions on his first day in the White House on Friday to take the opening steps to crack down on immigration, build a wall on the U.S.-Mexican border and roll back outgoing President Barack Obama’s policies. Trump, a Republican elected on Nov. 8 to succeed Democrat Obama, arrived in Washington on a military plane with his family a day before he will be sworn in during a ceremony at the U.S. Capitol. Aides said Trump would not wait to wield one of the most powerful tools of his office, the presidential pen, to sign several executive actions that can be implemented without the input of Congress.

“He is committed to not just Day 1, but Day 2, Day 3 of enacting an agenda of real change, and I think that you’re going to see that in the days and weeks to come,” Trump spokesman Sean Spicer said on Thursday, telling reporters to expect activity on Friday, during the weekend and early next week. Trump plans on Saturday to visit the headquarters of the CIA in Langley, Virginia. He has harshly criticized the agency and its outgoing chief, first questioning the CIA’s conclusion that Russia was involved in cyber hacking during the U.S. election campaign, before later accepting the verdict.

Trump also likened U.S. intelligence agencies to Nazi Germany. Trump’s advisers vetted more than 200 potential executive orders for him to consider signing on healthcare, climate policy, immigration, energy and numerous other issues, but it was not clear how many orders he would initially approve, according to a member of the Trump transition team who was not authorized to talk to the press. Signing off on orders puts Trump, who has presided over a sprawling business empire but has never before held public office, in a familiar place similar to the CEO role that made him famous, and will give him some early victories before he has to turn to the lumbering process of getting Congress to pass bills.

Read more …

The contradictions people seek don’t appear to exist.

Mnuchin Says Long-Term Strength of US Dollar Is Important (BBG)

Treasury Secretary nominee Steven Mnuchin told lawmakers the long-term strength of the U.S. dollar is important and said President-elect Donald Trump’s comments that the currency was too high weren’t meant as a longer-run policy. The dollar’s “long-term strength – over long periods of time – is important,” Mnuchin said in response to questions at his confirmation hearing Thursday before the Senate Finance Committee in Washington. “The U.S. currency has been the most attractive currency to be in for very, very long periods of time. I think that it’s important and I think you see that now more than ever.” At the same time, he said the greenback is currently “very, very strong, and what you see is people from all over the world wanting to invest in the U.S. currency.”

The Bloomberg Dollar Spot Index extended its gains on Thursday. The currency has appreciated more than 5% since Trump won the Nov. 8 election on expectations he will boost economic growth through tax cuts and spending increases. Trump expressed concern about the dollar’s recent appreciation in an interview with the Wall Street Journal this month, saying the currency was “too strong.” That prompted speculation that his administration might reverse longstanding tradition in the U.S. to support a strong-dollar policy. “When the president-elect made a comment on the U.S. currency, it wasn’t meant to be a long-term comment,” Mnuchin said. “It was meant to be that perhaps in the short term the strength in the currency, as a result of free markets and people wanting to invest here, may have had some negative impacts on our ability in trade.”

Read more …

You can’t keep Germany vested against Russia for too long for opaque reasons. History says so.

German Opposition Leader Calls For Security Union With Russia, End Of NATO (DW)

The parliamentary leader of Germany’s largest opposition party has urged the dissolution of the NATO alliance. Her remarks come after US president-elect Donald Trump described it as “obsolete.” German opposition leader Sahra Wagenknecht on Tuesday added her voice to calls to dissolve NATO in the wake of US President-elect Donald Trump’s controversial remarks concerning the military alliance “NATO must be dissolved and replaced by a collective security system including Russia,” Wagenknecht told Germany’s “Funke” media group. Wagenknecht, who leads the opposition Left Party in parliament, added that comments made by the future US president “mercilessly reveal the mistakes and failures of the [German] federal government.”

In an interview published by German tabloid “Bild,” Trump described NATO as an “obsolete” organization. “I said a long time ago that NATO had problems. Number one it was obsolete, because it was designed many, many years ago,” he said. “We’re supposed to protect countries. But a lot of these countries aren’t paying what they’re supposed to be paying, which I think is very unfair to the United States,” Trump added. Germany’s Left Party has previously called for warmer ties with Russia and scrapping the security alliance, measures which appear to be policy concerns for the incoming US administration. The Left Party is Germany’s largest opposition group in parliament, and holds seats in several state legislatures.

Read more …

Rutte is smart enough to feel the ghost of the times contradicting everything he ran on in the past, but he wants to use it to remain in power. Pragmatism?! It all plays into the hands of Wilders. 2 months to Dutch elections.

The ‘Ever Closer European Union’ Principle Is “Buried And Gone” (MT)

Dutch Prime Minister Mark Rutte and former European Parliament President Martin Schulz clashed over the strategy to relaunch the Union, illustrating the deep division at Europe’s helm in front of the global audience of the World Economic Forum 19 January. Hundreds of business leaders and political figures attending the Davos forum witnessed how fundamentally disunited Europeans are when they are confronted with challenges and the solutions needed to overcome them. Schulz, who stepped down as president of the European Parliament this week, praised the achievements of the past and the need to push forward EU integration. But Rutte told the Socialists and Democrats (S&D group) MEP to “leave out those romantic ideas”, adding that “that is the fastest way to dismantle Europe”.

Europe needs a “pragmatic approach and to stop lofty speeches”, Rutte said. He called for tangible results on migration, security or the internal market in the effort to create jobs. He even went as far to say that the ‘ever closer union’ principle is “buried and gone”. The ‘ever closer union’ goal is seen as the driving force behind the EU project. It was enshrined in the founding Treaty of Rome that celebrates its 60th anniversary this year. While the Dutchman said that the experiences of Helmut Kohl and François Mitterrand could not be “a model for the future”, Schulz punched back responding he was not a “romantic” but a “German”. He got an applause when he recalled how the emotional ties after World War II brought peace and prosperity to the continent.

The fight between the two started right from the get-go as Rutte insisted more efforts from France and Italy to reform their economies are needed to save Europe. He warned that if countries failed to meet their promises, it would be harder for Northern leaders like him to convince their citizens about the need to tighten their belts. “At the end, this will have a devastating impact on EU integration”, he warned. But Schulz told the Dutch leader to be “very prudent” about dictating to other countries what they should do, as this could further divide the European bloc. He said that it is the European Commission and Council, and not “several member states”, who are responsible for fiscal and macroeconomic recommendations made to national governments.

Read more …

Fake news.

Chinese Growth Slips To 6.7% In 2016, The Slowest For 26 Years (AFP)

China’s economy has grown at its slowest rate in more than a quarter-century as Beijing braces itself for an uncertain outlook that could see a trade stand-off with Donald Trump. After a tumultuous start to 2016, the country’s leaders used huge monetary stimulus to steer the world’s number two economy to hit their annual target and also record the first quarterly pick-up in two years. The Asian superpower is a crucial driver of global growth but Beijing is trying to reduce its heavy reliance on exports and state-backed investment and instead focus on domestic consumer spending to drive expansion. However, the transition has proved bumpy, with the crucial manufacturing sector struggling in the face of sagging global demand for its products and excess industrial capacity left over from an infrastructure boom.

This led to the economy growing 6.7% last year, in line with forecasts but down from 6.9% in 2015, and the worst reading since 1990. The government targeted 6.5-7.0%. The October-December increase of 6.8% also marked the first quarterly improvement since the final three months of 2014. The national statistics bureau called the figure a “good start” for the government’s goal of achieving 6.5% annual growth through to 2020. “China’s economy was within a proper range with improved quality and efficiency. However, we should also be aware that the domestic and external conditions are still complicated and severe,” the bureau said in a statement. It added that the coal and steel industries had cut overcapacity, but structural reform should be the “mainline” this year, urging policymakers to focus on “fending off risks” to stability.

Read more …

Beats expectations with a 26-year low. Wow.

China GDP Beats Expectations But Debt Risks Loom (R.)

China’s economy grew a faster-than-expected 6.8% in the fourth quarter, boosted by higher government spending and record bank lending, giving it a tailwind heading into what is expected to be a turbulent year. But Beijing’s decision to prioritize its official growth target could exact a high price, as policymakers grapple with financial risks created by an explosive growth in debt. China’s debt to GDP ratio rose to 277% at the end of 2016 from 254% the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said in a note. The fourth quarter was the first time in two years that the world’s second-largest economy has shown an uptick in economic growth, but this year it faces further pressure to cool its housing market, the impact of government efforts at structural reforms, and a potentially testy relationship with a new U.S. administration.

“We do not expect this (Q4 GDP) rebound to extend far into 2017, when a slowdown in the property market and steps to address supply shortages in the commodity sector ought to drag again on demand and output,” said Tom Rafferty, regional China manager for the Economist Intelligence Unit. The economy expanded 6.7% in 2016, the National Bureau of Statistics said on Friday, near the middle of the government’s 6.5-7% growth target but still the slowest pace in 26 years. Economists polled by Reuters had expected 6.7% growth for both the fourth quarter and the full year. Housing helped prop up growth again in the fourth quarter, with property investment rising a surprisingly strong 11.1% in December from 5.7% in November, even as house prices showed signs of cooling in some major cities.

Read more …

The mayhem is far from over.

There’s an Unexplained $9 Billion Gap in India’s Cash Supply (BBG)

India’s unprecedented ban on high-denomination currency bills has led to a mismatch in cash supply that has flummoxed some economists and data crunchers. Indians withdrew about 600 billion rupees ($9 billion) more than the 9.1 trillion rupees of currency in circulation as of Jan. 13, according to a report submitted by the Reserve Bank of India to a parliamentary panel on Wednesday. A copy of the document was seen by Bloomberg News. “This is usually not the case,” said Sujan Hajra, chief economist at Anand Rathi Securities in Mumbai, who was a director at the RBI from 1993-2006. He added that cash with public should be lower than currency in circulation “but then you don’t have demonetization usually.”

Clarity will emerge only once the central bank reconciles and publishes final figures, he said. The central bank has refused to share the amount of invalidated bills that have been deposited and said on Jan. 5 that it is still counting the notes to eliminate errors. In a shock move late on Nov. 8, Prime Minister Narendra Modi canceled 15.4 trillion rupees of the 17.7 trillion rupees in circulation and pledged to swap the worthless notes with fresh bills. Between Nov. 9 to Jan. 13, the RBI printed about 5.53 trillion rupees of new notes and put in circulation 25,197 million bank notes aggregating 6.78 trillion rupees, taking total currency in circulation to about 9.1 trillion rupees, according to the RBI’s document on Wednesday. As on Jan. 13 the public had withdrawn close to 9.7 trillion rupees from bank counters and cash-dispensing machines, the document said.

Read more …

Apples and oranges, but still. Amazon sucks money out of communities. Support your local dealer!

Amazon Is Going To Kill More American Jobs Than China Did (MW)

Amazon.com has been crowing about its plans to create 100,000 American jobs in the next year, but as with other recent job-creation announcements, that figure is meaningless without context. What Amazon won’t tell us is that every job created at Amazon destroys one or two or three others. What Jeff Bezos doesn’t want you to know is that Amazon is going to destroy more American jobs than China ever did. Amazon has revolutionized the way Americans consume. Those who want to shop for everything from books to diapers increasingly go online instead of to the malls. And for about half of those online purchases, the transaction goes through Amazon.

For the consumer, Amazon has brought lower prices and unimaginable convenience. I can buy almost any consumer product I want just by clicking on my phone or computer — or even easier, by just saying: “Alexa: buy me one” — and it will be shipped to my door within days or even hours for free. I can buy books for my Kindle, or music for my phone instantly. I can watch movies or TV shows on demand. But for retail workers, Amazon is a grave threat. Just ask the 10,100 workers who are losing their jobs at Macy’s. Or the 4,000 at The Limited. Or the thousands of workers at Sears and Kmart, which just announced 150 stores will be closing. Or the 125,000 retail workers who’ve been laid off over the past two years.

Amazon and other online sellers have decimated some sectors of the retail industry in the past few years. For instance, employment at department stores has plunged by 250,000 (or 14%) since 2012. Employment at clothing and electronics stores is down sharply from the earlier peaks as more sales move online. “Consumers’ affinity for digital shopping felt like it hit a tipping point in Holiday 2014 and has rapidly accelerated this year,” Ken Perkins, the president of Retail Metrics, wrote in a research note in December. And when he says “digital shopping,” he really means Amazon, which has increased its share of online purchases from about 10% five years ago to nearly 40% in the 2016 holiday season. It’s only going to go higher, as Amazon aggressively targets other sectors such as groceries and even restaurants with delivery services for restaurant-prepared meals.

Read more …

Important points by Simon Black.

Stiglitz Tells Davos Elite US Should “Get Rid Of Currency” (Black)

half a world away at the World Economic Forum in Davos, Switzerland, Nobel Laureate economist Joseph Stiglitz made remarks earlier this week that the US should “get rid of currency.” He means paper currency, as in the US should not only get rid of $100 bills… but ALL paper currency– 50s, 20s, 10s, 5s, and even 1s. You guessed it. Stiglitz suggests that regular people don’t need paper money, and that it’s only useful for drug dealers, terrorists, tax evaders, and money launders. This thinking is so 20th century, and it’s simply wrong. ISIS is a great example. The US military has literally blown up more than a billion dollars worth of ISIS’s stockpiles of physical cash during airstrikes. But this hasn’t affected their terrorist activities one bit. That’s because the most notorious terrorist group on the planet famously uses both the world’s oldest currency (gold) and the world’s newest currency (Bitcoin).

Professor Stiglitz has likely never been anywhere near a terrorist, so he likely doesn’t have a clue how they conduct financial transactions. Stiglitz also relies on the old claim that cash facilitates illicit activity. Again, this thinking only highlights a Dark Ages mentality. In the today’s world, drug dealers and prostitutes accept credit cards. No matter what you’re selling on a street corner, whether it’s hot dogs or marijuana, there are plenty of solutions (like Stripe, Square, or PayPal) to easily allow anyone to accept credit card payments. But these intellectuals seem stuck in a Pablo Escobar fantasy that drug dealers have entire rooms filled with cash. What Stiglitz, and perhaps many law enforcement agencies, fail to realize is that one of the biggest tools in masking illegal activity is actually Amazon.com. Specifically, Amazon gift cards.

[..] These guys just don’t get it. Cash isn’t about tax evasion or illegal activity. It’s about having a choice. Any rational person who actually looks at the numbers in the banking system has to be concerned. In many parts of the world, banks are pitifully capitalized and EXTREMELY illiquid. This is especially the case in Europe right now where entire nations’ banking systems are teetering on insolvency. In the United States, liquidity is also quite low, and banks play all sorts of accounting games to hide their true financial condition. Plus, never forget that the moment you deposit funds at a bank, it’s no longer YOUR money. It’s the bank’s money. As a depositor, you’re nothing more than an unsecured creditor of the bank, and they have the power to freeze you out of your life’s savings without even giving you a courtesy call. Physical cash provides consumers another option. If you don’t want to keep 100% of your savings tied up in a system that’s rigged against you and has a long history of screwing its customers, you can instead choose to hold physical cash.

Read more …

Wonder what the new administration will make of this.

US Government Caught Massively Fabricating Student Loan Default Data (ZH)

Ever since 2012 we have warned that one of the biggest threats arising from the US student loan bubble – which is no longer disputed by anyone except perhaps members of the outgoing administration – is not that it is soaring at an unprecedented pace, that’s obvious for anyone with the latest loan total number over $1.4 trillion, rising at a pace of nearly $100 billion per year, but that the government – either on purpose or due to honest miscalculation – was not correctly accounting for the true extent of delinquencies and defaults. Today, we finally got confirmation that, as speculated, the US government was indeed fabricating student loan default data, making it appear far lower than it was in reality. An the WSJ reported overnight “many more students have defaulted on or failed to pay back their college loans than the U.S. government previously believed.”

The admission came last Friday, when the Education Department released a memo saying that it had overstated student loan repayment rates at most colleges and trade schools and provided updated numbers. This also means that the number of loan defaults in various cohorts is far greater than previously revealed. A spokeswoman for the Education Department said that the problem resulted from a “technical programming error.” And so, the infamous “glitch” strikes again. How bad was the data fabrication? When The Wall Street Journal analyzed the new numbers, the data revealed that the Department previously had inflated the repayment rates for 99.8% of all colleges and trade schools in the country. In other words, virtually every single number was made to appear better than it actually was. And people mock China for its own “fake data.”

According to an analysis of the revised data, at more than 1,000 colleges and trade schools, or about a quarter of the total, at least half the students had defaulted or failed to pay down at least $1 on their debt within seven years. This is a stunning number and suggests that the student loan crisis is far greater than anyone had anticipated previously. It also means that the US taxpayer will be on the hook for hundreds of billions in government-funded loans once attention finally turns to who is expected to foot the bill for years of flawed lending practices.

Read more …

Translation: the EU has no idea, none at all, where its hundreds of millions in taxpayer funds have gone. It’s how the aid industry is set up. And the refugees still suffer for no reason other than profit, politics and greed.

EU Migration Commissioner Urges NGOs To Manage Funds With Transparency (KTG)

EU Migration Commissioner Dimitris Avramopoulos urged non-governmental organizations involved in the care of refugees and migrants to manage funds with more transparency. “NGOs must manage available funds with transparency,” Avramopoulos said on Wednesday and called on international organizations operating in the country “to step up their efforts to provide immediate assistance to those in need in the islands.” Avramopoulos was visiting the hot spot of Moria and the refugee camp of Kara on Lesvos together with Migration Minister Yannis Mouzalas and EU’s official responsible for NGOs funding, Philippe de Broers.

On his part, Mouzalas said “We covered 70% of the needs in the camps with less money than the money received by NGOs and institutional organizations.” Mouzalas added that the European Commission needed to take tight control of the funds given to NGOs for refugees and migrants. “We have asked the European Commission and the DG Echo (i.e. DG EU Humanitarian Aid and Civil Protection)” for tighter control “and we have stated that we can not we control to this money” he said. Criticism against the NGOs and international organizations comes after a bad weather front left thousands of refugees and migrants exposed to extreme weather conditions with heavy snow fall and polar cold.

Read more …

Nov 082016
 
 November 8, 2016  Posted by at 4:59 pm Finance Tagged with: , , , , , , , ,  2 Responses »
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Joe Schwartz/Jewish Museum May Day Parade, New York City 1936

Neither candidate in the US presidential election has had many specifics to offer on their economic ideas and projected policies, and that may be a smart move for both. If only because none of the two has indicated any real understanding of what awaits America as per November 9. And I don’t mean where the stock markets will be tomorrow morning, or the price of gold, though short term volatility is obviously certain.

The November 7 rally on Wall Street made plenty clear where everyone’s bets are placed -on Hillary-, so much so that there’s not much of a rally left if she wins. A Trump win could well see some panic, downward pressure for the dollar and stocks, upward pressure for gold, but there’s no telling how long that would last.

It’s the medium to long term future that’s far more interesting. Because who wins makes no difference for the reality of the US economy. It’s been abysmal for years, and there are no plans available for turning that around. Government debt – across the board- and budget deficits don’t help, but they’re not the biggest deal; the US controls its own currency.

It’s private debt, consumer debt, that will offer the winner his or her poisoned chalice. With 94 million Americans not counted as part of the workforce, and untold million others in jobs that pay hardly or no living wage, with so many millions of jobs that no longer pay sufficient or even any benefits, consumer spending has nowhere to go but down.

In an economy where that spending is good for 70% of GDP -perhaps a bit less by now, a bad enough sign-, taking spending power away from people is deadly. The only way people have been able to either keep up appearances or even just make ends meet is going into debt.

 

 

This graph from Wolf Richter shouldn’t really need any explanation, but people have been so numbed by endless repetitions of sunny skewed data that it does. Sure, mortgage debt no longer looks as bad, thanks to foreclosures, jingle mail etc. So Wolf depicts debt without mortgages.

In just 9 years, from let’s say Bear Stearns to roughly this summer, consumer debt in America has gone up more than 50% ex-mortgages. And it’s not as if it was low in 2007, quite the contrary. The graph shows us what the American economy has survived on. It’s as plain vanilla as that. It’s the only graph you need, all the rest is just decoration. And it’s every inch as scary as it looks.

There was a time when America worked for its money, for its homes, for its cars, its healthcare, for the education of its children. There was a time when America produced and sold enough to be able to afford all that. Those days are long gone. Today, the prospect is one of borrowing more money to be able to pay back what you borrowed yesterday.

If and when interest rates start to rise, either in and of themselves or because the Fed has an epiphany, all that debt will get much harder, and much more expensive, to repay. Increasingly, Americans will unceremoniously and rapidly start to fall off the back end of the truck, and one by one lower consumer spending even more.

There’s nothing a new president can do about this. There is a slight difference, granted, in that Hillary largely thinks she can let things continue as they have -but look at that graph, they cannot continue!-, while Donald Trump wants to tear up international trade deals and bring back jobs to America.

Trump’s idea look a tad wiser, but so much manufacturing infrastructure has been obliterated that there’s no telling how fast it can be rebuilt. It’ll take years, for sure. Moreover, America cannot produce most items as cheap as many other countries can, so already squeezed consumers will get squeezed even more.

It’ll have to be back all the way to Henry Ford, paying people more so they can afford what they produce. But, again, look at that graph. If Americans didn’t have that debt burden, and again that’s ex-mortgages, the ‘Ford model’ might have been more feasible. It is not now.

Either of the candidates would have had to base their campaigns on a story of ‘we need to take a few steps back in order to do better later’, and that’s still a politically deadly message in today’s realm of eternal growth, fictional as it may be. People will vote for the better promise, not for the more realistic one. After all, how can they tell? It’s not as if the media will enlighten them.

There’s only one set of possible circumstances under which people will even just accept the ‘few steps back’ idea, and that’s wartime. Which is exactly what Hillary seems to be going for, judging from her neverending anti-Russia, anti-Putin and anti-Assad ‘utterances’ that look very hard to step back from. Maybe she understands America’s economic predicament better than I think?!

I like Wikipedia’s definition of a Pyrrhic victory, couldn’t hardly have put it better myself: “A Pyrrhic victory is a victory that inflicts such a devastating toll on the victor that it is tantamount to defeat. Someone who wins a Pyrrhic victory has been victorious in some way. However, the heavy toll negates any sense of achievement or profit.”

That sounds about right. I just have the idea that Hillary would enjoy it a bit more, and more blindly, than the Donald would. But it wouldn’t make much difference regardless. Obama’s had the luck that he’s been able to hide the economic downfall on his watch behind a $10+ trillion increase in the Fed balance sheet and a multiple trillion, 50% increase in household debt.

The next president won’t have any such gift thrown into their laps. The new president will have to empty the poisoned chalice.

Imagine being -almost- 70 years old, well-off, and still wanting that job. What’s that make a body? In urgent need of a lifetime of therapy? Mariana Trench-deep unhappy?

And on top of that both candidates already know close to half the country hates their guts to begin with.

Remember, not even Socrates could beat the poisoned chalice.

 

 

Sep 192016
 
 September 19, 2016  Posted by at 1:25 pm Finance Tagged with: , , , , , , , , ,  Comments Off on China Relies On Property Bubbles To Prop Up GDP
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Carl Mydans Sharecropper’s family in Mississippi County, Missouri 1936

Lots of China again today. Most of it based on warnings, coming from the BIS, about the country’s financial shenanigans. I’m getting the feeling we have gotten so used to huge and often unprecedented numbers, viewed against the backdrop of an economy that still seems to remain standing, that many don’t know what to make of this anymore.

Ambrose Evans-Pritchard ties the BIS report to Hyman Minsky’s work, which is kind of funny, because our good friend and Minsky adept Steve Keen is the economist who most emphasizes the need to differentiate between public and private debt, in particular because public debt is not a big risk whereas private debt certainly is.

And that happens to be the main topic where people seem to get confused about China. To quote Ambrose: “..Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP..”

The big Kahuna question then becomes: should Chinese outstanding loans and corporate debt be seen as public debt or private debt, given that the dividing line between state and corporations is as opaque and shifting as it is? Even the BIS looks confused. I’ll address that below. First, here’s Ambrose:

BIS Flashes Red Alert For a Banking Crisis in China

The Bank for International Settlements warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1%, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences. It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed.

[..] Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP, and it is this that is keeping global regulators awake at night. The BIS said there are ample reasons to worry about the health of world’s financial system. Zero interest rates and bond purchases by central banks have left markets acutely sensitive to the slightest shift in monetary policy, or even a hint of a shift.

Bloomberg commented on the same BIS report:

BIS Warning Indicator for China Banking Stress Climbs to Record

[..] the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis. In a financial stability report published in June, China’s central bank said lenders would be able to maintain relatively high capital levels even if hit by severe shocks.

While the BIS says that credit-to-GDP gaps exceeded 10% in the three years preceding the majority of financial crises, China has remained above that threshold for most of the period since mid-2009, with no crisis so far. In the first quarter, China’s gap exceeded the levels of 41 other nations and the euro area. In the U.S., readings exceeded 10% in the lead up to the global financial crisis.

 

Why am I getting the feeling that the BIS thinks perhaps just this one time ‘things will be different’? If the credit-to-GDP gap (difference with long-term trend) anywhere exceeded 10%, that was a harbinger of the majority of financial crisis. But in China to date, with a 30.1% print, ‘the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis’. That sounds like someone’s afraid to state the obvious out loud.

If you ask me there’s a loud and clear writing on the Great Wall. But regardless, I didn’t set out to comment on the BIS, I just used that to introduce something else. That is to say, early today, CNBC ran an article on the Chinese property market, seen through the eyes of Donna Kwok, senior China economist at UBS.

Donna sees some light in fast rising home prices (an ‘improvement’..) but also acknowledges they constitute a challenge. She mentions bubbles – she even sees ‘uneven bubbles’, a lovely term, and ‘selective pockets of bubbles’-, but she does seem to understand what’s going on, even if she doesn’t put it in the stark terminology that seems to fit the issue.

CNBC names the article “China Faces Policy Dilemma As Home Prices Jump In GDP Boost”, an ambiguous enough way of putting things. A second title that pops up but has apparently been rejected by the editor is: “Chinese Property Market Is Improving: UBS”. That would indeed have been a bit much. Because calling a bubble an improvement is like tempting the gods, or worse.

I adapted the title to better fit the contents:

China Relies on Housing Bubble to Keep GDP Numbers Elevated (CNBC)

Policymakers in China were facing the dilemma of driving growth while preventing the property market from overheating, an economist said Monday as prices in the world’s second largest economy jumped in August. Average new home prices in China’s 70 major cities rose 9.2% in August from a year earlier, accelerating from a 7.9% increase in July, an official survey from the National Bureau of Statistics showed Monday. Home prices rose 1.5% from July. But according to Donna Kwok, senior China economist at UBS, the importance of the property sector to China’s overall economic health, posed a challenge.

It contributes up to one-third of GDP as its effects filter through to related businesses such as heavy industries and raw materials. “On the one hand, they need to temper the signs of froth that we are seeing in the higher-tier cities. On the other hand, they are still having to rely on the (market’s) contribution to headline GDP growth that property investment as the whole—which is still reliant on the lower-tier city recovery—generates…so that 6.5 to 7% annual growth target is still met for this year,” Kwok told CNBC’s “Street Signs.”

The data showed prices in the first-tier cities of Shanghai and Beijing prices rose 31.2% and 23.5%, respectively. Home prices in the second tier cities of Xiamen and Hefei saw the larges price gains, rising 43.8% and 40.3% respectively, from a year ago. Earlier, the Chinese government introduced measures aimed at boosting home sales to reduce large inventories in an effort to limit an economic slowdown. While the moves have boosted prices in top-tier cities with some spillover in lower-tier cities, there were still concerns of uneven bubbles in the market.

“We are seeing potential signs of selective pockets of bubbles appearing again, especially in tier 1 and tier 2 cities,” Kwok said. The Chinese government in the meantime was rolling out selective cooling measures in these cities to try to even out growth. “If it’s navigated in a such a way that the (positive) spillover to the adjacent tier 3 cities continues to spread further, then maybe that’s where you may get a first or second best outcome resulting,” she added.

To summarize: China can only achieve its 6.5 to 7% annual GDP growth target if the housing bubble(s) persist, and that’s the one thing bubbles never do.

If housing makes up -directly and indirectly, after ‘filtering through’- one third of Chinese GDP, which is officially still growing at more than 6.5%, then the effects of a housing crash in the Middle Kingdom should become obvious. That is, if the property market merely comes to not even a crash but just a standstill, GDP growth will be close to 4%. And that is before we calculate how that in turn will also ‘filter through’, a process that would undoubtedly shave off another percentage point of GDP growth.

So then we’re at 3% growth, and that’s optimistic, that would require just a limited ‘filtering through’. If the Chinese housing sector shrinks or even collapses, and given that there is a huge property bubble -intentionally- being built on top of the latest -recent- bubble, shrinkage is the least that should be expected, then China GDP growth will fall below that 3%.

And arguably down the line even in a best case scenario both GDP growth and GDP -the economy itself-, will flatline if not fall outright. Since China’s entire economic model has been built to depend on growth, negative growth will hammer its economy so hard that the Communist Party will face protests from a billion different corners as its citizens will see their assets crumble in value.

What at some point will discourage Beijing from keeping on keeping blowing more bubbles to replace the ones that deflate, as it has done for years now, is that China desperately seeks for the renminbi/yuan to be a reserve currency, it’s aiming to be included in ‘the’ IMF basket as soon as October 1 this year.

That is not a realistic prospect if and when the currency continues to be used to prop up the economy, housing, unprofitable industries etc. Neither the IMF nor the other reserve currencies in the basket can allow for the addition of the yuan if its actual value is put at risk by trying to deflect the most basic dynamics of markets, not to that extent. And not at that price either.

The Celestial Empire will be forced to choose, but it’s not clear if it either acknowledges, or is willing to make, such a choice. Still, it won’t be able to absorb all private debt and make it public, and still play in the big leagues, even if other major countries and central banks play fast and loose with the system too.

Jul 302016
 
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Jack Delano Street scene on a rainy day in Norwich, Connecticut 1940

US GDP Grew a Disappointing 1.2% in Q2 As Q1 Revised Down to 0.8% (WSJ)
Rescue Package In Place For Europe’s Oldest Bank, Weakest In Stress Tests (G.)
ECB Bond Buying Risks Blocking Debt Restructurings (R.)
Chinese Capital Outflows May Still Be Happening – But In Disguise (BBG)
Bank of Japan’s Quest for 2% Inflation (BBG)
The Bank of Japan Is At A Crossroads (BBG)
US Authorities Subpoena Goldman In 1MDB Probe (R.)
Australia Headed For Recession As Early As Next Year – Steve Keen (ABC.au)
‘Sell The House, Sell The Car, Sell The Kids’ – Gundlach (R.)
British Columbia Violates NAFTA With Its Foreign Property Tax (FP)
Another “Smoking Gun” Looms As Hillary Campaign Admits Server Hacked (ZH)
Greek Islands Appeal For Measures To Deal With Influx Of Refugees (Kath.)
England’s Plastic Bag Usage Drops 85% Since 5p Charge Introduced (G.)

 

 

Only positive is consumer spending. But without knowing how much of that is borrowed (let alone manipulated), it’s a meaningless number.

US GDP Grew a Disappointing 1.2% in Q2 As Q1 Revised Down to 0.8% (WSJ)

Declining business investment is hobbling an already sluggish U.S. expansion, raising concerns about the economy’s durability as the presidential campaign heads into its final stretch. GDP, the broadest measure of goods and services produced across the U.S., grew at a seasonally and inflation adjusted annual rate of just 1.2% in the second quarter, the Commerce Department said Friday, well below the pace economists expected. Economic growth is now tracking at a 1% rate in 2016—the weakest start to a year since 2011—when combined with a downwardly revised reading for the first quarter. That makes for an annual average rate of 2.1% growth since the end of the recession, the weakest pace of any expansion since at least 1949.

The output figures are in some ways discordant with other gauges of the economy. The unemployment rate stands at 4.9% after a streak of strong job gains, wages have begun to pick up, and home sales hit a post-recession high last month. Consumer spending also remains strong. Personal consumption, which accounts for more than two-thirds of economic output, expanded at a 4.2% rate in the second quarter, the best gain since late 2014. On the downside, the third straight quarter of reduced business investment, a large paring back of inventories and declining government spending cut into those gains. “Consumer spending growth was the sole element of good news” in the latest GDP figures, said Gregory Daco at Oxford Economics. “Weakness in business investment is an important and lingering growth constraint.”

Read more …

“This is a market operation that will reinforce the capital position of the bank and free it completely of bad loans…” If it’s that easy, do it all over the place, I’d think. Who do they think they’re fooling?

Rescue Package In Place For Europe’s Oldest Bank, Weakest In Stress Tests (G.)

A rescue package of the world’s oldest bank has been announced after a health check of the biggest banks across the EU showed that Banca Monte dei Paschi di Siena’s financial position would be wiped out if the global economy and financial markets came under strain. The much-anticipated result of the stress tests – for which there was no pass or fail mark – of 51 banks showed that Italy’s third largest bank emerged weakest from the assessment. But the test – which exposed banks to headwinds in the global economy and dramatic movements in currency markets – also underlined the drop in the capital position of bailed-out Royal Bank of Scotland and the hit taken by Barclays observed under the imaginary scenarios. Banks from Italy, Ireland, Spain and Austria fared worst.

Regulators said that the tests showed that the bank sector was much stronger than it had been at the time of the 2008 financial crisis, which led to the introduction of the stress tests. Even so, the European Banking Authority (EBA), which conducted the tests on lenders, acknowledged that more needed to done.Under the latest stress test scenario, some €269bn (£227bn) would be wiped off the capital bases of the banks. “The EBA’s 2016 stress test shows the benefits of capital strengthening done so far are reflected in the resilience of the EU banking sector to a severe shock,” said Andrea Enria, EBA chair. “This stress test is a vital tool to assist supervisors in accelerating the process of repair of banks’ balance sheets, which is so important for restoring lending to households and businesses.

“The EBA’s stress test is not a pass [or] fail exercise. While we recognise the extensive capital raising done so far, this is not a clean bill of health. There remains work to do which supervisors will undertake.” The bank that fared the worst was MPS, which suffered a dramatic 14 percentage point fall in its capital position. It had been expected to perform badly and talks had already been underway before the results of the stress tests were published to try to find a way to bolster its capital. New EU regulations prevented the Italian government from pumping any taxpayer money into MPS so efforts were needed to try to stop of tens of thousands of ordinary Italians – who had bought its bonds – losing their savings. Italy’s banks are in the spotlight as they are weighed down by €360bn of bad debts.

Italy’s finance minister, Pier Carlo Padoan – who as recently as Sunday said there was no crisis in Italy – endorsed the deal put together to raise €5bn from private investors and sell €9.2bn of bad debts. “The government is greatly satisfied with the operation [the deal] launched … by Monte dei Paschi of Siena,” he said. “This is a market operation that will reinforce the capital position of the bank and free it completely of bad loans. The operation will allow the bank to develop a solid industrial plan, thanks to which it will boost its support for the real economy through lending to families and businesses.”

Read more …

Unintended consequences. Hilarious, really.

ECB Bond Buying Risks Blocking Debt Restructurings (R.)

The European Central Bank could scupper future eurozone debt restructurings if it increases the amount of a country’s bonds it can buy under its economic stimulus program, a top debt lawyer warned. The problem, on the radar of European authorities suffering a hangover from the 2012 crisis, has been pushed to the fore by expectations the ECB will need to raise limits on its bond purchases to keep its quantitative easing scheme on track.

Kai Schaffelhuber, a partner at law firm Allen & Overy, said that if the ECB permitted itself to buy more than a third of a country’s debt it would make a restructuring of privately-held bonds more difficult, a move that could increase the likelihood of taxpayer rescues. In a debt restructuring, a quorum of investors has to agree the terms of a deal. The ECB cannot participate because it is forbidden from directly financing governments. “They (the ECB) should avoid a situation where they are holding so much (of a) debt that a restructuring becomes virtually impossible,” said Schaffelhuber, whose firm worked on Greece’s 2012 debt restructuring.

Read more …

Samoa….

Chinese Capital Outflows May Still Be Happening – But In Disguise (BBG)

When there’s a will to get money out of China, there’s a way: overpay. Authorities in the world’s second-largest economy have been able to pursue a policy of managed depreciation for the Chinese yuan without spooking markets and eliciting expectations of major foreign-exchange volatility, the way the one-off devaluation did last August. One big reason is that Beijing seems to have had success in cracking down on the flood of money leaving the country, which had been prompting sizable drawdowns in the central bank’s foreign currency reserves, to prop up the value of the yuan. But a report from a Nomura team led by Chief China Economist Yang Zhao says these capital outflows have merely taken another form: the over-invoicing of imports from select locales.

And this time, it’s not just a Hong Kong story. “A detailed breakdown by region shows imports from some tax haven islands or offshore financial centres surged” in the first half of the year, he writes, “against the backdrop of a large decline in overall imports.” Now, it may be the China’s appetite for copra and coconut oil, two key Samoan exports, has indeed surged. But Zhao has a different explanation. “This suggests to us that capital outflows may have been disguised as imports in China’s trade with these tax-haven or offshore financial centres, though the precise volumes are unknown,” according to the economist. “With stronger capital controls in place we believe continued capital outflows via the current account are likely.”

Read more …

Exposing the uselessness of the whole idea.

Bank of Japan’s Quest for 2% Inflation (BBG)

The U.S. Federal Reserve, the Bank of England and the ECB are among the world’s monetary authorities that have set an inflation target right around 2%. Nowhere, though, does the quest for this special number carry drama like it does in Japan, where Bank of Japan Governor Haruhiko Kuroda has vowed to do whatever it takes to stimulate prices. On Friday in Tokyo, the BOJ indicated there were risks to achieving this target anytime soon.

1. What’s so special about 2%? The BOJ set its current inflation target in January 2013, less than a month after Prime Minister Shinzo Abe came to power with a plan to pull the economy out of two decades of stagnation. In Japan and many other developed economies, prices rising by 2% a year is seen as optimal for encouraging companies to invest and consumers to spend. It’s also thought to be low enough to avoid sparking the runaway inflation that crippled Germany’s Weimar Republic in the 1920s and Zimbabwe in more recent times.

2. How close has Japan gotten to 2% inflation? Not very. What Japan has had, on-and-off since the late 1990s, is deflation – inflation below 0% – with prices dropping across a wide range of goods.

3. What caused deflation? It began with the bursting of a real estate and asset-price bubble. Wounded banks curbed lending, companies focused on cutting debt, wages stagnated and consumers reined in spending. Households became accustomed to falling prices and put off purchases. The global financial crisis of 2008, and the devastating earthquake, tsunami and nuclear meltdown at the Fukushima Daiichi plant in 2011, entrenched what Kuroda describes as a “deflationary mindset” among consumers and companies in Japan. The nation’s aging and shrinking population is now making matters worse.

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I think they passed that crossroads long ago. Just didn’t recognize it for what it was.

The Bank of Japan Is At A Crossroads (BBG)

After more than three years of pumping out wave after wave of cheap money that’s failed to secure its inflation target, the Bank of Japan has signaled a rethink. Instead of buying yet more government bonds, cutting interest rates or pushing further into uncharted territory, the BOJ disappointed some Friday when its policy meeting concluded with only a modest adjustment. Governor Haruhiko Kuroda, 71, and his colleagues declared it was time to assess the impact of their policies, which have variously spurred strong criticism from bankers, bond dealers and some lawmakers and former BOJ executives. The next gathering, on Sept. 20-21, offers a chance to either provide greater evidence that the current framework should continue, head further into uncharted territory, or scale back.

Regardless of the decision, this isn’t where one of the world’s most aggressive central bankers wanted to be in his fourth year in office. In early 2013, he expressed confidence the BOJ had the power to ensure its 2% inflation target could be reached within about two years. This year, with the shock adoption of a negative interest rate policy backfiring through a welter of warnings from commercial banks, there’s a growing perception monetary policy is losing effectiveness. “We are at a turning point” for the BOJ, because “it can no longer assume that stepping harder on the gas pedal would make this car go faster,” said Stephen Jen, co-founder of hedge fund SLJ Macro Partners and a former IMF economist. “Arrow 2 will take the lead now,” he said, in a reference to the three arrows of Abenomics – monetary, fiscal and structural-reform policies.

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Yeah, that’ll result in some jail time….

US Authorities Subpoena Goldman In 1MDB Probe (R.)

U.S. authorities have issued subpoenas to Goldman Sachs for documents related to the bank’s dealings with scandal-hit Malaysian state fund 1MDB, the Wall Street Journal reported late on Friday. Goldman received the subpoenas earlier this year from the U.S. Department of Justice and the Securities and Exchange Commission , the Journal reported, citing a person familiar with the matter. The authorities also want to interview current and former Goldman employees in connection with the inquiries, but none of those meetings had occurred by Friday, WSJ said.

1MDB, which was founded by Malaysian Prime Minister Najib Razak in 2009 shortly after he came to office, is being investigated for money-laundering in at least six countries including the United States, Singapore and Switzerland. Najib has consistently denied any wrongdoing. U.S. law enforcement officials are attempting to identify whether Goldman violated federal law after failing to flag a transaction in Malaysia, the Journal reported in June. New York state regulators have also asked the Wall Street bank for details about probes into billions of dollars it raised in a bond offering for 1MDB, Reuters reported in June, citing a person familiar with the matter.

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Note – Steve says: “I’ve said “as early as” 2017 and “between 20% & 70% fall” but all people hear is 2017 & 70%..”

Australia Headed For Recession As Early As Next Year – Steve Keen (ABC.au)

Australia’s credit binge will lead to a bust as soon as next year, with house prices to fall between 40 and 70% and unemployment to rise sharply, Professor Steve Keen says. The professor famously lost a bet when he predicted a catastrophic crash in Australian house prices following the GFC and had to walk from Canberra to Mount Kosciusko as a result. But he says, this time, he is right and does not have his hiking boots at the ready. “We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time and it simply won’t,” he told the ABC’s The Business.

Many believe the Reserve Bank has been a steady guiding hand to the Australian economy in the years since the GFC, but Professor Keen believes it has guided the economy “straight toward the shoals” by encouraging households to borrow with low rates which has led to asset bubbles. “They don’t know what they’re doing,” he said. “Our debt level according to the Bank of International Settlements, private debt level, has gone from 150% of GDP to 210% of GDP.” He argued that means a large part of the growth that Australia has enjoyed since the GFC, while many other countries plunged into recession, has been fuelled by a 60% rise in household debt. “Ireland did the same thing when they called themselves the Celtic Tiger and they don’t call themselves that anymore,” he said.

“Spain was doing the same thing during its housing bubble and we’ve replicated the same mistakes. He believes the Reserve Bank will be forced to take rates down to zero from their current level of 1.75% as the economy continues to slow, but that will not stop the collapse of the credit binge that has kept the country afloat until now. “[Lower rates] will suck more people in, it will suck more people in for a while and the [Reserve Bank] can delay this for a while by cutting the rates,” he said. He said the catalysts for the recession were the declining terms of trade, the continued fall in investment into the economy and the Federal Government’s “stupid” pursuit of a budget surplus. “The Government is frankly stupid about the economy and is obsessed about running surpluses when it is bad economics.”

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“The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”

‘Sell The House, Sell The Car, Sell The Kids’ – Gundlach (R.)

Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that many asset classes look frothy and his firm continues to hold gold, a traditional safe-haven, along with gold miner stocks. Noting the recent run-up in the benchmark Standard & Poor’s 500 index while economic growth remains weak and corporate earnings are stagnant, Gundlach said stock investors have entered a “world of uber complacency.” The S&P 500 on Friday touched an all-time high of 2,177.09, while the government reported that U.S. GDP in the second quarter grew at a meager 1.2% rate. “The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said in a telephone interview.

“The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.” Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine, said the firm went “maximum negative” on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32%. “We never short in our mainline strategies. We also never go to zero Treasuries. We went to lower weightings and change the duration,” Gundlach said. Currently, the yield on the 10-year Treasury note is 1.45%, which has translated into some profits so far for DoubleLine. “The yield on the 10-year yield may reverse and go lower again but I am not interested. You don’t make any money. The risk-reward is horrific,” Gundlach said. “There is no upside” in Treasury prices.

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The perks of trade agreements.

British Columbia Violates NAFTA With Its Foreign Property Tax (FP)

The British Columbia government has suddenly introduced a penalty tax forcing non-Canadian purchasers of residential real estate in the Greater Vancouver Regional District to pay a 15% tax on all purchases registered from Aug. 2, 2016. This penalty tax discriminates by definition against foreign investors buying residential real estate in the Greater Vancouver Area: Canadian citizens buying residential real estate are exempt; foreign buyers must pay the tax. That discrimination is a glaring violation of our trade treaties. The North American Free Trade Agreement (NAFTA) and other Canadian trade agreements prohibit governments from imposing discriminatory policies that punish foreigners while exempting locals.

NAFTA’s national treatment obligation requires that citizens from other NAFTA partners investing in B.C. receive the same treatment from the government as the very best treatment received by Canadian investors. Americans and Mexicans forced to pay the 15% penalty tax would be able to pursue direct compensation for B.C.’s discriminatory tax from an independent international tribunal. [..] While the vast majority of Vancouver’s foreign property buyers might be Chinese, who were apparently the provincial government’s main target, enough investors from our dozens of treaty partners, comprising of hundreds of affected foreigners with trade rights, could be caught up in this tax, leading to mass claims. Those claims would be against the Canadian government, the signatory to NAFTA and the other international trade treaties, not B.C. Canadian taxpayers could be on the hook for hundreds of millions, or even billions, of dollars.

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Big kahuna remains: the classified mails on Hillay’s server(s).

Another “Smoking Gun” Looms As Hillary Campaign Admits Server Hacked (ZH)

In the third cyberattack on Democratic Party-related servers, Reuters reports that the computer network used by Democratic presidential candidate Hillary Clinton’s campaign was hacked. This follows hacks of the DNC and the DCCC (the party’s fund-raising committee) in the past week. Who to blame this time? Well with US intelligence head Jim Clapper having exclaimed that he was “somewhat taken aback by the hyperventilation [blaming Russia]” by Democratic surrogates, we suspect another scapegoat will need to be found. The latest attack, which was disclosed to Reuters on Friday, follows reports of two other hacks on the Democratic National Committee and the party’s fundraising committee for candidates for the U.S. House of Representatives.

“The U.S. Department of Justice national security division is investigating whether cyber hacking attacks on Democratic political organizations threatened U.S. security, sources familiar with the matter said on Friday. The involvement of the Justice Department’s national security division is a sign that the Obama administration has concluded that the hacking was state sponsored, individuals with knowledge of the investigation said. The Clinton campaign, based in Brooklyn, had no immediate comment and referred Reuters to a comment from earlier this week by campaign senior policy adviser Jake Sullivan criticizing Republican presidential candidate Donald Trump and calling the hacking “a national security issue.”

It was not immediately clear what information on the Clinton campaign’s computer system hackers would have been able to access, but the possibility of more ‘smoking guns’ only rises with each hack. Of course the finger will inevitably be pointed at Vladimir Putin (and his media-designated puppet Trump) but even The Director of Nation Intelligence has urged that an end be put to the “reactionary mode” blaming it all on Russia…

“We don’t know enough to ascribe motivation regardless of who it might have been,” Director of National Intelligence James Clapper said speaking at Aspen’s Security Forum in Colorado, when asked if the media was getting ahead of themselves in fingering the perpetrator of the hack. Speaking on Thursday, Clapper said that Americans need to stop blaming Russia for the hack, telling the crowd that the US has been running in “reactionary mode” when it comes to the numerous cyber-attacks the nation is continuously facing. “I’m somewhat taken aback by the hyperventilation on this,” Clapper said, as cited by the Washington Examiner. “I’m shocked someone did some hacking,” he added sarcastically, “[as if] that’s never happened before.”

Of course that won’t stop the endless distraction and guilt-mongering to avoid any accountability for actual content of anything that is released. Finally, does it not seem a little “reckless” that so many Democratic servers have been hacked so easily?

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It’s starting to increase again.

Greek Islands Appeal For Measures To Deal With Influx Of Refugees (Kath.)

As the influx of migrants from neighboring Turkey continues – with a slight but noticable increase – regional authorities and tourism professionals are calling for measures to support communities on the Aegean islands. Over the past two weeks, following a failed coup in Turkey on July 15, the influx of migrants has increased, according to government figures. Overall, more than 1,000 migrants landed on the five so-called hot spots: Lesvos, Chios, Kos, Samos and Leros since the failed coup. Those islands are now accommodating 9,313 migrants in camps, many of whom have been there for several months awaiting the outcome of asylum applications or deportation.

In a letter to Migration Policy Minister Yiannis Mouzalas and Alternate Defense Minister Dimitris Vitsas, the governor of the northern Aegean region, Christiana Kalogirou, asked for immediate steps to decongest the islands. “We are seeing a constant and apparently increasing flow of migrants and refugees toward the islands of the northern Aegean,” she wrote, noting that the maximum capacity of state reception centers has been exceeded on all the islands. A representative of an aid agency working on Lesvos said that the increase in migrant arrivals on the island has not yet fuelled tensions in the camps. “But if they keep arriving at the same rate, we’ll have a problem soon,” according to the worker who asked not to be identified.

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That’s how hard that is. 5p.

England’s Plastic Bag Usage Drops 85% Since 5p Charge Introduced (G.)

The number of single-use plastic bags used by shoppers in England has plummeted by more than 85% after the introduction of a 5p charge last October, early figures suggest. More than 7bn bags were handed out by seven main supermarkets in the year before the charge, but this figure plummeted to slightly more than 500m in the first six months after the charge was introduced, the Department for Environment, Food and Rural Affairs (Defra) said. The data is the government’s first official assessment of the impact of the charge, which was introduced to help reduce litter and protect wildlife – and the expected full-year drop of 6bn bags was hailed by ministers as a sign that it is working.

The charge has also triggered donations of more than £29m from retailers towards good causes including charities and community groups, according to Defra. England was the last part of the UK to adopt the 5p levy, after successful schemes in Scotland, Wales and Northern Ireland. Retailers with 250 or more full-time equivalent employees have to charge a minimum of 5p for the bags they provide for shopping in stores and for deliveries, but smaller shops and paper bags are not included. There are also exemptions for some goods, such as raw meat and fish, prescription medicines, seeds and flowers and live fish. Around 8m tonnes of plastic makes its way into the world’s oceans each year, posing a serious threat to the marine environment. Experts estimate that plastic is eaten by 31 species of marine mammals and more than 100 species of sea birds.

Read more …

Jun 032016
 
 June 3, 2016  Posted by at 8:17 am Finance Tagged with: , , , , , , , , ,  9 Responses »
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Harris&Ewing Happy News Cafe, “restaurant for the unemployed”, Washington, DC 1937

Bill Gross: Capitalism Doesn’t Work At 0% (CNBC)
Negative-Yielding Sovereign Debt Tops $10 Trillion (WSJ)
Japan’s Sovereign Debt Burden Is Quietly Falling the Most in the World (BBG)
Explosion in Quasi-Sovereign Bond Issuance Is Making Analysts Queasy (BBG)
US-China Trade Troubles Grow (WSJ)
One Third Of Americans Are ‘Just Getting By’ (NY Times)
OECD Sees ‘Dramatic And Destabilising’ End To Australia Property Boom (AFR)
Fed Likely To Avoid Rate Hike Before Britain Votes On Leaving EU (R.)
Draghi Insists ECB Stimulus Only Half Done (BBG)
Bank of France Cuts Inflation Outlook, 2017 GDP Forecast (WSJ)
Bundesbank Cuts German GDP Forecasts On Weaker Export Demand (R.)
President Obama, Pardon Edward Snowden and Chelsea Manning (G.)
Facial Recognition Will Soon End Your Anonymity (MW)
The Fat Lady Always Sings Twice (Jim Kunstler)
Fewer Than 500 of 163,000 Migrants Find Jobs In Sweden (BB)
Corruption Gripes Help Five Star Movement Top Italy Local Election Polls (G.)
US Announces Near-Total Ban On Trade Of African Elephant Ivory (AFP)

Central bankers seem to think it does, though.

Bill Gross: Capitalism Doesn’t Work At 0% (CNBC)

Bill Gross has some bad news for investors. In his June investment outlook released Thursday, the widely followed bond fund manager contended that bond and stock returns realized in the last 40 years are “a grey if not black swan event that cannot be repeated.” Investors should not expect 7% returns on bonds or returns in the high single digits or double digits on stocks, Gross told CNBC on Thursday. “The markets are entirely different and it would pay to travel to Mars as opposed to stay on Earth, because the returns here are very, very low,” the manager of the Janus Capital Unconstrained Bond Fund, said on CNBC’s “Power Lunch”. Gross said easy central bank policy could hold down bond returns. Central banks in Europe and Japan have adopted negative interest rates, while the Federal Reserve’s target rate is at 0.25 to 0.50%.

German and Japanese 10-year bonds currently have negative yields, while their 30-year bonds yield less than 1%. The U.S. 10-year Treasury note yield sat around 1.8% Thursday. Gross contended those rate trends can hurt not only savers but also the broader economy. He said Fed policymakers, who have signaled they could hike rates at least once this year, realize they need to normalize policy. “Ultimately, they have to move back up and I think a certain number of Fed governors realize that the normalization process is necessary in order to save business models and to save capitalism basically because capitalism doesn’t work at 0% and it doesn’t work at negative interest rates,” he said.

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Negative bonanza.

Negative-Yielding Sovereign Debt Tops $10 Trillion (WSJ)

The amount of global sovereign debt with negative yields surpassed $10 trillion for the first time in May, according to Fitch Ratings. The measure stood at $10.4 trillion on May 31, up 5% from $9.9 trillion on April 25, when the rating agency last measured the amount, according to a Thursday report. It is spread across 14 countries, with Japan by far the largest source of negative-yielding bonds. Of the total, $7.3 trillion was long-term debt and $3.1 trillion was short-term debt.

The amount of debt with yields below zero has increased sharply this year as global central banks have instituted unconventional policy measures, such as negative interest rates. The Bank of Japan in January surprised markets by driving its rates below zero, pushing Japanese government-bond yields sharply lower. Banks in the euro currency bloc have also increased demand for government debt to meet regulatory requirements, another factor weighing on yields, Fitch said. “Higher amounts of Japanese and Italian sovereign securities with sub-zero yields were the biggest contributors to the monthly changes,” said Fitch analysts, led by Robert Grossman.

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Because it’s shifting into private hands. The BOJ buys it all. Which allows the government to keep on borrowing with abandon.

Japan’s Sovereign Debt Burden Is Quietly Falling the Most in the World (BBG)

Japan for years has been renowned for having the world’s largest government debt load. No longer. That’s if you consider how the effective public borrowing burden is plunging – by one estimate as much as the equivalent of 15 percentage points of GDP a year, putting it on track toward a more manageable level. Accounting for the Bank of Japan’s unprecedented government bond buying from private investors, which some economists call “monetization” of the debt, alters the picture. Though the bond liabilities remain on the government’s balance sheet, because they aren’t held by the private sector any more they’re effectively irrelevant, according to a number of analysts looking at the shift. “Japan is the country where public debt in private hands is falling the fastest anywhere,” said Martin Schulz at Fujitsu Research Institute in Tokyo.

While Japan’s estimated gross government debt is now over twice the size of the economy, according to Schulz’s calculations using BOJ data, the shuffle of holdings from private actors like banks and households to the central bank is having a big impact. It means debt in private hands will fall to about 100% of GDP in two to three years, from 177% just before Prime Minister Shinzo Abe took power in late 2012, he estimates. It’s not like Japan is slowing down on borrowing. Abe’s administration is now laying the groundwork for another burst of fiscal stimulus, which could be funded by selling bonds. He also announced Wednesday a delay to a sales tax hike planned for April 2017, rebuffing fiscal hawks who argued it was vital to raise revenue.

Finance Minister Taro Aso explained Tuesday that “the biggest problem is that private consumption hasn’t risen,” making now not a good time to raise the levy. Helping improve household sentiment could be one reason for making it explicit that at least some of the government bonds in the BOJ’s holdings will be written off. If Japanese consumers understand they’re not on the hook for all the gross debt outstanding, their mood could potentially perk up.

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What can we say but: Anything Goes!

Explosion in Quasi-Sovereign Bond Issuance Is Making Analysts Queasy (BBG)

Which fixed-income asset class is growing fast, outperforms similar debt issues, and rarely defaults? Emerging market ‘quasi-sovereign’ bonds, of course! At some $600 billion, debt sold by state-supported companies in emerging markets ranging from China to Oman has surpassed the amount of emerging market government debt outstanding, according to a new note from Bank of America Merrill Lynch. Such quasi-sovereign debt issuance has helped propel the stunning growth of the overall bond market, with EM issuance accounting for 47% of the growth in global debt between 2007-14, compared to 22% in the previous seven years, according to S&P Global Ratings.

But the surge in ‘quasi’ bonds is making some feel, well, queasy. “Quasi-sovereigns are effectively a ‘contingent liability’ for a country,” write the BofAML analysts, led by Kay Hope. They note that quasi-sovereign issuance now makes up half of the $1.6 – 1.8 trillion euro- and dollar-denominated corporate bond market for emerging markets, which could put added pressure on strained emerging market coffers.

China, with its lumbering state-owned enterprises, accounts for a full quarter of this kind of debt — despite the Chinese sovereign itself lacking virtually any foreign-denominated bonds. Meanwhile, the amount of debt from Brazilian quasi-sovereigns has nearly quadrupled, according to BofAML, while that sold by Mexico’s state-owned companies has just about doubled. Much of the growth has been driven by companies in the energy and commodities sectors, with giants of industry including Pemex, Petrobras, China National Offshore Oil and Gazprom all tapping the market in recent years.

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There’s going to be trouble.

US-China Trade Troubles Grow (WSJ)

The U.S. and China, facing mounting political pressures at home, are seeing economic tensions flare to their worst point in years over currency and trade practices. China has pushed the yuan to a five-year low against the dollar, reviving charges from American firms of currency manipulation to gain a competitive advantage for Chinese goods. The Obama administration has fired off a series of trade complaints and levied duties on several Chinese industries, from chicken feet to cold-rolled steel used in appliances and auto parts. The friction between the world’s two largest economies could worsen as domestic politics collide with already weak growth.

The U.S., seeing heightened anti-China rhetoric in the presidential election, wants China to press ahead with promised policies to open up its markets and allow greater international investment. Chinese leaders, worried about a deeper economic slowdown, are trying to keep factories humming and prevent the kind of market unrest that gripped global investors over the past year. [..] Some analysts think President Xi Jinping, wanting to consolidate power in the Communist Party ahead of a leadership transition next year, has paused reform efforts and instead is revving up the old playbook of credit-fueled growth and infrastructure spending. His aim: Ensure economic stability and mollify rivals, they say.

An attempt last year by Beijing to allow markets to play a role in setting its exchange rate was mismanaged, adding to a summertime of woe for China’s financial markets and sparking global jitters. The reaction surprised Chinese officials and created a headache for reformers. The Chinese government is keeping steel mills, coal plants and a host of manufacturing industries afloat despite dwindling demand and a tumble in commodity prices that should have closed many. [..] By supporting excess production capacity, the Chinese government is “engaged in economic warfare against the U.S.,” said John Ferriola, chief executive of North Carolina steel giant Nucor Corp. “Thousands of hardworking Americans have lost their jobs because of these illegal, unfair trade practices.”

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“..nearly half of all respondents said they could not cover an unexpected expense of $400..”

One Third Of Americans Are ‘Just Getting By’ (NY Times)

In the United States, nearly one-third of adults, about 76 million people, are either “struggling to get by” or “just getting by,” according to the third annual survey of households by the Federal Reserve Board. That finding, dismal though it is, represents a mild improvement in general well-being last year, compared with the two years before. The improvement, however, was clearly too little to raise Americans’ spirits: The new survey, which was conducted in late 2015 and released last week, also shows that optimism about the future has tempered. The Fed policy committee should take the survey to heart when it meets this month to decide whether to raise interest rates.

Higher rates are a way to slow an economy that is at risk of overheating – a far-fetched proposition when tens of millions of Americans are barely hanging in there. Congress and other economic policy makers, as well as the presidential candidates, could also use the survey to get some insight into Americans’ real economic problems. Among them is deep insecurity. Nearly 70% of adults said they were “living comfortably” or “doing O.K.” — up a bit from previous years — but nearly half of all respondents said they could not cover an unexpected expense of $400, or could do so only by selling something or borrowing money. Americans seeking a path upward through education are staggering under a load of debt. The median debt load for someone with a bachelor’s degree was $19,162.

For a master’s, it was $36,000, and for a professional degree, $100,000. Many students with debt use deferments or other plans to delay or extend repayments, but in most cases that increases the balance they owe. For those making payments, the average monthly bill was $533. By all indications, however, they are the relatively lucky ones. Americans who had attended college accounted for most of the improvement reported in the survey. Financial stress was more prevalent among less-educated people who responded to the survey, as well as racial and ethnic minorities and adults making less than $40,000 a year.

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Please remember and compare to yesterday’s (also OECD): “We’re a little concerned about housing prices in the greater Vancouver area and Toronto..”

OECD Sees ‘Dramatic And Destabilising’ End To Australia Property Boom (AFR)

Australia may be on the cusp of a “dramatic and destabilising” end to the housing boom rather than a hoped-for soft landing because of the apartments building boom, the Organisation for Economic Co-operation and Development said. In its latest assessment of the threats to the economy, the Paris-based think tank said jitters over the federal election are adding to risks, and called for an increase in the goods and services tax. Somewhat paradoxically, the OECD appears particularly worried about how to interpret changes in the housing market – even as it notes simultaneously that risks of a boom appear to be receding which, it argues, provides leeway for even more official interest rate cuts.

“Domestically, the unwinding of housing market tensions to date may presage dramatic and destabilising developments, rather than herald a soft landing,” it said. Parts of the real estate industry have already warned about failed settlements as record numbers of new apartments come due for completion in Sydney, Melbourne and Brisbane this year and next. The warning, which is accompanied by graphs showing dwelling approvals retreating from a peak and house prices levelling out, appears to have been prepared ahead of more recent evidence of a rebound in both measures.

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First things first.

Fed Likely To Avoid Rate Hike Before Britain Votes On Leaving EU (R.)

The U.S. Federal Reserve may be forced to delay a rate hike at its June meeting because of mounting concern over the economic fallout from Britain’s vote on whether to leave the European Union. The geopolitical risk likely will push any rate increase until at least July, despite apparent consensus among Fed officials that a hike is warranted by stronger U.S. growth and tight labor markets. The Fed’s June 14-15 rate-setting meeting comes just a week before the British vote on June 23. A “leave” vote is expected to roil financial markets, cause credit spreads to widen, trigger a rush into safe assets and bolster the dollar. The dollar’s recent stability is one reason the Fed has become more comfortable with raising rates, and officials may want to let the threat of Brexit pass before moving to tighten financial conditions.

Fed Board Governor Daniel Tarullo on Thursday joined the chorus of those warning of his concerns over the British vote, telling Bloomberg that Brexit would be a “factor” he would consider at the Fed’s June policy meeting and said that the British vote’s impact on markets would be key. [..] If the Fed does indeed take a pass at its June meeting, officials have signaled they’ll be ready to move in July. Minutes of the Fed’s March policy meeting showed officials preparing the ground for higher rates sometime in the summer months. After July, the next option would be September, in the middle of a U.S. election campaign, in which the Fed and Yellen could well become targets of debate.

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The illusion gets expensive, as returns diminish.

Draghi Insists ECB Stimulus Only Half Done (BBG)

Mario Draghi’s insistence that his stimulus program is only half done brings with it a worrying thought. What if its best effects are already spent anyway? At least four times at Thursday’s press conference in Vienna, the European Central Bank president emphasized how policy makers need to see the “full impact” and must “focus on implementation” of their measures. That augurs a busy month ahead as officials keep hoovering up government debt, start buying corporate bonds and enact the first of four long-term loan offerings to banks. While Draghi’s remarks suggest the next major calendar point for the ECB’s assessment of its stimulus will be September – after the release of economic-growth data and coinciding with its fresh forecasts – the omens so far are weak.

Yet another report of negative consumer prices this week underscored the challenge of revitalizing an economy fatigued by years of debt crises and delayed reforms, and battered by global forces beyond the ECB’s control. “We’re getting to the point of radically diminishing effectiveness of these interventions,” Andrew Balls, Pimco’s global fixed income chief investment officer, said on Bloomberg Television. “If we get a recession, which is perfectly plausible over the next three to five years, there’s a real question in terms of how policy makers can respond.”

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France blames emerging economies.

Bank of France Cuts Inflation Outlook, 2017 GDP Forecast (WSJ)

The Bank of France cut its inflation forecasts and trimmed its 2017 economic growth forecast in a semi-annual economic outlook Friday. The Bank of France pared back its GDP forecast for 2017 to 1.5% from 1.6% in December as it expects weaker trade to drag on the French economy. Despite a stronger-than-expected first quarter, it kept its GDP forecast for the whole of 2016 at 1.4%. The softer forecasts indicate how weak oil prices and uncertainty over the outlook for the global economy are cooling eurozone economies just as they emerge from a long period of weak growth. “While global demand is dynamic, it will accelerate only slightly in 2016, due to a less favorable growth outlook than previously forecast in emerging economies,” the Bank of France said.

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Germany blames exports in general. Stingy Greeks?!

Bundesbank Cuts German GDP Forecasts On Weaker Export Demand (R.)

The Bundesbank cut its German inflation and growth forecasts on Friday citing weaker demand for exports, even as it predicted that robust consumer demand and a tightening labor market would keep the domestic economy buoyant. The euro zone’s biggest economy has been an outperformer in recent years, posting healthy growth and driving the currency bloc’s best run since the start of the global financial crisis almost a decade ago. Exporters have been forced to “surrender” some of their market share gained in recent years, however, and this trend may continue this year and offset strong domestic factors, the central bank said in a biannual economic outlook.

“This should probably be interpreted mainly as a correction of previous market share gains not explained by price competitiveness,” the Bundesbank said. “This process could continue further into 2016 according to Ifo and DIHK surveys, in which industrial firms reported subdued export expectations and only a comparatively moderate increase in exports this year,” it said. The bank now sees GDP growing at 1.7% this year, below a December projection for 1.8%, and 1.4% in 2017, down from 1.7% seen earlier. The growth rate would then rebound to 1.6% in 2018.

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Not going to happen.

President Obama, Pardon Edward Snowden and Chelsea Manning (G.)

As he wraps up his presidency, it’s time for Barack Obama to seriously consider pardoning whistleblowers Chelsea Manning and Edward Snowden. Last week, Manning marked her six-year anniversary of being behind bars. She’s now served more time than anyone who has leaked information to a reporter in history – and still has almost three decades to go on her sentence. It should be beyond question at this point that the archive that Manning gave to WikiLeaks – and that was later published in part by the Guardian and New York Times – is one of the richest and most comprehensive databases on world affairs that has ever existed; its contribution to the public record at this point is almost incalculable. To give you an idea: in just the past month, the New York Times has cited Manning’s state department cables in at least five different stories.

And that’s almost six years after they first started making headlines. We know now that, despite being embarrassing for the United States, the leaks caused none of the great harm that US government officials said would come to pass. Even the government admitted during Manning’s trial that no one died because of her revelations, despite the hyperbolic government comments at the time, including that WikiLeaks had “blood on its hands”. (By the way, the US officials knew they were exaggerating in the media at the time.) Even if you think that she deserves some punishment for breaking the law, six years behind bars (and being tortured during her pretrial confinement) should be more than enough.

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Creepy.

Facial Recognition Will Soon End Your Anonymity (MW)

Nearly 250 million video surveillance cameras have been installed throughout the world, and chances are you’ve been seen by several of them today. Most people barely notice their presence anymore – on the streets, inside stores, and even within our homes. We accept the fact that we are constantly being recorded because we expect this to have virtually no impact on our lives. But this balance may soon be upended by advancements in facial recognition technology. Soon anybody with a high-resolution camera and the right software will be able to determine your identity. That’s because several technologies are converging to make this accessible. Recognition algorithms have become far more accurate, the devices we carry can process huge amounts of data, and there’s massive databases of faces now available on social media that are tied to our real names.

As facial recognition enters the mainstream, it will have serious implications for your privacy. A new app called FindFace, recently released in Russia, gives us a glimpse into what this future might look like. Made by two 20-something entrepreneurs, FindFace allows anybody to snap a photo of a passerby and discover their real name — already with 70% reliability. The app allows people to upload photos and compare faces to user profiles from the popular social network Vkontakte, returning a result in a matter of seconds. According to an interview in the Guardian, the founders claim to already have 500,000 users and have processed over 3 million searches in the two months since they’ve launched.

What’s particularly unsettling are the use cases they advocate: identifying strangers to send them dating requests, helping government security agencies to determine the identities of dissenters, and allowing retailers to bombard you with advertisements based on what you look at in stores. While there are reasons to be skeptical of their claims, FindFace is already being deployed in questionable ways. Some users have tried to identify fellow riders on the subway, while others are using the app to reveal the real names of porn actresses against their will. Powerful facial recognition technology is now in the hands of consumers to use how they please.

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American history 101.

The Fat Lady Always Sings Twice (Jim Kunstler)

That was the week Hillary began to look like the candidate who fell off a truck wearing a Nixon mask. Email-gate is taking on the odor of Watergate — the main ingredient of which was not the dopey crime itself but the stonewalling around it. The State Department Inspector General’s report saying definitively, no, she was not “allowed” to use a private, unsecured email server validated Donald Trump’s juvenile name-calling of “Crooked Hillary.” We may never hear the end of that now (if Trump is actually nominated). And, of course, there lurks the Godzilla-sized skeleton in her closet of the still-unreleased Goldman Sachs speech transcripts, the clamor over which is sure to grow. Meanwhile the specter of the California primary looms, a not inconceivable loss to Bernie Sanders.

And onto the convention in Philly which I contend will be even more fractious and violent than the 1968 fiasco in Chicago. I’ll say it again: Hillary is a horse that ain’t gonna finish. The Democrats better be prepared to haul Uncle Joe out of the closet, fluff up his transplanted hair, wax his dentures, give him a few Vitamin B-12 shots, and stick a harpoon in his fist for the autumn run against the White Whale (if Trump is actually nominated). The Republican convention in Cleveland is apt to be as bloody and violent a spectacle too (if Trump is actually nominated), with Black Lives Matters cadres having already promised to put on a show for global television and their Latino counterparts marching with Mexican Flags and cute signs saying: Trump: Chingate tu madre, perhaps garnished with the sobriquet pendejo.

In such a situation, Trump has enormous potential to make things worse with his childish snap-backs. Hubert Humphrey in 1968 at least had the good sense to keep his mouth shut about the moiling multitudes out on Michigan Avenue inveighing against him. The Vietnam War was a grave debacle, and it especially pissed off the young men subject to being drafted to fight in it, but the woof and warp of American life was otherwise intact. Blue collar workers still pulled in high wages in the Big Three auto plants, and women had not yet declared war on men, and the airwaves weren’t pornified, and there were still people in government with moral authority who loudly opposed official policy. The sobering martyrdoms of Martin Luther King and Robert Kennedy sanctified the opposition to the status quo.

Even Hubert Humphrey himself, a thoughtful man underneath his Rotarian clown mask, began to turn away from Lyndon Johnson’s war hawks. Nixon won. He surely benefited most not so much from the war issue and the riots in the streets as from the mass defection of Southern states from the long-entrenched domination of the Democratic Party — directly due to Johnson’s dismantling of the old Jim Crow laws. As a personality, Nixon was as much a pendejo as Donald Trump, but no one doubted his ability to run the machinery of government, if not the way they wanted to run it.

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” The figures of migrant unemployment follow a trend in Sweden of high unemployment for foreigners.”

Fewer Than 500 of 163,000 Migrants Find Jobs In Sweden (BB)

Sweden’s state-funded broadcaster has revealed that of 163,000 migrants who came to Sweden, less than 500 have found jobs. Sweden saw a record 163,000 applications for asylum last year as a result of the migrant crisis and many Swedes were assured that the new arrivals would contribute to the economy; but new research from Sweden’s state-owned SVT reveals that fewer than 500 migrants have found work. Using data from the Swedish employment agency and the Swedish migration authority, Migrationsverket, the network claims that only 494 asylum seekers are contributing to the economy, The Local reports. While in many countries asylum seekers are banned from formally working while their application is being processed, in Sweden there are exceptions.

The “at-und” is an exemption granted by Migrationsverket which allows asylums seekers access to the labour market. In an effort to explain the incredibly low number of migrants working, Lisa Bergstrand of Migrationsverket told SVT: “There was an incredible number of people applying for asylum in Sweden and so that we should be able to register them, we had to de-prioritise certain tasks, and that was the matter of jobs”. Of the migrants who claimed asylum in 2015 approximately one third of the men and women aged 20-64 were given the exemption to allow them to work, which is around 53,790 migrants. The figures of migrant unemployment follow a trend in Sweden of high unemployment for foreigners. The unemployment for those born in Sweden is at the lowest point since the 2008 financial crisis at around 4.8%, while foreign born unemployment is at 14.9%.

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Question to Italian readers: what effect has the death of Casaleggio had on Beppe?

Corruption Gripes Help Five Star Movement Top Italy Local Election Polls (G.)

Alessandro Aquilini had her by the hand. And he wasn’t letting go. Virginia Raggi, the woman tipped to be the next mayor of Rome, was hunting for votes in the street market in Boccea, a lower middle-class district of the Italian capital. Raggi’s trademark is exquisite courtesy – she proffers a slender hand even to reporters who approach her with hostile questions. At the butcher’s stall, though, she got more of a handshake than she bargained for. “We need help,” the 50-year-old Aquilini began. “Left. Right. Centre. We can’t take any more [of party politicians]. This country needs a bit more honesty.” Still gripping Raggi’s hand as he stretched across the slabs of veal, the burly butcher added: “We’re up to here with taxes and corruption.”

His monologue captured many of the reasons why Raggi, the candidate of the Five Star Movement (M5S), is leading the polls ahead of local elections in Rome and other Italian cities on Sunday. Unlike other non-traditional movements that have prospered in Europe, such as Syriza in Greece, the M5S’s protest is not so much against austerity as the corruption and cronyism of Italy’s mainstream parties. Nowhere has this been highlighted more vividly than Rome, where establishment politicians and officials are on trial alongside alleged mobsters, charged with conspiring to pocket millions of euros from rigged public contracts. All three of the final polls released before a ban took effect on 21 May put Raggi ahead by 3-6%age points in the mayoral race.

Run-offs between the two leading candidates in each town are slated for 19 June. Only then will it be known if the 37-year-old lawyer – almost unknown to the public until a few months ago – has won. A victory for Raggi would be a stinging reverse for Italy’s prime minister, Matteo Renzi, who leads the centre-left Democratic party, and a dramatic breakthrough for the internet-based M5S. Founded less than seven years ago by the comedian Beppe Grillo and his digital guru, the late Gianroberto Casaleggio, the M5S is today Italy’s leading opposition party. Grillo has said he will set fire to himself in public if Raggi fails to win. But he may yet regret that pledge.

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Is there hope?

US Announces Near-Total Ban On Trade Of African Elephant Ivory (AFP)

US authorities announced a near-total ban on the trade of African elephant ivory Thursday, finalizing a years-long push to protect the endangered animals. “Today’s bold action underscores the United States’ leadership and commitment to ending the scourge of elephant poaching and the tragic impact it’s having on wild populations,” Secretary of the Interior Sally Jewell said. The new rule “substantially limits” imports, exports and sales of such ivory across state lines, the US Fish and Wildlife Service (FWS) said. However, it does make exceptions for some “pre-existing manufactured” items, such as musical instruments, furniture and firearms that contain less than 200 grams of ivory and meet other specific criteria, according to the FWS.

Antiques, as defined under the Endangered Species Act, are also exempt. The new measures fulfill restrictions in an executive order on combating wildlife trafficking issued by President Barack Obama in 2013, the FWS said in its statement announcing the ban. It said that once illegal ivory enters the market it becomes virtually impossible to tell apart from legal ivory, adding that demand for elephant ivory, particularly in Asia, “is so great that it grossly outstrips the legal supply and creates a void in the marketplace that ivory traffickers are eager to fill.”

“We hope other nations will act quickly and decisively to stop the flow of blood ivory by implementing similar regulations, which are crucial to ensuring our grandchildren and their children know these iconic species,” Jewell said. The Wildlife Conservation Society welcomed the ban, calling it historic and groundbreaking. “The USA is shutting down the bloody ivory market that is wiping out Africa’s elephants,” WCS president and chief executive Cristian Samper said in a statement. “The USA is boldly saying to ivory poachers: You are officially out of business.” Some 450,000 elephants can be found on the African continent and it is estimated that more than 35,000 of these animals are killed each year.

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Mar 262016
 
 March 26, 2016  Posted by at 9:29 am Finance Tagged with: , , , , , , , , ,  1 Response »
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Jack Delano Freight operations on the Indiana Harbor Belt railroad 1943

US Q4 GDP Rose 1.4% As Corporate Profits Plunged (ZH)
World Trade Collapses in Dollars, Languishes in Volume (WS)
Bank of Japan’s Latest PR Move: ‘Negative Rates in Five Minutes’ (WSJ)
Foreigners Dumped More Japanese Stocks This Week Than Ever Before (ZH)
Yuan’s Fall Drags Down Chinese Companies (WSJ)
Shanghai Rolls Out Tightening Measures To Cool Home Market (Reuters)
Affordable Housing Crisis Has Engulfed All Cities In Southern England (G.)
Radical Economic Ideas Grab Attention Amid Low-inflation Torpor (SMH)
Modern Monetary Theory Has Ardent Proponents (SMH)
Brazil Economic Woes Deepen Amid Political Crisis (WSJ)
The River: America’s 40-Year Hurt (BBC)
Hope Turns To Despair As Lesbos Camp Becomes Open-Air Prison (Ind.)

“The resilient consumer”. Sure.

US Q4 GDP Rose 1.4% As Corporate Profits Plunged (ZH)

While the final revision to Q4 2015 GDP was so irrelevant it was released on a holiday when every US-based market is closed, even the futures, it is nonetheless notable that according to the BEA in the final quarter of 2015 US GDP grew 1.4%, up from the 1.0% previously reported, and higher than the 1.0% consensus estimate matching the highest Q4 GDP forecast. The final Q4 GDP print was still well below the 2.0% annualized GDP growth reported in Q3.

 

The figure marks a slowdown from the 2.2% average pace in the first three quarters of 2015. For all of last year, the U.S. economy grew 2.4% matching the advance in 2014. The reason for the change was largely due to upwardly Personal Consumer Spending, which rose from a contribution of 1.38% to the annualized bottom line to 1.66%. In CAGR terms, personal consumption rose 2.4%, following the 3.0% increase in Q3, higher than the 2.0% previously estimated.

Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased at a 1.7% rate, compared with a previously estimated 1.4% pace.  The rest of the GDP components were largely unchanged, with Fixed Investment adding 0.06% to the bottom line, up from 0.02% in the previous estimate, Private Inventories contracting fractionally more than previously estimated (-0.22% vs -0.14%), net trade subtracting 0.1% less from growth (-0.14% vs -0.25%), and finally government spending largely unchanged and hugging the unchanged line at 0.02%.

 

But while the “resilient consumer” once again carried the US economy in the fourth quarter, largely due to an estimated jump in spending on Transportation and Recreational services, which added an annualized $13 billion to the US economy vs the prior estimate, more disturbing was the drop in profits which we already knew courtesy of company reports and is known confirmed by the BEA whose GDP report also showed that corporate profits dropped in 2015 by the most in seven years. As Bloomberg writes, the earnings slump illustrates the limits of an economy struggling to gather steam at the start of this year. Some companies, encumbered by low commodities prices and sluggish foreign markets, are cutting back on investment while a firm labor market and low inflation encourage households to keep shopping.

Pre-tax earnings declined 7.8%, the most since the first quarter of 2011, after a 1.6% decrease in the previous three months. The estimate of nonfinancial corporate profits was reduced by a $20.8 billion settlement, considered a transfer to the government, between BP and the U.S. after the 2010 oil spill in the Gulf of Mexico. Profits in the U.S. dropped 3.1% in 2015, the most since 2008. Corporate earnings are being weighed down by weak productivity, rising labor costs and the plunge in energy prices. Economists at JPMorgan had expected a 9.5% drop in pre-tax earnings in the fourth quarter. “The pace of growth slowed as we ended 2015, though consumer spending is still the primary underpinning of this economic expansion,” Sam Bullard at Wells Fargo in Charlotte, North Carolina, said before the report. “Any pickup we might see is still likely going to be capped given the overall global picture.”

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Globalization is ending.

World Trade Collapses in Dollars, Languishes in Volume (WS)

The Merchandise World Trade Monitor by the CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, tracks global imports and exports in two measures: by volume and by unit price in US dollars. And the just released data for January was a doozie beneath the lackluster surface. The World Trade Monitor for January, as measured in seasonally adjusted volume, declined 0.4% from December and was up a measly 1.1% from January a year ago. While the sub-index for import volumes rose 3% from a year ago, export volumes fell 0.7%. This sort of “growth,” languishing between slightly negative and slightly positive has been the rule last year. The report added this about trade momentum:

“Regional outcomes were mixed. Both import and export momentum became more negative in the United States. Both became more positive in the Euro Area. Import momentum in emerging Asia rose further, whereas export momentum in emerging Asia has been negative for four consecutive months.” This is also what the world’s largest container carrier, Maersk Lines, and others forecast for 2016: a growth rate of about zero to 1% in terms of volume. So not exactly an endorsement of a booming global economy. But here’s the doozie: In terms of prices per unit expressed in US dollars, world trade dropped 3.8% in January from December and is down 12.1% from January a year ago, continuing a rout that started in June 2014. Not that the index was all that strong at the time, after having cascaded lower from its peak in May 2011.

If June 2014 sounds familiar as a recent high point, it’s because a lot of indices started heading south after that, including the price of oil, revenues of S&P 500 companies, total business revenues in the US…. That’s when the Fed was in the middle of tapering QE out of existence and folks realized that it would be gone soon. That’s when the dollar began to strengthen against other key currencies. Shortly after that, inventories of all kinds in the US began to bloat. Starting from that propitious month, the unit price index of world trade has plunged 23%. It’s now lower than it had been at the trough of the Financial Crisis. It hit the lowest level since March 2006:

This chart puts in perspective what Nils Andersen, the CEO of Danish conglomerate AP Møller-Maersk, which owns Maersk Lines, had said last month in an interview following the company’s dreary earnings report and guidance: “It is worse than in 2008.” But why the difference between the stagnation scenario in world trade in terms of volume and the total collapse of the index that measures world trade in unit prices in US dollars? The volume measure is a reflection of a languishing global economy. It says that global trade may be sick, but it’s not collapsing. It’s worse than it was in 2011. This sort of thing was never part of the rosy scenario. But now it’s here.

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‘Explaining’ what they don’t understand themselves.

Bank of Japan’s Latest PR Move: ‘Negative Rates in Five Minutes’ (WSJ)

The Bank of Japan launched a charm offensive Friday to win over spooked members of the public who have reacted negatively to negative interest rates. The central bank issued a booklet offering a crash course in the basic implications of negative rates, a move that demonstrates the strength of unease created by the introduction of a policy in a nation largely unfamiliar with the concept behind it. Written in a question-and-answer format and in a somewhat casual Japanese, the three-page booklet aims to explain negative rates “in five minutes” by covering 18 issues that have grabbed public attention. Negative rates have become a political hot potato ahead of July’s national elections, with opposition lawmakers accusing the central bank of creating anxiety among consumers. Some ruling party politicians, perhaps feeling uncomfortable about the prospect of explaining the policy to their constituents, are also feeling the jitters.

Prime Minister Shinzo Abe acknowledged Thursday that negative rates have made households nervous and it will likely take some time before people understand them. The Bank of Japan decided to start charging interest on some deposits held by commercial banks at the central bank in January. The policy is part of broader efforts to defeat deflation and create a stronger economy, but the central bank was ill-prepared for the public backlash the policy generated. One of the most common concerns over the policy is whether individuals with regular bank accounts will be charged interest on their deposits at the commercial banks. Opposition lawmakers have frequently quizzed BOJ Gov. Haruhiko Kuroda on this issue in parliament.

“Although the measure is called negative rates, it only involves imposing negative rates on a part of the money deposited at the BOJ by banks,” the booklet says. “Individuals’ deposits are different.” While addressing concerns over the new policy, the central bank also tries to convey the message that Japan must get rid of deflation, a negative cycle of price falls, adding that it has taken the right steps to do just that. “If prices don’t rise because of deflation, this means companies’ revenues don’t increase, and that’s why salaries don’t rise,” the booklet says. Since company earnings have improved a lot during the past three years of monetary easing, firms have started increasing basic pay, it says, adding that salaries will keep rising each year if deflation is overcome.

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“..weakness means weak Japanese economy means sell Japanese assets.. and we will soon see capital controls in the world’s largest debtor nation…”

Foreigners Dumped More Japanese Stocks This Week Than Ever Before (ZH)

USDJPY just had its best week in 2 months, funding bullish momentum and carry trades around the world in the midst of dismal economic data everywhere and tumbling earnings expectations. This "bullish" Yen strength, however, amid China's biggest weekly devaluation in almost 3 months, was ironically driven by drastic investment outflowsrecord sales of Japanese stocks by foreigners (sell JPY), and record purchases of foreign bonds by Japanese investors (sell JPY). Sooner, rather than later, it is obvious that the investment outflows will dominate the carry trades (see Thursday and Friday) and Kuroda and Abe will have a major problem.

Yen was dumped all week…

 

Which provided just enough juice for carry trades to lift Japanese stocks (despite the weakness in data and China's biggest weekly Yuan devaluation in almost 3 months)

 

But notice that the last two days have seen Japanese stocks decouple from USDJPY, perhaps the first glimpse of the investment outflows overwhelming any casino-based carry trades flows.

And this is why… Foreigners sold a record amount of Japanese stocks last week… (implicitly meansing Yen was sold)

 

And Japanese investors fled the insanity of record low yields in JGBs, buying a record amount of foreign bonds last week (implicitly selling Yen again)…

 

So the Yen weakness – which was so bullishly supportive of global equity markets via carry – was in fact a signal of massive investor anxiety fleeing the sinking ship. Peter Pan-ic indeed.

Abe and Kuroda will soon face a major problem as a weaker Yen will signal the exact opposite trade that has been so active since 2012 – weakness means weak Japanese economy means sell Japanese assets.. and we will soon see capital controls in the world's largest debtor nation.

And remember – the devaluation of The Yen has done nothing – NOTHING – to improve exports for Japan…

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It’s all about the dollar.

Yuan’s Fall Drags Down Chinese Companies (WSJ)

A weaker Chinese currency has roiled global markets and heightened worries about the state of the world’s second-largest economy. Now, some Chinese companies are reporting they’ve taken a hit from a depreciating yuan. The yuan fell 5% against the U.S. dollar in 2015, plunging after China’s central bank surprisingly devalued the currency in mid-August. A weaker currency helps the country’s exporters but hurts Chinese companies that pay for raw material in U.S. dollars or need to pay off loans in U.S. dollars. Among those negatively affected are firms that source from outside China, such as milk or food companies, as well as real estate companies that hold a lot of dollar-denominated debt, says Herald van der Linde at HSBC.

This was the case with Hengan International, one of the leading makers of tissue paper in China. The company said in a statement it saw $55.3 million in foreign-exchange losses in 2015 because it pays for raw material in U.S. dollars, holds U.S.-denominated debt and has Hong Kong-based yuan-denominated assets, which dropped in value. This contributed to a decline in tissue sales, it said. Weaker currencies also hurt China’s heavily-indebted real-estate developers. Shanghai-based property developer Shui On Land reported its 2015 profit dropped to 1.77 billion yuan ($272 million) from 2.49 billion yuan ($382 million) a year earlier in large part due to the depreciation of the company’s USD- and HKD-denominated debt. Then there are companies that suffer losses from selling to countries whose currencies have weakened.

Sourcing and logistics giant Li&Fung said 2015 revenue dropped 2.4% on year. The main reason? Foreign-exchange losses from weak European and Asian currencies, it said, since 38% of the company’s business is in non-U.S. markets but it accounts in U.S. dollars. In order to tackle the problem, some companies are looking to shed yuan — or at least get it out of the country. Hengan, the tissue company, has remitted the equivalent of several billion Hong Kong dollars from mainland China to Hong Kong in 2015, and another HK$2 billion in the first quarter of this year, said CFO Vincent Loo in Hong Kong. It is also negotiating with sources to pay them in less time — from 30 to 60 days rather than 90 — just in case the yuan continues to fall.

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Beijing’s ‘vision’ is now limited to short term only.

Shanghai Rolls Out Tightening Measures To Cool Home Market (Reuters)

Municipal authorities in Shanghai tightened mortgage down payment requirements for second home purchases on Friday, in a move to cool an overheating property market and reduce fears of a bubble. Senior Chinese leaders raised concerns about the country’s overheated housing market during an annual parliament meeting this month, and Shanghai is the biggest city to take action in the wake of the National People’s Congress, which ended a week ago. Under the new rules, home buyers will need to put down 50-70% of the price of a second home, compared to 40% previously, to qualify for a mortgage. “The new measure will have a big impact on market sentiment on both the primary and secondary market; new launches being sold out within one, two hours will not happen again,” said Joe Zhou, head of East China research at real estate services firm Jones Lang LaSalle.

With the new rules, Shanghai also made it harder for non-residents to buy homes in the city, according to a statement issued by the local government. Potential buyers who do not hold local residence permits, or hukou, must have paid social insurance or taxes in Shanghai for at least five years before they can purchase property. Previously the requirement was two years. Shanghai will also increase the supply of small- and medium-sized homes and crack down on property financing by informal financial institutions. Shanghai home prices gained 20.6% in February from a year ago, posting the second biggest gain in the country after the southern city of Shenzhen, where prices soared 56.9%, despite slowing economic growth.

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A world full of housing bubbles. Haven’t we understood how dangerous that is?

Affordable Housing Crisis Has Engulfed All Cities In Southern England (G.)

There is no longer a city in the south of England where house prices are less than seven and a half times average local incomes, according to analysis by Lloyds Bank that reveals how the home affordability crisis now stretches far beyond London. “The housing affordability gap has widened to its worst level in eight years,” said the Lloyds analysis, noting that the last time prices were so high was at the very top of the boom in 2008, just before the financial crisis struck. The Lloyds analysis is unique in that it compares local house prices with local earnings rather than national averages. On this measure, the worst house prices are not in London but in other parts of the south-east. Oxford is again identified as the least affordable city in the UK, with average prices at 10.68 times local earnings.

Winchester is a close second at 10.54, with London third at 10.06. Cambridge, Brighton and Bath all have prices that are now nearly 10 times local earnings, while cities such as Bristol and Southampton have prices close to eight times earnings. Wage growth has fallen far behind the rise in house prices, said Lloyds, with affordability worsening for the third successive year. The average home in a city in the UK now costs 6.6 times average local earnings, up from 6.2 last year. In the 1950s and 1960s, buyers could typically find homes with mortgages of three to four times their income. But the Lloyds figures show that there is now just one city in the UK that fits that profile: Derry in Northern Ireland. House prices in the city currently fetch 3.81 times local incomes.

While most of the “most affordable” cities in the Lloyds rankings are in the north, Scotland and Northern Ireland, buyers will still be stretched to afford a home from the local salaries on offer. Hull is widely regarded as a low house price area, yet local residents face having to pay 5.11 times average local incomes to buy a home. Meanwhile, York has joined the ranks of cities in the south in the unaffordability tables, with prices at 7.5 times incomes.

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When crazy ‘conventional’ ideas fail…

Radical Economic Ideas Grab Attention Amid Low-inflation Torpor (SMH)

Our economic guardians at Federal Treasury and the Reserve Bank sound increasingly uneasy about some policy choices being made offshore. Since the global financial crisis, quantitative easing has pumped trillions of dollars into major economies with limited success. More recently central banks in Europe and Japan have opted for negative interest rates in a bid to kick-start growth. On Tuesday the Treasury Secretary, John Fraser, pointed out that we’ve now been in an “experimental stage” with monetary policy for more than seven years. “A range of different interventions have been tried with, at least to date, mixed results,” he said. “Sadly, we will have to await the passage of years before we can pass final judgment.” What is clear, warned Fraser, is that these unusual policies “have had a pervasive and frankly quite worrying impact on the pricing of financial risk.”

Earlier this month the Reserve’s deputy governor, Philip Lowe, said it was “very rare” for central banks to worry that inflation is too low. “Yet today, we hear this concern quite often, and the ‘unconventional’ has almost become conventional,” he said. Lowe warned the abnormal monetary policies being adopted in some countries were “a complication for us” because they put upward pressure on exchange rate. But in a world where traditional economic remedies are proving ineffective a swag of other unorthodox policy suggestions are getting a hearing. One controversial option being canvassed by experts is for central banks to deliver “helicopter drops” of cash directly to citizens’ bank accounts in the hope they will spend it and revive growth. Even more radical is a proposal for governments to mandate an across-the-board pay rise for workers.

Olivier Blanchard, a former chief economist at the IMF, and Adam Posen, president of the Peterson Institute for International Economics, recently recommended the Japanese government try this approach to boost growth. The Bank of England’s chief economist, Andy Haldane, raised eyebrows last September when he argued abandoning cash altogether would make it easier for central banks to manage downturns. He warned that in future it might be necessary for central banks to opt for negative interest rates when depositors are charged for putting their money in the bank in a bid to encourage spending. One problem with that strategy, however, is that people are likely to convert deposits into cash. Eliminating cash and replacing it with a government-backed digital currency would remove that option. “This would preserve the social convention of a state-issued unit of account and medium of exchange… But it would allow negative interest rates to be levied on currency easily and speedily,” Haldane said.

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A second part from the article above.

Modern Monetary Theory Has Ardent Proponents (SMH)

As central banks struggle to revive growth, attention has shifted to fiscal policy the way governments use taxation and spending to influence the economy. Even the hard-heads at the IM have advised governments, including Australia’s, to spend more especially on infrastructure. The fund’s most recent assessment of our economy said “raising public investment (financed by borrowing, thus reducing the pace of deficit reduction) would support aggregate demand, take pressure off monetary policy, and insure against downside growth risks.” Amid these debates about fiscal policy, a radical school of thought called Modern Monetary Theory, or MMT, has gained more prominence. Proponents of this theory have been on the periphery of mainstream economics for more than two decades but their profile has been raised by this year’s US presidential race.

Academic economist Stephanie Kelton , a leading advocate of MMT, is an adviser to presidential hopeful, Senator Bernie Sanders. Kelton calls herself a deficit “owl” rather than a deficit hawk or dove. The hawks, of course, have a straightforward view of government finances: deficits are bad. The doves say deficits are necessary when economic times are tough but they should be balanced by surpluses over time. But deficit owls like Kelton have a far more radical take: deficits don’t matter. The starting point for Modern Monetary Theory is that a currency issuing government can keep printing and spending money but never go broke, so long as it doesn’t borrow in a foreign currency. The Australian Commonwealth, for example, will never run out of Australian dollars because it is a monopoly issuer of that currency.

It can always create the money it needs and, therefore, will always be able to service debts. The MMTers claim that in the modern era of floating exchange rates and deregulated financial markets, governments can, and should, run deficits whenever they are needed. There is a strong moral case for this: in a modern economy, there’s no good reason to have unemployed labour or capital. For the MMTers mass unemployment is a great evil and its daily, human cost dwarfs other economic challenges. They acknowledge there are limits to government spending. Resources in the real economy can be constrained and taxes are an essential tool to ensure demand for the currency and to cool the economy if it overheats. But there’s plenty of scope for governments to print and spend money without causing inflation or triggering a financial crisis. MMTers say sophisticated modern economies like the US and Australia are in no danger of the hyper-inflation which plagued Zimbabwe last decade or Germany’s Weimar Republic in the 1930s.

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Barely functioning, politically nor economically.

Brazil Economic Woes Deepen Amid Political Crisis (WSJ)

Brazil’s economic crisis is as bad as its political one. Latin America’s biggest economy appears headed for one of its worst recessions ever. It stalled in 2014, shrank 3.8% last year and now faces a similar contraction this year. Unemployment rose to 9.5% on Thursday as wages fell 2.4%, both trends forecast to worsen. One in five young Brazilians is out of work, and Goldman Sachs says Brazil may be facing a depression. The deteriorating outlook forms a dire backdrop for Brazil’s political straits. President Dilma Rousseff, deeply unpopular, faces impeachment proceedings in Congress amid a widening corruption scandal surrounding the state oil company, Petróbras. That situation is consuming so much energy from policy makers and Congress that the economic downturn isn’t getting the attention it needs, observers say.

“The gravity of the situation is this: We have the kind of problems where if nothing is done, things will definitely get worse,” said Marcos Lisboa, a former finance ministry official who is now president of the Insper business school in São Paulo. “Pretty soon we could be talking about the solvency of the federal government.” Brazil fended off the results of the 2008 global downturn with stimulus spending, and is trying to again inject money into the economy to spur demand. In January, the Rousseff administration unveiled some $20 billion of subsidized loans from state-owned banks such as the BNDES to boost agriculture and builders of big infrastructure projects.

But this time, the country has less leeway to fund stimulus measures. Brazil’s tax take is diminishing, and the Planning Ministry said Tuesday the government needs to cut around $5.9 billion of spending to meet its budget target. On Thursday, Finance Minister Nelson Barbosa asked Congress to loosen the target to allow a bigger deficit in 2016. Some investors say stimulus policies such as cheap credits from state banks haven’t done much long-term good, because they produced big deficits and the money was often poorly invested in money-losing dams and refineries.

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“..very few people understood that an epochal change had taken place in the American economy. GDP would grow. Income wouldn’t.”

The River: America’s 40-Year Hurt (BBC)

Bruce Springsteen is coming to London with the River tour. At £170 for the cheapest pair, I can’t afford to see the Boss any more, even if my body could handle standing on Wembley Stadium’s pitch for three-and-a-half-hours in an early June drizzle. It’s interesting that Springsteen is re-exploring The River album again. Whenever the anger that simmers in America erupts and reminds the rest of the world that the country is troubled, he seems to be the cultural figure whose work offers an explanation. In late 1986, midway through Ronald Reagan’s second term of office, with the twin scourges of Aids and crack racing through American cities and New Deal ideas of economic and social fairness consumed by the Bonfire of the Vanities taking place on Wall Street, Britain’s Guardian newspaper ran an editorial that said, “for good or ill, [America] is becoming a much more foreign land”.

I had just celebrated my first anniversary as an ex-pat in London and wrote an essay trying to explain what America was like away from the places Guardian readers knew. I described the massive population dislocations that followed the long recession that had begun in the mid-70s. I referenced Springsteen. The piece ran under the headline “Torn in the USA”. Now America is going through even worse ructions. But there is nothing fundamentally new. What we are seeing is the continuation of a disintegration that began forty years ago around the time Springsteen was writing the title song of the album. The River, which came out in 1980, was very much about guys trying to kick back at father time and stave off the inevitable arrival of life’s responsibilities – wife, kids, job, mortgage – and the equally probable onset of life’s disappointments in wife, kids, job, mortgage, and in oneself.

The title track is a long, mournful story about that process and the narrator’s desire to reconnect to the person he was when younger and full of hope. “I come from down in the valley / Where mister, when you’re young / They bring you up to do/like your daddy done…” The key point is being brought up to be like your father. Work the same job, carry yourself in the same way, do the right thing. In the song this tie that binds is seen as restricting the choices you can make in life. Your daddy worked in a steel mill, you will work in a steel mill, or on the line at River Rouge, or down a mine. Today, what wouldn’t many of us give for the economic and social stability that gave resonance to Springsteen’s lyrics? A union job, 30 years of work, a pension. Sounds sweet. The narrator of the song goes on to tell us, “I got a job working construction at the Johnstown company / but lately there ain’t been much work on account of the economy.”

Springsteen based the song on the struggle of his brother-in-law to stay employed during the bleak days after the Oil Shock of 1973: a half-decade of inflation and economic stagnation. At the time this stagflation was seen as a cyclical event, the economy would rebound soon. It would be boom time for all. The economy did rebound, but then went into recession in 1982, and rebounded and went into recession at regular intervals, until the near-death experience of 2007/2008. But very few people understood that an epochal change had taken place in the American economy. GDP would grow. Income wouldn’t. Median salaried workers’ wages stagnated. Those working low-wage jobs saw their incomes decline. As for job security, a perfect storm of automation, declining union power, and free-trade agreements put an end to that.

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All the time I’m thinking someone must stand up and say ‘till here and no further’. But instead, Europe tumbles to new lows on a daily basis.

Hope Turns To Despair As Lesbos Camp Becomes Open-Air Prison (Ind.)

Even before it became a holding pen, Moria was a pretty poor registration centre, unable to provide basic facilities and painfully slow to process the thousands of refugees and migrants who arrive on the shores of Lesbos every week. But since midnight on Sunday, when the new EU-Turkey migrant deal came into force, refugees have been picked up by the coastguard and transported directly to Moria by the Greek authorities. The camp has become an open-air prison, a compound of temporary buildings on a hill overlooking the coast of this island, not far from Turkey’s Mediterranean coast. It is to here that all arrivals must wait for the news their long struggle to reach Europe will almost certainly get them no further than the Greek islands.

They will be returned to Turkey, which the EU has now declared a safe country, in its bid to stem the biggest refugee crisis since the Second World War. The lightning fast implementation of the deal, signed last Friday, has stretched to the limit the capacity of the Greek government, which has no means to process the asylum claims that everyone who arrives has the right to make. Those who came looking for peace and a better life have instead found themselves locked up, and handed detention papers. In response, aid agencies have dropped out of their involvement at the centre one by one, refusing to be associated with the detention of migrants – among whom are more than 100 unaccompanied children. Oxfam this week said the development was “an offence” to Europe’s values.

“They have told us nothing,” says Naima Abdullah, 28, speaking through the chain link fence, her four-year-old daughter Mirna by her side. She paid $2,000 for herself, Mirna, and her one-month-old baby to cross the sea from Turkey after fleeing air strikes in rural Damascus three months ago. She arrived on Sunday, in the first boats after the deal came into force. But four days later, she still hadn’t been given an opportunity to register a claim for asylum. And as the numbers grow, observers worry the only possible outcome will be the mass expulsions Europe has promised to avoid. Nadine Abuasil, 25, said she came to Lesbos because life in Turkey since she fled Deraa in Syria a month ago was not worth living. Her family were blackmailed for money by local gangs, and there was no work in a country that is expensive to live in. “We cannot go back to Turkey,” she says simply.

She and her 23-year-old brother arrived on Sunday after a five hour boat journey during which two men died. They had apparently suffocated. She points to the ground of the detention centre. “We would rather die here than in Turkey.” Her brother, Mohammed, was no less emphatic when asked what he’d do if he was forced to return. “I don’t speak English,” he says. “But: kill myself, kill myself.” The deal has been decried by human rights groups and legal experts who question if Turkey can be considered a safe third country for the forcible return of migrants, and if Greece, which has floundered under the pressure of more than one million refugees arrivals in the past year, is capable of processing asylum claims – even with promised outside help.

“Greece has effectively been asked to build an asylum system in two weeks,” says Camino Mortera, a research fellow for the Centre for European Reform and a specialist in EU law. “The EU claims there won’t be returns en masse but if you are not able to process people in a regulated fashion, how else are they going to deal with this?”

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Jan 312016
 
 January 31, 2016  Posted by at 10:07 am Finance Tagged with: , , , , , , , , , ,  2 Responses »
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Edwin Rosskam Shoeshine, 47th Street, Chicago’s main Negro business street 1941

A Chinese Banker Explains Why There Is No Way Out (ZH)
China GDP Growth 4.3%, Or Lower, Chinese Professor Says (WSJ)
Yuan Vs. Yen: How China Figures Into Japan’s Negative Rates (WSJ)
IPO Market Comes to a Standstill (WSJ)
Greece’s Lenders To Start Bailout Review On Monday (Reuters)
Milk Collapse Brings a 45% Pay Cut to England’s Dairy Farmers (BBG)
‘Peak Stuff’ And The Search For Happiness (Guardian)
Merkel Says Refugees Must Return Home Once War Is Over (Reuters)
10,000 Refugee Children Are Missing, Says Europol (Observer)
Aegean Sea Refugee Crossings Rise 35 Fold Year-On-Year In January (Guardian)
Greeks Worry Threatened Closure Of EU Border ‘Definition Of Dystopia’ (Guar.)
Europe’s Immigration Bind: Morals vs Votes (Guardian)
39 Greece-Bound Refugees Drown Off Turkish Coast (AP)

“It’s not difficult to issue more loans, but let’s say in a years time when the loan is due, if the borrower defaults, then I won’t just see a pay cut, I’ll be fired, and still be responsible for loan recovery.”

A Chinese Banker Explains Why There Is No Way Out (ZH)

Friday’s adoption of NIRP by Japan, which send the US Dollar soaring, has only made any upcoming future Chinese devaluation even more likely. But whether China devalued or not, one thing is certain: it is next to impossible for China – under the current socio economic and financial regime – to stop the relentless growth in NPLs, which even by conservative estimates at in the trillion(s), accounting for at least 10% of China’s GDP. Sure enough, a cursory skimming of news from China reveals that even Chinese bankers now “admit the NPL situation is dire, but will keep on lending” anyway. As the Chiecon blog notes, NPL “ratios might be closer to 10%… supported by revelations in this article, where Chinese bankers complain of missing performance targets, spiraling bad loans, and end of year pay cuts.”

“Right now, we’ve nowhere to issue new loans” said Mr. Zhang, a general manager in charge of new loans at one of the listed commercial bank branches. Zhang believes NPL ratios have yet to peak, with SME loans the worst hit area. Ironically this has forced Zhang to direct lending back to the LGFVs, property developers and conglomerates, industries which the Chinese government had previously instructed banks to restrict lending to, based on oversupply and credit risk fears.

But the main reason why China is now trapped, and on one hand is desperate to stabilize its economy and stop growing its levereage at nosebleed levels, while on the other hand it is under pressure to issue more loans while at the same time it is unwilling to write off bad loans, can be found in the following very simple explanation offered by Mr. Zhou, a junior banker at a Chinese commercial bank.

“If I don’t issue more loans, then my salary isn’t enough to repay the mortgage, and car loan. It’s not difficult to issue more loans, but let’s say in a years time when the loan is due, if the borrower defaults, then I won’t just see a pay cut, I’ll be fired, and still be responsible for loan recovery.”

And that, in under 60 words, explains why China finds itself in a no way out situation, and why despite all its recurring posturing, all its promises for reform, all its bluster for deleveraging, China’s ruling elite will never be able to achieve an internal devaluation, and why despite its recurring threats to crush, gut and destroy all the evil Yuan shorts, ultimately it will have no choice but to pursue an external devaluation of its economy by way of devaluing its currency presumably some time before its foreign reserves run out (which at a $185 billion a month burn rate may not last for even one year). However, before it does, it will make sure that it also crushes every Yuan short, doing precisely what the Fed has done with equity shorts in the US over the past 7 years.

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While still ‘assuming the official agriculture and service sector growth figures are correct’.

China GDP Growth 4.3%, Or Lower, Chinese Professor Says (WSJ)

As growth in the world’s second-largest economy slows, the spotlight has intensified over the accuracy of China’s growth figures. This week, Xu Dianqing, an economics professor at Beijing Normal University and the University of Western Ontario, joined the debate with an estimate that China’s GDP growth rate might just be between 4.3% and 5.2%. China’s official growth rate in 2015 was 6.9%, the slowest pace in more than two decades, allowing the government to hit its target of around 7%. But longstanding questions over China’s statistical methodology have spurred a cottage industry in alternate growth indicators. Many of these analyze other measures believed to be less subject to political pressure in estimating actual growth, including indices compiled by economists at Capital Economics, Barclays Bank, the Conference Board and Oxford Economics.

Most peg China’s annual growth in the 4% to 6% range. Mr. Xu told reporters at a briefing this week that the focus of his concern is the growth rate for China’s manufacturing sector, which according to official figures grew 6.0% last year and accounts for 40.5% of the economy. A closer look at underlying indicators, however, including thermal power generation, railway freight volume, and output from the iron ore, plate glass, cement and steel industries released monthly by the National Bureau of Statistics paint a different picture, he said. Of some 60 major industrial products, nearly half saw output contract in the January to November period, while railway cargo volume fell 11.9% for all of last year, according to official sources.

Given weaker industrial output in China and more than three years of industrial deflation, a 6% expansion for manufacturing in 2015 is questionable “no matter how the number is counted,” said Mr. Xu, who added that he believes it’s more probable that industry and construction grew at most by 2% last year and perhaps not at all. That translates into economic growth that tops out at 5.2% last year and perhaps something in the 4s, assuming the official agriculture and service sector growth figures are correct, he said. Mr. Xu said it’s unlikely that the service sector– sometimes cited as an explanation for growth rate discrepancies – did better than reported by authorities.

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Twins.

Yuan Vs. Yen: How China Figures Into Japan’s Negative Rates (WSJ)

Japan’s move to negative interest rates is the latest step in a dangerous dance between the world’s second and third largest economies. The problem is currencies. China’s moves to bring down the value of the yuan have rattled markets this year, sparking a flight from risky assets that has sent investors into safer havens like the yen. The stronger yen in turn has threatened to tip Japan’s economy back into deflation, which the central bank has struggled to vanquish. The rising yen has also put more pressure on corporate profits and helped push Japanese stocks into bear market territory last week. So when the Bank of Japan announced its plan to lower interest rates below zero for the first time Friday, it makes sense that Governor Haruhiko Kuroda named just one country among the risks facing its economy China.

Now it’s China s turn to sweat. The yen fell as much as 2.1% after the announcement, which will make Chinese exports more expensive relative to Japanese products. The two countries, and most of their neighbors, are struggling against a tide of money outflows and weak trade. While governments in the rest of Asia have far more room to stimulate their economies than Japan does, a decline in the yen could spur them to try to push down their own currencies. Were China to follow and the central bank has already allowed the yuan to fall it would ignite another round of fear, which could push up the yen and force the Bank of Japan to act again. So far, the yen’s ups and downs have left it about where it was a year ago, so the risk of a cycle of competitive devaluation is limited.

In addition, the drop in the yen would have been a bigger problem for China when the yuan was pegged to the dollar. The government’s recent switch to a basket of currencies that includes the yen means the move up won’t be as big. But it still will push the currency in the wrong direction for the slowing economy. There’s another reason China does’ t want the yen to fall. Right now, thousands of Chinese are planning their Lunar New Year’s holidays in Japan early next month, hoping to take advantage of the cheap yen. During the October Golden Week, China’s other big travel week of the year, Chinese tourists descended on Japan, spending more than $830 million on shopping, according to the state-run China Daily.

China is suffering an epic capital flight in which hundreds of billions of dollars are leaving the country. A weaker yen will send more Chinese into Tokyo’s department stores and further drain China’s currency reserves. The economic fates of China and Japan are closely connected. Until their economies get on stronger footing, moves to boost growth in one country could hurt the other and risk retaliation. As the world economy stays weak, the interaction between China and Japan could play an increasingly important role both in Asia and globally.

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Zero.

IPO Market Comes to a Standstill (WSJ)

A frigid January for initial public offerings is pointing to a hard winter for fledgling biotechnology firms and other private companies. There were no U.S. IPOs in January, the first such month since the eurozone crisis in September 2011, according to data provider Dealogic. Investors and analysts attribute the dearth to the global stock-market rout of the first two weeks of the year, which signaled a broad retreat from risk by investors. If sustained, the reversal threatens to send ripples through global financial markets. Many analysts and traders view a healthy IPO sector as a necessary precondition for a sustainable advance in the broad stock indexes, as dozens of private companies have built their plans around raising cash in the public markets.

In recent years, markets were “wide open and companies that wanted to raise capital could,” said Eddie Yoon, portfolio manager of the Fidelity Select Health Care Portfolio, with $9 billion in assets. But now some companies, both public and private, could face being shut out for an extended period, as many investors seek to reduce risk by focusing on firms with histories of steady profitability and revenue growth. Several new share offerings by already-public biotech companies have floundered this year, not only pricing at steep discounts, but also falling even further the session after pricing. So far this year, new-share offerings by biotech companies have dropped 15% from the time of the announcement of the deal to the end of trading after the sale, according to data from Dealogic. “If the market does reopen, it will be for higher quality companies,” said Mr. Yoon.

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France wants debt relief?!

Greece’s Lenders To Start Bailout Review On Monday (Reuters)

Greece’s official lenders will start a review on Monday of what progress the country has made in implementing the economic reforms agreed under its third bailout, a necessary step towards debt relief talks, a finance ministry official said on Saturday. Greece’s international lenders are the IMF and the euro zone bailout fund. The reforms that Greece has to implement in exchange for loans are also reviewed by the ECB and the European Commission. “The first phase will last a few days as there will be a break at the end of next week, after which the institutions will return to conclude the negotiations,” the official said, declining to be named. Athens is keen for a speedy completion of the review, which was expected to begin late last year, and hopes a positive outcome will help boost economic confidence and liquidity.

To secure a positive result from the review Athens needs to pass legislation on pension reforms to render its social security system viable, set up a new privatization fund and come up with measures to attain primary budget surpluses for 2016-2018. A successful conclusion of the performance review will open the way for debt relief talks. The head of the bailout fund, the European Stability Mechanism (ESM), has ruled out a haircut for Greece’s debt but extending debt maturities and deferring interest are options that could be used to make it more manageable. French Finance Minister Michel Sapin told Kathimerini debt relief talks must start soon to help restore Greece’s financial stability. “France’s view is that the sooner the first review is completed, the faster we will be able to tackle the issue of debt sustainability and this will be better for everyone – for Greece as well as the entire euro zone,” Sapin told the paper.

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Stories from NZ have been bad for a while now.

Milk Collapse Brings a 45% Pay Cut to England’s Dairy Farmers (BBG)

England’s dairy farmers will see income fall by almost half this year, evidence that the global milk crisis is far from over. Earnings will average 46,500 pounds ($66,500) per farm in England for the 2015-16 season that started in March, the Department for Environment, Food & Rural Affairs said in a report Thursday. That figure, which includes European Union aid payments, is 45 percent below the prior season and the lowest in 9 years. Dairy farmers across Europe are struggling with a collapse in prices after a global oversupply of milk was compounded by slowing demand in China and Russia’s ban on EU dairy in retaliation for sanctions.

Protests over low prices broke out in France this week as more than 100 farmers, many of them livestock breeders, blocked roads and used tractors and burning tires to stop access to the port city La Rochelle. “There’s too much milk in the world,” said Robbie Turner, head of European markets at Rice Dairy International, a risk management advisory firm in London. “There are people who are hard for cash,” and prices are likely to remain low for at least the next six months, he said. On Thursday, Fonterra, the world’s largest dairy exporter, cut its milk price forecast to a nine-year low. The Auckland-based company doesn’t expect a sharp recovery in Chinese demand any time soon.

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Luckily we’re maxed out.

‘Peak Stuff’ And The Search For Happiness (Guardian)

On Monday, Walmart will start paying a minimum of $10 an hour to its 1.4 million skilled staff in America – in conventional economists’ terms, a ludicrous and unnecessary transfer of income from capital to labour. But, facing the same retail environment as Apple and Ikea, Walmart wants to motivate its frontline staff into being more engaged and innovative. Consumers want some help in understanding and interpreting their particularities, help in answering the question of what, in a profound sense, their spending is for. When you have enough, what need is being served by having more?

Economists are not equipped to address such phenomena. Faltering growth in consumer demand in all western countries is understood wholly in traditional economic terms: the story is that consumers are indebted and uncertain, they lack confidence and want to rebuild their savings. Rightwing, anti-state economists, so influential in the Republican and Conservative parties, peddle tax cuts as the universal panacea. Like Pavlov’s dog, consumers will flock back to the shops once they are emboldened by a tax cut. Obviously, there would be some increase in spending, but far less than there used to be. More fundamental forces are holding back spending .

There is a quest for meaning, aided and abetted by the knowledge and information revolutions, that is not answered by traditionally scale-produced goods and services. Economist Tomas Sedlacek, who has won an international following for his book Economics of Good and Evil, insists that contemporary societies have become slaves to a defunct economistic view of the world. When western societies were poorer, it was reasonable for economics to focus on how to produce more stuff – that was what societies wanted. Now, the question is Aristotelian: how to live a happy life – or “humanomics”, as Sedlacek calls it. Aristotle was clear: happiness results from deploying our human intelligence to act creatively on nature. To inquire and successfully to quest for understanding is the root of happiness.

Yet most people today, says Sedlacek, work in jobs they do not much like, to buy goods they do not much value – the opposite of any idea of the good life, Aristotelian or otherwise. What we want is purpose and a sense of continual self-betterment, which is not served by buying another iPhone, wardrobe or a kitchen. Yet purpose and betterment need a social context: purpose is a shared endeavour and self-betterment is to act on the world better with others. An individualistic society such as our own makes it much harder to find others with whom to make common cause.

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Well, stop the war then.

Merkel Says Refugees Must Return Home Once War Is Over (Reuters)

German Chancellor Angela Merkel tried on Saturday to placate the increasingly vocal critics of her open-door policy for refugees by insisting that most refugees from Syria and Iraq would go home once the conflicts there had ended. Despite appearing increasingly isolated, Merkel has resisted pressure from some conservatives to cap the influx of refugees, or to close Germany’s borders. Support for her conservative bloc has slipped as concerns mount about how Germany will integrate the 1.1 million migrants who arrived last year, while crime and security are also in the spotlight after a wave of assaults on women in Cologne at New Year by men of north African and Arab appearance.

The influx has played into the hands of the right-wing Alternative for Germany (AfD), whose support is now in the double digits, and whose leader was quoted on Saturday saying that migrants entering illegally should, if necessary, be shot. Merkel said it was important to stress that most refugees had only been allowed to stay for a limited period. “We need … to say to people that this is a temporary residential status and we expect that, once there is peace in Syria again, once IS has been defeated in Iraq, that you go back to your home country with the knowledge that you have gained,” she told a regional meeting of her Christian Democratic Union (CDU) in the state of Mecklenburg-Western Pomerania.

Merkel said 70 percent of the refugees who fled to Germany from former Yugoslavia in the 1990s had returned. Horst Seehofer, leader of the Christian Social Union (CSU), the CDU’s Bavarian sister party, has threatened to take the government to court if the flow of asylum seekers is not cut. Merkel urged other European countries to offer more help “because the numbers need to be reduced even further and must not start to rise again, especially in spring”. Fabrice Leggeri, the head of the European Union’s border agency Frontex, said a U.N. estimate that up to a million migrants could try to come to Europe via the eastern Mediterranean and Western Balkans next year was realistic. “It would be a big achievement if we could keep the number … stable,” he told the magazine Der Spiegel.

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Europe doesn’t care for kids.

10,000 Refugee Children Are Missing, Says Europol (Observer)

At least 10,000 unaccompanied child refugees have disappeared after arriving in Europe, according to the EU’s criminal intelligence agency. Many are feared to have fallen into the hands of organised trafficking syndicates. In the first attempt by law enforcement agencies to quantify one of the most worrying aspects of the migrant crisis, Europol’s chief of staff told the Observer that thousands of vulnerable minors had vanished after registering with state authorities. Brian Donald said 5,000 children had disappeared in Italy alone, while another 1,000 were unaccounted for in Sweden. He warned that a sophisticated pan-European “criminal infrastructure” was now targeting refugees.

“It’s not unreasonable to say that we’re looking at 10,000-plus children. Not all of them will be criminally exploited; some might have been passed on to family members. We just don’t know where they are, what they’re doing or whom they are with.” The plight of unaccompanied child refugees has emerged as one of the most pressing issues in the migrant crisis. Last week it was announced that Britain would accept more unaccompanied minors from Syria and other conflict zones. According to Save the Children, an estimated 26,000 unaccompanied children entered Europe last year. Europol, which has a 900-strong force of intelligence analysts and police liaison officers, believes 27% of the million arrivals in Europe last year were minors.

“Whether they are registered or not, we’re talking about 270,000 children. Not all of those are unaccompanied, but we also have evidence that a large proportion might be,” said Donald, indicating that the 10,000 figure is likely to be a conservative estimate of the actual number of unaccompanied minors who have disappeared since entering Europe. In October, officials in Trelleborg, southern Sweden, revealed that some 1,000 unaccompanied refugee children who had arrived in the port town over the previous month had gone missing. On Tuesday a separate report, again from Sweden, warned that many unaccompanied refugees vanished and that there was “very little information about what happens after the disappearance”.

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But they think they can stop it.

Aegean Sea Refugee Crossings Rise 35 Fold Year-On-Year In January (Guardian)

More than 52,000 refugees and migrants crossed the eastern Mediterranean to reach Europe in the first four weeks of January, more than 35 times as many as attempted the crossing in the same period last year. The daily average number of people making the crossing is nearly equivalent to the total number for the whole month of January as recently as two years ago, according to the International Organisation for Migration. More than 250 people have died attempting to make the crossing this month, including at least 39 who drowned in the Aegean Sea on Saturday morning after their boat capsized between Turkey and Greece. Turkish coastguards rescued 75 others from the sea near the resort of Ayvacik on Saturday, according to the Anadolou news agency.

They had been trying to reach the Greek island of Lesbos. The eastern route into Europe, via Greece, has overtaken the previously popular central Mediterranean route from north Africa over the past year. Refugees have continued to use the route all winter, despite rough seas and strong winds. “An estimated 52,055 migrants and refugees have arrived in the Greek islands since the beginning of the year,” the IOM said. “This is close to the total recorded in the relatively safe month of July 2015, when warm weather and calm seas allowed 54,899 to make the journey.” Turkey, which is hosting at least 2.5 million refugees from the civil war in neighbouring Syria, has become the main launchpad for migrants fleeing war, persecution and poverty.

Ankara struck a deal with the EU in November to halt the flow of refugees, in return for €3bn (£2.3bn) in financial assistance to help improve the refugees’ conditions. This week the IOM reported that a survey of migrants and refugees arriving in Greece showed 90% were from Syria, Iraq or Afghanistan. People of those nationalities are allowed to leave Greece and enter Macedonia en route to western Europe as asylum seekers. But on Wednesday the Idomeni border crossing from Greece to Macedonia remained closed from midday to midnight. Macedonian officials blamed congestion at the border with Serbia.

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“Why is Greece guilty? Because it doesn’t let them drown?”

Greeks Worry Threatened Closure Of EU Border ‘Definition Of Dystopia’ (Guar.)

With Brussels contemplating drastic measures to stem the flow, calls are mounting to seal the Greek-Macedonian border, raising fears of hundreds of thousands being stranded in Greece, the country now perceived to be the continent’s weakest link. The prospect of migrants being trapped in a member state that financially is also Europe’s most fragile may once have seemed extreme, even absurd. Its economy ravaged by six years of internationally mandated austerity and record levels of unemployment, Greece’s coping strategies are markedly strained. But as EU policymakers seek ever more desperate ways to deal with what has become the largest mass movement of people since the second world war, it is an action plan being actively worked on by mandarins at the highest level.

Like so much else in the great existential crisis facing Europe, a proposed policy that was once seen as bizarre now looks like it could become real. Last week Athens was also given a three-month ultimatum to improve the way it processes arrivals and polices its borders – at nearly 8,700 miles the longest in Europe – or face suspension from the passport-free Schengen zone. Closure of the Greek-Macedonian frontier would effectively cut it out of that fraternity. Those who have watched Greece’s rollercoaster struggle to keep insolvency at bay are united in their conviction that the move would be catastrophic. “It would place a timebomb under the foundations of Greece,” says Aliki Mouriki at the National Centre of Social Research. “Hundreds of thousands of refugees trapped in a country that is bankrupt, that has serious administrative and organisational weaknesses, with a state that is unable to provide for their basic needs?”

The question hangs in the air while she searches for the right word. “What we would witness,” she adds, “would be the definition of dystopia.” Like the mayors who have been forced to deal with the emergency on Greece’s eastern Aegean isles, federal politicians believe Turkey is the root of the problem. “With all due respect for a country that is hosting 2 million refugees, it is Turkey that must do something to stop the organised crime, the smugglers working along its coast,” Yannis Mouzalas, the minister for migration policy, told the Observer. “These flows are not Greece’s fault even if, it is true, we have been slow to set up hotspots and screening was not always what it should have been,” he said. “It is Turkey that turns a blind eye to them coming here. It is Turkey that must stop them. Why is Greece guilty? Because it doesn’t let them drown?”

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Morals? Europe?

Europe’s Immigration Bind: Morals vs Votes (Guardian)

The dream of free movement within the EU has also spawned paranoia about the movement of people into the EU. The quid pro quo for Schengen has been the creation of a Fortress Europe, a citadel against immigration, watched over by a hi-tech surveillance system of satellites and drones and protected by fences and warships. When a journalist from Germany’s Der Spiegel magazine visited the control room of Frontex, the EU’s border agency, he observed that the language used was that of “defending Europe against an enemy”. Many of the policies enacted over the past year give a sense of a continent at war. In June, an emergency EU meeting came up with a 10-point plan that included the use of military force “to capture and destroy” the boats used to smuggle migrants.

Soon afterwards, Hungary and other east European countries began erecting razor-wire fences. Germany, Austria, France, Sweden and Denmark suspended Schengen rules and reintroduced border controls. In November, the EU struck a deal with Turkey, promising it up to $3.3bn in return for clamping down on its borders. This month, Denmark passed a law allowing it to seize valuables from asylum seekers to pay for their upkeep. Despite the sense that the crisis is unprecedented, there is nothing new in it or the incoherence of the EU’s response. People have been trying to enter the EU, and dying in the attempt, for a quarter of a century and more.

Until 1991, Spain had an open border with North Africa. Migrant workers would come to Spain for seasonal work and then return home. In 1986, the newly democratic Spain joined the EU. As part of its obligations as a EU member, it had to close its North African borders. Four years after it did, it was admitted into the Schengen group. The closing of the borders did not stop migrant workers trying to enter Spain. Instead, they took to small boats to cross the Mediterranean. On 19 May 1991, the first bodies of clandestine migrants were washed ashore. Since then, it is estimated that more than 20,000 people have perished in the Mediterranean while trying to enter Europe.

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Every day.

39 Greece-Bound Refugees Drown Off Turkish Coast (AP)

Turkey’s state-run news agency says at least 39 people, including five children, have drowned in the Aegean Sea after their Greece-bound boat capsized off the Turkish coast. Anadolu Agency says coast guards rescued 75 others from the sea Saturday near the resort of Ayvacik en route to the Greek island of Lesbos. The agency has identified the survivors as natives of Afghanistan, Syria and Myanmar. The International Organization for Migration says 218 people have died this year while trying to cross by sea from Turkey to Greece. Turkey is hosting an estimated 2.5 million refugees from Syria. In November, Turkey agreed to fight smuggling networks and stem the flow of migrants into Europe. In return, the EU has pledged €3 billion to help improve the refugees’ conditions.

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Jan 192016
 
 January 19, 2016  Posted by at 9:33 am Finance Tagged with: , , , , , , , , ,  4 Responses »
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Ann Rosener Reconditioning spark plugs, Melrose Park Buick plant, Chicago 1942

China GDP at 25-Year Low, Long Slog Increases the Pain (WSJ)
China Stocks Surge As GDP Triggers Expectations Of Beijing Stimulus (MW)
The Case for Chaos in Trying to Pick Bottom of US Equity Rout (BBG)
Big US Banks Brace For Oil Loans To Implode (CNN)
The Fed Responds To Zero Hedge: Here Are Some Follow Up Questions (ZH)
The North Dakota Crude Oil That’s Worth Less Than Nothing (BBG)
China’s Hot Bond Market Seen at Risk of Default Chain Reaction (BBG)
Chinese Shipyards See New Orders Fall by Almost Half in 2015 (BBG)
World’s Biggest Steel Industry Shrinks for First Time Since 1991 (BBG)
Strong China Property Data Masks Big Problem of Unsold Homes (Reuters)
Japan Makes Plans for Pension Fund to Invest in Stocks (WSJ)
Italy Banks Lose $82 Billion of Cheap Financing From Savers (BBG)
Italy PM Renzi Sharpens His Rhetorical Barbs At EU (FT)
Hollande Says France In State Of Economic, Social Emergency (BBC)
Russia Considers Suspending Loans to Other Countries (Moscow Times)
Worse Than 1860 (Jim Kunstler)
End Of Europe? Berlin, Brussels’ Shock Tactic On Migrants (Reuters)
UN Seeks Mass Resettlement Of Syrians (AP)
Davos Boss Warns Refugee Crisis Could Become Something Much Bigger (BBG)
German Minister Urges Merkel To Prepare To Close Borders (Reuters)

Kudo’s to the WSJ for a bit of reflection. Just about all other outlets I’ve seen, parade analysts opining in hollow phrases.

China GDP at 25-Year Low, Long Slog Increases the Pain (WSJ)

Whether or not one believes China’s GDP data, the news is depressing. There was little in the fourth quarter to indicate that gobs of monetary and fiscal easing are doing anything but cushioning the economy through an increasingly painful slog. China’s headline GDP grew 6.8% in the fourth quarter. But in nominal terms, it grew just under 6%, the slowest since last century. With debt in the economy still growing at twice that rate, this implies that a huge amount of new lending is going nowhere but to pay off old loans, not to stimulate the economy. It’s a vicious cycle that will be hard for China to escape. The reason nominal GDP was lower than headline GDP—it’s usually the other way around—was a negative price deflator, indicating overall deflation.

It was the third time in four quarters that China’s deflator has been negative, giving the headline number a boost. Some suspect that China is monkeying with the deflator; the larger it is, the more it improves the headline figure. Nor is the deflator the only figure that private economists suspect is distorting the GDP series. Oxford Economics points to industrial-output numbers that it calls overly optimistic. Adjusting for that, it said China’s GDP grew 6.1% in the fourth quarter. Capital Economics, using various proxy indicators, puts growth at 4.5%. Other indicators support the dour outlook. Industrial-production growth slowed to 5.9% in December from 6.2% in November. Services sustained the party, up 8.2% from a year earlier in the fourth quarter.

But even that is a slowdown from the previous two quarters, a sign of how much the stock-market crash and volatility in the financial-services industry are undermining the idea that China can seamlessly shift the economy from industrial output to services. The poor end to the year is especially depressing in light of the stimulus pumped into the economy over the past six months. How much worse would its performance have been without a sharp ramp-up in government spending, low interbank rates and multiple cuts in interest rates and reserve requirements? For investors who are spooked whenever China’s currency and stock markets plunge, the data are hardly reassuring. And the increasing outflows of yuan from the economy suggest locals are nervous, too.

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When bad news gets so awful it must lead to something good. Something like that.

China Stocks Surge As GDP Triggers Expectations Of Beijing Stimulus (MW)

China shares turned higher Tuesday, as investors weighed the likelihood of further stimulus from Beijing following data that the economy grew at its slowest pace in a quarter of a century. The Shanghai Composite Index traded up 2.8%, after flitting near the flat line and Australia’s S&P/ASX climbed 0.9%. Japan’s Nikkei closed up by 0.6% and South Korea’s Kospi rose 0.6%. The region’s markets were reacting to the latest batch of data from the world’s second largest economy. Growth slowed to 6.9% in 2015, compared to 7.3% in 2014. China also expanded by an annualized 6.8% during the fourth quarter alone, shy of 6.9% expected by economists surveyed by The Wall Street Journal. “It does suggest that more stimulus [from authorities] may be needed to push forth the pace of expansion,” said Niv Dagan at Peak Asset Management.

“Investors are happy to take a backward step and increase their cash weighting until things stabilize.” Investors have been reluctant to buy up the region’s shares, remaining nervous about how Chinese authorities will guide their markets and lower oil prices. Doubts linger about the ability of China’s central bank to curb yuan speculation, which was the initial trigger for selling in markets worldwide earlier this year. China’s Shanghai Composite Index, which has fallen nearly 17% this year, has dragged markets in Japan and Australia near bear market territory, defined as a 20% fall or more from a recent high. Efforts by authorities to talk up the underlying health of the Chinese economy this weekend may have helped calm some fears among investors and encouraged them to return to markets, said Angus Nicholson at IG. “Chinese markets have already suffered such a dramatic correction this year that I think some of these official assurances have helped bring a few buyers back to the table,” he said.

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It has legs.

The Case for Chaos in Trying to Pick Bottom of U.S. Equity Rout (BBG)

In a market bouncing up and down 2% a day, investor psychology is taking a beating in U.S. stocks. But nerves may need to fray further before the volatility abates. For all of last week’s twists, measures of investor anxiety sit well below levels from the last selloff, when shares plunged 11% in August. Twice last week the Chicago Board Options Exchange Volatility Index jumped more than 10% in a day, yet it ended 34% below its summer high. To those who monitor sentiment for clues to the market’s direction, these aren’t things that add up to capitulation, when bulls give up and prices fall to levels where calm is restored. While last week’s losses capped an 8% tumble that equaled the worst start to a year on record, they see enough optimism left to keep gyrations coming. “Wholesale panic” is what’s needed before the market turns, according to Scott Minerd at Guggenheim Partners.

“You start to see a huge surge in volatility because everybody is just trying to get through the exits, and they’re pushing prices down just to get out of the positions.” Ten days into 2016 and more than $2 trillion has been wiped from American stocks, with the Standard & Poor’s 500 Index careening to the lowest close since August. Alternating swings in the Dow Jones Industrial Average over the last three days were the wildest since S&P stripped the U.S. of its AAA credit rating in 2011. The Chicago Board Options Exchange Volatility Index, a gauge of trader trepidation tied to options on the S&P 500, ended the week at 27.02, more than 60% above its average level in 2015. At the same time, it sits 12% below its mean reading during the six-day rout that started Aug. 18 – and 34% below its highest close in that stretch.

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In comes the Dallas Fed.

Big US Banks Brace For Oil Loans To Implode (CNN)

Firms on Wall Street helped bankroll America’s energy boom, financing very expensive drilling projects that ended up flooding the world with oil. Now that the oil glut has caused prices to crash below $30 a barrel, turmoil is rippling through the energy industry and souring many of those loans. Dozens of oil companies have gone bankrupt and the ones that haven’t are feeling enough financial stress to slash spending and cut tens of thousands of jobs. Three of America’s biggest banks warned last week that oil prices will continue to create headaches on Wall Street – especially if doomsday scenarios of $20 or even $10 oil play out. For instance, Wells Fargo is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.”

JPMorgan is setting aside an extra $124 million to cover potential losses in its oil and gas loans. It warned that figure could rise to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months. “The biggest area of stress” is the oil and gas space, Marianne Lake, JPMorgan’s chief financial officer, told analysts during a call on Thursday. “As the outlook for oil has weakened, we would expect to see some additional reserve build in 2016.” Citigroup built up loan loss reserves in the energy space by $300 million. The bank said the move reflects its view that “oil prices are likely to remain low for a longer period of time.” If oil stays around $30 a barrel, Citi is bracing for about $600 million of energy credit losses in the first half of 2016. Citi said that figure could double to $1.2 billion if oil dropped to $25 a barrel and stayed there.

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Interesting to see where this goes now that Kaplan has opened the door.

The Fed Responds To Zero Hedge: Here Are Some Follow Up Questions (ZH)

Over the weekend, we gave the Dallas Fed a chance to respond to a Zero Hedge story corroborated by at least two independent sources, in which we reported that Federal Reserve members had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances. Moments ago the Dallas Fed, whose president since September 2015 is Robert Steven Kaplan, a former Goldman Sachs career banker who after 22 years at the bank rose to the rank of vice chairman of its investment bank group – an odd background for a regional Fed president – took the time away from its holiday schedule to respond to Zero Hedge. This is what it said.

We thank the Dallas Fad for their prompt attention to this important matter. After all, as one of our sources commented, “If revolvers are not being marked anymore, then it’s basically early days of subprime when mbs payback schedules started to fall behind.” Surely there is nothing that can grab the public’s attention more than a rerun of the mortgage crisis, especially if confirmed by the highest institution. As such we understand the Dallas Fed’s desire to avoid a public reaction and preserve semantic neutrality by refuting “such guidance.” That said, we fully stand by our story, and now that we have engaged the Dallas Fed we would like to ask several very important follow up questions, to probe deeper into a matter that is of significant public interest as well as to clear up any potential confusion as to just what “guidance” the Fed is referring to.

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The world beyond spot prices. Still, a tad sensationalist.

The North Dakota Crude Oil That’s Worth Less Than Nothing (BBG)

Oil is so plentiful and cheap in the U.S. that at least one buyer says it would need to be paid to take a certain type of low-quality crude. Flint Hills Resources, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it would pay -$0.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a list price posted on its website. That’s down from $13.50 a barrel a year ago and $47.60 in January 2014. While the negative price is due to the lack of pipeline capacity for a particular variety of ultra low quality crude, it underscores how dire things are in the U.S. oil patch. U.S. benchmark oil prices have collapsed more than 70% in the past 18 months and West Texas Intermediate for February delivery fell as low as $28.36 a barrel on the New York Mercantile Exchange on Monday, the least in intraday trade since October 2003.

“Telling producers that they have to pay you to take away their oil certainly gives the producers a whole bunch of incentive to shut in their wells,” said Andy Lipow, president of Lipow Oil in Houston. Flint Hills spokesman Jake Reint didn’t respond to a phone call and e-mail outside of work hours on Sunday to comment on the bulletin. The prices posted by Flint Hills Resources and rivals such as Plains All American Pipeline are used as benchmarks, setting reference prices for dozens of different crudes produced in the U.S. Plains All American quoted two other varieties of American low quality crude at very low prices: South Texas Sour at $13.25 a barrel and Oklahoma Sour at $13.50 a barrel. High-sulfur crude in North Dakota is a small portion of the state’s production, with less than 15,000 barrels a day coming out of the ground, said John Auers at Turner Mason in Dallas. The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 million barrels a day in the past 10 years.

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China 2016: Stock losses prompt money to flee into bonds and real estate. But for all the wrong reasons.

China’s Hot Bond Market Seen at Risk of Default Chain Reaction (BBG)

China’s bond investors are raking it in as an equity rout scatters cash into fixed-income securities. But concerns are rising that spreading defaults and a sliding yuan will spark a selloff. Credit derivatives that are seen as a gauge of risk in the market have spiked 22 basis points since Dec. 31, the worst start to a year in data going back to 2008. The number of listed firms with debt double equity has jumped to 339 amid a weakening economy, from 185 in 2007. Traders surveyed by Bloomberg in December said note failures will spread. “2016 is a year when we will see systemic risks emerge in China’s credit market,” said Ji Weijie, credit analyst in Beijing at China Securities Co., the top arranger of bond offerings from state-owned and listed firms.

“There may be a chain reaction as more companies are likely to fail in a slowing economy and related firms could go down too.” The 18% tumble in China’s benchmark stock gauge this year has so far buoyed bonds, cutting yield premiums on local securities to record lows and on dollar debentures from the nation to the least in eight years. A reversal may be coming as the yuan’s slide spurs capital outflows that have forced the central bank to inject liquidity to hold down borrowing costs, a task it can’t manage indefinitely, according to First State Cinda. The weakest economic growth in a quarter century prompted onshore defaults to jump to at least seven in 2015 even as Premier Li Keqiang vowed to limit failures. Hua Chuang Securities said investors should avoid buying notes for now as surging supply also adds to risks that the hot onshore market will cool.

Such concerns have yet to be reflected in prices. The extra yield on top-rated local corporate debentures due in five years over similar-maturity government notes dropped 3.4 basis points since the start of the year to 57.3 basis points, near a record low. The premium on dollar securities from China is at 274 basis points, near the least since 2007, a Bank of America Merrill Lynch index shows. “The Chinese government wants to maintain a low domestic borrowing rate to support growth by injecting liquidity into the system,” said Ben Sy, the head of fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co. in Hong Kong. “CDS, on the other hand, is a proxy for global investors’ sentiment toward China and it can be speculative in nature.”

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Steel can fall by half along with shipyards.

Chinese Shipyards See New Orders Fall by Almost Half in 2015 (BBG)

New orders received by Chinese shipbuilders fell by nearly half last year from 2014, suggesting more consolidation is in order as the country’s appetite for raw materials wanes and shipping rates languish at multiyear lows. Shipbuilders in China received new orders amounting to 31.3 million deadweight tons last year, a world-leading 34% share of the global market, the Ministry of Industry and Information Technology said Monday. Backlog orders fell 12% to 123 million deadweight tons, or 36% of global market share. Chinese shipbuilders have sought government support as excess vessel capacity depresses shipping rates, leading to contracts being canceled.

South Korean and Singaporean shipyards are also feeling the pain, compounded by a bribery scandal in Brazil that has further affected orders. China Rongsheng Heavy Industries, once the country’s largest private shipyard, exited the sector last year amid heavy losses and changed its name to China Huarong Energy to reflect its new business focus. In early January, Zhoushan Wuzhou Ship Repairing & Building became China’s first state-owned shipbuilder to go bankrupt in a decade. In a sign of ongoing restructuring in the sector, the 10 leading shipbuilders on the mainland accounted for 53% of total orders completed and 71% of new orders received in 2015, the ministry said.

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A big story for this year. The global steel glut is beyond proportions. Time for tariffs and protectionism.

World’s Biggest Steel Industry (China) Shrinks for First Time Since 1991 (BBG)

Steel output in the world’s largest producer posted the first annual contraction in a quarter century. Mills in China, which make half of global supply, churned out less last year for the first time since at least 1991 as local demand dropped, prices sank and producers struggled with overcapacity. Crude steel production shrank 2.3% to 803.83 million metric tons, the statistics bureau said Tuesday. December output fell 5.2% to 64.37 million tons from a year earlier. Demand is weakening as policy makers seek to steer the economy away from investment toward consumption-led growth. The economy expanded 6.9% last year, the slowest full-year pace since 1990, data showed. Steel output will probably drop 2.6% this year, weakening the outlook for iron ore as global miners increase shipments, Citigroup has estimated.

“This marks the start of declining steel output in China as the economy slows,” Xu Huimin, an analyst at Huatai Great Wall Futures in Shanghai, said. “We’re likely to see more output cuts this year, though the magnitude of declines will be quite similar to 2015. Supply cuts in a glut are a long-drawn process as mills seek to maintain market share.” Crude-steel output in China surged more than 12-fold between 1990 and 2014, and the increase is emblematic of the country’s emergence as the world’s second-largest economy. Demand soared as policy makers built out infrastructure, shifted millions of people into cities and promoted consumption of autos and appliances.

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“Shanghai, up a healthy 15.5%..” Pray tell what’s healthy about that.

Strong China Property Data Masks Big Problem of Unsold Homes (Reuters)

For an economy facing its slowest economic growth in a quarter century, a 7.7% year-on-year rise in new home prices in December would seem to offer China some light at the end of the tunnel. But the headline number, published by the National Bureau of Statistics on Monday, masks China’s massive property problem – a vast amount of unsold apartments mainly in its smaller cities. Property prices were rising fast in mega cities like southern Shenzhen, where prices rocketed by nearly 47%, Shanghai, up a healthy 15.5%, and Beijing, which posted a respectable 8% gain over a year ago. But the recovery that began in October, after 13 months of straight decline, has only spread to just over half the 70 cities captured by official data, leaving others languishing far behind.

Wang Jianlin, China’s richest man and chairman of property and entertainment conglomerate Dalian Wanda Group, said on Monday that it could take four to five years for the market to digest the inventory in tier three and four cities. China has some 13 million homes vacant – enough to house the families of several small countries – and whittling down the excess is among Chinese policymakers top priorities for 2016. Dalian Wanda expects a significant decline in real estate income as it diversifies its business away from property. But, planning an initial public offering, Wang reckoned the market would manage so long as authorities took a gradual approach to the inventory issue. “Sales are highly concentrated in first- and second-tier cities, where 36 top cities account for three-quarters of the total sales value. So the portion from third- and fourth-tier cities is very low. As long as they destock slowly, there is no problem,” he told the Asia Financial Forum in Hong Kong.

Meantime, Wang said property investment in China’s first tier cities was the most risky due to high land costs, and his firm’s real estate focus is largely on the commercial sector in the lower-tier cities. Still, analysts reckon it will take a lot longer before the price recovery translates into growth in property investment that can help the overall economy regain momentum. “Property investment is expected to see a single-digit decline this year despite recovering home prices, so it will continue to weigh on GDP,” said Liao Qun, China chief economist at Citic Bank International in Hong Kong. That will hardly dull the pain for investors worried by a depreciation in the yuan currency and crumbling stock markets since the start of the year.

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Imagine that were your pension money. Invested in a market that is grossly overvalued. Abe is a madman.

Japan Makes Plans for Pension Fund to Invest in Stocks (WSJ)

Japan’s government is preparing legislation that would allow its $1.1 trillion public pension reserve fund to directly buy and sell stocks, a plan that is sparking divisions over the state fund’s role in private markets. The Government Pension Investment Fund currently entrusts its stock-investment money to outside managers. The welfare ministry plans to present a plan for direct investment to parliament this spring, though legislation might take until later in the year to pass, say politicians and government officials. The change would mark another step in the GPIF’s transformation from a conservative investor into one that resembles other global pension and sovereign-wealth funds. Prime Minister Shinzo Abe has encouraged the shift to reinvigorate Japan’s financial markets and improve corporate governance.

“GPIF could contribute more to Japan’s economy by constructively interacting not only with money managers, but also with corporations,” said GPIF chief investment officer Hiromichi Mizuno. “As Japan’s biggest asset owner, we can jump start a positive chain reaction of better governance between businesses and investors.” The plan has raised concerns among some business leaders and politicians who say the giant fund could distort markets with its stock picks or act as a tool for politicians to exert influence over companies. “I am most worried about political intervention,” said Keio Business School associate professor Seki Obata, who previously served on the GPIF’s investment advisory committee.

“In theory, I’m in support of in-house stock investing, but Japan is still the most immature country and society in terms of asset-management issues.” The Abe administration has already been criticized for using the GPIF to influence financial markets. In 2014, the fund said it was nearly doubling its allocation to equities, which some investors criticized as a “price-keeping operation”—an attempt to pump up the stock market. Criticism started again after the fund posted an ¥8 trillion loss in the third quarter of 2015, and further losses are likely in the current quarter if Japanese stocks continue their current slide. The Nikkei Stock Average has fallen more than 10% since the beginning of the year and fell 1.1% Monday.

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Turning to junk. Shorting Banco Dei Paschi has already been banned.

Italy Banks Lose $82 Billion of Cheap Financing From Savers (BBG)

Italian savers ditched €75 billion of bank bonds in the year ended September, further depriving lenders of a cheap source of funding. Retail holdings of the notes tumbled 27% in the period to €200 billion, extending declines since 2012, based on Bank of Italy data released on Monday. There was a €5 billion drop in the three months ended September, marking a slowdown from previous quarters. Savers are shunning bank bonds as losses at four small lenders in November have made more people aware that the investments are risky. The cash drain has contributed to a slump in prices for junior bonds, as lenders turn to more expensive wholesale financing and contend with tighter European Union rules on state aid.

“A lot of these banks have survived better thanks to retail funding,” Alberto Gallo at RBS, said before the data was released. “If you take out the retail-funding channel some banks may find it more expensive to fund.” A new EU bail-in regime, which forces lenders to impose losses on creditors before they can accept state aid, has driven declines in Italian bank bonds this year, Gallo said. Banca Popolare di Vicenza’s €200 million of 9.5% subordinated notes due September 2025 have dropped to 74 cents on the euro from 96 cents on Dec. 31, according to data compiled by Bloomberg. Banca Monte dei Paschi di Siena SpA’s€ 379 million of 5.6% September 2020 bonds have fallen to 72 cents from 95 cents.

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Numbered days.

Italy PM Renzi Sharpens His Rhetorical Barbs At EU (FT)

When Matteo Renzi visited Berlin last July he delivered a subtle warning to the assembled crowd at Humboldt university that a new deal was needed to save European integration. “A world that is changing so quickly needs a place that it can call home in terms of values, ideals, and passion – and that place is Europe,” the Italian prime minister said, weaving in references to Sophie Scholl, a symbol of German resistance to the Nazis, and Willy Brandt, the former chancellor. “We risk wasting it if we hand it over to bureaucrats and technocrats”. But the 41-year-old former mayor of Florence has now turned to much more pointed complaints, perhaps feeling that his delicate and vague admonitions of last summer were conveniently ignored.

Mr Renzi has sharply escalated his confrontational rhetoric towards the European Commission and the German government, triggering surprise and irritation in Brussels and Berlin. Italy’s increasingly bitter recriminations span a wide range of issues — from migration to energy, banking and budget policy — Mr Renzi feels that the EU is either applying its rules too rigidly, or is adopting double standards that often benefit Germany, to the detriment of Italy. “Europe has to serve all 28 countries, not just one,” he told the FT in an interview last month. Mr Renzi’s attacks on the EU — which have also made him an unlikely David Cameron sympathiser, if not an ally, ahead of Britain’s EU referendum — are undoubtedly a reflection of shifting public opinion in Italy over the past decade.

Whereas Italians used to be among the biggest supporters of European integration, years of economic stagnation and recession have brought a wave of disillusion with its outcomes, particularly when it comes to the euro. Mr Renzi, who took office nearly two years ago, saw his poll numbers drop substantially over the course of 2015, with the populist anti-euro Five Star Movement and Northern League consolidating their positions as Italy’s second and third largest political parties respectively. And Mr Renzi faces two key electoral tests this year: municipal elections in some of the largest Italian cities, including Rome and Milan, and a referendum on constitutional reforms to strip power from the Italian Senate that the prime minister has staked his political future on, threatening to resign should he lose.

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Funny thing is, he’s the first one other than Le Pen to say it out loud. Still, €2 billion won’t get him anywhere.

Hollande Says France In State Of Economic, Social Emergency (BBC)

President Francois Hollande has set out a €2bn job creation plan in an attempt to lift France out of what he called a state of “economic emergency”. Under a two-year scheme, firms with fewer than 250 staff will get subsidies if they take on a young or unemployed person for six months or more. In addition, about 500,000 vocational training schemes will be created. France’s unemployment rate is 10.6%, against a EU average of 9.8% and 4.2% in Germany. Mr Hollande said money for the plan would come from savings in other areas of public spending. “These €2bn will be financed without any new taxes of any kind,” said President Hollande, who announced the details during an annual speech to business leaders.

“Our country has been faced with structural unemployment for two to three decades and this requires that creating jobs becomes our one and only fight.” France was facing an “uncertain economic climate and persistent unemployment” and there was an “economic and social emergency”, he said. The president said recently that the country’s social emergency, caused by unemployment, was as serious as the emergency caused by terrorism. He called on his audience to help “build the economic and social model for tomorrow”. The president also addressed the issue of labour market flexibility. “Regarding the rules for hiring and laying off, we need to guarantee stability and predictability to both employers and employees. There is room for simplification,” he said.

“The goal is also more security for the company to hire, to adapt its workforce when economic circumstances require, but also more security for the employee in the face of change and mobility”. However, the BBC’s Paris correspondent Hugh Schofield said there was widespread scepticism that the plan would have any lasting impact. “Despite regular announcements of plans, pacts and promises, the number of those out of work continues to rise in France. “With a little over a year until the presidential election in which he hopes to stand for a second term, President Hollande desperately needs good news on the jobs front. But given the huge gap so far between his words and his achievements, there is little expectation that this new plan will bear fruit in time”, our correspondent said.

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Russia can’t borrow in world markets. The upside of that is it has very little debt.

Russia Considers Suspending Loans to Other Countries (Moscow Times)

Russia could suspend loans to foreign countries as the country’s budget continues to be strained by economic recession, the Interfax news agency reported Monday, citing Deputy Finance Minister Sergei Storchak. “The budget is strained, more than strained. I think we are in a situation where we are forced to take a break from issuing new loans,” Storchak was quoted by the news agency as saying. Given the current state of the national budget, the undertaking of new obligations involves increased risk, he added, according to Interfax.

Russia’s federal budget for this year, based on oil prices of $50 per barrel, will likely face problems as the oil price continues to drop dramatically. As of Monday morning, the price of Brent crude fell to $28 dollars per barrel following the lifting of sanctions against Iran, Interfax reported. Storchak also said that negotiations on Russia’s $5 billion loan to Iran were continuing and that no final decision had been taken yet. Last year, Iran requested a $5 billion loan from Russia for the implementation of joint projects, including the construction of power plants and development of railways.

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As much as I want to stay out of US politics, Jim’s observations here warrant a thorough read.

Worse Than 1860 (Jim Kunstler)

The Republican Party may be closer to outright blowup since the rank and file will never accept Donald Trump as their legitimate candidate, and Trump has nothing but contempt for the rank and file. If Trump manages to win enough primaries and collect a big mass of delegate votes, the July convention in Cleveland will be the site of a mass political suicide. The party brass, including governors, congressmen, senators and their donor cronies will find some device to deprive Trump of his prize, and the Trump groundlings will revolt against that move, and the whole nomination process will be turned over to the courts, and the result will be a broken organization. The Federal Election Commission may then have to appeal to Capital Hill to postpone the general election. The obvious further result will be a constitutional crisis.

Political legitimacy is shattered. Enter, some Pentagon general on a white horse. Parallel events could rock the Democratic side. I expect Hillary to exit the race one way or another before April. She comes off the shelf like a defective product that never should have made it through quality control. Nobody really likes her. Nobody trusts her. Nobody besides Debbie Wasserman Schultz and Huma Abedin believe that it’s her turn to run the country. Factions at the FBI who have had a good look at her old State Department emails want to see her indicted for using the office to gin up global grift for the Clinton Foundation. These FBI personnel may be setting up another constitutional crisis by forcing Attorney General Loretta Lynch either to begin proceedings against Clinton or resign.

Rumors about her health (complications from a concussion suffered in a fall ) won’t go away. And finally, of course, Senator Bernie Sanders is embarrassing her badly at the polls. The Democrats could feasibly end up having to nominate Bernie on a TKO, but in doing so would instantly render themselves a rump party peddling the “socialist” brand — about the worst product-placement imaginable, given our history and national mythos. In theory, the country might benefit from a partial dose of socialism such as single-payer Medicare-for-all — just to bust up the odious matrix of rackets that medicine has become — but mega-bureaucracy on the grand scale is past its sell-by date for an emergent post-centralized world that needs its regions to get more local and autonomous.

The last time the major political parties disintegrated, back in the 1850s, the nation had to go through a bloody convulsion to reconstitute itself. The festering issue of slavery so dominated politics that nothing else is remembered about the dynamics of the period. Today, the festering issue is corruption and racketeering, but none of the candidates uses those precise terms to describe what has happened to us, though Sanders inveighs against the banker class to some effect. Trump gets at it only obliquely by raging against the “incompetence” of the current leadership, but he expresses himself so poorly in half-finished sentences and quasi-thoughts that he seems to embody that same mental incapacity as the people he rails against.

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“You can only imagine what happens when the weather improves,” he said.”

End Of Europe? Berlin, Brussels’ Shock Tactic On Migrants (Reuters)

Is this how “Europe” ends? The Germans, founders and funders of the postwar union, shut their borders to refugees in a bid for political survival by the chancellor who let in a million migrants. And then — why not? — they decide to revive the Deutschmark while they’re at it. That is not the fantasy of diehard Eurosceptics but a real fear articulated at the highest levels in Berlin and Brussels. Chancellor Angela Merkel, her ratings hit by crimes blamed on asylum seekers at New Year parties in Cologne, and EU chief executive Jean-Claude Juncker both said as much last week. Juncker echoed Merkel in warning that the central economic achievements of the common market and the euro are at risk from incoherent, nationalistic reactions to migration and other crises.

He renewed warnings that Europe is on its “last chance”, even if he still hoped it was not “at the beginning of the end”. Merkel, facing trouble among her conservative supporters as much as from opponents, called Europe “vulnerable” and the fate of the euro “directly linked” to resolving the migration crisis – highlighting the risk of at the very least serious economic turbulence if not a formal dismantling of EU institutions. Some see that as mere scare tactics aimed at fellow Europeans by leaders with too much to lose from an EU collapse – Greeks and Italians have been seen to be dragging their feet over controlling the bloc’s Mediterranean frontier and eastern Europeans who benefit from German subsidies and manufacturing supply chain jobs have led hostility to demands that they help take in refugees.

Germans are also getting little help from EU co-founder France, whose leaders fear a rising anti-immigrant National Front, or the bloc’s third power, Britain, consumed with its own debate on whether to just quit the European club altogether. So, empty threat or no, with efforts to engage Turkey’s help showing little sign yet of preventing migrants reaching Greek beaches, German and EU officials are warning that without a sharp drop in arrivals or a change of heart in other EU states to relieve Berlin of the lonely task of housing refugees, Germany could shut its doors, sparking wider crisis this spring. With Merkel’s conservative allies in the southern frontier state of Bavaria demanding she halt the mainly Muslim asylum seekers ahead of tricky regional elections in March, her veteran finance minister delivered one of his trademark veiled threats to EU counterparts of what that could mean for them.

“Many think this is a German problem,” Wolfgang Schaeuble said in meetings with fellow EU finance ministers in Brussels. “But if Germany does what everyone expects, then we’ll see that it’s not a German problem – but a European one.” Senior Merkel allies are working hard to stifle the kind of parliamentary party rebellion that threatened to derail bailouts which kept Greece in the euro zone last year. But pressure is mounting for national measures, such as border fences, which as a child of East Germany Merkel has said she cannot countenance. “If you build a fence, it’s the end of Europe as we know it,” one senior conservative said. “We need to be patient.”

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Call the assembly together then.

UN Seeks Mass Resettlement Of Syrians (AP)

The new chief of the U.N. refugee agency said Monday the world should find a fairer formula for sharing the burden of Syria’s crisis, including taking in tens of thousands of refugees from overwhelmed regional host nations. Filippo Grandi, who assumed his post earlier this month, heads an agency grappling with mounting challenges as Syria’s five-year-old civil war drags on. Humanitarian aid lags more and more behind growing global needs, including those caused by the Syrian conflict. More than 4 million Syrians have fled their homeland, the bulk living in increasingly difficult conditions in neighboring countries such as Jordan and Lebanon, while hundreds of thousands have flooded into Europe. Grandi came to Jordan after a stop in Turkey. Later this week, he is due in Lebanon. He visited the Zaatari refugee camp in Jordan after meeting with King Abdullah II in the capital, Amman.

His agency, UNHCR, hopes to raise money for refugees at a London pledging conference in February, followed by an international gathering in March in Geneva where countries would commit to taking in more refugees. “I think we need to be much more ambitious” about resettling refugees, Grandi said. “We are talking about large numbers … in the tens of thousands.” “What is needed is a better sharing of responsibilities, internationally, for a crisis that cannot only concern the countries neighboring Syria,” he said. Hundreds of thousands of refugees entered Europe in 2015, often with the help of smugglers who ferried them across the Mediterranean in dangerous voyages. Grandi said it was time to create legal ways for some refugees to leave overburdened host countries.

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Either stop bombing or face mass migration on a much larger scale than what we’ve already seen. At least it’s not complicated.

Davos Boss Warns Refugee Crisis Could Become Something Much Bigger (BBG)

As the crash in commodities prices spreads economic woe across the developing world, Europe could face a wave of migration that will eclipse today’s refugee crisis, says Klaus Schwab, executive chairman of the World Economic Forum. “Look how many countries in Africa, for example, depend on the income from oil exports,” Schwab said in an interview ahead of the WEF’s 46th annual meeting, in the Swiss resort of Davos. “Now imagine 1 billion inhabitants, imagine they all move north.” Whereas much of the discussion about commodities has focused on the economic and market impact, Schwab said he’s concerned that it will also spur “a substantial social breakdown. That fits into what Schwab, the founder of the WEF, calls the time of “unexpected consequences” we now live in.

In the modern era, it’s harder for policy makers to know the impact of their actions, which has led to “erosion of trust in decision makers.” “First, we have to look at the root causes of this,” Schwab said. “The normal citizen today is overwhelmed by the complexity and rapidity of what’s happening, not only in the political world but also the technological field.” That sense of dislocation has fueled the rise of radical political leaders who tap into a rich vein of anger and xenophobia. For reason to prevail, Schwab said, “we have to re-establish a sense that we all are in the same boat.” The theme for this year’s meeting is the Fourth Industrial Revolution, which the WEF defines as a “fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.”

While that presents huge opportunities, Schwab warns that technological innovation may result in the loss of 20 million jobs in the coming years. Those job cuts risk “hollowing out the middle class,” Schwab said, “a pillar of our democracies.” At the same time, Schwab argues, trends like the sharing economy and the changes wrought by technology mean economists must adapt the tools they use to assess well-being. “Many of our traditional measurements do not work anymore,” he said. After decades watching the ebbs and flows of the global economy, Schwab said the current anxiety is “not new” for him. But he said that as the world gets ever more interconnected, the consequences of such turmoil could become more grave. This week’s WEF meeting, he said, will offer policy makers “the first opportunity after the markets have come down to look at the situation and coordinate.”

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It’s been so long since I wrote there should an emergency UN meeting on refugees, I don’t even remember when. Let me renew that call. The EU must be afraid it wouldn’t like the outcome.

German Minister Urges Merkel To Prepare To Close Borders (Reuters)

Chancellor Angela Merkel’s transport minister has urged her to prepare to close Germany’s borders to stem an influx of asylum seekers, arguing that Berlin must act alone if it cannot reach a Europe-wide deal on refugees. Alexander Dobrindt said Germany could no longer show the world a “friendly face” – a phrase used by Merkel as refugees began pouring into Germany last summer – and that if the number of new arrivals did not drop soon, Germany should act alone. “I urgently advise: We must prepare ourselves for not being able to avoid border closures,” Dobrindt, a member of the Bavarian Christian Social Union (CSU), told the Muenchner Merkur newspaper.

The CSU, the Bavarian sister party to Merkel’s conservative Christian Democrats (CDU), has ramped up pressure on the chancellor over her open-door refugee policy that saw 1.1 million migrants arrive in Germany last year alone. CSU leader Horst Seehofer told Der Spiegel magazine in a weekend interview that he would send the federal government a written request within the next two weeks to restore “orderly conditions” at the nation’s borders. Bavaria is the main entry point to Germany for refugees. “I would advise us all to prepare a Plan B,” Dobrindt said in an advanced release of an interview to run in the Muenchner Merkur’s Tuesday edition. Merkel has vowed to “measurably reduce” arrivals this year, but has refused to introduce a cap, saying it would be impossible to enforce without closing German borders.

Instead, she has tried to convince other European countries to take in quotas of refugees, pushed for reception centers to be built on Europe’s external borders, and led an EU campaign to convince Turkey to keep refugees from entering the bloc. But progress has been slow. Dobrindt rejected Merkel’s argument that closing borders would jeopardize the European project. “The sentence, the closure of the border would see Europe fail, is true in reverse. Not closing the border, just going on, would bring Europe to its knees,” he said.

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