US President Donald Trump will meet Russia’s Vladimir Putin later on Monday, ending a tumultuous European tour in which he criticised his allies. Mr Trump said he had “low expectations” ahead of the talks in the Finnish capital, Helsinki, but added that “maybe some good” would come of them. The summit comes after 12 Russians were charged with hacking in the 2016 US elections. Mr Trump says he will raise the issue, but there is no formal agenda. The two leaders will meet one-on-one, and will be joined only by their interpreters. It is the first-ever summit between Mr Putin and Mr Trump – although they have previously met on the sidelines of multilateral talks.
There have been calls in the US for Mr Trump to cancel the meeting altogether over the indictments of Russian military intelligence agents, announced on Friday. Russia denies the allegations, and says it is looking forward to the talks as a vehicle for improving relations. US National Security Adviser John Bolton has said both sides have agreed the meeting will have no set agenda. But he said he found it “hard to believe” Mr Putin did not know about the alleged election hacking and the subject would be mentioned. “That’s what one of the purposes of this meeting is, so the president can see eye to eye with President Putin and ask him about it,” he told ABC News.
U.S. President Donald Trump’s criticism of Russia’s Nord Stream-2 gas pipeline to Europe is an egregious example of unscrupulous competition and it worries Moscow, Kremlin spokesman Dmitry Peskov was quoted as saying on Monday. Speaking shortly before Trump and Russian President Vladimir Putin sit down together for a summit in the Finnish capital, Peskov also said discussions between the two on Syria would be difficult because of the U.S. stance on Iran, Russia’s ally and a major player in the Syrian conflict. Russia’s RIA news agency quoted Peskov as saying he hoped the Helsinki talks would represent some kind of step away from the current crisis in U.S.-Russian relations.
Donald Trump described the European Union one of his greatest “foes” in another extraordinary diplomatic intervention on Sunday, just hours before sitting down to a high-stakes summit with Russian president Vladimir Putin. Asked in a TV interview to name his “biggest foe globally right now”, the US president started by naming the European Union, calling the body “very difficult” before ticking off other traditional rivals like Russia and China. Hours earlier, British prime minister Theresa May revealed that Trump suggested she “sue the EU” rather than go into negotiations over Brexit. “Well I think we have a lot of foes,” Trump told CBS News at his Turnberry golf resort in Scotland. “I think the European Union is a foe, what they do to us in trade. Now you wouldn’t think of the European Union but they’re a foe.”
Apparently taken aback, anchor Jeff Glor replied: “A lot of people might be surprised to hear you list the EU as a foe before China and Russia.” But Trump insisted: “EU is very difficult. I respect the leaders of those countries. But – in a trade sense, they’ve really taken advantage of us.” Trump’s controversial tour through Europe has turned postwar western relations inside out, the president sparring with Nato leaders in Brussels and blasting May’s Brexit strategy in the Sun newspaper. His remarks have reflected one of this president’s core beliefs: that America is exploited by its allies. Donald Tusk, president of the European council, tweeted: “America and the EU are best friends. Whoever says we are foes is spreading fake news.”
China ranges over the global economy like a bull elephant roams the savanna. Other grassland wildlife is sensitive to this mammoth’s slightest moves. The ferocious lion, the U.S., is no exception. China has yet to become fully aware that it is the elephant in the global economy’s boardroom. But in Washington, Trump was cognizant that he could not stand idly by after China vowed to knock the U.S. off its economic pedestal in just 17 years from now. He campaigned for the presidency by promising voters he would put “America first.” News of China’s decision to bring forward its modernization target date emerged at a bad time. It came shortly after Xi had promised Trump business deals worth $250 billion.
That pledge came in November, when Trump was visiting Beijing, and was portrayed as a salve that would help to heal the U.S.’s massive trade deficit with China. As expected, it was little more than talk. The trade gap continues to quickly widen. Alarmed by China’s ambitions and frustrated by the lack of progress in narrowing the U.S. trade deficit, Trump went on the offensive in the spring. There are good reasons for China coming under U.S. trade fire. It has been the biggest beneficiary of the global trade system since it became a member of the World Trade Organization at the end of 2001. All the while, it has imposed strict foreign ownership limits in each industrial sector, forced foreign companies that enter China to transfer technologies and has set up various other barriers to its markets.
Backed by huge amounts of government funds, Chinese companies have made splashy acquisitions of U.S. and European companies that own key technologies, especially in the auto and information technology sectors. Chinese companies can quickly obtain technologies by acquiring or taking equity investments in U.S. and European companies. In the U.S. and Europe, any company can acquire any other company as long as it can obtain the necessary funds. But it is difficult for U.S. and European companies to acquire Chinese companies. Chinese authorities have numerous regulations at their disposal to block any such attempt.
When Xi bared China’s sharp claws, declaring China would overtake the U.S. economically by 2035, he did so for the benefit of a domestic audience and to aid his fierce power struggle with the political factions that had run China for decades. China is now beginning to realize the high price it is having to pay for Xi’s declaration.
“It is absolutely unreal how the world pays so much respect to mediocrity or even incompetence when it comes to running the financial system. Central banks and their heads have created this monster balloon which is now waiting to be popped. They have given the world the impression that they have been instrumental in saving the world economy. The central bank chiefs that managed to retire before the balloon burst can count themselves lucky. In my view, the luck is now in the process of running out for the present ones. These chiefs believe so much in their own ability as saviors of the world that they don’t understand that all they are doing is creating a much bigger monster by printing and printing and printing.
[..] When the monster, ‘everything’ bubble pops, so will the paper markets in gold, silver, and other precious metals. The size of this market is at least 100-times bigger than the physical market. The rise of this market is very much linked to manipulation of the precious metals by central banks, the Bank for International Settlements (BIS), and bullion banks. When the paper metals markets pop, there will be no gold (or silver) offered at any price. This is the time when overnight or over a weekend the price will go from $1,250 to $10,000 or even $100,000. This might sound totally unreal to some, but this will be the most likely consequence of the monster bubble popping and everyone in markets running for the exit.
Most people believe that the status quo can go on forever and that central banks will continue their ridiculous game of pretending that air is real money that can create wealth. The few people who believe that there is a serious risk that the system will not survive in its present form, and that their assets — be it cash, bonds, or stocks — could decline substantially in value, must seriously consider insurance.
The next decline in financial markets is likely to start in late 2018 or early 2019. And this will not be an ordinary decline or normal correction. Instead, it will be the beginning of the biggest global bear market in history. And this time central banks and governments will fail in their attempts to save the system. They will, however, certainly print a lot of money and try to reduce interest rates. But as global bond markets collapse, rates will go up rapidly. This means that bonds and stocks will both crash along with most assets.
Lyndon Johnson, who was majority leader in the US Senate before he became his country’s president, once declared that the most important talent in politics is “the ability to count”. There aren’t enough people who can count around Mrs May. The fatal flaw in her plan is that there is no majority for it in the House of Commons. The Brexit ultras are crying treachery and promising havoc. They both express and feed the furies of Tory activists. The Brextremists don’t have an alternative plan, other than to crash out of the EU without any deal at all, a catastrophic outcome that some of them actually wish for, but that hasn’t stopped them before and won’t curb them now.
Jacob Rees-Mogg and his cabal can muster the 48 signatures of Tory MPs that they need to trigger a confidence vote in Mrs May. They do not sound confident that they have the numbers – they require 159 – to oust her from the premiership. What the ultras can do is make the government’s life even more hellish by prosecuting a “guerrilla war” in parliament. Even if Mrs May could get the EU to accept her plan, 60-plus Conservative MPs are opponents of her version of a Brexit deal. That number will climb if, as is inevitable, she has to make further concessions in Brussels to secure an agreement. There are more than enough Brextremist rebels to block the prime minister in the Commons unless she can get some assistance from the opposition.
She needs the help of Labour MPs and she is not going to get it. Jeremy Corbyn won’t give her any succour. He is more interested in bringing down the Tories than helping them to solve a mad riddle of their own making. The Labour leadership calculates that defeating Mrs May in Brexit votes is their best chance of collapsing the government and precipitating an early general election. But Number 10 clearly harboured hopes that centrist Labour MPs might embrace her plan as the least worst version of Brexit that they are likely to get in the circumstances.
Theresa May faces a concerted rebellion from the hard Brexit wing of the Conservative party on Monday, as MPs unhappy with her Chequers compromise prepare to mount a show of strength by voting for their amendments on the customs bill. The party’s European Research Group says it will reject any last attempts at compromise by Number 10 as they hope to force May to change course over Brexit or risk a no-confidence vote before the summer break by demonstrating the depth of their support. A special ERG whipping operation, using the WhatsApp messaging service, has been created by Steve Baker, the former Brexit minister who resigned from the government last week, although ERG insiders would not put a number on how many they expected to rebel in the Commons.
Jacob Rees-Mogg, the chairman of the ERG, told the BBC “we’ll have an idea of the numbers at 10pm on Monday evening” while one ERG insider added that they were “intensely relaxed” about the number of rebels they had signed up. Last week, members of the hard Brexit group put down four amendments to the taxation (cross-border trade) bill due to be debated on Monday evening, aimed at halting the customs plan announced by May at Chequers nine days ago. The level of support they attract will draw intense focus, particularly if the number significantly exceeds the 48 required to call for a vote of no confidence in May’s leadership of the Conservative party.
Britain’s housing market saw a glut of new property offered for sale this month, keeping a lid on prices at a time when sales typically suffer from a seasonal lull, property website Rightmove said on Monday. Real estate agents now have the highest amount of stock since September 2015, Rightmove said. “While an increase in seller numbers is a welcome sign of more liquidity in a generally stock-starved market, it has unfortunately come at a quieter time of year,” Rightmove director Miles Shipside said. The number of homes advertised by Rightmove, Britain’s largest property website, is 8.6 percent higher than the same month a year ago, but the number of sales is virtually unchanged from a year earlier, down 0.2 percent.
Average asking prices for new sellers are down 0.1 percent since June, typical for the time of year, Rightmove added. But in a sign that previous sellers had priced their property too high, a third of stock being advertised had seen at least one price reduction, the highest proportion for the time of year since 2011. Other industry data has shown British house price growth has slowed sharply since the June 2016 Brexit vote, though with marked regional variation. The slowdown is most marked in London and neighbouring areas, where demand has been hit by higher tax on expensive property and reduced demand from foreign investors. In other parts of Britain, prices are still rising moderately.
The European Union on Monday called on the United States, China and Russia to work together to avoid trade “conflict and chaos” to prevent it spiralling into violent confrontation. “It is the common duty of Europe and China, but also America and Russia, not to destroy (the global trade order) but to improve it, not to start trade wars which turned into hot conflicts so often in our history,” EU Council President Donald Tusk said in Beijing. “There is still time to prevent conflict and chaos.” Tusk spoke after meeting with Chinese Premier Li Keqiang as part of an annual EU-China summit that opened against the backdrop of the growing China-US economic confrontation and wider global trade discord.
The EU — the world’s biggest single market with 28 countries and 500 million people — is trying to buttress alliances in the face of the protectionism unleashed by US President Donald Trump’s “America First” administration. The meeting between Chinese and European officials in Beijing, which also included European Commission head Jean-Claude Juncker, comes as Trump prepared to hold talks in Helsinki with Russian leader Vladimir Putin. The world needed trade reform, rather than confrontation, Tusk said. “This is why I am calling on our Chinese hosts, but also on Presidents Trump and Putin, to jointly start this process from a thorough reform of the WTO.”
Tuesday is a red-letter day for international law: from then on, political and military leaders who order the invasion of foreign countries will be guilty of the crime of aggression, and may be punishable at the international criminal court in The Hague. Had this been an offence back in 2003, Tony Blair would have been bang to rights, together with senior numbers of his cabinet and some British military commanders. But if that were the case, of course, they would not have gone ahead; George W Bush would have been without his willing UK accomplices. The judgment at Nuremberg declared that “to initiate a war of aggression … is the supreme international crime”.
But this concept never entered UK law (as the misguided crowdfunded effort to prosecute Blair discovered last year). International acceptance of it stalled until states could agree on an up-to-date definition. The crime was included in the ICC jurisdiction back in 1998, but was suspended until its elements could be decided (in 2010) then ratified by at least 30 states (in 2016). At last it is finally being “activated”. In the meantime, Iraq and Ukraine have been invaded and other countries threatened, while Donald Trump attacked Syria last year. Now, the very existence of the crime of aggression offers some prospect of deterrence, and some degree of certainty in identifying the criminals.
How many people remember it was the US that drove Castro into Russian arms? He visited the US shortly after becoming president. Eisenhower refused to talk. Everything after that is propaganda and fake news.
Guerrilla revolutionary and communist idol, Fidel Castro was a holdout against history who turned tiny Cuba into a thorn in the paw of the mighty capitalist United States. The former Cuban president, who died aged 90 on Friday, said he would never retire from politics. But emergency intestinal surgery in July 2006 drove him to hand power to Raul Castro, who ended his brother’s antagonistic approach to Washington, shocking the world in December 2014 in announcing a rapprochement with US President Barack Obama. Famed for his rumpled olive fatigues, straggly beard and the cigars he reluctantly gave up for health reasons, Fidel Castro kept a tight clamp on dissent at home while defining himself abroad with his defiance of Washington.
In the end, he essentially won the political staring game, even if the Cuban people do continue to live in poverty and the once-touted revolution he led has lost its shine. As he renewed diplomatic ties, Obama acknowledged that decades of US sanctions had failed to bring down the regime – a drive designed to introduce democracy and foster western-style economic reforms – and it was time to try another way to help the Cuban people. A great survivor and a firebrand, if windy orator, Castro dodged all his enemies could throw at him in nearly half a century in power, including assassination plots, a US-backed invasion bid, and tough US economic sanctions.
Born August 13, 1926 to a prosperous Spanish immigrant landowner and a Cuban mother who was the family housekeeper, young Castro was a quick study and a baseball fanatic who dreamed of a golden future playing in the US big leagues. But his young man’s dreams evolved not in sports but politics. He went on to form the guerrilla opposition to the US-backed government of Fulgencio Batista, who seized power in a 1952 coup. That involvement netted the young Fidel Castro two years in jail, and he subsequently went into exile to sow the seeds of a revolt, launched in earnest on December 2, 1956 when he and his band of followers landed in southeastern Cuba on the ship Granma. Twenty-five months later, against great odds, they ousted Batista and Castro was named prime minister.
Once in undisputed power, Castro, a Jesuit-schooled lawyer, aligned himself with the Soviet Union. And the Cold War Eastern Bloc bankrolled his tropi-communism until the Soviet bloc’s own collapse in 1989. Fidel Castro held onto power as 11 US presidents took office and each after the other sought to pressure his regime over the decades following his 1959 revolution, which closed a long era of Washington’s dominance over Cuba dating to the 1898 Spanish-American War.
Wisconsin’s election board agreed on Friday to conduct a statewide recount of votes cast in the presidential race, as requested by a Green Party candidate seeking similar reviews in two other states where Donald Trump scored narrow wins. The recount process, including an examination by hand of the nearly 3 million ballots tabulated in Wisconsin, is expected to begin late next week after Green Party candidate Jill Stein’s campaign has paid the required fee, the Elections Commission said. The state faces a Dec. 13 federal deadline to complete the recount, which may require canvassers in Wisconsin’s 72 counties to work evenings and weekends to finish the job in time, according to the commission. The recount fee has yet to be determined, the agency said in a statement on its website.
Stein said in a Facebook message on Friday that the sum was expected to run to about $1.1 million. She said she has raised at least $5 million from donors since launching her drive on Wednesday for recounts in Wisconsin, Michigan and Pennsylvania – three battleground states where Republican Trump edged out Democratic nominee Hillary Clinton by relatively thin margins. Stein has said her goal is to raise $7 million to cover all fees and legal costs. Her effort may have given a ray of hope to dispirited Clinton supporters, but the chance of overturning the overall result of the Nov. 8 election is considered very slim, even if all three states go along with the recount. The Green Party candidate, who garnered little more than 1 percent of the nationwide popular vote herself, said on Friday that she was seeking to verify the integrity of the U.S. voting system, not to undo Trump’s victory.
A series of informal but concerted efforts by pro-remain politicians to reshape or even derail the Brexit process is under way and gaining momentum, according to people involved. MPs from across the parties had discussed how to push the government into revealing its Brexit plans and to ensure continued single market access, sources said, as a series of senior political figures made public interventions suggesting the result of the EU referendum could be reversed. Tony Blair and John Major both suggested this week that the public should be allowed to vote on or even veto any deal for leaving the EU. However, those connected to efforts by serving pro-remain MPs say the former prime ministers’ views had little support in the Commons.
More significant, they argued, were strategy discussions involving MPs from all parties “caught between their own views and those expressed at the ballot box” in the referendum. “It’s a long process of gradually bringing people round to our way of thinking, on all sides,” said someone who works closely with pro-remain figures. “A lot of people are a bit unsure what to do – they’re caught between their own views and those expressed at the ballot box, often by their own constituents. “There’s a growing realisation that this is a long game. There’s actually very little information out there, and very little substance to get into. It’s hard to coalesce people around particular policy positions when the government has no policy to speak of. That’s quite a challenge.”
Major told a private dinner that there was a “perfectly credible case” for holding a second referendum on the terms of a Brexit deal. He said the views of the 48% of people who voted to remain should be taken into account and warned against the “tyranny of the majority”. Blair, in particular, is known to be sounding out opinion on Brexit as part of his re-emergence into political life. The former Labour prime minister’s office said he had discussed the issue with the former chancellor George Osborne, among “many people”.
Houses have NEVER BEEN MORE EXPENSIVE to end-user, mortgage-needing shelter buyers. The recent rate surge crushed what little affordability remained in US housing. It now it requires 45% more income to buy the average-priced house than just four years ago, as incomes have not kept pace it goes without saying. The spike in rates has taken “UNAFFORDABILITY” to such extremes that prices, rates, and/or credit are now radically out of scope. At these interest rate levels house prices are simply not sustainable even in the lower-end price bands, which were far more stable than the middle-to-higher end bands (have been under significant pressure since spring). [..] The Data (note, for simplicity my models assume best-case 20% down and A-grade credit, which is the “minority” of lower-to-middle end buyers).
1) The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed. For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper. Bottom line: Reversion to the mean will occur through house price declines, credit easing, a mortgage rate plunge to the high 2%’s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.
2) The average $274k builder house requires nearly $53k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $53k is needed. For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper. Bottom line: Reversion to the mean will occur through house price declines, credit easing, a mortgage rate plunge to the high 2%s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.
3) Bonus Chart … Case-Shiller Coast-to-Coast Bubbles Bottom line: IT’S NEVER DIFFERENT THIS TIME. Easy/cheap/deep credit & liquidity has found its way to real estate yet again. Bubbles are bubbles are bubbles. And as these core housing markets hit a wall they will take the rest of the nation with them; bubbles and busts don’t happen in “isolation.”
There are still four weeks left to pull out the year. And hopes persists that this year will be decent. But online sales are hot, according to Adobe Digital Index, cited by Reuters. Online shoppers blew $1.15 billion on Thanksgiving Day, between midnight and 5 pm ET, according to Adobe Digital Index, up nearly 14% from a year ago. Sales by ecommerce retailers have been sizzling for years, growing consistently between 14% and 16% year-over-year and eating with voracious appetite the stale lunch of brick-and-mortar stores, particularly department stores. The lunch-eating process began in 2001. The chart below shows monthly department store sales, seasonally adjusted, since 1992. Note the surge in sales in the 1990s, driven by population growth, an improving economy, and inflation (retail sales are mercifully not adjusted for inflation). But sales began to flatten out in 1999. The spike in January 2001 (on a seasonally adjusted basis!) marked the end of the great American department store boom.
Even as the US fell into a recession in March 2001, ecommerce took off. But department store sales began their long decline, from nearly $20 billion in January 2001 to just $12.7 billion in October 2016, despite 14% population growth and 36% inflation! The decline of department stores is finding no respite during the holiday season. Not-seasonally-adjusted data spikes in October, November, and December. But these spikes have been shrinking, from their peak in December 2000 of $34.3 billion to $23.4 billion in December 2015, a 32% plunge, despite, once again, 14% population growth and 36% inflation!
In other words: the brick-and-mortar operations of department stores are becoming irrelevant. Ecommerce sales include all kinds of merchandise, not just the merchandise available in department stores. So it’s a broader measure. They have skyrocketed from $4.5 billion in Q4 1999 ($1.5 billion a month on average) to $101 billion in Q3 2016 ($33.7 billion a month on average).
Payday lenders asked a federal judge in Washington, D.C., for emergency relief to stop what they called a coordinated effort by U.S. regulators to stop banks from doing business with them, threatening their survival. In Wednesday night filings, the Community Financial Services Association of America (CFSA) and payday lender Advance America, Cash Advance Centers Inc said a preliminary injunction was needed to end the “back-room campaign” of coercion by the Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency. Advance America said its own situation became dire after five banks decided in the last month to cut ties, including a 14-year relationship with U.S. Bancorp, putting it “on the verge” of being unable even to hold a bank account.
Payday lenders make small short-term loans that can help tide over cash-strapped borrowers. But critics say fees can drive effective interest rates well into three digits, and trap borrowers into an endless debt cycle in which they use new payday loans to repay older loans. The CFSA said other payday lenders are also losing banking relationships as a result of “Operation Choke Point,” a 2013 Department of Justice initiative meant to block access to payment systems by companies deemed at greater risk of fraud. “Protecting consumers from credit fraud is, of course, a commendable goal,” Charles Cooper, a lawyer for the CFSA, wrote. “But the manner in which the defendant agencies have chosen to pursue that ostensible goal betrays that their true intent has always been to eradicate a disfavored industry.”
I don’t know to what extent Modi is the psychopath he’s made out to be here, but I do like the decentralization described (fits in with my end of centralization themes). “What a crazy idea it is to have a State monopoly on money..” [..] “In a tribalistic and irrational society, decentralization makes life much safer and makes the market more free, as complex decisions will be taken on the local level, where they belong”
Most people — particularly the salaried middle class – still seem to have a favorable opinion of Mr. Modi. They have been indoctrinated – in India’s extremely irrational and superstitious society – to believe that this demonetization will somehow alleviate corruption and that anything but support of Modi’s actions is anti-national and unpatriotic. This gives me pause to reflect. What a crazy idea it is to have a State monopoly on money, particularly a money that carries no inherent value and depends on regulatory edicts. On a deeper level, it makes me reflect on why for the culture of India – which is tribalistic, nativistic, superstitious and irrational – “India” is actually an unnatural entity. Such a society should consist of hundreds of tribes and countries, which is what “India” was before the British consolidated it.
In a tribalistic and irrational society, decentralization makes life much safer and makes the market more free, as complex decisions will be taken on the local level, where they belong . India’s institutions – not just organizations, but larger socio-political beliefs – have begun to decay and crumble after the British left, losing their underlying essence, the reason for which they had been institutionalized in the first place. This degradation is now picking up pace. They must eventually fall apart – including the nation-state of India – to adjust to the underlying culture. Let us consider some of these institutions. Western education implanted in India has mutated. It is making individuals cogs in a big machine, all for the service of one great leader. Public education and the mass-media have become instruments of propaganda.
Complexity and the diversity of options that technology brings make an irrational thinker extremely confused, forcing him to seek sanity in ritualistic religion —hence the increase in religiosity in India and elsewhere in the region. This has happened despite the explosion in information technology. The concept of the nation-state, when it took hold in Europe, was about the values the emergent rational and enlightened societies of Europe shared and had collectively come to believe in, at least among their elites. In India, the idea of the nation-state has morphed into a valueless thread, which binds people together through nothing but a flag and an anthem, symbols completely devoid of any values. It has collectivized tribalistic and irrational people (an irrationality that is amply epitomized by the negative force Islam has become in the last two decades).
In India and many similarly constituted countries, institutions that are not natural to their culture – the nation state, education, monetary system, etc. must eventually face entropy, slowly at first, and then rapidly. India has now entered the rapid phase. The death of money – amid a lack of respect for property rights (which again are a purely European concept that emerged from the intellectual revolutions of the last 800 years) – has been sudden and will very likely be catastrophic. It is a man-made disaster of gargantuan proportions. It will fundamentally change India in a very negative way, particularly if the demonetization effort succeeds, as it will have created the foundations enabling the rapid emergence of a police state.
In late January of the year 98 AD, after decades of turmoil, instability, inflation, and war, Romans welcomed a prominent solider named Trajan as their new Emperor. Prior to Trajan, Romans had suffered immeasurably, from the madness of Nero to the ruthless autocracy of Domitian, to the chaos of 68-69 AD when, in the span of twelve months, Rome saw four separate emperors. Trajan was welcome relief and was generally considered by his contemporaries to be among the finest emperors in Roman history. Trajan’s successors included Hadrian and Marcus Aurelius, both of whom were also were also reputed as highly effective rulers.
But that was pretty much the end of Rome’s good luck. The Roman Empire’s enlightened rulers may have been able to make some positive changes and delay the inevitable, but they could not prevent it. Rome still had far too many systemic problems. The cost of administering such a vast empire was simply too great. There were so many different layers of governments—imperial, provincial, local—and the upkeep was debilitating. Rome had also installed costly infrastructure and created expensive social welfare programs like the alimenta, which provided free grain to the poor. Not to mention, endless wars had taken their toll on public finances. Romans were no longer fighting conventional enemies like Carthage, and its famed General Hannibal bringing elephants across the Alps.
Instead, Rome’s greatest threat had become the Germanic barbarian tribes, peoples viewed as violent and uncivilized who would stop at nothing to destroy Roman way of life. Corruption and destructive bureaucracy were increasingly rampant. And the worse imperial finances became, the more the government tried to “fix” everything by passing debilitating regulation and debasing the currency. In his seminal work The History of the Decline and Fall of the Roman Empire, Edward Gibbon wrote: “The story of its ruin is simple and obvious; and instead of inquiring why the Roman empire was destroyed, we should rather be surprised that it had subsisted so long.”
Innovation is a dominant ideology of our era, embraced in America by Silicon Valley, Wall Street, and the Washington DC political elite. As the pursuit of innovation has inspired technologists and capitalists, it has also provoked critics who suspect that the peddlers of innovation radically overvalue innovation. What happens after innovation, they argue, is more important. Maintenance and repair, the building of infrastructures, the mundane labour that goes into sustaining functioning and efficient infrastructures, simply has more impact on people’s daily lives than the vast majority of technological innovations. The fates of nations on opposing sides of the Iron Curtain illustrate good reasons that led to the rise of innovation as a buzzword and organising concept.
Over the course of the 20th century, open societies that celebrated diversity, novelty, and progress performed better than closed societies that defended uniformity and order. In the late 1960s in the face of the Vietnam War, environmental degradation, the Kennedy and King assassinations, and other social and technological disappointments, it grew more difficult for many to have faith in moral and social progress. To take the place of progress, ‘innovation’, a smaller, and morally neutral, concept arose. Innovation provided a way to celebrate the accomplishments of a high-tech age without expecting too much from them in the way of moral and social improvement.
Before the dreams of the New Left had been dashed by massacres at My Lai and Altamont, economists had already turned to technology to explain the economic growth and high standards of living in capitalist democracies. Beginning in the late 1950s, the prominent economists Robert Solow and Kenneth Arrow found that traditional explanations – changes in education and capital, for example – could not account for significant portions of growth. They hypothesised that technological change was the hidden X factor. Their finding fit hand-in-glove with all of the technical marvels that had come out of the Second World War, the Cold War, the post-Sputnik craze for science and technology, and the post-war vision of a material abundance.
Robert Gordon’s important new book, The Rise and Fall of American Growth, offers the most comprehensive history of this golden age in the US economy. As Gordon explains, between 1870 and 1940, the United States experienced an unprecedented – and probably unrepeatable – period of economic growth. That century saw a host of new technologies and new industries produced, including the electrical, chemical, telephone, automobile, radio, television, petroleum, gas and electronics. Demand for a wealth of new home equipment and kitchen appliances, that typically made life easier and more bearable, drove the growth. After the Second World War, Americans treated new consumer technologies as proxies for societal progress – most famously, in the ‘Kitchen Debate’ of 1959 between the US vice-president Richard Nixon and the Soviet premier Nikita Kruschev. Critics wondered if Nixon was wise to point to modern appliances such as blenders and dishwashers as the emblems of American superiority.
The federal government has announced it will make it easier for foreigners to buy new apartments amid concerns of a looming glut that will drive down prices. Treasurer Scott Morrison said the government will make changes to the foreign investment framework to allow foreign buyers to buy an off-the-plan dwelling that another foreign buyer has failed to settle as a new dwelling. Previously, on-sale of a purchased off the plan apartment was regarded as a second hand sale, which is not open to foreign buyers. Foreign buyers can only buy new dwellings. The move effectively opens up the pool of buyers who can soak a potential flood of apartments hitting the residential markets due to failed settlements.
“This change addresses industry concerns, and means property developers won’t be left in the lurch when a foreign buyer pulls out of an off-the-plan purchase,” Mr Morrison said in an announcement. “It is common sense that an apartment or house that has just been built, or is still under construction and for which the title has never changed hands, is not considered an established dwelling.” The policy change comes after Mirvac said it experienced a rise in the default rate for the settlement of off-the-plan residential sales, above its historic average of 1%. The changes will apply immediately and regulation change will be made soon to enable developers to acquire “New Dwelling Exemption Certificates” for foreign buyers of these recycled off-the-plan homes.
On top of defaults, the Australian apartment markets – which boomed in the last four years – are facing other fresh risks. On Friday, HSBC said an oversupply of apartments in Melbourne and Brisbane could send unit prices down by as much as 6% in 2017. The apartment building boom, an ongoing concern for the Reserve Bank of Australia, especially in inner city Melbourne is likely to “start showing through” in price drops of between 2% and 6% in that city next year, HSBC chief economist Paul Bloxham said in a note. It’s a similar story in Brisbane where apartment prices are forecast to fall by as much as 4%. “A national apartment building boom, which has been part of the rebalancing act, is likely to deliver some oversupply in the Melbourne and Brisbane apartment markets, which is expected to see apartment price falls in these markets,” Mr Bloxham said.
The Clinton Foundation has a rocky past. It was described as “a slush fund”, is still at the centre of an FBI investigation and was revealed to have spent more than $50 million on travel. Despite that, the official website for the charity shows contributions from both AUSAID and the Commonwealth of Australia, each worth between $10 million and $25 million. News.com.au approached the Department of Foreign Affairs and Trade for comment about how much was donated and why the Clinton Foundation was chosen as a recipient. A DFAT spokeswoman said all funding is used “solely for agreed development projects” and Clinton charities have “a proven track record” in helping developing countries. Australia jumping ship is part of a post-US election trend away from the former Secretary of State and presidential candidate’s fundraising ventures.
Norway, one of the Clinton Foundation’s most prolific donors, is reducing its contribution from $20 million annually to almost a quarter of that, Observer reported. One reason for the drop-off could be increased scrutiny on international donors. The International Business Times reported in 2015 on curious links between donors and State Department approval. IBT wrote that the State Department approved massive commercial arms sales for countries which had donated to the Clinton charity. More than $165 billion worth of arms sales were approved by the State Department to 20 nations whose governments gave money to the Clinton Foundation, data shows. The countries buying weapons from the US were the same countries previously condemned for human rights abuses. They included Algeria, Saudi Arabia and Kuwait.
But what does Australia gain from topping up the Clinton coffers? The Australian reported in February that Australia was “the single biggest foreign government source of funds for the Clinton Foundation” but questions remain unanswered about the agreement between the two parties. “It’s not clear why Canberra had to go through an American foundation to deliver aid to Asian countries (including Indonesia, Papua New Guinea and Vietnam). There is now every chance the payments will become embroiled in presidential politics.” The Daily Telegraph wrote in October that “Lo and behold, (Julia Gillard) became chairman (of the Clinton-affiliated Global Partnership for Education) in 2014”, one year after being defeated in a leadership ballot by Kevin Rudd.
For months we’ve been told that the Clinton Foundation, and it’s various subsidiaries, were simple, innocent “charitable” organizations, despite the mountain of WikiLeaks evidence suggesting rampant pay-to-play scandals surrounding a uranium deal with Russia and earthquake recovery efforts in Haiti, among others. Well, if that is, in fact, true perhaps the Clintons could explain why wealthy foreign governments, like Australia and Norway, are suddenly slashing their contributions just as Hillary’s schedule has been freed up to focus exclusively on her charity work. Surely, these foreign governments weren’t just contributing to the Clinton Foundation in hopes of currying favor with the future President of the United States, were they? Can’t be, only an useless, “alt-right,” Putin-progranda-pushing, fake news source could possibly draw such a conclusion.
Alas, no matter the cause, according to news.com.au, the fact is that after contributing $88mm to the Clinton Foundation, and its various affiliates, over the past 10 years the country of Australia has decided to cease future donations to the foundation just weeks after Hillary’s stunning loss on November 4th. And just like that, 2 out of the 3 largest foreign contributors to the Clinton Foundation are gone with Saudia Arabia being the last remaining $10-$25mm donor that hasn’t explicitly cut ties or massively scaled by contributions. [..]
News.com.au confirmed Australia’s decision to cut future donations to the Clinton Foundation earlier today. When asked why donations were being cut off now, a Department of Foreign Affairs and Trade official simply said that the Clinton Foundation has “a proven track record” in helping developing countries. While that sounds nice, doesn’t it seem counterintuitive that these countries would pull their funding just as Hillary has been freed up to spend 100% of her time helping people in developing countries?
“Australia has finally ceased pouring millions of dollars into accounts linked to Hillary Clinton’s charities. Which begs the question: Why were we donating to them in the first place? The federal government confirmed to news.com.au it has not renewed any of its partnerships with the scandal-plagued Clinton Foundation, effectively ending 10 years of taxpayer-funded contributions worth more than $88 million. News.com.au approached the Department of Foreign Affairs and Trade for comment about how much was donated and why the Clinton Foundation was chosen as a recipient. A DFAT spokeswoman said all funding is used “solely for agreed development projects” and Clinton charities have “a proven track record” in helping developing countries.”
A group of distinguished former newspaper editors has launched a scathing attack on plans for New Zealand’s largest print media companies to merge, calling it a threat to democracy which could see a concentration of power exceeded “only in China”. The merger of NZME and Fairfax Media, which was proposed in May, would not be healthy in a country that “already suffers from a dearth of serious content and analysis”, the editors say in a submission to the commerce commission. The group, which includes Suzanne Chetwin, former Dominion chief Richard Long and ex-New Zealand Herald editor Gavin Ellis, also criticise the trend towards “click-bait stories” at a time when television has “all but abandoned current affairs and our public discourse is increasingly glib”.
“The merger would see one organisation controlling nearly 90% of the country’s print media market (and associated websites), the greatest level of concentration in the OECD and one that is exceeded only by China. “That cannot be healthy, particularly in a society like New Zealand’s that has so few checks and balances in its constitutional arrangements.” The submission went on to state the greatest threat to New Zealand media came from off-shore publishers who had “no feel for New Zealand’s social fabric”, and urged the commerce commission to decline the merger. The merger was sold as an attempt by both companies to stem revenue losses and drastic staff and budget cuts, particularly to rural and regional newsrooms.
Dunedin’s The Otago Daily Times would be the only newspaper in the country to remain independent, although it too could be affected as they have content sharing agreements with NZME’s The New Zealand Herald. Radio stations and magazines owned by both companies would also be affected.
Greece’s battered banks are being asked to swap about 33 billion ($35 billion) euros in floating-rate bonds for 30-year, fixed-rate securities under a euro-area plan to shield Athens from future interest rate increases, three people with knowledge of the matter said. The swap is part of a package of debt-relief proposals for Greece to be presented at a Dec. 5 meeting of euro-area finance ministers, according to the people, who asked not to be named because they weren’t authorized to speak publicly about the matter. The notes were issued by the European Financial Stability Facility, the region’s crisis-fighting fund, to re-capitalize Greek lenders in 2013.
While the current EFSF holdings of Greek banks fall due between 2034 and 2046, the fixed-rate notes will expire in 2047, the people said. That will reduce Greece’s interest rate risk, but it may come at a cost for its four systemically important lenders, which could be left with securities that are more difficult to trade. The technical aspects of the operation are still being hashed out. “There are discussions going on as to proposals which will improve the sustainability of the Greek debt,” Piraeus Bank Chairman George Handjinicolaou said in an interview Thursday. “Part of this proposal is a change in the EFSF bonds for something else, some form of fixed-rate debt, which would improve the predictability of the sustainability of the Greek debt profile.”
Shvets says the world should have actually delevered or paid down the debt to return initiative to the private sector, but thinks people could not accept the levels of pain associated with it. “You could eliminate the impact of the overcapacity through deflation. Nobody is prepared to accept that we might have to wipe out decades of growth just to eliminate leverage. Banks go, there are defaults, bankruptcies, layoffs,” he said. He thinks the Biblical debt jubilee, where slaves would be freed and debt would be forgiven every 50 years is a nice idea that would also work today if it weren’t for entrenched special interests. “The debt is not spread evenly, we still live in a tribal world, and it’s easier to start a war than to forgive debt,” Shvets said.
Global central banks with their easy money policies of negative interest rates and quantitative easing are working against a debt deflation scenario, with limited success, according to Shvets. “That was the entire idea of aggressive monetary policies: Stimulate investment and consumption. None of that works, there is no evidence. It can impact asset prices, but they don’t flow into the real economy,” he said. “Remember, the people at the Fed and the Bank of England are not supermen, they are people with an above average IQ trying to do a very difficult job in a highly complex environment.” Both overleveraging, easy money policies, and technological shifts are responsible for increasing levels of income inequality across the globe, another hallmark of the previous two industrial revolutions. Fewer people control more of the wealth.
The Federal Reserve signals a reluctance to raise interest rates. The yen strengthens to 90 per dollar. Haruhiko Kuroda decides to act. Helicopter money is coming, says Mark Mobius, even as soon as next month. The 80-year-old investment veteran is outlining how he expects central banks to respond to sluggish economic growth. For Mobius, executive chairman of Templeton Emerging Markets Group, traditional easing measures have just made people save instead of spend or borrow. Combined with a stronger yen, he says that’s going to force the Bank of Japan governor to contemplate a policy he’s repeatedly ruled out. “They’re really beginning to think what ammunition they have,” he said in an interview on a visit to a typhoon-struck Tokyo this week.
“The first reaction is to say, OK, let’s go for helicopter money, let’s get money directly into the hands of consumers,” he said. “I think that would probably be the next step.” Central bankers have flooded their economies with monetary stimulus in the eight years since the global financial crisis, driving up asset prices – including the stock markets that Mobius invests in – while struggling to kickstart global growth. A foray into negative interest rates in Japan has been met with the yen surging to about 100 per dollar, falling stocks and dwindling bank profits.
While markets wait for Janet Yellen’s latest message about the direction of monetary policy, the Federal Reserve chief and her colleagues already have one for politicians: the U.S. economy needs more public spending to shift into higher gear. In the past few weeks, Yellen and three of the Fed’s other four Washington-based governors have called in speeches and Congressional hearings for government infrastructure spending and other efforts to counter weak growth, sagging productivity improvements, and lagging business investment. The fifth member has supported the idea in the past. The Fed has no direct influence over fiscal policy and its officials traditionally refrain from discussing it in detail.
Having its top officials – from Yellen to former investment banker and Bush administration official Jerome Powell – speak in one voice sends a strong signal to the next president and Congress about the limits they face in setting monetary policy and what is needed to improve the economy’s prospects. The Fed’s annual conference in Jackson Hole, Wyoming, where Yellen speaks on Friday, is due to focus on how to improve central banks’ “toolkit,” but the unanimous message from the Fed’s top policymakers is that those tools are not enough. “Monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth,” Fed vice chair Stanley Fischer said on Sunday. He said it was up to the administration to invest more in infrastructure and education.
Behind Fischer’s statement lies a troubling feature of the recovery – business investment has fallen below levels in prior years and companies seem to have stopped responding to low borrowing costs. As a share of GDP, U.S. annual business investment since 2008 has averaged nearly a full percentage point below the previous decade’s average, government data shows. Reuters calculations indicate the investment shortfall has blown a hole in annual GDP that has grown to as much as one trillion dollars a year compared with what it would have been if the previous trend continued.
Adding to the picture of crummy demand for goods around the world, the CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, just released its preliminary data of its Merchandise World Trade Monitor for June. Trade volumes rose 0.7% in June from May, after falling 0.5% in May, but were about flat year-over-year, and below the volumes of December 2014! On a quarterly basis – it averages out the monthly ups and downs – world trade fell 0.8%, contracting for the second quarter in a row. The CPB recently adjusted its world trade data down, going back many years.
The new data now depicts a post-Financial Crisis recovery of global trade that was a lot weaker than the original data had indicated. These downward adjustments of 2% to 3% came in a world where economic growth, according to the IMF, is stuck at 3.1% in 2016. This chart of the CPB’s World Trade Monitor index shows the old data released as of July 2015 (blue line) and the newly adjusted data released today (red line). Note the 4.4% drop from the peak in global trade volumes in the original data for December 2014 and in the current data for June 2016!
World trade is a reflection of the goods-producing economy. Services don’t get shipped around the world. Goods do. So industrial production, excluding construction, is key. And here the trend is awful for advanced economies. Global industrial production, excluding construction, rose 0.6% in June, after a 0.3% decline in May. The index for industrial production in advanced economies rose to 102.5, below where it had been in January (103.4), a level it had hit after the Financial Crisis in December 2012, but down from the glory days before the Financial Crisis when the index peaked in February 2008 (107.8). And here’s a tidbit: the first time that the index hit the current level had been in April 2006. A full decade of stagnation.
Industrial production has shifted to emerging economies (“cheap labor” economies) for many years, such as China, as companies in the US, decades ago, and eventually in Europe and Japan began outsourcing and offshoring production to emerging economies. Hence, industrial production in emerging economies has surged over this period. This was particularly the case after the Financial Crisis when companies in the US, Europe, and Japan redoubled their efforts to get production relocated offshore. This chart shows the CPB’s industrial production index globally (green line), and also separated by advanced economies (the dismally flat-ish blue line at the bottom) and emerging economies (brown line at the top):
Some of the world’s largest energy companies are saddled with their highest debt levels ever as they struggle with low crude prices, raising worries about their ability to pay dividends and find new barrels. Exxon Mobil, Shell, BP and Chevron hold a combined net debt of $184 billion—more than double their debt levels in 2014, when oil prices began a steep descent that eventually bottomed out at $27 a barrel earlier this year. Crude prices have rebounded since, but still hover near $50 a barrel. The soaring debt levels are a fresh reminder of the toll the two-year price slump has taken on the oil industry. Just a decade ago, these four companies were hauled before Congress to explain “windfall profits” but now can’t cover expenses with normal cash flow.
Executives at BP, Shell, Exxon and Chevron have assured investors that they will generate enough cash in 2017 to pay for new investments and dividends, but some shareholders are skeptical. In the first half of 2015, the companies fell short of that goal by $40 billion, according to a Wall Street Journal analysis of their numbers. “Eventually something will give,” said Michael Hulme, manager of the $550 million Carmignac Commodities Fund, which holds stakes in Shell and Exxon. “These companies won’t be able to maintain the current dividends at $50 to $60 oil—it’s unsustainable.” BP has said it expects to be able to pay for its operations, make new investments and meet its dividend at an oil price of between $50 and $55 a barrel next year.
The debt is piling up despite cuts of billions of dollars on new projects and current operations. Repaying the loans could weigh the companies down for years, crimping their ability to make investments elsewhere and keep pumping ever more oil and gas. “They are just not spending enough to boost production,” said Jonathan Waghorn at Guinness Atkinson Asset Management.
Soothsayers out there have been prophesying time and again, for over a year, that very soon, in fact next week, the supply glut will start to unwind; that production in the US is already coming down sharply, that demand is up, or whatever…. In the end, a glut comes down to whether inventories are rising, particularly during a time of the year when they’re supposed to be falling (glut gets worse), or whether they’re falling (glut stabilizes or abates). It’s not just crude oil, but also the products that crude oil gets refined into for eventual use. And these stocks of petroleum products have been a doozie, particularly gasoline.
Gasoline stocks were essentially unchanged for the week, at 232.7 million barrels, a record for this time of the year, and up 8.5% from the already elevated inventory levels last year. Distillate fuels rose by 200,000 barrels to 153.3 million barrels. And “all other oils” jumped by a total of 3.9 million barrels to 490.6 million barrels. So total petroleum products stocks rose by 6.6 million barrels during the week, or 0.5%. Once again, this small-ish number, but over the period of the oil bust, total petroleum products stocks have soared by 30% and now exceed for the first time ever another huge milestone: 1.4 billion barrels. This chart shows what a truly relentless glut looks like:
Scotland’s revenues from North Sea oil have collapsed by 97% in the past year as oil prices have plummeted, reigniting a fierce debate over whether an independent Scotland could finance itself. Scottish Liberal Democrat leader Willie Rennie said: “The nationalists’ case for independence has been swallowed up by a £14bn black hole.” Taxes collected from oil production fell from £1.8bn in 2015 to just £60m in 2016. The gap between tax revenues and what Scotland spends is now 9.5%, or £14.8bn, compared to a 4% deficit for the UK as a whole. Scotland’s public sector now spends £12,800 per person, but collects just £10,000 each, the figures reveal. In 2008-9, as oil peaked at almost $150 per barrel, the Scottish government brought in a record £11.6bn from North Sea fields.
Russian markets are red hot again. Two years after plunging oil prices and Western economic sanctions fueled an investor exodus, the Micex stock index on Tuesday hit an all-time high. It is up 25% this year in dollar terms, making Russia the sixth-best performer among 23 emerging countries tracked by MSCI Inc. The ruble has gained 13% against the dollar this year, ranking third among all emerging currencies. Russia’s local-currency bonds rank third this year in performance out of 15 countries tracked by JP Morgan Chase. Many investors credit central-bank chief Elvira Nabiullina for Russia’s resurgence. They cite her surprise decision to end the ruble’s peg to the dollar in November 2014 and then sharply raise interest rates to combat capital flight and knock down inflation.
The moves were painful for Russia’s economy, which went into a sharp recession as the value of the ruble slumped, reducing consumer and business purchasing power. But over time they have helped to restore some international-investor faith in a country still shadowed by its 1998 default. “The correct steps taken by the Russian central bank have restored confidence in the ruble and its macroeconomic policy,” said Andrey Kutuzov, an associate portfolio manager of the Wasatch Emerging Markets Small Cap fund. Global investors this year have added $1.3 billion to funds that invest in Russian bonds and stocks, according to EPFR Global. The share of foreigners among government bondholders rose to 24.5% as of June 1, its highest level since late 2012, according to the Russian central bank.
China imposed limits on lending by peer-to-peer platforms to individuals and companies in an effort to curb risks in one part of the loosely-regulated shadow-banking sector. An individual can borrow as much as 1 million yuan ($150,000) from P2P sites, including a maximum of 200,000 yuan from any one site, the China Banking Regulatory Commission said in Beijing on Wednesday. Corporate borrowers are capped at five times those levels. Tighter regulation may encourage consolidation that aids the industry long-term, said Wei Hou at Sanford C. Bernstein in Hong Kong. China’s authorities are concerned about defaults and fraud among the nation’s 2,349 online lenders. In December, the country’s biggest Ponzi scheme was exposed after Internet lender Ezubo allegedly defrauded more than 900,000 people out of the equivalent of $7.6 billion.
The nation has 1778 “problematic” online lenders, according to the CBRC. The P2P lenders are barred from taking public deposits or selling wealth-management products and must appoint qualified banks as custodians and improve information disclosure, the regulator said. [..] China’s P2P industry brokered 982 billion yuan of loans in 2015, almost quadruple the amount in 2014 and an approximately 10-fold increase from 2013, according to Yingcan. P2P firms attracted more than 3.4 million investors and 1.15 million borrowers in July, with loans extended at an average interest rate of 10.3%, according to Yingcan. Products offered by P2P platforms in China can include anything from loans for weddings, guaranteed against the cash gifts that couples expect to receive, to high-yield lending for risky property or mining projects.
Wanted posters for fugitive debtors, not commercials, are the main images that flash up on a big electronic screen in downtown Yixing, in the heart of the faltering Chinese industrial powerhouse that is the Yangtze River Delta. The posters, from the local courts, show the identity card numbers and pictures of dozens of people who have fled unpaid debts. Rewards ranging from 20,000 yuan (HK$23,000) to 330,000 yuan are offered to anyone reporting their whereabouts. But Hengsheng Square is the glitziest part of Yixing – with the most luxury stores, the brightest lights and the priciest office buildings – and few passers-by, their attention directed elsewhere, heed the wanted posters. They have little novelty value in any case, with the “runaway debtor” phenomenon now just part of daily life in the small city as economic growth slows.
In many ways, the square stands as a metaphor for the overall health of the Chinese economy. Under a prosperous surface, deep cracks have begun to emerge in its investment-led model, casting a shadow over the country’s economic growth prospects and even giving rise to doubts about the fundamental soundness of the world’s second-biggest economy. “The economic dynamics are waning,” said Professor Hu Xingdou, an economist at Beijing Institute of Technology. “China’s economic growth in recent years was powered by massive money printing, which is dangerous and unsustainable.”
Jacob Rothschild, the billionaire scion of arguably Europe’s greatest banking dynasty says we’re living through “the greatest experiment in monetary policy in the history of the world.” There’s a major flaw in the experiment, though: the real world isn’t responding to policy in the way that the textbooks say it should. Moreover, it seems increasingly evident that the fears that led to zero interest rates and quantitative easing were at best overblown, if not entirely unjustified. The economic quandary is easy to parse. Central banks almost everywhere have sanctioned a 2% inflation target as signifying financial Nirvana. But, as the table below shows, consumer prices in the world’s major economies are rising much slower than that arbitrary ideal:
Spain has emerged as the poster child for deflation. Prices fell by 0.6% in July, the country’s 12th consecutive month with no increase in inflation. The textbooks suggest that when there’s a prolonged period of falling prices – the definition of deflation – the economy can quickly find itself in a tailspin. Businesses and consumers will defer purchases in the expectation that goods and services will be even cheaper in the future. So if Spain has had an average inflation rate of -0.4% since the end of 2013, and has seen lower prices in 23 of the past 30 months, consumers will have responded by shunning the shops and curtailing their spending, right? Wrong:
International credit rating agency S&P Global Ratings has warned of the increasing risks facing New Zealand banks as a result of the continuing rise in house prices. In a new report, S&P has downgraded its Banking Industry Country Risk Assessment (BICRA) for NZ’s banks by a notch, dropping it from 3 to 4, on a scale where 1 is the lowest risk and 10 is the highest risk. However it has not changed the individual credit ratings of any New Zealand banks. [..] .. our ratings on all the financial institutions operating in New Zealand remain unchanged. “This reflects our expectation that despite some weakening in the capital levels of all these financial institutions, their stand alone credit profiles (SACPs) would remain unchanged.
However S&P did downgrade the SACPs of ASB and Rabobank by one notch each, although it did not downgrade the two banks’ credit ratings, “… reflecting our assessment of timely financial support from their respective parents, if needed,” S&P said. S&P said the increased risks to this country’s banking sector had been driven by “…continued strong growth in residential property prices nationally, coupled with an increase in private sector credit growth.” “We believe the risk of a sharp correction in property prices has further increased and, if it were to occur – with about 56% of registered banks’ lending assets secured by residential home loans – the impact on financial institutions would be amplified by the New Zealand economy’s external weaknesses, in particular its persistent current account deficit and high level of external debt.”
There’s a giant pot of corporate gold sitting outside the United States, and the U.S. Treasury and the European Commission are squabbling over how to get their hands on it. American multinational corporations have stashed more than $2 trillion in profits and assets outside to avoid paying what many companies argue are unduly high U.S. corporate tax rates. Over the past few years, the European Commission has opened investigations into a handful of those companies, including Apple, Starbucks and Amazon, to determine whether they owe taxes to European countries. But the Treasury Department, in a “white paper” released Wednesday, said those investigations have gone too far.
The paper attacked the legal approach the EU is using to determine tax liabilities on American companies, saying it targets “income that (European) Member States have no right to tax under well-established international tax standards.” The paper also argued that taxes collected by European countries could, in effect, come right out of the pockets of American taxpayers. That’s because taxes collected by European countries could be deducted from any future payments to the Treasury. “That outcome is deeply troubling, as it would effectively constitute a transfer of revenue to the EU from the U.S. government and its taxpayers,” the paper said. The report urged the European Commission to “return to the system and practice of international tax cooperation that has long fostered cross-border investment between the United States and EU Member States.”
The drama of Brexit may soon be matched or eclipsed by crystallizing events in France, where the Long Slump is at last taking its political toll. A democracy can endure deflation policies for only so long. The attrition has wasted the French centre-right and the centre-left by turns, and now threatens the Fifth Republic itself. The maturing crisis has echoes of 1936, when the French people tired of ‘deflation decrees’ and turned to the once unthinkable Front Populaire, smashing what remained of the Gold Standard. Former Gaulliste president Nicolas Sarkozy has caught the headlines this week, launching a come-back bid with a package of hard-Right policies unseen in a western European democracy in modern times.
But the uproar on the Left is just as revealing. Arnaud Montebourg, the enfant terrible of the Socialist movement, has launched his own bid for the Socialist Party with a critique of such ferocity that it bears examination. The former economy minister says France voted for a left-wing French manifesto four years ago and ended up with a “right-wing German policy regime”. This is objectively true. The vote was meaningless. “I believe that we have reached the end of road for the EU, and that France no longer has any interest in it. The EU has left us mired in crisis long after the rest of the world has moved on,” he said. Mr Montebourg stops short of ‘Frexit’ but calls for the unilateral suspension of EU labour laws. “As far as I am concerned, the current treaties have elapsed.
I will be inspired by the General de Gaulle’s policy of the ’empty chair’, a strike against the EU. I am not in favour of a French Brexit, but we can longer accept a Europe like that,” he said. In other words, he wishes to leave from within – as Poland, and Hungary are doing – without actually triggering any legal or technical clause. Mr Montebourg is unlikely to progress far but his indictment of president François Hollande is devastating. The party leadership was warned repeatedly and emphatically that contractionary policies would inevitably lead to another million jobless but the economic was swept aside. “They never budged from their Catechism and their false certitudes,” he said.
The tweet was sent by Germany’s ministry for migration and refugees a year ago today. “The #Dublin procedure for Syrian citizens is at this point in time effectively no longer being adhered to,” the message read. With 175 retweets and 165 likes, it doesn’t look like classic viral content. But in Germany it is being spoken of as the first post on social media to change the course of European history. Referring to an EU law determined at a convention in Dublin in 1990, the tweet was widely interpreted as a de facto suspension of the rule that the country in Europe where a refugee first arrives is responsible for handling his or her asylum application.
By this point in 2015, more than 300,000 asylum seekers had reached Europe by boat – a figure that was already 50% higher than even the record-breaking number of arrivals in 2014. Although the German ministry’s intervention certainly did not start the crisis, it did make Germany the first-choice destination for Syrians who previously might have aimed for other countries in Europe, such as Sweden, which at the time offered indefinite asylum to Syrians. It also created an impression of confusion and loss of political control, from which Angela Merkel’s government has at times struggled to recover. Twelve months on, politicians and officials at the centre of Berlin’s bureaucratic machine are still trying to figure out how the tweet came about.
Four days previously, Angelika Wenzl, the executive senior government official at the refugee ministry, which in Germany is known as BAMF, had emailed out an internal memo titled “Rules for the suspension of the Dublin convention for Syrian citizens” to its 36 field bureaux around the country, stating that Syrians who applied for asylum in Germany would no longer be sent back to the country where they had first stepped on European soil. [..] By channels that officials and journalists have so far failed to pinpoint, Wenzl’s internal memo was leaked to the press.
When Charles Dickens, the English novelist, was detailing the “soft black drizzle” of pollution over London, he might inadvertently have been chronicling the early signs of global warming. New research led by Australian scientists has pegged back the timing of when humans had clearly begun to change the climate to the 1830s. An international research project has found human-induced climate change is first detectable in the Arctic and tropical oceans around the 1830s, earlier than expected. That’s about half a century before the first comprehensive instrumental records began – and about the time Dickens began his novels depicting Victorian Britain’s rush to industrialise.
The findings, published on Thursday in the journal Nature, were based on natural records of climate variation in the world’s oceans and continents, including those found in corals, ice cores, tree rings and the changing chemistry of stalagmites in caves. Helen McGregor, an ARC future fellow at the University of Wollongong and one of the paper’s lead authors, said it was “quite a surprise” the international research teams of dozens of scientists had been able to detect a signal of climate change emerging in the tropical oceans and the Arctic from the 1830s. “Nailing down the timing in different regions was something we hadn’t expected to be able to do,” Dr McGregor told Fairfax Media.
Interestingly, the change comes sooner to northern climes, with regions such as Australasia not experiencing a clear warming signal until the early 1900s. Nerilie Abram, another of the lead authors and an associate professor at the Australian National University’s Research School of Earth Sciences, said greenhouse gas levels rose from about 280 parts per million in the 1830s to about 295 ppm by the end of that century. They now exceed 400 ppm.
Prime Minister Shinzo Abe’s “bold” plan to revive the economy with a $273 billion package leaves him traveling down a well-trod path: it marks the 26th dose of fiscal stimulus since the country’s epic markets crash in 1990, in a warning for its effectiveness. The nation has had extra budgets every year since at least 1993, and even with that extra spending, it has still had six recessions, an entrenched period of deflation, soaring debt and a rapidly aging population that has left the world’s third-largest economy still struggling to get off the floor. While some analysts say the latest round of spending may buy the economy time, few are convinced it will be enough to dramatically change the course.
First off, much of the 28 trillion yen announced by Abe last week won’t be spending, but lending. And if previous episodes are any guide, an initial sugar hit to markets and growth will quickly fade amid a realization that extra spending does little to cure the economy’s underlying problems. A Goldman Sachs study found that markets gave up their gains in the first month after the cabinet approved the stimulus in 18 of the 25 packages it studied since 1990. Skeptics of Abe’s latest plan aren’t hard to find. Instead of adding to a debt pile already more than twice the economy’s size, more should be done to tackle thorny structural problems such as a declining labor force and protected industries, according to Naoyuki Shinohara, a former Japanese finance ministry official.
“Looking at the history of the Japanese economy, there have been lots of fiscal stimulus packages,” according to Shinohara, who was a top official at the IMF until last year. “But the end result is that it didn’t have much impact on the potential growth rate.”
Activity in China’s manufacturing sector eased unexpectedly in July as orders cooled and flooding disrupted business, an official survey showed, adding to fears the economy will slow in coming months unless the government steps up a huge spending spree. While a similar private survey showed business picked up for the first time in 17 months, the increase was only slight and the much larger official survey on Monday suggested China’s overall industrial activity remains sluggish at best. Both surveys showed persistently weak demand at home and abroad were forcing companies to continue to shed jobs, even as Beijing vows to shut more industrial overcapacity that could lead to larger layoffs.
And other readings on Monday pointed to signs of cooling in both the construction industry and real estate, which were key drivers behind better-than-expected economic growth in the second quarter. The official Purchasing Managers’ Index (PMI) eased to 49.9 in July from the previous month’s 50.0 and below the 50-point mark that separates growth from contraction on a monthly basis. While the July reading showed only a slight loss of momentum, Nomura’s chief China economist Yang Zhao said it may be a sign that the impact of stimulus measures earlier this year may already be wearing off. That has created a dilemma for Beijing as the Communist Party seeks to deliver on official targets, even as concerns grow about the risks of prolonged, debt-fueled stimulus.
“The government has realized the downward pressure is great but they’ve also realized that stimulus to stimulate the economy continuously is not a good idea and they want to continue to focus on reform and deleveraging,” Zhao said.
For David Wong, the business of selling homes isn’t as good this year as it was in 2015, and he’s blaming that on a decline in customers from China. “The residential-property market here, especially for those priced between $2.5 million to $3 million, has been affected by China’s measures to control capital flight,” said the New York City-based Keller Williams Realty Landmark broker. “You need to cut the price, or it may take a real long time.” Wong is not the only one who has felt the cooling in the U.S. real estate market for foreign buyers. Total sales to Chinese buyers in the 12 months through March fell for the first time since 2011, to $27.3 billion from $28.6 billion a year earlier, according to an annual research report released by the National Association of Realtors.
The number of properties purchased by Chinese also declined to 29,195 units from 34,327 units. While the total international sales saw its first decline in three years, the 1.25% pace is slower than 4.5% recorded for Chinese buying. In terms of U.S. dollar value, the total share of Chinese buying of international sales dropped from 27.5% to 26.7%. [..] The yuan began plummeting in August, driving the Chinese currency to a five-year low versus the U.S. dollar. The Chinese authorities have been compelled to increasingly tighten the noose on cross-border capital flows to defend the yuan and to slow down the burnout of the nation’s foreign-exchange reserves since then. This includes increasing scrutiny of transfers overseas, to closely check whether individuals send money abroad by breaking up foreign-currency purchases into smaller transactions.
In 2010, Social Security (OASDI) unofficially went bankrupt. For the first time since the enactment of the SS amendments of 1983, annual outlays for the program exceeded receipts (excluding interest credited to the trust funds). The deficit has grown every year since 2010 and is now up to 8% annually and is projected to be 31% in 2026 and 44% by ’46. The chart below highlights the OASDI annual surplus growth (blue columns) and total surplus (red line). This chart includes interest payments to the trust funds and thus looks a little better than the unvarnished reality. For a little perspective, the program pays more than 60 million beneficiaries (almost 1 in 5 Americans), OASDI (Old Age, Survivors, Disability Insurance) represents 25% of all annual federal spending, and for more than half of these beneficiaries these benefits represent their sole or primary source of income.
The good news is since SS’s inception in 1935, the program collected $2.9 trillion more than it paid out. The bad news is that the $2.9 trillion has already been spent. But by law, Social Security is allowed to pretend that the “trust fund” money is still there and continue paying out full benefits until that fictitious $2.9 trillion is burned through. To do this, the Treasury will issue another $2.9 trillion over the next 13 years to be sold as marketable debt so it may again be spent (just moving the liability from one side of the ledger, the Intergovernmental, to the other, public marketable). However, according to the CBO, Social Security will have burnt through the pretend trust fund money (that wasn’t there to begin with) by 2029.
Below, the annual OASDI surplus (in red) peaking in 2007, matched against the annual growth of the 25-64yr/old (in blue) and 65+yr/old (grey) populations. The impact of the collapse of the growth among the working age population and swelling elderly population is plain to see. And it will get far worse before it eventually gets better. [..] Americans turning 67 in 2030 will be told that after being mandated to pay their full share of SS taxation throughout their working lifetime, they will not see anything near their full benefits in their latter years. However, those in retirement now and those retiring between now and 2029 are being paid in full despite the shortfall in revenue. They will be paid in full until this arbitrary “trust fund” is theoretically drained.
I have no intention of funding, in full, current retirees benefits with my tax dollars only to know I will hit the finish line with a 30%+ reduction that will only worsen over time. My goal is to pay it forward to my kids and then do my best to never to be a burden to them. The SS (OASDI) benefits must be cut now to be in line with revenues. Raise taxes, lower benefits…your choice. But I’m not about to make the old whole so I can then subsequently see my generation go bankrupt in my latter years.
Dealing with the effects of poverty costs the public purse £78bn a year, or £1,200 for every person in the UK, according to the first wide-ranging report into the impact of deprivation on Britain’s finances. The Joseph Rowntree Foundation (JRF) estimates that the impact and cost of poverty accounts for £1 in every £5 spent on public services. The biggest chunk of the £78bn figure comes from treating health conditions associated with poverty, which amounts to £29bn, while the costs for schools and police are also significant. A further £9bn is linked to the cost of benefits and lost tax revenues. The research, carried out for JRF by Heriot-Watt and Loughborough universities, is designed to highlight the economic case, on top of the social arguments, for tackling poverty in the UK.
The prime minister, Theresa May, has made cutting inequality a central pledge. Julia Unwin, the chief executive of the foundation, said: “It is unacceptable that in the 21st century, so many people in our country are being held back by poverty. But poverty doesn’t just hold individuals back, it holds back our economy too. “Taking real action to tackle the causes of poverty would bring down the huge £78bn yearly cost of dealing with its effects, and mean more money to create better public services and support the economy. UK poverty is a problem that can be solved if government, businesses, employers and individuals work together.”
Put simply, the EU is a half-way house with too much democracy and nothing in the way of transfer union. “There are too many moving parts in the electoral politics of 28 nation states, and too many conceivable random-like events that could push political and economic developments in one direction or another, with impossible-to-predict consequences and timelines,” the agency added. The perfect case in point is Italy’s banking crisis. If the country’s struggling banks are not saved with a combination of public and private money — a process that, to all intents and purposes, began on Friday with the announcement of Monte dei Paschi’s suspension of the ECB’s stress test as well as a €5 billion capital expansion later this year — the resulting carnage could unleash not only a tsunami of financial contagion but also an unstoppable groundswell of political opposition to the EU.
For a taste of just how disastrous the political fallout would be for Italy’s embattled premier, Matteo Renzi, here’s an excerpt from a furious tirade given by Italian financial journalist Paolo Barnard on prime-time TV, addressing Renzi directly:
“You went to meet Mrs. Merkel to ask for a minor public funded bail-out of Italian banks and you got a sharp NO. But did anyone tell you that Germany from 2009 onwards bailed out its failing banks with public money? “Banks, that is, with holes in their balance sheets visible from the Moon.
Germany bailed them out to the tune of €704 billion. It was all paid for by European taxpayers’ money, public funds that is. “It was done through the EU Commission of Mr Barroso and by Mr Mario Draghi at the ECB. Didn’t you know that Mr Renzi? Couldn’t you have barked this right into Ms Merkel’s face?”
Barnard rounded off his rant with a rallying call for Italians to follow the UK’s example and demand an exit from the EU — a prospect that should be taken very seriously given that one of the manifesto pledges of Italy’s rising opposition party, the 5-Star Movement, is to call a referendum on Italy’s membership of the euro.
Opec’s worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has failed to break the back of the US shale industry. The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is an illusive victory. North America’s hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits.
Scott Sheffield, the outgoing chief of Pioneer Natural Resources, threw down the gauntlet last week – with some poetic licence – claiming that his pre-tax production costs in the Permian Basin of West Texas have fallen to $2.25 a barrel. “Definitely we can compete with anything that Saudi Arabia has. We have the best rock,” he said. Revolutionary improvements in drilling technology and data analytics that have changed the cost calculus faster than most thought possible. The “decline rate” of production over the first four months of each well was 90pc a decade ago for US frackers. This dropped to 31pc in 2012. It is now 18pc. Drillers have learned how to extract more. Mr Sheffield said the Permian is as bountiful as the giant Ghawar field in Saudi Arabia and can expand from 2m to 5m barrels a day even if the price of oil never rises above $55.
His company has cut production costs by 26pc over the last year alone. Pioneer is now so efficient that it already adding five new rigs despite today’s depressed prices in the low $40s, and it is not alone. The Baker Hughes count of North America oil rigs has risen for seven out of the last eight weeks to 374, and this understates the effect. Multi-pad drilling means that three wells are now routinely drilled from the same rig, and sometimes six or more. Average well productivity has risen fivefold in the Permian since early 2012. Consultants Wood Mackenzie estimated in a recent report that full-cycle break-even costs have fallen to $37 at Wolfcamp and Bone Spring in the Permian, and to $35 in the South Central Oklahoma Oil Province. The majority of US shale fields are now viable at $60.
Money managers have never been more certain that oil prices will drop. They increased bets on falling crude by the most ever as stockpiles climbed to the highest seasonal levels in at least two decades, nudging prices toward a bear market. The excess supply hammered the second-quarter earnings of Exxon Mobil and Chevron. Inventories are near the 97-year high reached in April as oil drillers boosted rigs for a fifth consecutive week. “The rise in supplies will add more downward pressure,” said Michael Corcelli, chief investment officer at Alexander Alternative Capital, a Miami-based hedge fund. “It will be a long time before we can drain the excess.”
Hedge funds pushed up their short position in West Texas Intermediate crude by 38,897 futures and options combined during the week ended July 26, according to the Commodity Futures Trading Commission. It was the biggest increase in data going back to 2006. WTI dropped 3.9% to $42.92 a barrel in the report week, and traded at $41.75 at 12:20 p.m. Singapore time. WTI fell by 14% in July, the biggest monthly decline in a year. It’s down by 19% since early June, bringing it close to the 20% drop that would characterize a bear market.
U.S. crude supplies rose by 1.67 million barrels to 521.1 million in the week ended July 22, according to U.S. Energy Information Administration data. Stockpiles reached 543.4 million barrels in the week ended April 29, the highest since 1929. Gasoline inventories expanded for a third week to 241.5 million barrels, the most since April. “The flow is solidly bearish,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It reflects a recognition that the market is, at least for the time being, oversupplied.”
China will not tolerate “unwanted accusations” about its investments in Britain, a country that cannot risk driving away other Chinese investors as it looks for post-Brexit trade deals, China’s official Xinhua news agency said on Monday. British Prime Minister Theresa May was concerned about the security implications of a planned Chinese investment in the Hinkley Point nuclear plant and intervened to delay the project, a former colleague and a source said on Saturday.The plan by France’s EDF to build two reactors with financial backing from a Chinese state-owned company was championed by May’s predecessor David Cameron as a sign of Britain’s openness to foreign investment.
But just hours before a signing ceremony was due to take place on Friday, May’s new government said it would review the project again, raising concern that Britain’s approach to infrastructure deals, energy supply and foreign investment may be changing. China General Nuclear Power, which would hold a stake of about a third in the project, said on Saturday it respected the decision of the new British government to take the time needed to familiarise itself with the program. Xinhua, in an English-language commentary, said China understood and respected Britain’s requirement for more time to think about the deal. “However, what China cannot understand is the ‘suspicious approach’ that comes from nowhere to Chinese investment in making the postponement,” it said.
The project will create thousands of jobs and create much needed energy following the closure of coal-fired power plants, Xinhua added, dismissing fears China would put “back-doors” into the project. “For a kingdom striving to pull itself out of the Brexit aftermath, openness is the key way out,” it said.
More than a year after they were imposed, capital controls in Greece will be substantially eased on Monday in a bid to lure back billions of euros spirited out of the country, or stuffed under mattresses, at the height of the eurozone crisis. The relaxation of restrictions, whose announcement sent shockwaves through markets and the single currency, is aimed squarely at boosting banking confidence in the eurozone’s weakest member. The Greek finance ministry estimates around €3bn-€4bn could soon be returned to a system depleted of more than €30bn in deposits in the run-up to Athens sealing a third bailout to save it from economic collapse last summer.
“The objective is to re-attract money back to the banking system which in turn will create more confidence in it,” said Prof George Pagoulatos who teaches European politics and economy at Athens University. “And there are several billion that can be returned. People just need to feel safe.” As such the loosening of measures initially seen as an aberration in the 19-strong bloc is being viewed as a test case: of the faith Greeks have in economic recovery and the ability of their leftist-led government to oversee it. New deposits will not be subject to capital controls; limits on withdrawals of money brought in from abroad will also be higher; and ATM withdrawals will be raised to €840 every two weeks in a reversal of the policy that allowed depositors to take out no more than €420 every week.
[..] From 2008, the year before the country’s debt crisis erupted, until the end of 2015, an estimated 244,700 small- and medium-sized businesses have closed with many more expected to declare bankruptcy this year. The latest move, which follows easing of transactions abroad, is directed at small entrepreneurs, for years the lifeline of the Greek economy, and individual depositors. But while economists are calling the easing of restrictions a significant step to normalisation, Greek finances are far from repaired. Challenges for the prime minister, Alexis Tsipras, are expected to peak – along with social discontent – in the autumn when his fragile two-party coalition is forced to meet more milestones and creditor demands, starting with the potentially explosive issue of labour reform. Further disbursement of aid – €2.8bn – will depend exclusively on the painful measures being passed.
Politics in the advanced economies of the West is in the throes of a political shakeup unseen since the 1930s. The Great Deflation now gripping both sides of the Atlantic is reviving political forces that had lain dormant since the end of World War II. Passion is returning to politics, but not in the manner many of us had hoped it would. The right has become animated by an anti-establishment fervor that was, until recently, the preserve of the left. In the United States, Donald Trump, the Republican presidential nominee, is taking Hillary Clinton, his Democratic opponent, to task – quite credibly – for her close ties to Wall Street, eagerness to invade foreign lands, and readiness to embrace free-trade agreements that have undermined millions of workers’ living standards.
In the United Kingdom, Brexit has cast ardent Thatcherites in the role of enthusiastic defenders of the National Health Service. This shift is not unprecedented. The populist right has traditionally adopted quasi-leftist rhetoric in times of deflation. Anyone who can stomach revisiting the speeches of leading fascists and Nazis of the 1920s and 1930s will find appeals – Benito Mussolini’s paeans to social security or Joseph Goebbels’ stinging criticism of the financial sector – that seem, at first glance, indistinguishable from progressive goals.
What we are experiencing today is the natural repercussion of the implosion of centrist politics, owing to a crisis of global capitalism in which a financial crash led to a Great Recession and then to today’s Great Deflation.
The right is simply repeating its old trick of drawing upon the righteous anger and frustrated aspirations of the victims to advance its own repugnant agenda. It all began with the death of the international monetary system established at Bretton Woods in 1944, which had forged a post-war political consensus based on a “mixed” economy, limits on inequality, and strong financial regulation. That “golden era” ended with the so-called Nixon shock in 1971, when America lost the surpluses that, recycled internationally, kept global capitalism stable.
The Indian government has come to the rescue of more than 10,000 of their starving citizens in Saudi Arabia. Some 16,000 kg of food was distributed on Saturday night by the consulate to penniless workers who’ve lost their jobs and not been paid. The issue came to light when a man tweeted India’s foreign minister Sushma Swaraj saying around 800 Indians had not eaten for three days in Jeddah, asking her to intervene. Investigations found that there were thousands starving across Saudi Arabia and Kuwait. Ms Swaraj instructed the consulate to make sure no unemployed worker is to go without food, and is said to have monitored the situation on an hourly basis.
She tweeted: “Large number of Indians have lost their jobs in Saudi Arabia and Kuwait. The employers have not paid wages, closed down their factories. “The number of Indian workers facing food crisis in Saudi Arabia is over ten thousand.” Many workers in Saudi Arabia and Kuwait have been living in inhumane conditions after losing their jobs. Hundreds have been laid off without being paid their wages. Indian newspapers reported that one firm – the Saudi Oger company – did not pay wages for seven months. Of its 50,000 employees, 4,000 were Indians. India’s Consul General Mohammad Noor Rehman Sheikh, told a news agency: “For the last seven months these Indian workers of Saudi Oger were not getting their salaries and the company had also stopped providing food to these workers.”
[..] India’s junior foreign minister VK Singh has been tasked to travel to Saudi Arabia to put in place an evacuation process which is due to begin soon. He had successfully led the evacuation of a large number of Indians from war-torn Yemen and most recently from South Sudan. There are more than three million Indians living and working in Saudi Arabia and more than 800,000 in Kuwait. Falling oil prices have hit the economy of Saudi Arabia and other Gulf countries.
Weaker demand from emerging markets made 2015 the worst year for world trade since the aftermath of the global financial crisis, highlighting rising fears about the health of the global economy. The value of goods that crossed international borders last year fell 13.8% in dollar terms — the first contraction since 2009 — according to the Netherlands Bureau of Economic Policy Analysis’s World Trade Monitor. Much of the slump was due to a slowdown in China and other emerging economies. The new data released on Thursday represent the first snapshot of global trade for 2015. But the figures also come amid growing concerns that 2016 is already shaping up to be more fraught with dangers for the global economy than previously expected.
Those concerns are casting a shadow over a two-day meeting of G20 central bank governors and finance ministers due to start on Friday. Mark Carney, the Bank of England governor, was set to warn the gathering that the global economy risked “becoming trapped in a low growth, low inflation, low interest rate equilibrium”. His comments will echo the IMF, which this week warned it was poised to downgrade its forecast for global growth this year, saying the world’s leading economies needed to do more to boost growth. The Baltic Dry index, a measure of global trade in bulk commodities, has been touching historic lows. China, which in 2014 overtook the US as the world’s biggest trading nation, this month reported double-digit falls in both exports and imports in January.
In Brazil, which is now experiencing its worst recession in more than a century, imports from China have collapsed. Exports from China to Brazil of everything from cars to textiles shipped in containers fell 60% in January from a year earlier while the total volume of imports via containers into Latin America’s biggest economy halved, according to Maersk Line, the world’s largest shipping company. “What we are seeing right now from China is not only a phenomenon for Brazil; we are seeing the same all over Latin America, declining [Chinese export] volumes into all the markets,” said Antonio Dominguez, managing director for Maersk Line in Brazil, Paraguay, Uruguay and Argentina. “It has been going on for several quarters but is getting more evident as we move into the year .”
Scepticism is rife that the G20 gathering of finance ministers will agree to co-ordinate currency policy but there is some belief it could provide a short-term boost to risk appetite. Japan has led calls for the two-day meeting in Shanghai to bring calmness to an unstable market with a broad-based FX strategy, seen by some market commentators as a reprise of the 1985 Plaza Accord that succeeded in weakening a rampant dollar. But those hopes have been knocked back by China and the US, and market expectations have been subdued in the run-up to the G20 meeting that ends with a communique on Saturday. “A grand solution like the Plaza Accord feels far-fetched”, said Peter Rosenstrich at the online bank Swissquote.
“G20 members were ‘too unique’ to agree which currencies were mispriced, while to decide who wins and who loses would be ‘far too complex'” , he said. Some FX strategists are braced for a negative market reaction to the G20 meeting, basing their fears on the experience of previous gatherings. “Our fear is that…there may yet be a sense of despondency, an ‘is that it’ moment, should the G20 be seen to be papering over some rather large cracks in an all too familiar fashion“, said Neil Mellor at BNY Mellon. Market turmoil has driven a sharp rise in the value of the yen against the dollar, causing alarm at the Bank of Japan and jeopardising the government’s Abenomics growth strategy.
Japan’s negative interest rates policy, which came under attack as the G20 meeting began, has failed to reverse the yen’s rise, leading to heightened expectation of unilateral FX intervention by the BoJ. David Bloom, head of FX research at HSBC, said that possibility had been put on hold in the build-up to the G20 meeting, given the potential backlash from other G20 members. “But once that peer pressure passes after the meeting, FX intervention could be back on the table, he warned”. “Any push in USD-JPY towards 110 could be enough to trigger the green light on direct intervention”, said Mr Bloom. The best that can be hoped for from the meeting, said Steven Englander at Citigroup, was a communique that convinced investors that global policymakers are ‘sufficiently on the same page to add to global confidence’.
The world’s top economies are set to declare on Saturday that they need to look beyond ultra-low interest rates and printing money if the global economy is to shake off its torpor, while promising a new focus on structural reform to spark activity. A draft of the communique to be issued by the Group of 20 (G20) finance ministers and central bankers at the end of a two-day meeting in Shanghai reflected myriad concerns and policy frictions that have been exacerbated by economic uncertainty and market turbulence in recent months. “The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” the leaders said in a draft seen by Reuters. “Monetary policies will continue to support economic activity and ensure price stability … but monetary policy alone cannot lead to balanced growth.”
Geopolitics figured prominently, with the draft noting risks and vulnerabilities had risen against a backdrop that includes the shock of a potential British exit from the European Union, which will be decided in a June 23 referendum, rising numbers of refugees and migrants, and downgraded global growth prospects. But there was no sign of coordinated stimulus spending to spark activity, as some investors had been hoping after the market turmoil that began 2016. Divisions have emerged among major economies over the reliance on debt to drive growth and the use of negative interest rates by some central banks, such as in Japan. Germany had made it clear it was not keen on new stimulus, with Finance Minister Wolfgang Schaeuble saying on Friday the debt-financed growth model had reached its limits.
“It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy,” he said. The G20, which spans major industrialized economies such as the United States and Japan to the emerging giants of China and Brazil and smaller economies such as Indonesia and Turkey, reiterated in the communique a commitment to refrain from targeting exchange rates for competitive purposes, including through devaluations. While G20 host China has ruled out another devaluation of the yuan after surprising markets by lowering its exchange rate last August, there still appeared to be concerns that some members may seek a quick fix to domestic woes through a weaker currency.
Japanese finance minister Taro Aso said late on Friday he had urged China to carry out currency reform and map out a mid-term structural reform plan with a timeframe. U.S. Treasury Secretary Jack Lew also encouraged China on Friday to shift to a more market-oriented exchange rate in “an orderly way” and “refrain from policies that would be destabilizing and create an unfair advantage”.
This month, Chinese banking officials omitted currency data from closely watched economic reports. Weeks earlier, Chinese regulators fined a journalist $23,000 for reposting a message that said a big securities firm had told elite clients to sell stock. Before that, officials pressed two companies to stop releasing early results from a survey of Chinese factories that often moved markets. Chinese leaders are taking increasingly bold steps to stop rising pessimism about turbulent markets and the slowing of the country’s growth. As financial and economic troubles threaten to undermine confidence in the Communist Party, Beijing is tightening the flow of economic information and even criminalizing commentary that officials believe could hurt stocks or the currency.
The effort to control the economic narrative plays into a wide-reaching strategy by President Xi Jinping to solidify support at a time when doubts are swirling about his ability to manage the tumult. The persistence of that tumult was underscored on Thursday by a 6.4% drop in Chinese stocks, which are now down more than a fifth since the beginning of this year alone. The government moved to bolster confidence on Saturday by ousting its top securities regulator, who had been widely accused of contributing to the stock market turmoil. Mr. Xi is also putting pressure on the Chinese media to focus on positive news that reflects well on the party. But the tightly scripted story makes it ever more difficult to get information needed to gauge the extent of the country’s slowdown, analysts say. “Data disappears when it becomes negative,” said Anne Stevenson-Yang, co-founder of J Capital Research, which analyzes the Chinese economy.
The party’s attitude has raised further questions among executives and economists over whether Chinese policy makers know how to manage a quasi-market economy, the second-largest economy in the world, after that of the United States. Economists have long cast some doubt on Chinese official figures, which show a huge economy that somehow manages to avoid the peaks and valleys that other countries regularly report. In recent years, China made efforts to improve that data by releasing more information more frequently, among other measures. It also gave its financial media greater freedom, even as censors kept a tight leash on political discourse. But the party now sees reports of economic turbulence as a potential threat. The same goes for data. “Many economic indicators are on a downward trend in China, and economic data has become quite sensitive nowadays,” said Yuan Gangming, a researcher at the Center for China in the World Economy at Tsinghua University.
Financial reporting in China was back in the spotlight again Friday, with one strategist claiming Chinese businesses were using “accounting trickery” to mask underlying credit problems. China looks like it’s heading towards a credit bust, Chris Watling, CEO and chief market strategist at Longview Economics told CNBC on Friday, explaining that cash borrowed by mainland firms is primarily being used to service debts. “We’ve been looking a lot at Chinese accounting recently and it is highly questionable,” he said. The corporate sector is increasing borrowing to pay interest, while instances of fraud and default are on the rise, he added in a note published Thursday. He said there were many examples where operating profit has been high, while cash flow has been negative — a “classic sign” that firms aren’t generating a profit, he added.
Watling highlighted that the balance sheets of commercial banks were particularly worrying. “In an economy which has undergone a credit boom, all of the lending is not necessarily readily apparent from the top level data,” he said. “Accounting trickery is often at work,” Watling claimed. Chinese corporates would reject the accusations, but this isn’t the first time there has been speculation over the accuracy of Chinese figures. Back in September, the state’s statistics bureau announced it would officially change the way it calculated gross domestic product amid skepticism over the credibility of the numbers as the government sought to sooth reaction to China’s economic slowdown. Watling now claims lenders are using tricks like labelling loan collateral as revenue in their balance sheets, rather than as a creditor.
And it may be helping inflate banks’ balance sheets, which in aggregate have increased tenfold in 10 years to over three times gross domestic product at $30 trillion, he said. However, whether this will help lead to a devastating credit bust isn’t clear, Watling explained, saying that while the cracks are starting to show, the economy is managed so differently that normal market rules don’t necessarily apply. A current slowdown in Chinese growth comes at a time when the country’s leadership is stepping up regulation, curbing an overheated credit market and switching an export-focused economy into a consumer-driven one. After double-digit growth for the last decade, investors and officials in China are coming to terms with growth that has fallen below 7%, hitting a 25- year low.
China has had an overcapacity problem in its aluminum, chemical, cement, and steel industries for years. Now it’s reaching crisis levels. “The situation has gone so dramatically bad that action has to happen very soon,” said Jörg Wuttke, president of the European Union Chamber of Commerce in China, at a press conference in Beijing on Feb. 22, where a chamber report on excess capacity was released. That report’s conclusion: “The Chinese government’s current role in the economy is part of the problem,” while overcapacity has become “an impediment to the party’s reform agenda.” Many of the unneeded mills, smelters, and plants were built or expanded after China’s policymakers unleashed cheap credit during the global financial crisis in 2009. The situation in steel is especially dire.
China produces more than double the steel of Japan, India, the U.S., and Russia—the four next-largest producers—combined, according to the EU Chamber of Commerce. That’s causing trade frictions as China cuts prices. On Feb. 12 the EU announced it would charge antidumping duties of as much as 26.2% on imports of Chinese non-stainless steel. Steel mills are running at about 70% capacity, well below the 80% needed to make the operations profitable. Roughly half of China’s 500 or so steel producers lost money last year as prices fell about 30%, according to Fitch Ratings. Even so, capacity reached 1.17 billion tons, up from 1.15 billion tons the year before. With about one-quarter of China’s steel production coming from Beijing’s neighboring province of Hebei, excess production is a major contributor to the capital’s smoggy skies.
And with average steel prices likely to fall an additional 10% in 2016, fears of spiraling bad debts are growing. A survey released in January by the China Banking Association and consulting firm PwC China found that more than four-fifths of Chinese banks see a heightened risk that loans to industries with overcapacity may sour. [..] China will “actively and steadily push forward industry and resolve excess capacity and inventory,” the People’s Bank of China said on Feb. 16 after a meeting with the National Development and Reform Commission, the banking regulatory commission, and other agencies.
The government may find it hard to achieve that goal. The steel industry will lose as many as 400,000 jobs as excess production is shuttered, Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, predicted in January. Hebei and the industrial northeastern provinces of Heilongjiang, Jilin, and Liaoning, home to much of China’s steel production, don’t have lots of job-creating companies to absorb unemployed steelworkers. “They are concerned about the possibility of social unrest with workers’ layoffs,” says Peter Markey at consultants Ernst & Young. “As you can see around the world, steelworkers are pretty feisty people when it comes to protests.”
Yield versus yuan. That’s the crux of the investment decision now facing the global funds given more access to China’s bond market. While it offers the highest yields among the world’s major economies, PIMCO and Schroder Investment say exchange-rate risk is damping global demand for Chinese assets. Barclays said this week there’s a growing chance China will announce a sharp, one-time devaluation to change sentiment toward the currency and suggested such a move would need to be in the region of 25% to be effective. “Uncertainty around currency policy remains one of the larger hurdles for foreign investors,” said Rajeev De Mello at Schroder Investment in Singapore. “This should be resolved as the year progresses and would then be a signal to increase investments in Chinese government bonds.”
The People’s Bank of China said Wednesday that most types of overseas financial institutions will no longer require approvals or quotas to invest in the 35 trillion yuan ($5.4 trillion) interbank bond market, which had foreign ownership of less than 2% at the end of January. The nation’s 10-year sovereign yield of 2.87% compares with 1.74% in the U.S., which offers the highest rate among Group of 10 countries, and sub-zero in Japan and Switzerland. The yuan has weakened 5% versus the dollar since a surprise devaluation in August, even as the central bank burnt through more than $400 billion of the nation’s foreign-exchange reserves over the last six months trying to support the exchange rate amid record capital outflows.
China is opening its capital markets to foreign investors to try and draw money as the slowest economic growth in a quarter century drives funds abroad, pressuring the yuan. Freer access will help the nation’s bonds gain entry to global benchmarks, bolstering appetite for the securities as a restructuring of local-government debt spurs record issuance. Uncertainty on the currency is preventing investors from buying onshore assets now, according to Luke Spajic, an emerging markets money manager at Pimco, whose developing-nation currency fund has outperformed 82% of peers during the past five years. “If you buy these bonds, collect coupons, make some profits, how can you take the money out, are there any issues.” Spajic said in an interview in Shanghai on Thursday. “What we want to clarify is how this process works now, given the capital control environment.”
In recent weeks, Germany has put forward two proposals for the future viability of the EMU that, if approved, would radically alter the nature of the currency union. For the worse. The first proposal, already at the centre of high-level intergovernmental discussions, comes from the German Council of Economic Experts, the country s most influential economic advisory group (sometimes referred to as the ‘five wise men’). It has the backing of the Bundesbank, of the German finance minister Wolfgang Sch‰uble and, it would appear, even of Mario Draghi.
Ostensibly aimed at severing the link between banks and government (just like the banking union) and ensuring long-term debt sustainability , it calls for: (i) removing the exemption from risk-weighting for sovereign exposures, which( essentially means that government bonds would longer be considered a risk-free asset for banks (as they are now under Basel rules), but would be ‘weighted’ according to the ‘sovereign default risk’ of the country in question (as determined by the fraud-prone rating agencies depicted in The Big Short); (ii) putting a cap on the overall risk-weighted sovereign exposure of banks; and (iii) introducing an automatic sovereign insolvency mechanism that would essentially extend to sovereigns the bail-in rule introduced for banks by the banking union, meaning that if a country requires financial assistance from the European Stability Mechanism (ESM), for whichever reason, it will have to lengthen sovereign bond maturities (reducing the market value of those bonds and causing severe losses for all bondholders) and, if necessary, impose a nominal ‘haircut’ on private creditors.
The second proposal, initially put forward by Schaeuble and fellow high-ranking member of the CDU party Karl Lamers and revived in recent weeks by the governors of the German and French central banks, Jens Weidmann (Bundesbank) and François Villeroy de Galhau (Banque de France), calls for the creation of a eurozone finance ministry , in connection with an independent fiscal council . At first, both proposals might appear reasonable – even progressive! Isn’t an EU- or EMU-level sovereign debt restructuring mechanism and fiscal authority precisely what many progressives have been advocating for years? As always, the devil is in the detail.
As for the proposed ‘sovereign bail-in’ scheme, it s not hard to see why it would result in the exact opposite of its stated aims. The first effect of it coming into force would be to open up huge holes in the balance sheets of the banks of the riskier countries (at the time of writing, all periphery countries except Ireland have an S&P rating of BBB+ or less), since banks tend to hold a large percentage of their country’s public debt; in the case of a country like Italy, where the banks own around €400 billion of government debt and are already severely undercapitalised, the effects on the banking system would be catastrophic.
The biggest bull on European stocks just buckled. Societe Generale, among the few firms that hadn’t cut 2016 estimates in response to global-growth concerns, now has the most bearish forecast. The bank sees the Euro Stoxx 50 Index ending 2016 at 3,000, up just 4.3% from Thursday’s close. It’s a far cry from only two weeks ago. Europe’s equities were at a 2 1/2-year low, yet the bank’s call for an year-end level of 4,000 translated to an almost 50% advance. Societe Generale also cut its estimate for the Stoxx Europe 600 Index to 340, indicating a 4.1% rise from the last close. “We trim our equity market forecasts in light of the downgraded U.S. economic outlook,” strategists led by Roland Kaloyan wrote in a report.
“We nevertheless maintain a positive stance on equities, as the recent correction already prices in this scenario to a certain extent. Equity indices should recover in the second quarter from oversold levels, followed by low single-digit quarterly declines in the second half of the year.” Societe Generale favors French and Italian stocks, citing “improving economic momentum,” while saying weakness in China will likely pressure the DAX Index. Along with the Swiss Market Index, the German benchmark is among the bank’s least-preferred markets in Europe. European equity funds had a third straight week of outflows, according to a Bank of America note on Friday citing EPFR Global data. Societe Generale analysts also expect the U.K. equity market to benefit from “rising Brexit fever.” It now expects the FTSE 100 Index to end the year at 6,400, up 6.4% from yesterday’s closing level.
Japan has stockpiled a record amount of cash at central banks as part of its currency reserves, after selling Treasuries, as policy makers around the world adjust to rising U.S. interest rates and falling bond-market liquidity. Foreign-exchange deposits in the vaults of overseas institutions ballooned to $124.1 billion as of Jan. 31, from $14 billion at the end of 2014, according to data from Japan’s Ministry of Finance. That’s the most based on figures going back to 2000, and accounts for about 10% of the nation’s total reserves. While the figure isn’t broken down, it coincides with a surge in greenbacks held by global central banks at the Fed. Any shift away from Treasuries would protect Japan’s reserves from potential losses as the Fed extends monetary policy tightening and concerns rise over bond-market liquidity.
Dollar holdings kept in cash stand to benefit from higher U.S. interest rates and a stronger currency, even as monetary authorities in Japan and across Europe start charging banks for some deposits. “Everybody’s devaluing their currencies, everywhere across the planet, except the U.S. dollar,” said John Gorman at Nomura, the nation’s biggest brokerage. “People are more comfortable putting their reserves in a currency that’s appreciating rather than a currency that’s depreciating. An official in the office of foreign exchange reserve management in the Ministry of Finance declined to comment on the matter, saying it can affect markets. The increase in Japan’s cash at foreign institutions is a change in the composition of the country’s foreign-exchange reserves. The overall stockpile, the world’s largest after China’s, has fallen almost 3% to $1.19 trillion since it reached a record at the start of 2012.
Japan, America’s largest overseas creditor after China, is cutting its Treasuries position. The stake among both government and private investors dropped 8.8% in 2015, the first sales since 2007, based on the most recent Treasury Department data. The reduction dovetails with a decline in foreign securities in Japan’s foreign exchange reserves. Since November 2014, bond holdings fell $126.4 billion, while deposits rose $116.9 billion. The strategy of selling Treasuries and holding dollars would allow investors to get out of older U.S. government securities that can be difficult to trade and may get even tougher to transact if the Fed raises rates further. Declining liquidity in the Treasury market is driving demand for the newest, easiest-to-sell securities. When policy makers increased benchmark borrowing costs in December, they indicated they will act four more times in 2016. Even so, the Bloomberg U.S. Treasury Bond Index has advanced 3.4% so far in 2016 in a flight from riskier assets.
A reminder of what the market actually represents is a good place to start. The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders. Those cash flows are generated from revenues less costs of the underlying companies that make up the market. Let’s use the Wilshire 5000 Full Price Cap Index as the proxy market for this discussion as it is the broadest measure of total market cap for US corporations. It’s level actually represents market capital in billions.
So the market has put a valuation on those expected future cash flows to equity holders (as of today) at around $19.7T (a 55% increase from Jan of 2012) down from around $22.5T (a 77% increase from Jan of 2012) at the market peak last summer. So let’s take a look at the growth in cash flows of US corporations over that same period. We should expect to find a growth pattern in free cash flows similar to the above growth pattern in the overall market valuation (the Wilshire is a statistically large enough sample to be representative of total US corporations). Let’s have a look…
The above chart depicts corporate free cash flows (blue line) indexed to 100 in Jan 2012. It is obtained by taking the BEA’s Net Cash Flow with IVA and CCAdj adding back depreciation and net dividends and subtracting net capex. (The actual definitions of these can be found here.) What we find is that while the current valuation of expected future free cash flows to equity holders (i.e. market cap of Wilshire) has increased by some 55% since the end of 2011, the actual free cash flows of US corporations have only increased by 4%.
This becomes a very difficult fact to reconcile inside the classroom. Why would market participants be baking in so much growth when the actual data simply doesn’t support it?
Well there are plenty of potential explanations. For instance, rarely are investors rational. While buy low and sell high is rational investing behaviour, often market euphoria comes at the market top right before a major sell off, leading to a buy high and sell low strategy. Another reason is that the Fed has been providing a free put to all investors for the past 7 years essentially significantly reducing naturally occurring risk factors. But whatever the reason this dislocation between expected and realized growth begs the question, how long can it last? So let’s explore this issue.
Below is a longer term growth chart of the Wilshire vs US corporate free cash flows to equity holders both indexed to 1995 (i.e. 1995 = 100).
And so over the past 20 years we’ve seen this same type of dislocation three times. That is, we see expectations of growth far exceeding actual growth of free cash flows to equity holders. In the previous two dislocations we reached a peak dislocation (peak stupidity) followed by a reversion to reality (epiphany) where expected growth moves back in line with actual growth.
Barack Obama used to talk about the audacity of hope. Mervyn King was Governor of the Bank of England during ‘the biggest financial crisis this country has faced since 1914’. Its lesson, he says, is that we now need ‘the audacity of pessimism’. Only when we fully understand how badly things went wrong – and why they are still wrong today – can we start to put them right. His new book suggests how. I meet Lord King in his modest office at the London School of Economics. Typically, he is just off to the West Midlands for a dinner for famous sons of Wolverhampton. He is a proud provincial boy, not a City slicker. I ask him to recall the moment he first understood the depth of the problem facing the world. Back in September 2007, when he ‘it was already clear that Northern Rock would need support’, King recalls, he was in Basel for a conference.
There was alarm in the United States because ‘sub-prime’ mortgages were collapsing. The central bank supervisors at the conference insisted that sub-prime failure could not bring down the system. But King talked to his friend Stan Fischer, then Governor of the Bank of Israel. They shared their fears: ‘If the only thing that goes wrong is sub-prime, ok. But what else could go wrong? What if the unimaginable happens?’ It did. Over the next two months, says King, he became obsessed with the need for more equity capital in the banking system. The banks resisted at first and ‘The politicians [Gordon Brown’s government] were susceptible to pressure from the banks’. But ‘we limped along till the bankruptcy of Lehman Brothers’ in September 2008. Then ‘the banking of the entire industrial world was at risk of collapse’.
Britain – without a proper ‘bank resolution regime’ which, says King, ‘could have solved the problem of Northern Rock in a weekend, without fuss’ – was enormously vulnerable. Whereas US banking sector assets were worth only 80% of its GDP, Britain’s were worth 500%, a terrifying ratio. New Labour, having turned its back on nationalisation, had to revert to it: ‘It must have been galling for them.’ In Mervyn King’s mind, the credit crunch was brought about by something profoundly wrong. Bankers had been encouraged to take enormous risks with the customers’ money, enrich themselves and then dump the losses on the taxpayer. Huge pay increases for senior executives had produced a ‘very unattractive culture when clever people started to say to themselves: “I’m smart, I can make money out of people who don’t understand this”.’
Bank of America is preparing for significant job cuts across its global banking and markets business, according to people with knowledge of the matter. Senior executives in the division were tasked with identifying potential job cuts a few weeks ago, and this week were asked to increase their size, according to people familiar with the situation. The cuts are likely to be over 5% of staff, the people said. Some business lines will face deeper cuts than others, and the details haven’t been finalized. Employees could be told of the cuts as soon as March 8, one of the people said, which is weeks sooner than managers were initially expecting. The people didn’t know the reasons the cuts had been pushed forward.
BofA is joining firms across Wall Street in paring back staff amid one of the worst quarters for investment-banking and trading revenues. Business Insider reported on Monday that Deutsche Bank was cutting 75 staff in fixed income, while Morgan Stanley and Barclays have also recently cut staff. Daniel Pinto, CEO of JPMorgan’s corporate and investment bank, said on Tuesday that the firm’s investment-banking revenues are forecast to be down 25% in the first quarter. Markets revenues are down 20% year-on-year, Pinto said, speaking at JPMorgan’s Investor Day conference.
Belgian authorities accused UBS of money laundering and fiscal fraud over allegations it helped clients evade taxes, citing help from France where the Swiss bank is fighting similar accusations. The investigating judge also accused UBS of illegally approaching Belgian clients directly rather than through its Belgian unit, according to an e-mailed statement Friday from the Brussels prosecutor’s office. UBS said it will continue to defend itself against any unfounded allegations. The probe is continuing and the investigating judge will present his findings to prosecutors at a later date. The accusations are based on strong evidence of guilt uncovered by the investigative magistrate, said Jennifer Vanderputten, a spokeswoman at the prosecutor’s office. UBS will be given the right to access evidence supporting the allegations, she said.
The Belgian prosecutor cited “excellent collaboration” with authorities in France, where UBS is awaiting a decision on whether it will face trial for allegedly helping clients evade taxes. UBS is also accused in France of laundering proceeds from tax evasion. Investigating judges in France wrapped up their formal investigation earlier this month, turning the case over to the national financial prosecutor who will make a recommendation on whether it goes to trial. The bank, which has called the French allegations “unfounded,” was forced to post a bail of 1.1 billion euros ($1.2 billion). Friday’s decision came after the head of UBS’s Belgium unit was similarly accused in 2014 of money laundering and fiscal fraud as part of the probe. Marcel Bruehwiler was questioned for several hours before being released in June 2014.
Roughly five weeks ago, Donald Tusk, one of the EU’s most powerful political figures, issued a blunt warning to its 28 countries: Come up with a coherent plan to tackle the refugee crisis within two months, or risk chaos. Surprisingly, given the plodding pace of European Union policy making, three weeks before Mr. Tusk’s deadline, many of Europe’s national leaders are now moving swiftly, announcing tough new border policies and guidelines on asylum — even with three weeks remaining on the deadline set by Mr. Tusk, president of the European Council. The problem is that the leaders are not always adhering to European rules, possibly not sticking to international law and not acting with the unity envisioned by Mr. Tusk. In some cases, they instead seem to be reverting to historical alliances rather than maintaining the EU’s mantra of solidarity.
This week, Austria joined with many of the Balkan countries to approve a tough border policy in what some are wryly calling the return of the Hapsburg Empire. Four former Soviet satellites, led by Poland and Hungary, have become another opposition power bloc. All the while, a call for unity by Chancellor Angela Merkel of Germany is increasingly being ignored, even as she struggles to tamp down on a political revolt at home while searching for a formula to reduce the number of refugees still trying to reach Germany. “We are now entering a situation in which everybody is trying to stop the refugees before they reach their borders,” said Ivan Krastev, chairman of the Center for Liberal Strategies, a research institute in Sofia, Bulgaria. Mr. Krastev added, “The basic question is, which country turns into a parking lot for refugees?”
For many months, European Union officials, joined by Ms. Merkel, have tried to share the burden by distributing quotas of the refugees already in Greece and Italy to different member states. Many states have balked, and the program is largely paralyzed. European Union leaders also agreed to pay 3 billion euros, roughly $3.3 billion, to aid organizations in Turkey to help stanch the flow of migrants departing the Turkish coast for the Greek islands. But record numbers of migrants keep coming.
The European Commission said Friday that it is putting together a humanitarian aid plan for Greece as Balkan countries placed further restrictions on the numbers of refugees and migrants that could cross their territories. As of last night, authorities in the Former Yugoslav Republic of Macedonia (FYROM) had not allowed any refugees to pass from Greece. Earlier, Slovenia, Croatia and Serbia said they would each restrict the number of migrants allowed to enter their territories to 580 per day. The clampdown comes in the wake of Austria last week introducing a daily cap of 80 asylum seekers and saying it would only let 3,200 migrants pass through each day. As border restrictions north of Greece have been stepped up, the number of migrants and refugees stuck in the country has increased.
The government is attempting to stem the flow of migrants to mainland Greece by asking ferry companies to delay crossings from the Aegean islands, but between 2,000 and 3,000 people are arriving in Greece each day. It is estimated that there are currently 20,000 to 25,000 in the country. Some of them are out in the open, having chosen not to remain in transit centers or other temporary shelters provided by Greek authorities. Several thousand have reached the village of Idomeni at the border with FYROM, where conditions were said to be deteriorating last night as a result of bad weather.
The government launched a hotline for people or companies who want to donate items that are in need at the moment, such as non-perishable food, sneakers, towels and plastic cutlery. European Commission spokeswoman Natasha Bertaud admitted Friday that due to the changing situation in Greece, Brussels is putting together an “emergency plan” to avert a humanitarian crisis in Greece. Speaking at an economic forum in Delphi yesterday, Migration Commissioner Dimitris Avramopoulos warned that the upcoming summit between EU members and Turkey on March 7 would be crucial to addressing the growing crisis. “If there is no convergence and agreement on March 7, we will be led to disaster,” the former Greek minister said.
The rift over how to handle Europe’s immigration crisis ripped wide open Friday. As nations along the Balkans migrant route took more unilateral actions to shut down their borders, diplomats from EU nations bordering the Mediterranean rallied around Greece, the epicenter of the crisis. Cypriot Foreign Minister Ioannis Kasoulides — speaking on behalf of colleagues from France, Spain, Italy, Portugal, Malta and Greece — said decisions on how to deal with the migrant influx that have already been made by the 28-nation bloc cannot be implemented selectively by some countries. “This issue is testing our unity and ability to handle it,” Kasoulides told a news conference after an EU Mediterranean Group meeting. “The EU Med Group are the front-line states and we all share the view that unilateral actions cannot be a solution to this crisis.”
Kasoulides urged EU countries to enact all EU decisions on immigration so there “will be no unfairness to anybody.” Greek Foreign Minister Nikos Kotzias blasted some European nations for imposing border restrictions on arriving migrants, saying that police chiefs are not allowed to decide to overturn EU decisions. He said Mediterranean colleagues were “unanimous” in their support for Greece’s position on the refugee crisis and that there was “clear criticism to all those who are seeking individual solutions at the expense of other member states.” The Greek government is blaming Austria — a fellow member of Europe’s Schengen Area — for the flare-up in the crisis. Austria imposed strict border restrictions last week, creating a domino effect as those controls were also implemented by Balkan countries further south along the Balkans migration route.
Greece recalled its ambassador to Austria on Thursday and rejected a request to visit Athens by Austrian Interior Minister Johanna Mikl-Leitner. The United Nations secretary-general expressed “great concern” Friday at the growing number of border restrictions along the migrant trail through Europe. Ban Ki-moon’s spokesman said the U.N. chief is calling on all countries to keep their borders open and says he is “fully aware of the pressures felt by many European countries.” The statement noted in particular the new restrictions in Austria, Slovenia, Croatia, Serbia and Macedonia. Thousands of migrants are pouring into Greece every day and officials fear the country could turn into “a giant refugee camp” if they are unable to move north due to borders closures.
In Munich, German Chancellor Angela Merkel echoed the Mediterranean EU ministers in calling for a unified European approach to tackle the migrant crisis. Merkel, who has said that those fleeing violence deserve protection, said she was encouraged by the recent deployment of NATO ships to the Aegean Sea alongside vessels from the European Union border agency Frontex. “NATO has started to work in collaboration with the Turkish coast guard and Frontex. It is too early to see the effects of this measure. All 28 (EU) member states want to stop illegal immigration,” she said. But NATO Secretary-General Jens Stoltenberg said the ships would only be providing a support role. “NATO ships will not do the job of national coastguards in the Aegean. Their mission is not to stop or turn back those trying to cross into Europe,” he wrote.
A sharp, one-off devaluation of the yuan is among options China’s central bank might consider to stem capital outflows and shift market psychology to appreciation from depreciation, according to Barclays. The risk of such a move, which Barclays says would need to be in the region of 25% to alter perceptions, is rising as China’s foreign-exchange reserves plunge, analysts Ajay Rajadhyaksha and Jian Chang wrote in a report. Based on the current pace of decline in those holdings, there’s a six- to 12-month window before they drop to uncomfortable levels and measures such as capital controls or monetary tightening may also have to be looked at to curb the exodus of money, they said. All those options carry elements of danger.
Another rapid yuan depreciation could spook investors just as concern about the state of the global economy is growing and other central banks would likely follow, countering the beneficial impact on Chinese exports, the analysts said. Strict capital controls won’t work in an export-driven economy, while a move to policy tightening could slow growth and cause credit defaults, they said. “A devaluation of this magnitude seems impossible to ‘sell’ to the rest of the world,” according to the analysts at Barclays, the world’s third-biggest currency trader. “The People’s Bank of China will probably have to take more aggressive measures to stem outflows,” said head of macro research Rajadhyaksha in New York and Hong Kong-based chief China economist Chang.
[..] Chinese policy makers are trying to counter record outflows and prop up the yuan, while opening up the capital account and keeping borrowing costs low to revive growth in the world’s second-biggest economy. The balancing act challenges Nobel-winning economist Robert Mundell’s “impossible trinity” principle, which stipulates a country can’t maintain independent monetary policy, a fixed exchange rate and free capital borders all at the same time.
Standard Chartered dropped the most in more than three years after reporting a surprise full-year loss, as revenue missed estimates and loan impairments almost doubled to the highest in the bank’s history. The stock dropped as much as 12% as the London-based bank said its pretax loss was $1.5 billion in 2015, down from profit of $4.2 billion a year earlier. Excluding some one-time items, pretax profit was $834 million. CEO Bill Winters is attempting to unwind the damage caused by predecessor Peter Sands’ revenue-led expansion across emerging markets, which left the bank riddled with bad loans when the commodity market crashed and growth stalled from China to India.
Since June, Winters has raised $5.1 billion from investors, scrapped the dividend and announced plans to cut 15,000 jobs to help save $2.9 billion by 2018, while seeking to restructure or exit $100 billion of risky assets. “While our 2015 financial results were poor, they are set against a backdrop of continuing geo-political and economic headwinds and volatility across many of our markets,” Winters said in the statement. “We expect the financial performance of the group to remain subdued during 2016.”
[..] Implicit in the whole misbegotten wealth effects doctrine is the spurious presumption that the Wall Street gambling apparatus can be rented for a spell by the central bank. So doing, our monetary central planners believe themselves to be unleashing a virtuous circle of increased spending, income and output, and then more rounds of the same. At length, according to these pettifoggers, production, income and profits catch-up with the levitated prices of financial assets. Accordingly, there are no bubbles; and, instead, societal wealth continues to rise happily ever after. Not exactly. Central bank stimulated financial asset bubbles crash. Every time.
The Fed and other practitioners of wealth effects policy do not rent the gambling apparatus of the financial markets. They become hostage to it, and eventually become loathe to curtail it for fear of an open-ended hissy fit in the casino. Bernanke found that out in the spring of 2013, and Yellen three times now – in October 2014, August 2015 and January-February 2016. But unlike the last two bubble cycles, where our monetary central planners did manage to ratchet the money market rate back up to the 6% and 5% range, by 2000 and 2007, respectively, this time an even more obtuse posse of Keynesian true believers rode the zero bound right to the end of capitalism’s natural recovery cycle.
Accordingly, the casinos are populated with financial time bombs like never before. Worse still, the central bankers are now so utterly lost and confused that they are all thronging toward the one thing that will ignite these time bombs in a fiery denouement. That is, negative interest rates. This travesty reflects sheer irrational desperation among central bankers and their fellow travelers, and will soon illicit a fire storm of political revolt, currency hoarding and revulsion among even the gamblers inside the casino. Besides that, they are crushing bank net interest margins, thereby imperiling the solvency of the very banking system that the central banks claim to have rescued and fixed.
We will treat with some of the time bombs set to explode in the sections below, but first it needs to be emphasized that the third bubble collapse of this century is imminent. That’s because both the global and domestic economy is cooling rapidly, meaning that recession is just around the corner. Based on the common sense proposition that the nation’s 16 million employers send payroll tax withholding monies to the IRS based on actual labor hours utilized – and without any regard for phantom jobs embedded in such BLS fantasies as birth/death adjustments and seasonal adjustments – my colleague Lee Adler reports that inflation-adjusted collections have dropped by 7-8% from prior year in the most recent four-week rolling average.
As far as the OECD is concerned, monetary policy is being forced to take too much of the strain. Its chief economist Catherine Mann made the point that lasting recovery required three things: stimulative monetary policy; activist fiscal policy; and structural reform. The OECD wants the second of these ingredients to be added to the recipe in the form of increased spending on public infrastructure, something it says would more than pay for itself at a time when governments can borrow so cheaply.
The Paris-based thinktank says collective action by the world’s leading economies is needed because a go-it-alone approach will result in the effects of stronger demand being blunted by higher imports. It will make the case for higher investment spending at this week’s meeting of the G20 in Shanghai, almost certainly to little effect. Central banks will argue that they still have plenty of ammunition left, even though as the years tick by it becomes more and more apparent that relying solely on monetary policy is the equivalent of pushing on a piece of string. Central banks now have one last chance to live up to their exalted reputations. A prolonged period of low but positive interest rates carries the risk that it will create the conditions for asset price bubbles. That risk is amplified by quantitative easing.
All the dangers associated with low but positive borrowing costs apply to negative interest rates – but with some added complications. One is that it affects the profitability of banks, by squeezing lending spreads, at a time when many of them have yet to make a full recovery from the last crisis. Another is that central banks will overcook things and that the deeper into negative territory interest rates go now the higher they will have to go later. Perhaps though the biggest danger is to the reputation of central banks. Throughout the crisis, the assumption has been that the Federal Reserve, the Bank of England, the ECB, the Bank of Japan and all the other central banks are in control of a tricky situation. Central bankers give the impression that they can model the impact of interest rates and QE on growth and inflation; that is part of their mystique.
Now, it may be that it is simply taking time for central banks to get to grips with a protracted and complex crisis. Everything may work out well in the end, with inflation returning to target and interest rates back to more normal levels. The absence of supportive fiscal policy could be making an already tough job that much tougher. But the longer this goes on the more the suspicion grows that central bankers aren’t quite so clever as they think they are, and that what is dressed up as a carefully calibrated policy response is really just blundering around in the dark. Central banks have been conducting a gigantic experiment over the past seven years and Tyrie will want to know from Carney whether he actually knows what he is doing. It is a perfectly fair question.
China, Japan and other overseas central banks are leaving more of their dollars with the U.S. Federal Reserve as they have liquidated their U.S. Treasuries holdings to raise cash in an effort to stabilize their currencies, government data show. Foreign central banks’ reduced ownership of U.S. government debt, especially older issues, have bloated the bond inventories of U.S. primary dealers and kept U.S. money market rates elevated in recent months, analysts said. Primary dealers, or the top 22 Wall Street firms that do business directly with the Fed, held $113.5 billion worth of Treasuries in the week ended Feb. 10, the most since October 2013. As Wall Street holds more Treasuries, foreign central banks have piled more money into the Fed’s reverse purchase program where they earn interest income.
“They have been selling their Treasuries holdings and using more the Fed’s reverse repo program,” Alex Roever, head of U.S. interest rate strategy at J.P. Morgan Securities in New York, said on Monday. On Monday, the New York Federal Reserve’s executive vice president Simon Potter said the Fed’s repo program for foreign central banks has increased because “the constraints imposed on customers’ ability to vary the size of their investments have been removed, the supply of balance sheet offered by the private sector to foreign central banks appears to have declined, and some central banks desire to maintain robust dollar liquidity buffers.” On Feb. 17, overseas central banks held $246.65 billion in reverse repos, up from $129.78 billion a year earlier, Fed data released last week showed.
During Deutsche Bank’s share price meltdown a couple of weeks ago, Wolfgang Schäuble, the German finance minister, said he had “no concerns” about the health of Germany’s largest bank. But what could he actually do if he really were worried? Last year Mark Carney, governor of the Bank of England, proclaimed that the era of too-big-to-fail banks was over, meaning that politicians (via their taxpayers) will no longer be able to rescue banks. If Mr Carney is right about that, it would indeed be some achievement. It was in 1984 that Stewart McKinney, a US congressman, popularised the phrase “too big to fail” when he described the near collapse of Continental Illinois Bank, which at the time was the seventh-largest bank in the US. The issue came back to haunt policymakers in 2008 with the plethora of bank rescues.
But can taxpayers around the world really breathe a sigh of relief that next time it will not be down to them to pay for the bailout of their banks? Nobody knows. Indeed, just last week Neel Kashkari, one of the architects of the $700bn taxpayer bailout of US banks in 2008 and the head of the Minneapolis Federal Reserve, said that he thought “too big to fail” remained alive and well. We all know what the new rule book says; that when one of the world’s largest banks becomes close to going bust, then it is up to all of its debt and equity holders to pay for the rescue. That bit is clear. But financial history is littered with examples of rule books being ignored in the teeth of a crisis.
That is what happened in 2008, when governments trampled over rules that placed limits on deposit guarantees and refused to call on senior bondholders to suffer the losses that they were contractually expected to bear. Faced with contagion risk and fears of systemic failures, governments break rules. To some extent we can ask the markets to judge Mr Carney’s claim that “too big to fail” has really ended against Mr Kashkari’s scepticism. An April 2014 IMF report estimated that the too-big-to-fail subsidy — the lower funding costs enjoyed by the world’s largest banks — totalled up to $630bn per annum. If true, then removing that subsidy would destroy the profits of these big banks.
Yet the fact that share prices for most banks, whilst weak, have not totally collapsed suggests that markets, at least, either do not believe that the subsidy was ever that big, or that the age of “too big to fail” is still not over. There have always been two ways to address this too-big-to-fail challenge. One approach — the one which hitherto has been favoured by most regulators — is to place the cost of bailouts on the private sector and therefore to remove the cost of failure from taxpayers. Yet as Mr Kashkari makes clear, there remains considerable doubt over whether such a course of action will really work in practice. And until a major bank nears collapse, such doubts will inevitably remain.
Insane. That’s how Jonathan Tepper, chief executive officer at research firm Variant Perception, described Australia’s housing sector in a word, painting the picture of a market that’s strikingly similar to that of the U.S. prior to the financial crisis. A local 60 Minutes segment that aired on Sunday titled “Home Groans” chronicled some of the eye-popping events in the nation’s real estate market, with amateurs owning (and under water on) multiple homes with no tenants, interest-only loans increasing in prominence, price-to-income ratios at elevated levels, and home auctions attended by the community and captured for the small screen.
Much of the clip centers on the coal town of Moranbah, which the narrator deems to be a canary in the coal mine for the nation’s housing market as a whole, and the financial and emotional plight of those who got caught up in the boom. According to an owner, the value of one property in the Queensland town has declined by roughly 80%. Perhaps the juiciest tidbit, however, is a claim that John Hempton, a hedge fund manager at Bronte Capital and long-time Australian property bear, and Tepper—who’s called housing busts in the U.S., Spain, and Ireland—put on Twitter:
Tepper later added that this offer came from a “major brand lender.” While most discussions of frothy housing markets focus on the low cost of credit (and central banks’ role in that), the ability to access credit is arguably more important. A borrower may be willing to take on a dangerous amount of leverage to be part of a seemingly can’t-miss opportunity, but in the end, the bank still has the final say on whether to provide the funds. Australia hasn’t had a recession since the early 1990s, but it’s tough to see the nation avoiding one in the event that Tepper’s prophesied 30% to 50% crash in home values comes to pass. Of course, investors have also been warning of an Australian housing bubble for almost as long.
We are searching for an insight. Each time we think we see it… like the shadow of a ghost in an old photo… it gets away from us. It concerns the real nature of our money system… and what’s wrong with it. Here… we bring new readers more fully into the picture… and try to spot the flaw that has doomed our economy. Let’s begin with a question. After the invention of the internal combustion engine, people in Europe… and then the Americas… got richer, almost every year. Earnings rose. Wealth increased. Then in the 1970s, after two centuries, American men ceased making progress. Despite more PhDs than ever… more scientists… more engineers… more capital… more knowledge… more Nobel Prizes… more college graduates… more machines… more factories… more patents… and the invention of the Internet… after adjusting for inflation, the typical American man earned no more in 2015 than he had 40 years before.
Why? What went wrong? No one knows. But we have a hypothesis. Not one person in 1,000 realizes it, but America’s money changed on August 15, 1971. After that, not even foreign governments could exchange their dollars for gold at a fixed rate. The dollar still looked the same. It still acted the same. It still could be used to buy booze and cigarettes. But it was flawed money. And it changed the whole world economy in a fundamental way… a way that is just now coming into focus. The Old Testament tells us that God chased Adam and Eve from the Garden of Eden with this curse: “By the sweat of your brow, you will earn your food until you return to the ground.” From then on, you worked… you earned money… you could buy bread. Or lend it out. Or invest it.
Dollars – or any form of real money – were compensation… for work, for risk taking, for accumulating knowledge and capital. Money is information. It tells us how much reward we’ve earned… how much things cost… how much profit, how much loss, how much something is worth… how much we’ve saved, how much we’ve spent, how much we need, and how much we’ve got. Ultimately, only a market-chosen money can be sound. The market chose gold as the most marketable commodity. There were no meetings or committees deciding on this, it happened spontaneously – governments simply usurped it. Money doesn’t have to be “hard” or “soft” or expensive or cheap. But it has to be honest. Otherwise, the whole system runs into a ditch. But the new money was a phony. It put the cart ahead of the horse.
This was money that no one ever had to break a sweat to get. It was based on credit – the anticipation of work, not work that had already been done. Money no longer represented wealth. It now represented anti-wealth: debt. So, the economy stopped producing real wealth. The Fed could create money that no one ever earned and no one ever saved. It was no longer the real thing, but a counterfeit. In this way, effort and reward were cut off from one another. The working man still had to labor. But it was the banker, gambler, speculator, lender, financier, investor, politician, or inside operator who made the money. And the nature of the economy changed. Instead of rewarding the productive Main Street economy, it rewarded insiders… and the financial sector.
World trade is as bad as it has been at any point since the global financial crisis in 2008. The Baltic Dry Index, a measure of how much it costs to transport raw materials, in November dropped below 500 for the first time, and it has kept falling. The index was as high as 1,222 in August, and it has fallen 84% from a recent peak of 2,330 in late 2013. The index measures how much it costs to ship dry commodities, meaning raw materials like grain and steel, around the world. It is frequently used as a so-called canary in the coal mine for the state of the global economy and how well international trade is performing. If the price is low, it suggests trade is slowing.
Analysts at Deutsche Bank led by Amit Mehrotra have been watching the fall closely. The drop has been so bad that ships are being scrapped faster than they are being built. Here are the main points in a recent note:
• Total dry bulk capacity declined by almost 1M tons (net) last week as the pace of deliveries slowed and scrapping remained elevated.
• Around 16 ships were sold for scrap last week totaling 1.6M tons. This more than offset 9 new deliveries, translating to a net reduction of 7 vessels.
• Last week’s scrapping would represent an annualized pace of 11% of installed capacity, which is almost double the all-time high of 6.3% set in 1986.
• Year-to-date scrapping is up 80% versus same time last year.
It’s bad news, as it means that ship owners expect demand for cargo transport to remain weak long into the future. And they’re generally very good at predicting trends in global trade. This graph from Capital Economics shows just how closely the Baltic Dry index tracks world trade volumes.
OPEC and U.S. shale may need a relationship counselor. After first ignoring it, later worrying about it and ultimately launching a price war against it, OPEC has now concluded it doesn’t know how to coexist with the U.S. shale oil industry. “Shale oil in the United States, I don’t know how we are going to live together,” Abdalla Salem El-Badri, OPEC secretary-general, told a packed room of industry executives from Texas and North Dakota at the annual IHS CERAWeek meeting in Houston. OPEC, which controls about 40% of global oil production, has never had to deal with an oil supply source that can respond as rapidly to price changes as U.S. shale, El-Badri said. That complicates the cartel’s ability to prop up prices by reducing output.
“Any increase in price, shale will come immediately and cover any reduction,” he said. The International Energy Agency earlier on Monday gave OPEC reason to worry about shale oil, saying that total U.S. crude output, most of it from shale basins, will increase by 1.3 million barrels a day from 2015 to 2021 despite low prices. While U.S. production from shale is projected to retreat by 600,000 barrels a day this year and a further 200,000 in 2017, it will grow again from 2018 onward, the IEA said. “Anybody who believes that we have seen the last of rising” U.S. shale oil production “should think again,” the IEA said in its medium-term report.
Standard & Poor’s cut its corporate credit ratings on BP, Total SA and Statoil ASA , citing the Europe-based oil and gas companies’ persistent weak debt coverage measures over 2015-2017. The ratings agency on Monday cut the long- and short-term corporate credit ratings on BP Plc to ‘A minus/A-2’ from ‘A/A-1’ with a stable outlook. S&P lowered the long- and short-term corporate credit ratings on Total S.A. to ‘A plus/A-1’ from ‘AA-/A-1 plus’ and assigned a negative outlook. The ratings agency also cut the long- and short-term corporate credit ratings on Statoil ASA to ‘A plus/A-1’ from ‘AA minus/A-1 plus’ and assigned a stable outlook. Standard and Poor’s had lowered its ratings on some U.S. exploration & production companies after price assumption revisions earlier this month.
The sea stretched toward the horizon last New Year’s Eve as the Theo T, a red-and-white tug at her side, slipped quietly beneath the Corpus Christi Harbor Bridge in Texas. Few Americans knew she was sailing into history. Inside the Panamax oil tanker was a cargo that some on Capitol Hill had dubbed “Liquid American Freedom” – the first U.S. crude bound for overseas markets after Congress lifted the 40-year export ban. It was a landmark moment for the beleaguered energy industry and one heavy with both symbolism and economic implications. The Theo T was ushering in a new era as it left the U.S. Gulf coast bound for France.
The implications – both financial and political – for energy behemoths such as Saudi Arabia and Russia are staggering, according to Mark Mills, a senior fellow at the Manhattan Institute think tank and a former venture capitalist. “It’s a game changer,” he said. For the Saudis and their OPEC cohorts, who collectively control 40% of the globe’s oil supply, the specter of U.S. crude landing at European and Asian refineries further weakens their grip on world petroleum prices at a time they are already suffering from lower prices and stiffened competition. With Russia also seeing its influence over European energy buyers lessened, the two crude superpowers last week tentatively agreed to freeze oil output at near-record levels, the first such coordination in a decade and a half.
The political effects need not wait until U.S. shipments become more plentiful, Mills said. “In geopolitics, psychology matters as much as actual transactions,” he said. Meanwhile, the U.S. is also poised to make its first shipments of liquefied natural gas, or LNG, from shale onto world markets within weeks, about two months later than scheduled. Cheniere Energy Iexpects to have about 9 million metric tons a year of LNG available for its own portfolio from nine liquefaction trains being developed at two complexes in Texas. That’s enough to power Norway and Denmark combined for a year.
[..] Beyond corporations, the Dec. 18 lifting of the export ban by Congress and President Barack Obama created geopolitical winners and losers, too. The U.S., awash in shale oil, has gained while powerful exporters like Russia and Saudi Arabia, for whom oil represents not just profits but also power, find themselves on the downswing. The U.S. remains a net importer, but its demand for foreign oil has fallen by 32% since its peak in 2005. Meanwhile, plummeting oil and gas prices, driven in part by the U.S. shale revolution, have already eroded OPEC and Russia’s abilities to use natural resources as foreign policy cudgels. They are also squeezing petroleum-rich economies from Venezuela to Nigeria that rely heavily on crude receipts to fund everything from military budgets to fuel subsidies.
Oil prices are unlikely to significantly rebound for at least a few years, the International Energy Agency projected on Monday, as a top official with the Organization of the Petroleum Exporting Countries said he wouldn’t rule out taking additional steps to stabilize the market. The new IEA projections and the statements by OPEC’s secretary-general, which came as oil ministers, executives and analysts gathered for the annual IHS CERAWeek conference in Houston made one point abundantly clear: No one is immediately coming to the rescue for struggling oil producers. Oil rallied Monday following the IEA’s projection that shale production is poised to fall this year by about 600,000 barrels a day, and by 200,000 barrels a day in 2017.
But Fatih Birol, the executive director of the IEA, which tracks the global oil trade on behalf of industrialized nations, and OPEC’s Abdalla el-Badri, who represents the cartel of major exporters, both agreed that market signals continue to point to depressed prices. “Everybody is suffering,” said Mr. el-Badri, noting that the rapid fall in crude had caught many member nations by surprise. “This is historical,” said Mr. Birol. “In the last 30 years, we have never seen oil investment decline two-consecutive years.” A preliminary agreement between Saudi Arabia and Russia to freeze output at January levels was a “first step” toward creating market stability, he said. Iran, whose oil exports have only recently been freed from Western sanctions, has yet to agree. “If this is successful, maybe we can take other steps in the future,” Mr. Birol said, declining to specify what those could be. He also asserted OPEC’s continued relevance on the world scale. “We are not dead. We are alive and alive and alive. You will see us for many years.”
Investment in the UK’s embattled oil and gas industry is expected to fall by almost 90pc this year, raising urgent industry calls for the Government to reform its North Sea tax regime to safeguard the industry’s future. Oil firms have been forced to dramatically slash costs in order to survive a 70pc cut in oil prices since mid-2014, but the severe drop in investment threatens thousands of North Sea jobs, said Oil and Gas UK (OGUK). The trade group says that firms have forced down the cost of oil production from $29.30 a barrel in 2014 to just under $21 a barrel in 2015. But despite improving efficiency and cutting operating costs almost half of the UK’s oilfields will struggle to make a profit if oil prices remain at $30-a-barrel levels for the rest of the year.
The financial risk means many have axed or delayed investment decisions, and OGUK said that investment in new projects could fall as low as £1bn this year, compared with a typical average of £8bn a year. OGUK boss Deidre Mitchell said: “This drop in activity is being felt right across the supply chain, which contracted by a quarter in the last year and is expected to fall further in the coming year as current projects near completion. “With demand for goods and services falling, ongoing job losses are the personal cost to individuals and families across the UK.” North Sea job losses could reach a total of 23,000, and Aberdeen is expected to take the brunt of the economic hit. Securing the future of the region has already climbed the political agenda this year with both the Scottish and Westminster governments pledging hundreds of millions of pounds in support.
In for a penny, in for a pound. With falling oil prices eroding Canada’s revenue base, newly elected Prime Minister Justin Trudeau is fully embracing deficits, with his finance minister hinting Monday the country will run a deficit of about C$30 billion ($22 billion) in the fiscal year that starts April 1. It’s one of the biggest fiscal swings in the country’s history that, in just four months since the Oct. 19 election, has cut loose all the fiscal anchors Trudeau pledged to abide by even as he runs deficits. The government’s bet is that appetite for more infrastructure spending and a post-election political honeymoon will trump criticism over borrowing and unmet campaign promises. “It looks like the Liberals want to front load as much bad news as possible in the hope when the election occurs in four years things will be better,” said Nik Nanos, an Ottawa-based pollster.
Trudeau swept to power in part by promising to put an end to an era of fiscal consolidation the Liberals claimed was undermining Canada’s growth, which has been lackluster since the recession in 2009. Still, he has tried to temper worries by laying out three main fiscal promises: annual deficits of no more than C$10 billion, balancing the budget in four years and reducing the debt-to-GDP ratio every year. On Monday, Finance Minister Bill Morneau indicated none of those three promises will be met. A fiscal update – released a month before the government’s first budget is due – showed Canada’s deficit in the year that begins April 1 is on pace to be C$18.4 billion, even before the bulk of the government’s C$11 billion in spending promises and any other stimulus measures are accounted for. The same document shows the nation’s debt-to-GDP ratio will be rising in the coming fiscal year, not falling. Morneau also reiterated that balancing the budget in the near term would be “difficult.”
Thousands of refugees and migrants gathered at Greece’s border with the Former Yugoslav Republic of Macedonia (FYROM) on Monday, heightening concern that they will become trapped over the coming days. Some 4,000 people were estimated to have congregated at the Idomeni border crossing after FYROM refused to allow any Afghans at all or Iraqis and Syrians who did not have passports to cross from Greece. Athens said it had launched diplomatic efforts to convince Skopje to allow the Afghans, who make up around a third of arrivals, through. But the FYROM government said its decision was triggered by actions to its north. Austria, which is not accepting more than 80 refugees a day has called a summit with Albania, Bosnia, Bulgaria, Croatia, Montenegro, FYROM, Serbia, Slovenia and Kosovo tomorrow to attempt to coordinate their reaction to the refugee crisis.
Slovakia’s Prime Minister Robert Fico expressed doubts about whether the EU’s plans to reach a deal with Turkey next month on limiting the flow of migrants and refugees would be effective. “If that does not work, and I am very pessimistic, and all of us in Europe will insist on proper protection of external borders, there will be nothing left but protecting the border on the line of Greece-Macedonia and Greece-Bulgaria,” he said. FYROM’s action on its border was already having a knock-on effect in other parts of Greece yesterday. Thousands of migrants arriving at Piraeus from the Aegean islands, where almost 8,000 people arrived between Friday and Sunday, were held back at the port to avoid further overcrowding at Idomeni. Some were taken to the new transit center at Schisto.
“Our biggest fear is that the 4,000 migrants who are in Athens head up here and the place will become overcrowded,” Antonis Rigas, a coordinator of the medical relief charity Doctors Without Borders, told Reuters. Despite the rise in arrivals over the weekend, bad weather cut the number of refugees and migrants arriving in Greece by 40% last month compared to December, the European Union’s border agency Frontex said. But the number was still nearly 40 times higher than a year before. Frontex said most of the 68,000 people that reached Greece last month were Syrians, Iraqis and Afghans.
Greece has been making frantic appeals to Macedonia to open its frontier after a snap decision to tighten border controls by the Balkan state left thousands of people stranded. By midday on Monday up to 10,000 men, women and children had been trapped in Greece, with most marooned in the north. Another 4,000, newly arrived from islands off Turkey’s Aegean coast, were stuck in Athens’s port of Piraeus. The backlog came after Macedonia refused entry to Afghan refugees, claiming it was reacting to a similar move by Serbia. Amid rising tension and fears of the collapse of the passport-free Schengen zone,Greece lambasted the policies being pursued by countries to its north.
Speaking on state-run ERT television, the Greek migration minister, Yiannis Mouzalas, said: “Once again the European Union voted for something, it reached an agreement, but a number of countries lacking the culture of the European Union, including Austria, unfortunately violated this deal barely 10 hours after it had been reached.” Neighbouring countries along the Balkan corridor had in turn become enmeshed in “an outburst of scaremongering”. “The Visegrád countries have not only not accepted even one refugee; they have not sent even a blanket for a refugee,” he added, referring to the Czech Republic, Poland, Hungary and Slovakia. “Or a policeman to reinforce [EU border agency] Frontex.” Skopje said on Monday it had tightened restrictions after Austria imposed a cap on transit and asylum applications, triggering a domino effect down the migrant trail.
As officials scrambled to find accommodation for the newcomers, Athens’s leftist-led government was engaged in desperate diplomatic efforts to ease the border controls. Greece has become Europe’s main entry point for the vast numbers fleeing war and destitution in the Middle East, Africa and Asia. Last year, more than 800,000 people – the majority from Syria – passed through the country en route to Germany and other more prosperous EU member states. With the pace of arrivals showing no sign of abating – a record 11,000 people were registered on Aegean islands in the space of three days last week – Athens has been in a race against the clock to improve hosting facilities including ‘hot spot’ screening centres and camps.
Mounting questions over Turkey’s desire to stem the flow, and Greece’s ability to handle it, have fuelled fears that if nations take unilateral action to seal frontiers, hundreds of thousands will end up trapped in Europe’s most chaotic state. Battling its worst economic crisis in modern times, Athens is ill-equipped to deal with the emergency.
Greek police started removing migrants from the Greek-Macedonian border on Tuesday after additional passage restrictions imposed by Macedonian authorities left hundreds of them stranded, sources said. The migrants had squatted on rail lines in the Idomeni area on Monday after attempting to push through the border to Macedonia, angry at delays and additional restrictions in crossing. Greek police and empty buses had entered the area before dawn, a Reuters witness said. In one area seen from the Macedonian side of the border, about 600 people had been surrounded by Greek police, the witness said. There were an estimated 1,200 people at Idomeni, in their vast majority Afghans or individuals without proper travel documents.
A crush developed there on Monday after Macedonian authorities demanded additional travel documentation, including passports, for people crossing into the territory. Some countries used by migrants as a corridor into wealthier northern Europe are imposing restrictions on passage, prompting those further down the chain to impose similar restrictions for fear of a bottleneck in their own country. But there are concerns at what may happen in Greece, where a influx continues unabated to its islands daily from Turkey. On Tuesday morning, a further 1,250 migrants arrived in Athens by ferry from three Greek islands. Some of them had bus tickets to Idomeni, but it was unclear if they would be permitted to travel north from Athens.
Thessaloniki Mayor Yiannis Boutaris is absolutely right: “Refugees don’t eat people.” We are not sure if the reverse is true, as current events do not allow for any kind of certainty in the matter. For many leaders and citizens in a number of countries, refugees have already proved expendable, ready for sacrifice. A mass whose feelings don’t count, whose hopes for a better life bring laughter to those already enjoying it. This mass only acquires any significance when incorporated into the strategies of geopolitical players. In order for these strategies to succeed, it is no longer necessary to sacrifice parts of the cronies’ powers, in other words the unknown soldiers, as is usually the case when it comes to typical confrontations between countries. Being foreign and often of a different religion, the refugees are a great substitute and are inexpensive.
They constitute hundreds of thousands of pawns being moved on the map by chess-playing marshals constantly launching threats and blackmailing each other. We see this happening in bilateral and multilateral summit meetings in Brussels, London, Geneva, Vienna and Ankara, where talks focus on reaching a truce in the Syrian conflict, the allocation of refugees in European states and Turkey’s obligations, not to mention the precise rewards for fulfilling these obligations. A crucial element is that one of the biggest taboos of the post-Nazi era, threatening references to a Third World War, are forfeited during these meetings. Greece is not among the big players. It never has been. It is nowhere near Turkey in terms of size, population figures or diplomatic cynicism, which during Recep Tayyip Erdogan’s dominance has increasingly acquired delusions of grandeur.
When it comes to the refugee-migrant issue, Greece is just a pipeline, in between two taps over which it has no control. In the east, the entry tap can be opened and closed as the Turkish government pleases, depending on what suits its interests at the time: from showing a bit of good behavior through a partial containment of flows to playing the tough guy, by turning a blind eye to the smuggling rings. At the same time, Greece has very little influence over the exit tap at the Former Yugoslav Republic of Macedonia border. The neighboring country appears to be treating the current situation as a major opportunity to promote its broader interests, hence offering its services to the so-called Visegrad Four and Western Balkan countries.
No matter what else is going on, Greece must continue to honor its agreements, making the absence of morals and justice in the international political arena even more painfully clear.
As losses snowballed in U.S. stocks around midday, the best thing U.S. bulls had to say about the worst start to a year since 2001 was that there are 248 more trading days to make it up. “My entire screen is blood red – there’s nothing good to talk about,” Phil Orlando at Federated Investors said around noon in New York, as losses in the Dow Jones Industrial Average approached 500 points. “On days like today you need to take a step back, take a deep breath and let the rubble fall.” Taking a break and breathing helped: the Dow added almost 150 points in the last 30 minutes to pare its loss to 276 points.
Still, investors returning to work from holidays were greeted by the sixth-worst start to a year since 1927 for the Standard & Poor’s 500 Index, which plunged 1.5% to erase $289 billion in market value as weak Chinese manufacturing data unnerved equity markets. The selloff started in China and persisted thanks to a flareup in tension between Saudi Arabia and Iran. A report in the U.S. showed manufacturing contracted at the fastest pace in more than six years added to concerns that growth is slowing.
By many, many historically predictive valuation meassures, stocks are overvalued to the tune of 75%-100%. In the past, when stocks have been this overvalued, they have often “corrected” by crashing (1929, 1987, 2000, 2007, for example) . They have also sometimes corrected by moving sideways and down for a long, long time (1901-1920, 1966-1982, for example). After long eras of over-valuation, like the period we have been in since the late 1990s (with the notable exceptions of the lows after the 2000 and 2007 crashes), stocks have also often transitioned into an era of undervaluation, often one that lasts for a decade or more. In short, stocks are so expensive on historically predictive measures that the annual returns over the next decade are likely to net out to about 0% per year.
How we get there is anyone’s guess. But… A stock-market crash of ~50% from the peak would not be a surprise. It would also not be the “worst-case scenario,” by any means. The “worst-case scenario,” which has actually been a common scenario over history, is that stocks would drop by, say 75% peak to trough. Those are the facts. Why isn’t anyone talking about those facts? Three reasons: First, as mentioned, no one in the financial community likes to hear bad news or to be the bearer of bad news when it comes to stock prices. It’s bad for business. Second, valuation is nearly useless as a market-timing indicator. Third, yes, there is a (probably small) chance that it’s “different this time,” and all the historically predictive valuation measures are out-dated and no longer predictive. The third reason is the one that everyone who is bullish about stocks these days is implicitly or explicitly relying on: “It’s different this time.”
Some sobering words about China’s imminent crisis, not from your friendly neighborhood doom and gloom village drunk, but from BofA’s China strategist David Cui. Excerpted from “2016 Year-Ahead: what may trigger financial instability”, a must-read report for anyone interested in learning how China’s epic stock market experiment ends.
A case for financial instability – It’s widely accepted that the best leading indicator of financial instability is rapid debt to GDP growth over a period of several years as it’s a strong sign of significant malinvestment. Based on Bank of International Settlement’s (BIS) private debt data and the financial instability episodes identified in “This time is different”, a book by Reinhart & Rogoff, we estimate that once a country grows its private debt to GDP ratio by over 40% within a period of four years, there is a 90% chance that it may run into financial system trouble. The disturbance can be in the form of banking sector re-cap (with or without a credit crunch), sharp currency devaluation, high inflation, sovereign debt default or a combination of a few of these. As Chart 1 demonstrates, China’s private debt to GDP ratio rose by 75% between 2009 and 2014 (i.e., since the Rmb4tr stimulus), by far the highest in the world (we suspect a significant portion of the debt growth in HK went to China). At the peak speed, over four years from 2009 to 2012, the ratio in China rose by 49%.
Other than sovereign debt default, China has experienced all the other forms of financial instability since the open-door reform started in late 1970s, including a sharp currency devaluation in the early 1990s (Chart 3) and hyper-inflation in the late 1980s and early 1990s (Chart 4). China also needed to write-off bad debt and recap its banks every decade or so. Banking sector NPL reached some 40% in the late 1990s and early 2000s and the government had to strip off some 20% of GDP equivalent of bad debt from the banking system between 1999 and 2005.
When the debt problem gets too severe, a country can only solve it by devaluation (via the export channel), inflation (to make local currency debt worth less in real terms), writeoff/re-cap or default. We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem, particularly if the growth continues to be driven by debt-fueled investment in a weak-demand environment. We consider the most likely forms of financial instability that China may experience will be a combination of RMB devaluation, debt write-off and banking sector re-cap and possibly high inflation. Given the sizeable and unstable shadow banking sector in China and the potential of capital flight, we also think the risk of a credit crunch developing in China is high. In our mind, the only uncertainty is timing and potential triggers of such instabilities.
The Chinese authorities were battling to prop up the country’s stock markets on Tuesday after a surprise cash injection from the central bank failed to calm jitters among investors. The unexpected 130 billion yuan ($19.94 billion) injection by the central bank – the largest such move to encourage more borrowing since September – came after a 7% crash on Monday triggered a “circuit-breaker” mechanism to suspend trading for the day. The measures initially helped Chinese mainland indexes recover quickly from a steep initial fall but the selling gained the upper hand in the afternoon to leave the Shanghai Composite index down 2.16% at 5.30am GMT. Elsewhere in Asia Pacific, Japanese stocks fell for a second day in choppy trade to their lowest point since October. In Australia the ASX/S&P200 closed down 1.6% as the outlook for China continued to drag on the country’s resource-heavy market.
However, markets in Europe and the US were expected to open higher on Tuesday, according to futures trading. Beijing’s intervention on Tuesday appeared timed to reassure Chinese retail investors, who are always sensitive to liquidity signals, that the bank would support the market with cash. The People’s Bank of China offered the liquidity in the form of what are known as seven-day reverse repos at an interest rate of 2.25%, according to the statement. China’s securities regulator said it was studying rules to regulate share sales by major shareholders and senior executives in listed companies. This would address concerns that the end of a six-month lockup on share sales by major institutional investors timed for this Friday – and scheduled to free up an estimated 1.2 trillion yuan worth of shares for sale next Monday – would result in a massive institutional evacuation from stocks.
The PBOC also published nine new financial service standards that will come into effect on 1 June, to protect consumers. The China securities regulatory commission also defended the functioning of the new “circuit breaker” policy that caused Chinese stock markets to suspend trade on Monday, triggering the mechanism on the very first day it came into effect. While some analysts criticised the design of the circuit breaker, saying it inadvertently encouraged bearish sentiment, the regulator said the mechanism had helped calm markets and protect investors – although it said the mechanism needed to be further improved. Analysts and investors warned that the success of the interventions was not assured. Repeated and often heavy handed interventions by Beijing have kept stock valuations at what many consider excessively high given the slowing economy and falling corporate profits.
“We’ve been waiting for a market drop like this for a long time,” said Samuel Chien, a partner of Shanghai-based hedge fund manager BoomTrend Investment Management. “The economy is poor, stock valuation is still high, and the yuan keeps sliding. The market drop is overdue.”
China moved to support its sinking stock market as state-controlled funds bought equities and the securities regulator signaled a selling ban on major investors will remain beyond this week’s expiration date, according to people familiar with the matter. Government funds purchased local stocks on Tuesday after a 7% tumble in the CSI 300 Index on Monday triggered a market-wide trading halt, said the people, who asked not to be identified because the buying wasn’t publicly disclosed. The China Securities Regulatory Commission asked bourses verbally to tell listed companies that the six-month sales ban on major stockholders will remain valid beyond Jan. 8, the people said.
The moves suggest that policy makers, who took unprecedented measures to prop up stocks during a mid-year rout, are stepping in once again to end a selloff that erased $590 billion of value in the worst-ever start to a year for the Chinese market. Authorities are trying to prevent volatility in financial markets from eroding confidence in an economy set to grow at its weakest annual pace since 1990. The sales ban on major holders, introduced in July near the height of a $5 trillion crash, will stay in effect until the introduction of a new rule restricting sales, the people said. Listed companies were encouraged to issue statements saying they’re willing to halt such sales, they said.
The total volume of goods transported by China’s national railway dropped by a tenth last year, its biggest ever annual decline, business magazine Caixin reported on Tuesday, a figure likely to fan concerns over how sharply the economy is really slowing. Citing sources from railway operator National Railway Administration, Caixin said rail freight volumes declined 10.5% year-on-year to 3.4 billion tonnes in 2015. In comparison, volumes fell 4.7% in 2014. The amount of cargo moved by railways around China is seen as an indicator of domestic economic activity. The country’s top economic planner said last month that November rail freight volumes fell 15.6% from a year earlier.
Weighed down by weak demand at home and abroad, factory overcapacity and cooling investment, China is expected to post its weakest economic growth in 25 years in 2015, with growth seen cooling to around 7% from 7.3% in 2014. But some China watchers believe real economic growth is already much weaker than official data suggest, pointing to falling freight volumes and weak electricity consumption among other measures. Power consumption in November inched up only 0.6% from a year earlier. A private survey published on Monday showed that the factory activity contracted for the 10th straight month in December and at a sharper pace than in November, suggesting a continued gradual loss of momentum in the world’s second-largest economy.
China could once again “spook” global financial markets in 2016, the IMF’s chief economist warned. Global spillovers from China’s slowdown have been “much larger than we could have anticipated,” affecting the global economy through reduced imports and weaker demand for commodities, IMF Economic Counselor Maurice Obstfeld said in an interview posted on the fund’s website. After a year in which China’s efforts to contain a stock-market plunge and make its exchange rate more market-based roiled markets, the health of the world’s second-biggest economy will again be a key issue to watch in 2016, Obstfeld said. “Growth below the authorities’ official targets could again spook global financial markets,” he said as global equities on Monday got off to a rough start to the year.
“Serious challenges to restructuring remain in terms of state-owned enterprise balance-sheet weaknesses, the financial markets, and the general flexibility and rationality of resource allocation.” Obstfeld, who took over as chief economist at the International Monetary Fund in September, said emerging markets will also be “center stage” this year. Currency depreciation has “proved so far to be an extremely useful buffer for a range of economic shocks,” he said. “Sharp further falls in commodity prices, including energy, however, would lead to even more problems for exporters, including sharper currency depreciations that potentially trigger still-hidden balance sheet vulnerabilities or spark inflation,” he said. With emerging-market risks rising, it will be critical for the U.S. Federal Reserve to manage interest-rate increases after lifting its benchmark rate in December for the first time since 2006, Obstfeld said.
Cerro Verde, Peru – In this volcanic desert, a dusty moonscape patrolled by bats, snakes and guanacos, America’s biggest miner is piling on to the new force in industrial resources: supermines. It’s a strategy that could be driving miners into the ground. Freeport-McMoRan is completing a yearslong $4.6 billion expansion that will triple production at its Cerro Verde copper mine, turning a once-tiny, unprofitable state mine into one of the world’s top five copper producers. As Cerro Verde’s towering concrete concentrators grind out copper to be made into pipes and wires in Asia, it will add to production coming from newly built giant mines around the world, in a wave of supply that is compounding the woes of the depressed mining sector.
Slowing growth in China and other emerging markets has dragged metals prices into a deep downturn, just a few years after mining companies and their investors bet billions on a so-called supercycle, the seemingly never-ending growth in demand for commodities. Back then, miners awash in cheap money set out to build the biggest mines in history, extracting iron ore in Australia, Brazil and West Africa, and copper from Chile, Peru, Indonesia, Arizona, Mongolia and the Democratic Republic of Congo. They also expanded production of minerals such as zinc, nickel and bauxite, which is mined to make aluminum. Those giant mines are now giving the industry an extra-bad hangover during the bust.
The big mines cost so much to build and extract minerals so efficiently that mothballing them is unthinkable—running them generates cash to pay down debts, and huge mines are expensive to simply maintain while idle. But as a result, their scale means they are helping miners dig themselves even deeper into the price trough by adding to a glut. The prolonged price slump has forced miners to make painful cuts. In December, Anglo American, which recently completed a supermine in Brazil that went over budget by $6 billion, announced 85,000 new job cuts, asset sales and a suspended dividend. On the same day, Rio Tinto, which has built supermines in Western Australia, cut spending plans, while in September, Glencore suspended its dividend and raised $2.5 billion in stock as part of a plan to cut debt.
The debt payments of Detroit Public Schools — already the highest of any school district in Michigan — are set to balloon in February to an amount nearly equal to the school district’s payroll and benefits as the city school system teeters on the edge of insolvency. Detroit Public Schools has to begin making monthly $26 million payments starting in less than a month to chip away at the $121 million borrowed this school year for cash flow purposes and $139.8 million for operating debts incurred in prior years. The city school system’s total debt payments are 74% higher from last school year. The debt costs continue to mount while Gov. Rick Snyder and the Legislature remain at odds over how to rescue Michigan’s largest school district.
A bankruptcy of the district could leave state taxpayers on the hook for at least $1.5 billion in DPS debt. The school district’s payroll and health care benefits are projected to cost $26.8 million in February — meaning the debt payments will be 97% of payroll. General fund operating debt payments that exceed 10% of payroll are “a major warning flag,” municipal bond analyst Matt Fabian said. “That’s extremely high,” said Fabian, managing director of Municipal Market Advisors in Concord, Massachusetts, who also followed the city of Detroit’s bankruptcy case. “That’s no longer, really, a normal school district. The school district has turned into a debt-servicing entity. It’s making its own mission impossible.” As a result, the Detroit district won’t have enough cash to pay any bills in four months.
More than 2.5 million families in England are being forced to cut back on essentials such as heating and clothing this winter to pay their rent or mortgage, according to housing charity Shelter. Its research also found that one in 10 parents were worried about whether they would be able to afford to meet their housing payments this month. The charity’s findings coincided with separate research from National Debtline showing that more than 5.5 million Britons said they were likely to fall behind with their finances in January as a result of Christmas spending. The two surveys underline the strain that many individuals and families are under as the new year begins, with some so worried about their situation that they sought online advice on Boxing Day.
As part of the Shelter research, YouGov questioned more than 4,500 adults during November, including around 850 parents with children aged 18 and under. It found that 27% of parents – the equivalent of almost 2.7 million people in England – said they had already cut back on either using energy to heat their home or buying warm clothing to help meet their rent or mortgage payments this winter. Around 10% of parents said they were worried about being able to afford to pay their monthly rent or mortgage, while 15% told the researchers they were already planning to cut back on buying festive food, or had used savings meant for Christmas presents to help meet their housing costs this winter. Shelter said a shortage of affordable homes had left many families struggling with “sky-high” housing costs, and was part of the reason why more than 100,000 people had sought advice on housing debt from its online, phone-based and face-to-face services in the past year.
Brazil’s economy will contract more than previously forecast and is heading for the deepest recession since at least 1901 as economic activity and confidence sink amid a political crisis, a survey of analysts showed. Latin America’s largest economy will shrink 2.95% this year, according to the weekly central bank poll of about 100 economists, versus a prior estimate of a 2.81% contraction. Analysts lowered their 2016 growth forecast for 13 straight weeks and estimate the economy contracted 3.71% last year. Brazil’s policy makers are struggling to control the fastest inflation in 12 years without further hamstringing a weak economy.
Finance Minister Nelson Barbosa, who took the job in December, has faced renewed pressure to moderate austerity proposals aimed at bolstering public accounts and avoiding further credit downgrades. Impeachment proceedings and an expanding corruption scandal have also been hindering approval of economic policies in Congress. “We’re now taking into account a very depressed scenario,” Flavio Serrano, senior economist at Haitong in Sao Paulo, said by phone. Central bank director Altamir Lopes said on Dec. 23 the institution will adopt necessary policies to bring inflation to its 4.5% target in 2017.
Less than a week later, the head of President Dilma Rousseff’s Workers’ Party, Rui Falcao, said Brazil should refrain from cutting investments and consider raising its inflation target to avoid higher borrowing costs. Consumer confidence as measured by the Getulio Vargas Foundation in December reached a record low. Business confidence as measured by the National Industry Confederation fell throughout most of last year, rebounding slightly from a record low in October. The last time Brazil had back-to-back years of recession was 1930 and 1931, and has never had one as deep as that forecast for 2015 and 2016 combined, according to data from national economic research institute IPEA that dates back to 1901.
The U.S. Justice Department on Monday filed a civil lawsuit against Volkswagen for allegedly violating the Clean Air Act by installing illegal devices to impair emission control systems in nearly 600,000 vehicles. The allegations against Volkswagen, along with its Audi and Porsche units, carry penalties that could cost the automaker billions of dollars, a senior Justice Department official said. VW could face fines in theory exceeding $90 billion – or as much as $37,500 per vehicle per violation of the law, based on the complaint. In September, government regulators initially said VW could face fines in excess of $18 billion. “The United States will pursue all appropriate remedies against Volkswagen to redress the violations of our nation’s clean air laws,” said Assistant Attorney General John Cruden, head of the departments environment and natural resources division.
The Justice Department lawsuit, filed on behalf of the Environmental Protection Agency, accuses Volkswagen of four counts of violating the U.S. Clean Air Act, including tampering with the emissions control system and failing to report violations. The lawsuit is being filed in the Eastern District of Michigan and then transferred to Northern California, where class-action lawsuits against Volkswagen are pending. “We’re alleging that they knew what they were doing, they intentionally violated the law and that the consequences were significant to health,” the senior Justice Department official said. The Justice Department has also been investigating criminal fraud allegations against Volkswagen for misleading U.S. consumers and regulators. Criminal charges would require a higher burden of proof than the civil lawsuit.
The civil lawsuit reflects the expanding number of allegations against Volkswagen since the company first admitted in September to installing cheat devices in several of its 2.0 liter diesel vehicle models. The U.S. lawsuit also alleges that Volkswagen gamed emissions controls in many of its 3.0 liter diesel models, including the Audi Q7, and the Porsche Cayenne. Volkswagen’s earlier admissions eliminate almost any possibility that the automaker could defend itself in court, Daniel Riesel of Sive, Paget & Riesel P.C, who defends companies accused of environmental crimes, said. To win the civil case, the government does not need to prove the degree of intentional deception at Volkswagen – just that the cheating occurred, Riesel said. “I don’t think there is any defense in a civil suit,” he said. Instead, the automaker will seek to negotiate a lower penalty by arguing that the maximum would be “crippling to the company and lead to massive layoffs,” Riesel said.
As Europe belatedly gets around to repairing its weakest banks, investors who have lent to financial institutions by buying bonds face a brave new world. Their money can effectively be confiscated to plug balance-sheet holes. Recent events in Portugal suggest that the authorities should be wary of treating bondholders as piggybanks, or risk destroying a key source of future funds for the finance industry. Let’s begin with the “what” before we get to the “why.” Here’s what happened to the prices of five Portuguese bank bonds in the past few days: Picture the scene. You left the office on Dec. 29 owning Portuguese bank debt that was trading at about 94% of face value. In less than 24 hours, you lost 80% of your money. So what happened? Last year, Portugal divided Banco Espirito Santo, previously the nation’s largest lender, into a “good” bank and a “bad” bank.
If you owned any of those five bonds on Tuesday, you were owed money by Novo Banco, the good bank. On Wednesday, you were told that your bonds had been transferred to BES, the bad bank. The Portuguese central bank selected five of Novo Banco’s 52 senior bonds, worth about €1.95 billion, and reassigned them – thus backfilling a €1.4 billion hole in the “good” bank’s balance sheet that had been revealed in November by the ECB’s stress tests of the institution. At the time of those tests, the value of Novo Banco bonds rose because the capital shortfall was lower than some investors had feared, and the good bank was widely expected to be able to mend the deficit by selling assets. Instead, the Dec. 30 switcheroo means selected bondholders are footing that bill.
Here is where the shoe pinches. The documentation for senior debt typically stipulates that all such debt is what’s called “pari passu”; that is, all securities rank equally, and none should get preferential treatment. But by moving just five bonds off the healthy bank’s balance sheet, Portugal has destroyed the principle of equality between debt securities. There’s nothing inherently wrong with “bailing in” bondholders who’ve lent to a failing institution. It’s certainly preferable to the old solution of using taxpayers’ money to shore up failed banks, and it’s enshrined in the EU’s new Bank Resolution and Recovery Directive, which came into effect on Jan. 1. But the principle of equal treatment for ostensibly identical securities is a key feature of the bond market. If investors fear they’re at the mercy of capricious regulatory decisions in a restructuring, they’ll think more than twice before lending to banks.
Russia has updated a bunch of strategies to fight against threats to its national security, as demonstrated by the document “About the Strategy of National Security of the Russian Federation,” which President Vladimir Putin signed on New Year’s Eve. Amid ongoing clashes with the West over Ukraine and other fronts, leaders of the country have chosen to stand up to Western threats, while attaching growing importance to security cooperation across the Asia-Pacific. On the one hand, the West has shown substantial willingness, following visits to Moscow by leaders or senior representatives of major Western powers, to work with the Kremlin on a global anti-terror campaign and a political settlement of the protracted conflict in Syria.
On the other hand, one can hardly deny new friction and tensions would arise during this engagement, considering the fact that the West remains vigilant about a Russia that aspires to regain its global stature. Taking into account the enormous changes in the geopolitical, military and economic situation, the document, a revised version of the 2009 one, calls for the consolidation of “Russia’s status of a leading world power.” Russia believes it is now confronted with a host of threats, both traditional and new, such as the expansion of NATO, military build-up and deployment in its neighboring countries, a new arms race with the United States, as well as attempts to undermine the Moscow regime and to incite a “color revolution” in the country. Last year has witnessed repeated saber-rattling between Russia and NATO.
The expansion of the alliance, which saw a need to adapt to long-term security challenges with special interests in deploying heavy weapons in Eastern Europe and the Baltic countries, was blamed for the current military situation in the region and its cooling relationship with Moscow that has warned it would respond to any military build-up near Russian borders. At the same time, sanctions imposed by the United States and its allies over Moscow’s takeover of the Black Sea peninsula Crimea and its alleged role in the Ukraine crisis, together with the ongoing fall in oil prices, have once again drawn attention to Russia’s over-reliance on exports of raw materials and high vulnerability to the fluctuations in foreign markets, which the new document described as “main strategic threats to national security in the economy.”
Moreover, the daunting provocation and infiltration of the Islamic State terrorist group have just made Russia’s security concerns even graver. Domestically, Moscow has tightened security measures since Islamic extremists threatened attacks and bloodshed in the country. Globally, it has long been calling for a unified coalition, including collaboration with the United States, to double down on the anti-terror battle. As antagonism between Russia and the West currently shows little signs of receding, Moscow has begun to turn eastward, a strategic transition that is reflected by the national security blueprint. Mentioning specific relations with foreign countries, the document noted firstly that the strategic partnership of coordination with China is a key force to uphold global and regional stability. It then mentioned the country’s “privileged strategic partnership” with India.
There should be little doubt that Saudi Arabia wanted to escalate regional tensions into a crisis by executing Shi’ite cleric Nimr al-Nimr. On the same day, Riyadh also unilaterally withdrew from the ceasefire agreement in Yemen. By allowing protestors to torch the Saudi embassy in Tehran in response, Iran seems to have walked right into the Saudi trap. If Saudi Arabia succeeds in forcing the US into the conflict by siding with the kingdom, then its objectives will have been met. It is difficult to see that Saudi Arabia did not know that its decision to execute Nimr would cause uproar in the region and put additional strains on its already tense relations with Iran. The inexcusable torching of the Saudi embassy in Iran -Iranian President Hassan Rouhani condemned it and called it “totally unjustifiable,” though footage shows that Iranian security forces did little to prevent the attack- in turn provided Riyadh with the perfect pretext to cut diplomatic ties with Tehran.
With that, Riyadh significantly undermined U.S.-led regional diplomacy on both Syria and Yemen. Saudi Arabia has long opposed diplomatic initiatives that Iran participated in– be it in Syria or on the nuclear issue — and that risked normalizing Tehran’s regional role and influence. Earlier, Riyadh had successfully ensured Iran’s exclusion from Syria talks in Geneva by threatening to boycott them if Iran was present, U.S. officials have told me. In fact, according to White House sources, President Barack Obama had to personally call King Salman bin Abdulaziz Al Saud to force the Saudis to take part in the Vienna talks on Syria this past fall. Now, by having cut its diplomatic relations with Iran, the Saudis have the perfect excuse to slow down, undermine and possibly completely scuttle these U.S.-led negotiations, if they should choose to do so.
From the Saudi perspective, geopolitical trends in the region have gone against its interests for more than a decade now. The rise of Iran – and Washington’s decision to negotiate and compromise with Tehran over its nuclear program – has only added to the Saudi panic. To follow through on this way of thinking, Riyadh’s calculation with the deliberate provocation of executing Nimr may have been to manufacture a crisis — perhaps even war — that it hopes can change the geopolitical trajectory of the region back to the Saudi’s advantage. The prize would be to force the United States to side with Saudi Arabia and thwart its slow but critical warm-up in relations with Tehran. As a person close to the Saudi government told the Wall Street Journal: “At some point, the U.S. may be forced to take sides [between Saudi Arabia and Iran]… This could potentially threaten the nuclear deal.”
Forecast 2016 There’s really one supreme element of this story that you must keep in view at all times: a society (i.e. an economy + a polity = a political economy) based on debt that will never be paid back is certain to crack up. Its institutions will stop functioning. Its business activities will seize up. Its leaders will be demoralized. Its denizens will act up and act out. Its wealth will evaporate. Given where we are in human history — the moment of techno-industrial over-reach — this crackup will not be easy to recover from; not like, say, the rapid recoveries of Japan and Germany after the brutal fiasco of World War Two. Things have gone too far in too many ways. The coming crackup will re-set the terms of civilized life to levels largely pre-techno-industrial. How far backward remains to be seen.
Those terms might be somewhat negotiable if we could accept the reality of this re-set and prepare for it. But, alas, most of the people capable of thought these days prefer wishful techno-narcissistic woolgathering to a reality-based assessment of where things stand — passively awaiting technological rescue remedies (“they” will “come up with something”) that will enable all the current rackets to continue. Thus, electric cars will allow suburban sprawl to function as the preferred everyday environment; molecular medicine will eliminate the role of death in human affairs; as-yet-undiscovered energy modalities will keep all the familiar comforts and conveniences running; and financial legerdemain will marshal the capital to make it all happen.
Oh, by the way, here’s a second element of the story to stay alert to: that most of the activities on-going in the USA today have taken on the qualities of rackets, that is, dishonest schemes for money-grubbing. This is most vividly and nauseatingly on display lately in the fields of medicine and education — two realms of action that formerly embodied in their basic operating systems the most sacred virtues developed in the fairly short history of civilized human endeavor: duty, diligence, etc. I’ve offered predictions for many a year that this consortium of rackets would enter failure mode, and so far that has seemed to not have happened, at least not to the catastrophic degree, yet.
I’ve also maintained that of all the complex systems we depend on for contemporary life, finance is the most abstracted from reality and therefore the one most likely to show the earliest strains of crackup. The outstanding feature of recent times has been the ability of the banking hierarchies to employ accounting fraud to forestall any reckoning over the majestic sums of unpayable debt. The lesson for those who cheerlead the triumph of fraud is that lying works and that it can continue indefinitely — or at least until they are clear of culpability for it, either retired, dead, or safe beyond the statute of limitations for their particular crime.
Gliding high above the Baltic Sea under pylons that stretch 669-feet into the air, the daily commute across Europe’s longest rail and road link was once a symbol of integration in the region. But for many of the 15,000 people who commute daily across the Oeresund Bridge between Malmoe, Sweden’s third-largest city, and Copenhagen, the trip to work and back just became a lot more difficult. On Monday, Sweden imposed identification checks on people seeking to enter by road, rail or ferry after the country was overwhelmed by a record influx of refugees. The development “doesn’t fit with anyone’s vision for the Oeresund region,” Ole Stavad, a former Social Democrat minister once in charge of Nordic cooperation, said in an interview. “This isn’t just about Oeresund, Copenhagen, Malmoe or Scania. It’s about all of Sweden and Denmark.”
He predicts economic pain for both countries “unless this issue is resolved.” If not even Sweden and Denmark can get along, that doesn’t bode well for the rest of Europe, which is now grappling with the ever-present threat of terrorism, a groundswell in nationalism and sclerotic economic growth. And the ripple effects are already starting. Twelve hours after the Swedish controls came into force, Denmark introduced spot checks on its border with Germany, threatening the passport-free travel zone known as Schengen. The move, which has yet to be approved by Schengen’s guardian, the EU, has not pleased Berlin. And mutual recriminations are flying in Scandinavia. The Danes say they were forced to impose their measures after Sweden enforced its controls.
The Swedes blame the Danes for not sharing the burden of absorbing refugees. Sweden received around 163,000 asylum applications in 2015, compared with Denmark’s 18,500. The controls are placing an unexpected burden on workers who had bought into the idea of an international business area of 3.7 million inhabitants. The Malmoe-based Oeresund Institute, a think-tank, estimates the daily cost of checks on commuters alone are 1.3 million kroner ($190,000). Denmark’s DSB railway says it costs it 1 million kroner in lost ticket sales and expenses for travel across a stretch made famous by the popular Scandinavian crime series “The Bridge.”
Greek coast guard officers found the bodies of four people, thought to be migrants, in the sea near the islands of Fournoi in the eastern Aegean. The bodies, of three men and one woman, were found on Sunday in an advanced state of decomposition, according to authorities. The coast guard also rescued 160 migrants and arrested two traffickers off Samos on Sunday.
A Turkish news agency says the bodies of nine drowned migrants, including children, have washed up on a beach on Turkey’s Aegean coast after their boat capsized in rough seas. The Dogan news agency says the bodies were discovered early on Tuesday in the resort town of Ayvalik, from where migrants set off on boats to reach the Greek island of Lesvos. Turkish coasts guards were dispatched to search for possible survivors. Eight migrants were rescued. Dogan video footage showed a body, still wearing a life jacket, being pulled from the sea onto the sandy beach. There was no immediate information on the migrants’ nationalities.
A spate of jumbo corporate debt offerings has lifted US issuance to a record high as companies seek to lock in financing to fund multibillion-dollar acquisitions before the Federal Reserve lifts rates for the first time since the financial crisis. US multinationals have raised more than $132bn in so-called jumbo-deals debt offerings above $10bn in size in 2015, more than a fourfold increase from a year earlier as companies including Microsoft, Hewlett-Packard Enterprise and UnitedHealth take advantage of low interest rates, according to data from Dealogic. The offerings have buoyed overall corporate debt deal values in the US to a record of $815bn, with more than a month and a half to go before year end. The figure surpasses the previous high set in 2014 of $746bn.
There has been strong investor appetite for the debt offerings, which have been used to fund acquisitions, buy back stock and pay for dividends, leading bond funds to balloon in size. “It’s two years of incredible issuance flows”, says Mitch Reznick at Hermes Investment Management. “It’s driven by a desire to get financing done ahead of lift-off and a lot of this is going into M&A … The issuance just continues and continues.” After a slow summer, with companies braced for a rise in interest rates that never came as they struggled with the global oil price rout, issuance has picked up. Close to $30bn of debt has been raised in each of the past two weeks. It has been a particularly big year for highly rated debt, with issuance at a record $633bn. The $182bn worth of junk bond sales trail the 2012 peak of $246bn.
The former U.S. comptroller general says the real U.S. debt is closer to about $65 trillion than the oft-cited figure of $18 trillion. Dave Walker, who headed the Government Accountability Office (GAO) under Presidents Bill Clinton and George W. Bush, said when you add up all of the nation’s unfunded liabilities, the national debt is more than three times the number generally advertised. “If you end up adding to that $18.5 trillion the unfunded civilian and military pensions and retiree healthcare, the additional underfunding for Social Security, the additional underfunding for Medicare, various commitments and contingencies that the federal government has, the real number is about $65 trillion rather than $18 trillion, and it’s growing automatically absent reforms,” Walker told New York’s AM-970 in an interview airing Sunday.
The former comptroller general, who is in charge of ensuring federal spending is fiscally responsible, said a burgeoning national debt hampers the ability of government to carry out both domestic and foreign policy initiatives.“If you don’t keep your economy strong, and that means to be able to generate more jobs and opportunities, you’re not going to be strong internationally with regard to foreign policy, you’re not going to be able to invest what you need to invest in national defense and homeland security, and ultimately you’re not going to be able to provide the kind of social safety net that we need in this country,” he said.
He said Americans have “lost touch with reality” when it comes to spending. Walker called for Democrats and Republicans to put aside partisan politics to come together to fix the problem. “You can be a Democrat, you can be a Republican, you can be unaffiliated, you can be whatever you want, but your duty of loyalty needs to be to country rather than to party, and we need to solve some of the large, known, and growing problems that we have,” he said.
The blowout U.S. jobs report for October means the Federal Reserve may be weeks away from raising interest rates. For U.S. savers earning next to nothing on $2.6 trillion of money-market mutual funds, the move will barely register. The reason is that there’s an unprecedented shortfall in the safest assets, especially Treasury bills – a mainstay of money funds and traditionally the government obligations that are most sensitive to changes in Fed policy. The shortage means some key money-fund rates will probably remain near historic lows even if the central bank increases its benchmark from near zero next month. The phenomenon is a consequence of regulators’ efforts to curb risk after the financial crisis.
Money-market industry rules set to take effect in October 2016 may lead investors and fund companies to shift as much as $650 billion into short-maturity government obligations, according to JPMorgan Chase. Meanwhile, the amount of bills as a share of government debt is the lowest since at least 1996, at about 10%, and the Treasury is just beginning to ramp up issuance of the securities after slashing it amid the debt-ceiling impasse. “The demand for high-quality short-term government debt securities is insatiable and there is just not enough supply,” said Jerome Schneider at PIMCO. “Even given the increased bill sales coming as the debt-limit issue has passed, it won’t keep up with rising demand from regulatory forces. This will keep rates low.”
While the U.S. government stands to benefit as the imbalance holds down borrowing costs, it’s proving the bane of savers. Average yields for the biggest money-market funds, which buy a sizable chunk of the $1.3 trillion Treasury bills market, haven’t topped 0.1% since 2010, according to Crane Data. In 2007, they were above 5% before the Fed started slashing rates to support the economy. With returns this low, investors have less incentive to sock away cash. The Standard & Poor’s 500 index has earned 3.8% this year, including dividends.
Her name is Kathryn. Every few weeks, I’ll answer the phone, and someone will want to talk to her. In fact, whoever is on the other end of the line will insist on talking to her. They assume that I am her, even when I inform her that I’m not and that I don’t know who she is. They threaten that if I don’t bring her to the phone, I’ll face “consequences”. Sometimes I’ll get two phone calls a day, every day of the week. These debt collectors want Kathryn to repay some student loans, and every time her file is sold to a new agency, my phone number is transferred along with it – and I have to begin convincing a new bunch of folks that this isn’t the way to find her. Halloween may be over, but the world of zombie debt is a year-round horror show.
Aggressive collectors buy credit card accounts from original lenders like Chase or Bank of America that have been written off as in default and impossible to collect on. Having paid only pennies for every dollar owed to acquire these accounts, the new collectors have a big financial incentive to collect the maximum they can – it’s not about recouping money but about seeing how much they can make. Getting someone to agree to pay $1 for every $10 of debt owed could mean a 100% return. Small wonder that a number of players in this space resort to abusive practices, and the Federal Trade Commission (FTC) announced last week a new nationwide initiative involving not only 47 attorneys general and many state regulatory agencies but also numerous local bodies and even a Canadian provincial regulator.
Operation Collection Protection will try to halt the industry’s worst practices – and it’s needed, says Edith Ramirez, chairwoman of the FTC. “We receive more complaints about this industry than any other,” she told a press conference last Thursday, noting that debt collectors make a billion contacts a year with consumers. “The majority [of those] are legal. Many are not.” With consumer debt climbing steadily, the problem is more likely to grow than to diminish. In 2010, Americans had total consumer debt of nearly $2.5tn, Ramirez said. Today, excluding mortgage debt, that figure is closer to $3.34tn (with mortgages added to the mix, it would be more than $11tn), and the average household has a credit card balance that stands at $7,281. When you consider the fact that many Americans don’t have credit cards or don’t carry balances, that average balance is actually much higher.
True, new rules mean that it’s harder for banks and credit card purveyors to get students to load up on debt, over and above their student loans. And more households are being more disciplined in how they use their credit cards, paying off their balance in full. But there also are some troubling signs, including the Federal Reserve’s survey results showing that of those Americans who carried a balance from one month to the next, more than half made only the minimum payment on their accounts. It’s those folks who are most at risk of ending up fielding calls from debt collectors down the road.
Dollar bulls have reason to be wary of the currency’s Friday rally on stronger-than-forecast U.S. labor data. The jobs report bolstered the case for a December interest-rate increase by the Federal Reserve and propelled a broad gauge of the greenback past this year’s previous high. Yet the last time the dollar was this strong, the central bank flagged it as a burden on exporters and a damper of inflation, driving the currency down by the most since 2009. The March experience is raising red flags for investors and strategists. A surging dollar may lead Fed officials to warn that currency moves will limit rate increases in 2016, even if they boost their benchmark next month from near zero, where it’s been since 2008.
“It’s going to be really hard for them to hike rates aggressively,” said Brendan Murphy, a senior portfolio manager at Standish Mellon. Once the Fed lifts rates, “you may be nearing the end of this broader move we’ve seen in the dollar.” Murphy says he’s betting on the greenback versus the euro and currencies from commodity exporting nations, but he’s trimmed positions since the start of the year. The dollar appreciated to its strongest level since April versus the euro and its highest in more than two months versus the yen after a Labor Department report showed U.S. employers added 271,000 workers in October, the most this year.
The world’s economy is growing at a slower pace than the IMF and other large forecasters are predicting. That’s according to Nils Smedegaard Andersen, CEO at A.P. Moeller-Maersk. His company, owner of the world’s biggest shipping line, is a bellwether for global trade, handling about 15% of all consumer goods transported by sea. “We believe that global growth is slowing down,” he said in a phone interview. “Trade is currently significantly weaker than it normally would be under the growth forecasts we see.” The IMF on Oct. 6 lowered its 2015 global gross domestic product forecast to 3.1% from 3.3% previously, citing a slowdown in emerging markets driven by weak commodity prices. It also cut its 2016 forecast to 3.6% from 3.8%.
But even the revised forecasts may be too optimistic, according to Andersen. “We conduct a string of our own macro-economic forecasts and we see less growth – particularly in developing nations, but perhaps also in Europe – than other people expect in 2015,” Andersen said. Also for 2016, “we’re a little bit more pessimistic than most forecasters.” Maersk’s container line on Friday reported a 61% slump in third-quarter profit as demand for ships to transport goods across the world hardly grew from a year earlier. The low growth rates are proving particularly painful for an industry that’s already struggling with excess capacity.
Trade from Asia to Europe has so far suffered most as a weaker euro makes it tougher for exporters like China to stay competitive, Andersen said. Still, there are no signs yet that the global economy is heading for a slump similar to one that followed the financial crisis of 2008, he said. “We’re seeing some distortions amid this redistribution that’s taking place between commodity exporting countries and commodity importing countries,” he said. “But this shouldn’t lead to an outright crisis. At this point in time, there are no grounds for seeing that happening.”
Profits at major Japanese companies are on track to fall for the first time in more than a year during the third quarter, partly the result of a slowdown in China’s economy. Earnings fell a combined 3.2% from a year earlier, according to data compiled by SMBC Nikko Securities that covered 70% of companies listed on the first section of the Tokyo Stock Exchange with a financial year ending March 31. All had released quarterly earnings as of Friday. If that result holds after all companies have reported, it would be the first decline since earnings fell 7% in the second quarter of 2014, after a sales-tax increase hit Japanese consumers and set off a recession. Now external factors are playing a bigger role, analysts say. As China’s economy has cooled further, for example, its steel makers unloaded supply on the international market, driving prices lower and hurting their Japanese competitors.
Kobe Steel Ltd. saw its profit fall by more than half during the fiscal first half and cut its projection for full-year earnings by another 20%, after lowering it by half in September. Nippon Steel & Sumitomo, meanwhile, saw its shares tumble last week after it lowered its full-year net profit forecast by 31%. JFE Holdings Inc. downgraded its full-year ordinary profit outlook by 50%. “The China-related sectors performed poorly, especially Japan’s top three steel makers, who were hit hard by an oversupply of Chinese steel,” said Atsushi Watanabe at Mitsubishi UFJ Morgan Stanley. Komatsu, which makes heavy machinery, said its sales to China fell by half during the first half of the fiscal year, and reported a 16.5% drop in net profit. Demand in China showed no signs of improving in the most recent quarter after worsening in the previous quarter, said Yasuhiro Inagaki, the company’s senior executive officer and general manager for business coordination.
China’s exports fell for a fourth straight month and imports matched a record stretch of declines, signaling that the mounting drag from slower global growth will push policy makers toward expanding stimulus. Overseas shipments dropped 6.9% in October in dollar terms, the customs administration said Sunday, a bigger decline than estimated by all 31 economists in a Bloomberg survey. Weaker demand for coal, iron and other commodities for China’s declining heavy industries helped drag imports down 18.8% in dollar terms, leaving a record trade surplus of $61.6 billion.
The report signals that policy makers may need to unleash more fiscal stimulus to support growth even after the People’s Bank of China cut the main interest rate six times in the last year to a record low and devalued the currency. The government has already relaxed borrowing rules for local authorities, and the top economic planning body has stepped up project approvals. “The October trade data keep pressure on for more domestic easing,” said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. “Measures are likely to continue to focused on shoring up domestic demand rather than weakening the currency. And over time the role of fiscal policy expansion should rise.”
China’s exports fell in October for the fourth consecutive month, as a once-powerful engine of the country’s growth continued to sputter in the face of weak global demand. The world’s appetite for goods from China—the world’s second-largest economy accounts for nearly one-fifth of global factory exports—has been lower than expected this year. Meanwhile, weak domestic demand continues to reduce imports. Both are contributing to China’s growth slowdown. “The mix of the data is again not encouraging,” said Commerzbank economist Zhou Hou. “Trade momentum is unlikely to turn around in the near term.” Sunday’s results suggest the export scene is worsening. China’s General Administration of Customs said October exports fell 6.9% year-over-year in dollar terms, after a drop of 3.7% in September.
Imports in October fell by a sharper-than-expected 18.8% from a year earlier, after a 20.4% fall in September. China’s trade surplus widened in October to $61.64 billion from $60.3 billion in September. China’s Commerce Ministry said Thursday in a report that exports are likely to see little increase in 2015, while imports will likely report a “relatively big” decline as falling commodity prices continue to weigh on trade flows. China’s rising labor and land costs in recent years have weakened the competitiveness of the nation’s exporters, the Commerce Ministry said. The average wage for workers in coastal provinces, including the manufacture hub of Guangdong province, has reached $600 a month, twice the level of Southeast Asian countries.
The flood of steel that mills in China are pushing onto global markets eased from a record in October amid rising trade frictions and weak overseas demand, signaling that what’s been a safety valve for the world’s top producer may now be starting to close. Outbound cargoes shrank 20% to 9.02 million metric tons last month from September, according to customs data released on Sunday. That was the lowest figure since June, and below the monthly average so far this year of 9.21 million tons. “The slump in steel exports last month compared with September reflects rising trade frictions for Chinese products,” Helen Lau at Argonaut Securities said by e-mail on Sunday.
China’s mills, which account for half of global production, have exported unprecedented volumes of steel this year to try to counter contracting demand in Asia’s top economy. The surge has undermined prices and increased competition from India to Europe and the U.S., spurring complaints that the trade is unfair. While down on-month, China has still shipped 25% more steel this year than in the same period of 2014. The global steel market is being overwhelmed with metal coming from China’s state owned and state-supported producers, a collection of industry groups including the American Iron and Steel Institute said on Thursday. The next day, ArcelorMittal cut its full-year profit target, citing exceptionally low Chinese export prices.
Evidence of cases against Chinese steel imports is surfacing worldwide. Last week, the U.S. Department of Commerce said it planned duties of 236% on imports of corrosion-resistant steel from five Chinese companies. More than 20 cases have been lodged against China’s cargoes, with about seven from Southeast Asia. “Lower steel exports reflect waning demand from overseas trading partners,” Xu Huimin at Huatai Great Wall Futures said before the data. Financial markets and many businesses in China were closed Oct. 1-7, which may have also contributed to the drop in exports, Xu said.
Inbound cargoes of iron ore shrank 12% to 75.52 million tons last month from September, according to the customs figures. Purchases totaled 774.5 million tons in the first 10 months, little changed compared with the same period a year earlier, the data showed. China is the world’s largest buyer. Iron ore stockpiled at Chinese ports rose 1.5% to 86 million tons in the week to Nov. 6, according to Shanghai Steelhome Information. Ore with 62% content delivered to Qingdao was at $48.21 a dry ton on Friday, 32% lower this year, according to Metal Bulletin Ltd.
The closed-door meeting of some of China’s most powerful economic mandarins this fall was getting tense. Their boss, President Xi Jinping, was already unhappy he was taking the blame for the economic gloom that had settled over China this summer, and it was their job to come up with ways to fix it. Officials from the state planning commission at the Sept. 22 meeting in a conference room at the agency’s headquarters called for the kind of big spending on airports, roads and other government projects that Beijing had relied on to rev up the economy in recent years, according to internal minutes of the meeting. Finance-ministry officials disagreed, favoring a plan to encourage Chinese consumers to buy more electronics, cars, clothes and other goods China churns out.
But most in the room agreed on one thing: It would be hard to proceed with plans to liberalize the tightly controlled economy and still hope to meet Mr. Xi’s 7% GDP-growth target for 2015. Such plans, laid out in better times, weren’t likely to deliver the shot of growth China’s economy needed. “Reform itself faces huge problems,” said an attendee at the Sept. 22 meeting, which gathered officials of the National Development and Reform Commission—the planning agency—and the finance ministry, according to the minutes, reviewed by The Wall Street Journal. “It’s doubtful that any reform dividends can be translated into economic growth in the foreseeable future.” In the weeks following, China has taken new steps to slow plans that had been meant to loosen control over the financial system, adding to similar delaying moves since summer.
Some steps have the effect of keeping industries on life support. On Oct. 23, the central bank scrapped its cap on deposit rates. But it backed away from freeing interest rates from its control, as it was previously expected to do, saying it feared that might raise funding costs for businesses and consumers. Other steps seek to hold money in the domestic economy rather than letting it flow abroad. On Oct. 30, the central bank and other agencies dialed back on plans for Shanghai’s free-trade zone, a testing ground for financial overhauls, that would have let residents more easily buy foreign assets.Many measures China’s leaders have delayed since summer are ones that economists and some Chinese leaders have long said are needed to put the world’s second-largest economy on a sustainable growth path in coming years.
A Euro Working Group held via teleconference on Sunday failed to result in an agreement between Greece and its lenders ahead of Monday’s Eurogroup. A high-ranking European official told Kathimerini’s Brussels correspondent Eleni Varvitsiotis said it was agreed that the two sides would try to settle the outstanding issues by Wednesday so that another Euro Working Group, possibly with officials meeting in person, could be held on Friday. During Sunday’s teleconference it was made clear to the Greek participants that Athens is already three weeks behind schedule, Kathimerini understands. The key stumbling block is primary residence foreclosures. Greece has put forward stricter criteria that protects 60% of homeowners, while suggesting that this is then gradually reduced over the next years. Greek officials will continue deliberating with their eurozone colleagues over the next hours in a bid to ensure that Monday’s Eurogroup does not end in a negative manner.
Coal consumption is poised for its biggest decline in history, driven by China’s battle against pollution, economic reforms and its efforts to promote renewable energy. Global use of the most polluting fuel fell 2.3% to 4.6% in the first nine months of 2015 from the same period last year, according to a report released Monday by the environmental group Greenpeace. That’s a decline of as much as 180 million tons of standard coal, 40 million tons more than Japan used in the same period. The report confirms that worldwide efforts to fight global warming are having a significant impact on the coal industry, the biggest source of carbon emissions. It comes a day before the International Energy Agency is scheduled to release its annual forecast detailing the ways the planet generates and uses electricity.
“These trends show that the so-called global coal boom in the first decade of the 21st century was a mirage,” said Lauri Myllyvirta, Greenpeace’s coal and energy campaigner. The decline in coal use will help reduce greenhouse-gas emissions that are blamed for heating up the planet. To limit the rise in global temperatures to 2 degrees Celsius (3.6 degrees Fahrenheit) – the level scientists say cannot be exceeded if the world is to avoid catastrophic climate change – emissions from coal must fall 4% annually through 2040, Greenpeace said.
In China, responsible for about half of global coal demand, use in the power sector fell more than 4% in the first three quarters and imports declined 31%, according to the report. Since the end of 2013, the country’s electricity consumption growth has largely been covered by new renewable energy plants. “The coal industry likes to point to China adding a new coal-fired power plant every week as evidence that coal demand will pick up in the future, but the reality on the ground is rather different,” according to the report. “Capacity utilization of the plants has been plummeting. China is now adding one idle coal-fired power plant per week.”
Saudi Arabia is determined to stick to its policy of pumping enough oil to protect its global market share, despite the financial pain inflicted on the kingdom’s economy. Officials have told the Financial Times that the world’s largest exporter will produce enough oil to meet customer demand, indicating that the kingdom is in no mood to change tack ahead of the December 4 meeting in Vienna of the producers’ cartel Opec. “The only thing to do now is to let the market do its job,” said Khalid al-Falih, chairman of the state-owned Saudi Arabian Oil Company (Saudi Aramco). “There have been no conversations here that say we should cut production now that we’ve seen the pain.”
Saudi Arabia rocked oil markets last November when Opec decided against production cuts, making clear that the kingdom was abandoning its policy of reducing supplies to stabilize the price. Since then, the oil price has collapsed from a high of $115 a barrel last year to $50 a barrel. Global oil companies, which have put hundreds of billions of dollars of investment on hold as a result of low prices, will be disappointed by the Kingdom’s stance. The effect on business sentiment has sparked domestic criticism of the market share policy engineered by Ali al-Naimi, the oil minister, and agreed by both the late King Abdullah and the current King Salman, who was crown prince last year and ascended the throne in January.
Officials in Riyadh say their policy will be vindicated in one to two years when revived demand swallows the global oil glut and prices begin to recover. They argue that in the past, Opec output cuts raised prices to levels where more expensive production, such as shale and deep-sea oil, could flourish. Moving ahead, Opec – led by Saudi Arabia – plans to pump as much as it can towards meeting global oil demand, leaving higher-cost producers to make up the remainder. For higher-cost producers, “$100 oil was perceived as a guarantee of no risk for investment”, said Mr Falih. “Now, the insurance policy that’s been provided free of charge by Saudi Arabia does not exist any more.”
Oil markets will continue to be oversupplied for as long as five years as producers in the Middle East ramp up output, according to Mohammed Al-Shatti, Kuwait’s representative to OPEC. Iraq pumped a record 4.4 million barrels a day in June, according to data compiled by Bloomberg. Libyan output, which has declined by more than half due to conflict, can return “at any moment,” Al-Shatti said in an interview Saturday in Doha. Iran has the capacity to boost exports by 500,000 barrels a day within one week of sanctions being lifted and by 1 million a day within six months, Roknoddin Javadi, managing director of state-run National Iranian Oil Co., said last month.
“Lower prices will continue until the glut in the market ends,” Al-Shatti said. “Many countries are expected to increase production. Iranian crude is expected to return and that means an increase in production.” Demand isn’t expected to absorb the extra capacity and it will take shifts in supply to affect prices, he said. Al-Shatti said geopolitical disruptions or reduced future output because of the 30% fall in capital expenditure by oil companies could cause an increase.
Residents of north-eastern China donned gas masks and locked themselves indoors on Sunday after their homes were enveloped by some of the worst levels of smog on record. Levels of PM2.5, a tiny airborne particulate linked to cancer and heart disease, soared in Liaoning province as northern China began burning coal to heat homes at the start of the winter. In Shenyang, Liaoning’s capital, visibility levels plummeted to as little as 100 metres, the state broadcaster CCTV said. China’s official news agency, Xinhua, published an apocalyptic gallery of images showing the country’s latest smog crisis alongside the headline: “Fairyland or doomsday?” In some areas of Shenyang, PM2.5 readings reportedly surpassed 1,400 micrograms per cubic metre, which is about 56 times the levels considered safe by the World Health Organisation.
“The air stings and makes my eyes and throat feel sore when I’m outdoors,” one woman, who had ventured out to buy a face mask, was quoted as saying. “As for what exactly we should do, I don’t know,” she added. By Monday afternoon there had been a slight improvement, although air quality remained at “hazardous” levels in Shenyang, an industrial city of about 8 million inhabitants. The Associated Press said Sunday’s smog represented one of the worst episodes of air pollution recorded in China since authorities began releasing air quality data in 2013. There was indignation on social media as China confronted its latest “airpocalypse”. “The government knows how severe the smog problem is, so why haven’t they tackled it?” one critic wrote on Weibo, China’s Twitter.
“What’s the point of having an environmental protection department? The precondition for developing the economy is not damaging the environment. Our leaders are all well educated. Can’t they understand this simple truth?” Others reacted with resignation. “Other than reporting it, what can the government do?” Shenyang, a major industrial centre since the days of Mao Zedong, has been attempting to clean up its act in recent years by relocating factories and starting to use natural gas instead of coal to heat homes. But on Monday doctors in Shenyang were dealing with the consequences of the latest bout of toxic pollution to hit their city. Yang Shenjia, who works at the Liaoning Jinqiu Hospital, said there had been a sudden influx of patients suffering from breathing complaints over the past two days. “The respiratory department’s inpatient wards are full,” the doctor told Xinhua.
Precise data collection is a tricky business everywhere, as the Volkswagen scandal over discrepancies between the German auto company’s emissions claims and the real world performance of its engines has shown. But getting accurate emissions data is crucial for governments seeking a global climate accord in Paris this December. Negotiators say that, to succeed, any agreement must be built upon “measurable, reportable and verifiable” statistics in order to assess whether countries are on track to meet their emissions targets. And getting a better grasp of the right numbers is particularly crucial in the case of China, which is widely assumed to be the world’s largest carbon emitter. China’s energy use is so great that even minute errors in data can translate into a difference of millions of tonnes of emissions.
No one currently knows how many tonnes of carbon China emits each year. Its emissions are estimates based on how much raw energy is consumed, and calculations are derived from proxy data consisting mostly of energy consumption as well as industry, agriculture, land use changes and waste. Many outside observers view the accuracy of those figures with skepticism. “China’s contribution (to the global climate plan in Paris) is based on CO2 emissions but China doesn’t publish CO2 emissions,” said Glen Peters, senior researcher at the Center for International Climate and Environmental Research in Oslo. “You’re left in the wilderness, really.”
Demands for better data played a major role in the failure of the 2009 Copenhagen conference, when China and several developing nations balked at providing the rest of the world with detailed data, claiming it would be an intrusion on their sovereignty. The last time Beijing produced an official figure was in 2005, when it said its emissions stood at “approximately” 7.47 billion tonnes. And while it has promised that emissions will peak by 2030 at the latest, experts say the statistical uncertainty is so great that forecasts on what that peak means can vary from 11 to 20 billion tonnes a year. That margin is greater than the entire annual carbon footprint of Europe.
John Key has opened up the spy agencies to public scrutiny in a way which we have never seen in New Zealand. We know more now about what they do and even how they do it. We know how the two agencies are managed, in that the GCSB and NZSIS both have top-flight lawyers in charge. There will always be those who say we don’t know enough. For those people, we now have improved oversight of the agencies. This also happened under the Prime Minister’s watch as minister in charge of the agencies. The new Inspector General of Intelligence and Security Cheryl Gwyn – another superb lawyer – has been a breath of the freshest air. Mr Key has since stepped away from directly overseeing the agencies, which is a further liberation. It seems right that the most powerful weapons of state should sit with someone whose role is to objectively challenge his Cabinet colleagues.
Now, even at a ministerial level, the SIS and GCSB answer to a lawyer, this time Attorney General Chris Finlayson. In terms of oversight and public disclosure, we are heading into an era unparalleled in our history. Citizens now have more ability to see and have explained the tasks done in their name. Again, it might not be enough but it is considerably more than we have had before. That’s where we have come to, three years after Mr Key had to admit Kim Dotcom and one of his co-accused had been illegally spied on by the GCSB. He also had to apologise – a concession which must have been galling. That single event appears to be the point at which the Prime Minister stopped taking at face value the assurances given by the intelligence agencies, and began a programme for reformation which is huge in its scale and largely behind closed doors.
For all the comparative openness, it is unlikely the public will ever know the truth about how far adrift our intelligence agencies wandered. As a broad indication, consider the fact that respected senior lawyers with strong state experience now sit at all significant levels of the intelligence community. When you’re unsure about the law, you need lawyers. But there have also been reports which paint a picture of the state of New Zealand’s intelligence services, past and present. None are individually explicit in their descriptions of how bad it was but the collective run of reports gives an impression of the intelligence community as an isolated part of government, lost to the public they were serving, changing purpose and shape under a cloak of secrecy.
German Finance Minister Wolfgang Schaeuble and Vice Chancellor Sigmar Gabriel were at odds over stricter asylum rules for some applicants from Syria, just days after Chancellor Angela Merkel defused a rebellion in her ruling coalition against her open-door refugee policy. Speaking on German ARD public television on Sunday, Schaeuble and Gabriel disagreed over a proposal by Interior Minister Thomas de Maiziere to grant refugees from Syria who aren’t individually persecuted a limited asylum status that restricts family reunions in Germany. “Family reunions can and must be restricted for people who are granted subsidiary protection, and that’s the large majority,” Schaeuble said. “This is a necessary decision and I’m very much in favor that we find agreement on this in the coalition quickly.”
De Maiziere cast doubt on a lasting compromise in the coalition over the weekend, telling N-TV television that the government should consider granting some Syrians only temporary asylum and limiting family reunions. Merkel earlier extracted a compromise from her coalition partners to set up migrant processing centers in Germany, in which the Social Democratic Party, led by Gabriel, prevailed. “Every time we reach an agreement, shortly thereafter there’s a new proposal that wasn’t on the table before,” Gabriel said on ARD, adding his party can’t agree to a proposal that wasn’t previously discussed in the coalition. “That leads to a situation in which Germans get the impression that the left hand doesn’t know what the right hand is doing in the government.”
As many as 1 million people are expected to seek shelter in Germany from war and poverty in their homelands. Merkel, while having pledged to do everything to stem the flow, has ruled out closing borders or placing upper limits on the numbers who qualify for asylum. A European Union report last week said the influx could boost Germany’s economy by 0.1 percentage point this year and 0.4 point in 2016. Schaeuble and Gabriel agreed the EU needs to regain control over its borders and set quotas for refugees who would then be distributed among the bloc’s members. “We are close to the limit of our capabilities,” Schaeuble said. As long as there’s no coordinated distribution within Europe, “we must send the message to the countries where the refugees are coming from that they shouldn’t be misled, that not everyone can come.”