Apr 222020

Saul Leiter Man in straw hat 1955




The following was written by Bruce Wilds, who runs the Advancing Time blog. Bruce is a small business owner in the Midwest.

I get lots of articles sent to me, but hardly ever publish any (sorry I can’t send everyone a reply) because they’re not what I think this site should be. But with this article it’s different. I think what Bruce describes is interesting, important even. The US has been losing small businesses for a long time, and the virus response is set to greatly accelerate the process. The huge stimulus plans will bypass most small businesses, because they are too small for governments to know what to do with.

The article was written before the latest round of handouts, but there’s very little reason to believe it will change much of anything. It’s not so much a grand plan or conspiracy, it just that the system has come to recognize only that bigger is better. America doesn’t like small. This is as true for banks as it is for various levels of government. But small businnesses have not only built the country, and are crucial for the faces of Main Streets and small towns, they also employ enormous amounts of Americans.



Bruce Wilds: The Paycheck Protection Program or PPP was funded with $350 billion in the last stimulus bill, this money is now gone. Of the thirty million small businesses in America, only 1.7 million received money from the 2.3 trillion dollar aid package passed to help sustain America during this difficult time. If the government blew through this money and was only was able to help only around 5% of small businesses. it is difficult to think another 250 billion dollars will set things straight. Clearly, because when the government made promises it delayed the wave of firing while companies waited for help.

The government has failed to keep its promise so now we should expect unemployment to soar as reality sets in. One of the largest problems facing small companies is they are often underfunded and have difficulty getting financing at reasonable rates. Banks find larger companies much more profitable. The sector of the economy most damaged by the covid-19 shutdown is small business. When this is over America will find many small businesses have been decimated and are not able to reopen. Others will never recover and be forced to close within months. Since small businesses employ over 54 million people in America and their importance in the economy should not be underestimated.

• Small businesses contribute 44 percent of all sales in the country.
• Small businesses employ 54.4 million people, about 57.3 percent of the private workforce.

Rest assured government employees and bureaucrats will still continue to get paid but small business, the most productive part of the economy has a knife to its throat. As a landlord and small business owner, I can tell you the program was structured in a way that will be of little help to most small businesses. The government slammed expensive legislation through with no idea of the damage they were doing and how it will cause hundreds of thousands of businesses to close their doors forever. Washington has become so attuned to dealing with lobbyists from mega-companies it has lost sight of the fact small is small, and when this comes to business, this means usually under twenty employees, not hundreds.



The government’s answer to keeping people employed was to promise small businesses an easy to get, rapid maximum loan amount of two and a half times a company’s average monthly payroll expense over the past 12 months. This loan would turn into a grant and be forgiven if a company did not fire its employees. Sadly, legislators failed to take into consideration that not all small businesses are labor or payroll intense. Some businesses with large or expensive showrooms are getting hammered by rent, others by inventory, or things like taxes, utilities, or even by having to toss products due to spoilage.

The PPP also failed to address the issue of what these employees are going to do while the company has no customers and business barely trickling. In the past, these employees were expected to pursue activities that earned revenue and garnered profits for the business but with no costumers, this is difficult to do. The PPP also ignored the fact that by keeping these employees on the payroll a generous employer is left open to the harsh mandates laid out in the government’s previous bill. The hastily drawn up 110-page federal covid-19 economic rescue package, which Trump fully supported dealt a hard blow to small business. For a small business this is a disaster, the bill requires;

• Employers with fewer than 500 employees and government employers offer two weeks of paid sick leave through 2020.
• Those same employers must now provide up to 3 months of paid family and medical leave for people forced to quarantine due to the virus or care for family because of the outbreak

As expected, this measure, named “Families First Coronavirus Response Act.” resulted in millions of workers suddenly losing their jobs. Ironically, it was held before the voters as proof lawmakers could work together during a crisis. By framing the poorly crafted pork-packed bill this way promoters positioned themselves to demonize those unwilling to support it. Remember, this bill is was in addition to the $8.3 billion emergency spending bill first approved to curb the spread of covid-19.



As government has grown larger it seems to have become totally oblivious to the fragility of many small businesses and how much it can cost a community when they close. By framing these pork-packed bills as bipartisan their promoters imply they are fair and balanced. This is not true, small business is the big loser and hundreds of thousands will soon have to close. With so many tenants looking at foregoing rent small landlords that don’t have deep pockets also face huge problems. We have our heads in the sand if we think companies that exist on events where people gather will overnight regain their luster. It is not like someone can simply flick a switch and things will return to normal.

Reality undercuts the idea of the “V-shaped recovery” theory and the idea after the economy has come to a dead stop it can quickly reboot and be back at full speed in a few months. The government has presented us with an extension of crony capitalism structured to throw just enough to the masses to silence their outrage but in the coming weeks, we will see it failed. Large businesses with access to cheap capital are the winners and the big losers are the middle-class, small businesses, and social mobility. All those people that want a higher minimum wage can forget that ever happening if we don’t have jobs.

As for just how much small business owners make, according to figures from 2015 from the Small Business Administration the median income for self-employed individuals at an incorporated business was $49,804 and $22,424 for unincorporated firms. According to PayScale’s 2017 data, the average small business owner’s income is $73,000 per year. But, total earnings can range from $30,000 – $182,000 per year. This means it varies greatly depending on where and just how big the business is. However, it is important to remember these people have “skin in the game” and most risk losing everything if their business fails.


It is important to recognize that starting your own business has always been about the opportunity to design and build your own future. It is a symbol of freedom not a guarantee of wealth. Many people choose this path proudly, not to make more money but as a way to express their individuality. For these competent and talented people, a job in government or at a large company often offers more security and benefits but far less freedom. Do not underestimate the value of small business and what it contributes to our society. Companies such as Amazon are the anti-thesis of small business making their workers a cog in a machine and stealing their soul.

Based on the government’s promise to small businesses a great many held off on letting employees go but with each passing day in order to survive they are now in the process of letting hundreds of thousands of employees go. This is a ticking time-bomb. By telling these businesses to close and then through its failure to carry out its promise of helping them the government has created a situation with massive negative economic ramifications. To make matters worse, people going on unemployment look to get almost as much as those that do work. Why will anyone want to work, especially government workers when they can get paid to stay home? This is not about wanting more money for small business, it is about the reality that the firings are just beginning.



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Aug 182015
 August 18, 2015  Posted by at 2:32 pm Finance Tagged with: , , , , , , ,  7 Responses »

Gustave Doré Dante and Virgil among the gluttons 1868

In case you missed it, we’re doing something a little different. Nicole wrote a very lenghty article and we decided to publish it in chapters. Over five days we are posting five different chapters of the article, one on each day, and then on day six the whole thing. Just so there’s no confusion: the article, all five chapters of it, was written by Nicole Foss. Not by Ilargi.

This is part 4. Part 1 is here:
Global Financial Crisis – Liquidity Crunch and Economic Depression,
Part 2 is here:
The Psychological Driver of Deflation and the Collapse of the Trust Horizon
and part 3 is here:
Declining Energy Profit Ratio and Socioeconomic Complexity

Blind Alleys and Techno-Fantasies

The majority of proposals made by those who acknowledge limits fail on at least one of the previous criteria, and often several, if not all of them. Solution space is smaller than we typically think. The most common approach is to insist on government policies intended to implement meaningful change by fiat. Even in the best of times, government policy is a blunt instrument which all too often achieves the opposite of its stated intention, and in contractionary times the likelihood of this increases enormously.

Governments are reactive – and slowly – not proactive. Policies typically reflect the realities of the past, not the future, and are therefore particularly maladaptive at times of large scale trend change, particularly when that change unfolds rapidly. Those focusing on government policy are mostly not thinking in terms of crisis, however, but of seamless proactive adjustment – the kind of which humanity is congenitally incapable.

There is a common perception that government policy and its effect on society depends critically on who holds the seat of power and what policies they impose. The assumption is that elected leaders do, in fact, wield the power to determine and implement their chosen policies, but this has become less and less the case over time. Elected leaders are the public face of a system which they do not control, and increasingly act merely as salesmen for policies determined behind the scenes, mostly at the behest of special interest groups with privileged political access.

It actually matters little who is the figure-head at any given time, as their actions are constrained by the system in which they are embedded. Even if leaders fully understood the situation we face, which is highly unlikely given the nature of the leadership selection process, they would be unable to change the direction of a system so much larger than themselves.

Where public pressure on elected governments develops around a specific issue, for whatever reason, the political response is generally to act in such a way as to appear to do something meaningful, while actually making no substantive change at all. Often the appearance of action is nothing more than vacuous political spin, assuaging public opinion while doing nothing to threaten the extractive interests driving the system in the same direction as always. We cannot expect truly adaptive initiatives to emerge from a system hostage to powerful vested interests and therefore locked into a given direction.

Public understanding of the issues agitated for or against tends, unfortunately, to be limited and one-dimensional, meaning that it is essentially impossible to create public pressure for truly informed policy changes, and it is relatively simple to claim that the appearance of action constitutes actual action. A short public attention span makes this even simpler. People are also extremely unlikely to vote for policies which, if they were to make a meaningful difference, would amount to depriving those same people of the outsized consumption habits to which they have become accustomed. The insurmountable obstacles to achieving change through government policy become obvious.

Planned degrowth assumes the possibility of a smooth progression towards a lower consumption future, but this is not how contractions unfold following the bursting of a bubble. What we can expect is a series of abrupt dislocations that are going to wreak havoc with our collective ability to plan anything at all for many years, by which time we will already be living in a lower consumption future arrived at chaotically. Effective planning for an epochal shift requires the capacity for top-down policy implementation at large scale, combined with social cohesion, the ability to maintain complexity, and the energy to maintain control over a myriad distinct aspects simultaneously. It is simply not going to happen in the manner that proponents envisage.

Similarly, a steady state economy is not a realistic construct in light of many non-negotiable realities. Human history, and in fact the non-human evolution which preceded it, is a dynamic history of boom and bust, of niches opening up, being exploited, being over-exploited and collapsing. It is a history of opportunism and the consequences following from it. In the human experience, boom and bust in the form of the rise and fall of empire is an emergent property of civilizational scale. A steady state at this scale is prima facie impossible.

An approximation of steady state can exist under certain circumstances, where a population well below ecological carrying capacity, and surrounded by abundance, is left in isolation for a very long period of time. The Australian aboriginal existence prior to the European invasion is probably the best example, having persisted for tens of thousands of years. The circumstances which permitted it were, however, diametrically opposite to those we currently face.

Proponents of the steady state economy do not seem to appreciate the extent to which we have long since transgressed the point of no return from the perspective of being able to maintain what we have built. Even if we were merely approaching limits, instead of having moved substantially into overshoot, we would not be able to hold society in stasis just below those limitations.

Populations grow and expansion proceeds with it. Intentionally preventing population growth globally is unrealistic. Even China, as a single country, has struggled with population control policies, and has had to take drastic and dictatorial measures in order to slow population growth. This clearly relies on strong top-down control, which is only barely possible at a national level and will never be possible at a global level.

In China we are also going to see that the outcome of population control has challenging consequences, and that a policy supposedly designed to foster stability can have the opposite effect. The desire for a male child has dangerously distorted the gender ratio in ways which will leave the country with a large excess of young men with no prospects for either work or marriage. That is a guarantee of trouble, either at home or abroad, or possibly both. There will also be far too few employed young people to look after a burgeoning elderly population, meaning a rapid die-off of the elderly cohort at some point.

Even then China is unlikely to have managed to get itself back below the carrying capacity it has done so much to destroy during its frantic dash for growth. The tremendous modernity drive China has engaged in essentially undone any benefit curbing population growth might have had, by increasing energy and resource consumption per capita by an enormous margin. It is population times consumption which determines impact, and in China the ecological impact has in many ways been catastrophic. That has to some extent been compensated for by obtaining access to a great deal of land in other countries, but economic colonialism has done nothing for global stability.

While it is possible to conceive, as some steady-state and degrowth proponents do, of a world in which civilization and large-scale urbanism have been dismantled in favour of autonomous, yet networked, village-scale settlements, that does not make it even remotely realistic. Humanity may, in the distant future, after the overshoot condition has been resolved by nature, as it will eventually be, find itself living in villages once again, but they would not be networked in the modern, technological sense, and the population they housed would be very smaller smaller than at present.

If it is below carrying capacity, then it will grow again, restarting the cycle of expansion and contraction rather than settling for a steady-state. Reaching for the stars again would not be possible however, as the necessary energy and resources have already been consumed or dissipated.

People are often inclined to think that a different trajectory is a matter of choice – for instance that we must collectively choose to live differently in order to prevent an ecological catastrophe. In fact it is not a matter of choice at all. There is no basis for top-down control capable of delivering meaningful change, nor would humanity ever collectively choose to scale back its consumption pattern, although individuals can and do. Given opportunities as a species, we take them, as evolution has shaped us to do.

Groups which made a habit of forgoing opportunities in the past would quickly have been out-competed by those who did not. We are the descendants of a long long line of opportunists, selected over millennia for our flexibility in turning an incredibly wide range of circumstances to our advantage. But, in this instance we will have no choice – the shift to lower consumption will be imposed on us by circumstance. The element of choice will be only in how we choose to face that which we cannot change.

Another class of ideas for ways forward is grounded in techno-optimism, suggesting that because human beings are clever and creative, and have tended to push back apparent limits before, that we will be able to do so indefinitely. The notion is that changing our trajectory is unnecessary because limits can always be circumvented. Needless to say, such a view is not grounded in physical reality. These ‘solutions’ are entrepreneurial rather than policy-driven, although they may expect to be facilitated through policy.

Ideas in this category would include such things as smart renewables-based power grids, high-performance electric cars, high-tech energy storage systems, thorium reactors, fusion reactors, biofuels, genetically modified (pseudo)foodstuffs, geoengineering, enhanced automation, high-tech carbon sequestration, global carbon trading platforms, electronic crypto-currencies, clean-tech, vertical farming skyscrapers and many other notions.

Notice that all of these presume the ready availability of cheap energy and resources, along with large quantities of capital, and all assume that technological complexity can be maintained or even increased. Options such as these also have a substantial dependence on the continuation of globalized trade in both goods and services in order to satisfy their complex supply chains. However, globalization depends on the ability to operate at large scale in extremely complex ways, it depends on cheap energy, it depends on maintaining trust in trading partners, and it depends on the ability to travel without facing unacceptable levels of physical risk from piracy or conflict.

Trade does very poorly in times of financial and economic contraction. In the Great Depression of the 1930s, trade fell by 66% in two years. Trust collapses, and with it the contractual ability to agree on risk-sharing arrangements. Letters of credit become impossible to obtain in a credit crunch, and without them goods do not move.

Many goods will in any case have no market, as there will be little purchasing power for anything but essentials, and possibly not even sufficient for those. As we move from the peak of globalized trade, there will be an enormous excess of transport capacity, which will drive prices down relentlessly to the point where transporting goods becomes uneconomic. Much transport capacity will be scrapped. Without credit to oil the wheels of trade, our highly leveraged economic system will grind to a halt.

It is natural that we regard our current situation as being normal, and take for granted that the march of technological progress – the only reality most of us have known – will continue. Few question very deeply the foundations of our societies, and even those who do recognize that change must occur rarely realize the extent to which that change will inevitably strike at the fundamental basis of modern existence. Globalization has peaked and will shortly be moving into reverse. The world will be a very different place as a result.

This is part 4. Part 1 is here:
Global Financial Crisis – Liquidity Crunch and Economic Depression,
Part 2 is here:
The Psychological Driver of Deflation and the Collapse of the Trust Horizon
and part 3 is here:
Declining Energy Profit Ratio and Socioeconomic Complexity

Tune back in tomorrow for part 5: Solution Space

Nov 112014
 November 11, 2014  Posted by at 7:24 pm Finance Tagged with: , , , , ,  12 Responses »

Marjory Collins Window of Jewish religious shop on Broome Street, New York Aug 1942

There are things in this world which simply look plain stupid, and then there are those that at closer examination prove to be way beyond stupid. How about this one:

1) G20 taxpayers (you, me) subsidize the fossil fuel industry. That in itself is crazy enough, and it should stop as per last week; industry participants must be able to fend for themselves, or fold. That they don’t, speaks to a very unhealthy level of power in and over our political systems. Subsidizing coal and oil is as insane as bailing out Wall Street banks. It’s money that defies gravity, by flowing from the bottom to the top, from the poor to the rich.

2) Then there’s the huge amount of the subsidies: $88 billion a year. That could solve a lot of misery for a lot of people. It adds up to well over $1 trillion in this century alone. Next time you feel good about prices at the pump, please add that number, it should set you straight.

3) But that’s just the start. Those $88 billion go towards exploration for new oil, gas and coal resources which, according to the UN’s IPCC climate panel, can never even be ‘consumed’ lest we go way beyond our – minimum – goals for CO2 concentrations and a global 2ºC warming limit.

4) And it keeps getting better. For who do you think pays for the research conducted for the IPCC reports? That’s right, the same G20 taxpayer. As in: you and me. We pay for both ends of the divine tragedy. We got it al covered. We pay for exploratory drilling in the Arctic, the Gulf of Mexico and all other ever harder to find, riskier and more polluting resources.

If this were not about us, we’d undoubtedly declare ourselves stark raving mad. Since it does directly involve us, though, we of course favor a more nuanced approach. Like sticking our heads in the sand.

I got that $88 billion a year number from a new report by British thinktank the Overseas Development Institute (ODI) and Washington-based analysts Oil Change International, The Fossil Fuel Bailout: G20 Subsidies For Oil, Gas And Coal Exploration. The Guardian has a few more juicy tidbits:

Rich Countries Subsidising Oil, Gas And Coal Companies By $88 Billion A Year

Rich countries are subsidising oil, gas and coal companies by about $88bn (£55.4bn) a year to explore for new reserves, despite evidence that most fossil fuels must be left in the ground if the world is to avoid dangerous climate change.

The most detailed breakdown yet of global fossil fuel subsidies has found that the US government provided companies with $5.2bn for fossil fuel exploration in 2013, Australia spent $3.5bn, Russia $2.4bn and the UK $1.2bn. Most of the support was in the form of tax breaks for exploration in deep offshore fields.

The public money went to major multinationals as well as smaller ones who specialise in exploratory work, according to British thinktank the Overseas Development Institute (ODI) and Washington-based analysts Oil Change International.

Britain, says their report, proved to be one of the most generous countries. In the five year period to 2014 it gave tax breaks totalling over $4.5bn to French, US, Middle Eastern and north American companies to explore the North Sea for fast-declining oil and gas reserves. A breakdown of that figure showed over $1.2bn of British money went to two French companies, GDF-Suez and Total, $450m went to five US companies including Chevron, and $992m to five British companies.

Britain also spent public funds for foreign companies to explore in Azerbaijan, Brazil, Ghana, Guinea, India and Indonesia, as well as Russia, Uganda and Qatar, according to the report’s data, which is drawn from the OECD, government documents, company reports and institutions.

The figures, published ahead of this week’s G20 summit in Brisbane, Australia, contains the first detailed breakdown of global fossil fuel exploration subsidies. It shows an extraordinary “merry-go-round” of countries supporting each others’ companies. The US spends $1.4bn a year for exploration in Columbia, Nigeria and Russia, while Russia is subsidising exploration in Venezuela and China, which in turn supports companies exploring Canada, Brazil and Mexico.

“The evidence points to a publicly financed bail-out for carbon-intensive companies, and support for uneconomic investments that could drive the planet far beyond the internationally agreed target of limiting global temperature increases to no more than 2C,” say the report’s authors.

“This is real money which could be put into schools or hospitals. It is simply not economic to invest like this. This is the insanity of the situation. They are diverting investment from economic low-carbon alternatives such as solar, wind and hydro-power and they are undermining the prospects for an ambitious UN climate deal in 2015,” said Kevin Watkins, director of the ODI.

“The IPCC [UN climate science panel] is quite clear about the need to leave the vast majority of already proven reserves in the ground, if we are to meet the 2C goal. The fact that despite this science, governments are spending billions of tax dollars each year to find more fossil fuels that we cannot ever afford to burn, reveals the extent of climate denial still ongoing within the G20,” said Oil Change International director Steve Kretzman.

The report further criticises the G20 countries for providing over $520m a year of indirect exploration subsidies via the World Bank group and other multilateral development banks (MDBs) to which they contribute funds.

That’s right, as you see in the graph we pay more towards Big Oil’s future profits then the companies do themselves. Without getting shares in those companies, mind you. We pay Big Oil and coal to produce more fossil fuels, and at the same time we pay the UN to publish reports demanding they produce less of them. Feel crazy yet?

Did you have any idea that your government sponsors oil companies with your money, which they don’t need, and certainly shouldn’t? Aren’t we supposed to at least take a serious look at alternative energy sources, and more importantly, use less energy, whether it’s coal or solar? If only to show we do indeed understand the 2nd law of thermodynamics?!

Big Oil, like Wall Street banks, should be, and can, take care of themselves, and very well. May I suggest you try and find out who in your respective government has given the thumbs up to these crazy handouts, and when you do, make sure they’re fired.

Jul 232014
 July 23, 2014  Posted by at 8:28 pm Finance Tagged with: , , ,  13 Responses »

Arthur Rothstein Home of worker in strip coal mine, Cherokee County, Kansas May 1936

A very impressive procession of hearses, containing the first 40 of the 298 caskets that will have to be ‘processed’, is going on as I speak in Holland, and has been for hours of slow driving, broadcast on live national TV. It’s a 100 mile or so distance, with thousands upon thousands of people along the route paying respect, from the airport where they landed form Ukraine to the facilities where they’ll be identified.

Which in the most ‘fortunate’ cases can be done in hours, in others may take weeks, and in yet others may never be conclusive. At least on the surface, the Dutch are doing everything right when it comes to honoring and respecting the people who died on MH17, and those who mourn them.

Still, when the bodies left Charkov earlier today, there were speeches by the Dutch and Australian ambassadors and other officials, all entirely in the spirit of what the moment and the victims deserve and are entitled to, but there was one noteworthy dissonant, which was even picked up by a Dutch reporter who wasn’t there to give his own opinion, but nevertheless opined that he thought it was very out of line for Ukraine Vice PM Groysman to use the occasion, which was intended to honor the victims only, to once again start off on a bitter, and frankly shameless, rant against Russia and Putin.

Ugly. But not unexpected. It goes to show that we really no longer know who our friends are. And as I said the other day, that goes for the whole Russia and Ukraine situation as much as it goes for the economy and the crisis it’s in. There are far too many Americans and Europeans who still think their governments are their friends. Which in Holland today is very tempting, because there’s this whole display of ‘correct mourning’ going on that draws in just about everyone simply on the fact that emotions must go somewhere, and they are easily guided into a shared platform, because people are drawn to that.

But they are, in the slipstream of those shared emotions, just as easily drawn towards venting anger at a perceived common enemy; it is easy to manipulate – emotionally vulnerable – people’s genuine grief into a blame game directed at a common enemy, even if you have no evidence that enemy did anything wrong, or even had anything to do with the acts that made them your enemy in the first place.

This is not something we had to wait for Sigmund Freud to discover for us; people have known since they were much more primitive primates how this works. Group – or mass- psychology works like a charm if you press the right buttons in a group. And it may have had benefits in the days of David vs Goliath, where a seemingly weaker party won the day against a stronger one. But it also has a dark side. When people are vulnerable, you can make them believe just about anything.

“We” follow the side that’s been pre-chosen for us in the ongoing Ukraine battle by our governments, i.e. US and EU. Who started getting heavily involved in Ukraine a number of years ago, and began to put the pedal to the metal when then-President Yakunovych declined to sign a deal that would have delivered Ukraine into a perhaps not all that advantageous partnership with the EU.

That’s when the West joined the Maidan protest in an aggressive way. By then, though, it had already spent a princely sum of $5 billion supporting all sorts of movements that had one thing in common: they were against Russia. Or more specifically: against Putin. Who refused to kowtow to Brussels and Washington.

With the help of a number of not-so-squeaky-clean groups in Ukraine, the Maidan side won: the elected president fled. US-handpicked guys – dare we say puppets – took over, and launched ferocious attacks against those amongst their own compatriots in the east of the country who didn’t want to bow to American and European rule, if only because it was announced very transparently by the new rulers in Kiev that they would be considered second hand citizens, if they would be allowed to live.

The eastern, Russian-speaking population, chose to align with Russia. A choice that so far cost many thousands of them their lives. Killed by their own government’s army, aided by US secret service agents and mercenaries, on their very own land they, and their ancestors, grew up on.

Blaming Putin for what has happened, not just to MH17 but to anything and everything in Ukraine over the past year and change, is way too easy. Putin, or let’s say Russia, has not been the aggressor, the west, i.e. have. Putin was fine with the way things were before. He thought Yanukovych was a stupid clown, but at least his oil interests were safe with that clown.

He acted just like the US and EU did and do to this day in 100+ different countries: as long as the prevailing government do what you want, you leave them in place. In Yanukovych’s case, it was gathering insane riches and bankrupting his nation, but at least never renditioning or mass murder. In many countries “we” support, wholesale slaughter is the order of the day, and has been for many decades. Whether it’s Saudi Arabia or Iraq or Chili or the Congo, we have built our wealth of supporting regimes that are willing to kill their neighbors so our interests are served.

It’s completely senseless to even try and deny that. But we are still led, in our justified grief and anger, towards hate for the very people we have set up to being killed by armies we ourselves finance. Call them devils, call them terrorists, proclaim they have no souls or they eat firstborn children. It’s as old as the first primates. It’s politics.

But it’s also the epitomy of disrespect. For those of you who have died, and who deserve for you to put in your best effort to find out who killed them. Not point fingers and not deliver any evidence. And disrespect for those who are being killed on your name – yes, that would be you -, so a political power game can be played over your heads and theirs. And down the line, your kids can be sent to go and murder the kids of those who were never your enemy other than in your politicians’ chants and games.

Your politicians are not your friends. But they are very good at pretending they are, especially in circumstances where you are – and they always know when that is – most vulnerable. The fact that all you’ve heard and read so far, a week after MH17 came down, is insinuations, and not a single shred of proof, should tell you all you need to know as far as your leaders’ credibility is concerned. They have nothing.

The most damning, or should I really say most entertaining, showcase is that is this conversation between Associated Press reporter Matt Lee and US State Department Deputy Spokesperson Marie Harf. What Harf is saying, for the good listener, is that the entire State Department assessment of the MH17 situation is based on social media posts from the Ukraine government.

Which just happens to have issued more lies and fabricated videos and and and than anyone else involved. BUK rocket movements Kiev said were ‘rebel rockets’, but which proved to be on Kiev controlled territory, black boxes they said were tampered with that were not, etc etc. Not one thing I can think of Kiev said has proven to be true. But they’re our governments’ installed puppets, so we listen to them.

If there’s no other way to find out who your friends are, at least this conversation should make it abundantly obvious to you who is not. Marie Harf may have lost her job on this, but she still said it. This is the kind of thing I find hard to believe when I see it, but I think maybe most people fail to see what’s actually being said. Then again, in an emotionally laden environment, it’s perhaps easy to miss out on essentials.

My uncle’s at the evenin’ table, makes his living runnin’ hot cars
Slips me a hundred dollar bill, says
“Charlie you best remember who your friends are.”

Straight Time, Springsteen

Yeah, that’s it, keep Russia alive …

Economic Meltdown Scenario Piles Pressure On Russia And The West (Guardian)

Oil prices above $200 a barrel. Energy shortages in western Europe. The return of recession to the still-fragile global economy. A slump in Russia. That’s the fear haunting policymakers as they contemplate how to respond to the shooting down of MH17 over eastern Ukraine last week. The meltdown scenario can be easily sketched out. Every global downturn since 1973 has been associated with a sharp rise in the price of energy. Russia is one of the world’s biggest energy suppliers and is responsible for about one-third of Europe’s gas. America’s economic recovery from the deep recession of 2008-09 has been weak by historic standards, while the European Union’s has barely got going. [..]

Given the public outrage at the loss of life on MH17 some increase in the severity of the sanctions looks inevitable. In Brusselson Tuesday, there was talk of imposing restrictions on capital movements from Russia and of curbs on exports of defence and energy technology. These measures would certainly increase the pain for Russia, and would run the risk that Putin would retaliate by choking off oil and gas exports to the west, looking instead to energy-hungry China as an alternative market. Slater estimates that UK growth next year would be 1% lower than expected were Russia to halt gas supplies through Ukraine, with the impact felt through higher energy prices, higher inflation, falling share prices and weaker consumer confidence. Closing the gas taps could then trigger the “phase three sanctions” being resisted by many EU countries, including Germany, France and Italy.

These would target entire sectors of the Russian economy, blocking their exports to the west and preventing them doing business with companies in the European Union and North America. It is this prospect that has prompted fears of rapidly rising oil prices. Slater calculates that Russian energy exports to the rest of the world could be cut by as much as 80%, with less than half the shortfall made up by the Opec oil cartel. “In such a scenario, world oil prices could soar above $200 per barrel and gas prices would also rise steeply.” Julian Jessop at Capital Economics notes that the biggest losers from this would be Russia, already in recession. Other suppliers would have an incentive to keep prices low in order to grab Russia’s energy customers. The west could draw down on strategic oil supplies to limit the impact of the loss of Russian supply.

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There are no markets left, just an artificial look-alike.

Why The Markets Don’t Care What Happens In The World (MarketWatch)

A plane carrying close on 300 innocent people gets shot down along one of the most sensitive borders in the world. Israel invades Gaza, reigniting the deepest wounds in the Middle East, and potentially sparking another regional conflict. A few hundred miles away, a militant insurgency threatens to turn Iraq into a full-blown terrorist state. The world has not been short of things to worry about in the last week, or the news bulletins short on drama and conflict. But how did the financial markets react? A few stocks got marked down, and gold made one of its reflex moves upwards. Yet on the whole, they barely registered any reaction. It was as if nothing of significance had happened. There is a message in that, and an interesting one. The markets are no longer interested in what happens in the rest of the world. The days when geopolitics could impact the prices of stocks, bonds, commodities or currencies in any significant way have been consigned to the past.

There are two possible explanations for that: firstly that there are not any wars or revolutions any more that can dramatically change the outlook for the global economy; and secondly, that the markets are so pumped up by quantitative easing, and easy money from the central banks, that anything else that happens pales into triviality by comparison. The truth is probably somewhere in between. Either way, investors can safely ignore war and politics from now on when they are structuring their portfolio. The declining interest of the financial markets in what is happening around the world has been evident for some time. The Arab Spring that saw governments fall across the Middle East was probably the last set of uprisings to make any real impact, but even that was largely restricted to frontier indexes such as Egypt, and they don’t count for a great deal in the greater scheme of things. But it has been most noticeable this year. It is not as if the past few months have been short on drama.

The Russian annexation of Crimea, and possible capture of eastern Ukraine, marks the first major re-drawing of national orders within Europe in many years. It could easily turn into the beginning of a new period of conflict between Russia and Western Europe — the opening salvos of a new Cold War. Likewise the militant uprising in Iraq could easily result in the creation of a terrorist Islamic state in a country with some of the largest oil reserves in the world, and which only 10 years ago the U.S. considered so strategically important it invaded to bring down what it regarded as a rogue regime.

Tension between the Israelis and the Palestinians is hardly anything new: the invasion of Gaza is merely the latest in a long and bitter history of conflict. Even so, it remains one of the most disputed regions in the world, and one where any military action threatens a wider conflagration. Not so long ago, geopolitical events such as those would have provoked wild swings in the financial markets. After the 9/11 attacks on Washington and New York, the stock market fell dramatically. The Iraqi invasion of Kuwait sparked a wave of selling, and the Middle Eastern conflicts of the 1970s sent the oil price soaring and the stock market crashing.

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State Dept. MH17 Assessment Based on Kiev Social Media Propaganda (RT)

State Department Deputy Spokesperson Marie Harf described Russia’s statements on MH17 plane crash as “misinformation” – but when reporters asked her whether Washington would be releasing their intelligence and satellite data, Harf only replied “may be.” So far the US has been backing its statements by social media and “common sense.”

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Yeah, Putin really fears US courts ….

Putin’s Ukraine Woes Compounded by $103 Billion Yukos Claim (Bloomberg)

Russia will discover next week how much it may be asked to pay for the confiscation a decade ago of Mikhail Khodorkovsky’s Yukos Oil Co., then the country’s biggest oil producer. The Permanent Court of Arbitration in The Hague will rule on July 28 on a $103 billion damages claim the company’s former owners filed against Russia in 2007, Tim Osborne, head of GML Ltd., former holding company of Yukos, said by e-mail. Court official Willemijn van Banning said by phone she couldn’t comment on the date for the ruling. The potential multibillion-dollar punitive award comes as Russian President Vladimir Putin risks further U.S. and European sanctions after the downing of a Malaysian passenger jet in eastern Ukraine that killed 298 passengers and crew. The Obama administration has blamed the plane’s downing on pro-Russian rebels, who deny any involvement.

A substantial award of damages “would add to Putin’s sense of being backed into a corner and that the West is out to get Russia,” Masha Lipman, an independent political analyst based in Moscow, said by phone. “Whether a coincidence or not, it will be seen as more than a coincidence.” GML has a good chance of winning partial damages, according to Gus Van Harten, a professor specializing in arbitration at York University’s Osgoode Hall Law School in Canada. There’s “very limited room” for appeal and Russia will resist paying, so any amount awarded would trigger a global legal battle to seize state property, including assets of OAO Rosneft, which acquired most of Yukos in a series of forced auctions, Van Harten said. Putin has said his opponents are using the crash for “selfish political gains.” The EU warned yesterday that it may restrict the country’s access to capital markets and sensitive energy and defense technologies.

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Super dollar.

Jobs Hold Sway Over Yellen-Carney as Central Banks Set To Split (Bloomberg)

Before the Federal Reserve and fellow central banks go to work raising interest rates, they first need others to go to work. That’s the signal from policy makers worldwide, as even those whose mandates focus on inflation put the health of labor markets at the heart of their decision making. The approach leaves investors bracing for global monetary policies to diverge after the post-crisis embrace of easy money. Accelerating job creation — and the hope this will spur wages — leaves the U.S. central bank and the Bank of England preparing for higher rates by the end of 2015. At the other end of the spectrum, double-digit unemployment in the euro area and stagnant pay in Japan mean stimulus remains the only option.

“Strength in the labor market is a key factor in the change in thinking about when the first rate hikes may occur,” said Nariman Behravesh, chief economist in Lexington, Massachusetts, for IHS Inc. “There’s a huge differentiation in performance now. The frontrunners are speeding up.” Investors are starting to tune in to the end of synchronized monetary policy, with economists at Goldman Sachs Group Inc. saying shifts in hiring during the past eight months worked well as a simple predictor of rate expectations. The forward curves for the U.S. and U.K., which gauge investor expectations for rates, show the most-pronounced steepening as unemployment in both countries has fallen to the lowest levels in more than five years. By contrast, the euro-area’s 11.6% jobless rate remains close to a record 12% as investors bet its benchmark will stay low until at least 2016.

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Oh, exciting!

Draghi Faces German Hard Line on Avoiding Deflation (Bloomberg)

The deutsche mark is dead. Long live the deutsche mark. That’s the view from Germany’s central bank, which is resisting a weaker euro, introduced in 1999, and opposing the most aggressive strategies Mario Draghi could deploy to ignite growth in Europe, says Simon Derrick, chief market strategist at Bank of New York Mellon Corp. Derrick sees parallels with the early 1990s when Germany refused to surrender its hard money dogma even as it transmitted pain elsewhere. The 18-member euro area’s emergence from a two-year recession is proving sluggish, with inflation about a quarter of the ECB target and unemployment above 20% in Spain and Greece. Back in 1992, the U.K. was under German pressure to live with the high interest rates demanded by the Exchange Rate Mechanism, a slipway to the single currency, even if it punished the British economy.

In the end – and under fire from billionaire investor George Soros – the U.K. buckled. It allowed sterling to slump and interest rates to decline, paving the way for a 15-year expansion. In 1993, with France in recession, the Bundesbank was unwilling to accelerate rate cuts for fear that would harm the deutsche mark. By July, the need for a weaker franc persuaded meant Europe’s leaders to allow their currencies to trade more flexibly as they sought to keep the euro project alive. Fast forward to today: Germany’s intransigence is again in play as Draghi, the Italian president of the European Central Bank, mulls whether to enact quantitative easing to prevent deflation. He has cut interest rates to record lows and pledged fresh loans for banks last month to little effect so far.

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Super dollar!

China’s Terrifying Debt Ratios Poised To Breeze Past US Levels (AEP)

The China-US sorpasso is looming. I do not mean the much-exaggerated moment when China’s GDP will overtake America’s GDP – which may not happen in the lifetime of anybody reading this blog post – as China slows to more pedestrian growth rates (an objective of premier Li Keqiang.) The sorpasso may instead be the ominous moment when China’s debt ratios overtake the arch-debtor itself. I had presumed that this inflection point was still a very long way off, but a new report from Stephen Green at Standard Chartered argues that China’s aggregate debt level has reached 251% of GDP, as of June. This is up 20%age points of GDP since late 2013. The total is much higher than normal estimates, though it tallies with what I have heard privately from officials at the IMF and the BIS.

Mr Green – a highly-respected China veteran – includes total social financing (TSF), offshore cross-border bank borrowing (a story that we are going to hear a lot about), bond issuance, shadow banking of various kinds, and government debt. The ratio has risen by 100%age points of GDP over the last five years. As Fitch has argued out in the past, this is more than double the rise seen in Japan over the five years before the Nikkei bubble burst in 1990, or in the US before subprime blew up in 2007, or in Korea before the Asian financial crisis. It is the speed of the rise that worries credit rating agencies and regulators – including many at the Chinese central bank – as much as the volume itself. Though China is scary on both fronts. It has pushed debt to $26 trillion, more than the entire commercial banking systems of the US and Japan combined. The scale obviously has global ramifications. The FT’s Jamil Anderlini points out here that the figure is very high for an emerging economy.

Mature economies can handle a higher debt ratio for all kinds of reasons, not least because they have large assets to offset their liabilities. British figures of household debt look much more threatening than they really are because the debt is mostly for mortgages, and is balanced by high levels of equity and wealth. Total debt levels in the US are 260pc (if you assume that the Fed will never unwind QE, which I do). So unless the Politburo gets a grip very fast, and this too would be dangerous, it may catch the US by next year. This does not mean that China is about to crash. It has a state-controlled banking system. Therefore any bust scenario will play out in a different way, probably through much lower growth and two decades of Japanese-style extend and pretend. As the BIS implied in its annual report: almost the entire world has now been drawn into the Ponzi scheme of unsustainable debt. We can inflate some of it away, or we can deflate into defaults and creditor haircuts. Pick your poison.

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This is going so wrong…

China May Avoid Second Bond Default, Thanks To Bailout (MarketWatch)

China may avoid its second-ever corporate bond default due to a bailout by a local government, Chinese media said Tuesday. Huatong Road & Bridge Group, a privately held construction firm, said in a statement last week that it was uncertain whether it could pay the principal and interest on a 400-million-yuan ($64 million), 1-year bond when it reaches maturity on Wednesday. According to a 21st Century Business Herald report, the company had sent several tranches of funds “one after another” to the Shanghai Clearing House in order to cover the bond payment, but it was still short of the amount needed. However, the newspaper quoted an unamed source as saying that there was “no big problem” of a possible default, as the Shanxi provincial government appeared to have stepped in to coordinate the collection of company’s accounts receivable from local governments.

A possible default could harm concurrent efforts by the Shanxi government to convince the central bank to allow state-owned banks more lines of credit for investment projects in the province, the report quoted an expert as saying. Huatong Road & Bridge had cited the fact that its chairman, Wang Guorui, was under investigation in disclosing its financial troubles, according to the 21st Century Business Herald report. And while the company didn’t elaborate, the newspaper said Wang had been accused of illegal coal-mining activities. In March, Shanghai Chaori Solar Energy Science & Technology said it failed to make a full interest payment on a corporate bond it had issued, becoming the first onshore bond to default in China’s history.

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Well, that’s surprise.

China’s Net Forex Sales Suggests Capital Outflows (MarketWatch)

China’s central bank and financial institutions sold a net 88.28 billion yuan ($14.2 billion) of foreign currency in June, compared with a net purchase of 38.657 billion yuan in May, according to calculations by Dow Jones from central bank data. June is the first month of net sales after ten months of net purchases, suggesting capital started to flow out of China. The banking system’s foreign-currency purchase position totaled 29.45 trillion yuan at the end of June–lower than 29.54 trillion yuan at the end of May, People’s Bank of China data showed. The data include purchases and sales by commercial banks and other financial institutions but mostly reflect transactions by the central bank. Most analysts view the figures as a proxy for inflows and outflows of foreign capital as most foreign currency entering the country is generally sold to the central bank.

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Did you notice?

Everything In Your House Is Getting Cheaper To Buy (MarketWatch)

Maybe you haven’t noticed, but it’s a great time to buy all the things you need to fill up your house: Furniture, appliances, electronics, dishes and pots and pans. People tend to pay attention to the prices of things they buy all the time, like gasoline, milk and meat. But who can remember what it cost them the last time they bought a washing machine? Fortunately, the Bureau of Labor Statistics does keep track. The BLS reported Tuesday that prices of consumer durable goods have fallen 1.5% in the past year, the steepest decline since the depths of the recession in 2009. This isn’t a new trend: The prices of durable goods have been falling pretty steadily since peaking in 1997, and now they are as cheap as they were in 1988, after adjusting for the constant improvements manufacturers have been making to their products. What’s striking is how pervasive the price declines are. It’s not just a few items that are pulling down the average; prices are falling for almost every sort of durable good that consumers buy.

Here are the latest numbers from the BLS: Prices of major appliances are down 7.9% in the past year, the largest decline on record. Laundry-equipment prices are down 8.6%. Furniture and bedding prices are down 2.5% in the past year. Window coverings, rugs and other linens are down 2.1%. Clocks and lamps are down 6.9%. TVs are down 15%. Audio-equipment prices are down 2.4%. Telephone-equipment prices are down 7.7%. Camera prices are down 6.7%. Dishes and flatware are down 6.3%. Cookware prices are down 4.7%. Computers are down 6.3%. Tools and other hardware prices are down 1.5%. Toys are down 6.5%. Sporting goods are down 1.3%. Jewelry prices are down 4.5%. Medical equipment prices are down 1.1%. New car prices are down 0.4%. Auto parts are down 1.2%.

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Yeah, but far too big to fail. $55 trillion in derivatives?!

Deutsche Bank Suffers From Litany of Reporting Problems (WSJ)

An examination by the Federal Reserve Bank of New York found that Deutsche Bank’s giant U.S. operations suffer from a litany of serious financial-reporting problems that the lender has known about for years but not fixed, according to documents reviewed by The Wall Street Journal. In a letter to Deutsche Bank executives in December, a senior official with the New York Fed wrote that reports produced by some of the bank’s U.S. arms “are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm’s entire U.S. regulatory reporting structure requires wide-ranging remedial action.”

The criticism from the New York Fed represents a rebuke to one of the world’s biggest banks, and it comes at a time when federal regulators say they are increasingly focused on the health of overseas lenders with substantial U.S. operations. The Dec. 11 letter, excerpts of which were reviewed by the Journal, said Deutsche Bank had made “no progress” at fixing previously identified problems. It said examiners found “material errors and poor data integrity” in its U.S. entities’ public filings, which are used by regulators, economists and investors to evaluate its operations. The problems ranged from data-entry errors to not taking into account the value of collateral when assessing the riskiness of loans.

The shortcomings amount to a “systemic breakdown” and “expose the firm to significant operational risk and misstated regulatory reports,” said the letter from Daniel Muccia, a New York Fed senior vice president responsible for supervising Deutsche Bank. The New York Fed has various tools at its disposal to address shortcomings by banks it regulates. It can issue private letters demanding action, as it did with Deutsche Bank, or, in more severe cases, impose restrictions on banks’ activities. The letter, which hasn’t been previously reported, ordered senior Deutsche Bank executives to ensure steps were taken to fix the problems. It also said the bank might have to restate some of the financial data it has submitted to regulators.

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Krugman? Still have to talk about him?

Krugman’s Latest Debt Denial: His Magic Numbers Don’t Cut It (Stockman)

Professor Krugman is at it again—–conjuring fairy tales about a benign long-term fiscal outlook. Notwithstanding that the public debt has surged from 40% to 75% of GDP during the six short years since 2008, he claims there is no reason to fret and that there is no debt spiral anywhere in the future. In part that’s because the Keynesian priesthood has declared that interest rates have down-shifted on a permanent basis. CBO has therefore dutifully incorporated this assumption into its long-term projections:

This (interest rate) markdown has the effect of making the budget outlook — which was already a lot less dire than conventional wisdom has it — look even less dire. But there’s a further point worth emphasizing: the CBO has just declared an end to the debt spiral.

Even accepting CBO’s “rosy scenario” outlook (see below), it’s not evident that it has declared an end to the debt spiral. In fact, it projects publicly-held treasury debt to soar from $12 trillion today to about $52 trillion by 2039. Most people would judge that a spiral. Indeed, as shown in the CBO graph below based on “current policy”, the public debt ratio is heading sharply upwards to more than 100% of GDP.

So how does professor Krugman turn this dismal chart into an “all clear” reassurance–when it actually shows public debt heading to above WWII levels at a time when the baby boom is at peak retirement? Well, it seems that Krugman unearthed two numbers in a 182 page report that purportedly render harmless the $52 trillion of bonds, notes and bills that CBO projects will need to find a home at the historically low interest rates it forecasts for the next 25 years.

So we turn to Table A-1 on page 104 of the CBO report, and we learn that for the next 25 years CBO projects an average interest rate on federal debt of 4.1 percent and an average growth rate of nominal GDP of 4.3 percent. And this means no debt spiral at all.

A GDP growth rate higher than the average carry cost of the public debt sounds all good, but here’s the thing. Given outcomes during the 21st century to date, there is simply no plausible reason to believe that nominal GDP can grow at a 4.3% CAGR for the next 25 years. In fact, since the pre-crisis peak in early 2008, nominal GDP has grown at only a 2.5% CAGR, and even during the last two years when “escape velocity” was expected any day, the compound growth rate has been only 3.0%. Indeed, during the entire 14 years of this century—encompassing nearly two complete business cycles – nominal GDP has expanded at just 3.8% per annum. Needless to say, when you are crystal balling a quarter century ahead, CAGRs make a big difference, and that’s profoundly true of the Federal budget. Specifically, revenue is highly sensitive to nominal GDP growth because it is always money income, not real GDP, that is on the radar screen of the tax-man.

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Oh well, at least Québec doesn’t look like the moon yet.

Alberta Oil Clout Dominating Canada’s Unbalanced Economy (Bloomberg)

In Canada’s economy there’s Alberta, and there’s everywhere else. The oil- and gas-rich western province was responsible for all of the country’s net employment growth over the past 12 months, adding 81,800 jobs while the rest of Canada lost 9,500. Alberta’s trade surplus, C$7.4 billion ($6.9 billion) in May, almost matched the deficit rung up everywhere else. If growth trends over the past decade continue, Alberta would pass Quebec to become the country’s second-largest provincial economy in three years, according to data compiled by Bloomberg. “Alberta is already by far the strongest province economically, and higher oil prices will only exacerbate the regional split,” Benjamin Reitzes, a senior economist at BMO Capital Markets in Toronto, said in a telephone interview.

Alberta’s growing power is doing more than putting energy ahead of manufacturing exports such as Ontario’s cars and Quebec’s aircraft. It’s drawing tens of thousands of young people to the province, seeking energy jobs with some of the country’s highest salaries. It’s also posing a challenge to policy makers: Oil wealth has led to a stronger Canadian dollar, squeezing Ontario and Quebec manufacturers. Canada’s central bank is keeping interest rates near historic lows, looking for a weaker currency to boost exports. “We see a two-track economy,” Bank of Canada Governor Stephen Poloz said at a July 16 press conference after his decision to extend the longest interest-rate pause since the 1950s. Canada’s non-energy exports have disappointed, he said, holding back growth. At the same time, “energy exports have indeed been quite strong and we expect that to be a continuing trend.”

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Export Land.

OPEC’s Two-Decade Ride on Global Growth Stalls (Bloomberg)

For the past two decades, growth in the global economy spelled higher revenues for the Organization of Petroleum Exporting Countries. Not any more. The CHART OF THE DAY shows how last year was the first since 1993 that the value of OPEC’s total crude exports didn’t track the direction of global gross domestic product. The bottom panel shows how the group supplying about 40% of the world’s oil fetched lower average prices and also shipped fewer barrels year on year.

Production among OPEC’s 12 members fell 2.5% to average 31.6 million barrels a day last year, data from OPEC’s Annual Statistic Bulletin showed on July 18. Libya’s output slumped 31% amid political protests at oilfields and export terminals. Output from Iran, whose exports are subject to international sanctions, fell by 4.4%. The group’s members also consumed about 1% a day more domestically. “It’s three factors that have combined to give them, as they say, $100 billion less,” said Leo Drollas, an independent oil consultant in Athens and former chief economist at the Centre for Global Energy Studies. “The increase in the internal consumption, the slight fall in the price, and the fall in production in some members.”

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Jun 132014
 June 13, 2014  Posted by at 3:49 pm Finance Tagged with: , , , ,  2 Responses »

Jack Delano Military sentry at bridge over Colorado River, Topock, Arizona March 1943

With consensus building, after new health care data were released, that Q1 US GDP contracted by -2%, which is even worse than the latest -1% estimate, you’d think a bit of realism would pervade news reports. Think again. The ‘make it up as you go along’ factor only increases as numbers get worse. And, naive as I am, I can’t help wondering what the reason is for a journalist, whose MO should, at least in my view, contain a healthy dose of objectivity, to insist on making things look better and richer and growing more and faster than they really are. This attitude, which leans far too close for my comfort to viewing the world from a religious myopia, is practically all pervasive. And I strongly suggest that people keep that in the back of their heads no matter what they read. I personally – obviously – read lots of mainstream articles, and post links to quite a few, and I feel fine doing it because I have my BS radar on all the time. And I read and write lots of non-mainstream things to counter balance them. Hopefully, you do too. Here’s that latest contraction estimate (and again, I do adapt headlines at times to get to the essence of things):

US Q1 GDP Revised Downward To A -2% Contraction (WSJ)

The U.S. economy may have contracted more than previously thought during the first three months of 2014, private economists said Wednesday based on new health care-sector data from the government. Some analysts said economic output may have contracted at a 2% pace in the first quarter. That would be its worst performance since the recession. The Commerce Department’s latest estimate of GDP, the broadest measure of output across the economy, said it shrank at a seasonally adjusted annual rate of 1% in the first quarter. A revised estimate will be released June 25, and it could show an even larger contraction. That’s based on the Commerce Department’s Quarterly Estimates for Selected Service Industries report for the first quarter, released Wednesday. It showed that revenue in the U.S. health-care and social-assistance sector fell 2% in the first quarter from the fourth quarter of 2013, not adjusted for seasonal variations or price changes.

That’s pretty bad regardless of any other issues. If US GDP shrinks by -2% six-odd years into an alleged recovery, that is, to be frank, pretty frightening. That’s not how recoveries work or are supposed to work. Period. And while the mainstream press refuses to let go of the Q1 snow and ice story, and the non mainstream keeps on blowing holes in it, we did leave Q1 ten full weeks ago and things are not showing pent up demand or great surges in spending or recovery or anything like that. I mean, you can always hand pick a bunch of data and ignore the rest, but that just won’t do. Look, May is not Q1, it’s well into Q2:

Wholesale Prices in U.S. Unexpectedly Decreased in May

Wholesale prices in the U.S. unexpectedly fell in May, suggesting demand isn’t robust enough to push inflation closer to the Federal Reserve’s target. The 0.2% decrease in the producer price index compared with the median estimate in a Bloomberg survey of 71 economists that called for a 0.1% gain. Over the past 12 months, costs climbed 2%, figures from the Labor Department showed today. The May dip, the first in three months, suggests pricing power hasn’t yet materialized as the global economy is slow to accelerate. Muted costs are a problem for Federal Reserve policy makers, who have said they want inflation to increase closer to their 2% goal, a sign they will keep interest rate low well into 2015. “Producer price inflation is still fairly contained despite the big increases in the last few months,” Omair Sharif at RBS Securities said in a research note.

The most ‘out there’, and funniest at the same time, example today has got to be this Bloomberg piece, which was originally titled ‘May Sales Rise Less Than Forecast As Americans Take Respite’, and later changed into:

Cooling Sales Curb Optimism on U.S. Growth Rebound

American consumers paused for breath in May as retail sales climbed less than forecast following an impressive three-month run, tempering forecasts for a rebound in growth this quarter.

Americans took a breath, or a respite? From what, staying home in the cold? Or is it huge spending in April? Perhaps not.

This is from a May 13 Reuters article on April retail sales, Retail Sales Slow, But Growth Outlook Still Upbeat

… growth is expected to top a 3% rate this quarter. [..] While a gauge of consumer spending slipped in April, economists said the weak growth performance at the start of the year had probably made households more careful about spending. “It’s possible that consumers are being a bit more cautious in their spending habits as they await confirmation that the economy is, in fact, poised to reaccelerate,” said Jim Baird, CIO at Plante Moran Financial Advisors.

Wait, wait, hold on. Consumer spending slipped in April after a -2% Q1 number, and that’s because they were no longer cold, but … eh, but what? They were afraid it would get cold again? Or could it perhaps be that they spent all their money trying to stay warm? Just saying …

So-called core sales, which strip out automobiles, gasoline, building materials and food services and correspond most closely with the consumer spending component of GDP, dipped 0.1% in April. That followed a 1.3% advance in March. Still, economists were largely unframed by the drop and said consumer spending was on track to post a third consecutive quarter of robust growth, citing a firming labor market. “Despite an overall seemingly weak April retail sales report, thanks to the pop in March, the second quarter is starting off at a higher level that is consistent with strong consumption in the quarter,” said Bricklin Dwyer, economist at BNP Paribas.

A -2% Q1 GDP, but a “pop in March”, and ‘consumer spending slipped in April’. Now I’m getting confused. Anyway, April was weak, May was weak, but we still think Q2 GDP will ‘top a 3% rate’? That means June need to give us what, a 6%,7% gain? Really?

And moving back to the Bloomberg piece, excuse me, an impressive three-month run? What happened to the snow then? You see, three months ago we were still mired in Q1, and GDP fell -2% in that quarter. Did I miss something?

“It’s a story of gradual improvement,” said Michelle Girard, chief U.S. economist at RBS Securities [..] “We’re not getting the big acceleration that many people hoped for.”

That’s what I thought. No pent-up demand in sight. But that does make me wonder why someone would call it ‘gradual improvement’.

Consumers’ spirits are rising as job prospects strengthen. [..] “The most important of all economic indicators is employment, and since the jobs picture has improved, consumer attitudes are more upbeat,” said Richard Yamarone, a senior economist at Bloomberg. “If sustained, this could result in greater spending and overall economic growth.”

How is this not merely wishful thinking? If retail sales are cooling one month after GDP, 70% of which is consumers, was down -2%, where and how are ‘consumer spirits rising’?

Let’s try this angle: there was a cold winter, we all agree, but why don’t we subtract the increase in heating costs from the GDP number on the premise that it’s not an actual boost to the economy, since for many people it involved money they couldn’t spend twice, i.e. it directly interfered with the promise of any pent-up spending behavior. What would GDP look like then? How about -3%? I think we can all at least figure out the direction it would go in, even if not the exact percentage or amount. And yeah, unemployment at 6.3% is less bad than it was, but between ‘out of the labor force’ data and WalMart greeter and burger flipper “jobs”, don’t we all of us by now have a hunch of what jobless numbers are really like stateside? Why must we insist to persist in fooling one another about them? It only leads to a bewildering sequence of awfully wrong forecasts.

Governments, analysts, experts, pundits and journalists. A huge conspiracy built up to fool the American people. The Automatic Earth would do much better, attendance-wise and financially, if we were to simply follow that trend. Just keep on telling people the next quarter will be better, much better, and only have to swallow that sort of thing back half a year later, when no-one cares anymore and everyone’s fixated on newer data again. The media can say they only quoted government and experts, who in turn can claim their models really showed that dramatic uptick. But then every single one of you would be walking around in the emperor’s new clothes, perhaps feeling better short term, but exposed to ridicule, the elements and the debt you’ve gathered.

Let’s get this clear: the US economy is not doing well, at all, and it’s not picking up in any significant sense either, despite all the forecasts that always need to be revised downward at some later date (that’s not a coincidence, it’s an MO). Nor are other economies. China, Japan, EU, they’re all gasping for breath, not taking a breath. They’re also all issuing forecasts that are as rosy as they are absolute nonsense. But, you know, if everybody does it, that’s a safe place to be in, for who’s going to blame you?

I think Americans should be taking a breath alright, just not from spending money they don’t have to begin with or getting even deeper into debt, they should take a breath from “reports” intended to make them look like dumb-ass patsies.

US Q1 GDP Revised Downward To A -2% Contraction (WSJ)

The U.S. economy may have contracted more than previously thought during the first three months of 2014, private economists said Wednesday based on new health care-sector data from the government. Some analysts said economic output may have contracted at a 2% pace in the first quarter. That would be its worst performance since the recession. The Commerce Department’s latest estimate of gross domestic product, the broadest measure of output across the economy, said GDP shrank at a seasonally adjusted annual rate of 1% in the first quarter. A revised estimate will be released June 25, and it could show an even larger contraction. That’s based on the Commerce Department’s Quarterly Estimates for Selected Service Industries report for the first quarter, released Wednesday.

It showed that revenue in the U.S. health-care and social-assistance sector fell 2% in the first quarter from the fourth quarter of 2013, not adjusted for seasonal variations or price changes. Hospital revenue fell a seasonally adjusted 1.3% from the prior quarter. The Commerce Department’s last GDP report, though, said inflation-adjusted spending on health-care services surged to a seasonally adjusted annual level of $1.848 trillion in the first quarter from $1.808 trillion in the fourth quarter of 2013. That estimate for spending on health care boosted overall GDP growth by 1.01%age point, keeping the 1% contraction from being even worse.

J.P. Morgan Chase economist Daniel Silver and Pierpont Securities economist Stephen Stanley both cautioned that it’s not clear exactly how the Commerce Department will adjust GDP to account for the new health-care services data. But they and other analysts downgraded their estimates for the first quarter based on the new survey, as well as other recently released data. Mr. Silver predicted GDP declined at a 1.6% pace in the first three months of the year. Mr. Stanley predicted contraction at a 2% pace. Macroeconomic Advisers also estimated GDP shrank at a 2% pace. “Ouch,” Mr. Stanley said in a note to clients.

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Cooling Sales Curb Optimism on US Economy (Bloomberg)

American consumers paused for breath in May as retail sales climbed less than forecast following an impressive three-month run, tempering forecasts for a rebound in growth this quarter. The 0.3% increase in purchases last month fell short of the median estimate of economists surveyed by Bloomberg that projected a 0.6% advance, Commerce Department figures showed today. Receipts for April were revised up to cap the strongest three months in almost two years. The slowdown in demand last month prompted some economists to shave forecasts for second-quarter gross domestic product just as reports this week signaled the economy slumped at the start of the year even more than previously estimated.

Other data today showing consumer confidence is firming and the job market is healing brighten the outlook for the rest of 2014. “It’s a story of gradual improvement,” said Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut, and the second-best forecaster of retail sales over the past two years, according to Bloomberg data. “We’re not getting the big acceleration that many people hoped for.”

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Central banks cannot win, they can only try to temporarily give the impression they can. Don’t be fooled.

Carry Trade Nirvana Stymies Central Banks (Bloomberg)

Policy makers in Australia, New Zealand and Japan face the threat that the $5.3 trillion a day global foreign exchange market will derail their efforts to deliver sustainable economic growth. Central bank chiefs Glenn Stevens, Graeme Wheeler and Haruhiko Kuroda are struggling to rein in surging demand for their nations’ assets as their currencies climbed this week with investors focused on falling volatility and Japanese stocks. The kiwi and Aussie led gains among 31 major peers since June 6 while the yen is poised for its strongest week since early April. One-month implied volatility for Australia’s dollar slid its lowest level since 1996 yesterday, prompting traders to ignore this year’s 32% drop in prices for iron ore, the nation’s biggest export.

“As volatility moves lower, it’s really hard to fight the attraction of the Aussie and kiwi as carry trade currencies,” said Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “With the RBA clearly going no where for a long time to come, whenever volatility falls the carry attraction of the Aussie increases, which seems to be overriding every other factor at the moment.” In carry trades, investors buy high-yielding assets using money from nations with lower interest rates. A drop in the funding currency or a rise in the target exchange rate adds to the return from the interest-rate differential. Lower volatility lessens the chances the trade gets upended by sharp swings in exchange rates.

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They’ve painted themselves into a corner they can only get out of by inflicting damage.

Carney Sees Housing Debt Risk as Rate Increases Near (Bloomberg)

Mark Carney said rising U.K. mortgage debt may threaten Britain’s recovery as he signaled interest rates might start to rise earlier than anticipated. While investors don’t see the Bank of England’s benchmark rate increasing until next April, the central bank governor said it “could happen sooner than markets currently expect.” Speaking yesterday at the annual Mansion House speech in the City of London, he said higher borrowing costs could stretch over-leveraged households and undermine financial stability. The pound rose after the comments, which followed a pledge from Chancellor of the Exchequer George Osborne that the BOE’s Financial Policy Committee will get new powers to curb mortgage lending as a surging housing market raises concern about a potential bubble. Using those measures to head off a potential crisis could allow Carney to keep interest rates at a record-low for longer.

Employing such macroprudential tools “might also give Mr. Carney a bit of breathing space,” Neil MacKinnon, an economist at VTB Capital in London and a former U.K. Treasury official, said in a note. “However, market economists will be bringing forward the timing of the first U.K. rate hike into the end of this year.” MacKinnon said he will stick with his own forecast for an interest-rate increase in October. Before the speech, more than half the 29 financial institutions surveyed by Bloomberg predicted an increase in central bank rates by March, while forward contracts based on the sterling overnight interbank average, or Sonia, showed investors were betting the benchmark rate would rise 25 basis points by May.

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Carney Gets New Powers To Curb Mortgages To Prevent Asset Bubble (Guardian)

George Osborne is to give the Bank of England sweeping new powers to control the size of mortgages, as the Bank governor warns that interest rates are likely to rise before Christmas. Amid fears that rapidly rising house prices risk becoming a bubble that would threaten Britain’s economic recovery, the mortgage control measures will give Threadneedle Street the ability to impose direct curbs on the property market for the first time since the deregulation of the 1980s abolished queues for home loans. The moves by the Treasury to limit the amount of money people can borrow are an attempt to avoid damaging the entire economy with an increase in interest rates – something the governor of the Bank, Mark Carney, warned on Thursday could happen before the end of the year.

Carney said: “There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.” The City expects the first increase in official borrowing costs since 2007 to take place early next year. The new powers, which Osborne intends to push through parliament before next year’s election, were rejected as too draconian two years ago when the Treasury was deciding on the weapons needed by the Bank to prevent surges in asset prices causing financial crises. But the rapid recovery in the property market – especially in London, where price increases have averaged 18% over the last year – has forced a rethink, with Osborne convinced that the Bank should have a full range of alternatives to higher interest rates as a way of cooling down the housing market.

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Unintended consequences?!

UK Housebuilders Collapse On Rate Rise Fears (Telegraph)

Investors took fright and dumped shares in housebuilders after Mark Carney, the Governor of the Bank of England, signalled an earlier than expected interest rate rise, and Chancellor George Osborne gave the central bank new powers to curb mortgage lending in an effort to stave off a housing bubble. Persimmon dropped 4.8pc and Barratt Developments slid 4pc – the two heaviest fallers in the FTSE 100. In the mid-cap FTSE 250, Taylor Wimpey tumbled 4.7pc, Berkeley Group shed 4.2pc and Bovis Homes lost 4.1pc. Fears about the impact of a rate rise extended beyond the housebuilder stocks. Travis Perkins, the builders’ merchant also fell 2.6pc, while B&Q-owner Kingfisher cheapened 2.7pc. Howden Joinery, the kitchen supplier, was another casualty and declined 4.1pc.

Real estate investment trusts also fell, with British Land down 3.4pc and Land Securities off 3.2pc. The declines weighed on the wider market, with the FTSE 100 sliding 0.5pc to 6,809 and the FTSE 250 plunging 1.9pc to 15,826. Rebecca O’Keeffe, head of investment at broker Interactive Investor, said: “After months of managing market expectations on interest rates, we’ve seen the first hawkish signs from Mark Carney. “The remarks from the Governor have widened his immediate options as he starts to prepare the market for a return to higher rates. “With house price rises now a serious political issue and an increasing threat to financial stability, the Governor’s comments are the first warning to households that the landscape may be changing and that interest rates may rise sooner than expected.”

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Dropping fast. Gravity at work.

China May Home Sales Decline 11%, New Property Construction Down 19% (BW)

China’s home sales fell 11% in May from a year earlier amid slowing demand even after the central bank ordered easing of mortgage lending. The value of homes sold declined to 446.1 billion yuan ($72 billion) from 503 billion yuan in the same month in 2013, according to the difference between National Statistics Bureau data for the first half of the year and the first five months. The value of sales from January to May fell 10.2% to 1.97 trillion yuan from a year earlier, the data showed. China’s housing market, which faces a surplus of empty units as prices fall, has become a drag on the growth of the world’s second-largest economy. The central bank last month called on the nation’s biggest lenders to accelerate the granting of mortgages, urging them to give priority to first-home buyers.

“The property market is still not improving,” said Jinsong Du, a Hong Kong-based property analyst at Credit Suisse Group AG. “Developers may cut prices further, but the question is whether that will attract buyers.” Home prices fell for the first time on a monthly basis in May since June 2012, according to SouFun Holdings Ltd., China’s biggest real estate website owner. New property construction fell 19% to 599.1 million square meters (6.4 billion square feet) in the first five months of 2014 from a year earlier, today’s data showed.

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Down down down. The danger here is that they borrowed huge amounts of money to grow, and there is no growth, but the loans still need to be paid back.

China Real Estate Developers Face More Price Cuts In Q3 (Reuters)

Chinese property developers may be forced to embrace steeper price cuts, broader promotions or a change in strategy in the third quarter as they scramble to meet 2014 sales targets after many achieved less than 30% of their forecasts in the first five months. Price cuts would help boost sales and lower inventories, easing an oversupply of housing in the world’s second-largest economy. The cuts could however, come at the cost of profitability for many developers. Some developers are opting to adjust their strategies by introducing more basic housing where demand is solid compared to luxury apartments and by turning to commercial projects. “We are seeing more developers changing to renting their properties from selling because the market is very slow. By renting they can at least get some revenue,” said Raymond Wei, the Shanghai-based general manager for the commercial sector for realtor Centaline Property Agency Ltd.

Rating agency Standard and Poor’s said this week it expects China’s property sales to pick up from June, boosted by price cuts, and forecast full-year sales volume to rise 10%. Thomas Frank, the head of valuation in China for property consultancy Knight Frank, said a 20% cut in prices in second and third-tier cities would be more healthy for sales. China’s revenues from property sales dropped 8.5% in the first five months from a year earlier, the National Bureau of Statistics said on Friday, while growth in average new home prices in China slowed to a near one-year low in April, official data showed in May.

After seeing record sales of 8.14 trillion yuan ($1.31 trillion) in 2013, developers lifted their targets for this year by as much as 60%, despite a forecast slowdown in the real estate market as liquidity tightened and Beijing continued to cool the overheated sector. In the first five months, at least 13 Hong Kong-listed Chinese developers said they recorded a drop in sales compared to a year earlier, with declines ranging from single digits to more than 50%. China Resources Land said its sales fell 32%, resulting in it meeting just 28% of its full-year target.

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Wrong lessons learned.

China No-Money-Down Housing Echoes U.S. Subprime Loan Risks (Bloomberg)

China’s home buyers are being offered no-money-down purchases in an echo of the subprime lending that triggered a U.S. economic meltdown and the global financial crisis. Deals skirting government requirements for minimum 30% down payments have emerged this year from Guangzhou and Shenzhen in the south to Beijing in the north as real-estate sales slump, according to state media and statements by government agencies and developers. Loosening down-payment requirements could erode China’s financial stability by adding to risks for property companies, lenders and an economy already heading for the weakest growth in 24 years. Government warnings to consumers indicate that officials will strive to limit such arrangements, a sign of stress in a property market with a glut of homes. “The risk is severe for developers and third parties because there is no commitment from home buyers,” said Ding Shuang, senior China economist at Citigroup Inc in Hong Kong.

“Zero down payment has appeared in the U.S. before. It basically enabled unqualified people to buy houses,” said Ding, who used to work for the International Monetary Fund. “We need to see whether this will become widespread,” Ding said. “For now, it seems still sporadic.” The practice threatens to add to the build-up of risks in China’s $7 trillion shadow banking industry, with developers or third parties arranging funding to cover down-payment requirements, according to Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. In Guangzhou, in the southern province of Guangdong, nearly 20 housing developments rolled out no-down-payment plans to boost sales, Nanfang Daily, Guangdong’s official Communist Party newspaper, reported in April, as government agencies in Guangzhou and Shenzhen issued warnings against the practice. [..]

A 22% drop in the construction of new buildings in the first four months of 2014 highlighted the potential for property to drag down an economy projected to grow 7.3% this year, the slowest pace since 1990. UBS AG has estimated real-estate accounts for more than 25% of demand in the economy, including spin-offs from construction machinery to household appliances. “The oversupply problem is very severe,” Gan Li, director of the Survey and Research Center for China Household Finance, said in Beijing on June 10, citing a survey of 28,000 households in 29 provinces that indicated 22% of urban homes were vacant in 2013.

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Pushing on a string.

China’s New Loans, Money Supply Top Estimates (Bloomberg)

China’s new yuan loans and money supply topped estimates in May as the government supports economic growth while reining in shadow banking. Local-currency loans were 870.8 billion yuan ($140 billion), the People’s Bank of China said on its website yesterday. M2, the broadest measure of money supply, rose 13.4%, compared with a median projection for 13.1%. China is in danger of missing a 2014 target for economic growth of about 7.5%, prompting Premier Li Keqiang to speed up government spending and make limited cuts to lenders’ reserve requirements. The World Bank warned last week that rapid credit growth and debt accumulation by local governments are risks to financial stability.

“May is the first month this year we’ve seen a sizable easing of liquidity as evidenced by the strong new bank loans,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “It suggests that policy makers are turning more serious about the downside risks to the economy and began ramping up pro-growth measures.” The PBOC’s report was released after the close of China’s stock markets. The benchmark Shanghai Composite Index fell for the first time this week on concern economic data to be released later today for May industrial output and retail sales, and January-May fixed-asset investment, will be weaker than analysts estimate.

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Portrait of a collapsing market.

China’s First-Home Buyers Shrink as Market Slows (Bloomberg)

The ranks of China’s first-home buyers have shrunk amid a market slowdown, according to a report from the Survey and Research Center for China Household Finance. About 20% of buyers are purchasing homes for the first time this year, according to a survey between August and March, compared with 48% in 2012, said Gan Li, director of the center and a professor at Southwestern University of Finance Economics. Such buyers accounted for 90% in 2000, said Gan, who surveyed 28,000 households in 29 Chinese provinces. “The era of Chinese real estate industry being driven by first-time homebuyer demand is over,” Gan said after a press conference in Beijing today. “The market is going to be driven by investment and improvement in demand that is sensitive to price.”

Chinese government’s four-year efforts to rein in property prices have been aimed at squeezing speculative investments out of the market by increasing second-home mortgages and imposing home-purchase restrictions. Home prices fell for the first-time in May on a monthly base since June 2012, according to SouFun Holdings Ltd., the country’s biggest real estate website. More than 55% of households purchasing new homes this year already own one place, compared with 43% in 2013, according to the report. 21% of Chinese urban households own more than one home, it said.

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‘Sticks With Easing’ doesn’t begin to tell the story. Abe is wagering it all. But the problem in Japan is not the money supply – which he’s fast increasing – , it’s consumer spending. And the only way to increase that is by trying to hurt people’s savings even more than he already has. However, that does not make people spend, it just makes them even more scared, and less prone to spending.

BOJ Sticks With Easing as Analysts Delay Action Calls (Bloomberg)

The Bank of Japan raised its view of overseas economies while maintaining unprecedented stimulus as Governor Haruhiko Kuroda strives to boost inflation that remains short of a 2% target. The central bank will continue to expand the monetary base at a pace of 60 trillion yen to 70 trillion yen ($688 billion) per year, it said in a statement today in Tokyo, in line with estimates of all 33 economists in a Bloomberg News survey. A rebound in consumer sentiment and signs of strength in business investment indicate some resilience in the world’s third-biggest economy after April’s sales-tax increase. At the same time, a rebound in the yen after last year’s 18% decline against the dollar threatens to undercut inflation, with most economists surveyed by Bloomberg forecasting the central bank will boost stimulus this year to achieve its goal.

“The BOJ is growing more confident about the economy and its outlook,” said Naoki Iizuka, an economist at Citigroup Inc. in Tokyo. “Still, weakness in consumer spending and a halt in yen declines make it doubtful inflation will accelerate, prompting the BOJ to add to easing in October.” Consumer prices excluding fresh food rose 3.2% in April, the fastest pace since 1991. Stripping the impact of the 3%age point increase in the sales tax, core prices — the BOJ’s preferred inflation gauge — climbed 1.5%, according to a BOJ estimate.

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What is the benefit to society of this? And why then do we tolerate it?

Dark Pools, Off-Exchange Trading Of US Stocks On The Rise (Bloomberg)

The rise of off-exchange trading in the U.S. stock market continues unabated even as regulators question the wisdom of allowing the shift to continue. Shares changing hands in private venues such as dark pools accounted for 40.4% of total share volume on June 10, according to data compiled by Bloomberg. That’s the most since 41.7% took place off-exchange on June 22, 2012. The three biggest exchange companies each matched about 20% of trading on June 10. The high came after Securities and Exchange Chair Mary Jo White last week voiced concerns about the level of trading taking place on venues where bids and offers are kept private, masking the true depth of demand for shares. The rise in off-exchange trading came as calmness pervaded markets, with the Chicago Board Options Exchange Volatility Index, also known as the VIX, sliding to a seven-year low last week.

“Its been clearly demonstrated that the less volatile markets are, the more people trade away from exchanges,” Justin Schack, partner and managing director for market structure analysis at Rosenblatt Securities Inc., said in a phone interview. “Brokers also have an incentive to avoid exchanges and their fees, and with overall volumes low, the pressure to avoid costs is quite high.” The total number of shares traded on June 10 was 5.19 billion, according to data compiled by Bloomberg, compared with this year’s daily average of about 6.5 billion. Alternative trading systems, broker-run private venues which include dark pools, have been under increasing scrutiny in recent months. The New York attorney general has requested information from them in a probe related to high-frequency trading, a person familiar with the matter said last month. In May, ATSs began reporting more data on their trading to the Financial Industry Regulatory Authority, which posted the information on its website.

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How many zeroes can you take before getting dizzy?

12 Numbers From The Global Financial Ponzi Scheme (M. Snyder)

The truth is that our financial system is little more than a giant pyramid scheme that is based on debt and paper promises. It is literally a miracle that it has survived for so long without collapsing already. When Americans think about the financial crisis that we are facing, the largest number that they usually can think of is the size of the U.S. national debt. And at over $17 trillion, it truly is massive. But it is actually the 2nd-smallest number on the list below. The following are 12 numbers about the global financial Ponzi scheme that should be burned into your brain…

$1,280,000,000,000 – Most people are really surprised when they hear this number. Right now, there is only $1.28 trillion worth of U.S. currency floating around out there.
$17,555,165,805,212.27 – This is the size of the U.S. national debt. It has grown by more than $10 trillion over the past ten years.
$32,000,000,000,000 – This is the total amount of money that the global elite have stashed in offshore banks (that we know about).
$48,611,684,000,000 – This is the total exposure that Goldman Sachs has to derivatives contracts.
$59,398,590,000,000 – This is the total amount of debt (government, corporate, consumer, etc.) in the U.S. financial system. 40 years ago, this number was just a little bit above $2 trillion.
$70,088,625,000,000 – This is the total exposure that JPMorgan Chase has to derivatives contracts.
$71,830,000,000,000 – This is the approximate size of the GDP of the entire world.
$75,000,000,000,000 – This is approximately the total exposure that German banking giant Deutsche Bank has to derivatives contracts.
$100,000,000,000,000 – This is the total amount of government debt in the entire world. This amount has grown by $30 trillion just since mid-2007.
$223,300,000,000,000 – This is the approximate size of the total amount of debt in the entire world.
$236,637,271,000,000 – According to the U.S. government, this is the total exposure that the top 25 banks in the United States have to derivatives contracts. But those banks only have total assets of about $9.4 trillion combined. In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 25 to 1.
$710,000,000,000,000 to $1,500,000,000,000,000 – The estimates of the total notional value of all global derivatives contracts generally fall within this range. At the high end of the range, the ratio of derivatives exposure to global GDP is about 21 to 1.

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Must read from George. Get to know yourself.

Shifting Baseline Syndrome And The Values Ratchet (Monbiot)

Any political movement that fails to understand two basic psychological traits will, before long, fizzle out. The first is Shifting Baseline Syndrome. Coined by the biologist Daniel Pauly, it originally described our relationship to ecosystems, but it’s just as relevant to politics. We perceive the circumstances of our youth as normal and unexceptional – however sparse or cruel they may be. By this means, over the generations, we adjust to almost any degree of deprivation or oppression, imagining it to be natural and immutable.

The second is the Values Ratchet (also known as policy feedback). If, for example, your country has a public health system which ensures that everyone who needs treatment receives it without payment, it helps instil the belief that it is normal to care for strangers, and abnormal and wrong to neglect them. If you live in a country where people are left to die, this embeds the idea that you have no responsibility towards the poor and weak. The existence of these traits is supported by a vast body of experimental and observational research, of which Labour and the US Democrats appear determined to know nothing.

We are not born with our core values: they are strongly shaped by our social environment. These values can be placed on a spectrum between extrinsic and intrinsic. People towards the intrinsic end have high levels of self-acceptance, strong bonds of intimacy and a powerful desire to help other people. People at the other end are drawn to external signifiers, such as fame, financial success, image and attractiveness. They seek praise and rewards from others. Research across 70 countries suggests that intrinsic values are strongly associated with an understanding of others, tolerance, appreciation, cooperation and empathy. Those with strong extrinsic values tend to have lower empathy, a stronger attraction towards power, hierarchy and inequality, greater prejudice towards outsiders and less concern for global justice and the natural world. These clusters exist in opposition to each other: as one set of values strengthens, the other weakens.

People at the extrinsic end tend to report higher levels of stress, anxiety, anger, envy, dissatisfaction and depression than those at the intrinsic end of the spectrum. Societies in which extrinsic goals are widely adopted are more unequal and uncooperative than those with deep intrinsic values. In one experiment, people with strong extrinsic values who were given a resource to share soon exhausted it (unlike a group with strong intrinsic values), as they all sought to take more than their due(15).

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Spain and Britain can now do what they always wanted: let her rip! Monsanto wins another one.

EU Deal Opens Floodgate to GMO Crops (RT)

European Union governments have decided to let member states go their own way when it comes to genetically modified organisms (GMOs), allowing EU nations to either ban the crops or grow them as they see fit. The move ends years of legislative deadlock. At a meeting in Luxembourg, EU environment ministers from 26 out of 28 member states put their weight behind a 2010 proposal to give national governments an opt out from rules, making the 28-member bloc a single market for GMOs. Only Belgium and Luxembourg voted against it, although the final decision rests with the European Parliament, which is expected to endorse the plan, Bloomberg Businessweek reports.

A political split in Europe between countries in favor of GMOs, such as Britain and Spain, and those firmly against them, including France, has delayed EU-wide permission to grow them. This has prompted complaints from trading partners – such as the US, where GMOs are legal – which are seeking to expand the global bio seed market, which is valued at almost US$16 billion a year. The law will accelerate EU level endorsements for requests from US companies like Monsanto to plant genetically altered crops, which have been cleared as safe by scientists working for the European Commission. “This is a real step forward in unblocking the dysfunctional EU process for approving GM crops, which is currently letting down our farmers and stopping scientific development,” said Owen Paterson, UK secretary of state for the environment.

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Apr 242014
 April 24, 2014  Posted by at 2:38 pm Finance Tagged with: , , ,  8 Responses »

Unknown The Peninsula, Virginia, Lt. George A. Custer with dog 1862

That’s always a hard question to answer. At what point does government policy become criminal? Since governments make the laws, perhaps never. But then again, countries tend to have constitutions, and government actions can violate those. Still, before you know it, you get trapped and stuck in lawyer lingo limbo, and that’s not what I’m looking for. I’m wondering to what depths a government can go in its actions vis à vis it own people. So maybe I should rephrase this, maybe a more relevant question would be when government policy becomes morally repugnant. There I sure have a few candidates.

The Guardian reports on a study published this week, entitled Wars in Peace, and published by the Royal United Services Institute (RUSI), which states that Britain’s post-cold war peacetime war efforts will cost more than $100 billion (I guarantee you that’s still a conservative number). Almost half of that is needed to treat the veterans of the wars in Iraq and Afghanistan. Why have these wars been fought? Who knows. Have they been useful in any way? I would have to say I think not, because the study says “the bulk of the money has been spent on interventions judged to have been “strategic failures”. And “there is no longer any serious disagreement” over how the UK’s role in the Iraq war helped to increase the radicalisation of young Muslims in Britain. “Far from reducing international terrorism … the 2003 invasion [of Iraq] had the effect of promoting it … ”

To get there, the British and American troops, plus a ragtag small band of others present only to give the efforts an air of legitimacy, killed 100,000 Iraqis and sent 2 million fleeing from their homes. And now almost $50 billion will be needed to supply long-term care to the wounded and traumatized British veterans who killed and maimed them. I find it easier to understand why American society doesn’t go after Bush, Rumsfeld and Cheney (though I think it’s ludicrous) than why Britain doesn’t go after Tony Blair. The only plausible reason is that many of those who supported Blair when he sent Britain’s young and promising, the future of the nation, into desert hell-holes to go and kill the foreign man, only to return as mental if not physical cripples, are still in power today. In both countries, it’s been more than sufficiently established that both people and parliaments were served blatant lies. That fact that even parliaments don’t dare fight back tell you all you need to know about the level and extent of democracy in the Angle-Saxon world.

In this same vein, there is something else I read this morning that first made me wonder about governments and criminal behavior. Bloomberg:

UK Return To Loans for 95% of Home Value Seen as Risky

With U.K. home prices rising at the fastest pace since 2010, banks are making more high loan-to-value mortgages. The number of loan products available to borrowers with a 5% deposit has tripled to 132 since the government in October extended its Help-to-Buy program, which assists buyers with down payments on new homes [..] These higher risk loans are similar to those that spurred the U.K.’s property crash in 2008, when [..] home prices fell 17%. Today, with just 5% down, borrowers may later find themselves underwater, owing more on their properties than they are worth, said Rob Wood, a former BOE economist. “Small falls in house prices can push them into negative equity,” said Wood.

Prime Minister David Cameron’s support for homebuyers is boosting the economy before next year’s national elections. Help to Buy allows purchasers to take out a mortgage with a down payment of as little as 5% for a home costing as much as 600,000 pounds. Willem Buiter, an external member of the BOE’s rate-setting committee from 1997 to 2000, said earlier this month that encouraging people to take out higher loan-to-value mortgages is bad policy and the market is overheating. “If it’s a bubble, we’ll be able to tell after it pops,” he said at a briefing in London. “If it isn’t one, it sure looks like one.”

Seen as risky, says the headline. Yeah. Well, I see a government returning to subprime loans mere years after many people lost their shirt on their homes as criminal. Or make that “morally repugnant” if you will. Help to Buy is not helping the British people, other than to put their heads in a noose. Cameron is very aware of this, just as Blair and Bush knew many of their young soldiers would never return in one piece. Same difference.

As for Buiter’s “If it isn’t a [bubble], it sure looks like one,” we already have the answer to that. It’s what David Stockman has aptly christened “Canary-On-Thames”. Stockman cites Brett Arends at Marketwatch, who in “Ominous Signs For London Real Estate” notices that while house prices are still rising in London, rents are falling. Stockman writes:

In the attached survey of soaring real estate prices in Prime Central London [Brett Arends] does not bother to marvel at their near vertical ascent – up two-thirds in the past five years and 2X in the last decade – or enumerate the various sheiks, oligarchs, moguls and potentates who have converged on the posh precincts along the River Thames. Instead, he goes straight to an apparent anomaly: While property prices are soaring, rents are falling. During the past year, for example, property prices in Mayfair are up 5%, but rents are down 8%. Likewise, in the area north of Hyde Park, prices have risen 10%, while rents have fallen by 8%. Overall, rents peaked in 2011 in Prime Central London, and have been slowly falling ever since.

Needless to say, falling rents are not a sign of scarcity – even in the toniest sanctuaries of one of the planet’s hottest urban centers. Nor are they an endorsement for the real estate brokers’ pitch that central London is different – an irreplaceable treasure of civilization that is immune to the normal laws of economics. What the rent/price anomaly really means is that “yields” or cap rates in central London have been falling drastically. In fact, they are at an all-time low according to Frank Knight – the acknowledged authority on London real estate. From a 10% yield in the mid-1990s, cap rates had fallen to 4% by March 2009, and now stand at just 2.8%.

Check any prior property bubble peak – say the Miami condo market in 2006-07 – and what you will find is plummeting cap rates, pushing down into the 2-4% zone. And what you will also find not far behind is a central bank running its printing presses overtime. In short, the economic deformation spotted by Arends is a monetary phenomenon, not a reflection of physical supply and demand or simply the mechanics of the free market at work. The add factor is cheap credit – the marginal source of the “bid” that can keep apartment and townhouse prices soaring even when the units are empty.

What is unique about London is English Law and open borders. So that makes central London not only a haven for so-called “flight capital”, but also the virtual epi-center of a global financial bubble that has been created by the combined money printing exertions of all the world’s major central banks. Stated differently, the monumental global expansion of cheap credit since the turn of the century – up from $1 trillion to $25 trillion in China alone – has caused a huge inflation of real estate and resource values all around the planet.

Yes, this means that the Cameron/Osborne Help-to-Buy bubble is already well past its best-before date. Even if thousands more foreign buyers high on cheap credit and shady deals may flock in before this city-of-cards comes tumbling down. What Downing Street 10 will have done is to dislocate huge numbers of Londoners unable to keep up with rising prices, and fool many many gullible thousands more into signing up for the property ladder only to to be unceremoniously kicked off with huge debts tied around their necks.

There are those who would argue that in financial systems and “free” markets, those who don’t pay attention get fleeced, and that this has a function. But for a government and central bank to push and advocate this sort of development, just to look better for a short time, is a whole different story. Not a day goes by that I don’t hear and read yet more about the miraculous recovery Britain has accomplished for itself. Hail Cameron! Well, reading the above, you, like me, may have an pretty clear idea where this is going. My advice to the British people: take ’em to court, let them explain how the upcoming disaster came to be, and even if the law says it doesn’t constitute criminal behavior, make sure to let ’em sweat. So the next set of doofuses will think twice before trying it again.

Obviously, there are very similar “miraculous recovery” stories doing the rounds about the US. And for very similar reasons. Try New York real estate prices. Nevertheless, both existing and new home sales numbers that came out this week spell it out as clear as you can wish it to be: the US housing recovery is dead. Falling sales, construction dead in the water, the works.

I read something toady to the extent that “100% of experts polled agreed that US interest rates would start rising significantly this year”. I’ve said it many times before, and I’ll say it again: GET OUT! You’re not all going to be among the 1% of people who beat the markets. Go find something more useful to do with your time and your money and your life than to spend it all in this cheap credit casino that was constructed specifically to take it all away from you.

US New Home Sales Drop 14.5% In March (AP)

The number of Americans buying new homes plummeted in March to the slowest pace in eight months, a sign that real estate’s spring buying season is off to a weak start. The Commerce Department said Wednesday that sales of new homes declined 14.5% last month to a seasonally adjusted annual rate of 384,000. That was the second straight monthly decline and the lowest rate since July 2013. Sales plunged in the Midwest, South and West in March. But they rebounded in the Northeast, where snowstorms in previous months curtailed purchases. New-home sales have declined 13.3% over the past 12 months. “Our core view is that the housing market has stalled and won’t contribute” to overall economic growth this year, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Rising home prices have caused some buyers to back off at the lower end of the market, while new-home buyers at the top continue to buy. As a result, median sales prices jumped 12.6% during the past month to $290,000. Home sales usually improve with the start of the spring. More would-be buyers venture to open houses. Families with children often begin to look for homes so that they can move once the school year ends. Builders anticipated a snap back with the warmer weather. There were 193,000 new homes for sale at the end of the month, about 39,000 more than the same period last month.

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The avearge American should fear rising rates more then the Fed.

Why The Fed Fears Honest Interest Rates (Alhambra)

I mentioned earlier today that pretty much the only sector of the economy (outside of government run lending for university waste) acting favorably toward interest rate stimulus was autos. Prior to the historic credit selloff and MBS rout in the middle of last year, you could add housing to the list. The latest figures for March 2014 from the National Association of Realtors leave no doubt that housing has disengaged over the interim.

ABOOK Apr NAR Home Sales

The obsession with temperature continues, even though March was free and clear of the kind of unusual storms plaguing January and February. Again, such pandering is indicative of the kind of groping and pleading for something that can explain what is otherwise obvious while still preserving the monetarist view and paradigm. To accept what is obvious means either total refutation or more experimentation with the limits of rational expectations theory.

ABOOK Apr NAR Home Sales Y-Y

The change in trend clearly predated the change in season, but aligns exactly with the inflection in mortgage finance and credit. This should be much more alarming to mainstream observers, as I have noted repeatedly that a relatively minor increase in interest rates should not have provoked something so dazzling in its contrast. How can 80 or so basis points lead to these results, absent any artificial market factors? Once more, the tide of asset inflation.

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Explaining The Horrendous US Home Sales Report (Zero Hedge)

This is our best attempt at playing clueless propaganda cheerleaders also known as economists:

Q. Why did new home sales crash in all regions except the traditionally coldest, wettest, and snowiest Northeast, where sales rose?

A. Uhm, because it obviously snowed everywhere except in the Northeast.
And there you have it: spin 101 for braindead zombies and vacuum tubes.

And for those confused about the current state of the “housing recovery”, here is a longer-term chat:

Source: Bullshit Bureau

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Fed Money Printers At Work: March Y/Y New Home Sales Down 12% (Alhambra)

Economists blaming weather for the real estate/housing pause were cautiously optimistic for March ahead of this week s housing data windfall.

Economists expect that sales rose 2.3 percent to a seasonally adjusted annual rate of 450,000 last month, according to a survey by FactSet. New-home buying dipped 3.3 percent in February. Harsh winter storms that month curtailed purchases in the Northeast, while buying also fell in Western states where prices increases during 2013 have hurt affordability.

According to the Commerce Department, March was actually far worse than February, and, depending on your view of bubbles, far better. The seasonally adjusted estimated level of new home sales fell to 384k in March from 449k in February. That was 18% below January s pace. Unadjusted, sales in March 2014 were 12% below March 2013.

ABOOK Apr New Home Sales

ABOOK Apr New Home Sales Y-Y

Now that winter is fading into spring, a lack of supply is forming as the new narrative excuse. That would be one way to explain this:

ABOOK Apr New Home Sales Prices

But if there was surging demand not being met by existing supply, basic, common sense economics (not orthodox) posits that we should be seeing a housing construction boom right now. After all, rising prices via a shortage screams for an increase in production, yet we have been observing the exact opposite.

ABOOK Apr 2014 RE Constr Single Fam NSA

Those with direct access are bidding far past what fundamental buyers (those that actually want to live in a dwelling) are able to obtain. That is not a supply problem, nor is this a market; it is the tide of intentional asset inflation.

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UK Return To Loans for 95% of Home Value Seen as Risky (Bloomberg)

When James Seabury found his first home in northeast England in November, he had to borrow almost all of the 140,500-pound ($236,000) purchase price. “Seven thousand pounds was all we had for a deposit,” said Seabury, 30, a town planner whose loan covered 95% of the purchase price. “We managed to get the mortgage sorted and move in within four or five months. It was really quick.” With U.K. home prices rising at the fastest pace since 2010, banks are making more high loan-to-value mortgages.

The number of loan products available to borrowers with a 5% deposit has tripled to 132 since the government in October extended its Help-to-Buy program, which assists buyers with down payments on new homes, according to Genworth Financial Inc. These higher risk loans are similar to those that spurred the U.K.’s property crash in 2008, when the country’s biggest mortgage lender, Northern Rock Plc, collapsed, and home prices fell 17%. Today, with just 5% down, borrowers may later find themselves underwater, owing more on their properties than they are worth, said Rob Wood, a former Bank of England economist. “Small falls in house prices can push them into negative equity,” said Wood, who works at Berenberg Bank in London.

Prime Minister David Cameron’s support for homebuyers is boosting the economy before next year’s national elections. Help to Buy allows purchasers to take out a mortgage with a down payment of as little as 5% for a home costing as much as 600,000 pounds. Willem Buiter, an external member of the BOE’s rate-setting committee from 1997 to 2000, said earlier this month that encouraging people to take out higher loan-to-value mortgages is bad policy and the market is overheating. “If it’s a bubble, we’ll be able to tell after it pops,” he said at a briefing in London. “If it isn’t one, it sure looks like one.”

Read more …

Canary-On-Thames: Soaring Property Prices And Falling Rents (Stockman)

Brett Arends is one member of the financial commentariat who can see through the outward manifestations of bubble finance. In the attached survey of soaring real estate prices in Prime Central London he does not bother to marvel at their near vertical ascent – up two-thirds in the past five years and 2X in the last decade – or enumerate the various sheiks, oligarchs, moguls and potentates who have converged on the posh precincts along the River Thames. Instead, he goes straight to an apparent anomaly: While property prices are soaring, rents are falling. During the past year, for example, property prices in Mayfair are up 5%, but rents are down 8%. Likewise, in the area north of Hyde Park, prices have risen 10%, while rents have fallen by 8%. Overall, rents peaked in 2011 in Prime Central London, and have been slowly falling ever since.

Needless to say, falling rents are not a sign of scarcity – even in the toniest sanctuaries of one of the planet’s hottest urban centers. Nor are they an endorsement for the real estate brokers’ pitch that central London is different – an irreplaceable treasure of civilization that is immune to the normal laws of economics. What the rent/price anomaly really means is that “yields” or cap rates in central London have been falling drastically. In fact, they are at an all-time low according to Frank Knight – the acknowledged authority on London real estate. From a 10% yield in the mid-1990s, cap rates had fallen to 4% by March 2009, and now stand at just 2.8%.

Check any prior property bubble peak – say the Miami condo market in 2006-07 – and what you will find is plummeting cap rates, pushing down into the 2-4% zone. And what you will also find not far behind is a central bank running its printing presses overtime. In short, the economic deformation spotted by Arends is a monetary phenomenon, not a reflection of physical supply and demand or simply the mechanics of the free market at work. The add factor is cheap credit—the marginal source of the “bid” that can keep apartment and townhouse prices soaring even when the units are empty.

What is unique about London is English Law and open borders. So that makes central London not only a haven for so-called “flight capital”, but also the virtual epi-center of a global financial bubble that has been created by the combined money printing exertions of all the world’s major central banks. Stated differently, the monumental global expansion of cheap credit since the turn of the century – up from $1 trillion to $25 trillion in China alone – has caused a huge inflation of real estate and resource values all around the planet. As the global bubble inflated, the developers, builders, miners, shippers and material processors made fortunes far beyond ordinary measures of return on the tangible and intellectual capital involved in these enterprises.

Read more …

Ominous Signs For London Real Estate (MarketWatch)

Uh-oh. Is the biggest bubble in the western world about to pop? I’ve learned from long experience that one can never tell for certain. But the signs are ominous. I’m in London, where real estate is just entering the sixth year of a mania that seems to be putting all others in the shade. London’s property market today makes Las Vegas in 2005 look like penny ante poker in an old people’s home. It makes you think of Tokyo in the late ‘80s. This mania is massive. Everyone here is rich — on paper. Every piece of real estate is worth gazillions. My old one-bedroom, fourth-floor walk-up would apparently now sell for nearly $1 million. It measured 450 square feet. Did I mention there was no elevator?

Everyone is talking about how much money they have made on their home in the last year and how much more they are going to make in the next. Prices are up every month. Values are way, way past the levels seen even in 2007. Conversations here go like this: “Did you hear? A flat just like mine over on Thingummy Avenue just sold for $2.2 million. I think it was about the same size as mine, but it didn’t have a third bathroom, and the view wasn’t as good. I think my place is now worth $2.5 million.” “Well, the flat two floors below us sold for $3 million. They’d only been there a year. It needs a new bathroom. And it’s on the other side of the building, so the view isn’t so good…” But there’s just one problem. While the nominal value of property is still going up, the cost of renting one of those properties isn’t keeping pace. In fact, it’s going down. No, really.

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Cost Of British Military Actions Since Cold War Tops $100 Billion (Guardian)

Britain’s military operations since the end of the cold war have cost £34.7bn and a further £30bn may have to be spent on long-term veteran care, according to an authoritative study. The bulk of the money has been spent on interventions in Iraq and Afghanistan judged to have been “strategic failures”, says the study, Wars in Peace, published by the Royal United Services Institute (RUSI). In comments with particular resonance in the light of Tony Blair’s speech on Wednesday exhorting the west to do more to defeat Islamic extremism, the RUSI study concludes that “there is no longer any serious disagreement” that Britain’s role in the Iraq war served to channel and increase the radicalisation of young Muslims in the UK.

The RUSI study refers to estimates of 100,000 Iraqis killed, with 2 million refugees fleeing to neighbouring countries. Most of the study’s figures have been collated for the first time from responses to freedom of information requests to the Ministry of Defence. If the material cost of British deaths and injuries in subsequent compensation payments is included, the cost to Britain of military conflicts since 1990 could total as much as £42bn – excluding the cost of caring for veterans. What the study describes as “largely discretionary” operations – the failed interventions in Iraq from 2003, and in Afghanistan after 2005 – accounted for 84% of the total cost of British military interventions since 1990. The figures are net additional costs of the operations – that is, on top of what the armed forces would have been spending in any case, on running costs such as fuel, training exercises, and salaries.

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7 Million GM Recalls Seen Eroding Profit Under CEO Barra (Bloomberg)

This was supposed to be the year when General Motors made a record $10 billion in profit. Now, new Chief Executive Officer Mary Barra will be hard pressed to avoid posting a loss when GM announces its first-quarter earnings tomorrow. The cost of recalling 2.59 million vehicles linked to the deaths of at least 13 people – combined with continued losses in Europe and new challenges in Russia, Australia, Asia and South America — have prompted analysts to downgrade their earnings estimates.

“It’s certainly been a trying 100 days” since Barra started on Jan. 15, said Brian Johnson, an industry analyst with Barclays Plc. This week, Johnson lowered his earnings estimate to a penny-per-share loss from a 20-cent profit. He predicted that the company would have its worst results since the fourth quarter of 2009, when GM was fresh from its U.S. government-backed bankruptcy reorganization.

Over the past four weeks, 12 of 14 analysts surveyed by Bloomberg lowered their estimates for GM’s first-quarter adjusted EPS, bringing the consensus estimate down 88%, to 6 cents a share. Detroit-based GM reported an adjusted 67 cent per share profit a year ago. A year ago, GM reported a net first-quarter profit of $1.18 billion. This quarter, it has forecast taking a $1.3 billion loss for costs related to recalling 7 million vehicles, including those with faulty ignition switches. It has also said it will take a $400 million pretax charge for changes in Venezuela’s currency. That will come on top of any losses in Europe, which have totaled more than $18 billion since 1999.

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GM Car Owners Claim Bankruptcy Fraud to Keep Recall Lawsuits Alive (Bloomberg)

General Motors’s request for court protection from 50 car-owner lawsuits seeking compensation for millions of recalled autos with defective ignition switches was attacked as legally “unsupportable.”Car owners challenged GM’s position that it may compensate accident victims but not them, claiming in a court filing yesterday that GM committed fraud by not revealing the defects, allegedly known since 2001, or listing either group as creditors in its 2009 bankruptcy. In the reorganization, U.S. Bankruptcy Judge Robert Gerber freed GM from most of its liabilities, leaving intact only some warranty obligations and responsibility for accidents.

To stop Gerber from protecting GM from new suits, the ignition switch car owners must prove their fraud allegation, bankruptcy attorney Chip Bowles of Bingham Greenebaum Doll LLP said. “This is very difficult,” Bowles said. “However there is a middle ground and that would be the parties requesting discovery,” or pre-trial evidence from GM, to prove fraud. “There is a decent chance that Gerber would allow discovery.” GM, which has said it isn’t seeking to block lawsuits over accidents that caused injury, loss of life or property, told the judge he must rule on the issue before other ignition lawsuits against the company may proceed. A conference on GM’s request is set for May 2 in U.S Bankruptcy Court in Manhattan.

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Part 2 of Shilling’s series.

The Economic Monster Called Deflation (A. Gary Shilling)

In part one of this series, I wrote about the deflation specter that is haunting Europe. Central bankers are so fearful of deflation that they want an inflationary cushion to prevent an economic shock or geopolitical crisis from sending low inflation into negative territory. The Federal Reserve, European Central Bank, Bank of England and Bank of Japan have inflation targets of 2%. Why is deflation so troubling to central bankers? First, with chronic deflation, debts rise in real terms. Their nominal value remains fixed, yet nominal incomes and profits — the wherewithal to service those debts — tend to fall. So bankruptcies leap, and lending, the driver of much economic growth, atrophies.

Second, when deflation occurs, economies weaken and central banks lose much of their power. Interest rates fall to zero, and monetary policy becomes asymmetrical (because rates can only be raised, not lowered). Third, real interest rates are always positive, even with zero nominal rates. That’s been the case in Japan for two decades. This means that central banks can’t create the negative real rates they desire to encourage borrowing. To be effective, they need to pay borrowers, in real terms, to take money. Finally, deflation breeds deflationary expectations, which results in a sluggish economy. That’s been the case in Japan since the early 1990s. Buyers wait for lower prices before purchasing, so excess capacity and inventories mount, pushing prices down.

That confirms prospective buyers’ expectations, so they hold off further, creating a self-feeding cycle of buyer hesitation, which spawns excess inventories and capacity that depresses prices and encourages further restraint by purchasers, and so on. To make matters worse, global financial deleveraging, which also depresses growth, will probably persist for four more years or so, given that it normally takes a decade to unwind excessive debt after a major financial crisis (as happened in 2008). Deleveraging has been so profound that it has largely offset the huge fiscal stimulus and monetary easing in the U.S. and elsewhere.

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ECB Prepares Measures To Combat Possible Deflation (Spiegel)

One of European Central Bank President Mario Draghi’s most important duties is watching his mouth. One ill-considered utterance is enough to sow panic on the financial markets. But during a press conference earlier this month, Draghi allowed himself a telling slip. Speaking to gathered journalists at the Spring Meetings of the International Monetary Fund and the World Bank, Draghi twice almost uttered a word he has been at pains to avoid. “Defla…”, Draghi began, before stopping himself and continuing with the term “low inflation.”

Yet despite Draghi’s efforts, the specter of deflation was omnipresent in Washington during the meetings. And it is one that is making central bank heads and government officials nervous across the globe. The IMF in particular is alarmed, with Fund economists warning that there is currently up to a 20% risk of a euro zone-wide deflation. IMF head Christine Lagarde has called on European central bankers to “further loosen monetary policy” to address the danger. The reason for concern is clear: Ever since the Great Depression at the beginning of the 1930s, deflation has been seen as one of the most dangerous illnesses that can befall an economy.

Several countries at the time fell victim to a downward spiral consisting of falling prices, rapidly rising unemployment and shrinking economic output — a morass that took years to escape. Because prices were falling, people stopped spending in the hope that everything would become even cheaper. Companies were unable to sell their products and many went broke, which led to millions of people losing their jobs and a further squeeze on consumption. Japan provides a more recent example, where the economy has been largely stagnant for years amid falling prices. Is the euro zone now facing a similar nightmare? The inflation rate in the common currency zone sank to 0.5% in March, dangerously close to zero and far away from the ECB’s target of 2%.

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Yes, kiddo’s, this too is presented as serious news. I’s say if it takes Greece and Portugal to boost the Eurozone, it’s women and children first.

Greece And Portugal Boost Eurozone (Guardian)

Europe’s recovery from its debt crisis took two significant steps forward on Wednesday as Greece posted a primary budget surplus and Portugal made a successful return to the bond markets for the first time in three years. The European commission paved the way for Greece to begin debt relief talks with its creditors by announcing that the country had been left with a surplus of about €1.5bn (£1.2bn) last year, or 0.8% of national output,once its hefty debt payments and the cost of recapitalising its banks had been stripped out. The EU’s executive arm said Greece’s finances were ahead of the targets agreed with its lenders, describing it as a “reflection of the remarkable progress that Greece has made in repairing its public finances since 2010”.

The commission, a member of the troika that bailed out Greece alongside the International Monetary Fund and the European Central Bank with packages worth more than €200bn, said it believed the country’s debts were sustainable. Greek government ministers said the country’s long years of sacrifices since accepting a bailout in 2010 were paying off. “After these years that were very tough on households and businesses, the country and its economy are in a definitely better position,” said the deputy finance minister Christos Staikouras.

The primary surplus means that, technically, Greek government revenues now exceed expenditure. However, it was only reached by ignoring the interest payments on Greece’s borrowings, the cost of recapitalising its banks, and other one-off measures. Greece’s total national debt actually rose to 175% of national output in 2013, up from 157% of GDP the previous year. Much is held by other eurozone governments, which must decide whether to help Athens by cutting the interest rates on its bonds or extending the maturities on those debts.

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No kidding, Mo.

Europe Still Has a Mountain of Debt (El-Erian)

There was a time not so long ago when the vast majority of experts agreed that a country could not emerge decisively from a financial crisis unless it solved problems of both “stocks” and “flows” — that is, secured a flow of money to cover its immediate needs and found a way to manage its stock of outstanding debt over time. In Europe today, this conventional wisdom appears to be fading. The temptation there is to declare victory having solved only the flow, not the stock, challenge. The flow/stock intuition is quite straightforward. In the first instance, a crisis-ridden country must generate enough resources to meet its pressing funding needs, and do so in a manner that does not erode its growth potential.

Soon thereafter – or, even better, simultaneously – the country needs to realign its longer-term payment obligations in a manner that is consistent with both its ability and willingness to pay. Unless a country does both, the productive commitment of its own people and companies will be too tentative to drive a full and proper recovery. It will also be a lot harder to attract the scale and scope of long-term foreign direct investment that is so helpful for enhancing growth, jobs and national prosperity.

The need for a comprehensive approach was most vividly illustrated during the Latin American debt crises. Having secured sufficient emergency financing and embarked on serious economic reform efforts, the successful countries devoted lots of effort to improving their debt maturity profiles, better aligning the currency composition of their debt and, most important, reducing the size of their contractual obligations. These efforts were instrumental in productively re-engaging the domestic private sector and in attracting sizable foreign investment.

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A currency war has been building for years.

A Currency War Is Coming (MarketWatch)

While most investors like to believe that things like earnings and the economic data drive the market’s ups and downs, lately it’s been all about moves in the currency market. Since stocks started surging higher in late 2012, they’ve been marching in lockstep with the Japanese yen. Specifically, whenever the yen goes down, stocks rise. And when the yen strengthens, stocks weaken. (The relationship is so close that since the beginning of 2013, the yen’s movement explains 60% of the changes in the S&P 500.) But now, amid some signs of stalling in the global economy and turmoil in the stock market (with the Nasdaq threatening its 200-day moving average for the first time since 2012), the currency market assumptions that have pushed the market higher over the last three years are under threat.

We’re on the cusp of an outright currency war — something that the Brazilians first warned about in 2010 — as central banks in all the major economies actively work to weaken their currencies to boost exports, their economies, and keep pushing inflation higher. While headlines remain focused on the simmering conflict in Ukraine, the real battle is about to break out in the foreign-exchange market as countries battle, not for supremacy, but in a race to the bottom. What has changed is that both China and Europe are quickly moving to weaken their currencies in an effort to support growth.

China’s actions have already attracted the ire of the U.S. Treasury, which in a recent semi-annual currency-market report singled out China as keeping its currency significantly undervalued after “unprecedented” decline earlier this year. And in a first, the European Central Bank, after watching the euro zone’s overall inflation rate drop dangerously low amid stagnant credit creation, is now openly discussing launching a quantitative-easing bond-buying stimulus. In a preview of the potential market turmoil that could be unleashed by ECB action to weaken the euro against the yen, just remember what happened on April 4 when stocks suffered an epic midday reversal from all-time highs on reports in the German press that ECB analysts were beginning computer simulations on what the impact of a bond-buying stimulus would be on inflation and growth.

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Great Durden exposé.

The Chinese Ponzi: An Orgy Of Borrowing, Building and Speculating (Zero Hedge)

Much has been said here and elsewhere about not only China’s ghost cities – that final resting place where trillions in Chinese GDP “fixed investment” goes to quietly die but no before contributing to over half of China’s GPD – over the past five years, but also about the bursting of the Chinese housing bubble in the past several months now that the Beijing Politburo has drastically slowed down the pace of loan creation and the country has shocked its bond investors by admitting failure is an all too real possibility.

This post will therefore hardly reveal anything new, however it will provide some perspective on how from one of the most important industries for China’s suddenly cooling economy, housing has becoming nothing more (or less) than one giant Ponzi scheme. Here are some of the soundbites of a recent Bloomberg piece showing how “Xi’s Squeeze Leaves China’s Heartland Missing Boom” covering such exciting topics as:

… Bubbles:

“Cities in China are facing some serious real estate bubbles, and the bubbles in third-, fourth-tier cities have the risks of total collapse,” said Tao Ran, director of the China Center for Public Economics and Governance at Renmin University in Beijing, in a phone interview on March 31. “The central government and banks tightened credit in the property market because they realized the risks.”

… Collateral

That makes it harder for Zhu Houlun, 43, who took over as Laohekou party secretary in August 2012 with plans to merge with neighboring Gucheng by building a new urban center on 70 square kilometers (27 square miles) of farming communities between the two. The project would create a city of 700,000 by 2020, more than double Laohekou’s existing urban population, according to a Xiangyang government report.

Zhu must rely on private developers like Liu Pingfeng, from neighboring Hunan province, who is building a 5 billion yuan project north of Laohekou called the Red River Valley Eco-Tourism Resort that includes apartments, a five-star hotel, a theme park and a polo club. “Raising funds is very difficult,” said Liu, 47, who has been building in Hunan for a decade. “I used to use land as collateral — as long as I got the land certificate I could get the loan. Now it’s almost impossible.”

… Social problems:

“Local government officials are still very fixated on economic growth,” said Lynette Ong, an associate professor at the University of Toronto who wrote the 2012 book “Prosper or Perish: The Political Economy of Credit and Fiscal Systems in Rural China.” “Without growth, a lot of social problems like unemployment will surface.”

… from ashes to ashes, from ghost town to ghost town:

The expansion on the coast was largely fed by immigrants from provinces like Hubei that are now struggling to lure them back. On a February morning in Laohekou’s cavernous and unheated labor exchange, a single jobseeker scans the vacancies posted on the back wall, while five female staff clutch thermoses of hot drinks to keep warm. “It’s hard to hire people here,” said Zhang Hongju, one of the staff. “The young people have all gone to Guangdong and those who haven’t need to stay home to take care of elderly family or kids.”

In Chen Genxin’s village, slated to be demolished to make way for China Dreamland, he says everyone is over 50. His sons left during the boom to get jobs in other cities. “If the country wants us to tear it down, we’ll tear it down,” said Chen, 71, as he harvests spinach from his small plot with his wife in the afternoon sun. “The earth will bury me wherever I go.”

… and, of course, the fact that it is all one massive Ponzi scheme:

In Red River’s muddy construction site by the river, there are clusters of concrete skeletons that Liu says are due to open in October as shops, cafes, bars and a fitness center. Nearby is a hole in the ground the size of a football field that will be a musical fountain. The soaring cost of loans means Liu will build and sell Red River in stages. “As we sell our first batch of apartments, we’ll have cash flow to build the next stage,” he said in an interview in February in Laohekou.

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Stop using plastic. Use cash where you can.

The Growing Perils of the Cashless Future (Fiscal Times)

We’re finally on the brink of the cashless society that futurists and other have been forecasting for years. The average consumer owns at least two credit cards and early adopters have begun ditching plastic for virtual wallets. Even businesses that used to rely heavily on cash — think taxis, food trucks or even craft fairs — can now go cashless, thanks to new technology like Square. Yet, the more we abandon paper bills for plastic, smartphone payments and even cryptocurrencies like Bitcoin, the perils of the new, cashless economy are becoming more apparent. Recent security breaches at Target, Neiman Marcus and other retailers illustrate the vulnerability of electronic payments to hacking attacks.

There were 2,164 reported security incidents exposing 822 million records last year, nearly doubling the previous highest year, 2011, according to Risk Based Security, a data security firm. The pace seems to be continuing this year. Chip-and-pin cards, in use in Europe for years, would remove some of the threat. Computer chips embedded on the cards verify unique personal identification numbers consumers punch into terminals. The cards would help reduce fraud, but it’s not clear how much. For instance, they don’t help prevent online fraud.The problem is cost. Making the cards and installing the new terminals needed to read them is expensive. Consumer advocates want Congress to press retailers and banks for fast adoption of chip-and-pin technology.

“Some institutions in the U.S. say they will switch to this technology in the next few years, but we need a stronger commitment from all stakeholders,” stated Delara Derakhshani, policy counsel for Consumers Union, in testimony to Congress. “Policymakers must also take action to encourage investments in technology to tighten up the security of our financial institutions.” Data breaches aren’t the only downside. Going cashless in a world of Big Data means all your purchases — and therefore your privacy — is up for grabs. Did you hear the one about the woman who wanted to surprise her husband and tell him that after three years of trying, she was finally pregnant? Too late. While on line one night on their home computer, he noticed all these products geared to pregnancy and childbirth.

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My, what a hard choice. Lung disease or the Putin bogeyman.

Poland Pushes Coal on Europe as Putin Wields Gas Weapon (Bloomberg)

Polish Prime Minister Donald Tusk says the country’s giant coal fields should become a cornerstone in Europe’s defense against a newly aggressive Russia. Because the fossil fuel supplies 90% of Poland’s power it has less need of Russian natural gas than other Eastern European nations, burning half as much per capita as the neighboring Czech Republic, for example. As politicians wrestle with how to respond to the crisis in Ukraine, Tusk argues Europe needs to “rehabilitate” coal’s dirty image and use it to break Russia’s grip on energy supply. “In the context of the Russian-Ukrainian conflict, the overriding objective is to lessen the dependence on Russia,” said Mujtaba Rahman, an analyst at Eurasia Group in London.

“Climate objectives will be absolutely secondary to that.” Coal, a cheaper source of power than gas, nuclear, wind or solar at today’s prices, is already a key part of Poland’s economy, keeping factories competitive and guaranteeing hundreds of thousands of manufacturing jobs. It’s even a tourist attraction. Poland burns over 50 million tons of coal a year, more than any European nation other than Germany, while having the lowest reliance on natural gas among the EU’s 10 largest economies, according to International Energy Agency data. That’s a popular position in a nation where Soviet troops were stationed for four decades until the early 1990s.

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Russian FM Lavrov: Americans Are ‘Running The Show’ In Ukraine (RT)

Sophie Shevardnadze: Sergey Lavrov, Russia’s Foreign minister, it’s great to have you on our show today. So, just the other day Joe Biden on his visit to Kiev said that time is short for Russia to make progress on its commitments made in Geneva. What is expected of Russia?

Sergey Lavrov: Well, it’s difficult to say because I discuss this almost daily with John Kerry. And frankly the American colleagues chose to put all the blame on Russia, including the origin of the conflict and including the steps which must be taken. They accuse us of having Russian troops, Russian agents in the east and South of Ukraine. They say that it is for the Russians only to give orders and the buildings illegally occupied would be liberated and that it is for the Russians to make sure that the East and South of Ukraine stops putting forward the demands for the federalization and the referendum and so on and so forth. This is absolute…you know…switching the goal post if you wish.

In Geneva we all agreed that there must be reciprocal approach to any illegitimate action in Ukraine, be it in Kiev, be it in the West, be it in the East, be it in the South. And the people who started the process of illegitimate actions must step back first. It is absolutely abnormal due to any norms in a European city that Maidan is still occupied, that the buildings in Kiev are still occupied and in some other cities, that those who put on fire the buildings belonging to Communist party headquarters in Kiev, the buildings belonging to the Trade Union headquarters are not even under investigation. I don’t even want to mention the sniper cases because everyone forgot about those snipers. And we only hear that “Let’s concentrate on eliminating terrorist threats in the East and in the South”.

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Kerry offered $50 million. He can pay that from his own pocket without lifting his a hairdo.

Ukraine’s Unpaid Russian Gas Bills Dwarf US Aid Offer (Bloomberg)

Ukraine’s best hope for keeping furnaces and factories running through next winter is to store as much natural gas as it can after a U.S. aid pledge fell far short of the nation’s needs. Energy supplies have given Russian leader Vladimir Putin powerful economic leverage in his battle with Ukraine. The former Soviet republic gets half its gas from Russia, and it’s the transit route for 50% to 60% of the gas Russia sells to other European nations. U.S. Vice President Joe Biden told Ukrainian leaders this week that the U.S. would provide help so that “Russia can no longer use energy as a weapon.”

Biden announced $50 million in aid, an unspecified part of which would go to develop the country’s gas reserves, explore alternative energy and improve efficiency. Russia responded yesterday, when Prime Minister Dmitry Medvedev said Ukraine would have to prepay for gas shipments unless it starts paying down the $2.2 billion debt it’s accumulated through March. The immediate danger facing Ukraine is a cutoff of Russian gas shipments for nonpayment of its debt. Medvedev told the Duma, the lower house of Russia’s parliament, yesterday that Ukraine’s only option is, “Gas for cash.”

“The near-term options are limited, so if supplies were cut off tomorrow, they’d be in a pretty difficult spot,” Jason Bordoff, who heads Columbia University’s Center on Global Energy Policy and is a former energy and climate adviser to the Obama administration, said in an interview yesterday. “Before next winter, they really want to be building up as much storage as possible.” Saddled with aging electric generators, leaky furnaces and drafty apartment blocks that date back to the Soviet era, Ukraine lacks the infrastructure to curb energy demand enough to make a significant dent in its dependence on Russia. Exploiting new petroleum discoveries beneath the Black Sea will take years of drilling and pipeline construction to bear fruit.

Modernizing Ukraine’s energy infrastructure and attaining supply independence would take 16 years and require $170 billion euros ($234 billion) in investment, a figure that dwarfs its annual economic output, the Paris-based International Energy Agency said in an October 2012 report.

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This is going to turn sooo bad.

60% Of China’s Water Too Polluted To Drink (RT)

At least 60% of China’s underground water resources have “very poor” or “relatively poor” quality, which means these water can’t be used for drinking directly, says a new report, showing a deep environmental crisis in the country. China’s Ministry of Land and Resources has been monitoring at least 4,778 areas in 203 Chinese cities in 2013, the official Xinhua news agency said. According an annual report unveiled by the ministry, in at least 43.9% of the monitored sites the underground water was ranked as “relatively poor” and in 15.7% of cases as “very poor.” This means that about 59.6% of underground water can’t be used directly for drinking.

The recent results show a decrease in the amount of drinkable underground water in China by 2% compared to 57.4% in 2012. If the quality of water is considered “poor,” it can’t be used at all as a source for drinking water, say China’s underground water standards, while water of “relatively poor” quality may be used for drinking only after special treatment. According to the report, water quality became worse in 754 areas monitored by the ministry and improved only in 647 sites. Deterioration of drinking water quality is still one of the country’s major problems. The pollution is caused by an increasing population and rapid economic growth as well as lax environmental oversight.

In April, cancer-inducing benzene was found in water supply in the city of Lanzhou, which is considered one of the most polluted in the country. Citizens stockpiled crates of water as the government warned them not to consume any of the tap water for the next 24 hours. The water supply was switched off in one district. China blamed Veolia Water, the sole water supplier for more than 2 million people in the city, for failing to maintain water quality. The company, however, stated that the pollution was because of industrial contamination.

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Go for it, VT!

Vermont Poised To Enact Toughest US GMO-Labeling Law Yet (RT)

Vermont lawmakers have passed legislation that requires food made with genetically modified organisms, or GMOs, to be labeled as such. The law, the first of its kind in the US, must now get approval from Gov. Peter Shumlin, who has supported the bill. The state House of Representatives approved the bill on Wednesday by a vote of 114-30. The state Senate passed the legislation last week by a vote of 28-2. The bill would require any foods containing GMOs sold at retail outlets to be labeled as having been produced or partially produced with “genetic engineering.” The law would go into effect on July 1, 2016. Gov. Shumlin must now sign the bill to cap the process. He again expressed support for the measure on Wednesday.

“I am proud of Vermont for being the first state in the nation to ensure that Vermonters will know what is in their food. The Legislature has spoken loud and clear through its passage of this bill,” Shumlin said. “I wholeheartedly agree with them and look forward to signing this bill into law.” Anticipating lawsuits from industry, legislators established a fund of up to $1.5 million to help the state pay for defense against any legal action. People can contribute voluntarily to the fund, and settlements won in other court cases can be added to the fund by the state attorney general, the Burlington Free Press reported. The bill also makes it illegal to call any food that contains GMO ingredients “natural” or “all natural.”

Maine and Connecticut are the only US states that have passed GMO labeling laws, though their proposals would only go into effect if and when surrounding states also pass similar laws. GMO labeling is required in 64 countries, including the European Union. The Center for Food Safety says dozens of states are considering GMO labeling laws on some level, as there is no federal labeling standard. Polling suggests over 90%of Americans would prefer GMO ingredients in consumables to be labeled to some extent.

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