Mar 262016
 
 March 26, 2016  Posted by at 9:29 am Finance Tagged with: , , , , , , , , ,  1 Response »


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.”

Read more …

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.

Read more …

‘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.

Read more …

“..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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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 »


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 »


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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Jan 172016
 
 January 17, 2016  Posted by at 9:28 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle January 17 2016


DPC Madison Avenue, Memphis, Tennessee 1906

Why Are We Looking On Helplessly As Markets Crash All Over The World? (Hutton)
China’s Stock Market Value Plummets By $600 Billion In One Week (Xinhua)
The Ugly Subtext Beneath China’s Two-Track Economy Tale (FT)
Buckle Your Seatbelts: China Could Rock Markets Next Week (CNBC)
China’s Economy Grew By Around 7% In 2015, Premier Li Says (Reuters)
The Fantasy And The Reality Of China’s Economic Rebalancing (CNBC)
China Stocks Watchdog Acknowledges Flaws in Equities Regulation (BBG)
China-Led AIIB Development Bank Aims to Swiftly Approve Loans (AP)
Dallas Fed Quietly Suspends Energy Mark-To-Market On Loss Contagion Fears (ZH)
Wall Street Braces for Bigger Shale Losses After Oil Drops Below $30 (BBG)
With Liftoff Done, the Fed Revisits a $4.5 Trillion Quandary (BBG)
Saudi Aramco – $10 Trillion Mystery At The Heart Of The Gulf State (Guardian)
Market Meltdown Rattles Canadian Investors, Panic Sets In (BBG)
German Lawmakers Urge Merkel To Tell Draghi: End Record-Low Rates (BBG)
The Business Case For Helping Refugees (Gillian Tett)
Schäuble Proposes Special EU Tax On Gasoline To Finance Refugee Costs (Reuters)
Five Bodies Wash Up On Shore Of Samos (AP)

“The Chinese economy is a giant Ponzi scheme. Tens of trillions of dollars are owed to essentially bankrupt banks – and worse, bankrupt near-banks that operate in the murky shadowlands of a deeply dysfunctional mix of Leninism and rapacious capitalism. “

Why Are We Looking On Helplessly As Markets Crash All Over The World? (Hutton)

There has always been a tension at the heart of capitalism. Although it is the best wealth-creating mechanism we’ve made, it can’t be left to its own devices. Its self-regulating properties, contrary to the efforts of generations of economists trying to prove otherwise, are weak. It needs embedded countervailing power – effective trade unions, law and public action – to keep it honest and sustain the demand off which it feeds. Above all, it needs an ordered international framework of law, finance and trade in which it can do deals and business. It certainly can’t invent one itself. The mayhem in the financial markets over the last fortnight is the result of confronting this tension. The oil price collapse should be good news. It makes everything cheaper. It puts purchasing power in the hands of business and consumers elsewhere in the world who have a greater propensity to spend than most oil-producing countries. A low oil price historically presages economic good times. Instead, the markets are panicking.

They are panicking because what is driving the lower oil price is global disorder, which capitalism is powerless to correct. Indeed, it is capitalism running amok that is one of the reasons for the disorder. Profits as a share of national income in Britain and the US touch all-time highs; wages touch an all-time low as the power of organised labour diminishes and the gig economy of short-term contracts takes hold. The excesses of the rich, digging underground basements to house swimming pools, cinemas and lavish gyms, sit alongside the travails of the new middle-class poor. These are no longer able to secure themselves decent pensions and their gig-economy children defer starting families because of the financial pressures.

The story is similar if less marked in continental Europe and Japan. Demand has only been sustained across all these countries since the mid-1980s because of the relentless willingness of banks to pump credit into the hands of consumers at rates much faster than the rate of economic growth to compensate for squeezed wages. It was a trend only interrupted by the credit crunch and which has now resumed with a vengeance. The result is a mountain of mortgage and personal debt but with ever-lower pay packets to service it, creating a banking system that is fundamentally precarious. The country that has taken this further than any other is China. The Chinese economy is a giant Ponzi scheme. Tens of trillions of dollars are owed to essentially bankrupt banks – and worse, bankrupt near-banks that operate in the murky shadowlands of a deeply dysfunctional mix of Leninism and rapacious capitalism.

The Chinese Communist party has bought itself temporary legitimacy by its shameless willingness to direct state-owned banks to lend to consumers and businesses with little attention to their creditworthiness. Thus it has lifted growth and created millions of jobs. It is an edifice waiting to implode. Chinese business habitually bribes Communist officials to put pressure on their bankers to forgive loans or commute interest; most loans only receive interest payments haphazardly or not at all. If the losses were crystallised, the banking system would be bust overnight. On top, huge loans have been made to China’s vast oil, gas and chemical industries on the basis of oil being above $60 a barrel, so more losses are in prospect.

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Some $600 billion lost in one week.

China’s Stock Market Value Plummets (Xinhua)

China’s declining stock market has resulted in a sharp decrease in the market capitalization of the two bourses in Shanghai and Shenzhen. The market value of the Shanghai and Shenzhen bourses plummeted to 42.74 trillion yuan (about 6.5 trillion U.S. dollars) on Friday’s closing of market, down nearly 9% from the previous week. There are 1,081 and 1,747 listed companies in the Shanghai and Shenzhen stock markets, where the price-earnings ratio were 14.54 and 41.38 respectively. China’s has the world’s second-most capitalized stock market behind the United States, after overtaking Japan a year ago. After a bearish week, the Shanghai and Shenzhen bourses were valued at 24.26 trillion yuan and 18.48 trillion yuan respectively by the close of market on Friday.

Amid global market turbulence accompanying lackluster domestic economic data, the benchmark Shanghai index lost 8.96% to end at 2,900.97 points, and the Shenzhen index shrank 8.18% to close at 9,997.92 points over the week. On Saturday, China’s securities watchdog vowed to learn a lesson from the stock market rout. “Wild market swings revealed our supervision and management loopholes,” said Xiao Gang, head of the China Securities Regulatory Commission, at a national conference on securities market regulation. “We will improve regulation mechanisms, intensify supervision and guard against risks so as to create a stable and sound market,” Xiao said.

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Reconfirming what I’ve written on China earlier: “Coal miners do not become internet programmers overnight, or even delivery men.”

The Ugly Subtext Beneath China’s Two-Track Economy Tale (FT)

This week the Chinese government will attempt to take back control of the narrative. The release of its 2015 economic growth estimate on January 19 provides an opportunity for Beijing to argue that a renewed outburst of stock market chaos and currency policy confusion over recent weeks was just surface noise, while the underlying economy remains sound. That China’s once vaunted economic managers suddenly find themselves in this position is a reminder of how dramatically they too can be wrong-footed by events, albeit ones that were under their control until a series of self-inflicted policy errors. Until China’s stock market bubble burst on June 15 — President Xi Jinping’s birthday of all days — the rest of the world was obsessed with the country’s downwards economic growth trajectory.

An ill-advised stock market rescue in July, followed by a poorly communicated currency policy adjustment in August, gave the world a bigger issue to worry about — the competence of China’s leadership, or lack thereof. In this context, the second and third quarter gross domestic product estimates, in line with the government’s 7% growth target, were reassuring. Chinese officials now freely admit that the country’s growth story is a tale of two economies. There is the bad old industrial economy — credit-fuelled and investment-led, resulting in chronic overcapacity and unsold apartment blocks. And there is the good new services economy — innovative and consumption-driven. Their key point is that the rise of the latter will balance the decline of the former, as has been the case this year.

As a result, they argue, the overall economy will hum along at a “sustainable” rate of about 6.5% over the next five years. This spells trouble for the African, Australian, Russian and South American commodity producers who have grown fat off Chinese demand over the past 20 years. But it should benefit European and US service providers, market access permitting, as well as Japanese and South Korean gadget makers. If only it were that simple. There are at least two known unknowns that could disrupt China’s smooth glide path. The first is what happens to rust-belt regions that have plenty of the old economy but not much of the new. “It will be very difficult for those who work in the old economy to transition into the new economy,” says Chen Long, China economist at Gavekal Dragonomics.

“Coal miners do not become internet programmers overnight, or even delivery men.” The second is a potential debt crisis of historic proportions, stemming in part from the government’s fears about the consequences for coal country if they were to turn off the credit taps. In 2007, on the eve of the global financial crisis, China’s overall debt to GDP ratio was 147%. Now it is at 231% and climbing. “They absolutely have no room left for further debt accumulation,” says Rodney Jones at Wigram Capital, an economic advisory firm. “That’s the central issue — not the exchange rate, not the stock market. These are symptoms. The problem is unsustainable growth and continued rapid accumulation of debt, leverage and credit.”

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“China is expected to release fourth-quarter GDP, industrial production and retail sales data Tuesday morning.”

Buckle Your Seatbelts: China Could Rock Markets Next Week (CNBC)

Global markets are poised for more volatility next week with key economic data from China expected to show that the world’s second-largest economy continues to grow at its slowest pace since the financial crisis, despite aggressive measures taken by the central bank to boost growth. “There has been ongoing fear bubbling since August that the China slowdown is worse than expected. Investors are nervous that we’ll see a massive downside correction in China’s economy. That’s why this data is so important to markets,” said James Rossiter at TD Securities. China is expected to release fourth-quarter GDP, industrial production and retail sales data Tuesday morning. Wasif Latif at USAA Investments agrees.

“These data reports next week could be very important in their power to either confirm or refute the current narrative that China is experiencing a very bad slowdown,” said Latif. The kick-off to 2016 has been challenging to say the least for China which continues to show signs of weakness, particularly on the manufacturing and services front. This downbeat data has pushed investors to alter their global forecasts, readjust earnings expectations and talk about what life with a slowing China means for trading stocks bonds and commodities this year. Markets around the world have been under pressure due in part to China worries. The Shanghai Composite is already down 18% this year and down over 40% from its June 2014 high.

Barclays strategists wrote that China remains a key source of turmoil as it affects currencies, commodities and financial volatility. Analysts also point to Beijing’s unpredictable nature in addressing the country’s economic woes and market structure. For instance in the last week, China reversed a new rule on circuit breakers that had brought stocks to a complete halt after just minutes of trading. Questions remain over whether the central bank of China will respond to weak data through its currency, or if the government will intervene in new ways if stocks continue to fall on the domestic markets.

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Li Keqiang decided to give us the good news a few days early. Curious.

China’s Economy Grew By Around 7% In 2015, Premier Li Says (Reuters)

China’s economy grew by around 7% in 2015, with the services sector accounting for half of GDP, Premier Li Keqiang said on Saturday. The premier also said that employment had expanded more than expected and that consumption contributed nearly 60% of economic growth. Li made theremarks at the opening ceremony for the China-backed Asian Infrastructure Investment Bank (AIIB) in Beijing. China’s fourth-quarter and full-year 2015 GDP figures are expected to be released on Jan. 19. Analysts polled by Reuters have forecast 2015 growth cooled to 6.9%, down from 7.3% in 2014 and the slowest pace in a quarter of a century. China does not intend to use a cheaper yuan as a way to boost exports and has the tools to keep the currency stable, the premier said, state news agency Xinhua had reported earlier Saturday.

“China has no intention of stimulating exports via competitive devaluation of currencies,” the premier said at the meeting in Beijing, which marks China’s previously announced official entry into the bank. Li added that China is capable of keeping the yuan’s exchange rate basically stable at an appropriate and balanced level, Xinhua reported. After a nearly 3% devaluation in mid August 2015 which rattled markets, China’s yuan has fallen over 1% so far in 2016, as the nation has struggled to contain capital outflows in the wake of a dramatic equity market collapse and weak economic data. Despite recent declines, China has the world’s largest foreign exchange reserves, and policymakers have repeatedly said they have the firepower to keep the yuan stable.

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From January 11.

The Fantasy And The Reality Of China’s Economic Rebalancing (CNBC)

China’s economic expansion may be far less than official estimates of 6.8% and could be closer to 2.4%, according to a new report. The GDP growth of the world’s second-largest economy has slowed steadily since 2010, although levels remain far higher than those achieved by most developed and many developing economies. Last month, China’s central bank forecast that GDP would slow to 6.8% in 2016 from an estimated in 6.9% in 2015. However, Fathom, a macro research consultancy based in London, claimed in a report that China’s economy is only expanding at 2.4% per annum.

“We have long questioned the legitimacy of China’s official GDP statistics. Pointing to only a mild growth deceleration, we find these impossible to reconcile with a whole host of alternative evidence, not least our own measure of China’s economic activity which suggests that growth could be as low as 2.4%,” Fathom said in the report published Friday entitled “The fantasy and the reality of China’s economic rebalancing.” This year, global markets remain alert to any hints that China’s economic slowdown might be accelerating. Major U.S. stock indexes lost around 6% or more last week, as these fears helped fuel a rout in global stocks. International analysts and economists have long suspected that Chinese official GDP figures were inflated. Not many have suggested that annual growth could actually be as low as 2.4%, however. The IMF, for instance, estimates that China’s economy grew by 6.8% in 2015 and forecasts it will expand by 6.3% in 2016.

“While there is evidence that the old growth engine, powered by manufacturing, investment and exports, has started to stutter, we find far fewer indicators that point to a pickup in consumption. This is contrary to China’s official GDP breakdown, which suggests that activity in the tertiary sector is not only the largest as a share of nominal GDP but also the fastest growing, with annual growth outpacing that of both primary and secondary industries,” Fathom said. The official GDP data reported by Chinese regional government is particularly questionable. In December, China official news agency, Xinhua, reported that economic levels in parts of China’s northeastern rust belt were overstated. One county in Liaoning province posted extra fiscal revenue of 847 million yuan ($129 million) in 2013, 127% higher than the real figure, according to media reports.

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“The slumping stock market, fleeing liquidity, speedy deleveraging activities, augmented by self-defeating redemption at mutual funds and selloffs in futures, spiraled into a full-scale crisis like a domino effect..”

China Stocks Watchdog Acknowledges Flaws in Equities Regulation (BBG)

The Chinese equities watchdog has acknowledged loopholes and ineptitude within its regulatory system after a review of the turmoil that’s shaken markets since last June. An immature bourse and participants, incomplete trading rules, an inadequate market system and an inappropriate regulatory system were to blame and regulators will learn from their mistakes, Xiao Gang, chairman of China Securities Regulatory Commission, said in a transcript of an internal meeting of the regulator that was posted on the agency’s website on Saturday. Chinese shares fell into a bear market again on Friday, wiping out gains from an unprecedented state rescue amid waning confidence in the government’s ability to manage the country’s financial markets.

The initial collapse in June, which came after cheerleading by state media helped fuel an unprecedented boom in mainland equities, triggered stock purchases by the government, restrictions on trading and a temporary ban on initial public offerings. Xiao was criticized for helping to talk up the market as the bubble developed. “The slumping stock market, fleeing liquidity, speedy deleveraging activities, augmented by self-defeating redemption at mutual funds and selloffs in futures, spiraled into a full-scale crisis like a domino effect,” Xiao said in the transcript. “During the abnormal volatility in the stock market, some institutions let illegal and irregular activities ride instead of taking responsibility to stabilize the market.”

It’s been a wild ride for Chinese stock investors. The Shanghai Composite Index more than doubled in the 12 months through May before losing 34% by the end of September as regulators failed to manage a surge in leveraged bets by individual investors. A state-sponsored market rescue campaign sparked a rally toward the end of the year but those gains have been wiped out this month. “The stock market developed so fast that the regulations failed to catch up,” said Ronald Wan, chief executive of Partners Capital International Ltd., an investment bank in Hong Kong. “Only when the laws and regulations improve, can the market develop in a healthy way. That cannot be done in one or two months.”

Losses this year were fueled by a controversial circuit-breaker system, which authorities scrapped in the first week of January after finding that it spurred investors to rush for the exits on big down days. The turbulence in China has rippled through global markets this year, contributing to a 8.5% drop in the MSCI All-Country World Index. The CSRC will try to learn from its overseas counterparts but will avoid wholesale adoption of another nation’s regulatory system, said Xiao. IPO reforms will be gradual and the registration system for offerings won’t be settled in one step, he said. China plans to shift to a registration-based system for IPOs, loosening the grip of the CSRC, which has controlled the timing and pricing of listings.

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Peanuts.

China-Led AIIB Development Bank Aims to Swiftly Approve Loans (AP)

The head of the newly opened Asia Infrastructure Investment Bank said the China-led group is aiming to approve its first loans before the end of the year, part of Beijing’s efforts to weave together regional trade partners and solidify its global status. The AIIB officially opened at a ceremony on Saturday in Beijing, formalizing the emergence of a competitor to the Washington-led World Bank and strengthening China’s influence over global development and finance. AIIB’s inaugural president, the Chinese banker Jin Liqun, said Sunday that Asia still faces “severe connectivity gaps and significant infrastructure bottlenecks.” The bank would welcome the US and Japan, two economic powers that have declined invitations to join the organization, said Jin, who was previously a high-ranking official at both the World Bank and Japan-led Asian Development Bank.

Washington has said it welcomes the additional financing for development but had expressed concern looser lending standards might undercut efforts by existing institutions to promote environmental and other safeguards. Chinese officials have said the bank will complement existing institutions and promised to adhere to international lending standards. Chinese President Xi Jinping has outlined a broad plan called “One Belt One Road” to deepen trade relations with neighboring countries and open new markets, with the AIIB a key component of that strategy. Leaders in the world’s No. 2 economy have long felt they don’t have proportional influence inside international financial institutions dominated by Western powers. China pledged to put up most of the bank’s $50 billion in capital and says the total will eventually be as high as $100 billion. Xi on Saturday unveiled an additional $50 million fund for infrastructure projects in less-developed countries.

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Fed sees recession.

Dallas Fed Quietly Suspends Energy Mark-To-Market On Loss Contagion Fears (ZH)

We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by with it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston. This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down.

Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches. In other words, the Fed has advised banks to cover up major energy-related losses. The reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks’ commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.

In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.” Naturally, once this becomes public, the Fed risks a stampeded out of energy exposure because for the Fed to intervene in such a dramatic fashion it suggests that the US energy industry is on the verge of a subprime-like blow up. Putting this all together, a source who wishes to remain anonymous, adds that equity has been levitating only because energy funds are confident the syndicates will remain in size to meet net working capital deficits. Which is a big gamble considering that as we firsst showed ten days ago, over the past several weeks banks have already quietly reduced their credit facility exposure to at least 25 deeply distressed (and soon to be even deeper distressed) names.

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Bail-in or bail-out?

Wall Street Braces for Bigger Shale Losses After Oil Drops Below $30 (BBG)

The Wall Street banks that financed the U.S. shale boom are facing growing losses as oil falls below $30 a barrel. Losses are spreading from bondholders to banks amid the worst oil crash in a generation. Wells Fargo, Citigroup and JPMorgan have set aside more than $2 billion combined to cover souring energy loans and will add to that safety net if prices remain low, the companies reported this week. Losses are mounting as more oil and natural gas producers default on debt payments and declare bankruptcy. Wells Fargo lost $118 million on its energy portfolio in the fourth quarter and Citigroup lost $75 million. “It takes time for losses to emerge, and at current levels we would expect to have higher oil and gas losses in 2016,” John Stumpf, Wells Fargo’s chairman and CEO, said during a Friday earnings call.

Oil plunged 36% in the past year, putting an end to the debt-fueled drilling spree that pushed U.S. oil production to the highest in more than 40 years. After years of spending more than they made, shale companies have parked drilling rigs and fired thousands of workers in an effort to conserve cash. In 2015, 42 oil and and gas producers went bust owing more than $17 billion, according to law firm Haynes & Boone. The weakness in oil and gas lending was a hot topic during bank earnings calls this week, and it’s clear that the potential for losses is snowballing the longer prices remain low. Wells Fargo’s energy reserves of $1.2 billion are enough to cover 7% of the $17 billion of the bank’s outstanding oil and gas loans.

JPMorgan Chase boosted energy loan-loss reserves by $550 million last year and said it will add another $750 million if oil stays at $30 for 18 months. Citigroup increased reserves by $250 million and that will go up by an additional $600 million in the first half of 2016 if oil prices remain at $30. If oil falls to $25, that number may double. Lenders are walking a tightrope between helping their clients stay afloat and looking out for their own bottom line. Borrowers with risky credit typically put up their oil and gas properties as collateral for their loan. Historically, lenders managed to get all of their money back, even in bankruptcy, by liquidating the assets. However, foreclosing on a troubled borrower comes with the risk that the properties will sell for less than is owed to the bank.

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With no credibility left, Fed options are limited.

With Liftoff Done, the Fed Revisits a $4.5 Trillion Quandary (BBG)

Federal Reserve officials who spent months debating their first interest-rate increase in almost a decade are turning next to the thorny question of what to do with a balance sheet equivalent to the size of Japan’s economy. A month after liftoff, turmoil in global financial markets has pushed out expectations for more rate hikes and raised concern about what tools are available to fight the next downturn. Vice Chairman Stanley Fischer has suggested the $4.5 trillion balance sheet could be maintained as a way to hold down longer-term Treasury yields while the short-term policy rate was lifted. Fischer’s idea – discussed in a Jan. 3 speech partly on strategies for pulling the short-term rate away from zero – was taken up in more practical terms by New York Fed President William C. Dudley Friday.

Reinvesting maturing bonds and putting off a reduction in the balance sheet until the federal funds rate is raised somewhat higher “makes sense,” Dudley said. “Having more ‘dry powder’ in the form of higher short-term interest rates seems more desirable than less dry powder and a smaller balance sheet,” he said. Fed Chair Janet Yellen made similar comments in her Dec. 16 press conference, meaning the three most senior officials still view the central bank’s vast holdings of debt as an active policy tool rather than a relic of the financial crisis that needs to be shrunk as soon as possible. “Dudley’s view is if we get to choose our tool” to tighten policy, “then we are going to choose interest rates,” said Michael Hanson, senior economist at Bank of America.

That’s the safer choice, Hanson said, because officials are highly uncertain what shrinking the balance sheet would do to financial markets. The preference to maintain trillions in bond holdings for months to come, however, isn’t likely to be popular with all Federal Open Market Committee participants. Richmond Fed President Jeffrey Lacker favors an “expeditious” unwinding of the Fed’s bond holdings. The Fed’s balance sheet swelled to $4.5 trillion in 2014 from about $900 billion in 2008 on purchases of Treasuries and mortgage-backed securities, during three stages of a strategy known as quantitative easing.

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IPO looks silly.

Saudi Aramco – $10 Trillion Mystery At The Heart Of The Gulf State (Guardian)

The possible selloff of at least part of Aramco, previously considered the country’s crown jewel, has stunned the global energy and investment sectors as much as locals. One Wall Street report claimed an American financial adviser was forced to stop his car because he was laughing so much from sheer incredulity when the Aramco float news broke. But plans for an initial public offering by what may be most secretive – but almost certainly the most valuable – company in the world have been confirmed by its chairman, Khalid al-Falih. “We are considering … a listing of the main company and obviously the main company will include upstream,” he said last week, thereby indicating that the flotation plan could give access to the country’s 260bn barrels of oil reserves and 263 trillion cubic feet of gas.

Among the more than 100 oil and gas fields controlled by Aramco – which began life as the California-Arabian Standard Oil Company in 1933 – are Ghawar, the world’s largest onshore oil location, plus Safaniya, the biggest offshore field in the world. The scale of the Aramco empire dwarfs every other corporation in the world. Its oil assets alone are 10 times more than those held by the world’s largest publicly quoted oil company, ExxonMobil. If the Texas-based business has a stock market value of $400bn, that would make Aramco’s oil assets potentially worth $4tn. Energy analysts admit they find it impossible to accurately calculate the exact worth of a company that boasts of producing 9.5m barrels of oil a day – one in every eight of the world’s production.

But some estimates go as high as $10tn. That is 10 times the combined value of Apple and Alphabet (the new parent company of Google). They know Aramco has huge oil and gas reserves, a raft of refineries and other business interests, but details are scant. The company does not publish its accounts or even its revenues, never mind its profits.

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Panic should have started long ago.

Market Meltdown Rattles Canadian Investors, Panic Sets In (BBG)

A record losing streak in the loonie, plunging bond yields and about $150 billion wiped out in the stock market have left Canadian investors hanging by a thread. Panic is starting to set in. “The word fear is finally starting to come up,” said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel in Calgary. “Clients and people are starting to panic. It’s sinking in, but no one knows what to do.” North American stock markets wrapped up one of their most turbulent weeks in recent memory Friday as oil prices and the dollar plunged further. The commodity-sensitive loonie plumbed depths not seen since 2003 as it fell for an 11th-straight day, losing 0.81 of a U.S. cent to close at 68.82 cents US.

The benchmark Standard & Poor’s/TSX Composite Index dropped 262.57, or 2.13%, to 12,073.46 — its lowest close since June 2013 — after rebounding more than 165 points on Thursday. Yields on five-year government bonds fell to a record low of 0.511% Wednesday as speculation builds the Bank of Canada will cut interest rates next week. Canada’s economy, heavily weighed toward resource industries, has been rocked by concerns about the slowdown in China that has pushed the price of West Texas Intermediate crude below $30 for the first time since 2003. Prices for Canada’s heavy crude, which trades at a discount to the U.S. benchmark, have sunk to around $15 a barrel.

The February contract for WTI crude fell $1.78 to US$29.42 on Friday, while February natural gas fell four cents to US$2.10 per mmBTU. “Right now … people are looking at oil and saying the price of oil is dropping, ergo the economic outlook doesn’t look good. I think it’s as simple as that,” said Ian Nakamoto, director of research at 3Macs. “If oil rallies like it did (Thursday), I think the markets rise here.” But Nakamoto isn’t betting we’ve seen the bottom for oil just yet. “One thing we do know is the supply is greater than demand, so structurally it looks likes prices still have further to go here on the downside.”

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What independent central bank?

German Lawmakers Urge Merkel To Tell Draghi: End Record-Low Rates (BBG)

Lawmakers allied with German Chancellor Angela Merkel say it’s time for the ECB to outline an exit strategy from record-low interest rates and she should tell Mario Draghi so. As Merkel hosted the ECB president for a private meeting in Berlin on Friday, German banks, her party bloc and Bundesbank head Jens Weidmann are pushing for Draghi to explain how he’ll get out of quantitative easing. Designed to counter “economic malaise” as Europe’s debt crisis recedes, the policy is seen by critics as hurting German savers and retail investors, who tend to prefer low-risk investments. “I trust that the chancellor will clearly address the concerns related to the ECB’s policy” when she hosts Draghi at the chancellery, said Alexander Radwan, a member of the German parliament’s finance committee and lawmaker from Merkel’s party bloc.

Merkel should help to ensure “that Europe recognizes the limits of central-bank policy,” he said. While ECB policy is out of Merkel’s hands, low borrowing costs for the 19 euro-area nations are adding to dissatisfaction among members of her party, whose loyalty is already strained by euro-area bailouts and a record influx of refugees to Germany. Draghi argues that the central bank’s €1.5 trillion bond-buying program is needed to try to revive inflation and he’s pledged to do more if prices don’t pick up. Merkel and Draghi held what Steffen Seibert, Merkel’s chief spokesman, described as an “informal and confidential” meeting. The chancellor’s office declined to comment on what they discussed.

That reticence hasn’t stopped Wolfgang Schaeuble, Merkel’s finance minister since 2009 and one of her key allies, from publicly prodding the ECB and portraying its policies as a threat to financial stability. Monetary policy has fueled a tendency toward “exaggeration in financial markets,” with liquidity spurring nervousness “that’s materializing in China now,” Schaeuble said in Brussels on Thursday. “I will not deny that the low interest rates are worrying us,” Antje Tillmann, the finance-policy spokeswoman of Merkel’s party bloc, said in an interview. Germany can manage the low-rate environment only in the short term “and I hope therefore that this will change. I believe Mr. Draghi knows that we’re waiting for this.” Weidmann warned on Tuesday in Paris that low rates over an extended period squeeze bank profits and risk fueling financial bubbles.

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Help for refugees will have to come from the people, not government or business. That’s why our AE for Athens Fund works. No side issues.

The Business Case For Helping Refugees (Gillian Tett)

Last year Hamdi Ulukaya, a Kurdish entrepreneur who created the billion-dollar US-based Chobani yoghurt empire, travelled to Greece to see the swelling refugee crisis with his own eyes. Unsurprisingly, he was horrified by the human suffering that he witnessed, particularly as he shares a cultural affinity with many of the refugees — he grew up near the Syrian border in Turkey, before moving to the US as a student. But Ulukaya was also appalled by something else: the hopelessly bureaucratic and old-fashioned nature of the organisations running the aid efforts. “The refugee issue is being dealt with using [methods from] the 1940s and it’s in the hands of the UN and mostly government and you don’t see a lot of private sector and entrepreneurs involved,” he told me last week.

“I decided we have got to hack this — we have got to bring another perspective into this issue, there are technologies that can be used.” So Ulukaya decided to act. Last year he established a foundation, Tent, to channel financial aid and innovation efforts into refugee work. He also declared that he would give half his fortune to refugee causes (he has made an eye-popping $1.4bn from his wildly popular Chobani yoghurts in recent years). And he has stepped up efforts to hire as many refugees as he can at his yoghurt plants, where they currently account for 30 per cent of the total workforce, or 600 people. “There are 11 or 12 languages spoken in our factories,” says Ulukaya. “We have translators 24 hours a day.”

Now, however, Ulukaya wants to take his campaign further. At next week’s World Economic Forum (WEF) meeting in Davos, he will call on other CEOs to join a campaign to channel corporate money, lobbying initiatives, services and jobs to refugees. Five companies have already signed up: Ikea, MasterCard, Airbnb, LinkedIn and UPS — and Ulukaya says more are poised to join. I daresay some FT readers will shrug their shoulders at this; indeed, as a journalist, part of me feels a little cynical. Over the past couple of years, there has been a string of philanthropy initiatives from American billionaires. And this year’s WEF meeting is likely to produce another wave of pious pledges, not least because many corporate elites will be arriving in Switzerland keenly aware that they need to do more to quell a popular backlash over income inequality.

But what makes Ulukaya’s move unusual — and admirable — is his unashamed embrace of the refugee cause. And that illustrates a bigger point: the voice of business has been extraordinarily muted, if not absent, from this wider policy debate. To be sure, some companies, such as American Express, Starbucks, Google and Uniqlo, have made donations to humanitarian groups involved in helping refugees. Others have offered practical services: Daimler, for example, has provided buildings and medical devices. Most companies, however, have avoided getting too embroiled in the issue, preferring to concentrate on less political causes such as medical aid. “With few exceptions, the business community has been absent from the debate about how to best deal with the refugee crisis, not only in the short term but, importantly, in the long term,” says Ioannis Ioannou, a professor at London Business School.

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More talk of a ‘coalition of the willing’. More division in Europe.

Schäuble Proposes Special EU Tax On Gasoline To Finance Refugee Costs (Reuters)

German Finance Minister Wolfgang Schaeuble has proposed the introduction of a special tax on gasoline in European Union member states to finance refugee-related costs such as strengthening the continent’s joint external borders. Schaeuble’s proposal drew criticism from members of his own conservative party, the Christian Democratic Union (CDU), as well as from the Social Democrats (SPD), junior partner in Chancellor Angela Merkel’s ruling coalition. “I’ve said if the funds in the national budgets and the European budget are not sufficient, then let us agree for instance on collecting a levy on every liter of gasoline at a specific amount,” Schaeuble told Sueddeutsche Zeitung newspaper in an interview published on Saturday.

“We have to secure Schengen’s external borders now. The solution of these problems must not founder due to a limitation of funds,” the veteran politician said. Asked if all EU countries should increase their payments to Brussels to finance joint refugee-related costs, Schaeuble said: “If someone is not willing to pay, I’m nonetheless prepared to do it. Then we’ll build a coalition of the willing.” Schaeuble gave no details on how high the extra levy on gasoline should be and whether Brussels or the EU member states would be in charge of collecting it. Schaeuble’s was met with criticism across the party political spectrum. “I’m strictly against any tax increase in light of the good budgetary situation,” said CDU deputy Julia Kloeckner who wants to win a regional election in the western state of Rhineland-Palatinate in March.

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When describing dead bodies they know nothing about, AP chooses to go with “most likely migrants”. Whereas, obviously, they’re at least as likely to be refugees. They know it, we know it, but the bias is too strong to overcome. Plus, it’s like saying all refugees are migrants. And if you repeat it often enough… Does any of you people ever think about the lack of respect for the dead you promote?

Five Bodies Wash Up On Shore Of Samos (AP)

Five people, most likely migrants, have been found dead off the eastern Greek island of Samos, Greek authorities report. The Greek coast guard has recovered the bodies of two men and three women, and are trying to recover the sixth in rough seas, a coast guard spokeswoman told AP. No vessel has been recovered yet. The rescue operation continues, said the spokeswoman, who was not authorized to be identified because of the continuing operation. Samos, which lies very close to the Turkish coast, is one of the main points of entry for migrants, most refugees from Syria and Iraq.

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Nov 062015
 
 November 6, 2015  Posted by at 9:30 am Finance Tagged with: , , , , , , ,  1 Response »


Jack Delano Long stairway in mill district of Pittsburgh, Pennsylvania 1940

If Angela Merkel wants to get rid of one of her major headaches, we suggest she should tell Volkswagen to move its operations from Wolfsburg to China. It may seem a strange thing to do at first blush, with 750,000 German jobs on the line, but bear with us here, because this could well be the only way to preserve at least some value for VW’s stock- and bondholders.

And several layers of German government, as well as German pension funds, are major investors. In a company that has now lost 40%, over €32 billion, of its market cap, and, according to an estimate by UBS, faces €35 billion or more in costs over the various emissions scandals. Count your losses, German pensioners! And the way things are going, and the way the scandal is widening, this may still be a conservative number.

Here’s the ‘thing’: after the most recent admissions coming from the carmaker and its affiliates it may well have become impossible for -international- lawmakers and lawyers alike to not go after Volkswagen with all they’ve got. First the EPA found a few days ago that defeat devices were installed in larger diesel engines too, those used in Porsche and Audi cars, instead of just the smaller ones whose testing by the University of West Virginia started this whole Teutonic drama.

Now we find that for VW’s petrol engines, too, various emissions have gone severely underreported. Porsche’s official reaction to the new diesel findings was that the company was ‘surprised’. Maybe that has something to do with the fact that the new Volkswagen CEO, Mueller, ran Porsche before being promoted to his present gig?! ‘Surprised’?

Other than that ‘surprise’ comment, both Audi and Porsche have reportedly flatly denied the very existence of the defeat devices in their products, even as the EPA research looks solid. Perhaps they should have been advised by their vast legal staffs that flat denial at this point in the game is a dangerous move.

VW has had ample time to come clean, with the EPA, with German regulators, as well as with a wide range of other regulators across the globe. But it’s abundantly clear they haven’t come clean. Moreover, thus far they’ve mostly been allowed to do their own in-house testing. And yes, that is as crazy as it sounds.

If and when the company is found to not have spoken the truth and nothing but the truth after the initial EPA findings (which, remember, followed a multi-year period of blatant lies, denial and deceit), replacing a CEO or pointing fingers at employees will no longer suffice. Heads will have to roll, and they will have to roll straight into prison cells.

At the same time, the company will be ordered, by regulators, lawmakers and judges, to pay fines so hefty its very existence will be in danger. VW lost 40% of its market cap and stands to lose 40% more in fines. An attractive investment? Only until the next lie gets exposed, one would presume.

This is no longer about the cost of repairs. And it’s no longer about greater fools still buying VW cars either. You can’t keep on lying to disguise your earlier lies and expect to get away with it just because you’re a large corporation.

That may not seem obvious or intuitive in today’s environment, but because attacks on VW will come from a multitude of sources -a dozen countries and ten dozen lawyers from all over the world-, regulators won’t want to be found going easy on VW as -some of- their peers go for the jugular. At some point, it gets to be about credibility.

Credibility of the EPA, and of all the other regulators. South Korea and Japan sales are plummeting, and India of all places is now getting on the bandwagon. This is not just a Merkel headache, it’ll be a migraine attack soon. Move the whole thing to China, Angela! Cut your losses…

Why China? We first thought of the VW-China connection because of this Jen Sorensen comic, but thought right away that it would be even much more applicable to China than it is (and it very much is, of course) to the US. That is, the idea of a political system with a built-in defeat device. China’s defeat device is its ‘official numbers’. The government says it wants X% growth, and that’s what comes out a year later.

What defeat device? Well, for one thing, Chinese President Xi Jinping looks to be starting a new personality culture in the vein of Mao, and presumably to that end last week introduced a new 5-year plan. But let’s be frank, these are things that don’t fit in a 2015 economy that relies on trade with the entire world.

The 2016-20 plan, which spans all corners of nation-building, represents Xi’s best chance to enact his reforms and establish a legacy before party retirement rules compel him to clear the way for a successor in 2022. “It bears Xi Jinping’s fingerprints, as does everything else in the Chinese government now. He is the top man, not first among equals, just first. One-man rule is back in China,” said Stein Ringen, a professor of sociology and social policy at the University of Oxford. “This is Xi saying, ’I am in charge and I will continue to be in charge.’”

That Xi goes down this path anyway shows us that he still seeks total control in the Mao or Deng Xiao Ping tradition, even though that is not remotely possible in an even half-open economic system. In China’s economy today, GDP growth can neither be planned nor fabricated. But the numbers still can! Which is where the defeat device comes in.

Xi Jinping cannot resist the temptations of a personality culture and at the same time demands a minimum 6.5% GDP growth over the next five years. A volatile combination. Question then is: what happens if and when growth is much lower than that? Who is Xi going to blame? And who are the Chinese people going to blame? What are the odds that a sub-6.5% growth rate will lead to mayhem?

But that’s just one side of the tale. There are many western observers, quite a few of them quite knowledgeable, who put Chinese GDP growth already at much less than 6.5 %. Lombard Street, Chris Balding, the Li Keqiang Index, Capital Economics, Danny Gabay, you just Google them, there are far too many critical views to ignore. And they on average put REAL China GDP growth at less than half XI’s 6.5% number.

And so again: what will happen when Mao-wannabe Xi can no longer fudge the numbers enough to make his 1.3 billion people believe? What will happen when the PBoC cannot buy sufficient assets with sufficient printed mullah to keep markets appear steady that haven’t been steady in ages?

The 5-year plan calls for GDP to double from 2010-2010, and for per capita income to do the same. Imagine if the US or EU set such goals. There’s no prediction, whether from the OECD or IMF or one of various central banks that comes even close to being correct after just one year, let alone five.

Xi Jinping’s 5-year plan should be read in the same way that one reads Alice in Wonderland. It is wishful thinking devoid of any sense of reality, and it’s only the inbuilt ‘official number’ defeat device that can provide it with an air of importance.

Apparently, China’s emissions numbers follow the same path, and the link to Volkswagen is again awfully easy to make in that respect too:

China has been consuming as much as 17% more coal each year than reported, according to the new government figures. By some initial estimates, that could translate to almost a billion more tons of carbon dioxide released into the atmosphere annually in recent years, more than all of Germany emits from fossil fuels.

The adjusted data, which appeared recently in an energy statistics yearbook published without fanfare by China’s statistical agency, show that coal consumption has been underestimated since 2000, and particularly in recent years. The revisions were based on a census of the economy in 2013 that exposed gaps in data collection, especially from small companies and factories.

Illustrating the scale of the revision, the new figures add about 600 million tons to China’s coal consumption in 2012 — an amount equivalent to more than 70% of the total coal used annually by the United States.

In other words, the deceit is built-in, it’s a feature not a flaw. That goes for both China’s and Volkswagen’s emissions models, and it goes for Xi Jinping’s 5-year plan. One common element seems to be desperation, the knowledge that certain aspired conditions cannot be met, and the subsequent decision to then fudge and cheat. That decision is made necessary by one thing only: incompetence.

We don’t want to harp this horse to death, the overall idea should be clear by now. But while writing, we do get new ideas popping up. Like those 750,000 Germans who depend on Volkswagen, directly or indirectly, for their jobs, can all move to China, and settle in some of the abundant ghost cities.

Their homes in Wolfsburg et al can then be made available to the 1 million or so refugees that Germany expects to settle in this year. Win win win, everybody happy.

But we remain anxious about what will happen if and when it becomes clear that the Chinese doubling of GDP and incomes is just a weird fantasy of a man who feels omnipotent enough to think he can control global financial markets. China has malinvested to such an extent that major busts are inevitable.

The British steel industry knows exactly what we mean. And predictions are that a year from now, all US aluminum smelters will be closed. China exports deflation. And that is being felt in its domestic economy too. So it looks like either Xi will need to crack down on his people, or they will crack down on him. Neither is an enticing prospect.

But he can’t tell the truth either, because it’s too far removed from the fairy tales he’s been telling. Just like Volkswagen.

Oct 202015
 
 October 20, 2015  Posted by at 9:11 am Finance Tagged with: , , , , , , , , , ,  5 Responses »


Hans Behm Windy City tourists at Monroe Street near State 1908

Another Quarter Of Remarkably Precise China GDP Growth Data (Reuters)
China’s Better-Than-Expected GDP Prompts Skepticism From Economists (WSJ)
Chinese Economists Have No Faith In 7% Growth ‘Target’ (Zero Hedge)
China’s Capital Outflows Top $500 Billion (FT)
China Heads For Record Crude Buying Year (Reuters)
Britain’s Love Affair With China Comes At A Price (AEP)
The Perfect Storm That Brought Britain’s Steel Industry To Its Knees (Telegraph)
Deutsche Bank, Credit Suisse Set to Scale Back Global Ambitions (Bloomberg)
Wal-Mart Puts The Squeeze On Suppliers To Share Its Pain (Reuters)
Brazil’s Corruption Crackdown Can’t Be Stopped (Bloomberg)
US Supreme Court May Weigh In on a Student Debt Battle (Bloomberg)
New Canada PM Justin Trudeau: Out of Father’s Shadow and Into Power (Bloomberg)
Farewell Fossil Fools – Harper And Abbott Both Dispatched (CS)
Death by Fracking (Chris Hedges)
Is There A War Crime In What The Dutch Safety Board Is Broadcasting? (Helmer)
Stranded in Cold Rain, a Logjam of Refugees in the Balkans (NY Times)
Without Safe Access To Asylum, Refugees Will Keep Risking Their Lives (Crawley)
Merkel In Turkey: Trade-Offs And Refugees (Boukalas)
Greek Coast Guard Rescues 2,561 Migrants Over The Weekend (AP)

Maybe Beijing is just very good at predicting.

Another Quarter Of Remarkably Precise China GDP Growth Data (Reuters)

China GDP releases are starting to look like near-perfect landings each and every time, in all kinds of weather conditions and visibility. Yet another quarter has just gone by – literally less than three weeks ago – and already statisticians have reported that growth slowed a tiny sliver from Beijing’s 2015 target of 7% recorded for the first half of the year. Now it’s 6.9%, slightly above the Reuters consensus forecast from 50 economists of 6.8%. It is difficult to understate just how precise such figures are in the grand scheme of economic data reporting. It is also difficult to ignore just how remarkable this stability is considering the Chinese authorities are trying to rebalance the entire economy away from reliance on exporting manufacturing goods toward domestic consumer spending.

And that worry about a Chinese growth slowdown was one of the main reasons cited by the U.S. Federal Reserve for holding off last month on its first rate rise in nearly a decade. That’s also not to mention that China growth concerns dominated the International Monetary Fund and World Bank’s latest meetings in Lima, Peru. In the past three years, Chinese GDP data as reported have only missed the Reuters Polls consensus three times, and on each occasion it was because the reported growth figure beat by just 0.1 percentage point. For the periods of Q4 2013 through to Q1 of this year, the reported figure was exactly on forecast.

Other large and important global economies are nowhere near as accurate. U.S. growth data have taken even the most pessimistic forecaster completely off guard on several occasions since the financial crisis, most recently in the first quarter of last year. The initial report for Q1 GDP this year also matched the lowest forecast. Initial U.S. growth data have only actually been reported exactly in line with expectations three times in the last half decade. It seems implausible that economists, who are often widely panned as a group for failing to predict economic turning points, are uncannily able to nail Chinese GDP within a few tiny slivers of a percentage point each and every time.

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Not much use trying to analyze something so obvious.

China’s Better-Than-Expected GDP Prompts Skepticism From Economists (WSJ)

Within minutes of China’s publishing its rosier-than-expected numbers, a wave of skepticism emanated from economists over the accuracy of the official 6.9% third-quarter growth figure. Economists’ doubts centered in part on the apparent disconnect between the headline figure and the underlying data. Both exports and imports declined during the third quarter, and industrial production was weaker than expected. Factories have seen 43 consecutive months of falling prices and—despite a flood of government infrastructure spending—fixed-asset investment decelerated in September. While retail sales and services have held up, and new lending data in September point to a pickup in demand, these factors haven’t been enough to offset the parade of negative data, economists said.

“When you look at the numbers, it’s not entirely easy to see how GDP growth held up so well,” said Société Générale CIB economist Klaus Baader. The weak reports leading up to Monday’s GDP release had strengthened the impression that China is increasingly under siege to reach its 2015 growth target of about 7%, which already would be its slowest pace in a quarter century. Economists say the world’s second-largest economy is far from collapsing, though a number of them say they believe actual growth is one or two percentage points below the official figure. China’s official growth statistics have long been viewed with skepticism. Although the methodology has improved exponentially since the days of the 1958-61 Great Leap Forward, when cadres were encouraged to inflate production statistics to please Chairman Mao, many say there is still a focus on reaching a predetermined number, even when underlying conditions change.

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Much better index, and Pettis explaining how China is both much worse and not all that bad (I disagree).

Chinese Economists Have No Faith In 7% Growth ‘Target’ (Zero Hedge)

Earlier today in “The Truth Behind China’s GDP Mirage: Economic Growth Slows To 1999 Levels”, we pointed out that Beijing may be habitually understating inflation for domestic output, which has the effect of making “real” GDP less “real” than nominal GDP. This is what we’ve called the “deficient deflator math” problem and it raises questions about whether China is netting out import prices when they calculate the deflator. If they’re not, then the NBS is likely overstating GDP during periods of rapidly declining commodities prices. If Beijing is indeed understating the deflator it’s not entirely clear that it’s their fault, as robust statistical systems take time to implement, especially across an economy the size of China’s.

That said, there are plenty of commentators who believe that the practice of overstating GDP is policy and exists with or without an understated deflator. Put simply: quite a few people think China is simply lying about its economic output. To be sure, there’s ample evidence to suggest that Beijing’s critics are right. After all, the Li Keqiang index doesn’t appear to be consistent with the numbers coming out of the NBS and the degree to which the data tracks the Communist party’s “target” is rather suspicious (and that’s putting it nicely).

In effect, everyone is perpetually in an awkward scenario when it comes to Chinese GDP data. Economists are forced to “predict” a number that they know is gamed and while that’s pretty much always the case across economies (just see “double adjusted” US GDP data for evidence), with China it’s arguably more blatant than it is anywhere else, and one could run up a pretty impressive track record simply by betting with Beijing’s “target.” It’s with all of this in mind that we bring you the following clip from University of Peking economist Michael Pettis, whose outlook is apparently far more dour than his compatriots:

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I can’t see how or why this would stop.

China’s Capital Outflows Top $500 Billion (FT)

Capital outflows from China topped $500bn in the first eight months of this year, according to new calculations by the US Treasury that highlight the shifting fortunes in the global economy. The outflows, which peaked at about $200bn during the market turmoil in August according to the estimates released on Monday, have also contributed to a shift by Washington in its assessment of the valuation of China’s currency, the renminbi. In its latest semi-annual report to Congress on the global economy, the US Treasury dropped its previous assessment that the renminbi was “significantly undervalued”. Instead, the Treasury said the Chinese currency was “below its appropriate medium-term valuation”. “Given economic uncertainties, volatile capital flows and prospects for slower growth in China, the near-term trajectory of the RMB is difficult to assess,” Treasury economists wrote.

“However, our judgment is that the RMB remains below its appropriate medium-term valuation.” The new language reflects the cautious welcome that the Obama administration has given to Beijing’s efforts in recent months to prop up the renminbi since China announced on August 11 that it would allow a greater role for the market in setting the currency’s exchange rate. It is also a sign of the recognition in Washington that even as it believes China’s currency should strengthen in the longer term, in the short term the renminbi is facing downward pressures because of several factors including what amount to historic outflows from China and other emerging economies. “Market factors are exerting downward pressure on the RMB at present, but these are likely to be transitory,” the Treasury said. Among those factors, Treasury economists wrote, was the unwinding of carry trades betting on the appreciation of the renminbi.

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Q: what will happen to prices when Chinese storage has filled up its teapots?

China Heads For Record Crude Buying Year (Reuters)

As China closes in on the US as the world’s biggest crude oil importer, demand from private refiners and stockpiling of cheap oil is expected to keep imports at record levels after a wobble in the third quarter. Despite slower growth in recent months – crude imports rose just 1.3% in September on a year earlier – buying for October-November delivery has picked up strongly, traders and analysts say. The purchases will ease concerns of a sharp slowdown in Chinese buying and support prices in coming months, analysts said. The increased buying has shown up in tanker movements and freight rates, said Energy Aspects analyst Virendra Chauhan, and analysts are upgrading earlier forecasts for second half growth. “Despite a slowing Chinese economy, crude imports remain robust on the back of accelerated stockpiling activities into operating and commercial storage,” said Wendy Yong, analyst at oil consultancy FGE.

Since July, China has also granted nearly 700,000 barrels per day (bpd) of crude import quotas to small refiners, known as “teapots”, or roughly 10% of China’s current total imports, as part of efforts to boost competition and attract private investment, creating a new source of demand. “The teapots are super-active,” said one oil trader, with many racing to fill their new quotas. And state-owned refiners are restocking after a third-quarter lull. Unipec, the trading arm of Asia’s top refiner Sinopec, bought 6 million barrels of North Sea Forties crude and 2.9 million barrels of Russian ESPO for loading this month, and it has also stepped up Angolan crude purchases for November. To accommodate the oil, new storage tanks on southern Hainan island have either been put to use or are due to be filled with crude from end-2015.

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Something to do with licking certain body parts.

Britain’s Love Affair With China Comes At A Price (AEP)

It is a sobering experience to travel through eastern China with a British passport. Again and again you run into historic sites that were burned, shelled or sacked by British forces in the 19th century. The incidents are described in unflattering detail on Mandarin placards for millions of Chinese national pilgrims, spiced with emotional accounts of the Opium Wars. The crown jewel of this destructive march was the Summer Palace of the Chinese emperors outside Beijing, looted of its Qing Dynasty treasures by Lord Elgin in 1860, and burned to ground. It was a reprisal for the murder of 18 envoys by the Chinese court, but the exact “casus belli” hardly matters anymore. The defilement lives on in the collective Chinese mind as a high crime against the nation, the ultimate symbol of humiliation by the West.

The Communist Party has carefully nurtured the grievance under its “patriotic education” drive. David Marsh, from the Official Monetary and Financial Institutions Forum, says Britain’s leaders are implicitly atoning for a colonial past by rolling out the red carpet this week for Chinese President Xi Jinping, and biting their tongue on human rights. They are acknowledging that British officialdom is in no fit position to lecture anybody in Beijing. The exact line between good manners and kowtowing is hard to define, but George Osborne came close to crossing it on his trade mission to China last month, earning plaudits from the state media for his “pragmatism” and deference. But as the Chancellor retorted, you have to take risks in foreign policy. Moral infantilism is for the backbenches. “China is what it is,” he said.

The proper question for David Cameron and Mr Osborne is whether they have accurately judged the diplomatic and commercial trade-off in breaking ranks with other Western allies and throwing open the most sensitive areas of the British economy to Chinese expansion, and whether they will reap much in return. The US Treasury was deeply irritated when the Chancellor defied Washington and signed up to the Asian Infrastructure Investment Bank (AIIB), China’s attempt to create an Asian rival to the Bretton Woods institutions controlled by the West. Mr Osborne was correct on the substance. Congress acted foolishly in trying to smother the AIIB in its infancy and stem the rise of China as a financial superpower. It was tantamount to treating the country as an enemy, an approach that soon becomes self-fulfilling.

The AIIB is exactly what is needed to recycle China’s trade surpluses back into the world economy, just as the US Marshall Plan recycled American surpluses in the 1950s. The problem is that Britain carelessly undercut a close ally, putting immediate mercantilist interests ahead of a core strategic relationship. Anglo-American ties are now at their lowest ebb for years, a risky state of affairs at a time when the UK faces a showdown with the European Union.

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Overinvestment.

The Perfect Storm That Brought Britain’s Steel Industry To Its Knees (Telegraph)

Britain’s steel industry is caught in a “perfect storm”, ravaged by global economics and politics, reducing an industry that once led the world to a mere bit player on the global stage. Just 12m tonnes of the metal that is a basic raw material for the modern world were produced in the UK in 2013, according to the World Steel Association, out of a global total of 1.65bn. In 1983 this figure was 15m tonnes out of a total 663bn. However, the number of people employed making the metal in Britain has dropped from 38,000 in 1994 to less than 18,000 today. While productivity improvements account for some of the decline, with worldwide demand more doubling than in a generation, there are other factors that are inflicting a much heavier toll on the industry. Globalisation is the main one, according to Chris Houlden at commodities analyst CRU.

“The issue facing UK steel has been developing since the financial crisis,” he says. “Demand for steel in Britain and the EU has fallen and not recovered and there’s persistent global overcapacity.” While things weren’t all sunshine and roses ahead of the crash – the sector faced the universal pressures to find efficiencies and savings – Britain’s steel industry could function successfully with the growing global economy gobbling up available output, led by China’s burgeoning growth. Today things are different. Beijing is pencilling in annual growth of about 7pc, half the rate seen in heady pre-crisis times as its economy industrialised, placing huge demand on the country’s steel mills to turn out the beams and sheets needed for machines and construction.

Thanks to heavy investment in its steel industry, China is now responsible for half of the world’s steel output – up from 10pc a decade ago – and is reluctant to let it go to waste. As a result, China’s mills are dumping excess output abroad, and the country’s overcapacity is estimated to be 250m tonnes a year. “China’s production is not abating,” says Peter Brennan, European editor at steel industry data provider Platts. “You might have thought they would cut capacity but in a country where industry is effectively government controlled, it’s not happened. In what’s arguably a more unstable society, the government has no intention of cutting masses of jobs.”

The sentiment is echoed by the International Steel Statistics Bureau. “It would take a major reversal of the slowdown in the Chinese economy to prevent them pushing steel abroad,” says ISSB commercial manager Steve Andrews. “That’s why they are looking externally. There’s not the political will to remove capacity. They have taken some of the old and highly polluting plants out as they look at improving air quality but a lot of their stuff is big and modern.” The result is cheap steel coming on to the market, pushing prices down. But it’s not just China that is dumping output. “China is not unique,” says Houlden. “There’s low to no growth in a lot of other major steel producers such as Brazil and Russia, so they are doing it, too. Japan, the world’s second largest producer, is also looking to export more steel.”

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All banks are in deep shit.

Deutsche Bank, Credit Suisse Set to Scale Back Global Ambitions (Bloomberg)

Europe’s last global banks are caving in to pressure from regulators and preparing to tell investors just how much their aspirations will shrink. “The European banks were too long holding onto the past and not realizing that this change is for good – it’s permanent,” said Oswald Gruebel, a former chief executive officer of both UBS and Credit Suisse. “The main reason for reducing global investment banking is that with the capital requirements which the regulators put on these banks, you cannot make any decent return.” Deutsche Bank announced sweeping management changes on Sunday, less than two weeks before co-CEO John Cryan will present his plans to scale back the trading empire built by his predecessor.

On Wednesday, Tidjane Thiam will probably reveal a strategy to prune Credit Suisse’s investment bank in favor of wealth management. Barclays, BNP Paribas and Standard Chartered are also trimming operations. Europe’s global lenders are struggling to adapt to rising capital requirements, record-low interest rates and shrinking opportunities for growth. Their retrenchment risks further squeezing lending to economies in the region and handing more business to U.S. competitors, which were quicker to raise capital levels and are benefiting from growth at home. “Everything that’s being done should have been done years ago,” said Barrington Pitt Miller at Janus Capital in Denver. “The European muddle-through scenario has been proven not to be a terribly good one.”

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Very predictable, and very blind too: “..Wal-Mart believes it can grow sales by 3 to 4% a year over the next three years..”

Wal-Mart Puts The Squeeze On Suppliers To Share Its Pain (Reuters)

Suppliers of everything from groceries to sports equipment are already being squeezed for price cuts and cost sharing by Wal-Mart. Now they are bracing for the pressure to ratchet up even more after a shock earnings warning from the retailer last week. The discount store behemoth has always had a reputation for demanding lower prices from vendors but Reuters has learned from interviews with suppliers and consultants, as well as reviewing some contracts, that even by its standards Wal-Mart has been turning up the heat on them this year. “The ground is shaking here,” said Cameron Smith, head of Cameron Smith & Associates, a major recruiting firm for suppliers located close to Wal-Mart’s headquarters in Bentonville, Arkansas. “Suppliers are going to have to help Wal-Mart get back on track.”

For the vendors, dealing with Wal-Mart has always been tough because of its size – despite recent troubles it still generates more than $340 billion of annual sales in the U.S. That accounts for more than 10% of the American retail market, excluding auto and restaurant sales, and the company increasingly sells a lot overseas too. To risk having brands kicked off Wal-Mart’s shelves because of a dispute over pricing can badly hurt a supplier. On Wednesday, Wal-Mart stunned Wall Street by forecasting that its earnings would decline by as much as 12% in its next fiscal year to January 2017 as it struggles to offset rising costs from increases in the wages of its hourly-paid staff, improvements in its stores, and investments to grow online sales.

This at a time when it faces relentless price competition from Amazon.com, dollar stores and regional supermarket chains. Keeping the prices it pays suppliers as low as it can is essential if it is to start to claw back some of this cost hit to its margins. Helped by investments to spruce up stores and boost worker pay, Wal-Mart believes it can grow sales by 3 to 4% a year over the next three years, or by as much as $60 billion, offering suppliers new opportunities to boost their own revenues.

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Here’s hoping.

Brazil’s Corruption Crackdown Can’t Be Stopped (Bloomberg)

In a continent of peacocks, Brazilian federal judge Sergio Moro makes an unlikely celebrity. Laconic and poker-faced, he has little time for the spotlight, and yet his name is emblazoned on t-shirts and protest banners, and splashed across social media. Why the fuss? Check out the 13th federal district court, where Moro has presided over the largest corruption investigation in the country’s history, sent muckety-mucks to jail and helped restore civic pride in a land where too often justice has been honored in the breach. So after the Brazilian Supreme Court ruled last month to take a high-profile defendant named by witnesses in the landmark Petrobras case away from the 13th district, worried citizens hit the streets. Is the so-called Operation Carwash investigation into looting at the state oil company in danger of getting derailed, as some claim?

Brazil’s white-collar crooks should be so lucky. True, the scope of the scam at Latin America’s biggest corporation might never have come to light had it not been for the 43-year-old judge, who specializes in money-laundering cases, and a dedicated cadre of prosecutors. From their base in Curitiba, a city in southern Brazil, investigators exposed what Prosecutor General Rodrigo Janot called a “complex criminal organization” bent on skimming money from padded supply contracts with Petrobras into political coffers. But getting to Curitiba took the collaboration of the best minds in public service, from the federal police to the Finance Ministry’s financial intelligence unit. That web of sleuths and wonks is the best assurance that the effort to shut down Brazil’s most brazen political crime ring will carry on, no matter who holds the gavel.

The probe began when federal police watching a gas station and one-time car wash (hence the name) in the nation’s capital uncovered a money-changing scheme to spirit gains overseas. The public prosecutor’s office took up the chase and, tapping into finance ministry data, followed the money trail to Petrobras. Janot took the investigation across the Atlantic, where Swiss prosecutors found evidence pointing to the head of Brazil’s lower house, as well as to corporate leaders. Some of Brazil’s biggest oil and construction executives are behind bars, and dozens of politicians are under investigation, including the head of the senate. And despite recently ruling to spin off parts of the investigation, the Supreme Court has consistently buttressed Moro’s authority in the past.

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“One in four borrowers is either delinquent or in default on his or her student loans.”

US Supreme Court May Weigh In on a Student Debt Battle (Bloomberg)

Mark Tetzlaff is a 57-year-old recovering alcoholic who has been convicted of victim intimidation and domestic abuse. He may also be the person with the best shot at upending the way U.S. courts treat student debt for bankrupt borrowers. Tetzlaff has spent three years battling lawyers for the Department of Education over the right to have his student loans canceled in bankruptcy. On Thursday, he appealed his case to the Supreme Court. If the nation’s highest court takes the case on, it will be one of the rare occasions when it has addressed the $1.3 trillion pile of student debt held by 41 million Americans. Tezlaff also got a new attorney after representing himself for most of his case. The lawyer, Douglas Hallward-Driemeier, successfully argued part of the landmark June case that made same-sex marriage a legal right in all 50 states.

Hallward-Driemeier and his team have asked the court to clarify 1970s-era rules that prevent borrowers from getting rid of education debt in bankruptcy, except in cases in which repaying it would constitute an “undue hardship.” Lawmakers never fully defined “undue hardship,” leaving it to the courts to define these special, and rare, circumstances in individual cases. Tetzlaff has said that the standard being applied to his case is unconstitutional. The Supreme Court may be tempted to consider the case partly because it would be able to resolve a split between federal courts in their interpretation of the law, according to court documents. Courts disagree mainly on which of two tests should be used to determine whether someone can erase his or her debt in bankruptcy.

The so-called Brunner test is used in most federal courts and was applied in Tetzlaff’s case. It is the strictest version of the standard because it requires debtors to prove that they have diligently tried to repay their loans, that making any payments would deprive them of a “minimal” standard of living, and that the hardship affecting them today will persist long into the future. Over the past two decades, lawyers arguing on behalf of the government have further pushed courts to take the most stringent view of each one of those components. Tezlaff’s legal team has said the Supreme Court should instead apply a less harsh alternative to the Brunner test, known as the “totality of the circumstances” test, which has been gaining ground in courts across the country.

[..] It would be hard to overstate the significance of this case for people struggling with student debt. Student loans are the largest source of consumer debt aside from mortgages. The total amount of outstanding student debt is expected to double to $2.5 trillion in the next decade. One in four borrowers is either delinquent or in default on his or her student loans.

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Surprisingly nice write-up of Trudeau for Bloomberg. I wish Justin well, but Canada’s in for very hard times.

New Canada PM Justin Trudeau: Out of Father’s Shadow and Into Power (Bloomberg)

As a young man, Justin Trudeau continually sought respite from his father’s long shadow. He debated in university as Jason Tremblay, boxed as Justin St. Clair and eventually settled on Canada’s west coast – as far in Canada as he could get from being Pierre Trudeau’s eldest and still be close to great skiing. Now 43, he has come full circle, reviving a moribund Liberal Party to a solid majority amid a new wave of the Trudeaumania that swept his father to power in 1968. In ousting Stephen Harper Monday, he becomes the country’s first inter-generational prime minister and gets to move back into his childhood home. Trudeau campaigned on a brand of optimism, transparency and youthful energy – while promising government activism to stimulate a weak economy and address middle class anxiety over income inequality and retirement security.

In contrast to the departing Harper, he will run deficits willingly, reduce Canada’s combat role against the Islamic State and get behind the Iran nuclear deal. He’ll also rule out the purchase of F-35 fighters in favor of more spending on the navy and join President Barrack Obama in Paris in pushing for aggressive action on climate change. He is, in many ways, the happy faced anti-Harper. Trudeau’s political role model is not so much his beloved “papa,” whose public persona over 15 years as prime minister mixed charisma and aloofness, but his maternal grandfather, Jimmy Sinclair, a consummate glad-handing, baby-kissing Scottish immigrant to Canada and Rhodes scholar.

It was no accident that Trudeau held his final campaign event Sunday night in the Vancouver constituency his grandfather represented from 1940 to 1958. “I’m not sure if love of campaigning has any kind of genetic component, but if it does, I can trace my passion for it straight back to grandpa,” he told an enthusiastic crowd on what was the birthday of both his father and his eldest son, eight-year-old Xavier James, named for Sinclair. “He loved knocking on doors, getting out, meeting with people, taking the time to really listen to what they had to say. It’s his style that I’ve adopted as my own.”

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“Both of them had a penchant for using precisely the same words to describe the country’s future as an “Energy Superpower”.

Farewell Fossil Fools – Harper And Abbott Both Dispatched (CS)

The prospects for the forthcoming global climate conference to be held in Paris later this year have received a significant diplomatic boost. The two developed world leaders most intent on undermining the conference – Australia’s Tony Abbott and Canada’s Stephen Harper – have been dispatched to the political wilderness. Based on early Canadian election vote counting Monday night, Harper’s Conservative Party look set to lose office, with the centrist Liberals having been declared the winner of 173 seats at the time of writing and projected to win 184 of the 338 lower house seats (according to Canada’s Globe and Mail), giving them the ability to rule in their own right. The Conservatives have suffered big losses, with latest counting giving them 92 seats with a projection of 102 seats.

Back in June 2014 when Abbott visited Harper in Canada, the two put on an act of professing concern for climate change while describing a policy that would actually limit carbon emissions as something that would “clobber the economy” in Abbott’s words while being “job killing” in Harper’s words. As Climate Spectator noted in Harper and Abbott: Two fossils fooling no one, what was plainly obvious was that both Harper and Abbott had confused the interests of the coal mining industry (in Abbott’s case) and tar sands (Harper) with the interests of their respective country as a whole.

A year on it appears the two of them had far too narrowly focussed and deeply flawed economic strategies. [..] Harper and Tony Abbott have followed eerily similar strategies. Both of them had a penchant for using precisely the same words to describe the country’s future as an “Energy Superpower”. Unfortunately for them the plummeting price of a barrel of oil and a tonne of coal left them both floundering without a coherent economic narrative for how to drive their respective nations’ future prosperity. They then both resorted in desperation to the bottom of the barrel trying to using fears of terrorism in an attempt to restore their popularity.

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“Resistance will be local. It will be militant. It will defy the rules imposed by the corporate state. It will turn its back on state and NGO environmental organizations. And it will not stop until corporate power is destroyed or we are destroyed.”

Death by Fracking (Chris Hedges)

The maniacal drive by the human species to extinguish itself includes a variety of lethal pursuits. One of the most efficient is fracking. One day, courtesy of corporations such as Halliburton, BP and ExxonMobil, a gallon of water will cost more than a gallon of gasoline. Fracking, which involves putting chemicals into potable water and then injecting millions of gallons of the solution into the earth at high pressure to extract oil and gas, has become one of the primary engines, along with the animal agriculture industry, for accelerating global warming and climate change. The Wall Street bankers and hedge fund managers who are profiting from this cycle of destruction will—once clean water is scarce and crop yields decline, once temperatures soar and cities disappear under the sea, once droughts and famines ripple across the globe, once mass migrations begin—surely profit from the next round of destruction.

Collective suicide is a good business, at least until it is complete. It is a pity most of us will not be around to see the power elite go down. [..] The activists are waging a war against a corporate state that is deaf and blind to the rights of its citizens and the imperative to protect the ecosystem. The corporate state, largely to pacify citizens being frog-marched to their own execution, passes environmental laws and regulations that, at best, slow the ongoing environmental destruction. Corporations, which routinely ignore even these tepid restrictions, largely write the laws and legislation designed to regulate their activity. They rewrite them or overturn them as the focus of their exploitation changes. They turn public hearings on local environmental issues into choreographed charades or shut them down if activists succeed in muscling their way into the room to demand a voice.

They dominate the national message through a pliable and bankrupt corporate media and slick public relations. Elected officials are little more than corporate employees, dependent on industry money to stay in office and, when they retire from “public service,” salivating for jobs in the industry. Environmental reform has become a joke on the public. And the Big Green environmental groups are complicit because they rely on donors, at times from the fossil fuel and animal agriculture industries; they are silent about the reality of corporate power, largely ineffectual, and part of the fiction of the democratic process. Resistance will be local. It will be militant. It will defy the rules imposed by the corporate state. It will turn its back on state and NGO environmental organizations. And it will not stop until corporate power is destroyed or we are destroyed.

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John Helmer has written a deep-digging and extensive series on the Dutch MH17 report (h/t Yves Smith). I’ve left the topic alone, because Holland was never in a position to write a neutral analysis. From the get-go it was made clear that Russia and the rebels were responsible, proof be damned, because that fitted the overall anti-Russia mood whipped up by US and EU. What’s perhaps most galling is that the question of intent has been taken off the table altogether: whoever shot down the plane, did they do it on purpose? In ignoring that question, the answer is implied, and analysis makes way for propaganda. Victims’ families be damned.

Is There A War Crime In What The Dutch Safety Board Is Broadcasting? (Helmer)

Tjibbe Joustra, chairman of the Dutch Safety Board, wants it to be very clear that Russia is criminally responsible for the destruction of Malaysian Airlines Flight MH17 on July 17, 2014; that a Russian-supplied ground-to-air missile, fired on Russian orders from territory under Russian control, exploded lethally to break up the MH17 aircraft in the air, killing everyone on board; and that Russian objections to these conclusions are no more than cover-up and dissimulation for the guilty. Joustra also wants to make sure that no direct evidence for what he says can be tested, not in the report which his agency issued last week; nor in the three Dutch government organs which prepared and analysed the evidence of the victims’ bodies, the aircraft remains, and the missile parts on contract to the Dutch Safety Board (DSB) – the Dutch National Aerospace Laboratory (NLR), the Netherlands Organization for Applied Scientific Research (TNO), and the Netherlands Forensic Institute (NFI).

So Joustra began broadcasting his version of what he says happened before the release of the DSB report. He then continued in an anteroom of the Gilze-Rijen airbase, where the DSB report was presented to the press; in a Dutch television studio; and on the pages of the Dutch newspapers. But when he and his spokesman were asked today for the evidence for what Joustra has been broadcasting, they insisted that if the evidence isn’t to be found in the DSB report, Joustra’s evidence cannot be released. So, if the evidence for Joustra’s claims cannot be found in the NLR, TMO and NFI reports either, what exactly is Joustra doing – is he telling the truth? Is he broadcasting propaganda? Is he lying? Is he covering up for a crime?

In the absence of the evidence required to substantiate what the DSB chairman is broadcasting, is the likelihood that Joustra is concealing who perpetrated the crime equal to the probability that he is telling the truth? And if there is such a chance that Joustra is concealing or covering up, is this evidence that Joustra may be committing a crime himself? In English law, that may be the crime of perverting the course of justice. In US law, it might be the crime of obstruction of justice. In German law, it might be the crime of Vortäuschung einer Straftat. By the standard of World War II, Joustra’s crime might be propagandizing for the losing side, that’s to say the enemy of the winning side.

When William Joyce, an Anglo-American broadcaster on German radio during the war and known as Lord Haw-Haw, was prosecuted in London in 1945, he was convicted of treason and hanged. The treason indictment said he “did aid and assist the enemies of the King by broadcasting to the King’s subjects propaganda on behalf of the King’s enemies.” The legality of this indictment and the conviction was upheld by the Court of Appeal and the House of Lords.

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They’re going to die like flies.

Stranded in Cold Rain, a Logjam of Refugees in the Balkans (NY Times)

After weeks of warnings about the dangers involved in Europe’s migrant influx, and fears about winter’s arrival, the worries of public officials and humanitarian groups were realized on Monday when thousands of asylum seekers, many of them families with small children, began to back up at crossings and were stranded in a chilly rain. The backups came just two days after Hungary closed its border with Croatia, and occurred as countries on the north end of the Balkan route tightened border controls while states to its south quarreled over how to manage the unabated human flow into Europe.

The logjam followed a month of relative stability across the Balkans and Central Europe, as countries unofficially worked together to create a safe and relatively quick route north and west by transporting asylum seekers by bus or train from one border to the next, where they could exit on their way toward Germany, Sweden and other desired destinations. The arrangement filled the void left by the European Union, which has talked, bickered and failed to come up with a common solution to the problem of accommodating hundreds of thousands of new arrivals, many fleeing war in Syria, Iraq and Afghanistan, or repression in places like Eritrea in northern Africa.

A recent effort to stem the flow of migrants by keeping them in Turkey, and preventing them from entering the European Union through Greece, faltered over the weekend, when little progress was reported in talks between Chancellor Angela Merkel of Germany and Turkish leaders. No other plans appear to be on the table, and the safety of the migrants has depended upon the cooperation of the countries along the route, many of them dubious about the migration from the start and resentful that Germany has encouraged it by agreeing to accommodate asylum seekers. That policy by the government of Ms. Merkel has created tensions in Germany, as well, where the weekend stabbing of the politician in charge of refugee affairs in Cologne heightened the polemics surrounding the influx.

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“I could get there and back for just €30. That’s because I’m British. I am not Syrian, Afghan, Palestinian, Iraqi, Somali or Eritrean.”

Without Safe Access To Asylum, Refugees Will Keep Risking Their Lives (Crawley)

I stood in the corner of a dusty cemetery on the Greek island of Lesvos and watched a mother bury her child. As the tiny body of a baby boy wrapped in a white sheet was lifted from the boot of a car, she fell to her knees and howled with pain. The child had slipped from her arms into the cold waters of the Aegean as she made the journey from Turkey to join her husband, who had already travelled to Germany to seek protection from the war that is ravaging their home country, Syria. Her baby should not have died. The journey from Turkey to Lesvos is short and safe. If I wanted to take a ferry trip from the port of Mytiline to Ayvalik on the Turkish coast, the trip would take around an hour. I could get there and back for just €30. That’s because I’m British. I am not Syrian, Afghan, Palestinian, Iraqi, Somali or Eritrean.

I am not required to put my life at risk by paying a smuggler hundreds or even thousands of euros to sit in the bottom of a motorised dingy with 30 or 40 other people to take the exact same journey. I do not need to close my eyes and pray that my children and I will make it to the other side without drowning. After a long summer of protracted negotiations about how to respond to the crisis in the Mediterranean region, this is what European asylum policy still looks like in practice. Although (most) EU member states have reluctantly agreed to redistribute 160,000 of those who have already arrived, there is still no legal route for refugees to enter Europe. And with no hope of a better life at home, thousands of people continue to make the illegal, expensive and potentially dangerous journey across the sea. They know the risks, but the water seems like a better option than the alternatives.

Although Turkey offers temporary protection to Syrian refugees, it is not a signatory to the 1967 Protocol which extends the protection available under the 1951 Refugee Convention to those coming from outside Europe. That means no guaranteed access to employment, education or even basic health care. Conditions for Syrian refugees in Turkey are well documented and known to be deteriorating. There is no prospect that things will improve, no hope for a better future. Those who are not from Syria get nothing. And so they come to Europe. Since the beginning of 2015, more than a quarter of a million people have arrived on Lesvos by sea, and still more are coming. More than 70,000 people arrived in September alone and, according to the International Organisation for Migration (IOM), the numbers are set to be even higher for October.

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Cattle trade.

Merkel In Turkey: Trade-Offs And Refugees (Boukalas)

The gilded thrones may have been the perfect expression of Turkish President Recep Tayyip Erdogan’s sultanic ambitions but they appeared to make his guest, Angela Merkel, somewhat uncomfortable judging by the customary photographs. Maybe the German chancellor was thinking that such a lavish setting was not appropriate for discussing the fate of thousands of people whose only surviving assets are their bodies, their children and whatever dollars or euros they have managed to save up to pay their traffickers. Maybe Merkel, as she sat in the kind of showy opulence that usually reveals something deeper, was thinking that she was being used by the Turkish president as a propaganda tool, that her presence in Istanbul just a few days before elections in Turkey was giving Erdogan a powerful boost.

Particularly at a time when the Turkish government is facing so many accusations: of waging war against the Kurds and brushing off every proposal for a peace settlement in a bid to appeal to those who want authoritarian rule; of racism and intolerance; of persecuting its political rivals; and of quashing free speech by cracking down on “unorthodox” journalists who don’t propagate the Erdogan narrative. Merkel cannot be unaware of all this, and even if her own advisers failed to brief her 100 Turkish university professors did in an open letter. Let us accept that on a mission during which she was not just representing Germany but the EU as a whole, Merkel decided to strike a concessionary tone for the sake of the issue at hand: the protection of the refugees, or, rather, the stemming of the flow of refugees.

The idea is that the refugee influx will abate not as a result of peace in Syria but by convincing Turkey to be more vigilant of its borders, to accept the creation of camps on its territory where refugees can be identified and documented and to grant passage to Europe to those who are deemed eligible for refugee status. It is a technical solution to a political problem; ergo, no solution at all. Turkey, naturally, did not just demand financial remuneration for its cooperation. It asked that its own people be given easier to access to Europe. And it got it. It asked that its European accession be speeded up even though it has fulfilled only a handful of the 40 criteria. And it was promised this would happen by the most powerful voice in Europe: the German one.

And what about the refugees? If only they had been the main topic of discussion at that meeting. Instead, they will keep drowning. And if the complex war in Syria continues unabated, even the winter will not prevent them from trying to get across.

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Most shocking: nobody’s shocked by dead babies anymore.

Greek Coast Guard Rescues 2,561 Migrants Over The Weekend (AP)

Greece’s coast guard says it has rescued 2,561 people in dozens of incidents in the eastern Aegean over the weekend as Europe’s refugee crisis continues unabated. The coast guard said Monday the rescues occurred in 69 operations from Friday morning until Monday morning near eight Aegean islands. The number doesn’t include those who make it ashore themselves from the nearby Turkish coast, often in overcrowded and unseaworthy vessels. On Sunday, the bodies of two women, a baby and a teenager were recovered near the remote island of KastelLorizo after their vessel overturned, while 12 others were rescued by a passing sailing boat. The deaths came a day after a 7-year-old boy died after falling into the water from a boat carrying 80 people who reached the island of Farmakonisi.

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Aug 282015
 
 August 28, 2015  Posted by at 11:10 am Finance Tagged with: , , , , , , , , ,  4 Responses »


Dorothea Lange Resettlement project, Bosque Farms, New Mexico Dec 1935

Real Chinese GDP Growth Is -1.1%, According to Evercore ISI (Zero Hedge)
BofA: China Stock Rout To Resume As Intervention Ends (Bloomberg)
Money Pours Out of Emerging Markets at Rate Unseen Since Lehman (Bloomberg)
What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse (ZH)
Global Equity Funds Witness Biggest-Ever Exodus (CNBC)
PBOC Uses Derivatives to Tame Yuan Fall Expectations (WSJ)
China Local Govt Pension Funds To Start Investing $313 Billion ‘Soon’ (Reuters)
Chinese Banking Giants: Zero Profit Growth as Bad Loans Pile Up (Bloomberg)
The Great Wall Of Money (Hindesight)
China Will Respond Too Late to Avoid -Global- Recession: Buiter (Bloomberg)
China’s Ongoing FX Trilemma And Its Possible Consequences (FT)
China Has Exposed The Fatal Flaws In Our Liberal Economic Order (Pettifor)
Albert Edwards: “99.7% Chance We Are Now In A Bear Market” (Zero Hedge)
Who Will Be the Bagholders This Time Around? (CH Smith)
Now’s The Right Time For Yellen To Kill The ‘Greenspan Put’ (MarketWatch)
The Emperor Is Naked; Long Live The Emperor (Fiscal Times)
IMF Could Contribute A Fifth To Greek Bailout, ESM’s Regling Says (Bloomberg)
Yanis Varoufakis: ‘I’m Not Going To Take Part In Sad Elections’ (Reuters)
For Those Trying to Reach Safety in Europe, Land can be as Deadly as Sea (HRW)

That sounds more like it.

Real Chinese GDP Growth Is -1.1%, According to Evercore ISI (Zero Hedge)

With Chinese data now an official farce even among Wall Street economists, tenured academics, and all others whose job obligation it is to accept and never question the lies they are fed, the biggest question over the past year has been just what is China’s real, and rapidly slowing, GDP – which alongside the Fed, is the primary catalyst of the global risk shakeout experienced in recent weeks. One thing that everyone knows and can agree on, is that it is not the official 7% number, or whatever goalseeked fabrication the communist party tries to push to a world that has realized China can’t even manipulate its stock market higher, let alone its economy.

But what is it? Over the past few months we have shown various unpleasant estimates, the lowest of which was 1.6% back in April. Today we got the worst one yet, courtesy of Evercore ISI, which using its own GDP equivalent index – the Synthetic Growth Index (SGI) – gets a vastly different result from the official one, namely Chinese growth of -1.1% annually. Or rather, contraction. To wit, from Evercore:

Our proprietary Synthetic Growth Index (SG!) fell 1.1% mim in July, and was also down 1.1% y/y. No wonder global commodities are so weak. The most recent 18 months have been much weaker than the 2011-13 period. Even if we adjust our SG I upward (for too-little representation of Services — lack of data), we believe actual economic growth in China is far below the official 7.0% yly. And, it is not improving, Most worrisome to us; the ‘equipment’ portion of Plant & Equipment spending is very weak, a bad sign for any company or country. Expect more monetary and fiscal steps to lift growth.

And here is why the world is in big trouble.

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With confidence gone, is there another option left?

BofA: China Stock Rout To Resume As Intervention Ends (Bloomberg)

The rebound in China’s stocks will be short-lived because state intervention is too costly to continue and valuations aren’t justified given the slowing economy, says Bank of America. “As soon as people sense the government is withdrawing from direct intervention, there will be lots of investors starting to dump stocks again,” said David Cui at Bank of America in Singapore. The Shanghai Composite Index needs to fall another 35% before shares become attractive, he said. The Shanghai gauge rallied for a second day on Friday amid speculation authorities were supporting equities before a World War II victory parade next week that will showcase China’s military might. The government resumed intervention in stocks on Thursday to halt the biggest selloff since 1996.

China Securities Finance, the state agency tasked with supporting share prices, will probably end direct market purchases within the next month or two, Cui said. While the benchmark gauge trades 47% above the levels of a year earlier, data from industrial output to exports and retail sales depict a deepening slowdown. China’s first major growth indicator for August showed the manufacturing sector is at the weakest since the global financial crisis. Profits at the nation’s industrial companies fell 2.9% in July, data Friday showed. Equities on mainland bourses are valued at a median 51 times reported earnings, according to data compiled by Bloomberg. That’s the most among the 10 largest markets and more than twice the 19 multiple for the Standard & Poor’s 500 Index. Even after tumbling 37% from its June 12 peak, the Shanghai gauge is the best-performing equity index worldwide over the past year.

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This is going to be seminal.

Money Pours Out of Emerging Markets at Rate Unseen Since Lehman (Bloomberg)

This week, investors relived a nightmare. As markets from China to South Africa tumbled, they pulled $2.7 billion out of developing economies on Aug. 24. That matches a Sept. 17, 2008 exodus during the week Lehman Brothers went under. The collapse of the U.S. investment bank was a seminal moment in the timeline of the global financial crisis. The retreat from risky assets, triggered by concern over a slowdown in China and higher interest rates in the U.S., has taken money outflows from emerging markets to an estimated $4.5 billion in August, compared with inflows of $6.7 billion in July, data compiled by Institute of International Finance show. It’s lower stock prices that people are most worried about.

Equity outflows from developing nations increased to $8.7 billion this month, the highest level since the taper tantrum of 2013 when the prospect of higher rates in the U.S., making riskier assets less attractive, first shook emerging markets. Debt inflows softened this month while remaining positive at $4.2 billion, the IIF says. “Emerging market investors have been spooked by rising uncertainty about China, and stress has been exacerbated by a combination of fundamental concerns about EM economic prospects and volatility in global financial markets,” Charles Collyns, chief economist at the IIF, said.

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Interconnections.

What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse (ZH)

Earlier today, Bloomberg – citing the ubiquitous “people familiar with the matter” – confirmed what we’ve been pounding the table on for months; namely that China is liquidating its UST holdings. As we outlined in July, from the first of the year through June, China looked to have sold somewhere around $107 billion worth of US paper. While that might have seemed like a breakneck pace back then, it was nothing compared to what would transpire in the last two weeks of August. Following the devaluation of the yuan, the PBoC found itself in the awkward position of having to intervene openly in the FX market, despite the fact that the new currency regime was supposed to represent a shift towards a more market-determined exchange rate.

That intervention has come at a steep cost – around $106 billion according to SocGen. In other words, stabilizing the yuan in the wake of the devaluation has resulted in the sale of more than $100 billion in USTs from China’s FX reserves. That dramatic drawdown has an equal and opposite effect on liquidity. That is, it serves to tighten money markets, thus working at cross purposes with policy rate cuts. The result: each FX intervention (i.e. each round of UST liquidation) must be offset with either an RRR cut, or with emergency liquidity injections via hundreds of billions in reverse repos and short- and medium-term lending ops.

It appears that all of the above is now better understood than it was a month ago, but what’s still not well understand is the impact this will have on the US economy and, by extension, on US monetary policy, and furthermore, there seems to be some confusion as to just how dramatic the Treasury liquidation might end up being. Recall that China’s move to devalue the yuan and this week’s subsequent benchmark lending rate cut have served to blow up one of the world’s most popular carry trades. As one currency trader told Bloomberg on Tuesday, “it’s a terrible time to be long carry, increased volatility – which I think we’ll stay with – will continue to be terrible for carry. The period is over for carry trades.”

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Negative records being set all over.

Global Equity Funds Witness Biggest-Ever Exodus (CNBC)

Investors yanked $29.5 billion out of global equity funds in the week that ended August 26, the biggest single-week outflow on record as markets around the world over went into meltdown mode, according to data from Citi. On a regional basis, U.S. funds suffered the highest level of outflows at $12.3 billion, followed by Asia funds, which saw $4.9 million in redemptions. Citi’s records go back to 2000. European funds, which broke their chain of 14 weeks of inflows, witnessed $3.6 billion in outflows for the week.

Concerns around the outlook for the Chinese economy and jitters around the U.S. Federal Reserve’s impending rate hike have sent global markets into a tailspin over the past week. The MSCI World Index and MSCI Emerging Market Index both slid over 7% between August 19 and August 26. China, the market at the heart of the global selloff, saw losses of a far higher magnitude. The notoriously volatile benchmark Shanghai Composite tumbled 22% over this period, leading to outflows of $1.2 billion from China and Greater China funds during the week.

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Yeah, sure, add more leverage…

PBOC Uses Derivatives to Tame Yuan Fall Expectations (WSJ)

China’s central bank used an unusual and complex financial tool Thursday to tame growing expectations for the yuan to fall, three people familiar with the matter said. The People’s Bank of China intervened in the market for U.S. dollar-yuan foreign-exchange swaps, causing their price to fall sharply, a movement that implies a stronger Chinese currency and lower interest rates in the world’s No. 2 economy in the future, said the people. The move came after waves of sharp selloffs in the Chinese currency in offshore markets, such as Hong Kong’s, where the yuan trades freely, following Beijing’s surprise nearly 2% yuan devaluation on Aug. 11.

Thanks to what each of the three people described as “massive” orders from a few commercial banks acting on the PBOC’s behalf, the so-called one-year dollar-yuan swap spread—in rough terms, a measure of the implied future differential between Chinese and U.S. interest rates—plunged to 1200 points from 1730 points Wednesday. In the offshore market, the spread dropped to 1950 points from 2310 points Tuesday, following the onshore move. A drop in the spread for dollar-yuan swaps, which consist of a spot trade and an offsetting forward transaction, would also imply a weaker spot exchange rate at a predetermined future date.

The currency derivatives are typically used by investors seeking to hedge against exchange-rate and interest-rate fluctuations. “The central bank chose a rarely used tool this time—the FX swaps—to intervene and it did so via a couple of midsize banks, instead of the usual big state lenders that serve as its agent banks,” one of the people said.

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Desperation. Again, remember when pensions were limited to AAA rated assets?

China Local Govt Pension Funds To Start Investing $313 Billion ‘Soon’ (Reuters)

China’s local pension funds will start investing 2 trillion yuan ($313.05 billion) as soon as possible in stocks and other assets, senior government officials said on Friday, in a bid to boost the investment returns of such funds. China said last weekend that it would let pension funds under local government units to invest in the stock market for the first time, a move that might channel hundreds of billions of yuan into the country’s struggling equity market. Up to 30 percent can be invested in stocks, equity funds and balanced funds. The rest can be invested in convertible bonds, money-market instruments, asset-backed securities, index futures and bond futures in China, as well as major infrastructure projects.

“We will actively make early preparations… we will formally start investment operations as soon as possible,” Vice Finance Minister Yu Weiping told a briefing. But the timing of investment will depend on preparations as the National Social Security Fund (NSSF), the manager of local pension funds, will entrust professional investment firms to make actual investments, Yu told reporters after the briefing. “When they (investment firms) will enter the market, the government will not intervene,” Yu said. You Jun, vice minister of human resources and social security, told the same news conference that pension investment will benefit the economy and the country’s capital market, but he downplayed any attempt to support the ailing stock market. “Supporting the stock market or rescuing the stock market is not the function and responsibility of our funds,” You said.

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The crucial point becomes how much of this can be kept hidden.

Chinese Banking Giants: Zero Profit Growth as Bad Loans Pile Up (Bloomberg)

The first two Chinese banking giants to report earnings this week have two things in common: zero profit growth and bad loans piling up at more than twice the pace of a year earlier. Industrial & Commercial Bank of China posted a 31% increase in bad loans in the first half, while Agricultural Bank of China had a 28% jump, their stock-exchange statements showed on Thursday. At a press briefing in Beijing, ICBC President Yi Huiman indicated that the lender may have to abandon a target of keeping its nonperforming loan ratio at 1.45% this year, citing “severe” conditions. The level at the end of June was 1.4%.

The economic weakness and $5 trillion stock-market slump that prompted the central bank to cut interest rates and lenders’ reserve requirements this week may make it harder for China’s banks to revive earnings growth and attract investors. For now, the biggest banks are trading below book value. “We are nowhere near the end of this down cycle, not with the economy wobbling like now,” said Richard Cao at Guotai Junan Securities. ICBC’s profit was little changed at 74.7 billion yuan ($11.7 billion) in the quarter ended June 30, based on an exchange filing, almost matching 74.8 billion yuan a year earlier. That compared with the 75.7 billion yuan median estimate of 10 analysts surveyed by Bloomberg. Nonperforming loans jumped to 163.5 billion yuan, the company said.

Agricultural Bank reported a profit decline of 0.8% to 50.2 billion yuan and bad loans of 159.5 billion yuan, including debt in the construction and mining industries. For ICBC, the biggest increases in nonperforming credit in the first half were in China’s western region, where coal businesses are struggling, the Yangtze River Delta and the Bohai Rim. ICBC, Agricultural Bank and another of China’s large lenders to report on Thursday, Bank of Communications, all reported declines in net interest margins, a measure of lending profitability. The rural lender had the biggest fall, a slide of 15 basis points from a year earlier to 2.78%.

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Bretton Woods.

The Great Wall Of Money (Hindesight)

China is in severe trouble and that trouble has already been reverberating around EM exporters for a number of years. It is just one of many dollar currency peg countries that have experienced tightening conditions because of higher US interest rate guidance and dollar strength. An unwelcome addition to their own domestic issues, but always a circular outcome, as they are inextricably linked to the US by their Bretton Woods II relationship. By devaluing and thus de-stabilising the ‘nominal’ anchor for Asian exchange rates, they will crush the growth engine of the developed countries on whose consumption they so rely on.

Since 2009, we have forecast and documented the unwinding of the Bretton Woods II currency system. Financialisation of our economies and markets, which escalated post-2008 at the instigation of governments and central bankers, is going to go into full reverse for all asset classes. Economies and markets are so entwined that a drop in asset classes will lead the world back into recession. In 2013, we believed the odds had tilted firmly towards increasing debt deflation at the hands of China. Large current account deficits had led to unsustainable debt creation, and as a consequence the trade deficit countries were the first to experience a severe financial crisis. However, on the other side of the equation, the surplus countries were now experiencing their reaction to the crisis.

In November 2013, we wrote: “The deleveraging process which began in 2008 has been a slow burner but is likely now in full swing. The deflationary risks are very high. China is the driver. All eyes on China.” We conceive that this slow-burner of deleveraging, which has occurred since the 2008 crisis, is potentially about to engulf all asset prices. We are beginning to think the unthinkable – that just maybe asset prices will back up 20 to 30% and fast and that through the autumn we could experience even greater price depreciation. Almost 8 years on from the GFC, the Dow Jones Industrials are perched on the edge of a sharp drop.

Will the Ghost of 1937 revisit us eight years on from the Great Crash of 1929, when U.S. stocks and the world economy got roiled all over again? This is already unfolding as we speak. The Yuan movement may well send more Chinese capital floating across the globe into financial assets and real estate, but it will be short-lived. The debt deleveraging which has been engulfing Emerging Markets has just begun to turn into a ranging inferno, which will eventually burn down all, especially overpriced, global assets. Since the GFC, ‘The Great Wall of Money’ that Bretton Woods II has furnished via its vendor-financing relationship, has masked the deleveraging of our world economy. The Great Wall is about to collapse and fall.

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Not too late, but too little. Because too little is all that is left.

China Will Respond Too Late to Avoid -Global- Recession: Buiter (Bloomberg)

China is sliding into recession and the leadership will not act quickly enough to avoid a major slowdown by implementing large-scale fiscal policies to stimulate demand, Citigroup’s top economist Willem Buiter said. The only thing to stop a Chinese recession, which the former external member of the Bank of England defines as 4% growth on “the mendacious official data” for a year, is a consumption-oriented fiscal stimulus program funded by the central government and monetized by the People’s Bank of China, Buiter said. “Despite the economy crying out for it, the Chinese leadership is not ready for this,” Buiter said in a media call hosted Thursday by the Council on Foreign Relations in New York. “It’s an economy that’s sliding into recession.”

Premier Li Keqiang is seeking to defend a 7% economic growth goal at a time when concern over slowing demand in China is fueling volatility in global markets. The true rate of expansion “is probably something closer to 4.5% or less,” Buiter said. Li has repeatedly pledged to avoid stimulus similar to the one following the global financial crisis in 2008 that led to a surge in debt for local governments and corporations. Some economists and investors have long questioned the accuracy of China’s official growth data. When Li was party secretary of Liaoning province in 2007, he said that figures for gross domestic product were “man-made” and therefore unreliable, according to a diplomatic cable published by WikiLeaks in 2010.

“They will respond but they will respond too late to avoid a recession, which is likely to drag the global economy with it down to a global growth rate below 2% – which is in my definition a global recession,” said Buiter.

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“..open capital account, independent monetary policy, and stable tightly managed exchange rate”

China’s Ongoing FX Trilemma And Its Possible Consequences (FT)

From UBS’s Tao Wang on what, post China’s surprise revaluation, is now an oft used phrase, the impossible trinity — AKA the corner China finds itself in:

“The impossible trinity says that a country cannot simultaneously have an open capital account, independent monetary policy, and stable tightly managed exchange rate. Some academics argue that since capital controls are no longer as effective in the current day world, complete monetary policy independence is still not possible without some degree of exchange rate flexibility, even without a fully open capital account – or impossibly duality. Regardless of whether it is an impossible trinity or duality, the fact is that in recent years, as a result of substantial capital controls relaxation, China has found it increasingly difficult to manage independent monetary policy while simultaneously maintaining a fixed exchange rate.

Since last year, the PBOC has had to repeatedly inject liquidity and use the RRR to offset capital outflows – its efforts to ease monetary policy have been less effective because of FX leakages, while at the same time rate cuts are reducing arbitrage opportunities to add further downward pressures on the currency. As China’s government has announced and seems to be committed to fully opening the capital account soon, these challenges will only become greater. Therefore, it is the right thing to do to break the RMB’s dollar peg and move to materially increase its flexibility. At the moment, China’s weak domestic demand and deflationary pressures necessitate further interest rate cuts, which may further fan capital outflows and depreciation pressures.

Meanwhile, not only is the RMB’s recent effective appreciation still hurting China’s tradable goods sector, but the central bank’s defence of the exchange rate is also draining substantial domestic liquidity that necessitates constant replenishing, both of which is undermining the effectiveness of overall monetary policy easing. With a more flexible exchange rate, the RMB can be weakened by outflows and depreciation pressures without draining domestic liquidity, and domestic assets will become relatively cheaper and thus more attractive than foreign assets – which may ultimately alter market expectations to reduce capital outflows.

In addition, a weaker RMB should improve China’s current account balance to also alleviate depreciation pressures. Conversely, if China’s exchange rate is allowed to appreciate along with capital inflows and appreciation pressures, it will make domestic assets more expensive and less attractive, to ultimately worsen China’s current account balance.”

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“The Chinese should have been warned, for they won accolades from Western economists for their “Goldilocks” economy.”

China Has Exposed The Fatal Flaws In Our Liberal Economic Order (Pettifor)

How can we make sense of volatile global stock markets? Economists explained this week’s dramatic falls by pinning responsibility on China. They are at pains to assure us this is not 2008 all over again. I beg to disagree. Even though data is not reliable, it appears that China is slowing down. By 2009, the Chinese authorities were embracing the Western economic model that had just brought down much of Western capitalism. Undeterred, they launched a massive credit-fuelled investment programme. Growth soared at 10% per annum. Investment recently peaked at an extraordinary 49% of GDP. Total debt (private and public) rocketed to 250% of GDP – up 100 points since 2008, according to the IMF. Property and other asset markets boomed, as did consumption.

The Chinese should have been warned, for they won accolades from Western economists for their “Goldilocks” economy. China’s stimulus helped keep the global economy afloat in the years following. But there are economic, ecological, social and political limits to a developing country like China continuing to support richer economies. And there are limits to Beijing’s willingness to abandon control and adopt in full the Western neoliberal economic model; the Communist Party has begun intervening. It is this intervention, we are led to believe, that spooked global markets. Yet the real reason for global weakness lies elsewhere – in the Western neoliberal economic model itself, which lay behind the global financial crisis of 2007-9.

Financial and trade liberalisation, privatisation of taxpayer-financed assets, excessive private indebtedness and wage repression constituted an explosive economic formula and blew up the Western banking system. That model has not undergone even superficial change since 2009. On the contrary: economists and financiers used the “shock and awe” generated by the crisis to buttress the model. The crisis had its origins in banks suffering severe bouts of debt intoxication. Like alcohol addicts, they could not be treated effectively until admitting to the problem: the flawed liberal, financial and economic order. Yet neither the private finance sector nor central bankers and their political friends were willing to admit to the cause of the disease. Instead, central bankers rushed to offer life support in the form of QE to private banking systems in the UK, Japan and the US.

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“Although I am a bear of very little brain one thing I have learned is that most investors only realise the economy is in a recession well after it has begun. ”

Albert Edwards: “99.7% Chance We Are Now In A Bear Market” (Zero Hedge)

Over the years, SocGen’s Albert Edwards has repeatedly expressed his skepticism of both the economy and the market (the longest US equity “bull market” since 1945) both propped up by generous central banks injecting liquidity by the tens of trillions (at this point nobody really knows the number now that the ‘black box’ that is China has entered the global “plunge protection” game) and yet never did he have as “conclusive” a call as he does today. As the following note reveals, when looking at one particular indicator, Edwards is now convinced: ‘we are now in a bear market.” First, Edwards looks east, where he finds nothing short of China’s central bank succumbing to the “wealth effect” preservation pressures of its western peers:

After holding firm last weekend and resisting pressure to give the market what it wanted namely a cut in interest rates and the reserve requirement ratio – the PBoC caved in, unable to endure the riot in the equity markets. In giving the markets what they want China is indeed acting like a fully paid up member of the international financial community. I am not thinking here about freeing up their capital account and allowing the renminbi to be more market determined. I?m thinking instead of China?s replicating the failed US policies of ramping up the equity market to boost economic growth, only to then open the monetary flood gates as equity investors turn nasty.

We disagree modestly with this assessment because as we described first on Tuesday, the RRR-cut had much more to do with unlocking $100 billion in much needed funding so that China could continue to intervene in the FX market by dumping a comparable amount of US Treasurys since its August 11 devaluation, something which as we reported earlier today, China itself has also now admitted. But the reason why we do agree, is that while the RRR-cut may have had other “uses of funds”, today’s dramatic intervention by the PBOC in both the stock market, leading to a 5.5% surge in the last hour of trading, as well as a dramatic intervention in the FX market, it is quite clear that the PBOC will do everything in its power once again to prevent any market drops. Edwards, then goes on to observe something which is sure to anger the Keynesians and monetarists out there: no matter how many trillions central banks inject, they will never replace, or override, the most fundamental thing about the economy: the business cycle.

Despite deflation fears washing westward and US implied inflation expectations diving to levels not seen since the 2008 Great Recession, there remains a touching faith that the US is resilient enough to withstand further renminbi devaluation. And if it isn’t, why worry anyway, because QE4 will be around the corner. But let me be as clear as I can: the US authorities CANNOT eliminate the business cycle, however many QE helicopters they send up. The idea that developed economies will decouple from emerging market turmoil is as ridiculous as was the reverse in the first half of 2008. Remember EM and commodities had then de-coupled from the west’s woes until they too also crashed.

Which brings us to the key point – the state of the market, and why for Edwards the signal is already very clear – the bear market has arrived:

Although I am a bear of very little brain one thing I have learned is that most investors only realise the economy is in a recession well after it has begun. The same is true of an equity bear market. We need help before it is too late to react. Hence when Andrew Lapthorne shows that one of his key predictors of a bear market registers a 99.7% probability that we are already in a bear market, there might still be time to act!

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Just about everyone will.

Who Will Be the Bagholders This Time Around? (CH Smith)

Once global assets roll over for good, it’s important to recall that somebody owns these assets all the way down. These owners are called bagholders, as in “left holding the bag.” Those running the rigged casino have to select the bagholders in advance, lest some fat-cat cronies inadvertently get stuck with losses. In China, authorities picked who would be holding the bag when Chinese stocks cratered 40%: yup, the poor banana vendors, retirees, housewives and other newly minted punters who borrowed on margin to play the rigged casino. Corrupt Chinese officials, oil oligarchs and everyone else who overpaid for flats in London, Manhattan, Vancouver, Sydney, etc. will be left holding the bag when to-the-moon prices fall to Earth.

Anyone buying Neil Young’s 2-acre estate in Hawaii for $24 million will be a bagholder. (If nobody buys it at this inflated price, Neil may end up being the bagholder.) Bond funds that bought dicey emerging market debt (Mongolian bonds, anyone?) and didn’t sell at the top are bagholders. Everyone with bonds and stocks in the oil patch who didn’t sell last summer is a bagholder. Everyone holding yuan is a bagholder. Everyone who bought euro-denominated assets when the euro was 1.40 is a bagholder at euro 1.12. Everyone with 401K emerging market equities mutual funds who didn’t sell last summer is a bagholder. Everyone who reckons “buy and hold” will be the winning strategy going forward will be a bagholder.

Anyone buying anything with borrowed money is a bagholder. Leveraging up to buy risk-on assets like Mongolian bonds and homes in vancouver is brilliant in bubbles, but not so brilliant when risk-on turns to risk-off. As the asset’s value drops below the amount borrowed to buy it, the owner becomes a bagholder. Anyone betting China’s GDP is really expanding at 7% and the U.S. economy will grow by 3.7% next quarter is angling to be a bagholder.

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One of many views. My own notion is that too many people believe the Fed is looking out for the US economy, whereas they really look out for banks.

Now’s The Right Time For Yellen To Kill The ‘Greenspan Put’ (MarketWatch)

The Federal Reserve says the timing of its first interest rate hike in nine years depends on the data, but that doesn’t mean the Fed will be digging through the jobs, growth and inflation reports for the all-clear signal. Instead, the Fed will be doing what millions of people have been doing for the past couple of weeks: Watching the stock market. Many investors have assumed that the recent selloffs in markets from Shanghai to New York meant that the Fed definitely won’t pull the trigger on a rate hike at its Sept. 16-17 meeting. Many prominent talking heads – from Suze Orman to Jim Cramer – are explicitly begging the Fed to hold off on higher interest rates as a way to protect stock prices.

It seems they still fervently believe in the “Greenspan put.” They assume that the Fed will always come riding to the rescue of the markets, as Fed Chair Alan Greenspan did so many times. You can’t blame them for believing that, because from 1987 to today, the Fed has reacted to nearly every market hiccough and tantrum by flooding markets with liquidity and reassurances. They’ve given the markets rate cuts, quantitative easing and promises that easy-money policies will continue for a long time, if not forever. This “Greenspan put” means investing in the stock market is a one-way bet. On Wednesday, New York Fed President Bill Dudley seemed to close the door on a September rate hike when he said that, “at this moment,” a rate hike next month no longer seemed as “compelling” as it once did.

Traders in federal funds futures lowered the odds of an increase in September to about 24%, down from about 50% just before the global market selloff intensified last week. But Dudley didn’t take September off the table, as many people have assumed. Indeed, he explicitly said that a September rate hike “could become more compelling by the time of the meeting as we get additional information.” And what sort of additional information would make a rate hike more compelling? Dudley said the Fed is looking at more than the economic data, widening its scope to examine everything that might impact the economic outlook. They are looking at the value of the dollar, the price of commodities, the risk of contagion from Europe, from China, and from emerging markets. And, above all, the U.S. stock market.

I believe the market selloff has made a September rate hike even more compelling than it was before, because it gives Fed Chair Janet Yellen the opportunity she needs to kill the “Greenspan put” once and for all.

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Great pic.

The Emperor Is Naked; Long Live The Emperor (Fiscal Times)

Over at Barclays, economists Michael Gapen and Rob Martin pushed back their rate hike forecast to March 2016. They admit Fed policymakers are “market dependent” and won’t tighten policy in the maw of a stock correction, even as they see “economic activity in the U.S. as solid and justifying modest rate hikes.” Should the market turmoil continue, the rate hike could be pushed past March. Alberto Gallo, head of credit research at RBS, is more direct: “Policymakers responded to the financial crisis with easy monetary policy and low interest rates. The critics — including us — argued against ‘solving a debt crisis with more debt.’ Put differently, we said that QE was necessary, but not sufficient for a recovery. We are now coming to the moment of reckoning: central bankers look naked, and markets have nothing else to believe in.”

Gallo believes an overreliance on excess liquidity has actually hindered capital investment — as companies have focused on debt-funded share buybacks and dividend hikes instead — limiting the global economy’s potential growth rate. Now, contagion from China — lower commodity prices, lower demand, currency volatility — has revealed the structural vulnerabilities. More stimulus, in his words, “could be self-defeating without fiscal and reform support.” As for Fed hike timing, Gallo sees the odds of a September liftoff at just 30%, down from 36% last week, based on futures market pricing. December odds are at 60%. The open question is: Should the Fed delay its rate hike and the People’s Bank of China ease, will stocks actually rebound? Or has the Pavlovian reaction function been broken by a loss of confidence? We’re about to find out.

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The IMF would have to do a 180 on its own sustainability assessment.

IMF Could Contribute A Fifth To Greek Bailout, ESM’s Regling Says (Bloomberg)

The IMF will probably join Greece’s third bailout and might contribute almost a fifth to the €86 billion program, the head of Europe’s financial backstop said. Speaking to reporters in Berlin on Thursday, European Stability Mechanism Managing Director Klaus Regling said “it would make sense” for the fund to use the 16 billion euros it didn’t pay out to Greece during the second bailout, which expired at the end of June. “Up to 16 billion is something I could imagine,” Regling said. “I assume with a large probability that the IMF will contribute,” though less than the third it contributed to Greece’s bailout five years ago, he said.

Regling is expressing optimism on the IMF’s participation even after Managing Director Christine Lagarde said debt relief for cash-strapped Greece must go “well beyond what has been considered so far.” The IMF has accepted the euro-region view that Greece’s debt load as a percentage of its economy isn’t a proper debt sustainability gauge as long as bond redemptions and interest payments are largely suspended thanks to the financial support, Regling said. Greece’s gross financing need will be below 15% of GDP for a decade, he said. Maturities on outstanding Greek debt can be extended and interest rates lowered to a “certain” degree to achieve the debt easing demanded by the IMF, while a nominal haircut for public creditors is not on the agenda, Regling said. One “needn’t do a whole lot” to help Greece meet the revised debt sustainability requirement, he said.

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Europe-wide will not get you anywhere.

Yanis Varoufakis: ‘I’m Not Going To Take Part In Sad Elections’ (Reuters)

Yanis Varoufakis will not take part in “sad” elections expected next month in Greece and will instead focus on setting up a new movement to “restore democracy” across Europe, the former Greek finance minister told Reuters on Thursday. The combative, motorbike-riding academic was sacked as finance minister last month after alienating euro zone counterparts with his lecturing style and divisive words, hampering Greece’s efforts to secure a bailout from partners. The one-time political rock star has since steadily attacked the bailout programme that prime minister Alexis Tsipras subsequently signed up to and the austerity policies that go with it, rebelling against his former boss in parliament.

“I’m not going to take part in these sad elections,” Mr Varoufakis told Reuters by telephone when asked about the vote likely to be held on September 20th. Mr Tsipras’s Syriza party, which hopes to return to power with a strengthened mandate, says it will not allow Mr Varoufakis and others who voted against the bailout to run for parliament under the Syriza ticket anyway. “Not only him but other lawmakers who did not back the bailout will not be part of the ticket,” a party official said. Mr Tsipras has poured scorn on Mr Varoufakis, telling Alpha TV on Wednesday that he had realised in June that “Varoufakis was talking but nobody paid any attention to him” at the height of Greece’s negotiations with IMF and EU lenders.

“They had switched off, they didn’t listen to what he was saying,” Mr Tsipras said. “He didn’t say anything bad but he had lost his credibility among his interlocutors.” Mr Varoufakis, in turn, likened Mr Tsipras to the mythical Sisyphus condemned to push a rock uphill only to have it roll back down, telling Australia’s ABC Radio the prime minister had embarked on “pushing the same rock of austerity up the hill” against the laws of economics and ethical principles. The 54-year-old Mr Varoufakis has already dismissed speculation that he would join the far-left Popular Unity party that broke away from Syriza last week, telling ABC that he had “great sympathy” but fundamental differences with them and considered their stance “isolationist”.

Instead, he told Reuters he wanted to set up a European network aimed at restoring democracy that could eventually become a party, but at the moment was just an idea that he had seen a lot of support for. “Instead of having national parties that run on a national level it will be a European network which is active on a national level,” he said. “It’s not something immediate. It’s something slow-burning … something that gradually grows roots across Europe.”

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Hunderds die every day now. Blame Brussels.

For Those Trying to Reach Safety in Europe, Land can be as Deadly as Sea (HRW)

More gruesome details will undoubtedly emerge, but we already know enough to be horrified: Up to 50 people died in what were surely agonizing deaths, locked in a truck parked on an Austrian highway, leading to Vienna. That so many should die in a single episode, so close to a European capital where ministers are meeting to discuss migration in the Western Balkans, has made this international news. But the land route into the European Union trekked by migrants and asylum seekers has claimed thousands of victims over the years. In March, two Iraqi men died of hypothermia at the border between Bulgaria and Turkey. In April, 14 Somalis and Afghans were killed by a high-speed train in Macedonia as they walked along the tracks. Last November, a 45-day-old baby died with his father on those same tracks.

While deaths in the Mediterranean capture much of the attention, the list of those who have died of suffocation, dehydration, and exposure to the elements at land borders is unconscionably long. One count puts the overall death toll at EU borders at more than 30,000 since 2000. The smugglers directly responsible for deaths and abuse should be brought to justice. Ill-treatment by border guards and police in Macedonia and Serbia adds to the perils of the journey. But there’s lots of blame to spread around. Failed EU policies, which place an unfair burden on countries at its frontiers, and Greece’s inability to handle the numbers of migrants, have contributed to the crisis at EU borders.

Instead of erecting fences, as Hungary is, the EU should expand safe and legal alternatives for people seeking entry, especially those fleeing persecution and conflict. This means increasing refugee resettlement, facilitating access to family reunification, and developing programs for providing humanitarian visas. It also requires EU governments to meet their legal obligations to provide access to asylum and humane conditions for those already present. EU countries should step up to alleviate the humanitarian crisis in debt-stricken Greece, where 160,000 migrants have arrived since the start of the year. The umbrella group European Council on Refugees and Exiles (ECRE) has called for EU countries to relocate 70,000 asylum seekers from Greece within a year, double the insufficient relocation numbers agreed by governments for both Greece and Italy in July.

Many of those traveling along the Western Balkans route and into Austria are from Syria, Somalia, Iraq, and Afghanistan – countries experiencing war or generalized violence. Others are hoping to improve their economic prospects and the lives of their children. None of them deserve to be exploited, abused, or to die.

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Jun 032015
 
 June 3, 2015  Posted by at 2:02 pm Finance Tagged with: , , , , , , ,  17 Responses »


Jack Delano Mike Evans, welder, Proviso Yard, Chicago & North Western RR 1940

We’ve been entertaining ourselves to no end the past couple days with a ‘vast array’ of articles that purport to provide us with ‘expert’ opinion on the question of whether we are witnessing a bubble or not. Got the views of Goldman’s David Kostin, Robert Shiller, Jeremy Grantham, Jeremy Siegel, Howard Marks.

But although these things can be quite amusing because while they’re at it, of course, the ‘experts’ say the darndest things (check Bloomberg ‘Intelligence’s Carl Riccadonna: “You had equity markets benefit from QE, but eventually QE also jump-started the broader recovery.. Ultimately everyone’s benefiting.”), we can’t get rid of this one other nagging question: who needs an expert to tell them that today’s markets are riddled with bubbles, given that they are the size of obese gigantosauruses about to pump out quadruplets?

Moreover, when inviting the opinions of these ‘authorities’, you inevitably also invite denial and contradiction (re: Siegel). And before you know what hit you, it turns into something like the climate change ‘debate’: just because a handful of ‘experts’ deny what’s right in front of their faces as tens of thousands of scientists do not, doesn’t mean there’s a valid discussion there. It’s just noise with an agenda.

And though the global climate system is infinitely more complex than the very vast majority of people acknowledge, fact remains that a plethora of machine-driven and assisted human activities emit greenhouse gases, greenhouse gases trap heat and higher concentrations of greenhouse gases trap more heat. In very similar ways, central banks’ stimuli (love that word) play havoc, and blow bubbles, with and within the economic system. Ain’t no denying the obvious child.

But even more than the climate ‘debate’, the bubble expert articles made us think of a Jerry Seinfeld episode called The Opera, which ends with Jerry doing a stand-up shtick that goes like this:

I had some friends drag me to an opera recently, you know how they’ve got those little opera glasses, you know, do you really need binoculars, I mean how big do these people have to get before you can spot ’em?

These opera kids they’re going two-fifty, two-eighty, three-twenty-five, they’re wearing big white woolly vests, the women have like the breastplates, the bullet hats with the horn coming out.

If you can’t pick these people out, forget opera, think about optometry, maybe that’s more you’re thing.

As far as we can figure out, all you need to know today about bubbles is displayed right there in front of you if you’re able to simply imagine what asset prices would be like without the $40 trillion or so in global stimulus measures the central banks have gifted upon the banks and forced upon the rest of us.

Does anyone honestly think that prices for stocks and bonds and houses and commodities would be anywhere near where they are now without all that zombie money?

How can you even pretend that anything at all has a fair valuation these days? Central banks buy bonds up the wazoo, and there’s no way that does not drive up prices like they’re being chased by the caucasian Baltimore police force department.

Home prices have stabilized for one reason only: the beneficiaries of QE money have done one of two things: either buy up homes wholesale themselves, or sign some poor greater sucker into a loan to procure a leaking and peeling American dream at inflated ‘value’.

As for stocks, they’re supposed to reflect the state of the economy, and their record setting highs obviously do nothing of the kind, because economic performance is just as obviously many lightyears away from any record high.

In fact, the only thing that’s ‘positive’ about the economy is home and share prices. And that is because corporations engage in M&A and in buybacks the size of which people just 10 years ago would have not deemed possible, or even legal, and because that drives up share prices to levels where the many millions of greater fools get tempted to participate. Just watch China.

The flipside of this, as they will find out soon enough, is that QE and ZIRP and that entire alphabet soup completely destroy price discovery. And that means that nobody knows what anything is really worth, everyone’s just guessing, there is no correlation left to the work that has gone into producing anything, let alone to the practical value of what’s being produced.

These companies that buy their own shares can do so with credit borrowed at very low rates, so low their actual activities don’t even have to generate anywhere near an economically viable profit. They can simply borrow it.

Where and when then will these grossly bloated monstrosities burst? The clue would seem to be closely related to what Martin Armstrong had to say:

Velocity of Money Below Great Depression Levels

Ever since the repeal of Glass-Steagall by Bill Clinton in 1999, this “new” way of making money by transforming banking from Relationship to Transactional Banking has destroyed the economy in ways we are soon to discover. The VELOCITY of money has fallen to BELOW Great Depression levels. This is the destruction of Capitalism, and I fear the response against the banks on the next downturn will lead to authoritarianism.

Taking interest rates NEGATIVE will not reverse this trend – it will accelerate the trend. This is all part of Big Bang. We seriously need to understand the nature of the problem or we will lose all rights and freedom because of what the bankers have set in motion. Transactional Banking only benefits the banks and fails to create a foundation for economic growth. This is not about Fractional Banking, this is all about the destruction of Relationship Banking which creates small businesses and employment.

The collapse in the VELOCITY of money illustrates the collapse in liquidity in the markets, which will erupt in higher volatility we have not seen before. The VELOCITY of money declines as HOARDING rises. This is how empires, nations, and city-states decline and fall.

Armstrong uses the following graph to make his point, which is a series that depicts (not seasonally adjusted) GDP/St. Louis Adjusted Monetary Base.

I’ll add the MZM graph (Money Zero Maturity = all money in M2 less the time deposits, plus all money market funds). It’s not as dramatic, but more commonly used (do note that the timescale is different):

It’s obvious that what ails the US economy, and all western economies, is that people are not spending. That’s what brings velocity of money down. And that’s also what causes deflation, and by that we don’t mean falling prices only.

Ergo: when Armstrong states that “The VELOCITY of money declines as HOARDING rises”, he’s half right, but only half. I’ve explained before that this is also where Bernanke’s preposterous claims about an Asian savings glut a few years ago failed in dramatic fashion.

In that same sense, I wrote recently that the ‘savings rate’ in the US is calculated to include debt payments. If you pay off your mortgage or your payday loan, that is jotted down as you saving, even hoarding your money. Just one in a long range of mind-numbing accountancy tricks the US utilizes to hide the real state of its economy. Makes one wonder what the double seasonally adjusted savings rate might be.

This issue shirks uncomfortably close to the contribution of each dollar of added debt to a country’s GDP, which in the west by now must shirk just as uncomfortably close to zero. And once it is zero, the game’s up.

That puts into perspective Jon Hilsenrath’s quasi-funny letter yesterday in the Wall Street Journal, which Tyler Durden presented with: “..to our best knowledge, this is not the WSJ transforming into the Onion.”

Dear American Consumer,

This is The Wall Street Journal. We’re writing to ask if something is bothering you. The sun shined in April and you didn’t spend much money. The Commerce Department here in Washington says your spending didn’t increase at all adjusted for inflation last month compared to March. You appear to have mostly stayed home and watched television in December, January and February as well. We thought you would be out of your winter doldrums by now, but we don’t see much evidence that this is the case. You have been saving more too. You socked away 5.6% of your income in April after taxes, even more than in March. This saving is not like you. What’s up?

The most glaring problem with this letter is -though granted, there’s quite a few- that Americans are not actually saving. Of course some of them are, but that’s not what drives the savings rate. Americans are paying off debt. They have no choice. They’re maxed out. They don’t want to lose their homes, or not feed their kids. The only jobs created have been low-paid ones. While home prices have been QE’d into a suspended state of Wile E. style false stability.

This is how you gut a society. It’s 101. Central banks’ largesse has indulged the rich with more than they can spend, while the rest get less than they need to spend to survive. Home prices are so high they keep people from spending, says Bloomberg.

That’s where the rubber hits the road. That’s where the asset bubbles hit the real economy. And they haven’t even started to burst yet, for real. When they do, the brunt of that will be borne by the real economy as well.

What will bring down our western economies is that people simply no longer have money to spend. While consumer spending in the US is still close to 70% of GDP. That won’t be solved by handing money to banks, or by keeping asset prices from reverting to their market values. Quite the contrary.

May 312015
 
 May 31, 2015  Posted by at 10:44 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle May 31 2015


Jack Allison “Utopia Children’s House, Harlem, New York.” 1938

There’s A Currency War Going On And The Fed Can’t Play (CNBC)
When Betting on QE Suddenly Goes Wrong (WolfStreet)
For The Fed, It’s The Rebound That Matters (MarketWatch)
What Bubble Vision Doesn’t Get About Q1’s Punk GDP Numbers (Stockman)
Why the Bank of Japan Can’t Stop a Sudden Collapse of the Yen (WolfStreet)
China Central Bank: We Want ‘Healthy’ Stock Market (Reuters)
What Do Falling Corporate Profits Mean With Stocks Near Their Highs? (Lyons)
Elon Musk’s Growing Empire Is Fueled By Government Subsidies (LA Times)
Economic Theory: Science Or Scam? (Hanauer)
New Arrests Coming in FIFA Corruption Probe, Says Investigator (Bloomberg)
Seymour Hersh And The Dangers Of Corporate Muckraking (Mark Ames)
Stephen Hawking: No Funding For Students With My Kind Of Condition (Guardian)
European Union Anger at Russian Travel Blacklist (BBC)
The Rebel of St. Peter’s Square (Spiegel)
‘Wanted Criminal’ Saakashvili Attempts a Napoleon as Governor of Odessa (RT)
Over 4,200 Migrants Rescued In Mediterranean In 1 Day As Crisis Grows (Reuters)
Kos Shows There Is No Escape From The Migrant Crisis (Guardian)
The Most Polluted City In The World?! (NY Times)

Emerging economies face the biggest threat from this.

There’s A Currency War Going On And The Fed Can’t Play (CNBC)

There is a currency war going on—one in which the Federal Reserve is the least able to play, said David Woo, head of global interest rates and currencies research at Bank of America Merrill Lynch, on Friday. The ECB statement during a dinner last week regarding the purchase of more bonds is a strong signal it doesn’t want the euro to go back over $1.15, said Woo during an interview with CNBC’s “Squawk on the Street.” “You could argue that the U.S. got back on the street playing that game,” explained Woo. “Now, the U.S. cannot tell others they cannot play this game.” With inflation picking up and better performance from U.S. companies, the Fed has less of a reason to get engaged in this war at the moment, said Woo.

As the deadline for a debt payment by Greece draws closer, the volatility of currencies has increased. The country is supposed to pay about €300 million to the IMF on June 5, but creditors have been worried about Greece’s ability to make the payment. Woo added that the latest data show €5.6 billion leaving the Greek banking system for elsewhere—double the March figure. He added that this might force a showdown into the end of June.

Meanwhile, Wells Fargo’s Scott Wren, also on “Squawk on the Street,” said that the volatility was creating more of a chance to buy stocks. “Volatility is going to hopefully cause more buying opportunities. Even in a worst-case scenario for Greece, which I don’t think is going to happen, they are going to Band-Aid this thing and kick it down the road,” said Wren. Woo said that his biggest worry is Asia, especially China. With the Chinese yuan one of the strongest currencies and Germany’s exposure to China, there might be some problems for the euro. “I think the euro will have an issue,” said Woo. “German exposure is more than U.S exposure to China.”

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One day, they’ll find themselves pushing on a string.

When Betting on QE Suddenly Goes Wrong (WolfStreet)

The ECB rode to the rescue. This sort of turmoil went against everything it had tried to accomplish. So it announced that it would frontload some of its bond-buying spree ahead of the summer, under the pretext that this would avoid having to buy so much debt at a time when European market players would be on vacation and nothing could get done. As far as the markets were concerned, the announcement meant an additional short-term mini-QE. It stopped the bleeding. Bonds recovered some, and yields settled down. By now, the German 10-year yield, after spiking from 0.05% to 0.77% during the weeks of turmoil, has dropped to 0.50%.

All this even though the ECB’s QE has barely begun. But it shows how these bouts of QE around the globe have perverted asset pricing mechanisms. The markets front-run QE as rumors and suggestions of QE run wild, and they’re driving up bonds and stocks in the hope of QE, as they have done in Europe, and when QE finally arrives as it did in March, stocks and bonds begin to sink. German stocks, for example, are down 7.4% from their peak in early April, after having shot up nearly 50% since October. And so central bank jawboning, rumors of QE, suggestions of QE, promises of QE, and finally QE itself work in driving up markets – until someday, they don’t. And that’s when “unexpected” turmoil sets in.

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Brilliant obfuscation: the lower the Q1 data are, the bigger the rebound can be. Even reality is just in the eye of the beholder.

For The Fed, It’s The Rebound That Matters (MarketWatch)

The Federal Reserve has already indicated that it isn’t too bothered by the weak first quarter. The key factor for the U.S. central bank going forward is the strength of the bounce back. “It’s the extent of the rebound that will be critical in determining the timing of the Fed’s first move on interest rates,” said Chris Williamson, chief economist at Markit, in a note to clients. New data from the government Friday showed that the economy got off to a weak start in 2015, shrinking at an 0.7% annual rate in the first quarter, down from the prior estimate of a tepid 0.2% increase. Bricklin Dwyer, economist at BNP Paribas, said the first quarter GDP report should give the Fed confidence that the soft patch was likely driven by temporary disruptions. What matters for the Fed is the second-quarter data.

St. Louis Fed President James Bullard on Thursday said he wanted to hike rates this year but needed “confirmation” of his hunch that the first quarter weakness wouldn’t last. Barclays said Friday its Q2 GDP tracking estimate was 2.5%. This is down from expectations earlier in the year, of second quarter growth over 3%. The Chicago PMI report also injected some concern that the economy may be struggling to move beyond the first quarter soft-patch, said Millan Mulraine at TD Securities. The index dipped back into contractionary territory, falling to 46.2 from 52.3 the month before. Fed officials will gather on June 16-17 to set policy for the next six weeks. While Fed officials have taken pains not to take a rate hike off the table at that meeting, economists don’t think policymakers will have enough data to justify a rate hike.

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“..you would think that after a recessionary plunge that was in a league all by itself that some account of that would be taken in assessing the recovery.”

What Bubble Vision Doesn’t Get About Q1’s Punk GDP Numbers (Stockman)

Promptly upon release of today’s GDP update, Steve Liesman and his Wall Street economist pals spent 10 minutes bloviating about why the negative print should be completely ignored. Herein is an essay on why it is they who should be given the heave-ho. According to Liesman & Co the GDP shrinkage reported by the BEA for Q1 was all a mistake due to winter, strikes and unseasonal seasonals. So don’t sweat the small stuff, they brayed to what remains of the CNBC audience, the US economy actually continues bounding along at a 2.5% growth rate, as it has for the entire recovery. Well, hold it right there. I am all for ignoring the quarterly jerks and flops embedded in the GDP data, too. But if you want to talk trend and context – let’s do exactly that.

And first and foremost there is no such trend as 2.5% growth. After all, Liesman and his Wall Street cronies have been cheerleaders for the Fed’s insane 80 months of ZIRP and massive QE on the grounds that extraordinary measures were needed to combat the deep economic plunge known as the Great Recession. In fact, measured from peak to trough, the latter was the worst downturn since 1950. Real GDP shrank by 4.2% compared to an average of 1.7% during the previous nine recessions, and handily topped the 2.6% decline in 1981-1982 and the 3.0% decline in 1973-1975. So you would think that after a recessionary plunge that was in a league all by itself that some account of that would be taken in assessing the recovery.

Indeed, that’s particularly pertinent in the present instance because the depth of the Great Recession was exacerbated by a violent inventory liquidation in the fall and winter quarters right after the Wall Street meltdown in September-October 2008. In fact, fully one-third of the $636 billion (2009 dollars) real GDP decline from peak to trough was accounted for by inventory liquidation; real final sales dropped by a far more modest 2.8%. Accordingly, the appropriate way to measure the trend is to remove the violent inventory swings from the numbers, and then to look at the path of real final sales after the peak – averaging in the down quarters and the subsequent rebound.

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Rate hike. “It will be the mother of all currency debasements.”

Why the Bank of Japan Can’t Stop a Sudden Collapse of the Yen (WolfStreet)

On Friday morning in Tokyo, the Nikkei stock index was up again, at 20,600, highest in 15 years. Since “Abenomics” has become a common word in December 2012, the Nikkei has soared 128% on a crummy economy, terrible government deficits, and an insurmountable mountain of government debt. This 10-day run of straight gains, or 11-day run if Friday plays out, is the longest glory streak since February 1988 when Japan was in one of the craziest bubbles the world had ever seen. The subsequent series of crashes had the net effect that the Bank of Japan became engaged in propping up the stock market not only by pushing interest rates to zero and dousing the market with money via waves of QE, but also by buying equity ETFs and J-REITs.

Prime Minister Shinzo Abe has made asset-price inflation his top priority. Under pressure from the BOJ and the government, state-controlled entities – such as the Government Pension Investment Fund with ¥137 trillion in assets – are dumping Japanese Government Bonds into the lap of the BOJ and are buying stocks with the proceeds. Foreign hedge funds have jumped into the fray, which is the hot money that can evaporate overnight. But fear not, every time the Nikkei drops 100 points or so, the BOJ starts buying, or creates the perception that it’s buying, and within minutes, stocks shoot back up. It’s part of the BOJ’s relentlessly communicated policy to inflate asset prices come hell or high water. And hell or high water may now be on the way. [..]

To keep the nation from descending to where Greece is, the BOJ will keep its iron fist on the government bond market. It will keep interest rates near zero. It will keep JGB prices inflated. And it will keep the government funded. It will do so by buying JGBs and handing out yen, no matter what. The rest is secondary – the yen and the stock market, both. So when the yen begins to crash past all jawboning, there might not be much of a floor underneath it. If Japan is lucky, there won’t be a sudden ruble-like 60% crash in the yen, on top of the 35% swoon it already experienced. Or it may come years down the road when another government is in place and when a different crew runs the BOJ. That’s the plan for those folks today. After us the deluge. But if something nevertheless triggers it in an untimely manner, or if it starts coming unglued on its own, it will get ugly. It will be the mother of all currency debasements.

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If only bloated would count as healthy.

China Central Bank: We Want ‘Healthy’ Stock Market (Reuters)

China’s central bank said on Friday it wants to see a “healthy” stock market, a day after surging Chinese shares slumped 6% in record trading volume as investors fled tighter borrowing rules. In its 2015 financial stability report, the People’s Bank of China (PBOC) warned of a slowing economy and rising debt levels, but repeated its vow to deepen China’s nascent financial market through reforms. The PBOC said in the report released online it was monitoring widely-recognised financial risks in the world’s second-biggest economy, including heavily-indebted local governments and a slowing real estate market. It did not address the dangers of China’s soaring shares, saying only that it wishes to promote a “stable” bourse. Chinese stocks have zoomed up 140% in the last 12 months.

“We will promote stable and healthy development of the stock market, and continue to expand the main board and the small-and medium boards,” the PBOC said, adding that there are plans to set up a new board on the Shanghai stock exchange. Chinese stocks, which ended flat on Friday after a volatile session, skidded earlier this week as more brokers tightened margin trading requirements and as the central bank drained cash from the money market. There are worries that China’s buoyant stock market is being powered by its looser monetary policy, at the expense of small businesses which are grappling with high real interest rates and a shortage in loans.

Even though the PBOC has cut interest rates three times in six months to stoke growth in China’s stuttering economy from a six-year low, real interest rates in China are still over 3%, Morgan Stanley said in a report this month. That is well above real rates in Japan, Europe and the United States, where borrowing costs are negative, the investment bank said. The PBOC acknowledged the problem of high borrowing cost in China, saying it would lower interest rates in a “targeted” fashion, but did not elaborate. “Downward pressure on the economy is increasing,” it said. “Some economic risks are showing up, and the overall debt level is still climbing.”

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That ticking sound.

What Do Falling Corporate Profits Mean With Stocks Near Their Highs? (Lyons)

If you’ve followed our commentary for awhile, you may have noticed that we don’t cover fundamental or economic data too often. That is for a good reason: we don’t use it, at all. Occasionally, however, a data point will cross the radar that piques our interest for whatever reason. So it is with the current state of U.S. Corporate Profits. The U.S. Bureau of Economic Analysis released the latest data today revealing that Corporate Profits (after Tax with Inventory Valuation Adjustment and Capital Consumption Adjustment) were down 9% for the 1st quarter and are now down 16% from their peak in the 3rd quarter of 2013. Perhaps we don’t run in the right circles but we haven’t heard much regarding the significance of this trend on the stock market, which continues to trade near its all-time highs.

Perhaps that’s a good thing considering we’ve found scant profitable uses for fundamental data in our investment approach (which is why we don’t use it). So we decided to take a look at it ourselves to see what effect similar historical precedents, assuming there were any, may have had on the stock market. This is what we looked for: Quarters when Corporate Profits were down at least 12% from their 2-year high, and the S&P 500 made a 2-year high at some point within the same quarter. As it turns out, there have been 21 quarters meeting that criteria since 1960.

Many of the occurrences came in clusters in 1980, 1986-1987 and 1998-2000. There were also single occurrences in 1961, 2007, 2011 and the 1st quarter of last year. Without going into great depth of analysis, one can tell by the inauspicious dates that these circumstances have not worked out well in the past. The stock market may not have rolled over immediately in every occasion (e.g., 1986, 1998, 2014), but it usually ended up paying the piper. Specifically, the average drawdown over the 2 years following these quarters was -18.6%. This compares with an average 2-year drawdown of -7.3% following all quarters since 1960.

We don’t follow economic and fundamental data too often since we’ve never found it very helpful in our investment decision-making process. At times, however, a certain data series will garner our attention. Often times, as is the case with Corporate Profits presently, it grabs our attention because it is receiving very little attention elsewhere. From just a cursory look at the current trend of falling Corporate Profits, however, it would appear to be a potential negative influence on the stock market that is trading near its all-time highs – if not immediately, then eventually.

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Pop.

Elon Musk’s Growing Empire Is Fueled By Government Subsidies (LA Times)

Los Angeles entrepreneur Elon Musk has built a multibillion-dollar fortune running companies that make electric cars, sell solar panels and launch rockets into space. And he’s built those companies with the help of billions in government subsidies. Tesla Motors, SolarCity and Space Exploration Technologies, known as SpaceX, together have benefited from an estimated $4.9 billion in government support, according to data compiled by The Times. The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups. “He definitely goes where there is government money,” said Dan Dolev, an analyst at Jefferies Equity Research. “That’s a great strategy, but the government will cut you off one day.”

The figure compiled by The Times comprises a variety of government incentives, including grants, tax breaks, factory construction, discounted loans and environmental credits that Tesla can sell. It also includes tax credits and rebates to buyers of solar panels and electric cars. A looming question is whether the companies are moving toward self-sufficiency — as Dolev believes — and whether they can slash development costs before the public largesse ends. Tesla and SolarCity continue to report net losses after a decade in business, but the stocks of both companies have soared on their potential; Musk’s stake in the firms alone is worth about $10 billion. (SpaceX, a private company, does not publicly report financial performance.)

Musk and his companies’ investors enjoy most of the financial upside of the government support, while taxpayers shoulder the cost. The payoff for the public would come in the form of major pollution reductions, but only if solar panels and electric cars break through as viable mass-market products. For now, both remain niche products for mostly well-heeled customers. The subsidies have generally been disclosed in public records and company filings. But the full scope of the public assistance hasn’t been tallied because it has been granted over time from different levels of government. New York state is spending $750 million to build a solar panel factory in Buffalo for SolarCity.

The company will lease the plant for $1 a year. It will not pay property taxes for a decade, which would otherwise total an estimated $260 million. The federal government also provides grants or tax credits to cover 30% of the cost of solar installations. SolarCity reported receiving $497.5 million in direct grants from the Treasury Department. That figure, however, doesn’t capture the full value of the government’s support. Since 2006, SolarCity has installed systems for 217,595 customers, according to a corporate filing. If each paid the current average price for a residential system — about $23,000, according to the Union of Concerned Scientists — the cost to the government would total about $1.5 billion, which would include the Treasury grants paid to SolarCity.

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“..if paying workers more resulted in higher unemployment, we would have no restaurants in Seattle.”

Economic Theory: Science Or Scam? (Hanauer)

Noah Smith, a smart financial writer with a very good blog, wrote an article on the $15 minimum wage at Bloomberg earlier this week. The piece celebrated the fact that, finally, we’ll have some data on how the $15 minimum wage would affect jobs. Smith said he considered it a test because in theory “a higher minimum wage should cause increased unemployment.” The more I thought about it, the less sense this premise made. Noah’s article underscored two big things for me: first, the degree to which people see the evidence they want to see, and also how silly the idea of “economic theory” can be. Smith claims that we don’t know what the result of a $15 minimum wage will be. Will it kill jobs or not? But the truth is, there’s abundant and overwhelming evidence that this theory is wrong, and that higher minimum wages don’t hurt employment.

The evidence is there; you just have to choose to see it. Let’s just look in my own back yard for an example of that evidence. Washington State has had the highest minimum wage in the nation for several years—at $9.47, it’s a full 30% more than the federal minimum of $7.25. Washington’s unemployment rate of 5.5% isn’t the best in the country, but it’s not the worst, either. In fact, it perfectly matches the national rate. But Seattle was until recently the fastest growing big city in the country. And speaking of evidence, the first part of the $15 minimum wage rollout was successfully implemented in April, and unemployment in our county promptly plummeted to 3.3%.

An even more dramatic example of the goofiness of this so-called “economic theory” is the impact of the wages of tipped workers on the restaurant industry. In Washington, these workers earn at least $9.47 plus tips, a whopping 440% more than the federal tipped minimum of $2.13 plus tips. Despite the predictions of “economic theory,” and despite the warnings from the National Restaurant Association that eliminating the tip credit would cause food armageddon, Seattle has one of the most robust restaurant scenes in the USA. Why? Because when restaurants pay restaurant workers enough so that even they can afford to eat in restaurants, it’s really good for the restaurant business. If economic “theory” were correct, if paying workers more resulted in higher unemployment, we would have no restaurants in Seattle.

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Hornets nest.

New Arrests Coming in FIFA Corruption Probe, Says Investigator (Bloomberg)

The U.S. investigation of corruption in soccer’s governing body is moving to a new phase that will bring criminal charges against more people, the Internal Revenue Service’s chief investigator said in an interview. How the case develops hinges in part on the fate of nine FIFA officials and five sports marketing executives charged in a racketeering and bribery indictment unsealed May 27, said Richard Weber, chief of the IRS Criminal Investigation Division. The prosecution, which has garnered worldwide attention, came two days before FIFA re-elected its embattled president, Sepp Blatter, 79, for another four-year term. “It’s probably hard to say who is on the list for the next phase and the timing of that,” Weber said. “I’m confident in saying that an active case is ongoing, and we anticipate additional arrests, indictments and/or pleas.”

The IRS joined the Federal Bureau of Investigation and U.S. prosecutors in Brooklyn, New York, in building a case alleging sports-marketing executives paid more than $150 million in bribes and kickbacks over 24 years for media and marketing rights to soccer tournaments. Prosecutors charged Jeffrey Webb and Jack Warner, the current and former presidents of soccer’s governing body for North America, Central America and the Caribbean. They secured guilty pleas from Charles Blazer, 70, the group’s former general secretary; Jose Hawilla, a Brazilian sports marketing executive, who agreed to forfeit $151 million; and Warner’s two sons, Daryll and Daryan. “A lot depends on how the case unfolds from this point forward, depending on if other defendants decide to cooperate, whether or not other witnesses come forward based upon the allegations in the indictment,” Weber said.

“There are a lot of factors beyond our control, so it’s hard to put a specific timeframe on it,” he said. “But we do have evidence that we’re already developing and working on. It depends on how other pieces of the puzzle come together.” The IRS entered the case in 2011 when a Los Angeles-based agent, Steven Berryman, began a tax investigation of Blazer, Weber said. Blazer lived in a Trump Tower apartment, flew on private jets, dined at the world’s finest restaurants and hobnobbed with celebrities and world leaders. His blog, “Travels with Chuck Blazer and his Friends,” featured pictures of Blazer with Hillary Clinton, Nelson Mandela and Prince William, among others. Blazer, now fighting cancer, drew the IRS into FIFA, Weber said. In late 2011, the IRS joined the FBI, which was separately probing FIFA.

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Gulf and Western and Mario Puzo.

Seymour Hersh And The Dangers Of Corporate Muckraking (Mark Ames)

[..] it’s a wonder that Hersh and his collaborator on the Korshak articles, Jeff Gerth (now at ProPublica), didn’t find themselves in the obit pages shortly afterwards, their careers tragically cut short in mysterious car crashes or suicide overdoses. . . . Instead, Hersh smelled blood: the Korshak articles opened his eyes to a company that was, in the 1970s, the symbol of aggressive, shady corporate power: Gulf & Western. Most people have probably forgotten Gulf & Western, once considered the most aggressively acquisitive conglomerate in the US, so aggressive that even Wall Street nicknamed the company “Engulf & Devour” (immortalized as the evil corporation in Mel Brooks’ “Silent Movie”).

G&W’s best known subsidiary was Paramount Pictures, which Gulf & Western bought in the mid-1960s during its massive acquisition spree, underwritten by easy money from banking giants Chase Manhattan and Manufacturers Hanover. Under Gulf & Western, Paramount made some classic films including Chinatown, The Godfather, Airplane!, and Three Days of the Condor. G&W also made the career of future media tycoon Barry Diller, who was named Paramount’s CEO and chairman in 1974 and served there for a decade. Mob attorney Korshak was so integral to Gulf & Western’s Paramount subsidiary, he was known as the film company’s “consigliere,” and rumored to be the model for Robert Duvall’s consigliere character in Paramount’s “The Godfather.”

Two years after acquiring Paramount in 1968, G&W pulled off a mind-boggling transaction with notorious Sicilian mafia financier Michele Sindona, who oversaw the mafia’s global heroin money laundering operations, managed the Vatican’s global portfolio (earning the nickname “God’s banker”), and helped the CIA move money around the globe. Somehow, Gulf & Western managed to exchange reams of worthless commercial paper in a broke subsidiary, Commonwealth United, at a vastly inflated price in exchange for a 10.5% stake in Sindona’s investment empire, Societa General Immobilaire — which was followed by another shady transaction giving half of Paramount Studio’s movie lot to Sindona’s mafia bank.

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What did the people pay for their education who now cut funding for the next generation?

Stephen Hawking: No Funding For Students With My Kind Of Condition (Guardian)

World-renowned physicist and author Stephen Hawking has spoken of fears that a gifted academic with a condition as serious as his own would not be able to flourish in today’s tough economic times. The 73-year-old, Britain’s highest-profile scientist who found fame with a new audience following the release of award-winning film The Theory Of Everything, expressed the concerns at an event to celebrate his 50th year as a fellow at the University of Cambridge’s Gonville and Caius college. He praised the college for supporting him throughout the progression of motor neurone disease, allowing him to focus on his groundbreaking work. But, speaking before an invited audience at the college, he added: “I wonder whether a young ambitious academic, with my kind of severe condition now, would find the same generosity and support in much of higher education. “Even with the best goodwill, would the money still be there? I fear not.”

Although Hawking did not elaborate on his comments, he has previously raised concerns about cuts to government funding for research budgets. Seven years ago he warned that £80m of grant cuts threatened Britain’s international standing in the scientific community, saying: “These grants are the lifeblood of our research effort; cutting them will hurt young researchers and cause enormous damage both to British science and to our international reputation.” His comments come at a time when universities continue to lobby for sufficient resources. Speaking earlier this month, Wendy Platt, director general of the Russell Group, which represents the leading research universities, said: “The new government must ensure our universities have sufficient funding to carry out cutting-edge research and provide excellent teaching to students.”

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Because we can ban Russians, but they can’t ban us.

European Union Anger at Russian Travel Blacklist (BBC)

The European Union has responded angrily to Russia’s entry ban against 89 European politicians, officials and military leaders. Those banned are believed to include general secretary of the EU council Uwe Corsepius, and former British deputy prime minister Nick Clegg. Russia shared the list after several requests by diplomats, the EU said. The EU called the ban “totally arbitrary and unjustified” and said no explanation had been provided. Many of those on the list are outspoken critics of the Kremlin, and some have been turned away from Russia in recent months. The EU said that it had asked repeatedly for the list of those banned, but nothing had been provided until now. “The list with 89 names has now been shared by the Russian authorities.

We don’t have any other information on legal basis, criteria and process of this decision,” an EU spokesman said on Saturday. “We consider this measure as totally arbitrary and unjustified, especially in the absence of any further clarification and transparency,” he added. Swedish Foreign Minister Margot Wallstrom said the move did not “contribute to increasing the trust of Russian actions” The list of those barred from Russia has not been officially released, although what appears to be a leaked version (in German) is online. A Russian foreign ministry official would not confirm the names of those barred, but said that the ban was a result of EU sanctions against Russia.

“Why it was precisely these people who entered into the list… is simple – it was done in answer to the sanctions campaign which has been waged in relation to Russia by several states of the European Union,” the official, who was not named, told Russian news agency Tass. The official said Moscow had previously recommended that all diplomats from countries that imposed sanctions on Russia should check with Russian consular offices before travelling to see if they were banned. “Just one thing remains unclear: did our European co-workers want these lists to minimise inconveniences for potential ‘denied persons’ or to stage another political show?” he said.

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Long article about the frictions Francis allegedly causes.

The Rebel of St. Peter’s Square (Spiegel)

When Pope Francis, otherwise known as Jorge Mario Bergoglio, entered St. Peter’s Basilica at 10 a.m. on Pentecost Sunday for the Holy Mass, he had been in office for 797 days. Seven-hundred-ninety-seven days in which he has divided the Catholic rank-and-file into admirers and critics. At time during which more and more people have begun to wonder if he can live up to what he seems to have promised: renewal, reform and a more contemporary Catholic Church. Francis has had showers for homeless people erected near St. Peter’s Square, but has at the same time also spent millions on international consultants. He brought the Vatican Bank’s finances into order, but created confusion in the Curia. He has negotiated between Cuba and the United States, but also scared the Israelis by calling Palestinian President Mahmoud Abbas an “angel of peace.”

This pope is much more enigmatic than his predecessor – and that is becoming a problem. Right up to this day, many people have been trying to determine Francis’ true intentions. If you ask cardinals and bishops, or the pope’s advisors and colleagues, or veteran Vatican observers about his possible strategy these days – the Pope’s overarching plan – they seem to agree on one point: The man who sits on the Chair of St. Peter is a notorious troublemaker. Like a billiard player who nudges the balls and calmly studies the collisions during training, Francis is getting things rolling in the Vatican. His interest in experimentation may stem from his past as a chemical engineer. He makes decisions like Jesuit leaders – after thorough consultation, but ultimately on his own.

The Francis principle has a workshop character to it, with processes more important than positions. Traditional Catholics see things exactly the other way around from Bergoglio, the Jesuit, and this is creating confusion right up to the highest circles of the Vatican. People want to know where the pope is heading.

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Saakashvili had been ‘hiding’ in New York before being handed a Ukrainian passport. WIth Georgia on his mind.

‘Wanted Criminal’ Saakashvili Attempts a Napoleon as Governor of Odessa (RT)

Petro Poroshenko’s decision to appoint Georgia’s disgraced former President as Governor of the Odessa region just might be his most bizarre move yet. Mikhail Saakashvili is a wanted criminal suspect in his homeland. When the pro-Euromaidan activist Maxim Eristavi tweeted on Friday that Mikhail Saakashvili was to become Odessa’s new Governor, the Twittersphere didn’t seem to know whether shock or amusement was the most appropriate reaction. However, on closer inspection, the move isn’t such a surprise after all. There are myriad reasons why Saakhasvili would find Odessa’s top job attractive and equally as many why Poroshenko is most likely delighted to send him there.

It’s common knowledge that Ukraine is a tragically divided land, but Odessa is split like no other city in the country. 150 years ago, Odessa was one of Europe’s most vibrant destinations, at a time when it was a multi-ethnic smorgasbord of Russians, Jews, Greeks, Italians and Albanians. In fact, it even had two French governors – Duc De Richelieu and Count Andrault De Langeron. So famed was Odessa that in 1869, the legendary American writer, Mark Twain, predicted that it would become “one of the great cities of the old world.” Russia’s national poet Alexander Pushkin wrote of the Black Sea Pearl: “the air is filled with all Europe, French is spoken and there are European papers and magazines to read.” By 1897, 37%% of the city’s population was Jewish.

Post World War II, the Russian (largely to Moscow and Leningrad) and Jewish (mainly to Israel and the USA) elite moved out and the Soviets moved in Ukrainian villagers to replace them. The glory days have long since passed. Riddled with corruption, in the 21st century, Odessa is an extremely melancholic and economically moribund city better known for mafia activity and sex tourism (Odessa Dreams by the Guardian’s Shaun Walker is a useful read on the latter subject), than high culture. Despite its rich history, and striking Italianate architecture, any right-thinking visitor would find the place rather mournful.

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There are thousands a day now. When will Europe start shooting them?

Over 4,200 Migrants Rescued In Mediterranean In 1 Day As Crisis Grows (Reuters)

More than 4,200 migrants trying to reach Europe have been rescued from boats in the Mediterranean in last 24 hours, the Italian coastguard said on Saturday. In some of the most intense Mediterranean migrant traffic of the year, a total of 4,243 people have been saved from fishing boats and rubber dinghies in 22 operations involving ships from nations including Italy, Ireland, Germany, Belgium and Britain. On Friday the Italian navy said 17 dead bodies had been found on one of the boats off Libya. Details of the nationalities of the victims and how they died have not yet been released. The bodies and more than 200 survivors will be brought to the port of Augusta in eastern Sicily aboard the Italian navy corvette Fenice later on Saturday, the coastguard said.

Migrants escaping war and poverty in Africa and the Middle East this year have been pouring into Italy, which has been bearing the brunt of Mediterranean rescue operations. Most depart from the coast of Libya, which has descended into anarchy since Western powers backed a 2011 revolt that ousted Muammar Gaddafi. Calm seas are increasingly favoring departures as warm spring weather sets in. Last month around 800 migrants drowned off Libya in the Mediterranean’s most deadly shipwreck in living memory when their 20-metre long fishing boat capsized and sank. That spurred the European Union to agree on a naval mission to target gangs smuggling migrants from Libya, but a broader plan to deal with the influx is in doubt due to a dispute over national quotas for housing asylum seekers.

The EU plan to disperse 40,000 migrants from Italy and Greece to other countries met with resistance this week, with Britain saying it would not participate and some eastern countries calling for a voluntary scheme. Around 35,500 migrants arrived in Italy from the beginning of the year up to the first week of May, the UN refugee agency estimated, a number which has swelled considerably since. About 1,800 are either dead or missing. Most of those rescued on Friday and Saturday are expected to reach ports around southern Italy during the weekend. The British naval vessel HMS Bulwark offloaded more than 740 early on Saturday at the southeastern Italian port of Taranto. More than 200 migrants arrived at the Calabrian port of Crotone in south-west Italy on board the Belgian navy ship Godetia.

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They will keep coming. Move over and get used to it.

Kos Shows There Is No Escape From The Migrant Crisis (Guardian)

In the face of characteristic warnings (“misguided sentimentalism”) from the Daily Mail of 1938, some thousands of refugees were none the less allowed into Britain before the second world war, with 15,000 Jewish children arriving on the Kindertransport trains orchestrated by Sir Nicholas Winton. As well as finding foster parents, he had to raise £50 per head to pay for their eventual departure. The former prime minister, Stanley Baldwin, launched another fund to help refugees who needed “a hiding place from the wind, a covert from the tempest”. Margaret Thatcher’s family was among those who took in a refugee. “The honour of our country is challenged,” Baldwin said, in the years before Britons became so agitated, as in Kos, about correct refugee appearance.

But as much as they deserve international ridicule and disgust, the tales of holidaymakers’ “nightmares”, and pictures of studiously averted faces, are no more shame-inducing than Britain’s official approach to the migrant crisis, which they could not more vividly encapsulate. Our new government also averts its eyes from the hordes of displaced, regardless of their various origins and claims, and clearly has no truck with the sort of idealistic bilge once emitted by Winton and Baldwin. Nor with the principles that later made room – in an unenthusiastic Britain – for 28,000 Ugandan Asians and 19,000 Vietnamese boat people.

Rather, when the country’s honour is challenged, Cameron’s response appears to be modelled on the lines of the Sun columnist who described all the Mediterranean migrants – half of whom, says the UNHCR, are fleeing war and persecution – as “cockroaches”. After 46,000 Mediterranean migrants arrived in the first four months of this year, and more than 1,750 died or went missing, one of Cameron’s first acts, as prime minister, was to opt out of an EU proposal to allocate refugees evenly among member states. To date, Britain has formally resettled 187 refugees from Syria, a number that might be just, fractionally less inexcusable if it were accompanied by any inclination to discover and rescue eligible asylum seekers before thousands more are abused, cheated and drowned by smugglers.

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If this is not scary enough for you…

The Most Polluted City In The World?! (NY Times)

When I became a South Asia correspondent for The New York Times three years ago, my wife and I were both excited and prepared for difficulties – insistent beggars, endemic dengue and summertime temperatures that reach 120 degrees. But we had little inkling just how dangerous this city would be for our boys. We gradually learned that Delhi’s true menace came from its air, water, food and flies. These perils sicken, disable and kill millions in India annually, making for one of the worst public health disasters in the world. Delhi, we discovered, is quietly suffering from a dire pediatric respiratory crisis, with a recent study showing that nearly half of the city’s 4.4 million schoolchildren have irreversible lung damage from the poisonous air.

For most Indians, these are inescapable horrors. But there are thousands of others who have chosen to live here, including some trying to save the world, others hoping to describe it and still others intent on getting their own small piece of it. It is an eclectic community of expatriates and millionaires, including car executives from Detroit, tech geeks from the Bay Area, cancer researchers from Maryland and diplomats from Dublin. Over the last year, often over chai and samosas at local dhabas or whiskey and chicken tikka at glittering embassy parties, we have obsessively discussed whether we are pursuing our careers at our children’s expense.

Foreigners have lived in Delhi for centuries, of course, but the air and the mounting research into its effects have become so frightening that some feel it is unethical for those who have a choice to willingly raise children here. Similar discussions are doubtless underway in Beijing and other Asian megacities, but it is in Delhi – among the most populous, polluted, unsanitary and bacterially unsafe cities on earth – where the new calculus seems most urgent. The city’s air is more than twice as polluted as Beijing’s, according to the World Health Organization. (India, in fact, has 13 of the world’s 25 most polluted cities, while Lanzhou is the only Chinese city among the worst 50; Beijing ranks 79th.)

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May 292015
 
 May 29, 2015  Posted by at 2:32 pm Finance Tagged with: , , , , , , ,  2 Responses »


Walker Evans Saint Charles Street. Liberty Theatre, New Orleans 1935

With the 3rd US Q1 GDP print coming in at -0.7% (-3% if not for inventories), perhaps the media spotlights – and lively imagination – can move away from Greece for a few weeks. The US has enough problems of its own, it would seem. For one thing, its Q1 GDP is now worse than Greece’s. Of course its debt is also much higher, just not to the IMF and ECB. But let’s leave that one be for the moment. Though a bit of perspective works miracles at times.

Of course it’s not a technical recession yet for the US, which only recently presented a +4% quarter with a straight face, and there’s always the ‘multiple seasonal adjustment’ tool. But still. It’s ugly.

The IMF confirmed on Thursday that Athens has the right to ask for “bundled” repayments in June. “Countries do have the option of bundling when they have a series of payments in a given month … making a single payment at the end of that month,” as per an IMF spokesman. Who added that the last country to do so was Zambia three decades ago.

That leaves Athens, in theory, with a 30-day window, not a 7-day one. This of course takes the pressure cooker away from Athens, and the media attention as well. There is no immediate risk of a default, or a Grexit, or anything like that. The negotiations with the creditors will continue, but the conversation will change with time less of an issue.

One thing that’s changing is that the pressure on the other eurozone countries is rising fast. They might yet get to regret the way ‘their side’ conducts the debt talks with Syriza, in which they are a party through the eurogroup of finance ministers. Because it makes ever more deposits disappear from Greek banks, some €300 million in the past few days alone. That triggers a eurozone ‘program’ entitled Target2. For those who don’t know what it is, I’ll use an explanation by Mish from 2012:

If a Greek depositor sends money to a foreign bank (say a German bank), that bank now has additional deposits. To the extent it doesn’t want to recycle them (in the past, it may have used them to buy Greek government bonds), it deposits them with a national central bank – in this case the Bundesbank. Target claims are created because the Greek bank that loses deposits gets funding via the ECB’s ELA (Emergency Liquidity Assistance) program.

Simply put, the ECB sends money to the Bank of Greece in a kind of open credit line to make up for the cash that left the Greek bank. There are some restrictions, but not many. This is not a major problem unless Greece changes currencies, or defaults. If it does, Greece will repay the credit line with Drachmas, not euros.

There are quite a few other ways in which the rest to the eurozone is on the hook for Greek debts, but this is a major one. RIght now, so-called ‘Intra-Eurosystem Liabilities’ from the Greek national bank, the Bank of Greece, have risen to €115 billion and counting -fast-. Germany’s on the hook for 27% of that, or €31 billion. While that is not life threatening for Germany, other countries will not feel that comfortable.

Countries like Spain and Portugal may by now scratch their heads about taking a hard line on the Greek issue. They may not have fully realized to what extent the eurozone is indeed a shared commitment. All eurozone nations now have at least another 30 days to think that over. The main risk in that period is that Greece may decide to leave on its own.

The 30-day grace period will probably dampen the deposit outflows for a bit, depending on what both parties have to offer in the way of statements going forward. And the incumbent ‘leaders’ in various countries can use the time to try and tell the troika that they don’t want to explain the potential losses to their voters. There are elections coming up all over, starting with Italy this weekend.

There is another possibility: that the ECB makes good on its long running threat of limiting Greek banks’ access to the ELA program. But, given the 30-day ‘grace’, and given that it would be seen as a political move by at least some parties, that seems unlikely. And it’s not like the entire thing has now become predictable, just that there’s breathing space. In which clearer -and smarter- heads can prevail.

As for the US, it’s spring, the season to adjust. But -0.7% still stings, and things ain’t going well at all no matter what anybody tells you.