Aug 182016
 
 August 18, 2016  Posted by at 8:51 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »


NPC George W. Cochran & Co., 709 14th Street NW, Washington DC 1920

Japanese Imports Drop -24.7%, Exports Crash -14.1% (ZH)
A Physics Lesson for Central Bankers (BBG)
The Idea Of The Fed Raising The Inflation Target Is Outrageous (Boockvar)
On The Impossibility Of Helicopter Money And Why The Casino Will Crash (DS)
US Buyback Announcements Tumble to a 2012 Low (BBG)
Oil Drillers Have Slashed Spending For 2015-2020 By $1 Trillion
Only 37% Of Borrowers Are Paying Down Their Student Loans (WSJ)
Chinese Airlines Need To Hire 100 Pilots A Week For The Next 20 Years (BBG)
Hillary Clinton Picks TPP and Fracking Advocate To Set Up Her White House (IC)
Is US Moving Nuclear Weapons From Turkey to Romania? (EurA)
America Is Complicit in the Carnage in Yemen (NYT Editorial Board)
California Slaughter: The State-Sanctioned Genocide of Native Americans (NW)
Uncovering The Brutal Truth About The British Empire (G.)
Greek Villagers Rescued Refugees. Now They Are the Ones Suffering. (NYT)

 

 

Apparently Kuroda doesn’t buy enough yet.

Japanese Imports Drop -24.7%, Exports Crash -14.1% (ZH)

For the 19th month in a row, Japanese Imports plunged – dropping 24.7% YoY (worse than expected), the biggest drop since Oct 2009. Exports were just as dismal, also missing expectations, plunging 14.1% YoY – worst since Oct 2009. The biggest driver of the collapse of Japanese trade was a 44% crash in the Chinese trade balance. There’s no lipstick to put on this pig… it’s a disaster.. and worse still Yen is strengthening back below 100 against the USD.

Read more …

Why not simply admit that central bankers and economists alike have no idea what they’re doing?! Even if they ever had a clue, we’re now 8 years into ‘uncharted territory’, and it’s all anyone‘s guess. That’s what ‘uncharted territory’ means.

Moreover, central bankers and economists come in with dogmatic school book theories that don’t apply in ‘uncharted territory’, and those school book educations make sure they’re the very last candidates for finding creative solutions. Comparing economics to actual science does not help one bit.

A Physics Lesson for Central Bankers (BBG)

The world is braced for the discovery of a fifth fundamental forces of nature – the four known ones being electromagnetism, gravity, and strong and weak nuclear forces – that subverts the so-called standard model of particle physics. Given the lackluster outlook for global growth, maybe economics needs a similar revolution. Quantitative easing’s failure to quash the threat of deflation is finance’s equivalent of the bump in the data that alerted physicists to the possibility of a new boson. The mismatch between economic theory and the real-world outcome of zero interest rates poses a direct challenge to the current orthodoxy that puts a 2% inflation target at the heart of monetary policy in most of the developed world.

Figures earlier this week showed inflation running at an annual pace of just 0.8% in the U.S. and 0.6% in the U.K. Consumer prices in the euro zone are rising by about 0.2% a year; in Japan, prices dropped by 0.4% in June. The consensus forecast among economists surveyed by Bloomberg News is for none of the four central banks in those regions to meet their targets in 2016, and for the ECB and the BOJ to continue falling short for at least the next year:

Years of pumping trillions of dollars, euros, yen and pounds into the economy by buying government debt and other securities hasn’t produced the rebound in inflation that economics textbooks predicted. Record low borrowing costs haven’t led to a surge in investment and spending that would lead to higher prices. That’s the kind of empirical evidence that should produce a reconsideration of what Rothschild Investment Trust Chairman Jacob Rothschild this week called “the greatest experiment in monetary policy in the history of the world.” Neil Grossman, director of Florida-based bank C1 Financial and former chief investment officer at TKNG Capital Partners, likens the need to abandon the current economic orthodoxy with the impact of quantum physics on science in the last century.

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“There is no science to this 2% number, it is all art.”

The Idea Of The Fed Raising The Inflation Target Is Outrageous (Boockvar)

I can’t let an opportunity go by without criticizing a Fed official. I believe their feet should be held to the fire after creating a huge asset price bubble and culture of debt that is dragging down economic growth. Fed President John Williams comments yesterday really got me angry. First, he suggested possibly raising the Fed’s 2% inflation target. This reflects an amazing cluelessness of the damage this would do if realized. We are in an epic bond bubble globally where higher inflation would be kryptonite. With the bond monster central bankers have created, the last thing they should want is higher inflation. Also, many U.S. citizens are literally living paycheck to paycheck and a higher cost of living without a corresponding increase in wages or any interest income would damage the largest component of the U.S. economy and the lives of millions.

Second, he said, “Conventional monetary policy has less room to stimulate the economy during an economic downturn.” This we know is true. But he then added, “This will necessitate a greater reliance on unconventional tools like central bank balance sheets, forward guidance, and potentially even negative policy rates.” This last sentence proves he’s blind to the negative consequences of what unconventional tools have wrought and he believes in negative rates even in the face of all the evidence of how damaging the idea is. Let me expand on the first issue of inflation. Central banks in the U.S., Eurozone, UK and in Japan have tethered their monetary policy decisions on growth certainly but also the desire for 2% annual inflation. There is no science to this 2% number, it is all art.

The reason for this target and desire for this level of inflation is a matter of control. While they like to keep interest rates artificially low, they also understand the need to have them higher than they are in order to respond to any economic challenges. The fallacy with this theory that higher inflation is good and deflation is bad, is inflation is just a symptom of underlying supply and demand and technological improvements, and thus shouldn’t be manipulated.

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Stockman: “..earnings had fallen by 19% since then, even as the stock market moved from 1950 to nearly 2200 or 13% higher..”

On The Impossibility Of Helicopter Money And Why The Casino Will Crash (DS)

[..] .. the S&P 500 companies posted Q2 2016 earnings for the latest 12 month period at $86.66 per share. So at the August bubble high the market was being valued at a lunatic 25.1X. Even in a healthy, growing economy that valuation level is on the extreme end of sanity. But actual circumstances are currently more nearly the opposite. That is, earnings have now been falling for six straight quarters in line with GDP growth that has slumped to what amounts to stall speed. In fact, reported earnings for the S&P 500 peaked at $106 per share in the 12 months ended in September 2014. That means that earnings had fallen by 19% since then, even as the stock market moved from 1950 to nearly 2200 or 13% higher.

This is called multiple expansion in the parlance of Wall Street, but it’s hard to find a more bubblicious example. Two years ago the market was trading at just 18.4X, meaning that on the back of sharply falling earnings the PE multiple had risen by 36%! Valuation multiples are supposed to go up only when the economic and profits outlook is improving, not when it’s unmistakably deteriorating as at present. But during the spring-summer melt-up these faltering fundamentals were blithely ignored on the hopes of a second half growth spurt and, failing the latter, that the Fed would again pull the market’s chestnuts out of the fire.

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Time for Yellen to buy those stocks? Buybacks were the no. 1 reason the S&P looked good till now. Better find something to replace them, or else…

US Buyback Announcements Tumble to a 2012 Low (BBG)

Stock buybacks appear to be slowing down, suggesting either corporate America’s outlook has dimmed, stock valuations have become prohibitively high or, most optimistically, that companies are starting to listen to investors and put funds toward other uses. Buybacks announced for the second quarter’s earnings season between July 8 and August 15 totaled an average of $1.8 billion a day, the lowest volume in an earnings season since the summer of 2012, according to TrimTabs Investment Research.
Share repurchases have been a key driver of this year’s stock market rally, despite a notable deceleration relative to to the same period in 2015. In the first seven months of 2016, buybacks totaled $376.5 billion, according to TrimTabs.

That’s down 21% from $478.4 billion in the first seven months of last year. Equity buybacks last week totaled just $2.6 billion, while record highs in U.S. stocks triggered an increase in new equity offerings. “The reluctance to pull the trigger on share repurchases suggests corporate leaders are becoming less enthusiastic about what they see ahead,” David Santschi, chief executive officer of TrimTabs, said in a press release on Tuesday. That means “buybacks aren’t likely to provide as much fuel for the stock market as they have in the recent past.” According to TrimTabs, just five companies have announced buybacks of more-than $3 billion this earnings season: Biogen ($5 billion), Visa ($5 billion), CBS ($5 billion), AIG ($3 billion), and 21st Century Fox ($3 billion).

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Hard to admit to something that will cost you your livelihood. They all keep hoping for rising prices.

Oil Drillers Have Slashed Spending For 2015-2020 By $1 Trillion

Mad Dog, BP’s drilling project deep in the Gulf of Mexico, could be Exhibit A in the oil industry’s war on cost. When the British oil giant announced the project’s second phase in 2011, it put the price at $20 billion. Last month, after simplifying plans and benefiting from a sharp drop in everything from steel to drilling services, Chief Executive Officer Bob Dudley said he could do the job for $9 billion.

Across the industry, companies have taken a chainsaw to expenses, slashing spending for the 2015-to-2020 period by $1 trillion through cutting staff, delaying projects, changing drilling techniques and squeezing outside contractors, according to consulting firm Wood Mackenzie. That’s cushioned businesses as oil prices plunged 60% since 2014. Now producers seek to show they can make the savings stick, while service providers try to reverse their losses. Industry costs “may be the defining issue of the next six to 12 months,” said J. David Anderson, a Barclays analyst in New York. “As you start ramping up, the fact is you’re going to need more services and they’re going to have to come in at a higher price.”

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Someone will come with an across the board forgiveness plan. But it’ll be contentious.

Only 37% Of Borrowers Are Paying Down Their Student Loans (WSJ)

A largely overlooked report released in February by the Government Accountability Office suggests that the Obama administration’s policies have exacerbated student debt, which equals nearly a quarter of annual federal borrowing. With only 37% of borrowers actually paying down their loans, the federal student-loan program more closely resembles the payday-lending industry than a benevolent source of funds for college. As this newspaper reported in April, “43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1,” and a staggering “1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt.”

If student debt continues to skyrocket, the federal government may have to deal with as much as a $500 billion write-down when future defaults and loan-forgiveness programs are factored in. In 2010, the Obama administration dispensed with the private intermediaries that had administered federal loans since the 1960s. It put in their place Direct Lending, a program administered by the Education Department. At the time, the Congressional Budget Office estimated that Direct Lending would save $62 billion from 2010 to 2020. That didn’t happen. The program’s advocates failed to anticipate how two other Obama-backed college affordability initiatives—Income-Driven Repayment and loan forgiveness—would create a cataclysmic hit to the federal student-loan program’s finances.

There are more than 20 Income-Driven Repayment programs, but they all work essentially the same way. Students struggling financially can defer their payments. When no or limited payments are made, their balances grow. Today, over 20 million borrowers are watching their loan balances increase thanks to these programs. The average balance ballooned to approximately $25,000 in 2014 from $15,000 in 2004, according to the Federal Reserve Bank of New York, and has grown still larger since then.

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In their dreams.

Chinese Airlines Need To Hire 100 Pilots A Week For The Next 20 Years (BBG)

Chinese airlines need to hire almost 100 pilots a week for the next 20 years to meet skyrocketing travel demand. Facing a shortage of candidates at home, carriers are dangling lucrative pay packages at foreigners with cockpit experience. Giacomo Palombo, a former United Airlines pilot, said he’s being bombarded every week with offers to fly Airbus A320s in China. Regional carrier Qingdao Airlines promises as much as $318,000 a year. Sichuan Airlines, which flies to Canada and Australia, is pitching $302,000. Both airlines say they’ll also cover his income tax bill in China. “When the time to go back to flying comes, I’ll definitely have the Chinese airlines on my radar,” said Palombo, 32, now an Atlanta-based consultant for McKinsey. “The financials are attractive.”

Air traffic over China is set to almost quadruple in the next two decades, making it the world’s busiest market, according to Airbus Group SE. Startup carriers barely known abroad are paying about 50% more than what some senior captains earn at Delta Air Lines, and they’re giving recruiters from the U.S. to New Zealand free rein to fill their captains’ chairs. With some offers reaching $26,000 a month in net pay, pilots from emerging markets including Brazil and Russia can quadruple their salaries in China, said Dave Ross, Las Vegas-based president of Wasinc International. Wasinc is recruiting for more than a dozen mainland carriers, including Chengdu Airlines, Qingdao Airlines and Ruili Airlines. “When we ask an airline, ‘How many pilots do you need?,’ they say, ‘Oh, we can take as many as you bring,”’ Ross said. “It’s almost unlimited.”

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Incredible, but he really said it: “..there’s not a single case where hydraulic fracking has created an environmental problem for anyone..”

Hillary Clinton Picks TPP and Fracking Advocate To Set Up Her White House (IC)

Two big issues dogged Hillary Clinton during the Democratic primary: the Trans-Pacific Partnership trade agreement (TPP) and fracking. She had a long history of supporting both. Under fire from Bernie Sanders, she came out against the TPP and took a more critical position on fracking. But critics wondered if this was a sincere conversion or simply campaign rhetoric. Now, in two of the most significant personnel moves she will ever make, she has signaled a lack of sincerity. She chose as her vice presidential running mate Tim Kaine, who voted to authorize fast-track powers for the TPP and praised the agreement just two days before he was chosen.

And now she has named former Colorado Democratic Senator and Interior Secretary Ken Salazar to be the chair of her presidential transition team — the group tasked with helping set up the new administration should she win in November. That includes identifying, selecting, and vetting candidates for over 4,000 presidential appointments. As a senator, Salazar was widely considered a reliable friend to the oil, gas, ranching and mining industries. As interior secretary, he opened the Arctic Ocean for oil drilling, and oversaw the botched response to the BP oil spill in the Gulf of Mexico. Since returning to the private sector, he has been an ardent supporter of the TPP, while pushing back against curbs on fracking.

The TPP would enhance the ability of corporations to sue to overturn environmental regulations, but Salazar helped a pro-TPP front group, the “Progressive Coalition for American Jobs,” argue the opposite. In a November 2015 USA Today op-ed that Salazar co-wrote with Bruce Babbitt, the two men argued that the TPP would be the “the greenest trade deal ever” by promoting sustainable energy. Both Salazar and Babbitt cited their former positions as interior secretaries to boost their credibility. The following month, Salazar authored a Denver Post op-ed with two former Colorado governors also affiliated with PCAJ, arguing that the agreement would protect the state’s scenic beauty: “And as a state rich with natural wonder and a long history of conservation, Colorado can be proud that the TPP includes the highest environmental standards of any trade agreement in history.”

Shortly after leaving his post at the Obama administration, Salazar appeared at an oil and gas industry conference to argue in favor of fracking. “We know that, from everything we’ve seen, there’s not a single case where hydraulic fracking has created an environmental problem for anyone,” Salazar told the attendees, who included the vice president of BP America, another keynote speaker at the conference. “We need to make sure that story is told.”

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Not confirmed. But moving them out of Turkey seems logical. Not exactly a safe third country these days.

Is US Moving Nuclear Weapons From Turkey to Romania? (EurA)

Two independent sources told EurActiv.com that the US has started transferring nuclear weapons stationed in Turkey to Romania, against the background of worsening relations between Washington and Ankara. According to one of the sources, the transfer has been very challenging in technical and political terms. “It’s not easy to move 20+ nukes,” said the source, on conditions of anonymity. According to a recent report by the Simson Center, since the Cold War, some 50 US tactical nuclear weapons have been stationed at Turkey’s Incirlik air base, approximately 100 kilometres from the Syrian border.

During the failed coup in Turkey in July, Incirlik’s power was cut, and the Turkish government prohibited US aircraft from flying in or out. Eventually, the base commander was arrested and implicated in the coup. Whether the US could have maintained control of the weapons in the event of a protracted civil conflict in Turkey is an unanswerable question, the report says. Another source told EurActiv.com that the US-Turkey relations had deteriorated so much following the coup that Washington no longer trusted Ankara to host the weapons. The American weapons are being moved to the Deveselu air base in Romania, the source said. Deveselu, near the city of Caracal, is the new home of the US missile shield, which has infuriated Russia.

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It doesn’t sit well with me at all that the NYT editors are saying this. Far too much blood on those hands. It doesn’t feel right one bit.

America Is Complicit in the Carnage in Yemen (NYT Editorial Board)

A hospital associated with Doctors Without Borders. A school. A potato chip factory. Under international law, those facilities in Yemen are not legitimate military targets. Yet all were bombed in recent days by warplanes belonging to a coalition led by Saudi Arabia, killing more than 40 civilians. The United States is complicit in this carnage. It has enabled the coalition in many ways, including selling arms to the Saudis to mollify them after the nuclear deal with Iran. Congress should put the arms sales on hold and President Obama should quietly inform Riyadh that the United States will withdraw crucial assistance if the Saudis do not stop targeting civilians and agree to negotiate peace.

The airstrikes are further evidence that the Saudis have escalated their bombing campaign against Houthi militias, which control the capital, Sana, since peace talks were suspended on Aug. 6, ending a cease-fire that was declared more than four months ago. They also suggest one of two unpleasant possibilities. One is that the Saudis and their coalition of mostly Sunni Arab partners have yet to learn how to identify permissible military targets. The other is that they simply do not care about killing innocent civilians. The bombing of the hospital, which alone killed 15 people, was the fourth attack on a facility supported by Doctors Without Borders in the past year even though all parties to the conflict were told exactly where the hospitals were located.

In all, the war has killed more than 6,500 people, displaced more than 2.5 million others and pushed one of the world’s poorest countries from deprivation to devastation. A recent United Nations report blamed the coalition for 60% of the deaths and injuries to children last year. Human rights groups and the United Nations have suggested that war crimes may have been committed.

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Today Yemen, yesterday California. Maybe if we stop trying to hide the past, we’re less likely to repeat it?!

California Slaughter: The State-Sanctioned Genocide of Native Americans (NW)

The tally is relentlessly grim: a whole settlement wiped out in Trinity County “excepting a few children”; an Indian girl raped and left to die somewhere near Mendocino; as many as 50 killed at Goose Lake; and, two months later, as many as 257 murdered at Grouse Creek, scores of them women and children. There were the four white ranchers who tracked down a band of Yana to a cave, butchering 30. “In the cave with the meat were some Indian children,” reported a chronicle published later. One of the whites “could not bear to kill these children with his 56-calibre Spencer rifle. ‘It tore them up so bad.’ So he did it with his 38-calibre Smith and Wesson revolver.”

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We might as well stop speaking about western ‘civilization’.

Uncovering The Brutal Truth About The British Empire (G.)

Help us sue the British government for torture. That was the request Caroline Elkins, a Harvard historian, received in 2008. The idea was both legally improbable and professionally risky. Improbable because the case, then being assembled by human rights lawyers in London, would attempt to hold Britain accountable for atrocities perpetrated 50 years earlier, in pre-independence Kenya. Risky because investigating those misdeeds had already earned Elkins heaps of abuse. Elkins had come to prominence in 2005 with a book that exhumed one of the nastiest chapters of British imperial history: the suppression of Kenya’s Mau Mau rebellion. Her study, Britain’s Gulag, chronicled how the British had battled this anticolonial uprising by confining some 1.5 million Kenyans to a network of detention camps and heavily patrolled villages.

It was a tale of systematic violence and high-level cover-ups. It was also an unconventional first book for a junior scholar. Elkins framed the story as a personal journey of discovery. Her prose seethed with outrage. Britain’s Gulag, titled Imperial Reckoning in the US, earned Elkins a great deal of attention and a Pulitzer prize. But the book polarised scholars. Some praised Elkins for breaking the “code of silence” that had squelched discussion of British imperial violence. Others branded her a self-aggrandising crusader whose overstated findings had relied on sloppy methods and dubious oral testimonies. By 2008, Elkins’s job was on the line. Her case for tenure, once on the fast track, had been delayed in response to criticism of her work.

To secure a permanent position, she needed to make progress on her second book. This would be an ambitious study of violence at the end of the British empire, one that would take her far beyond the controversy that had engulfed her Mau Mau work. That’s when the phone rang, pulling her back in. A London law firm was preparing to file a reparations claim on behalf of elderly Kenyans who had been tortured in detention camps during the Mau Mau revolt. Elkins’s research had made the suit possible. Now the lawyer running the case wanted her to sign on as an expert witness. Elkins was in the top-floor study of her home in Cambridge, Massachusetts, when the call came. She looked at the file boxes around her. “I was supposed to be working on this next book,” she says. “Keep my head down and be an academic. Don’t go out and be on the front page of the paper.”

She said yes. She wanted to rectify injustice. And she stood behind her work. “I was kind of like a dog with a bone,” she says. “I knew I was right.” What she didn’t know was that the lawsuit would expose a secret: a vast colonial archive that had been hidden for half a century. The files within would be a reminder to historians of just how far a government would go to sanitise its past. And the story Elkins would tell about those papers would once again plunge her into controversy.

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But not everyone has lost it: “If it happens again, everyone will do the exact same thing: We will help.”

Greek Villagers Rescued Refugees. Now They Are the Ones Suffering. (NYT)

Stratis Valamios revved the motor on his small white boat and steered under a thumbnail moon out of the harbor of this fishing village, perched on the northern tip of Lesbos, Greece’s third-largest island. Skies were clear enough to see the purple mountains of Turkey a short distance across the Aegean Sea. It would be easy on this tranquil evening to catch calamari. These days, he needed a good haul to make ends meet. A year ago, he and other fishermen in the tiny village, Skala Sikaminias, were making a more unusual catch: thousands of sea-drenched asylum seekers who streamed across the Aegean to escape conflict and poverty in the Middle East and Africa.

As one of the landfalls in Greece that is closest to Turkey, Skala Sikaminias, with its 100 residents, fast became ground zero for the crisis, the first stop in Europe for people trying to reach Germany in a desperate bid to start new lives. “I’d be in the middle of the sea, and I would see 50 boats zigzagging toward me,” Mr. Valamios said, gazing across the narrow channel. “I would speed toward them, and they would throw their children into my boat to be saved.” Today the migrants have mostly stopped coming. The coastline, once littered with orange life vests and wrecked boats, has been cleaned to a near-spotless white. But the human drama has left an imprint here, and across all of Lesbos, in ways that have only begun to play out.

The village is nearly empty of tourists this year as Germans, Swedes and other visitors who had long flocked to the crystalline waters of Lesbos go elsewhere, wary of spending their vacations in a place now associated with human desperation. Business at the island’s hotels and tavernas has slumped around 80%, especially along the 7.5-mile stretch between Skala Sikaminias and the vacation town of Molyvos, where many of the more than 800,000 migrants who survived the crossing last year washed ashore. Mr. Valamios used to supplement his income as a fisherman by working five months of the year at Myrivilis’ Mulberry taverna, facing the bucolic port where fishermen mend yellow nets beneath oleanders and village cats prowl for fish. This year, he was asked to work just one month amid a dearth of customers. Nearly 1,000 Greeks in the area have lost seasonal employment.

[..] The villagers no longer experience the sea in the same way. When they look at the horizon, some say they think for a split second that another refugee boat is coming. “We have to be ready,” Mr. Valamios said. “If it happens again, everyone will do the exact same thing: We will help.”

Read more …

Jun 022016
 
 June 2, 2016  Posted by at 8:21 am Finance Tagged with: , , , , , , , ,  3 Responses »


Gottscho-Schleisner New York City views. Looking down South Street 1933

China’s Hard Landing Began Last Year, And It’s Going To Get Worse (SCMP)
China’s Latest Export: Broken Deals (WSJ)
US Construction Spending Collapses – Worst April Since 2009 (ZH)
Banks’ Embrace of Jumbo Mortgages Means Fewer Loans for Blacks, Hispanics (WSJ)
Brexit, Spexit, Grexit and Frexit Could All Collide In June 23 Weekend (MW)
Donald Trump To Visit UK On Day Of EU Referendum Result
Leave Camp Must Accept That Norway Model Is The Only Safe Way To Exit EU (AEP)
Greece Under Troika Rule (Wren-Lewis)
Greek Home Prices Down 45%, Seen Dropping Another 20-25% By 2018 (Kath.)
OECD Warns Of “Disorderly Housing Market Correction” In Canada (ZH)
Number Of Homeless People In Vancouver Reaches 10-Year High (G&M)
EU Gives Budget Leeway To France ‘Because It Is France’ – Juncker (R.)
The ECB’s Illusory Independence (Varoufakis)
German Vote on Armenian Genocide Riles Tempers, and Turkey (NY Times)

“Perhaps not since the Pharaohs built the pyramids with slave labour has investment made up such a large share of a country’s economy and household consumption made up so little..”

China’s Hard Landing Began Last Year, And It’s Going To Get Worse (SCMP)

Economist and financial author Richard Duncan believes China’s economy entered into a hard landing in 2015, with the slowdown set to deepen into a slump that will prove to be “severe and protracted”. At its core, a growth model that relied too heavily on investment and exports has left the economy deeply imbalanced, with few drivers that can now take up the slack. Duncan has published a series of videos explaining why, in his opinion, China’s economic development model of export-led and investment-driven growth is now in crisis. The South China Morning Post brings you the second video in that series.

“Perhaps not since the Pharaohs built the pyramids with slave labour has investment made up such a large share of a country’s economy and household consumption made up so little,” Duncan said. “This enormous gap between investment and consumption means China’s economy is now wildly unbalanced.” Underscoring the scale of China’s reliance on investment as an engine of growth, consider how much it has ramped up spending in this area in just a few short years, compared to that of the US, the world’s largest economy. In 2014, investment in the US was US$177 billion higher than 2007, a growth rate of 6%. In 2014, the level of investment in China was US$3.2 trillion more than it was in 2007, representing growth of 236%.

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Too much capital is fleeing.

China’s Latest Export: Broken Deals (WSJ)

China’s global deal-making boom is coming undone. The mystery-shrouded Anbang Insurance is leading the way. It moved a step closer to hitting the trifecta of broken deals this week, just days after a major Chinese construction-equipment maker bailed on its bid to buy U.S. crane maker Terex. Announced overseas deals by Chinese companies topped 2015’s record before this year was half over, which would make China the world’s biggest buyer of foreign companies for the first time ever, according to Dealogic. Chinese companies have also failed to close on more deals than ever before, according to Dealogic.

It’s not a coincidence that the boom in Chinese overseas deal making occurred while businesses and individuals were pouring cash overseas, either to avoid an expected depreciation of the yuan or just to get assets out of the reach of Beijing. And the recent failures have happened while Beijing acts to stem the flow of these funds. That is just part of the weirdness that surrounds many of these deals, and their demise. Another is the opaque nature of the companies involved and the government owners or regulators that determine what is and isn’t allowed. Last are the reasons behind the deals, which have foreign regulators on edge. The latest deal on the ropes is Anbang’s planned $1.57 billion acquisition of U.S. insurer Fidelity & Guaranty Life, one of the biggest sellers of fixed indexed annuities.

Regulators in the U.S. have demanded but haven’t gotten detailed financial information from Anbang. Fidelity says it expects Anbang will try again to get the deal approved. It isn’t surprising that the company hasn’t provided the requested information. Efforts to figure out Anbang’s corporate structure or where its cash came from have so far failed to yield much clarity. This is the third proposed Anbang deal to run into trouble. First was its effort to buy Starwood Hotels & Resorts Worldwide Inc. After bidding up the price and threatening a rival deal, Anbang pulled out suddenly with little explanation.

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Weather.

US Construction Spending Collapses – Worst April Since 2009 (ZH)

Following a hope-strewn bounce in February and March, US Construction Spending plunged 1.8% in April (massively worse than the expected 0.6% rise). This is the biggest monthly drop since January 2011 as while religious construction surged 9.6%, Commercial, Healthcare, and Education construction all plunged with Communications and highway building collapsing 7.7% and 6.5% respectively. We are sure weather will be blamed but the 1.5% drop in residential construction is rather notable for an April – it is the weakest April since 2009.

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Lend only to the rich.

Banks’ Embrace of Jumbo Mortgages Means Fewer Loans for Blacks, Hispanics (WSJ)

Last decade’s financial crisis left many losers in banking. One winner is the jumbo. The biggest U.S. banks are tilting toward these high-dollar mortgages as they overhaul loan operations. And jumbo loans, which were less important during the subprime-loan boom, are helping banks take on less risk, as mandated by regulators in the postcrisis era. These loans, however, could put banks at odds with another federal regulatory mandate—one that says lenders should serve a racially diverse set of customers. As they approve relatively more jumbos, major banks are granting fewer mortgages to African-Americans and Hispanics than just before the crisis, a Wall Street Journal analysis found.

For banks, “it’s one of those damned if you do, damned if you don’t situations,” said Stu Feldstein, president at SMR Research Corp., a mortgage-research firm in Hackettstown, N.J. The Journal analyzed data on every mortgage approval reported to the federal government for home purchases in 2007 and 2014, the most recent available, including borrower race or ethnicity. In that period, each of the 10 biggest U.S. retail banks increased the share of its mortgage approvals that are jumbos. Jumbos, loans above $417,000 in most markets, are attractive because they typically feature high credit scores, big down payments and low default rates. And they aren’t linked to the government programs that cost banks tens of billions of dollars in fines related to the subprime-loan debacle.

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Note: it’ll take the entire weekend.

Brexit, Spexit, Grexit and Frexit Could All Collide In June 23 Weekend (MW)

The hedge funds will have prepped their positions. The investment banks will have ordered in pizza and extra coffee ready for a long night of dealing. Exit polls will have been commissioned, and currency traders will be ready to buy or sell sterling as soon as they start getting a clear idea of whether Britain has voted to stay in or get out of the EU on June 23. But hold on. In fact, it is not just the risk of Brexit that the markets need to be worrying about. In truth, the real drama is going to come over a long and difficult weekend, leading up to potentially wild day in European assets on Monday, June 27. Why? Over that weekend, Spanish voters will go back to the polls in another attempt to settle on a government, which may well see the far-left Podemos group make big gains.

Greece will be struggling to find the money to pay back its latest debts. And if the strikes in France escalate, the country may be close to running out of its strategic fuel reserves – and approaching a total meltdown. Brexit, Spexit, Grexit, and Frexit could all collide. The result? A car crash for the European markets. Brexit remains the most pressing worry for investors, and rightly so. With three weeks until the vote, the polls remain very close. The latest sample for the Daily Telegraph showed a five-point lead for “Remain,” and most have showed the two camps within five to 10 points of each other. But who knows what is going on? The UK hasn’t had a referendum like this for a generation. No one knows what questions to ask, what demographics to target and which side will be better at getting its people to the polling booths on the day.

Either side could win comfortably. Here is the interesting point, however. It may take until the weekend to work out what has happened. The TV networks have decided against an extensive exit poll, on the grounds that they don’t know how to make it accurate. The hedge funds are reported to be spending a lot of money on private exit polls, and the currency markets will tell us what those results look like.

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Brilliant: “I think I would be a great uniter. I think that I would have great diplomatic skills; I would be able to get along with people very well,” Trump said. “I had great success [in my life]. I get along with people. People say, ‘Oh gee, it might be tough from that standpoint’, but actually I think the world would unite if I were the leader of the United States.”

Donald Trump To Visit UK On Day Of EU Referendum Result

Donald Trump, the presumptive Republican nominee in the US presidential election, has confirmed he is to visit the UK later this month to attend the official reopening of his hotel and golf resort in Scotland. The billionaire property developer will be at the Turnberry hotel at the golf course in Ayrshire on 24 June for its official relaunch following a £200m redevelopment. Trump’s announcement throws up the question of whether David Cameron will meet him, as the visit comes the day after the UK’s referendum on EU membership on 23 June – a vote some polls suggest the prime minister faces losing. The Turnberry hotel, which Trump bought in 2014 for £35m, opened to guests on Wednesday. It features a £3,500-a-night presidential suite and, from August, the Donald J Trump ballroom – “the most luxurious meeting facility anywhere in Europe”, according to his publicists.

“Very exciting that one of the great resorts of the world, Turnberry, will be opening today after a massive £200m investment. I own it and I am very proud of it,” Trump said in a statement. He will not be officially confirmed as Republican nominee until the party’s convention in July. And his campaign did not say whether he planned any political activity while in the UK – or whether his trip was a coincidence. Trump has often weighed in on the referendum, and believes the UK should leave the EU. He told Fox News in May: “I know Great Britain very well. I know the country very well. I have a lot of investments there. I would say that they’re better off without it. But I want them to make their own decision.” He recently told Hollywood Reporter, “Oh yeah, I think they should leave”, after being initially unfamiliar with the term “Brexit”.

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Ambrose on Brexit. I’m sure many Britons feel this has nothing to do with them, it’s just a bunch of middle-aged right wingers squaring off.

Leave Camp Must Accept That Norway Model Is The Only Safe Way To Exit EU (AEP)

There have been two excellent reports on the EEA option, one by the Adam Smith Institute and another entitled ‘Flexcit’ by Richard North from the EU Referendum blog. The Adam Smith Institute starts from the premise that the EU is “sclerotic, anti-democratic, immune to reform, and a political relic of a post-war order that no longer exists.” It says the EEA option lets the public judge “what ‘out’ looks like” and keeps disruption to a minimum. “The economic risks of leaving would thus be neutralised – it would be solely a disengagement from political integration. All the business scare stories about being cut off from the single market would fade away,” it said. The report argues that everybody could live with an EEA compromise, whether the Civil Service, or the US, or the EU itself.

Britain would then be a sovereign actor, taking its own seat on the global bodies that increasingly regulate everything from car standards, to food safety, and banking rules. “As Britain is already a contracting party to the EEA Agreement there would be no serious legal obstacle,” it says. David Cameron disparages the Norwegian model as a non-starter. “While they pay, they don’t have a say,” he says. Actually they do. As our forensic report on Norway by Szu Ping Chan makes clear, they have a de facto veto over EU laws under Article 102 of the EEA agreement. Their net payments were £106 a head in 2014, a trivial sum.

They are exempt from the EU agricultural, fisheries, foreign, defence, and justice policies, yet they still have “passporting” rights for financial services. Their citizens can live in their Perigord moulins or on the Costa Del Sol just as contentedly as we can. They do not have to implement all EU law as often claimed. Norway’s latest report shows it has adopted just 1,349 of the 7,720 EU regulations in force, and 1,369 out of 1,965 EU directives. The elegance of the EEA option is that Britain would retain access to the EU customs union while being able to forge free trade deals with any other country over time.

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Not the biggest fan of Wren-Lewis, but this is good.

Greece Under Troika Rule (Wren-Lewis)

“The repayment of foreign loans and the return to stable currencies were recognized as the touchstones of rationality in politics; and no private suffering, no infringement of sovereignty was considered too great a sacrifice for the recovery of monetary integrity. The privations of the unemployed made jobless by deflation; the destitution of public servants dismissed without a pittance; even the relinquishment of national rights and the loss of constitutional liberties were judged a fair price to pay for the fulfilment of the requirements of sound budgets and sound currencies, these a priori of economic liberalism.” – Karl Polanyi (1944), “The Great Transformation” (p142)

This quote (HT Jeremy Smith) could almost be written today about Greece. I had once thought that the lessons of the interwar period and Great Depression had been well learnt, but 2010 austerity showed that was wrong. I therefore used in a 2014 post an earlier example of where one country allowed another to suffer for what was thought to be sound economics and their own ultimate good (‘a sharp but effectual remedy’): the British treatment of Ireland during the famine. The British held back relief because of a combination of laissez-faire beliefs and prejudice against Irish catholics. Replace famine relief with debt relief and Irish operating an inefficient agricultural system with lazy Greeks and an economy in need of structural reform, and the two stories have strong similarities, although of course the scale of the suffering is different.

To understand why the Greek crisis goes on you need to understand its history. That the Greek government borrowed too much is generally agreed. What is often ignored is that the scale of the excess borrowing meant default was pretty inevitable. But Eurozone leaders, worried about their banking system (which held a lot of Greek debt), first postponed default and then made it partial. The real ‘bailing out’ was for the European banks and others who had lent to the Greek government. The money the Eurozone lent to Greece largely went to pay off Greece’s creditors. There was absolutely nothing that obliged Eurozone leaders to lend their voters money to bail out these creditors. Pretty well all the analysis I saw at the time suggested it would be money that Greece would be unable to pay back.

If European leaders felt their banking systems needed support, they could have done this directly. But instead they convinced themselves that Greece could pay them back. It was a mistake they will do anything to avoid admitting. To try and ensure they got their money back, they along with the IMF effectively took over the running of the Greek economy. The result has been a complete disaster. The amount of austerity imposed caused great hardship, and crashed the economy. Whereas the Irish and Spanish economies are beginning to recover and regain market access, Greece is miles away from that, and the Troika’s structural reforms are partly to blame.

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When will the Chinese start buying?

Greek Home Prices Down 45%, Seen Dropping Another 20-25% By 2018 (Kath.)

Property market professionals are expecting house prices in Greece to drop further by up to 25% in the next few years, reporting a sudden rise in supply of properties owing to the upcoming repossessions, while demand will continue to fall due to the recessionary measures of the new bailout agreement. Since end-2008, house prices in the country’s two main cities, Athens and Thessaloniki, have fallen by an average of 45%, according to data from the Bank of Greece. The decline for the country as a whole comes to 41%. Therefore if the above estimate proves right, by the time the bailout period is supposed to be completed (in May 2018), the loss in residential properties’ market value will amount to 65-70%, or even more in some cases.

Giorgos Litsas, the head of chartered surveyors GLP Values, tells Kathimerini that “just under a year ago, when the agreement between the government and its creditors became known in the context of the capital controls, we estimated that the new bailout deal would entail a further 18% drop in home prices. Now, after the measures passed and under the threat of repossessions, we have had to revise the estimated drop in prices over the next couple of years to 20% or even 25%, particularly when taking into account the shift in supply of houses in a saturated market with no demand.”

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You don’t say: “We’re a little concerned about housing prices in the greater Vancouver area and Toronto..”

OECD Warns Of “Disorderly Housing Market Correction” In Canada (ZH)

With regulators and local authorities unable or unwilling to crack down on the unprecedented housing bubble in select Canadian cities, increasingly used by Chinese oligarchs to park hot cash offshore, the local banks are starting to take action into their own hands. Case in point, Bank of Nova Scotia has decided to ease off on mortgage lending in Vancouver and Toronto due to soaring prices, Chief Executive Officer Brian Porter said. “We’re a little concerned about housing prices in the greater Vancouver area and Toronto,” Porter, 58, said Tuesday in an interview on Bloomberg TV Canada. “We just took our foot off the gas the last couple quarters in terms of mortgage growth for the reasons I cited, in terms of Vancouver and Toronto.”

Nationwide home sales in April jumped 10.3% from a year earlier, the most activity for that month and the second-highest level ever, according to the Canadian Real Estate Association. In Vancouver, prices rallied 25% in the month to an average of C$844,800 ($643,000) and sales climbed 15%. Toronto prices jumped 13% to C$614,700 and sales rose 7%, the association said. Then again, while Porter did tacitly admit that soaring housing prices are a threat, he also added that “generally, Canadians have a strong ability to self regulate and they’ve demonstrated that before.”

That may be in doubt, because none other than the OECD itself rang a alarm bells over the frothy nature of the Toronto and Vancouver housing markets and high levels of consumer debt. “Very low borrowing rates have encouraged household credit growth and underpinned rapidly rising housing prices, particularly in Vancouver and Toronto, which together are a third of the Canadian housing market,” the Organization for Economic Co-operation and Development warned again today in its latest outlook quoted by the Globe and Mail.

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Just drive up home prices high enough. And then there’s people saying: ‘we have to build our way out of this’. Oh, lord.

Number Of Homeless People In Vancouver Reaches 10-Year High (G&M)

The number of homeless people in Vancouver is the highest in a decade, underscoring an affordability crunch that has worsened even as the local government has spent millions on new housing. Vancouver recorded 1,847 people without permanent housing during its annual homeless count in March – a 6-per-cent increase from a year earlier – in a city whose mayor came to office promising to end homelessness by the end of 2015. In releasing the tally on Tuesday, the city highlighted steps it had taken in recent years to build new homes and protect affordable housing, including changing its bylaws to make it more difficult for the owners of single-room occupancy hotels to evict low-income tenants.

But critics say those measures aren’t enough, especially when skyrocketing real estate prices make it tempting for building owners to evict tenants so they can sell or redevelop their properties. “We are not surprised by the numbers. What we are seeing in the Downtown Eastside – and it is happening across [Metro Vancouver] – is the loss of low-income housing,” Maria Wallstam, a spokeswoman for Carnegie Community Action Project, said Tuesday after the city released its report. “The existing low-income housing stock is being demolished, the rents are going up, or it’s being developed,” she added. “There are simply no options for people to live.” The homeless count, conducted over two nights in March, found 1,847 people who were homeless, compared with 1,746 in 2015.

The total comprises less than 1% of Vancouver’s population – 603,500 in the 2011 census – but is slightly higher than the level in several other Canadian cities, including Toronto and Saskatoon, the report said. The count showed that 61% had been homeless for less than a year and 78% were facing at least one physical or mental-health concern, or both. “What jumps out at me is the complexity of the issues behind these numbers,” said Jonathan Oldman, executive director of the Bloom Group, a non-profit organization that provides housing and support services in the Downtown Eastside.

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All pigs are equal.

EU Gives Budget Leeway To France ‘Because It Is France’ – Juncker (R.)

The European Commission has given France leeway on fiscal rules “because it is France,” the president of the EU executive Jean-Claude Juncker said on Tuesday, in a remark that may not go down well in Germany and other more thrifty euro zone states. The EU is debating how to best apply its fiscal rules, which require a budget deficit under 3% of GDP and public debt to fall, at a time when some argue that more public spending would help boost economic growth. The Commission, which is in charge of monitoring national budgets and recommending corrective measures, is sometimes accused by Germany and other northern euro zone governments of being to lenient in applying EU budget rules.

The EU executive arm gave France in 2015 two more years to bring its deficit below 3% of GDP, even though Paris appeared to miss agreed targets. Asked why the Commission, on several occasions, had turned a blind eye to French infractions, Juncker admitted candidly in an interview with the French Senate television Public Senate that it did so “because it is France”. “I know France well, its reflexes, its internal reactions, its multiple facets,” Juncker said, adding that fiscal rules should not be applied “blindly”. He then reiterated that France should respect its current commitment to bring its deficit below 3% next year.

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It’s politics all the way down.

The ECB’s Illusory Independence (Varoufakis)

A commitment to the independence of central banks is a vital part of the creed that “serious” policymakers are expected to uphold (privatization, labor-market “flexibility,” and so on). But what are central banks meant to be independent of? The answer seems obvious: governments. In this sense, the ECB is the quintessentially independent central bank: No single government stands behind it, and it is expressly prohibited from standing behind any of the national governments whose central bank it is. And yet the ECB is the least independent central bank in the developed world. The key difficulty is the ECB’s “no bailout” clause – the ban on aiding an insolvent member-state government. Because commercial banks are an essential source of funding for member governments, the ECB is forced to refuse liquidity to banks domiciled in insolvent members. Thus, the ECB is founded on rules that prevent it from serving as lender of last resort.

The Achilles heel of this arrangement is the lack of insolvency procedures for euro members. When, for example, Greece became insolvent in 2010, the German and French governments denied its government the right to default on debt held by German and French banks. Greece’s first “bailout” was used to make French and German banks whole. But doing so deepened Greece’s insolvency. It was at this point that the ECB’s lack of independence was fully exposed. Since 2010, the Greek government has been relying on a sequence of loans that it can never repay to maintain a façade of solvency. A truly independent ECB, adhering to its own rules, should have refused to accept as collateral all debt liabilities guaranteed by the Greek state – government bonds, treasury bills, and the more than €50 billion ($56 billion) of IOUs that Greece’s banks have issued to remain afloat.

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Storm, teacup: 11 of the EU’s 28 members have recognized the Armenian killings as genocide and, despite initial protests, Turkey has maintained good relations with several of those countries.

German Vote on Armenian Genocide Riles Tempers, and Turkey (NY Times)

If modern Germany has a mantra, it is that people should learn from their history. Yet Berlin’s latest attempt at reconciliation with the past focuses on the mass killing of Armenians by Ottoman Turks a century ago. And that gesture toward atonement has riled tempers on all sides of the already strained European relations with Turkey. The argument is set to peak on Thursday in a debate in the German Parliament, which is expected to overwhelmingly approve a resolution that officially declares the century-old Armenian massacres to be genocide — and condemns the then-German Empire, allied with Ankara, for failing to act on information it had at the time about the killings.

President Recep Tayyip Erdogan of Turkey said late Tuesday that he had warned Chancellor Angela Merkel of Germany in a telephone call that there could be consequences if the resolution passes. For Turkey, there is scarcely a more sensitive topic than what German and international historians say was the murder of more than a million Armenians and other Christian minorities from 1915 to 1916. The Turkish government has long rejected the term genocide, saying that thousands of people, many of them Turks, died in the civil war that destroyed the Ottoman Empire. For Germany, the resolution comes at a delicate time for Ms. Merkel.

She is relying on Turkey to stem the flow of migrants from the Middle East to Europe, a policy that has earned her criticism for allying with the increasingly authoritarian Mr. Erdogan. “If Germany is to be deceived by this, then bilateral, diplomatic, economic, trade, political and military ties — we are both NATO countries — will be damaged,” Mr. Erdogan told Turkish reporters before leaving on an official trip to Africa. To date, 11 of the European Union’s 28 members have recognized the Armenian killings as genocide and, despite initial protests, Turkey has maintained good relations with several of those countries.

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