Growth Archives - Page 4 of 8 - The Automatic Earth

China’s GDP grew at 6.7% year on year in the second quarter of 2016, at least officially. However, most analysts don’t believe the official figures. “The official figure is still around 7%, but those data are made in the statistical kitchen,” says Willem Buiter, the chief economist of Citigroup. He thinks China is not growing at more than 4%. After reporting 6.7% growth over the year in the first quarter of 2016, analysts were looking for 6.6% growth in the second quarter compared to the second quarter of 2015, so China managed to engineer a small beat and create the illusion of stability. Quarterly growth even picked up from 1.1% in the first quarter to 1.8% in the second quarter.

“The speed of growth that it points to is increasingly hard to believe given the clear structural drags that the economy is facing,” research firm Capital Economics writes in a note. The analysts think China grew 4.5% based on a proprietary activity index, roughly the same as in the first quarter. Private investment was the biggest drag on growth, it just expanded 1% in May, down from 15% in early 2015. State companies have picked up the slack. A survey of thousands of companies by the China Beige Book (CBB) released earlier in July paints a similar picture. CBB says most indicators improved in the second quarter, although activity is roughly flat over the year. In most cases, less than 50% of survey respondents report an improvement in sales, hiring, capital expenditure, or bank lending.

The harder they come…

• Asian Shares Rise To Eight-Month Highs (R.)

Asian shares extended gains to eight-month highs on Friday, on track for a solid weekly rise, as better-than-expected economic data from China lifted risk sentiment that was already buoyant after record highs on Wall Street. China’s economy grew 6.7% in the second quarter from a year earlier, steady from the first quarter and slightly better than expected as the government stepped up efforts to stabilize growth in the world’s second-largest economy.

Industrial output and retail sales also beat forecasts, which helped alleviate fears of slowing momentum, though fixed-asset investment growth slipped and missed market expectations. “The data showed the signs of stabilisation, which is very encouraging,” said Julian Wang, economist for Greater China at HSBC. “However, public sector investment and housing market are slowing down. So the challenges still loom quite large in the second half of the year.”

Well, that’s a surprise….

• US Exporters’ Gains From Chinese Economic Growth Shrink Further (WSJ)

China’s economic roller coaster is taking a bite out of American exporters, hurting U.S. industries ranging from mining equipment to cotton producers and adding to criticism that China is getting more than it gives in trade with the U.S. The U.S. shipped just $42.4 billion to China in the first five months of the year, or 8.2% less than the year-earlier period and 13.8% below the peak export year of 2014, according to the Census Bureau. The export drop comes as China’s economy, while slowing, is still officially expanding at more than 6% a year. That growth is driven in part by the mountain of goods—worth $174 billion so far this year—the U.S. imports from China. That is quadruple the size of its exports to China during those months, and only slightly less than 2014 levels.

The slowdown in U.S. exports could exacerbate accusations in the 2016 presidential campaign that China is engaged in unfair trade practices. Donald Trump, the presumptive Republican nominee, has cited the trade gap with China in threatening to slap new tariffs on the country if he becomes president. U.S. companies have grown increasingly vocal in criticizing Beijing for allegedly dumping subsidized steel and other products on world markets and for refusing to open major parts of its economy to foreign investment—a roadblock that almost certainly hinders two-way trade.

No doubt it could. But Brussels will first try and turn it into Greece….

• Could Italy Bring Down The Euro? (Kern)

[..] M5S’s Luigi Di Maio, who, polls show, has a very good chance of succeeding Renzi as prime minister, has reiterated his party’s long-standing call for a referendum on the euro: “We want a consultative referendum on the euro. The euro as it is today does not work. We either have alternative currencies or a ‘euro 2.’ We entered the European Parliament to change many treaties. The mere fact that a country like Great Britain even held a referendum on whether to leave the EU signals the failure of the European Union.” A referendum on the euro would be “consultative” because Italian law does not allow such plebiscites to change international treaties, including those that involve Italy’s relations with the European Union.

But Grillo is seeking a legislative change to allow an “ad hoc” exception, similar to the one in June 1989, when Italy held a consultative referendum on whether to transfer certain powers to the European Parliament. The exception would presumably be approved if M5S wins the prime minister’s office. Meanwhile, analysts are warning that the turmoil in Italy could spread to the rest of the eurozone. The risk of contagion is due to the so-called “doom loop” that exists between European governments and European banks, which have more than doubled the holdings of their own governments’ debt from a low of €355 billion in September 2008 to €791 billion today. International banks have lent Italy more than €500 billion, according to Die Welt, which reports that French banks alone hold €250 billion of Italian debt.

German banks hold €84 billion of Italian bonds. The only question, according to analysts, is whether taxpayers or bondholders will be left holding the tab. Wolfgang Münchau warned of the consequences of a disorderly Italian exit from the euro: “An Italian exit from the single currency would trigger the total collapse of the eurozone within a very short period. It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.” As Ambrose Evans-Pritchard of the Telegraph has pointed out, however, Italy must choose between the euro and its own economic survival. Leaving the euro “may be the only way to avert a catastrophic deindustrialization of the country before it is too late.”

…like here.

• EU Finance Ministers Get Tough With Italian Bank Trying For Third Bailout (G.)

The idea of modern banking was born in Siena in 1624, when the Medici Grand Duke decided to guarantee accounts held at Monte dei Paschi, the world’s oldest bank, with the proceeds of pasture he held in the Maremma in south-western Tuscany. Nearly 400 years later, the principle established by the Tuscan ruler – that account holders and investors are protected by the state – lies at the heart of a crisis at Monte dei Paschi di Siena (MPS) that is worrying financial markets around the world. The country’s third-largest lender has already been bailed out twice in modern Italian history but is likely to need a third multibillion-euro intervention by the Italian government – a move that would need Brussels to break new rules designed to prevent such taxpayer bailouts after the 2008 global financial crisis.

So the question of who will pay for the inevitable rescue of MPS, whose share value has fallen 80% over the past year, has yet to be answered. Three weeks after the news that Britain has voted to leave the European Union shocked the markets, a debate over the fate of MPS and the economic and political repercussions of inaction is raging from Rome to Brussels and Paris to Berlin. The welfare of thousands of Italian households is at stake, as well as the political fortune of Italy’s prime minister, Matteo Renzi, who is facing the toughest political challenge of his career. It is also testing Italy’s credibility among foreign investors. “There is no way they will let the bank go and create a systemic effect,” said Wolfango Piccoli, co-president of Teneo Intelligence. “The mechanics are still unclear but there will be a third bailout of Monte dei Paschi.”

[..] Unlike the US, Spanish and Irish financial crises, the Italian banking crisis is not the result of a speculative property bubble. While other issues have exacerbated the turmoil at Monte dei Paschi’s – including a poorly judged €9bn acquisition – the primary reason the bank is in trouble is because it doled out billions of euros in loans to small businesses at a time when the scale of the recession facing Italy was gravely underestimated. From 2007 to 2013, Italy lost about a quarter of its industrial production and tens of thousands of companies collapsed. In 2013 more than 150 shops closed every day. Construction and home sales slumped and none of the sectors has recovered fast enough.

Central banks are the only buyers left.

• Who’s Buying It? (Roberts)

With the market breaking out to all-time highs, the media has started to once again reach for their party hats as headlines suggest clear sailing for investors ahead. While I certainly do not disagree the breakout is indeed bullish, and signals a continuation of the long-term bullish trend, there are more than sufficient reasons to remain somewhat cautious. Earnings are still weak, there is little evidence of economic resurgence and inflationary pressures globally remain nascent. But, for now, a rash of global Central Banks continue to support asset prices by increasing accommodative policies either through additional reductions in interest rates or direct injections of liquidity. As Matt King from Citi recently noted: “It has been a surge in net global central bank asset purchases to their highest level since 2013.”

With the ECB in full QE mode, the BOC now using $300 billion in Pension Funds to prop up prices, and the BOJ now moving towards an additional $130 billion in QE as well, the liquidity push continues. Interestingly, despite the push by Central Banks to loft asset prices higher, individual market participants as measured by the Investment Company Institute (ICI) have a different idea. As shown in the chart below, despite asset prices ringing all-time highs, net equity inflows have turned decisively negative. This was much the same case following the 2012 market rout and it wasn’t until the launch of QE3 in 2013 that investors began to once again chase the markets.

Trudeau needs to act, and very fast, or he’ll be staring a monster in the face.

• Canada New Home Prices Grow At Fastest Pace In Nearly 9 Years (R.)

Canadian new home prices in May grew at their fastest pace in almost nine years, soaring 0.7% from April on strength in the booming markets of Toronto and Vancouver, Statistics Canada said on Thursday. Analysts polled by Reuters had predicted a 0.2% advance. May’s increase was the largest since the 1.0% jump recorded in July 2007. The Liberal government is concerned about rapidly rising prices in Toronto and Vancouver and is mulling more restrictions on mortgages. The combined region of Toronto and Oshawa – which accounts for 27.92% of the entire Canadian market – posted a 1.9% gain, the highest in 27 years.

Builders cited market conditions and the price of land. Market conditions also helped drive up new home prices in Vancouver by 1.1%. Overall, housing prices increased by 2.7% from May 2015, the largest year-on-year rise since the 2.7% advance seen in September 2010. The new housing price index excludes apartments and condominiums, which the government says are a particular cause for concern and which account for one-third of new housing.

A feature, not a bug.

• UK MPs Decry ‘Failed’ Effort To Stop London Property Money Laundering (G.)

Government attempts to stop the UK property market being exploited by international money launderers are “totally inadequate” and the country has instead “laid out a welcome mat” to criminals, the House of Commons home affairs committee has said. The influential panel of MPs, chaired by the Labour backbencher Keith Vaz, said it was disgraceful that at least £100bn was being laundered through the UK every year and astonishing that just 335 out of 1.2m property transactions last year were deemed to be suspicious by law enforcement officials. That means only 0.01% of the 2.4 million buyers and sellers in the UK generated suspicious activity reports at the National Crime Agency (NCA), whose system, Vaz said, was not fit for purpose.

“The proceeds of crime legislation has failed,” Vaz said. “London is a centre for money laundering, and its standing as a global financial centre is dependent on proactively and effectively tackling money laundering. Investment in London properties is a major route which tarnishes the image of the capital. Supervision of the property market is totally inadequate.” The NCA’s system gathers suspicious activity reports from lawyers, accountants, bankers and other professionals but is overwhelmed with more than 380,000 reports per year, when it is designed to handle 20,000. [..] The MPs said it remained “far too easy for someone intent on laundering money to buy a property with their ill-gotten gains, and rent it out in a very buoyant and robust letting market and take in clean money in perpetuity”.

As I said many times before: when growth goes, so does centralization. It seems hard to make that connection.

• McKinsey Slams Globalization: “The Resentment Will Explode” (ZH)

The IMF is getting nervous, and what it appears to be most concerned about, is a collapse of the status quo. Moments ago, in a speech in Washington, IMF head Christine Lagarde said that “The greatest challenge we face today is the risk of the world turning its back on global cooperation—the cooperation which has served us all well. We know that globalization – and increased integration – over the past generation has yielded many economic benefits for many people.” The IMF is not alone: for years, consultancy giant McKinsey towed the party line as well saying in 2010 that “the core drivers of globalization are alive and well” and adding as recently as 2014 that “to be unconnected is to fall behind.”

That appears have changing, and cracks are starting to form behind the cohesive push for globalization, at least among those who benefit the most from globalization. In a stunning study released today, one which effectively refutes all its prior conclusions on the matter, McKinsey slams the establishment’s status quo thinking and admits that the economic gains of changes in the global economy have not been widely shared lately, especially in the developed world. In the report titled “Poorer Than Their Parents? Flat or Falling Incomes in Advanced Economies” it finds that prospects for income growth have deteriorated significantly since the financial crisis, and that the benefits from globalization are now over:

This overwhelmingly positive income trend has ended. A new McKinsey Global Institute report finds that between 2005 and 2014, real incomes in those same advanced economies were flat or fell for 65 to 70% of households, or more than 540 million people. And while government transfers and lower tax rates mitigated some of the impact, up to a quarter of all households still saw disposable income stall or fall in that decade.

As Bloomberg reports, Britain’s vote to exit the European Union exemplifies what happens when people feel like the system is letting them down, Richard Dobbs, the co-leader of the research, said in an interview Wednesday, ahead of the report’s release. He likened the buildup of resentment over globalization to a dangerous natural gas leak in a row of houses. “One of them will explode. I did not think that it would be the U.K. first,” said Dobbs, a senior partner of McKinsey and a member of the McKinsey Global Institute Council in London. “When we launch a new policy, let’s think about the impact on those groups” who have been left behind, Dobbs said. Sometimes the goals of fairness and efficiency can conflict, he said. “Are we prepared to damage competitiveness a bit to reduce the risk of an explosion?”

Brandon Smith on one of my ‘hobby horses’. More good stuff in the article.

• Globalism vs. “Populism” (Smith)

The globalists have used the method of false dichotomies for centuries to divide nations and peoples against each other in order to derive opportunity from chaos. That said, the above dichotomy is about as close to real as they have ever promoted. As I explained [earlier], the recent passage of the Brexit referendum in the U.K. has triggered a surge of new propaganda from establishment media outlets. The thrust of this propaganda is the notion that “populists” are behind the fight against globalization and these populists are going to foster the ruin of nations and the global economy. That is to say – globalism good, populism bad. There is a real fight between globalists and those who desire a free, decentralized and voluntary society.

They have just changed some of the labels and the language. We have yet to see how effective this strategy will be for the elites, but it is very useful for them in certain respects. The wielding of the term “populist” is about as sterilized and distant from “freedom and liberty” as you can get. It denotes not just “nationalism,” but selfish nationalism. And the association people are supposed to make in their minds is that selfish nationalism leads to destructive fascism (i.e. Nazis). Therefore, when you hear the term “populist,” the globalists hope you will think “Nazi.” Also, keep in mind that the narrative of the rise of populism coincides with grave warnings from the elites that such movements will cause global economic collapse if they continue to grow.

Of course, the elites have been fermenting an economic collapse for years. We have been experiencing many of the effects of it for some time. In a brilliant maneuver, the elites have attempted to re-label the liberty movement as “populist” (Nazis), and use liberty activists as a scapegoat for the fiscal time bomb THEY created. Will the masses buy it? I don’t know. I think that depends on how effectively we expose the strategy before the breakdown becomes too entrenched. The economic collapse itself has been handled masterfully by the elites, though. There is simply no solution that can prevent it from continuing. Even if every criminal globalist was hanging from a lamp post tomorrow and honest leadership was restored to government, the math cannot be changed and decades of struggle will be required before national economies can be made prosperous again.

By Manuela Cadelli, President of the Magistrates’ Union of Belgium. Bit older, but interesting reasoning.

• President of Belgian Magistrates: Neoliberalism Is A Form Of Fascism (DDP)

Every totalitarianism starts as distortion of language, as in the novel by George Orwell. Neoliberalism has its Newspeak and strategies of communication that enable it to deform reality. In this spirit, every budgetary cut is represented as an instance of modernization of the sectors concerned. If some of the most deprived are no longer reimbursed for medical expenses and so stop visiting the dentist, this is modernization of social security in action! Abstraction predominates in public discussion so as to occlude the implications for human beings. Thus, in relation to migrants, it is imperative that the need for hosting them does not lead to public appeals that our finances could not accommodate. Is it In the same way that other individuals qualify for assistance out of considerations of national solidarity?

Social Darwinism predominates, assigning the most stringent performance requirements to everyone and everything: to be weak is to fail. The foundations of our culture are overturned: every humanist premise is disqualified or demonetized because neoliberalism has the monopoly of rationality and realism. Margaret Thatcher said it in 1985: “There is no alternative.” Everything else is utopianism, unreason and regression. The virtue of debate and conflicting perspectives are discredited because history is ruled by necessity. This subculture harbours an existential threat of its own: shortcomings of performance condemn one to disappearance while at the same time everyone is charged with inefficiency and obliged to justify everything. Trust is broken. Evaluation reigns, and with it the bureaucracy which imposes definition and research of a plethora of targets, and indicators with which one must comply. Creativity and the critical spirit are stifled by management.

In general, everywhere native people get an actual say, things improve.

• In New Zealand, Lands and Rivers Can Be People -Legally Speaking- (NYT)

Can a stretch of land be a person in the eyes of the law? Can a body of water? In New Zealand, they can. A former national park has been granted personhood, and a river system is expected to receive the same soon. The unusual designations, something like the legal status that corporations possess, came out of agreements between New Zealand’s government and Maori groups. The two sides have argued for years over guardianship of the country’s natural features. Chris Finlayson, New Zealand’s attorney general, said the issue was resolved by taking the Maori mind-set into account. “In their worldview, ‘I am the river and the river is me,’” he said. “Their geographic region is part and parcel of who they are.”

From 1954 to 2014, Te Urewera was an 821-square-mile national park on the North Island, but when the Te Urewera Act took effect, the government gave up formal ownership, and the land became a legal entity with “all the rights, powers, duties and liabilities of a legal person,” as the statute puts it. “The settlement is a profound alternative to the human presumption of sovereignty over the natural world,” said Pita Sharples, who was the minister of Maori affairs when the law was passed. It was also “undoubtedly legally revolutionary” in New Zealand “and on a world scale,” Jacinta Ruru of the University of Otago wrote in the Maori Law Review.

Personhood means, among other things, that lawsuits to protect the land can be brought on behalf of the land itself, with no need to show harm to a particular human. Next will be the Whanganui River, New Zealand’s third longest. The local Maori tribe views it as “an indivisible and living whole, comprising the river and all tributaries from the mountains to the sea — and that’s what we are giving effect to through this settlement,” Mr. Finlayson said. It is expected to clear Parliament and become law this year.

How crazy is this? ‘Misinformation is also information’.

• Obama Expected to Sign Industry-Backed GMO Label Bill Into Law (EW)

Looks like we’re finally getting GMO labels on food products—just not the kind you can actually read. President Obama is expected to throw his weight behind a controversial bill that allows businesses to use a smartphone scannable QR code instead of clear, concise wording that informs consumers if a product contains genetically modified ingredients. The bill would also nullify state-by-state GMO labeling mandates such as Vermont’s landmark law that took effect on July 1. “While there is broad consensus that foods from genetically engineered crops are safe, we appreciate the bipartisan effort to address consumers’ interest in knowing more about their food, including whether it includes ingredients from genetically engineered crops,” White House spokeswoman Katie Hill told Bloomberg in an e-mail.

“We look forward to tracking its progress in the House and anticipate the president would sign it in its current form.” The House of Representatives is voting today on legislation from the Senate, which voted 63 to 30 in favor of the bill on July 7, less than a week after Vermont enacted its GMO label law. The bipartisan “compromise” bill was conceived after years of negotiations by Democrat Sen. Debbie Stabenow and Republican Sen. Pat Roberts and is supported by the very industry that produces and profits from such products, including the powerful Grocery Manufactures Association and world’s largest seed producer and pesticide giant Monsanto. UPDATE: The U.S. House of Representatives passed the bill by a 306-117 vote Thursday. The bill now heads to President Obama’s desk.

Can’t stop the brilliance of the human brain.

• Biodiversity Is Below Safe Levels Across More Than Half Of World’s Land (G.)

The variety of animals and plants has fallen to dangerous levels across more than half of the world’s landmass due to humanity destroying habitats to use as farmland, scientists have estimated. The unchecked loss of biodiversity is akin to playing ecological roulette and will set back efforts to bring people out of poverty in the long term, they warned. Analysing 1.8m records from 39,123 sites across Earth, the international study found that a measure of the intactness of biodiversity at sites has fallen below a safety limit across 58.1% of the world’s land. Under a proposal put forward by experts last year, a site losing more than 10% of its biodiversity is considered to have passed a precautionary threshold, beyond which the ecosystem’s ability to function could be compromised.

“It’s worrying that land use has already pushed biodiversity below the level proposed as a safe limit,” said Prof Andy Purvis, of the Natural History Museum, and one of the authors. “Until and unless we can bring biodiversity back up, we’re playing ecological roulette.” Researchers said the study, published in the journal Science on Thursday, was the most comprehensive examination yet of biodiversity loss. The decline is not just bad news for the species but in the long term could spell problems for human health and economies. “If ecosystem functions don’t continue, then yes it affects the ability of agriculture to sustain human populations and we simply don’t know at which point that will be reached,” said Dr Tim Newbold, lead author of the work and a research associate at University College London. “We are entering the zone of uncertainty.”

There’s a man and then there’s ‘a mensch’.

• Gleaning: Harvesting Spain’s Unwanted Crops To Feed The Hungry (G.)

Under a blazing Catalan sun, Abdelouahid wipes the sweat from his brow in a cabbage patch full with clouds of white butterflies. “It’s really not warm today,” he says. “It’s only hot if you stop working.” Around him, unemployed workers and environmentalists squat in green bibs, black gloves and hats, plucking cabbages that would otherwise be threshed, to distribute at food banks around Barcelona. A 39-year-old Moroccan emigré with two small children, Abdelouahid began “gleaning” – harvesting farmers’ unwanted crops – with the Espigoladors (gleaners) after losing his job in the construction industry four years ago. It is Ramadan and he is fasting but still smiling as he cuts at the green jewels.

“I don’t like to spend my days at home, sending CVs to employers, waiting for their rejection letters, or going around the restaurants trying to find food,” he says. “I prefer to do something positive. A lot of people need this food. It is better to collect it than to leave it.” Europe wastes some 88m tonnes of food each year – around 173 kg per person – with costs estimated at €143bn (£113bn). Advocates of the new gleaning movements say that its collection could reduce pressure on land use, improve diets, feed the hungry and provide work for the socially excluded.

For now, most of its recovered foods go to food banks, but the Espigoladors social enterprise has launched an “Es Imperfect” (is imperfect) brand of jams, soups and sauces made from recovered produce. The line is growing so fast that the day after the cabbage picking, the project’s founder, Mireia Barba, was called to a meeting of Cotec, King Felip VI’s national development foundation. Another fruit of the gleaning project has been an “I’m imperfect too” advertising campaign which challenges conventional ideas of food and beauty, by using photos of ordinary people holding painted fruit. The idea was to change misconceptions about browned, soft or unusually shaped fruit and veg being any less tasty.

Brexit: The System Cannot Hold

Jun 242016

June 24, 2016 Posted by Raúl Ilargi Meijer at 10:16 am Finance Tagged with: Brexit, Brussels, Cameron, Corbyn, EU, Farage, Growth, Podemos 9 Responses »

Stephen Green 18×24 inches. 2016. Acrylic on canvas. MuseumofAwesomeArt.com

Well, they did it. A majority of Britons made clear they’re so fed up with David Cameron and everything he says or does, including promoting the EU, that they voted against that EU. They detest Cameron much more than they like Nigel Farage or Boris Johnson. It seems that everyone has underestimated that.

Cameron just announced he’s stepping down. And that points to a very large hole in the ground somewhere in London town. Because going through a list of potential leaders, you get the strong impression there are none left. Not to run the country, and not to negotiate anything with Brussels. Which has a deep leadership -credibility- hole of itself, even though the incumbents are completely blind to that.

But first Britain. The Leave victory was as much a vote against Chancellor George Osborne as it was against Cameron. So Osborne is out as potential leader of the Conservatives. Boris Johnson? Not nearly enough people like him, and he fumbled his side of the Leave campaign so badly his credibility, though perhaps not being fully shot, is far too much of an uncertainty for the Tories to enter the upcoming inevitable general elections with.

Who else is there? Michael Gove? Absolute suicide. Likeability factor of zero Kelvin. That bus these guys drove around which proclaimed they could get £350 million extra a week for the NHS health care system in case of a Brexit will come back to haunt all of them. Just about the first thing Farage said earlier when the win became clear, was that the £350 million was a mistake.

I guess you could mention Theresa May, who apparently wants the post, but she’s an integral part of the Cameron clique and can’t be presented as the fresh start the party so badly needs.

Talking about Farage, who’s not Tory, but Ukip, he’s done what he set out to do, and that means the end of the line for him. He could, and will, call for a national unity government, but there is no such unity. He got voted out of a job today -he is/was a member of the European Parliament- and Ukip has only one seat in the British parliament, so he’s a bit tragic today. There is no place nor need for a UK Independence Party when the UK is already independent.

Then there’s Labour, who failed to reach their own constituency, which subsequently voted with Farage et al, and who stood right alongside Cameron for Remain, with ‘leader’ Jeremy Corbyn reduced to the role of a curiously mumbling movie extra. So Corbyn is out.

Shadow finance minister John McDonnell has aspirations, but he’s a firm Remain guy as well, and that happens to have been voted down. Labour has failed in a terrible fashion, and they better acknowledge it or else. But they already had a very hard time just coming up with Corbyn last time around, and the next twist won’t be any easier.

Cameron, Osborne, Corbyn, they have all failed to connect with their people. This is not some recent development. Nor is it a British phenomenon, support for traditional parties is crumbling away everywhere in the western world.

The main reason for this is a fast fading economy, which all politicians just try to hide from their people, but which those same people get hit by every single day.

A second reason is that politicians of traditional parties are not perceived as standing up for either their people nor their societies, but as a class in themselves.

In Britain, there now seems to be a unique opportunity to organize a movement like (Unidos) Podemos in Spain, the European Union’s next big headache coming up in a few days. Podemos is proof that this can be done fast, and there’s a big gaping hole to fill.

Much of what’s next in politics may be pre-empted in the markets. Though it’s hard to say where it all leads, this morning there’s obviously a lot of panic, short covering etc going on, fact is that as I write this, Germany’s DAX index loses 6% (-16.3% YoY), France’s CAC is down 7.7% (-18.5%) and Spain’s IBEX no less than 10.3% (-30%). Ironically, the losses in Britain’s FTSE are ‘only’ 4.5% (-11%).

These are numbers that can move entire societies, countries and political systems. But we’ll see. Currency moves are already abating, and on the 22nd floor of a well-protected building in Basel, all of the relevant central bankers in the world are conspiring to buy whatever they can get their hands on. Losses will be big but can perhaps be contained up to a point, and tomorrow is Saturday.

By the way, from a purely legal point of view, Cameron et al could try and push aside the referendum, which is not legally binding. I got only one thing on that: please let them try.

As an aside, wouldn’t it be a great irony if the England soccer (football) team now go on to win the Euro Cup? Or even Wales, which voted massively against the EU?

Finally, this was of course not a vote about the -perhaps not so- United Kingdom, it was a vote about the EU. But the only thing we can expect from Brussels and all the 27 remaining capitals is damage control and more high handedness. It’s all the Junckers and Tusks and Schäubles and Dijsselbloems are capable of anymore.

But it’s they, as much as David Cameron, who were voted down today. And they too should draw their conclusions, or this becomes not even so much about credibility as it becomes about sheer relevance.

Even well before there will be negotiations with whoever represents Britain by the time it happens, the Brussels court circle will be confronted with a whole slew of calls for referendums in other member states. The cat is out of Pandora’s bag, and the genie out of her bottle.

Many of the calls will come from the far-right, but it’s Brussels itself that created the space for these people to operate in. I’ve said it before, the EU does not prevent the next battle in Europe, it will create it. EC head Donald Tusk’s statement earlier today was about strengthening the union with the remaining 27 nations. As if Britain were the only place where people want out…

Holland, France, Denmark, Italy, Spain, Hungary, they will all have calls for referendums. Greece already had one a year ago. The center cannot hold. Nor can the system. If referendums were held in all remaining 27 EU member states, the union would be a lot smaller the next morning. The Unholy Union depends on people not getting a say.

The overwhelming underlying principle that we see at work here is that centralization is dead, because the economy has perished. Or at least the growth of the economy has, which is the same in a system that relies on perpetual growth to ‘function’.

But that is something we can be sure no politician or bureaucrat or economist is willing to acknowledge. They’re all going to continue to claim that their specific theories and plans are capable of regenerating the growth the system depends on. Only to see them fail.

It’s high time for something completely different, because we’re in a dead end street. If the Brexit vote shows us one thing, it’s that. But that is not what people -wish to- see.

Unfortunately, the kinds of wholesale changes needed now hardly ever take place in a peaceful manner. I guess that’s my main preoccupation right now.

Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
Yeats

The Only Thing That Grows Is Debt

Jun 082016

June 8, 2016 Posted by Raúl Ilargi Meijer at 2:18 pm Finance Tagged with: centralization, collapse, cycle, democracy, elite, EU, Growth, referendum, US 10 Responses »

Fred Stein Evening, Paris 1934

Two months ago, there was a referendum in Holland about an association agreement between the EU and Ukraine. A relatively new Dutch law states that with an X amount of signatures a referendum can be ‘forced’ by anyone. Before, during and -especially- after the vote, its importance was -and is actively being- pooh-poohed by both the Dutch government and the EU. That in itself paints the issue better than anything else. Both the call and the subsequent support for the referendum stem from resistance against exactly that attitude.

The Dutch voted No to the EU/Ukraine agreement. It was with a turnout not much above the validity threshold, but a large majority of those who did vote agreed they want no part of the deal. This puts Dutch PM Rutte in an awkward position, he can’t be seen ignoring the population. Well, at least not openly. The EU can’t validate the agreement, and with Holland still holding the chair of the Union until July 1, a meeting on the topic has been pushed forward until the last weekend of June. With Rutte still in charge, but only just, and with the June 23 UK Brexit vote decided.

Brussels is frantically looking for a way to push through the agreement despite the Dutch vote, and likely some sort of bland compromise will be presented, which Rutte’s spin doctors will put into words that he can -with a straight face- claim honor the vote while at the same time executing what that same vote specifically spoke out against.

The EU will claim that since 27 other nations did ‘ratify’ the agreement, the 67% of the 32% of Dutch voters who bothered to show up should not be able to block it. As they conveniently fail to mention that nobody in the other 27 countries had a chance to vote on the issue. Just imagine a Brexit-like vote in all 28 EU nations on June 23. Brussels knows very well what that would mean. There’s nothing it finds scarier than people having an active say in their lives.

All this is a mere introduction for what is a ‘western world wide’ trend that hardly anybody is able to interpret correctly. It what seems to many to be a sudden development, votes like the Dutch one are ‘events’ where people vote down incumbents and elites. But these are not political occurrences, or at least politics doesn’t explain them.

In the US, there’s Trump and Bernie Sanders. In Britain, the Brexit referendum shows a people that are inclined not to vote FOR something, but AGAINST current political powers. In Italy, a Five-Star candidate is set to become mayor of Rome, something two Podemos affiliated -former- activists have already achieved in Barcelona and Madrid.

All across Europe, ‘traditional’ parties are at record lows in the polls. As is evident when it comes to Brexit, but what when you look closer is a common theme, anything incumbents say can and will be used against them. (A major part of this is that the ’propaganda power’ of traditional media is fast coming undone.)

The collapse of the system doesn’t mean people swing to the right, as is often claimed, though that is one option. It means people swing outside of the established channels, and whoever can credibly claim to be on that outside has a shot at sympathy, votes, power, be they left or right. Whatever else it is they may have in common, first and foremost they’re anti-establishment.

To understand the reason all this is happening, we must turn our heads and face economics. Or rather, the collapse of the economy. Especially in the western world – the formerly rich world-, there is no such thing as separate political and economic systems anymore (if there ever were). There is more truth in Hazel Henderson’s quote than we should like: “economics [..] has always been nothing more than politics in disguise”.

What we have is a politico-economic system, with the former media establishment clinging to (or inside?!) its body like some sort of embedded parasite. A diseased triumvirate.

With the economy in irreversible collapse, the politico part of the Siamese twin/triplet can no longer hold. That is what is happening. That is why all traditional political parties are either already out or soon will be. Because they, more than anything else, stand for the economic system that people see crumbling before their eyes. They represent that system, they are it, they can’t survive without it.

Of course the triumvirate tries as hard as it can to keep the illusion alive that sometime soon growth will return, but in reality this is not just another recession in some cycle of recessions. Or, at the very minimum this is a very long term cycle, Kondratieff style, . And even that sounds optimistic. The system is broken, irreparably. A new system will have to appear, eventually. But…

‘Associations’ like the EU, and perhaps even the US, with all the supranational and global entities they have given birth to, NATO, IMF, World Bank, you name them, depend for their existence on an economy that grows. The entire drive towards globalization does, as do any and all drives toward centralization. But the economy has collapsed. So all this will of necessity go into reverse, even if there are very powerful forces that will resist such a development.

Despite what the media try to tell you, as do the close to 100% manipulated economic data emanating from various -tightly controlled- sources, the economy is not growing, and it hasn’t for years; the only thing that grows is debt. And you can’t borrow growth.

You can argue in fascinating philosophical debates about when this started, arguments can be made for Nixon’s 1971 abolishment of the -last vestiges of- the gold standard anywhere up to Clinton’s 1998 repeal of Glass-Steagall, or anything in between -or even after.

It doesn’t matter much anymore, the specifics are already gathering dust as research material for historians. The single best thing to do for all of us not in positions of politico/economic power is to recognize the irreversible collapse of the system. Since we all grew up in it and have never known anything else, that is hard enough in itself. But we don’t have all that much time to lose anymore.

The whole shebang is broke. This can easily be displayed in a US nominal debt vs nominal GDP graph:

That’s really all you need to know. That’s what broke the shebang. It is easy. And even if a bit more of the ‘surplus’ debt had been allowed to go towards the common man, it wouldn’t have made much difference. We’ve replaced growth with debt, because that is the only way to keep the -illusion of- the politico-economic system going, and thereby the only way for the incumbent powers to cling on to that power.

And that is where the danger lies. It’s not just that the vast majority of westerners will become much poorer than they are now, they will be forced to face powers-that-be that face the threat of seeing their powers -both political and economic- slip sliding away and themselves heading towards some sort of Marie-Antoinette model.

The elites-that-be are not going to take that lying down. They will cling to their statuses for -literally- dear life. That right there is the biggest threat we all face (including them). It would be wise to recognize all these things for what they really are, not for what all these people try to make you believe they are. Dead seriously: playtime is over. The elites-that-be are ready and willing to ritually sacrifice you and your children. Because it’s the only way they can cling on to their positions. And their own very lives.

It may take a long time still for people to understand the above, but it’s also possible that markets crash tomorrow morning and bring the facades of Jericho down with them. Waiting for that to happen is not your best option.

Debt Rattle June 8 2016

Jun 082016

June 8, 2016 Posted by Raúl Ilargi Meijer at 8:43 am Finance Tagged with: arctic, BoJ, bonds, Brexit, Draghi, EU, fake invoices, Growth, monopoly, refugees 3 Responses »

Harris&Ewing Washington Monument, view from air 1919

• Bank of Japan’s Sovereign Debt Endgame Is The Naked Emperor (FP)

• Japan’s Biggest Bank To Quit As JGB Primary Dealer (ZH)

• Draghi Fires Starting Gun on Corporate Bond Purchases in Europe (BBG)

• Public Support For The EU Plunges Across Europe (R.)

• France Shuns Europe As Brexit Revolt Spreads (AEP)

• Billions Of Pounds Taken Out Of Britain Amid Fears Of Brexit (Ind.)

• China’s Exports Weaken, Signaling More Headwinds For Growth (BBG)

• China Central Bank Holds Line On Growth Forecast, Sees More Pain To Come (R.)

• US-China Talks Limited by Disagreements (WSJ)

• Millions Around The World Are Fleeing Neoliberal Policy (RNN)

• Only 10 Countries In The World Are Not At War (Ind.)

• Arctic Sea Ice Hit A Stunning New Low In May (WaPo)

• Greek Legal Rulings Back 35 Refugees Appealing Deportation (Kath.)

• EU Considers Linking African Aid to Curbs on Migrant Flows (WSJ)

“The workability of the institution breaks down when a different set of rules are seen to apply to governments versus those that apply to everyone else.”

• Bank of Japan’s Sovereign Debt Endgame Is The Naked Emperor (FP)

Last week, Bloomberg reported in depth on Japan’s miraculous diminishing debt load. Turns out, despite a steady rise in government borrowing, the burden of repayment is diminished because the buyer of 90% of that debt is the Bank of Japan. This has serious implications for Canadian investors, yet the full significance has not yet been thoroughly unpacked by media. My bet is most analysts and economists are aghast at this admission by a G7 government that debt could just be summarily forgiven. It suggests the notion of liability in credit does not apply to government, or its associated (yet private, to varying degree) central banks. But it’s really quite simple. The single most important rule upon which our global debt-driven economic growth equation is dependent is that debt is repaid.

If it isn’t, assets are confiscated. Just like if you don’t keep up with the mortgage payments on your house, you lose it. But what happens when the biggest creditor is also the debtor? The entire debtor/creditor relationship is rendered nonsensical. The size of the debt any one nation can undertake is directly related to its ability to repay any proposed amount over time. Its ability to repay its debt, in turn, is derived from the consensus of markets that demand a higher rate of interest the closer a debtor gets to defaulting. The debt limit is reached when no one will lend, because even at the highest rate of interest, the chance of default is greater. Or when the debtor misses a payment. This works well in a world ostensibly governed by free markets, and when the rules are universally applied. The workability of the institution breaks down when a different set of rules are seen to apply to governments versus those that apply to everyone else.

BoJ buys everything. Banks have to deal with a monopoly, no profit in that.

• Japan’s Biggest Bank To Quit As JGB Primary Dealer (ZH)

Ever since the launch of Japan’s QE, and worsening in the aftermath of January’s shocking NIRP announcement, Japan’s bond market, which moments ago slid to new record lows yields across the curve, has had its share of near-death experiences: between repeated VaR shocks, to days in which not a single bond was traded, to trillions in bonds with negative yields, it has seemed that the Japanese Government Bond is on life support. That support may be ending. According to Nikkei, and confirmed by Bloomberg, Japan’s biggest bank, Bank of Tokyo-Mitsubishi UFJ, is preparing to quit its role as a primary dealer of Japanese government bonds as negative interest rates turn the instruments into larger risks, a fallout from massive monetary easing measures by the Bank of Japan.

While the role of a Primary Dealer comes with solid perks such as meetings with the Finance Ministry over bond issuance and generally being privy to inside information and effectively free money under POMO, dealers also are required to bid on at least 4% of a planned JGB issuance, which as the Nikkei reports has become an increasingly heavy burden for BTMU. In other words, one of the key links that provides liquidity and lubricates the Japanese government bond market has just decided to exit the market due to, among other thinks, lack of liquidity entirely due to the policy failure of Abenomics in general, and Kuroda’s disastrous monetary policies in particular.

One could, of course, ask just how does BTMU plan on also exiting the Japanese economy itself, if and when the country’s $8 trillion bond market implodes, but we doubt the bank will ever be able to answer that. The ministry is expected to let the bank resign. Japan has 22 primary dealers including megabanks and major brokerages. Several foreign brokerages had pulled out before as part of restructuring efforts at home or for other reasons, but BTMU will be the first Japanese institution to quit. In a revolutionary shift, one created by the Bank of Japan itself, banks, once the biggest buyers of JGBs, see little appeal in sovereign debt today. The bonds have very low yields, and a rise in interest rates could leave banks with vast unrealized losses.

Private-sector banks held just over 229 trillion yen ($2.13 trillion) in JGBs at the end of 2015, nearly 30% less than at the end of March 2013, before the BOJ launched massive quantitative and qualitative easing measures. Negative rates introduced this year by the BOJ reinforced the trend. The highest bid yield on benchmark 10-year JGBs sank to a record low of negative 0.092% on Thursday. BTMU was the fifth-largest buyer of Japanese government bonds among the 22 primary dealers until spring 2015, but ranked 10th or lower between October 2015 and March 2016 as shareholders turned up their nose on government debt.

One day we’ll understand just how insane this is. One massive debt orgasm.

• Draghi Fires Starting Gun on Corporate Bond Purchases in Europe (BBG)

Investors will be watching Mario Draghi’s first corporate bond purchases on Wednesday for an indication of whether they were right to snap up the notes before the ECB. The ECB is adding investment-grade corporate notes to its €80 billion monthly purchase program, which already includes covered bonds, asset-backed securities and government debt, as part of efforts to encourage growth. The challenge will be buying enough bonds in increasingly illiquid markets, investors and analysts say. “There is a fair amount riding on this in terms of the ECB’s credibility,” said Victoria Whitehead at BNP Paribas Investment Partners. “The perception is that if they can’t buy at least €5 billion of bonds a month, the program will be seen as unsuccessful.” Investors have piled into investment-grade corporate bonds on the promise of central bank purchases, driving up prices and cutting borrowing costs.

The average yield for euro notes tumbled to 1.002% on Monday, the lowest in more than a year, according to BofAML index data. Companies responded to the surge in demand by selling more than €50 billion of bonds in the single currency in May, the second-busiest month on record. While purchases of more than €5 billion of bonds may boost the market, investors may be disappointed if the ECB bought less than €3 billion a month, CreditSights analysts wrote in a June 5 report. Commerzbank and Morgan Stanley don’t expect the monthly purchases to surpass €5 billion. “We’re worried that they won’t be able to buy quite as much as they want to,” said Tim Winstone at Henderson Global Investors. “If the buying underwhelms and reported volumes are less than most people expect, there is a risk of a selloff.”

Dissolve the monster peacefully while you still can. Or else.

• Public Support For The EU Plunges Across Europe (R.)

Public support for the European Union has fallen sharply in its biggest member states over the past year, a survey showed on Tuesday, weeks before Britons vote on whether to leave the 28-nation bloc. The survey of 10 large EU states by the Washington-based Pew Research Center showed strong support for Britain to stay in the EU, with 89% of Swedes, 75% of Dutch and 74% of Germans viewing a so-called Brexit as a bad thing. But most striking was a plunge in the percentage of Europeans who view the EU favorably, a development which appears linked to the bloc’s handling of the refugee crisis and the economy. The fall was most pronounced in France, where only 38% of respondents said they had a favorable view of the EU, down 17 points from last year.

Favorability ratings also fell by 16 points in Spain to 47%, by eight points in Germany to 50%, and by seven points in Britain to 44%. Public support for the EU was strongest in Poland and Hungary, countries which ironically have two of the most EU-sceptical governments in the entire bloc. The Pew survey showed that 72% of Poles and 61% of Hungarians view the EU favorably. “The British are not the only ones with doubts about the European Union,” Pew said. “Much of the disaffection with the EU among Europeans can be attributed to Brussels’ handling of the refugee issue. In every country surveyed, overwhelming majorities disapprove of how Brussels has dealt with the problem.”

This was especially true in Greece, which has been overwhelmed by migrants crossing the Aegean Sea from Turkey. Some 94% of Greeks believe the EU has mishandled the refugee crisis. In Sweden it was 88%, in Italy 77% and in Spain 75%. At 92%, Greeks were also the most disapproving of the EU’s handling of the economy, followed by the Italians at 68% and French at 66%. Roughly two-thirds of Greeks and Britons said powers should be returned to national governments from Brussels, far higher than in the other surveyed countries.

Close to what I’ve written before: “They may have to dissolve the EU as it is and try to reinvent it, both in order to bring the Brits back and because they fear that the whole political order will be swept away unless they do..”

• France Shuns Europe As Brexit Revolt Spreads (AEP)

France has turned even more viscerally eurosceptic than Britain over recent months, profoundly altering the political geography of Europe and making it impossible to judge how Paris might respond to Brexit. An intractable economic crisis has been eating away at the legitimacy of the French governing elites for much of this decade. This has now combined with a collapse in the credibility of the government, and mounting anger over immigration. A pan-European survey by the Pew Research Center released today found that 61pc of French voters have an “unfavourable” view, compared to 48pc in the UK. A clear majority is opposed to “ever closer union” and wants powers returned to the French parliament, a finding that sits badly with the insistence by President Francois Hollande that “more Europe” is the answer to the EU’s woes.

“It is a protest against the elites,” said Professor Brigitte Granville, a French economist at Queen Mary University of London. “There are 5000 people in charge of everything in France. They are all linked by school and marriage, and they are tight.” Prof Granville said the mechanisms of monetary union have upset the Franco-German strategic marriage, wounding the French psyche. “The EU was sold to the French people as a `partnership’ of equals with Germany. But it has been very clear since 2010 that this is not the case. Everybody could see that Germany decided everything in Greece,” she said. The death of the Monnet dream in the EU’s anchor state poses an existential threat to the European project and is running in parallel to what is happening in Britain.

The Front National’s Marine Le Pen is leading the polls for the presidential elections in 2017 with vows to restore the French franc and smash the EU edifice. While it has long been assumed that she could never win an outright majority, nobody is quite so sure after the anti-incumbent upset in Austria last month. “The Front National is making hay from the Brexit debate,” said Giles Merritt, head of the Friends of Europe think tank in Brussels. “The EU policy elites are in panic. If the British vote to leave the shock will be so ghastly that they will finally wake up and realize that they can no longer ignore demands for democratic reform,” he said.

“They may have to dissolve the EU as it is and try to reinvent it, both in order to bring the Brits back and because they fear that the whole political order will be swept away unless they do,” he said. Mr Merritt said it is an error to suppose that the EU would carry on as a monolithic bloc able to dictate terms after a Brexit vote. “The British would have pricked the bubble. The Germans are deeply alarmed at how suddenly the mood is shifting everywhere,” he said.

It’s going to be so much fun, the next two weeks. Can the footballers save England at the Euro Cup?

• Billions Of Pounds Taken Out Of Britain Amid Fears Of Brexit (Ind.)

Investors are moving billions of pounds in assets out of British currency and assets ahead of the EU referendum, new figures suggest. An analysis by Sky News found £65bn left the UK or was converted into other currencies in March and April, the largest amount since the economic crash. In the six months to the end of April, £77bn was pulled out of British pounds, compared to just £2bn in the six months to the end of last October. The figures, published by the Bank of England, are consistent with investors worrying that the pound is due for a sharp fall should Brexit to occur. Because financial markets are prone to collective panic, investors’ views are the main factor in determining whether the pound will actually fall. Any perception that a fall was about to take place could end up becoming a self-fulfilling prophecy.

In February, HSBC warned that 20% could be wiped off the value of sterling were Britain to leave the EU. In May this figure was corroborated by the National Institute for Economic and Social Research. The pound plunged to a three-week low yesterday, probably partly in response to polls showing the Leave campaigning ahead. It hit a seven-year low against the dollar the day after the former Mayor of London, Boris Johnson, announced he was backing Brexit, and also suffered the biggest one-day fall since David Cameron become Prime Minister. The collapse of the pound at the end of June would mean Britons going abroad during the summer would have their spending power reduced. Imported goods such as electronics would also likely become significantly more expensive.

That is one damning graph. Where would China’s imports be without the fake invoices?

• China’s Exports Weaken, Signaling More Headwinds For Growth (BBG)

China’s exports stabilized in May, with a weakening currency giving some support to growth in the world’s biggest trading nation. Overseas shipments fell 4.1% in dollar terms from a year earlier, the customs administration said Wednesday. Imports slipped 0.4% – the smallest drop since late 2014 – to leave a trade surplus of $50 billion. Reflecting a weaker currency, both exports and imports fared better when measured in local currency terms. The Shanghai Composite Index pared losses and the Australian dollar rallied. “The worst time for Chinese exports has passed,” said Harrison Hu at Royal Bank of Scotland in Singapore, adding that the dollar-denominated export growth is slightly misleading due to the price changes.

“The quantity of exports actually showed a subdued increase. The yuan also depreciated against a basket of currencies, which supports exports.” Still, that support remains restrained. The World Bank on Tuesday cut its global growth estimate to 2.4% for this year, which would be the same as 2015, from the 2.9% projected in January. Ma Jun, chief economist of the People’s Bank of China’s research bureau, lowered his forecast for China’s exports this year to a 1% decline, versus a 3.1% increase seen previously, according to a work paper published Wednesday. “The weakening momentum of global growth is our main reason to lower the forecast,” he wrote. “A 10-percentage point decline in exports can drag GDP growth down by about 1%.”

“China’s trade shrank 8% last year, compared with the government’s goal for 6% growth..”

• China Central Bank Holds Line On Growth Forecast, Sees More Pain To Come (R.)

China’s central bank slashed its forecast for exports on Wednesday, predicting a second straight annual fall in shipments, but said the economy will still grow 6.8% this year. The People’s Bank of China also warned in its mid-year work report that the government’s push to reduce debt levels and overcapacity could increase bond default risks and make it more difficult for companies to raise funds. And ahead of a meeting of the U.S. Federal Reserve’s policymaking board next week, it said the pace of U.S interest rate rises would affect global capital flows and emerging market currencies, but it did not mention the yuan. “Since the beginning of this year, the global and domestic economic environment has experienced a number of changes,” the PBOC said in the report.

“Reflecting these recent developments, we revised our China macroeconomic forecasts for 2016. Compared with our published forecasts in December last year, we maintain our baseline projection of 2016 real GDP growth at 6.8%.” The report was released shortly after monthly data showed China’s exports fell an annual 4.1% in May, more than expected and the 10th decline in the past 12 months. Imports were more encouraging, however, declining only marginally and much less than expected, pointing to improving domestic demand and adding to views that the economy may be slowly stabilizing. Preliminary commodity trade data showed sharp rises in imports of copper and iron ores.

[..] Despite cutting its forecast for exports to minus 1% from growth of 3.1%, the PBOC saw a domestic recovery remaining on track. It upgraded its forecast for fixed-asset investment growth to 11%, an increase of 0.2 percentage points from estimates it made late last year. A government spending spree on major infrastructure projects and a continuing recovery in the housing market have boosted demand for materials from cement to steel. China’s trade shrank 8% last year, compared with the government’s goal for 6% growth , in the worst performance since the global financial crisis.

And those are here to stay. Sharply conflicting interests.

• US-China Talks Limited by Disagreements (WSJ)

The U.S. and China made little progress on a series of disagreements during two days of high-level economic and security talks, as both countries prepare for leadership change and further economic uncertainty. Statements by officials from both sides on Tuesday suggested mostly incremental results from the dialogue. U.S. Treasury Secretary Jacob Lew said Chinese officials reaffirmed a commitment not to devalue an already weakening yuan for competitive purposes and pledged not to “target” an expansion of the steel industry, whose surging production he previously called market-distorting. Beijing widened access to its tightly regulated financial markets, offering U.S. investors a quota of 250 billion yuan ($38.1 billion) to buy Chinese stocks and bonds.

The two governments agreed to designate clearing banks in the U.S. for settling yuan transactions, a move that would promote greater use of the Chinese currency. Mr. Lew said it was too early to say which U.S. financial institution might be chosen but said the U.S. will have the second-largest quota after Hong Kong. On the more contentious issues in the relationship, the senior officials appeared to restate positions and, in some cases, outright disagree. A new Chinese law that grants police the authority to monitor foreign nonprofits provoked sharp differences. This year’s meeting of the Strategic and Economic Dialogue is the last for the Obama administration, with the U.S. presidential election approaching. China soon will face its own important leadership transition.

In 2017, five of the seven members of the Politburo Standing Committee, China’s top decision-making body, are due to step down. The timing of the meetings, combined with tensions over the South China Sea—where the U.S. is challenging Beijing’s assertion of sovereignty over islands, reefs and surrounding waters claimed by other countries—limited prospects for breakthroughs on issues such as trade and investment barriers and China’s currency policy.

TEXT

• Millions Around The World Are Fleeing Neoliberal Policy (RNN)

What it tells is almost identical to what has already been narrated for Russia and Greece. And what’s responsible for the increasing death rates is actually neoliberal economic policy, neoliberal trade policy, and the polarization and impoverishment of a large part of society. After the Soviet Union broke up in 1991, death rates soared, lifespans shortened, health standards decreased all throughout the Yeltsin administration, until finally President Putin came in and stabilized matters. Putin said that the destruction caused by neoliberal economic policies had killed more Russians than all of whom died in World War II, the 22 million people. That’s the devastation that polarization caused there.

Same thing in Greece. In the last five years, Greek lifespans have shortened. They’re getting sicker, they’re dying faster, they’re not healthy. Almost all of the British economists of the late 18th century said when you have poverty, when you have a transfer of wealth to the rich, you’re going to have shorter lifespans, and you’re also going to have immigration. The countries that have a hard money policy, a creditor policy, people are going to emigrate. Now, at that time that was why England was gaining immigrants. It was gaining skilled labor. It was gaining people to work in its industry because other countries were still in the post-feudal system and were driving them out. Russia had a huge emigration of skilled labor, largely to Germany and to the United States, especially in information technology. Greece has a heavy outflow of labor.

The Baltic states have had almost a 10% decline in their population in the last decade as a result of their neoliberal policies. Also, health problems are rising. Now, the question is, in America, now that you’re having as a result of this polarization shorter lifespans, worse health, worse diets, where are the Americans going to emigrate’ Nobody can figure that one out yet. There’s no, seems nowhere for them to go, because they don’t speak a foreign language. The Russians, the Greeks, most Europeans all somehow have to learn English in school. They’re able to get by in other countries. They’re not sure where on earth can the Americans come from’ Nobody can really figure this out.

Curious ‘thingy’ from the Independent: somewhere in the article it says Iceland is the world’s most peaceful country, even though it’s not in that list of 10.

• Only 10 Countries In The World Are Not At War (Ind.)

The world is becoming a more dangerous place and there are now just 10 countries which can be considered completely free from conflict, according to authors of the 10th annual Global Peace Index. The worsening conflict in the Middle East, the lack of a solution to the refugee crisis and an increase in deaths from major terrorist incidents have all contributed to the world being less peaceful in 2016 than it was in 2015. And there are now fewer countries in the world which can be considered truly at peace – in other words, not engaged in any conflicts either internally or externally – than there were in 2014. According to the Institute for Economics and Peace, a think-tank which has produced the index for the past 10 years, only Botswana, Chile, Costa Rica, Japan, Mauritius, Panama, Qatar, Switzerland, Uruguay, and Vietnam are free from conflict.

Brazil is the country that has dropped out of the list, and as one of the worst performing countries year-on-year represents a serious concern ahead of the Rio Olympics, the IEP’s founder Steve Killelea told The Independent. But perhaps the most remarkable result from this year’s peace index, he said, was the extent to which the situation in the Middle East drags down the rest of the world when it comes to peacefulness. “If we look at the world overall, it has become slightly less peaceful in the last 12 months,” Mr Killelea said. “But if we took the Middle East out of the index over the last decade – and last year – the world would have become more peaceful,” he said. “It really highlights the impact the Middle East is having on the world.”

Man was here.

• Arctic Sea Ice Hit A Stunning New Low In May (WaPo)

The 2016 race downward in Arctic sea ice continued in May with a dramatic new record. The average area of sea ice atop the Arctic Ocean last month was just 12 million square kilometers (4.63 million square miles), according to the National Snow and Ice Data Center (NSIDC). That beats the prior May record (from 2004) by more than half a million square kilometers, and is well over a million square kilometers, or 500,000 square miles, below the average for the month. Another way to put it is this: The Arctic Ocean this May had more than three Californias less sea ice cover than it did during an average May between 1981 and 2010. And it broke the prior record low for May by a region larger than California, although not quite as large as Texas.

This matters because 2016 could be marching toward a new record for the lowest amount of ice ever observed on top of the world at the height of melt season — September. The previous record September low was set in 2012. But here’s what the National Snow and Ice Data Center has to say about that: Daily extents in May were also two to four weeks ahead of levels seen in 2012, which had the lowest September extent in the satellite record. The monthly average extent for May 2016 is more than one million square kilometers (386,000 square miles) below that observed in May 2012. In other words, for Arctic sea ice, May 2016 was more like June 2012 — the record-breaking year. Going into the truly warm months of the year, then, the ice is in a uniquely weak state.

The whole thing is turning into such a mess you would think this is happening on purpose.

• Greek Legal Rulings Back 35 Refugees Appealing Deportation (Kath.)

Fears are rising about the possible breakdown of a deal between the European Union and Turkey for the return of migrants after legal committees in Greece upheld dozens of appeals by refugees against their deportation. By late Monday, Greek appeals committees had ruled in favor of 35 refugees, ruling that Turkey is “an unsafe country.” Only two rulings overturned appeals by refugees against their deportation. On Tuesday a crowd of refugees blocked the container terminal at the port of Thessaoniki to protest the slow pace at which asylum applications are being processed. Hundreds of applications are pending and there are fears that they too will result in rulings in favor of refugees, undercutting a deal signed between Ankara and Brussels in March to return migrants to Turkey.

Meanwhile there are also concerns about a pickup in arrivals from neighboring Turkey. For several weeks, a crackdown by Turkish authorities on smugglers had all but stopped the migrant influx. Now that ties between Turkey and the EU are strained over the former’s refusal to reform terrorism laws and its insistence that Turks be granted visa-free access to the bloc, more migrants have started arriving in Greece from Turkey. The total number of refugees in Greece is 57,458, according to government figures made public on Tuesday. The figure includes 5,700 people in rented accommodation arranged by the United Nations refugee agency, UNHCR. The remainder of the migrants are living in makeshift camps or state-run facilities on the Aegean islands or mainland Greece.

When in a hole, keep digging. One deal with a madman is not enough.

• EU Considers Linking African Aid to Curbs on Migrant Flows (WSJ)

The European Union’s executive body on Tuesday presented plans linking trade and investment perks for African countries to their efforts in reducing migration to Europe, a controversial idea that still needs the backing of EU governments. While the bloc has managed to stem the influx of Syrian refugees and other migrants after striking a deal with Turkey in March, an increasing number of mostly African migrants are attempting to make the perilous journey via Libya across the Mediterranean Sea to Italy. Nearly 50,000 people were rescued and brought to Italy this year and over 2,000 are feared dead after several boats capsized off the Libyan coast, according the United Nations’ refugee agency.

“We must do in the southern Mediterranean what we’ve done in the Aegean,” European Commission Vice-President Frans Timmermans said Tuesday in the European Parliament in Strasbourg. Under the proposed measures from the European Commission, which still need the approval of EU governments and the European Parliament, EU development funding and trade incentives would be linked to the countries’ level of cooperation on migration. “We propose a mix of positive and negative incentives, to reward those countries willing to cooperate effectively with us and to ensure there are consequences for those who do not. This includes using our development and trade policies to create leverage,” Mr. Timmermans said.

EU diplomats in Brussels expect “quite heated discussions” on the idea of linking development aid and trade policies to cooperation on migration, as governments have different views on whether it is ethical to make aid conditional on countries taking people back or preventing them from leaving. EU interior ministers meeting in Luxembourg on Friday will have a first exchange of views on the topic.

China: A 5-Year Plan And 50 Million Jobs Lost

Mar 062016

March 6, 2016 Posted by Raúl Ilargi Meijer at 8:17 pm Finance Tagged with: China, Congress, debt, export, Growth, job cuts, Kyle Bass, layoffs 6 Responses »

Arnold Genthe San Francisco , Chinatown. The street of the gamblers at night 1900

China never had an actual economic model or growth model. It simply printed an obscene amount of money, especially after 2008, and used it to build factories, 30-story see-through apartment blocks and highways into nowhere cities, without giving much if any thought to where this would lead when their formerly rich western customers had less to spend on its ever increasing amount of ever more useless products, or when its workers would stop spending ever more on apartments as investments, or when no more roads and bridges were needed because nowhere was already in plain sight. Or all of the above. It was ‘to infinity and beyond’ from the start, but that’s a line from a kids’ fantasy story, not a 5-year plan or an economic model.

Going into its 10-day, 3,000 delegates National People’s Congress opening on Friday, China was facing -and very much still is- two major and interconnected problems. Both are problems that the country has never faced before -not a minor point to make. The first is a giant debt load, one that could easily be as high as $40 trillion, or 350% of GDP, once one includes the shadow banking system (watch the shadows!). The second is the Communist Party’s -economic- credibility.

The debt problem is impossible to solve without very far-reaching restructurings of both the debt itself and of the entire Chinese economy. There appears to be a problem within the problem, however: the Party neither looks prepared to truly tackle the debt nor does it seem to know how.

As for the credibility issue, the very fact that a 5-year plan will be unveiled is the perfect in-a-nutshell illustration of what’s ailing Beijing. Not only does it hark back to communist days of old, not exactly a confidence booster, but trying to look 5 years ahead in today’s global economy is in itself not credible. It forces the Party to make statements nobody in their right mind will believe. And to compound the issue, that is something the leadership doesn’t really seem to take seriously. President Xi Jinping, more than anything else, looks like a man in the tradition of ‘what I say is true because I say so”.

That may have worked for a long time inside the country, but the desire to be part of the global economy means the ‘because I say so’ attitude is now being questioned by people Xi can neither bully nor bend into submission. Something he doesn’t seem to have clued into yet. Surrounded as he will be over these ten days by people who’ll say Yes at any appropriate and inappropriate instance, and laugh at anything he says that might be construed as a joke, Xi won’t come out any the wiser. He’d probably be better off spending those days with someone like Kyle Bass, but he’s not doing that.

Everybody, including most NPC delegates, knows that China’s grossly overleveraged, overproducing and overcapacitated economy needs another round of mass layoffs. Some initial numbers relating to job losses have been ‘leaked’ prior to the Congress. First, it was 1.8 million jobs cut in the coal and steel sectors, and a few days later that became 6 million. But that can only possibly be just a start.

It’s all in the numbers. China has something in the order of a billion workers, give or take 100 million or so. Even with the largest mass migration in human history, in which 100s of millions moved from the countryside to the cities, there are still an estimated 300 million people working in agriculture. That’s the entire US population. It’s also 30% of the Chinese workforce. In the US just 2 or 3% work in farming.

But that still leaves 700 million Chinese in other jobs. Many of these jobs were ‘invented’ in the past 20 years, as China’s ‘miracle growth’ transformed it first into the world’s no. 1 trinket producer, then into a kind of powerhouse that built highways to nowhere cities, and today a powerhouse with a fast plummeting global consumer base.

Many millions of Chinese workers produce things that can’t be sold. This is by no means confined to just coal and steel. The sharply dropping Chinese import and export numbers, as well as the purchasing indices, tell a bleak story. It’s evident that China must re-invent itself. And while that may be exactly what it claims it’s doing, the -alleged- transition to a service- and/or consumer economy may sound good, but its practical success is far from guaranteed.

Transforming a factory worker into a service sector employee is not a matter of flicking a switch. Repeating this 10 million times over, or 20 or 30 million, is a nightmare in an economy that is seeing its growth rates plummet while at the same time needing to deleverage its debt levels.

What are all these people going to do that produces actual economic value? And what will be the character of the companies they produce this value at? China is still dominated by state-owned enterprises, with workers relying on the faith that Beijing will always make everything right that goes wrong.

Losing that faith may have far-reaching consequences. At the same time, China cannot get the international economic status it so desperately seeks if so many de facto work for the government.

Though most tend to forget this, China was in a similar situation not so long ago:

In the late 1990s, China drastically restructured its state-owned enterprises, privatizing some and shutting down others. The result: from 1995 to 2002, over 40 million jobs in the state sector were cut, along with nearly 30 million jobs lost in the manufacturing, mining, and utilities sectors.

Although many of these workers were able to pick up jobs in the newly-growing private sector, the societal and cultural shift entailed in the restricting should not be underestimated. Prior to that wave of reforms, state sector employees (the vast majority of China’s workforce) enjoyed the benefits of an “iron rice bowl,” absolute job security along with social benefits (such as healthcare and pensions) provided by the state.

70 million – unproductive- jobs cut in 7 years. An average 10 million per year. A problem the country ‘solved’ by throwing tens of trillions (in US dollars) into overleveraged overproduction at exports-driven manufacturing enterprises. And by moving hundreds of millions of people into the cities that housed the enterprises.

15 years later, many of these newly created jobs have in their turn become unproductive. And the country may have to start the same process all over again. With probably tens of millions more jobs to replace. Question is, how will it fare this time around? Will people accept it as obediently as 15 years ago?

The reforms of the 1990s resulted in massive lay-offs. Overnight, tens of millions of workers lost their “iron rice bowls.” There were people who didn’t want to accept it, even those who actively resisted, but the government ruled with an iron fist and eventually the reforms went through. Even today, some of these people have grown old on the edge of poverty. On a certain level, we sacrificed them in exchange for huge reforms to the economic system.

But before wondering about civil obedience, let’s ask again: what are all these people going to do that produces actual economic value? Service economy? Consumer economy? There is no move available this time into another giant and overleveraged export industry. They’re at the end of the -debt- line.

Those people that had some money have lost a lot -and will lose much more- in equities and housing markets. Moreover, the government’s attempts to make them feel more secure about their old age would take decades to convince the people. So those who have something to save will do just that. So.. what consumer economy?

Service economy? Much of that in China is in financial services. Which has no future. So what else is there? How about the US model of burger flippers? That looks like a winner…

See, here’s a depiction of Chinese debt:

And here’s what they plan to do about it:

It looks like subprime derivatives on steroids: China hopes to bundle together billions of dollars worth of non-performing loans and eventually sell them to global investors Such a massive securitisation programme would represent the latest tactic in China’s campaign to lift one of the biggest shadows cast over its slowing economy -a debt pile that is as big as 230% of GDP. It would whittle back debts at Chinese banks and move some of the risk outside the domestic financial system.

According to official figures, such debts at the banks have reached Rmb1.27tn ($194bn), while analysts estimate the real number is likely to be many times higher. Chinese media has reported that the regulator has granted a total of Rmb50bn for the first wave of products. Demand for the scheme, however, is expected to be significantly more modest than supply. “How many global investors have been interested in the traditional [bad debt in China]?” asked one Hong Kong-based investor with experience buying distressed debt in Asia. “Not many.. is a more complicated version of this going to change that soon? No.”

This’ll be great, as great as the western approach to drowning in debt. Mind you, the Chinese haven’t even started talking about ‘recovery’ like we have, they’re still thinking -or propagandizing- that they’re on an ever upward trail. Well, they’re not. One of the early notes coming out of the People’s Congress was this: “China Says Will Keep Yuan Basically Stable Against Basket Of Currencies ..”

That’s not happening. They know it, we know it, and Kyle Bass knows it. Perhaps once the Congress is over, they’ll come clean? Hard to say. What’s certain is that global markets WILL force a substantial re-adjustment of the yuan, and there’s nothing Xi or the entire Communist Party can do to prevent it. And then, after a 30% readjustment, take another look at that dollar-denominated debt!

And they’ll have to cut many millions of jobs, and try to ‘pacify’ the newly unemployed, and deleverage the insane debt levels they’ve created, and find a way to explain to their people where it all went so wrong.

China no longer lives in a kids’ fantasy Toy Story.

Debt Rattle March 6 2016

Mar 062016

March 6, 2016 Posted by Raúl Ilargi Meijer at 9:55 am Finance Tagged with: cash, China, DNA, earnings, EU, Fukushima, Growth, reform, refugees, Turkey 1 Response »

Harris&Ewing War-bond rally on Penn. Avenue, Washington DC 1918

• China Picks Growth Over Reform At Annual Congress (AFR)

• Hard Landing Fallacy “No Way” In China: Regulator (Xinhua)

• China Says Cuts In Overcapacity Won’t Cause Massive Layoffs (Reuters)

• China PM Predicts ‘Battle’ For Growth (BBC)

• US Weekly Earnings Drop Most On Record (ZH)

• Sunshine, Lollipops and… (Bill Gross)

• Sweden Begins 5 Year Countdown Until It Eliminates Cash (ZH)

• Confused By The Economic Modelling? That’s The Whole Idea (SMH)

• Mutations, DNA Damage Seen In Fukushima Forests (AFP)

• Zaman Newspaper: Defiant Last Edition As Turkey Police Raid (BBC)

• “EU ’Must’ Hand Turkey €7 Billion Per Year To Keep Out Refugees” (Reuters)

• Merkel Pressures Greece to Step Up Refugee Aid (BBG)

• Open Letter To Vienna From Austrian Expatriates In Greece (Observer)

• EU Refugee Crisis Leaves 10,000 Children Missing, Europol Says (BBG)

But wasn’t reform supposed to be crucial to growth itself? Pretty sure it still is. They should be careful not to start contradicting themselves.

• China Picks Growth Over Reform At Annual Congress (AFR)

China will put development above structural reform over the next five years, as it outlined an ambitious economic growth target higher than economists and international agencies are forecasting. While announcing only modest tax cuts and a smaller than expected increase in fiscal spending, the government indicated it stands ready to roll out out other stimulus measures to meet targeted growth of 6.5% between 2016 and 2020. “We must remain committed to economic development as our central task … and respond effectively to challenges so as to ensure that China’s economy, like a gigantic ship, breaks the waves and goes the distance,” said Premier Li Keqiang during his opening address to the National People’s Congress on Saturday.

In outlining the three main priorities for its 13th Five Year Plan, Mr Li said development ranked ahead of structural reform and efforts to recalibrate China’s economy to be more reliant on consumption rather than investment. “Development is of primary importance to China and is the key to solving every problem we face,” he said. Mr Li’s determination for China to grow its way out of trouble will see a budgeted fiscal deficit of 3% of GDP in 2016, up from 2.3% last year. While this was lower than many had expected, it does not account for off-budget items, which are likely to see China post an actual fiscal deficit of 3.5% in 2015 and could see that figure top 4% this year. “The majority of the increase in the fiscal deficit will be used for a cut in taxes and charges in order to reduce the burden on enterprises,” Mr Li said.

This will result in 500 billion yuan ($103 billion) of tax cuts this year, as China replaces sales tax with a Value Added Tax. China set an economic growth target of between 6.5% and 7% for 2016. While this is well down on the double-digit growth rates of last decade, Mr Li put it in context by saying each 1 percentage point of growth today was the same as 2.5 percentage points 10 years ago, as the economy was now significantly larger. He also said each 1 percentage point of growth created 1.9 million new jobs. However, he conceded the country would face “more and tougher challenges” for economic development this year and must be prepared to “fight a battle” as international trade was weak and geopolitical risks were rising. But he said the economy was resilient and there was ample room for growth.

[..] On structural reform, Mr Li said the issue of so called “zombie enterprises” – companies that are effectively bankrupt but still operating – would be addressed “proactively yet prudently”. Beijing has outlined plans for 1.8 million steel and coal workers to lose their jobs over the next five years and has set up a 100 billion yuan ($20 billion) fund for compensating employees and restructuring companies. However, Mr Li outlined few details on how this would be achieved, suggesting it would be more gentle than the brutal restructure of State Owned Enterprises in the late 1990s, which saw an estimated 25 million workers lose their jobs.

“China accounted for a quarter of the world’s economic growth in 2014, Xy said..” Tyler Durden wryly observes: “And accounted for 40% of all global new debt issuance since 2008..”

• Hard Landing Fallacy “No Way” In China: Regulator (Xinhua)

The hard landing fallacy on China’s economy will “no way” occur in China, a senior economic official said Sunday. The Chinese economy is so resilient with relatively strong abilities to resist risks, Xu Shaoshi, who heads the National Development and Reform Commission, said on the sidelines of the annual parliamentary session. “We are capable of keeping economic growth at rates within a reasonable range,” Xu said. “We are confident of achieving that end.” China set the growth target at a range of 6.5% to 7% this year, and an average annual growth of above 6.5% for the next five years.

It had seen, for a quarter of a century, the slowest expansion of 6.9% in 2015, amid its structural adjustment and a fragile global recovery. China’s economic growth remains relatively fast among world major economies. The 6.9% growth was hard won given the sluggish global recovery, Xu said. China accounted for a quarter of the world’s economic growth in 2014, Xu said, citing data from the World Bank and China’s National Bureau of Statistics.

We respectfully disagree.

• China Says Cuts In Overcapacity Won’t Cause Massive Layoffs (Reuters)

China’s plans to reduce industrial overcapacity are unlikely to result in large-scale layoffs, the country’s top economic planner said on Sunday. Xu Shaoshi, head of the National Development and Reform Commission (NDRC), told reporters at a briefing that economic growth will create more jobs and help offset the impact of capacity cuts. China aims to keep its economy growing by at least 6.5% over the next five years while pushing hard to create more jobs and restructure inefficient industries, Premier Li Keqiang said on Saturday.

“There was plenty of talk about “painful rebalancing”, the need to reform inefficient state owned enterprises and to cut overcapacity – but for many, this speech will look a lot like business as usual: a commitment to growth at all costs..”

• China PM Predicts ‘Battle’ For Growth (BBC)

China’s National People’s Congress has set the country’s growth target for 2016 at a lower range of 6.5%-7%. Premier Li Keqiang made the announcement in his opening speech, warning of a “difficult battle” ahead. The annual meeting in Beijing sets out to determine both the economic and political agenda for the country. It comes at a time when China struggles with slowing economic growth and a shift away from overreliance on manufacturing and heavy industry. The congress is also expected to approve a new five-year plan, a legacy of the communist command economy. “China will face more and tougher problems and challenges in its development this year, so we must be fully prepared to fight a difficult battle,” Mr Li told delegates on Saturday.

Last year, China’s goal was “about 7%”. The economy actually grew by 6.9% – the lowest expansion in 25 years. Mr Li also said that China was targeting consumer inflation at “around 3%” and unemployment “within 4.5%”. Meanwhile, the country’s defence spending will be raised by 7.6%, the state-run Xinhua news agency reports, citing a budget report. China’s congress is a highly choreographed, largely rubber stamp affair, but Premier Li’s opening address can at least be gleaned for clues about the overall direction of policy, the BBC’s John Sudworth in Beijing reports. There was plenty of talk about “painful rebalancing”, the need to reform inefficient state owned enterprises and to cut overcapacity – but for many, this speech will look a lot like business as usual: a commitment to growth at all costs, our correspondent adds.

Ugly.

• US Weekly Earnings Drop Most On Record (ZH)

The headline jobs number was certainly good, beating expectations and well higher than last month’s disappointing (and upward revised) 182K print. However, a quick look below the headline reveals an amazing statistic: while we already noted that average hourly earnings posted only their first decline since December 2014, and just the 6th in the past decade, declining by -0.1%, what is the real surprise is that average weekly hours worked also dropped substantially by 0.2 from 34.6 to 34.4. This, naturally, is the denominator in the average hourly earnings calculation, and for it drop drop with the average also sliding, means that weekly earnings must have dropped.

And drop they did: as the chart below clearly shows, based on the data which showed a whopping tumble in average weekly earnings from 878.15 to just 872.04, at -0.7%, this was the biggest monthly drop in the entire series history!

The drop confirms that the jump in earnings observed in January, and which led many to prematurely conclude that wage growth has finally arrived, was nothing but a headfake driven by the increase in minimum wages across various states, which has now been fully digested, and as a result wage growth is once again what it was before: non-existent. Finally, it goes without saying that in the middle of a ‘recovery’ this is not really supposed to happen.

Long article by Gross, worth a read.

• Sunshine, Lollipops and… (Bill Gross)

Our Sun – a rather tiny star in the galaxial scheme of things – seems inexhaustible. But 5 billion years from now, it will swallow, instead of nurture the Earth as it burns itself out – first contracting, then expanding like a flaming candle turned firecracker. Not to worry though. We won’t be around. It’s not that we are beyond worrying; it’s that our lives are much shorter and we needn’t think much about it. In the nearer term, there is global warming/climate change, and other such down to Earth problems as paying the bills and getting kids into the right colleges. Still – there are presumably inexhaustible things that deserve our attention in the here and now. One of them is finance-based capitalism and our assumption that the risk/ reward historically inherent in it will be sufficient to drive economic growth forward.

Unlike the Sun, whose fate and lifespan can be scientifically determined, there is little evidence that anything could ever change what has been until now a flawed, yet the best economic system conceivable. Capitalistic initiative married to an ever expanding supply of available credit has facilitated economic prosperity much like the Sun has been the supply center for energy/ food and life’s sustenance. But now with quantitative easing and negative interest rates, the concept of nurturing credit seems to have morphed into something destructive as opposed to growth enhancing. Our global, credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers. Making money on money seems to be the system’s flickering objective.

Our global financed-based economy is becoming increasingly dormant, not because people don’t want to work or technology isn’t producing better things, but because finance itself is burning out like our future Sun. What readers should know is that the global economy has been powered by credit – its expansion in the U.S. alone since the early 1970’s has been 58 fold – that is, we now have $58 trillion of official credit outstanding whereas in 1970 we only had $1 trillion. Staggering, is it not? But now, this expansion appears to be reaching an ending of sorts, at least in its current form. Private sector savers are growing leery of debt piled upon debt and government regulators have begun to build fences against further rampant creation.

In addition, the return offered on savings/investment whether it be on deposit at a bank, in Treasuries/Bunds, or at extremely low equity risk premiums, is inadequate relative to historical as well as mathematically defined durational risk. The negative interest rates dominating 40% of the Euroland bond market and now migrating to Japan like a Zika like contagion, are an enigma to almost all global investors. Why would someone lend money to a borrower with the certainty of getting less money back at a future date? Several years ago even the most Einsteinian-like economists would not have imagined such a state but now it seems an everyday occurrence, as central banks plumb deeper and deeper depths like drilling rigs expecting to strike oil, if only yields could be lowered another 10, 20, 50 basis points.

Some kind of currency will appear. Maybe the Swedes will start using dollars.

• Sweden Begins 5 Year Countdown Until It Eliminates Cash (ZH)

How much louder can the “ban cash” calls get? Recall it was just last year when we catalogued the growing cacophony of crazies for whom banning physical currency is the only way to ensure that depositors can’t simply reassert their economic autonomy under a low or zero rate regime.. Put simply, if interest rates get too low, depositors will simply take their money out the bank and put it in the mattress or the safe where, to quote WSJ from last week, “interest rates are always low no matter what central bankers do. Most recently, Larry Summers called for the abolition of the $100 bill in the US and in Europe the €500 note is to go the way of the dinosaurs. Perhaps the most telling sign that citizens are starting to panic is that in Japan, they’re selling out of safes. Literally.

“It shows a vague sense of unease,” one Japanese lawmaker who brought up the soaring safe sales in parliament on Monday remarked. Now, the excuse given for banning big bills is that it combats crime. And maybe it does. But in the end the rationale is simple: if there are no more physical banknotes, people have no economic autonomy. Let’s say consumer spending is stagnating. No problem, take rates to -20%. We bet they’ll start spending then – either that or see their deposits haircut by 20%. In short, no cash means no effective lower bound and with no lower bound, the economy can be completely centrally planned – for all intents and purposes. Consumers not spending? No problem. Just tax their excess account balance. Economy overheating? Again, no problem. Raise the interest paid on account holdings to encourage people to stop spending.

So with Citi, Harvard, Denmark and Peter Bofinger, member of the German Council Of Economic Experts, all onboard, we’re surprised to hear that Sweden (already one of the leaders in the cashless society movement) is looking to phase out a series of new bank notes it just introduced last year and moved ever closer to the cashless utopia. “Last year Sweden introduced a series of new banknotes replacing its old kronor notes. But figures suggest these too could be gone from circulation in half a decade if the development towards a cashless society continues,” The Local reports,” continuing that “cash transactions today represent no more than 2% of the value of all payments made in Sweden, [and that estimate] will drop to below 0.5% within the next five years. Some welcome the trend – credit card providers, for instances – others have reservations.

“It is happening at a furious rate. And it’s important to many older people to be able to use cash. I mean, today it is legal tender and you have to be able to use it until parliament decides otherwise,” Christina Tallberg, chairwoman of Swedish pensioners’ organization PRO, told Swedish Radio on Friday. Well, until parliament or perhaps more appropriately, until The Riksbank and Stefan Ingves decides it. Because at -0.55, it’s a “how much lower can you go type scenario.” Well, if you go kronor-less, that question ceases to make sense. The “problem” simply goes away. “Sometimes you have to learn new things. It’s a little awkward for a transitional period, but I think it’s going to be so simple that you pretty soon realize that this is a lot easier and better than having cash,” said working environment ombudsman Krister Colde of the Commercial Employees’ Union (Handels). Famous last words Krister.

Fun in Oz.

• Confused By The Economic Modelling? That’s The Whole Idea (SMH)

Politics is about trust. Prime Minister Malcolm Turnbull has been claiming for weeks that Labor’s plans for negative gearing would smash house prices. “The 70% of Australians who own houses will see the value of their single most important asset smashed to fulfil an ideological crusade,” he told parliament. His Attorney-General George Brandis has made it sound even worse. “There is one thing we know about the negative-gearing debate,” he told us. “If the Labor Party were to implement its policy, the value of most Australians’ homes would collapse”. His assistant treasurer Kelly O’Dwyer briefly said the opposite. Labor’s policy would “increase the cost of housing for all Australians; for those people who currently own a home and for those people who would like to get into the housing market”.

And then his treasurer Scott Morrison latched on to a “credible report” that said Labor’s policy would have “a significant impact on property values”. He latched on too quickly. The report, by BIS Shrapnel, said no such thing. Prices would continue to rise in all but two of the next 10 years under the scenario it modelled, just as they would if negative gearing was maintained. After a decade, they would have climbed 15%. That’s less than with full negative gearing, but its still an increase. The report explained that house prices are typically “sticky in a downwards direction,” unable to fall lower than the cost of construction plus a markup. When new attempts at negative gearing were temporarily suspended between 1985 and 1987 real estate prices continued to climb.

While new investors would be less keen to buy if Labor’s policy stopped them negatively gearing, existing investors would be also less keen to sell, because they could only continue to negative gear if they hung on to the properties they had. Prices wouldn’t be smashed. It’s all there in the report Morrison lauded as credible (because it said rents would rise), but appeared not to properly read. Certainly his eyes appeared to glaze over the howling error on page one. The report said Australia’s national income would average $190 billion over the next ten years when it meant $1.9 trillion. And they appeared not to be troubled by its suggestion that a measure that raised around $2 billion per year would shrink the economy by $19 billion per year.

That’s $9 of economic damage for every $1 collected, a sum so big as to be way out of the ballpark of anything his department has ever modelled. When Treasury modelled a range of taxes for its tax discussion paper, it found the worst of them, stamp duty, did 70 cents of economic damage for each dollar collected. Yet first thing Thursday morning on AM Morrison described as “credible” a report that found removing negative gearing would create multiples of the biggest damage his department could find The Grattan Institute’s John Daley says the finding doesn’t even pass the giggle test. Try it for yourself. Attempt to say: “a tax that raises $2 billion will shrink the economy by $19 billion” without laughing.

5 years later.

• Mutations, DNA Damage Seen In Fukushima Forests (AFP)

Conservation group Greenpeace warned on Friday that the environmental impact of the Fukushima nuclear crisis five years ago on nearby forests is just beginning to be seen and will remain a source of contamination for years to come. The March 11, 2011 magnitude 9.0 undersea earthquake off Japan’s northeastern coast sparked a massive tsunami that swamped cooling systems and triggered reactor meltdowns at the Fukushima Daiichi nuclear plant. Radiation spread over a wide area and forced tens of thousands of people from their homes – many of whom will likely never return – in the worst nuclear accident since Chernobyl in 1986. As the fifth anniversary of the disaster approaches, Greenpeace said signs of mutations in trees and DNA-damaged worms were beginning to appear, while “vast stocks of radiation” mean that forests cannot be decontaminated.

In a report, Greenpeace cited “apparent increases in growth mutations of fir trees… heritable mutations in pale blue grass butterfly populations” as well as “DNA-damaged worms in highly contaminated areas”, it said. The report came as the government intends to lift many evacuation orders in villages around the Fukushima plant by March 2017, if its massive decontamination effort progresses as it hopes. For now, only residential areas are being cleaned in the short-term, and the worst-hit parts of the countryside are being omitted, a recommendation made by the International Atomic Energy Agency. But such selective efforts will confine returnees to a relatively small area of their old hometowns, while the strategy could lead to re-contamination as woodlands will act as a radiation reservoir, with pollutants washed out by rains, Greenpeace warned.

Shame on Europe and the US.

• Zaman Newspaper: Defiant Last Edition As Turkey Police Raid (BBC)

Turkey’s biggest newspaper, Zaman, has condemned its takeover by the authorities in a defiant last edition published just before police raided it. Saturday’s edition said Turkey’s press had experienced “one of the darkest days in its history”.
Police raided Zaman’s Istanbul offices hours after a court ruling placed it under state control, but managers were still able to get the edition to print. Police later fired tear gas to disperse Zaman supporters. Water cannon was also used as about 500 people gathered in front of Zaman’s headquarters on Saturday. They chanted “Free press cannot be silenced!” A number of the journalists returned to work, but some of them tweeted that:
• they had lost access to internal servers and were not able to file articles
• they were not able to access their email accounts
• the newspaper’s editor-in-chief Abdulhamit Bilici and a leading columnist had been fired

One reporter, Abdullah Bozturk, said attempts were also under way to wipe the newspaper’s entire online archive. The European Union’s response has been to issue weak statements of concern, the BBC’s Mark Lowen says. It is accused of acting softly on Turkey as it needs the country’s support in managing the refugee crisis. The paper is closely linked to the Hizmet movement of influential US-based cleric Fethullah Gulen, which Turkey says is a “terrorist” group aiming to overthrow President Recep Tayyip Erdogan’s government. Mr Gulen was once an ally of Mr Erdogan but the two fell out. Many Hizmet supporters have been arrested.

The court ruled on Friday that Zaman, which has a circulation of some 650,000, should now be run by administrators. No explanation was given. Turkish Prime Minister Ahmet Davutoglu said the move was “legal, not political”. “It is out of the question for neither me nor any of my colleagues to interfere in this process,” he said in a television interview. The government in Ankara has come under increasing international criticism over its treatment of journalists. The EU’s diplomatic service said that Turkey “needs to respect and promote high democratic standards and practices, including freedom of the media”, while the US described the move as “troubling”.

They should find other allies, this is nuts. Erdogan is (mass-)murdering Kurds and closing down the press. And we’re helping him do it?!

• “EU ’Must’ Hand Turkey €7 Billion Per Year To Keep Out Refugees” (Reuters)

The EU may need to more than double financial aid already pledged to Turkey to help it keep millions of Syrian refugees on its soil, Germany’s EU Commissioner Guenther Oettinger was quoted as saying on Saturday. The European Commission on Friday announced the first payouts from a €3 billion ($3.3 billion) fund to help Turkey pay for the needs of some 2.5 million refugees. “Europe should hold out the prospect of further financial support to Turkey also beyond 2017,” Oettinger told German magazine Der Spiegel. “Taking over full costs of the services that Turkey is providing by accommodating and caring for the refugees, the bill could easily add up to six or seven billion euros per year,” said Oettinger, a senior member of Chancellor Angela Merkel’s center-right party Christian Democratic Union (CDU).

Austrian Chancellor Werner Faymann proposed a new EU fund to finance the additional costs. “In the migrant crisis, we need joint European solutions,” Faymann told the magazine. “Therefore I suggest a fund in which each EU member state pays in, similar to the bank bailout. The money should be used to cover the costs of providing for the asylum seekers.” European Council President Donald Tusk, who on Friday held talks with Turkish President Tayyip Erdogan, will chair an emergency EU summit with Turkey on Monday aimed at strengthening cooperation to stem the flow of migrants to Europe.

Emptier words were never spoken.

• Merkel Pressures Greece to Step Up Refugee Aid (BBG)

German Chancellor Angela Merkel boosted pressure on the Greek government to step up its capacity for sheltering refugees, pledging that the European Union will assist the country with the task. Greece fell short of its aim of setting up shelter for 50,000 asylum seekers fleeing Syria and the Middle East by the end of 2015, Merkel said in an interview with Bild am Sonntag. “The backlog needs to be made up posthaste,” Merkel told the German newspaper. “I know from my talks with Greek Prime Minister Alexis Tsipras that he wants that too, but that that he needs our help to do it.”

Thousands of refugees are stranded in Greece. Merkel in the Bild interview blamed the humanitarian crisis on other European states that tightened their borders against the influx, blocking passage north, where most asylum seekers have sought shelter in more accommodating countries such as Germany. The chancellor has said the blocked borders endanger Europe’s system of passport-free travel, known as Schengen. “Today we have a different situation, because Austria and the Balkan nations made unilateral decisions at their national borders that have unfortunately placed a burden on our partner and Schengen member Greece,” Merkel told Bild. The EU’s 28 leaders and the Turkish government will discuss the refugee crisis in Brussels on Monday.

Well put.

• Open Letter To Vienna From Austrian Expatriates In Greece (Observer)

This is the full text of a letter written by prominent émigrés to ministers in protest over the country’s role in border closures against refugees

Open letter to the Austrian government Austrians living and working in Greece, who feel deeply connected with this country, appeal to the Austrian government to take a more responsible position in dealing with the refugee crisis. Instead of putting on blinkers, pretending that by closing the borders the problem will go away, the situation has to be tackled head-on at a European level. The Austrian government needs to understand that individual, national approaches fail to produce results, also because solitary advances contradict the basic tenets of the European programme, which is meant to serve as the foundation for a new generation. Despite the temporary ceasefire, the war in Syria continues unabated, forcing the frightened civilian population, trapped between the fighting fronts, to keep seeking refuge by fleeing their country.

While the neighbours of Syria bear the brunt of the pressure, the callous reaction of the Austrian government, one of the richest countries in the world (ranked 11), puts us to shame. Austrian politicians have claimed that our country has accepted more refugees than most others. But a glance at the facts from Europe’s south proves this statement to be fatally wrong, misrepresenting the data. Pushing solutions to the refugee crisis that rely on increasing the pressure on Greece is counterproductive, unrealistic and irresponsible. The Austrian Minister of the Interior maintains that “that will put an end to perilous journeys across the Mediterranean.” No, Mrs Minister, it won’t!

Dozens of boats continue to arrive on Greece’s shores on a daily basis, often carrying over three thousand desperate people a day. The unspeakable horror of the war, hopelessness in the adjacent countries and the desire to reunite with family members are a strong motivation for those who have nothing to lose to risk the journey towards European destinations. What could stop them? Coast guards? Warships? Walls? Barbed wire fences? None of these measures will have any effect, unless the acts of war are put to an end. Otherwise, traumatised, terrorised people will continue to do anything to escape their misery.

The Europeans, who cannot see eye to eye among each other and do not even seem to share the most basic values, are busying themselves reinforcing their ominous fortress. As much as they try, it is not going to prevent war refugees from attempting to save their lives. Many more will come, hoping to make it somehow, at all cost, as hope dies last. Europe has no choice but to face the catastrophic situation in the war-torn countries of the near and Middle East responsibly and make every effort to help these people rebuild their lives. This will require foresight, wisdom and the will to convince the doubters (and the constituencies). Otherwise, we will be faced with a generation growing up in war-torn nations in who cannot but feel deepest frustration and animosity towards Europe and its “values”.

Nobody cares. All they care about is that refugees stop coming.

• EU Refugee Crisis Leaves 10,000 Children Missing, Europol Says (BBG)

More than 10,000 child refugees have disappeared after arriving in Europe, according to crime-fighting agency Europol, as the region faces its worst migrant crisis since World War II. “This is something European police services and governments should be worried about,” Europol Chief Rob Wainwright said in an interview Saturday with French newspaper Le Figaro. “Not all are exploited for criminal purposes – illegal labor or sexual slavery. Some have left shelters to reunite with their families, but we have no proof of that.” Of the 1.2 million refugees who arrived in the European Union last year, a quarter were minors, and 85,000 were unaccompanied by an adult, Wainwright said.

More than 135,000 asylum seekers have made their way to Europe this year, compared with about 376,000 in October and November, according to UNHCR, the United Nations refugee agency. European leaders are struggling to develop an alternative for the patchwork of unilateral border controls imposed by national governments to stem the flow of migrants fleeing war and poverty. The European Commission, the EU’s executive arm, proposed on Friday to lift internal border border checks and restore passport-free travel by the end of the year.

Why This Slump Has Legs

Jan 182016

January 18, 2016 Posted by Raúl Ilargi Meijer at 10:39 pm Finance Tagged with: bubble, central banks, China, debt, deleveraging, Eccles, Growth, Ponzi, slump, US 8 Responses »

Berenice Abbott Columbus Circle, Manhattan 1936

We’ve only really been in two weeks of trading in the new year, things are looking pretty bad to say the least, so predictably the press are asking -and often answering- questions about when the slump will be over. Rebound, recovery, the usual terminology. When will we get back to growth?

For me personally, but that’s just me, that last question sounds a bit more stupid every single time I hear and read it. Just a bit, but there’s been a lot of those bits, more than I care to remember. Luckily, the answer is easy. The slump will not be over for a very long time, there will be no rebound or recovery, and please stop talking about a return to growth unless you can explain what you want to grow into.

I’m sorry, I know that’s not what you want to hear, but life’s a bitch and so’s the economy. You’ve lived on pink fumes for a long time, most of you for their whole lives, but reality dictates that real ‘growth’ stopped decades ago, and you never figured that out because, and I quote here (see below), you and the world you’re part of became “addicted to borrowing money, spending it, and passing this off as ‘growth'”.

That you believed this was actual growth, however, is on you. You fell for a scam and you’re going to have to pay the price. If there’s one single thing people are good at, it’s lying. It’s as old as human history, and it happens every day, so you’re no exception to any rule. You’re perhaps just not particularly clever.

How do we know a ‘recovery’ is so far off it’s really no use to even talk about it? As I said, it’s easy. Let me lead this in with a graph I saw just today, which deals with a topic the Automatic Earth has covered a lot: marginal debt, or more precisely, the productivity/growth gained from each additional dollar of debt.

Please note, this particular graph deals with private non-financial debt only, we’ll get to other kinds of added debt, but that restriction is actually quite illuminating.

Now of course, you have to wonder about the parameters the St. Louis Fed uses for its data and graphs, and whether ‘growth’ was all that solid in the run up to 2008. There’s plenty of very valid arguments that would say growth in the 1960’s was a whole lot more solid than that in the naughties, after the Glass-Steagall repeal, and after the dot.com blubber.

However, that’s not what I want to take away from this, I use this to show what has happened since 2008, more than before, when it comes to “passing debt off as ‘growth'”.

But it’s another thing that has happened since 2008, or rather not happened, that points out to us why this slump will have legs. That is, in 2008 a behemoth bubble started bursting, and it was by no means just US housing market. That bubble should have been allowed to fully deflate, because that is the only way to allow an economy to do a viable restart.

Instead, all that has been done since 2008, QE, ZIRP, the works, has been aimed at keeping a facade ‘alive’, and aimed at protecting the interests of the bankers and other rich parties. That facade, expressed most of all in rising stock markets, has allowed for societies to be gutted while people were busy watching the S&P rise to 2,100 and the Kardashians bare 2,100 body parts.

It was all paid for, apart from western QE, with $28 trillion and change of newfangled Chinese debt. The problem with this is that if you find yourself in a bubble and you don’t go through the inevitable deleveraging process that follows said bubble in a proper fashion, you’re not only going to kill economies, you’ll destroy entire societies.

And that is not just morally repugnant, it also works as much against the rich as it does against the poor. It’s just that that is a step too far for most people to understand. That even the rich need a functioning society, and that inequality as we see it today is a real threat to everyone.

Recognizing this simple fact, and the consequences that follow from it, is nothing new. It’s why in days of old, there were debt jubilees. It’s also why we still quote the following from Marriner Eccles, chairman of the Federal Reserve under FDR and Truman from 1934-1948, in his testimony to the Senate Committee on the Investigation of Economic Problems in 1933, which prompted FDR to make him chairman in the first place.

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.

It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

Everything would all be so much simpler if only more people understood this, that you need a – fleeting, ever-changing equilibrium- to prosper.

Instead, we’re falling into that same trap again. Or, more precisely, we already have. We have been fighting debt with more debt and built the facade put up by the Fed, the BoJ and the ECB, central banks that all face the same problems and all take the same approach: save the rich at the cost of the poor. Something Eccles said way back when could not possibly work.

Anyway, so here are the graphs that prove to us why the slump has legs. There’s been no deleveraging, the no. 1 requirement after a bubble bursts. There’s only been more leveraging, more debt has been issued, and while households have perhaps deleveraged a little bit, though that is likely strongly influenced by losses on homes etc. plus the fact that people were simply maxed out.

First, global debt and the opposite of deleveraging:

And global debt from a longer, 65 year, more historical perspective:

It’s a global debt graph, but it’s perhaps striking to note that big ‘growth’ spurts happened in the days when Reagan, Clinton and Obama were the respective US presidents. Not so much in the Bush era.

Next, China. What we’re looking at is what allowed the post 2008 global economic facade to have -fake- credibility, an insane rise in debt, largely spent on non-productive overinvestment, overcapacity highways to nowhere and many millions of empty apartments, in what could have been a cool story had not Beijing gone all-out on performance enhancing financial narcotics.

Today, the China Ponzi is on its last legs, and so is the global one, because China was the last ‘not-yet-conquered’ market large enough to provide the facade with -fleeting- credibility. Unless Elon Musk gets us to Mars very soon, there are no more such markets.

So US debt will have to come down too, belatedly, with China, and it will have to do that now. because there are no continents to conquer and hide the debt behind. We’re all going to regret engaging in the debt game, and not letting the bubble deflate in an orderly fashion when we still could, but all those thoughts are too late now.

What the facade has wrought is not just the idea that deleveraging was not needed (though it always is, after every single bubble), but that net US household worth rose by 55% in the 6-7 years since the bottom of the crisis, an artificial bottom fabricated with…more debt, with QE, and ZIRP.

Meanwhile, in today’s world, as stock markets go down at a rapid clip, China, having lost control of a market system it never had the control over that Politburos are ever willing to acknowledge they don’t have, plays a game of Ponzi whack-a-mole, with erratic ‘policies’ such as circuit breakers and CIA-style renditions of fund managers and the like.

And all the west can do is watch them fumble the ball, and another one, and another. And this whole thing is nowhere near the end.

China bad loans have now become a theme, but the theme doesn’t mean a thing without including the shadow banking system, which in China has been given the opportunity to grow like a tumor, on which Beijing’s grip is limited, and which has huge claims on local party officials forced by the Politburo to show overblown growth numbers. If you want to address bad loans, that’s where they are.

Chinese credit/debt graphs paint only a part of the picture if and when they don’t include shadow banks, but keeping their role hidden is one of Xi’s main goals, lest the people find out how bad things really are and start revolting. But they will anyway. That makes China a very unpredictable entity. And unpredictable means volatile, and that means even more money flowing out of, and being lost in, markets.

The ‘least worst’ place to be for what money will be left is US dollars, US treasuries and perhaps metals. But there’ll be a whole lot less left than just about anyone thinks. That’s the price of deleveraging.

The price of not deleveraging, on the other hand, is what we see in the markets today. And there is no cure. It must be done. The price for keeping up the facade rises sharply with each passing day, and the effort will in the end be futile. All bubbles have limited lifespans.

I’ll close this with a few recent words from Tim Morgan, who puts it so well I don’t feel the need to try and do it better.

The Ponzi Economy, Part 1

In order to set the Ponzi economy into some context, let’s put some figures on it. In the United States, total “real economy” debt (which excludes inter-bank borrowing) increased by $19.4 trillion – in real, inflation-adjusted terms – between 2000 and 2014, whilst real GDP expanded by only $3.7 trillion. Britain, meanwhile, added £1.9 trillion of new debt for less than £400bn on “growth” over the same period. I spent part of the holiday period unearthing quite how much debt countries added for each dollar of “growth” over a period starting at the end of 2000 and ending in mid-2015.

Unsurprisingly, the league is topped by Portugal ($5.65 for each $1 of growth), Ireland ($5.42) and Greece ($5.39). Britain’s ratio ($3.46) is somewhat flattering, in that the UK has used asset sales as well as borrowing to sustain its consumption. The average for the Eurozone ($3.54) covers ratios as diverse as Germany (just $1.87) and France ($4.22).

China’s $2.56 looks unexceptional until you note that the more recent (post-2007) number is much worse. Economies which seem to have been growing without too much borrowing (such as Brazil and Russia) are now experiencing dramatic worsening in their ratios, generally in the wake of tumbling commodity prices.

In the proverbial nutshell, then, the world has become addicted to borrowing money, spending it, and passing this off as “growth”. This is a copybook example of a pyramid scheme, which in turn means that the world’s most influential economic mentor is neither Keynes nor Hayek, but Charles Ponzi.

[..] How, in the absence of growth, can inflated capital values be sustained? The answer, of course, is that they can’t. Like all Ponzi schemes, this ends with a bang, not a whimper. This is why I find forecasts of a ‘big fall’ or ‘sharp correction’ in markets hard to swallow. Ponzi schemes don’t end gradually, any more than someone can fall off a cliff gradually, or be “slightly pregnant”.

The Ponzi economy simply continues for as long as irrationality prevails, and then implodes. Capital markets, though, are the symptom, not the cause. The fundamental problem is an inability to escape from an addictive practice of manufacturing supposed “growth” on the basis of borrowed money.

There may be shallow lulls in the asset markets, nothing ever only falls down in a straight line in the real world, but that debt I’ve described here will and must come down and be deleveraged.

The process will in all likelihood lead to warfare, and to refugee movements the likes of which the world has never seen just because of the sheer numbers of people added in the past 50 years.

When your children reach your age, they will not live in a world that you ever thought was possible. But they will still have to live in it, and deal with it. They will no longer have the facade you’ve been staring at for so long now, to lull them into a complacent sleep. And the Kardashians will no longer be looking so attractive either.

Volkswagen and China: A Perfect Fit

Nov 062015

November 6, 2015 Posted by Raúl Ilargi Meijer at 9:30 am Finance Tagged with: China, defeat device, GDP, Growth, Merkel, Volkswagen, VW, Xi Jinping 1 Response »

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Debt Rattle October 20 2015

Oct 202015

October 20, 2015 Posted by Raúl Ilargi Meijer at 9:11 am Finance Tagged with: China, fracking, GDP, Growth, MH17, oil, outflows, refugees, steel, Trudeau, Walmart 5 Responses »

Hans Behm Windy City tourists at Monroe Street near State 1908

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

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

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

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

• China Heads For Record Crude Buying Year (Reuters)

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

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

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

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

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

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

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

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

• Death by Fracking (Chris Hedges)

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

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

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

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

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

Maybe Beijing is just very good at predicting.

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

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

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

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

Not much use trying to analyze something so obvious.

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

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

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

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

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

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

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

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

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

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

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

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

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

• China Heads For Record Crude Buying Year (Reuters)

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

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

Something to do with licking certain body parts.

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

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

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

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

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

Overinvestment.

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

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

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

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

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

All banks are in deep shit.

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

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

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

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

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

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

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

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

Here’s hoping.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Death by Fracking (Chris Hedges)

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

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

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

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

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

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

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

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

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

They’re going to die like flies.

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

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

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

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

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

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

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

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

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

Cattle trade.

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

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

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

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

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

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

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

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

Debt Rattle October 19 2015

Oct 192015

October 19, 2015 Posted by Raúl Ilargi Meijer at 9:00 am Finance Tagged with: bubble, China, copper, credit, debt, Fed, Growth, refugees, Saudi, Turkey 5 Responses »

Jack Delano Truck service station on U.S. 1, NY Avenue, Washington, DC 1940

• China Economy Logs Weakest Growth Since 2009 Despite Easing (Reuters)

• The Fed Is Stuck, With US At The Mercy Of China (MarketWatch)

• UK In Economic Kowtow To Xi Seeks ‘Golden Era’ In China Trade (Bloomberg)

• Chinese Copper-Trading Surge Shakes Up Market (WSJ)

• China Ponders Tool Deemed Too Risky Post 2008 to Cut Bad Loans (Bloomberg)

• The World Hits Its Credit Limit, And The Debt Market Starts To Realize It (ZH)

• Saudi Crude Stockpiles at Record High in August as Exports Fell (Bloomberg)

• Saudi Arabia Said to Delay Contractor Payments After Oil Slump (Bloomberg)

• Deutsche Bank Restructures, Splits Investment Bank (CNBC)

• Why Americans Don’t Trust the Fed (Lowenstein)

• The Rise And Rise Of Australian Wussonomics (MB)

• US Military Quietly Builds Giant Security Belt Through Middle Of Africa (MGA)

• Thousands Stranded On New Migrant Route Through Europe (AP)

• Brussels Draws Up Plan To Resettle 200,000 Refugees Across Europe (FT)

• As Merkel, Erdogan Discuss Refugee Crisis, More Die In Aegean (Kath.)

• Italy Navy Says Eight Migrants Die In Mediterranean, 113 Rescued (Reuters)

• Five Refugees Drown Off Greek Islands, One Missing (Reuters)

Why do these ‘official’ numbers get any attention at all?

• China Economy Logs Weakest Growth Since 2009 Despite Easing (Reuters)

China’s economic growth dipped below 7% for the first time since the global financial crisis on Monday, hurt partly by cooling investment, raising pressure on Beijing to further cut interest rates and take other measures to stoke activity. The world’s second-largest economy grew 6.9% between July and September from a year ago, the National Bureau of Statistics said, slightly better than forecasts of a 6.8% rise but down from 7% in the previous three months. That hardened expectations that China would avoid an abrupt fall-off in growth, with analysts predicting a more gradual slide in activity stretching into 2016. “Underlying conditions are subdued but stable,” said Julian Evans-Pritchard at Capital Economics in Singapore.

“Stronger fiscal spending and more rapid credit growth will limit the downside risks to growth over the coming quarters.” Chinese leaders have been trying to reassure jittery global markets for months that the economy is under control after a shock devaluation of the yuan and a summer stock market plunge fanned fears of a hard landing. Some analysts were hopeful that the third-quarter cooldown could mark the low point for 2015 as a burst of stimulus measures rolled out by Beijing comes into force in coming months, but muted monthly data for September kept such optimism in check.

“As growth slows and risk of deflation heightens, we reiterate that China needs to cut reserve requirement ratio (RRR) by another 50bps in Q4,” economists at ANZ Bank said in a note to clients. “Looming deflation risk suggests that the People’s Bank of China will also adjust the benchmark interest rates, especially lending rate, down further.” In its battle against China’s worst economic cooldown in more than six years, the central bank has cut interest rates five times since November and reduced banks’ reserve requirement ratios three times this year. Despite the spate of easing, Monday’s GDP reading was still the worst since the first quarter of 2009, when growth tumbled to 6.2%.

The real problem is everyone’s lying about growth numbers.

• The Fed Is Stuck, With US At The Mercy Of China (MarketWatch)

The U.S. economy used to be like a muscleman surrounded by 98-pound weaklings. It regularly flaunted its power and was little swayed by what happened to the crowd on the beach. Those days, if they ever really existed, ended long ago. Although the U.S. is still more insular than its major economic rivals, some 30% of the nation’s economy involves trade through imports and exports. That’s a record high and about three times larger compared to several decades ago. The result: U.S. policy on interest rates and related matters are at the tender mercy of events around the globe, and the picture isn’t pretty. That’s why the Federal Reserve last month jettisoned a pending increase in interest rates and is now likely to wait until 2016.

Three things are holding the Fed back: Softer growth in China, a strong dollar and weak U.S. inflation. They are all tied together. Start with China. Evidence of slower growth caused stock markets worldwide to slump in August and September, freezing the Fed in place. Central bankers worry about spillover effects if the Asian giant’s slide continues. With a light U.S. economic calendar, investors will pay close attention this week when China gives an update on third-quarter gross domestic product. The pace of annual growth is expected to dip below 7%, but if it falls under 6.5%, another global stock rout could ensue. “There is a lot of fear about the news out of China,” said Scott Brown, chief economist of Raymond James. He thinks the worries are overblown.

Yet with China fresh on their minds, top Fed officials are worried that an increase in interest rates now could cause more harm than good. They are particularly concerned about making a move that would boost an already soaring dollar even further. The strongest dollar in more than a decade has dealt a heavy blow to manufacturers and companies that rely on exports, making American-made goods more expensive for foreigners to buy. Amid a slump in exports, those companies have responded in turn by cutting investments, postponing new hires or even eliminating jobs. That might help explain why hiring in the U.S. slowed sharply toward the end of the summer, giving the Fed even more reason to wait on rates.

Think anyone told Cameron China’s imports dropped by 20%?

• UK In Economic Kowtow To Xi Seeks ‘Golden Era’ In China Trade (Bloomberg)

The U.K. is rolling out the red carpet for Chinese President Xi Jinping’s state visit starting Monday. Amid the pomp of a 41-gun salute, lunch with Queen Elizabeth II and lodging at Buckingham Palace, Prime Minister David Cameron will be looking to Xi to open up the purse strings and dole out billions of pounds of new investment. China opening the investment spigot would help redress a lopsided trade relationship that’s left the U.K. lagging its continental peers in winning Chinese largess. Chinese officials have said the amount of deals Xi will announce during the trip will be “huge.” The U.K. is back in China’s good graces after Cameron’s May 2012 meeting with the Dalai Lama plunged the two countries into a near two-year diplomatic freeze.

Chancellor of the Exchequer George Osborne reflected the U.K.’s more accommodative tone on a September trip to China when he signaled the U.K. would refrain from criticism on human rights and not engage in “megaphone diplomacy.” The U.K., the first major Western country to get behind China’s Asian Infrastructure Investment Bank, was striving to be China’s “best partner in the West” and usher in a “golden era” between the countries, he said. While the U.K. is now China’s second biggest European Union trading partner after Germany, it has the biggest trade imbalance of the five largest EU economies. That trade deficit reflects its relatively weak exports of goods and services compared with imports from China. The U.K. is counting on Xi making progress in his drive to transform China’s economy from an export-driven model to a consumption-driven one to create new markets for British firms.

There’s always another bubble just around the corner. “If you stop the trading in one part of the market and there’s a proxy for offloading that risk elsewhere, you’ll use that proxy.”

• Chinese Copper-Trading Surge Shakes Up Market (WSJ)

Chinese investors hamstrung by stock-trading restrictions are piling into copper trading, a shift that analysts and traders say has distorted the global market for the metal. Since the start of July, when authorities began limiting stock trading in China, trading in stock-index futures has fallen 97% to around 65,000 contracts a day, while trading in Chinese copper futures has nearly doubled to roughly 710,000 contracts a day. Because investors now face obstacles in betting against stock futures, they have turned to the copper market as they seek avenues to bet on a deepening slowdown in the world’s second-largest economy, traders and other market experts say.

Spikes in activity on China’s main commodities exchange have coincided with a period of heightened volatility in copper prices and are driving copper-trading volumes world-wide. Global volumes are on track to hit a record high this year, with traders in China accounting for the largest share. The rising prominence of Chinese investors in the copper market is the latest example of the country’s increased heft in financial markets. In recent years, Chinese investors who used physical metals as collateral for bank loans were credited with driving up demand for copper, zinc and nickel and contributing to higher global prices.

Now, some industry officials have said the heavy selling of copper futures in China has skewed prices so much that they no longer accurately reflect the supply and demand for a metal used in everything from iPhones to refrigerators. “We saw copper being sold heavily [by Chinese traders] when trading was first being restricted in Chinese equities; it was an outlet to be able to sell risk,” said David Donora, who oversees $600 million invested in commodities at Columbia Threadneedle Investments. “If you stop the trading in one part of the market and there’s a proxy for offloading that risk elsewhere, you’ll use that proxy.”

Sounds terrifc: “..bad-debt securitization..”

• China Ponders Tool Deemed Too Risky Post 2008 to Cut Bad Loans (Bloomberg)

China is facing calls to bring back an instrument to fight bad loans it had deemed too dangerous after the global financial crisis: debt tied to failed assets. China Construction Bank said in August it’s exploring bad-debt securitization, in which lenders package soured loans into notes sold to investors. While a central bank official said in May such products are under study, regulators this month declined to comment on the plans. Only three Chinese firms have issued such bonds before a 2009 halt to all asset-backed securities that ended in 2012 with products tied only to performing assets. President Xi Jinping faces pressure to help banks cut the biggest pile of bad loans since 2008 as sliding corporate profits, rising defaults and a stock rout worsen credit strains.

Structures that allow lenders to move troubled credit off their books won’t encourage prudence among banks and Chinese raters are unlikely to be better than their U.S. counterparts that failed to anticipate the 2008 global turmoil, according to R&R Consulting. “Although China has some genuine strengths in ABS market building, risk measurement is its Achilles heel,” said Ann Rutledge, founding principal at the firm that assesses structured products and has its main offices in New York and Hong Kong. “The U.S. rating agencies that are active in China would probably be relied upon by investors, and it is well to bear in mind, they did not do a stellar job rating NPL securitizations in 1997-98, not to mention their role in non-performing securities production in the 2000s.”

Debt deflation.

• The World Hits Its Credit Limit, And The Debt Market Starts To Realize It (ZH)

One month ago, when looking at the dramatic change in the market landscape when the first cracks in the central planning facade became evident and it appeared that central banks are in the process of rapidly losing credibility, and the faith of an entire generation of traders whose only trading strategy is to “BTFD”, we presented a critical report by Citigroup’s Matt King, who asked “has the world reached its credit limit” summarized the two biggest financial issues facing the world at this stage. The first is that even as central banks have continued pumping record amount of liquidity in the market, the market’s response has been increasingly shaky (in no small part due to the surge in the dollar and the resulting Emerging Market debt crisis), and in the case of Junk bonds, a downright disaster.

As King summarized it “models linking QE to markets seem to have broken down.” Needless to say this was bad news for everyone hoping that just a little more QE is all that is needed to return to all time S&P500 highs. And while this concern has faded somewhat in the past few weeks as the most violent short squeeze in history has lifted the market almost back to record highs even as Q3 earnings season is turning out just as bad, if not worse, as most had predicted, nothing has fundamentally changed and the fears over EM reserve drawdown will shortly re-emerge, once the punditry reads between the latest Chinese money creation and capital outflow lines.

The second, and far greater problem, facing the world is precisely what the Fed and its central bank peers have been fighting all along: too much global debt accumulating an ever faster pace, while global growth is stagnant and in fact declining. King’s take: “there has been plenty of credit, just not much growth.” Our take: we have – long ago – crossed the Rubicon where incremental debt results in incremental growth, and are currently in an unprecedented place where economic textbooks no longer work, and where incremental debt leads to a drop in global growth. Much more than ZIRP, NIRP, QE, or Helicopter money, this is the true singularity, because absent wholesale debt destruction – either through default or hyperinflation – the world is doomed to, first, a recession and then a depression the likes of which have never been seen.

Space for stockpiling is always limited. Then it’s on to dumping.

• Saudi Crude Stockpiles at Record High in August as Exports Fell (Bloomberg)

Saudi Arabia’s crude inventories rose to a record level in August as production and exports by the world’s biggest oil shipper declined. Commercial crude stockpiles increased to 326.6 million barrels, the highest since at least 2002, from 320.2 million barrels in July, according to data posted on the website of the Riyadh-based Joint Organisations Data Initiative. Exports slumped 3.8% in August to 7 million barrels a day from 7.28 million the previous month. Saudi international shipments dropped each month since March except for June, the data show.

Brent crude oil prices have slid 12% this year as Saudi Arabia led the Organization of Petroleum Exporting Countries in boosting production to defend the group’s market share amid a global supply glut. Brent futures for December settlement closed Friday at $50.46 a barrel in London, up 73 cents. Saudi Arabia cut back oil production in August to 10.27 million barrels a day from 10.36 million in July, according to the JODI data. The kingdom told OPEC that it produced 10.23 million barrels daily in September. It pumped at an all-time high of 10.56 million barrels a day in June, exceeding a previous record from 1980.

In worse shape than anyone lets on.

• Saudi Arabia Said to Delay Contractor Payments After Oil Slump (Bloomberg)

Saudi Arabia is delaying payments to government contractors as the slump in oil prices pushes the country into a deficit for the first time since 2009, according to three people with knowledge of the matter. Companies working on infrastructure projects have been waiting six months or more for payments as the government seeks to preserve cash, the people said, asking not to be identified as the information is private. Delays have increased this year and the government has also been seeking to cut prices on contracts, the people said. Saudi Arabia is tackling the slump in crude, which accounts for about 80% of revenue, by tapping foreign reserves, cutting spending and selling bonds. Net foreign assets fell by about $82 billion at the end of August after reaching an all-time high last year.

The country has raised 55 billion riyals ($15 billion) from debt issuance this year. The government is also seeking to cut capital spending and delay projects. “It’s hard to hold back from boosting spending when oil is on the rise, but very hard to cut when oil prices fall,” Simon Williams at HSBC said in e-mailed comments. “Cuts are coming – the budget deficit is too large to ignore and pretend it’s business as usual.” Payment delays could slow the completion of projects under construction, including the $22 billion Riyadh metro, and curb the expansion needed to create jobs for a rising population. In the past, government spending has been a catalyst for growth. For example, when authorities announced $130 billion in social spending in 2011, the economy expanded 10%.

This year, growth will probably be about 3%, according to data compiled by Bloomberg. Crude’s decline – it’s about halved in the past 12 months – coupled with the kingdom’s spending plans, will leave Saudi Arabia with a budget deficit exceeding 400 billion riyals this year ($107 billion), according to the IMF. The aggregate deficit for 2015 to 2017 is likely to exceed $300 billion, according to a report by HSBC.

A bank in big trouble.

• Deutsche Bank Restructures, Splits Investment Bank (CNBC)

German banking giant Deutsche Bank on Sunday announced a sweeping reorganization plan designed to “fundamentally change” how it does business, cleaving its investment bank into two parts and parting ways with some of its key executives. As the bank continues to grapple with the fallout of trading and governance scandals, Deutsche made an announcement that was widely anticipated by Wall Street watchers. In a statement, Deutsche said it plans to combine its corporate finance and global transaction banking businesses, while making its private and business clients division an independent business unit. As a result of the changes, its asset management arm will operate as a stand-alone division focused solely on institutional clients and funds.

In what it called “an extraordinary meeting” at the bank’s headquarters in Frankfurt, Deutsche’s management “resolved to restructure the bank’s business divisions,” including reorganizing its senior ranks and abolishing certain units. “The Supervisory Board’s guiding principle, in light of the Bank’s Strategy 2020, was to reduce complexity of the Bank’s management structure enabling it to better meet client demands and requirements of supervisory authorities,” the statement added. In addition, the bank said it would abolish its group executive committee, while putting a representative of each of its four core operations on a newly constituted board. In recent months, Deutsche has been enmeshed in investigations, amid allegations that it was rigging financial markets. Since taking the reins after the departure co-CEO Anshu Jain earlier this year, analysts have been anticipating that newly installed CEO John Cryan would move quickly to restructure the bank.

Centralization.

• Why Americans Don’t Trust the Fed (Lowenstein)

When Woodrow Wilson ran for president in 1912, he was forced to declare himself “opposed to the idea of a central bank”—though in his heart, he was an avid supporter. Rep. Carter Glass, a Virginia Democrat, drafted a bill to restructure the banking system along regional lines. Not unlike Sen. Paul a century later, Glass didn’t trust Washington experts. But Wilson, after his election, insisted that Glass’s bill include a Reserve Board under federal control. The Federal Reserve Act, which Wilson signed in 1913, traveled a tortuous legislative path. Westerners and farmers worried that the new bank would crimp the money supply, preventing farmers from raising prices. But many bankers feared that the Fed would print too much money.

Today, these groups have switched sides. Wall Street has largely supported Fed Chairwoman Janet Yellen’s low-interest-rate policy while populist critics have castigated the Fed for promoting inflation. Still, inflation remains low; a basket of goods that cost $20 a decade ago costs $24.41 today. And with the U.S. economy growing (albeit at a modest rate) for six straight years, credit eminently affordable, and the dollar still prized world-wide, it is hard not to conclude that the Fed is doing at least a reasonable job. But if the Federal Reserve didn’t exist, Congress would have a hard time enacting it now.

Gary Gorton, a banking expert at the Yale School of Management, says that if the Fed were designed today, “It would have severely restricted powers. It might not be independent at all.” This is what several bills that are now before Congress attempt to bring about. Current criticism of the Fed is basically twofold: Some object to ultralow interest rates, fearing that they will lead to economic distortions, while others resent the bailouts and other programs designed to ease the 2008 financial crisis. Acting as this sort of “lender of last resort” was the Fed’s original purpose, of course, but many Americans still think that the Fed has too much power. Jackson’s ghost lives on.

“Our leaders celebrate dying coal not rising solar. Terrified of the household debt underpinning banks, they preen “confidence” instead of shifting funding structures to productive lending.”

• The Rise And Rise Of Australian Wussonomics (MB)

I put it to you that there are four main drivers of Australian wussonomics, some deeper than others, and all of them go to the heart of the economic challenge confronting Australia’s future. The first pillar of wussonomics is our peculiar economic structure. After a three decade run of good fortune, we are left with a massively inflated cost structure that means the only two economic activities of any magnitude that are left are shipping dirt and borrowing money to inflate house prices. This in itself leads to Banana Republic dynamics in which two dominant rent-seeking sectors – mining and banking – control policy, and various bizarre ideologies rise to justify that concentration.

The second pillar of wussonomics is the cyclical implications of the above. As we pass through cycles, bad decisions are made over and again, and those making them become more and more compromised. One example is the extraordinary turnover in our political leadership. As each new leader takes on the trappings of the dominant rent-seekers, wussonomics is sustained as economic narrative of the day. Our leaders celebrate dying coal not rising solar. Terrified of the household debt underpinning banks, they preen “confidence” instead of shifting funding structures to productive lending. A second example is the RBA which went from over-egging a commodity bubble and setting policy to let it run and, when its first bubble popped, shifting to over-egging a housing bubble and setting policy to let it run.

Each blunder begets another as institutions and their leaders sink further and further into arse-covering over national interest. Then, one after another, these same leaders are torn down by a disaffected polity because wussonomics only makes things worse by entrenching the economic vandals while promising the world. The third pillar of wussonomics is a really sick media. The timing here is unfortunate in that media is undergoing huge disruption that has bereft it of its traditional business model. That has killed vigorous journalism as cost cuts destroy corporate memory and talent, and as advertising becomes advertorial because managers are afraid to upset a narrowing set of business clients, that tend again to be in the dominant rent seeking sectors. One needs only to observe the centrality of real estate and banks to media profit growth to see this.

The fourth pillar of wussonomics is older and deeper. It is Australia’s unique sub-altern identity, it’s long term inferiority complex, a mind set that over-celebrates achievements and buries failures, which leaves Australians at constant peril of psychological colonisation.

This will not end well either.

• US Military Quietly Builds Giant Security Belt Through Middle Of Africa (MGA)

Nigeria has welcomed a US decision to send up to 300 military personnel to Cameroon to help the regional fight against Boko Haram, despite having itself requested more direct help from Washington. President Muhammadu Buhari’s spokesman Garba Shehu on Thursday said the deployment was a “welcome development” while the military said it demonstrated cooperation was needed against the Islamists. Washington last year provided intelligence, surveillance and reconnaissance expertise to Nigeria in the hunt for more than 200 schoolgirls abducted from their school. The assistance included drones and spy planes as well as up to 80 military personnel sent to Chad’s capital, N’Djamena. In 2013, the US set up a drone base in neighbouring Niger.

But the US is not only involved in fighting back Boko Haram on the continent. In recent years, the US has quietly ramped up its military presence across Africa, even if it officially insists its footprint on the continent is light. The decisive point seems to have been the election of President Barack Obama in 2008. For years, the United States Africa Command (known by the acronym AFRICOM) has downplayed the size and scope of its missions on the continent, and without large battalions of actual boots on the ground, as was the case in Afghanistan and Iraq, you’d be forgiven for missing its unfolding.

But behind closed doors, US military officials are already starting to see Africa as the new battleground for fighting extremism, and have begun to roll out a flurry of logistical infrastructure and personnel from West to East – colloquially called the “ new spice route” – and roughly tracing the belt of volatility on the southern fringes of the Sahara Desert; the deployment to Cameroon is just the latest of many. These support all the activities that American troops are currently involved in Africa: airstrikes targeting suspected militants, night raids aimed at seizing terror suspects, airlifts of French and African troops onto the battlefields, and evacuation operations in conflict zones.

Winter is coming.

• Thousands Stranded On New Migrant Route Through Europe (AP)

Tension was building among thousands of migrants as they remained stranded in fog and cold weather in the Balkans on Sunday local time in their quest to reach a better life in Western Europe, a day after Hungary closed its border with Croatia and the flow of people was redirected to a much slower route via Slovenia. Tiny Slovenia has said it will only take in 2,500 people a day, significantly stalling the movement of people as they flee their countries in the Middle East, Asia and Africa. On Saturday, more than 6,000 people reached Croatia, but most of them were stuck in the country as well as in neighboring Serbia on Sunday – and thousands kept on arriving. On the Serbian-Croatian border, tensions flared and scuffles erupted as hundreds of irritated migrants faced a cordon of Croatian policemen preventing them from entry.

The Balkan migrant route switched to Slovenia early Saturday after Hungary’s right-wing government closed its border to Croatia for the influx, citing security concerns and saying it wants to protect the European Union from an uncontrolled flow of people. Slovenian officials said they can’t accept 5,000 migrants per day as asked by Croatia, which is likely to cause a further backlog in the flow. Interior Ministry official Bostjan Sefic said Slovenia can’t take more than neighboring Austria, which said it can accept 1,500 per day. “If we would accept 5,000 migrants per day that would mean 35,000 would be in Slovenia in 10 days,” Sefic said, taking into account those who leave for Austria. “That would be unacceptable.”

Craziest thing of all in this cattle trade: Turkey asking for “a change in the EU’s stance on the 1915 massacres of Ottoman Armenians..”

• Brussels Draws Up Plan To Resettle 200,000 Refugees Across Europe (FT)

Brussels will propose a large-scale refugee resettlement scheme early next year in a move that could see 200,000 migrants distributed across the bloc directly from camps in countries such as Turkey, Jordan and Lebanon. The European Commission plans to propose a “structural EU-wide resettlement scheme” in March as part of a host of reforms aimed at stemming the flow of people from Turkey and nearby countries into the EU. Massive resettlement is seen as part of a quid pro quo of any deal with Turkey, which the EU is hoping to persuade to play a bigger role in stemming the flow of migrants to Europe. Angela Merkel, Germany’s chancellor, met Recep Tayyip Erdogan, Turkey’s president, in Istanbul on Sunday and promised her government would help breathe life into the country’s stalled accession negotiations with the EU in exchange for its help in stemming the tide of migrants and refugees into Europe.

“Germany is ready this year to open chapter 17, and fix benchmarks for 23 and 24,” Ms. Merkel said at a press conference with Turkey’s prime minister Ahmet Davutoglu, referring to three areas, or chapters, of EU law that make up the membership talks. “We can talk about the details.” A candidate for EU membership since 1999, Turkey has opened only 14 out of 35 chapters since talks began in 2005. It has closed only one. Ms. Merkel, however, stopped short of endorsing a list of separate demands to which Turkey appears to have tied its support for the EU plan, including lifting visa restrictions for Turkish nationals by next summer and a change in the EU’s stance on the 1915 massacres of Ottoman Armenians, referred to by many historians as the first genocide of the 20th century.

Last week, EU member states agreed a package of up to €3bn in aid for Turkey to cope with its 2.5m refugees, mostly from neighbouring Syria. Brussels will also re-examine whether Turkish citizens should automatically qualify for Schengen visas in exchange for Ankara’s help. Mr. Erdogan has poured scorn on what he and many of his countrymen see as Europe’s inability to cope with the influx. “They announce they’ll take in 30,000 to 40,000 refugees and then they are nominated for the Nobel for that,” the Turkish leader said on Friday, in a pointed reference to Ms. Merkel. “We are hosting 2.5 million refugees but nobody cares.”

They’re having the wrong discussion.

• As Merkel, Erdogan Discuss Refugee Crisis, More Die In Aegean (Kath.)

As German Chancellor Angela Merkel and Turkish President Recep Tayyip Erdogan prepared to discuss the refugee crisis in Istanbul on Sunday, at least five more migrants died in the Aegean. A boy was pronounced dead after arriving on the island of Farmakonisi with another 109 migrants aboard a smuggling vessel. According to an account by the boy’s parents, who were also on the boat, the child fell off the boat close to shore. He was pulled back aboard but remained unconscious and was pronounced dead by a local doctor. In another incident, off Kastellorizo, a sailing boat reported the discovery of a dead baby on Sunday morning. A Coast Guard vessel was subsequently dispatched and discovered the bodies of two women and a small boy. According to the accounts of the 11 survivors, a man remained unaccounted for.

It’s not just off the Greek coast.

• Italy Navy Says Eight Migrants Die In Mediterranean, 113 Rescued (Reuters)

Eight bodies have been recovered from a rubber boat carrying migrants trying to cross the Mediterranean, the Italian navy said in a Tweet on Sunday. It said the ship Bersagliere had rescued 113 migrants from the boat. It gave no further details. On Saturday, the navy rescued 562 migrants trying to reach Europe on five boats. Nearly all of those rescued on Saturday were from sub-Saharan African countries.

Dead children’s bodies are piling up. It’s what we have become.

• Five Refugees Drown Off Greek Islands, One Missing (Reuters)

Five people, including a baby and two children, drowned and one was missing in two separate incidents of migrants trying to reach Greece from nearby Turkey on Sunday, the Greek coastguard said. The service said a sail boat early on Sunday reported it had recovered the body of a baby and had rescued 11 migrants off the Kastellorizo island. The coast guard, which then rushed to the spot, recovered the corpses of another two women and a boy, while it was looking for a missing man, it said. Thousands of refugees – mostly fleeing war-torn Syria, Afghanistan and Iraq – attempt daily to cross the Aegean Sea from neighboring Turkey, a short trip but a perilous one in the inflatable boats the migrants use, often in rough seas.

Almost 400,000 people have arrived in Greece this year, according to the U.N. refugee agency UNHCR, overwhelming the cash-strapped nation’s capacity. In a separate incident, a boy, part of a group of about 110 people, drowned when he fell off a boat en route to the island of Farmakonisi. The rest of the people managed to get ashore. The EU has offered Turkey 3 billion euros ($3.4 billion) in aid and the prospect of easier travel visas and “re-energized” talks on joining the bloc if it helps stem the flow across its territory.

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