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The Most Elementary Question Must Not Be Asked

Dec 062014

December 6, 2014 Posted by Raúl Ilargi Meijer at 10:39 pm Finance Tagged with: Economics, failure, Growth, Keynes, puppetmasters 25 Responses »

Arthur Rothstein Interior of migratory fruit worker’s tent, Yakima, Washington Jul 1936

We’re in dire need of fresh blood and smart new ideas to clean up the mess the present ideologies and their puppets and puppetmasters have created. The present crew has made a neverending series of ‘mistakes’, intentional or not, and they are dead set on making more, if only because they refuse to change the tack that led to all these ‘mistakes’.

I say mistakes because that’s what they are from the point of view of all those who live in the real economy, not because I think the puppetmasters are mistaken from their own point of view. After all, all they do, literally all they do, is take care of their own interests. Where they will find themselves mistaken is down the line, when there is no longer a functioning real economy, and they will of necessity end up going down with it.

However, even though you wouldn’t say it to look at America and Europe these days, we don’t need to be puppets to any masters. I know, I know, most of you don’t even recognize yourselves as puppets – yes, you -. You believe most of what you read, or at least enough to keep going on the beaten track. And they’re good at making you believe. They’ve gotten a lot better at it ever since you were born, whenever you were born.

You only need to listen to things like this week’s US jobs report, which has the media falling over each other and themselves to declare victory. But which, when you take a good look, declares no such thing. And we’ve been going on this road for many years now, a road defined by debt on one side and propaganda on the other, and we stick to it because we are promised on a 24/7 basis that it will lead to growth, which is always just around the corner. Growth is the magic word.

But why do we need growth, and do we even need it at all? That is a question which is considered blasphemous anathema by the current class of economists and leaders. Still, and maybe especially for that reason, it is a question that needs to be asked, perhaps THE question. Because the past 10, 20 or even 40 years have not actually delivered any growth, once you look beyond the propaganda, and the added debt.

And when you add that debt to the equation, they’ve brought the real economy the opposite of growth, while handing the puppet masters unequaled riches. In a nutshell, the past 40 years or so have given us added layers of gadgets at the price of unaffordable education and health care, the price of a deteriorating real economy. And that is just the start of the way down.

Growth is a topic I’ve written a lot about over the years, too much to even try and find it all back again. Here are a few samples. From November 14 2011:

The Growth Paradigm Has Become An Embarrassment

It’s high time to come clean, to stop the incessant lying. To stop pretending things are a bit hard right now, but otherwise just fine. They’re not. Extend and pretend works only so long. Then it snaps back in your face with a vengeance. That’s why the bond markets are so successful in bringing down Italy and Greece. Not because the ECB doesn’t step in, since that would only serve to cover up reality for a little bit longer, but because they’ve both lied for so long about their real predicaments.

No, just stop lying. The consequences and challenges will be formidable, but they’ll be that anyway. You can’t cover up the debt and the losses forever. And the chances of growing your economies out of the cesspit are zero, if not below.

One thing no more lying will achieve is this: it will re-establish confidence in the markets -or what’ll be left of them-. And isn’t that what you guys always say you want to accomplish? Well, I can assure you, it’s the only way to do it: cut the fairy tales. Take a breath of fresh air and get to work. Do something real and rewarding for a change, and for a living.

Oh, and one other thing that must stop something urgent: stop talking about economic growth. There ain’t none, and we need to wonder hard and loud why we still and always unquestioningly assume and accept that we need it. No, the Greek economy will not grow its way out of its misery. Neither will Italy’s, or France’s or America’s. There’s too much debt to grow out of.

But perhaps this is hard to fathom without resorting to more philosophical questions. For those of you who’ve never read or heard Professor Albert Bartlett’s work on exponential growth (since that is what we’re talking bout), get moving. Bartlett is a physicist. That means he’s an actual scientist, and capable of understanding the inevitable endgame of exponential growth. People like Papademos and Monti, as well as just about any political and economic leader on the planet, don’t understand the science involved. Either that or they’re willfully blind to it.

And there’s another layer to the question, one that goes beyond the easy to understand impossibility of endless and eternal growth. That is, when we look around our respective places on the planet, why do we think we need to grow more? Why do we feel we haven’t grown enough? And perhaps more quintessential: what is it that we want to grow into? At what point, if we do want more growth, will it be enough for us? Have we even thought about that?

We are fed the constant growth story because it is indeed a necessity in our present system. When all money issued carries interest i.e. is issued as debt, you will need to grow your GDP at least as much as that interest rate to play even. Just as easy to understand as the exponential growth conundrum. Or so you would think.

But that doesn’t mean that you can always keep issuing enough money to meet your interest payment requirements. Not when a huge part of it is issued as for instance mortgage loans, but very few people buy homes. Not when money is created when banks issue fresh credit to industries, but industries find no market for their products and instead contract.

In other words: if we don’t grow, we will shrink. And that, we are told, is the very definition of armageddon. But why couldn’t we shrink a little and still be comfortable? In theory we could perhaps, but first of all the human mind isn’t made for shrinkage, and second the money we create as credit is virtual, and can disappear as fast as it was created, and into the same nothingness.

If we would for instance consciously choose to shrink by 5%, we’d run a very real risk that we would cause 50% of the money to vanish. The system based on credit will have the tendency to go down like so many dominoes. It has very little resilience and is thus enormously fragile, something we don’t pay attention to when we have growth, and are therefore not prepared for when we no longer do.

And from April 22, 2013:

What Do We Want To Grow Into?

The only good thing about all this is that if and when it becomes clear that there is no growth left in the system, all its one-dimensional advocates, from both the Spend! and the Cut! parties, will disappear into a great void. They have no idea what to do without growth. There is no economics class that teaches them, and they don’t have the brains to come up with an answer themselves.

Indeed, perhaps it’s even true that a “not necessarily growth” situation, simply of its own accord, selects for other “leaders”. That power hungry psychopaths, in all the various degrees to which they float to the top of the dungheap, are wiped out and alienated by such a situation.

That could be a very good thing. It’s on the way there, however, that we will see unimaginable damage, mayhem and bloodshed. The forever and always growth classes have an iron grip on everyone’s lives. If only because everyone believes them. Still, just because they can’t change their ways and views doesn’t mean you can’t. You can see quite easily that, in a material sense, you have more than enough already.

And many of you have clued in to the destruction ever more growth brings to your children’s living world (not to mention their brains). Unfortunately, quite a few then fall for the “more growth, but more greener” delusion. Or some steady state one (we don’t do steady, we don’t stand still).

When you get down to the heart of it, the only reason we need more growth is to pay off our debts. Which we owe largely to the same small group of rich, psychopathic and powerful that incessantly repeats the “need for growth” message, and makes sure it’s the only message available out there. But we will have to have the discussion some day, and it won’t be initiated by the people and powers that rule our societies today; that one’s up to us.

It’s a very simple discussion. You can start it today with Krugman or one of his alleged adversaries: Why do you advocate economic growth? Why do you see a period of non-growth or shrinkage as a necessary evil that needs to be brought down to its knees at – quite literally – all cost?

And what is it you want to grow into? Can you explain that? I’ve never seen that properly defined. Isn’t it perhaps true that if you don’t know the answer to that question, you are by definition blindly chasing a mirage? If you don’t know where you’re going, or why you’re going there, why go at all? Or is that still the sort of issue that can easily be swept under the carpet as “commie”?

So it’s refreshing to see this week a German economist and banker, Dr. Ulrich Salzer, thanks to Tyler Durden, going down that same line of questioning. These questions are long overdue. It’s not just one school of economics or the other failing us, it’s the entire field. Any field that refuses to ponder its most essential questions is per definition dead and useless.

Physicists can explain any time of day why we need Newton’s gravity and Einstein’s relativity in order to make sense of the world, and if anyone can prove them wrong, they’d be welcomed. Economists cannot explain we we need growth, it’s simply assumed to be a given.

Deficit Spending And Money Printing: A German Point Of View

The leading macroeconomic Nobel-Laureates, the Central Bankers as well as most Politicians have reduced their economic judgment on how to get the economies in Europe and Japan back to sustainable growth on just two recipes: public investments in infrastructure to be financed by additional public debt and, second, an expansive money market policy based on printing more money and reducing interest rates to zero or even beyond zero to negative rates!

And if the capital markets don’t swallow additional public debt, then the Central Banks will step in eagerly as Investors – regardless if this is in line with their statutes!

The expected results, backed by the leading macroeconomic wisdom, should be to kick-start economic growth, to induce private industry to invest and banks to lend to private investors, and thereby to reduce unemployment, and get deflationary tendencies back to an inflation rate that is now officially regarded as ideal if it oscillates around 2 % p.a. When and why this “two-percent” benchmark was introduced for the first time I can’t remember, but everybody today takes it for granted and repeats it like as an undisputed target of Central Bank’s money market policy. Included in this assumption is ever more public debt as the guarantor for lasting GDP-growth!

I never understood why macroeconomics should be regarded as an academic discipline if it is in practice reduced to these rather simple theories of how to handle a recession or even deflation! Maybe Alfred Nobel was just as clear-sighted as I am, and consequently never introduced a Nobel-prize for economics. That was done after his death by the Central Bank of Norway, which also contributed the required funds. It still does so, and not the Nobel foundation!

My personal advice is to stop handing out any more Nobel-prizes for economics to any more American professors on any new theory how to steer economic development and sustainable economic growth, because none of them has ever worked.

There is a lot of blame offloaded onto Maynard Keynes by critics of the present ruling opinion of more deficit spending by governments. But I don’t believe that Keynes would approve any of today’s Nobel-Laureates who saw no other way out of recession than by money printing in unlimited amounts and years of deficit spending by already over-indebted economies. According to Keynes public investment on deficit could be regarded as an “ultima ratio” to re-kick-start a slow economy, but he would never have advised any government that is already highly indebted to increase this debt even more!

In his theory, deficit-spending should be a limited action in time and amounts, and directly afterwards this debt should be repaid by the additional tax income from the stronger revenues of industry and private individuals who have profited from the intervention of the State.

But what our economists and central bankers are recommending nowadays is completely different from “short-term-kick-starts” – our systems are so full of the sweet drug of government deficit spending that (like a drug-addict) it constantly needs heavier doses of the same drug!

It was not long ago that the American Treasury Secretary publicly blamed Germany for not using its remaining credit standing for another round of deficit-spending in order to help Italy, France and other Southern European countries. As if more public debt and burning straw in Germany would have any impact on the southern countries’ economies without any serious political and economic reforms in those countries themselves to fight the weakness at its real source!

As long as our “economy doctors” don’t know anything better than to prescribe more drugs instead of getting the patient off the needle and help him to abandon the ever increasing drug doses, we will never get our economies “back to normal”!

We should never forget that at least the European economies had no real problem as long as the public debt to Gross National Product ratio remained within the Maastricht limits of 60% and before liquidity in the banking sector was multiplied without limit, thereby creating big bubbles in the financial assets of the banks which finally led to the financial crisis of 2008.

Japan is the very best example to prove that the therapy of deficit spending and money printing is dangerously wrong: it is now 25 years since Japan has adopted this cure. If anybody needs proof that the prescription was unprofessional and ineffective, he should look at the results to the Japanese economy and its public debt. Although hundreds of billions of Dollars have been spent during this period on programs to stimulate the Japanese economy the effect was that Japan fell from one recession into the next depression and the public debt ratio to GNP has meanwhile reached the astronomic bench mark of 230% (!!), which is double that of Greece and four times higher than the Maastricht criterion!

I am certain that Maynard Keynes would turn in his grave if he knew to what extent his theory was misinterpreted and misused! Of course it’s a big temptation for every politician to utilize the sweet but toxic medicine of deficit spending and more public debt rather than to introduce hard reforms on public budgets, on social spending and other benefits to their voters.

It’s also a big mistake that European governments have disregarded the traditional role of the European Central Bank as the watch-dog against inflation. In creating the ECB, Germany never consented that it should have more responsibilities and more authority than the Deutsche Bundesbank ever had.

It’s just like with deficit spending Keynes had recommended under certain conditions: it may be acceptable if the Central Bank acts as “Lender of last resort” in case of actual liquidity crisis. But this should be strictly on short-term basis. What we experience today is completely contrary to the German (maybe not the U.S.) understanding of the role of the Central Bank. The ECB has now assumed a role not only to protect the value of our common currency against inflation but also to take action as if it is responsible to create economic growth and full employment with instruments like money printing, zero interest rates and unlimited investments in bonds which the free market is rejecting.

We pay a high price for the chimera that we need constant economic growth and that it is a stigma if our GDP-growth is only 1.5% p.a. Can’t we accept that after 50 years of undisturbed peace and continuous prosperity we have reached a certain degree of personal satisfaction where we don’t need a new car every year, another cell-phone, additional furniture, more TV-sets, more laptops etc, etc. Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?

Is it really worth it to increase the already heavy burden of public debt, which our children must service someday, by accepting even more debt in a vain effort to increase public demand? Let’s instead be happy with zero GDP growth, zero inflation and zero growth of public debt! That could be a more rational solution. Why don’t we consider it?

You almost have to step outside of economics, even out of the financial world as a whole, to pose what is the most elementary question about our economy today. That can’t be right.

The most elementary question is not how we can achieve growth, it’s whether we need growth, and what we would need it for that is important enough to destroy our entire societies and economies for. As Salzer says: “Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?” The most elementary question is as simple as that.

I can finish this the way I started it: we need new ideas, new paradigms, to replace the ones that have gotten us the cesspool we find ourselves in, despite the false signals debt and propaganda provide us with. We’re in dire need of fresh blood and smart new ideas to clean up the mess the present ideologies and their puppets and puppetmasters have created.

Debt Rattle December 3 2014

Dec 032014

December 3, 2014 Posted by Raúl Ilargi Meijer at 12:25 pm Finance Tagged with: AI, default, deficit spending, deflation, Growth, oil, olive oil, OPEC, rigs, ruble, supply and demand 2 Responses »

Harris&Ewing National Emergency War Garden Commission display, Wash. DC 1918

• New US Oil And Gas Well November Permits Tumble Nearly 40% (Reuters)

• Think Collapsing Oil Is Bullish? Think Again (MarketWatch)

• Deficit Spending And Money Printing: A German Point Of View (Salzer)

• OPEC Is Wrong To Think It Can Outlast US On Oil Prices (MarketWatch)

• Oil War Slams Venezuela, Probability of Default Soars to 84% (Wolfstreet)

• Why Oil Is Finally Declining, Which May Lead to Disaster (Lee Adler)

• The Financialization of Oil (CH Smith)

• Oil, the Ruble and Putin Are All Headed for 63. A Russian Joke (Bloomberg)

• What Low Oil Prices Mean For The Environment (Reuters)

• French Bank Tells Investors To Dump UK Assets (CNBC)

• Australia Headed Into Perfect Storm In 2015 (CNBC)

• If Deflation Is So Terrible, Why Are Spain, Greece Growing? (MarketWatch)

• Eurozone Business Activity Slumps To 16-Month Low (CNBC)

• Non-Eurozone Czech Central Banker: We Need ECB Easing Too (CNBC)

• The Gold Fairy Tale Fails Again (Barry Ritholtz)

• Stop Talking about NATO Membership for Ukraine (Spiegel)

• We Are Starting To Learn Who Owns Britain (Monbiot)

• Mediterranean Diet Keeps People ‘Genetically Young’ (BBC)

• Olive Oil Prices Soar After Bad Harvest (Guardian)

• Stephen Hawking Warns Artificial Intelligence Could End Mankind (BBC)

Putting a brave face on the desperate hope for higher prices, soon. Or else.

• New US Oil And Gas Well November Permits Tumble Nearly 40% (Reuters)

Plunging oil prices sparked a drop of almost 40% in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007. Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October. The pullback was a “very quick response” to U.S. crude prices, which settled on Tuesday at $66.88, said Allen Gilmer, chief executive officer of Drilling Info. New permits, which indicate what drilling rigs will be doing 60-90 days in the future, showed steep declines for the first time this year across the top three U.S. onshore fields: the Permian Basin and Eagle Ford in Texas and North Dakota’s Bakken shale. The Permian Basin in West Texas and New Mexico showed a 38% decline in new oil and gas well permits last month, while the Eagle Ford and Bakken permit counts fell 28% and 29%, respectively, the data showed.

That slide came in the same month U.S. crude oil futures fell 17% to $66.17 on Nov. 28 from $80.54 on Oct. 31. Prices are down about 40% since June. U.S. prices fell below $70 a barrel last week after the Organization of Petroleum Exporting Countries agreed to maintain output of 30 million barrels per day. Analysts said the cartel is trying to squeeze U.S. shale oil producers out of the market. Total U.S. production reached an average of 8.9 million barrels per day in October, and is expected to surpass 9 million bpd in December, the highest in decades, according to the U.S. Energy Information Administration. Gilmer said last month’s pullback in permits was more about holding off on drilling good locations in a low-price environment than breaking even on well economics. “I think in this case this was just a quick response, saying ‘there are enough drill sites in the inventory, let’s sit back, take a look and see what happens with prices,'” he said.

Hey, that’s my headline!

• Think Collapsing Oil Is Bullish? Think Again (MarketWatch)

The biggest story of 2014 isn’t the end of quantitative easing. It’s the unrelenting collapse in oil prices, and what that means for stock markets worldwide. The meme out there? Falling oil is bullish. After all, the more oil falls, the more consumers and companies save. I’m sorry, but there are a number of flaws with this argument. First of all, falling oil can be bullish, but collapsing oil tends to historically be very bearish. Many major corrections and bear markets have been preceded by oil in a precipitous fall. Second, people forget that several state budgets actually rely on tax revenue that is derived from oil drilling and exploration activities. If that tax revenue collapses because those companies collapse on that oil decline, what’s the response by those states? Raises taxes on, you guessed it, consumers.

Third, you might want to be careful what you wish for when it comes to falling oil prices. A good amount of many junk-debt indices is made up of energy-sector bonds. Junk-debt spreads have been widening, and should defaults occur in the energy space, that could serve as a butterfly effect for all bonds. The biggest thing that counters the “collapsing oil is bullish” meme is the behavior of defensive sectors of the stock market, which our equity sector ATAC Beta Rotation Fund BROTX, +0.68% has the ability to position all in to based on our proprietary risk trigger. If indeed falling oil were bullish, shouldn’t more cyclical areas of the market rally on that? If falling oil were bullish, shouldn’t U.S. small-cap stocks — which are heavily dependent upon domestic U.S. revenue growth — be substantially outperforming?

And that’s my line! “Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?” Good to see I’m not the only one writing about that.

• Deficit Spending And Money Printing: A German Point Of View (Salzer)

What we experience today is completely contrary to the German (maybe not the U.S.) understanding of the role of the Central Bank. The ECB has now assumed a role not only to protect the value of our common currency against inflation but also to take action as if it is responsible to create economic growth and full employment with instruments like money printing, zero interest rates and unlimited investments in bonds which the free market is rejecting.

We pay a high price for the chimera that we need constant economic growth and that it is a stigma if our GDP-growth is only 1.5% p.a. Can’t we accept that after 50 years of undisturbed peace and continuous prosperity we have reached a certain degree of personal satisfaction where we don’t need a new car every year, another cell-phone, additional furniture, more TV-sets, more laptops etc, etc.

Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year? Is it really worth it to increase the already heavy burden of public debt, which our children must service someday, by accepting even more debt in a vain effort to increase public demand? Let’s instead be happy with zero GDP growth, zero inflation and zero growth of public debt! That could be a more rational solution. Why don’t we consider it?

To what extent is North Dakota spinning its numbers? ” .. the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 [..] In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says.”

• OPEC Is Wrong To Think It Can Outlast US On Oil Prices (MarketWatch)

Give Saudi Arabia credit: Whoever sets oil-production policy for the desert kingdom has guts. Unfortunately, the sheiks have made what’s likely to become a sucker’s bet. You know this part already, but the 12-nation Organization of the Petroleum Exporting Countries last week declined to cut production, sending Brent crude oil futures tumbling to their cheapest point since 2009. The Saudis appear to be spoiling for a fight, trying to find out exactly how cheap oil must be to force surging U.S. shale-oil production to seize up like an unlubricated engine. “Naimi declares price war on U.S. shale oil,” a Reuters headline shouted, referring to Saudi Arabia Oil Minister Ali al-Naimi. But there are at least three big problems with this strategy.

One, North American crude isn’t as expensive to produce as it used to be. Two, there’s more than you think in the pipeline to make it even cheaper. And third, OPEC nations, including Saudi Arabia, have squandered their edge in cheap oil supplies on welfare states rulers can’t easily cut back. In 2012, when U.S. shale burst into public consciousness, common wisdom was that it would cost at least $70 to $75 a barrel to produce. As recently as last week, saying U.S. producers could tolerate $60 oil seemed aggressive. But data from the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 — to make a 10% return for rig owners. In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says.

Another 27 rigs are around $29. That’s part of why oil companies aren’t cutting capital spending much — and they say they can keep production rising without spending more, by getting more out of wells they have already drilled. A key example is mega-independent Devon, which produces about 200,000 of the 9 million-plus barrels the U.S. drills each day. Devon wouldn’t give an interview, but said last month that it expects production to rise 20%-25% next year with little growth in capital spending. It has room to work because its pretax cash profit margins have widened by 37% in the first nine months of this year, to almost $30 per barrel of oil equivalent. More than half its 2015 production is protected by hedges if prices stay below $91 a barrel, the company says.

Can the CIA finally take over?

• Oil War Slams Venezuela, Probability of Default Soars to 84% (Wolfstreet)

OPEC member Venezuela has one of the largest oil and natural gas proven reserves in the world. It’s the 12th largest producer in the world. It’s still one of the top suppliers of crude oil to the US. Oil produces 95% of Venezuela’s export earnings. Oil and gas account for 25% of GDP. Oil is Venezuela’s single most important product. Oil is its critical source of foreign currency with which to pay for all manner of imported consumer and industrial products. But the price of oil has plunged 35% since June. Venezuela was already in trouble before the price of oil plunged. The fracking boom in the US and the tar-sands boom in Canada have been replacing Venezuelan imports of crude to the US for years.

The Keystone pipeline, if Congress approves it, will replace costly oil trains to move Canadian tar-sands crude to US refineries, making it even more competitive with Venezuelan crude. Shipments of crude from Venezuela to the US will continue to dwindle. Venezuela’s budget deficit is 16% of GDP, the worst in the world. Inflation is running at a white-hot 63%, also the worst in the world. The economy is heavily subsidized, but now the money for the subsidies is running out. Currency controls have been instituted to shore up the Bolivar. But instead, they’re strangling what is left of the economy. Anti-government protests and riots burst on the scene earlier this year as the exasperated people couldn’t take it any longer. The scarcity of even basic consumer products such as toothpaste and toilet paper has now spread across the spectrum, including medical supplies. Next year, scarcity is going to be even worse.

Venezuelan economist Angel Garcia Banchs worries that “what’s coming to Venezuela is chaos that will probably lead to barbarity and people looting.” It doesn’t help the budget that the government sells its most valuable export commodity at heavily subsidized prices at home, based on a special though iffy deal: the people get cheap energy, and in return, hopefully, they don’t riot, or outright revolt. The hope is that the government gets to stay in power a little longer even as it is going bankrupt. Yet social spending isn’t going to get cut, promised President Nicolas Maduro on state TV on Friday. “If we had to cut anything in our budget, we would cut extravagances, we would cut our own salaries as high officials, but we will never cut one Bolivar of the money that goes to education, food, housing, the missions of our nation,” he said.

“For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB.”

• Why Oil Is Finally Declining, Which May Lead to Disaster (Lee Adler)

The price of oil has finally started to obey the law. What law is that? The Law of Supply and Demand. Thanks to the US fracking boom that has done this (see chart) to US production, the supply of oil worldwide has outstripped demand since 2012. So why haven’t prices fallen before this summer? And are falling oil prices now a good thing? Or not? While US production was exploding, other countries had level or declining production. Meanwhile consumption was falling in developed nations, but the developing world more than made up for that. Worldwide consumption has been steadily increasing since 2009. However, because of the US fracking boom, with the exception of 2011 supply has exceeded demand. Prices should have been declining since 2012, right? After the oil price bubble peaked in 2008, the price of oil did crash when demand dropped. That drop in demand created a huge oversupply just as the US fracking boom was in its infancy.

Then the Fed and its cohort central banks started printing money helter skelter in 2009. The results showed up not only in world stock markets but in commodities as well, particularly oil. The price of oil rose in spite of the fact that world oil production continued to outstrip demand. For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB. It worked for a while, and the oil market even helped in 2011 when supply fell below consumption for a year. But then the US production increase again overran world wide consumption.

Prices don’t have to sink further to cause mayhem, they only need to stay where they are now.

• The Financialization of Oil (CH Smith)

Like home mortgages, oil has been viewed as a “safe” asset. The financialization of the oil sector has followed a slightly different script but the results are the same: A weak foundation of collateral is supporting a mountain of leveraged, high-risk debt and derivatives. Oil in the ground has been treated as collateral for trillions of dollars in junk bonds, loans and derivatives of all this new debt. The 35% decline in the price of oil has reduced the underlying collateral supporting all this debt by 35%. Loans that were deemed low-risk when oil was $100/barrel are no longer low-risk with oil below $70/barrel (dead-cat bounces notwithstanding). Financialization is always based on the presumption that risk can be cancelled out by hedging bets made with counterparties.

This sounds appealing, but as I have noted many times, risk cannot be disappeared, it can only be masked or transferred to others. Relying on counterparties to pay out cannot make risk vanish; it only masks the risk of default by transferring the risk to counterparties, who then transfer it to still other counterparties, and so on. This illusory vanishing act hasn’t made risk disappear: rather, it has set up a line of dominoes waiting for one domino to topple. This one domino will proceed to take down the entire line of financial dominoes. The 35% drop in the price of oil is the first domino. All the supposedly safe, low-risk loans and bets placed on oil, made with the supreme confidence that oil would continue to trade in a band around $100/barrel, are now revealed as high-risk. [..]

The failure of one counterparty will topple the entire line of counterparty dominoes. The first domino in the oil sector has fallen, and the long line of financialized dominoes is starting to topple. Everyone who bought a supposedly low-risk bond, loan or derivative based on oil in the ground is about to discover the low risk was illusory. All those who hedged the risk with a counterparty bet are about to discover that a counterparty failure ten dominoes down the line has destroyed their hedge, and the loss is theirs to absorb. All the analysts chortling over the “equivalent of a tax break” for consumers are about to be buried by an avalanche of defaults and crushing losses

Putin is still very popular in Russia. Western media will tell you that’s because of domestic propaganda, but they themselves engage in anti-Putin propaganda over here.

• Oil, the Ruble and Putin Are All Headed for 63. A Russian Joke (Bloomberg)

Heard the one about Vladimir Putin, the oil price and the ruble’s value against the dollar? They will all hit 63 next year. That’s the joke doing the rounds of the Kremlin as the Russian government digs in to weather international sanctions over the conflict in Ukraine. According to at least five people close to Putin, pressure from the U.S. and Europe is galvanizing Russians to withstand a siege on their economy. The black humor is part of an image of defiance not seen since the Cold War. As the economy enters its first recession in more than five years, the ruble depreciates to records and money exits the country, Putin’s supporters are closing ranks and say he’s sure to run for another six-year term in 2018. “We are becoming poorer, our savings vanish, prices grow, however we see an opposite effect to the one that is wanted by people who wish to see Putin knocked down,” said Olga Kryshtanovskaya, a sociologist studying the elite at the Russian Academy of Sciences. The jokes just underline their determination to stand till the end, she said.

Putin celebrates his 63rd birthday on Oct. 7. The price of Brent crude sank to a five-year low of $67.53 a barrel this week. The ruble has dropped to near 55 to the dollar from as strong as 34 less than six months ago, meaning it needs to lose another 13% to complete the joke. A friend of Putin who spoke on condition of anonymity said sanctions won’t work because the U.S. and European Union don’t understand the Russian mentality. The country endured the Leningrad siege for more than two years during World War II and will survive this too, he said. “The West is wrong in its understanding of the motivation Putin and his inner circle have,” said Evgeniy Minchenko, head of the International Institute of Political Expertise in Moscow. “They think Putin is a businessman, that money is the most important thing for him and that by pressing him and his allies financially they will break them.”

Not much so far.

• What Low Oil Prices Mean For The Environment (Reuters)

Are low oil prices good or bad for the environment? From one perspective, they’re bad: lower oil prices mean lower gas prices, which in turn encourage people to drive rather than use more environmentally friendly means of transportation. But in the case of U.S. shale oil, lower prices are good for Mother Earth, if only temporarily. Oil prices have been falling steadily since June, and given OPEC’s recent decision not to curb production, it seems they’ll remain low for a while. As Myles Udland pointed out in Business Insider last week, a lot of shale projects have break-even prices beneath the $80-per-barrel price level, but producers become less and less incentivized to start new projects as prices fall. [..] shale drilling permits fell 15% across 12 major shale formations in October, a sign that shale producers are willing to slow their rapid expansion until they can get more bang for their buck. It comes down to opportunity cost.

As Harold Hamm, an early shale pioneer who has lost $10 billion since August (let that sink in), told Bloomberg, “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.” Many see OPEC’s refusal to curb output as a multi-billion-dollar game of chicken with U.S. shale producers, whose booming production can be credited with the recent fall in world oil prices. Early evidence shows that it may be working—for now; fuelfix.com reported yesterday that Texas shale permits were down 50% in November. Ultimately, the case can be made that low oil prices are bad for the environment, as they encourage more oil use now, which makes investments in alternative energy less urgent. And the shale isn’t going anywhere–it’s just waiting there patiently for prices to become sufficient for new extraction projects.

“Stay away from U.K. assets into the 7 May elections ..”

• French Bank Tells Investors To Dump UK Assets (CNBC)

French bank Société Générale has told investors to steer clear of U.K. assets and sell sterling, because “zero” reform and political deadlock pose key risks to the country’s economy. “Stay away from U.K. assets into the 7 May elections,” the SocGen global asset strategy team, led by Alain Bokobza, said in the bank’s 2015 outlook. “In the U.K., 2015 will be marked by the General Election, triggering some volatility and pushing the risk premium on the FTSE 100 higher as the debate on the European Union exit gains momentum.” As such, Bokobza recommended: “Minimal exposure to U.K. assets as political deadlock and delayed tightening by the Bank of England should lead to a weakening of sterling.”

This warning comes despite the U.K.’s robust economic growth compared with the euro zone. U.K. GDP grew by 0.7% in the third quarter on the previous quarter, while the euro zone and France grew by just 0.2% and 0.3% respectively over the same period. But the French banking group insisted that U.K. assets remained risky, and had continually underperformed. “We have been underweight on U.K. assets in the last quarters, with little reason for regret. In particular, U.K. equities are underperforming all developed markets, and a lower GBP/USD is one of our strategic calls (with a 1.50 target),” the bank’s asset strategy team said. “So far there has been zero structural reform and no improvement in twin deficits or exports despite a significant devaluation of the currency. Also, the spillover effects of weak euro zone fundamentals have been underestimated. We are concerned, and therefore seek to protect our asset allocation.”

The perils of having just one main client.

• Australia Headed Into Perfect Storm In 2015 (CNBC)

Australia’s economy will undergo a crucial stress test in 2015, faced with a triple whammy from the lagged impact of plunging commodity prices, sharp declines in mining investment and renewed fiscal tightening, says Goldman Sachs. “The challenges are now widely known…but these challenges still lie mainly ahead for Australia rather than behind,” Tim Toohey, chief economist, Australia at Goldman Sachs wrote in a note on Wednesday. On top of the these headwinds, the economy also needs to contend with tighter financial conditions and lower levels of housing investment, said Toohey, factors that had previously helped to offset the slump in the mining sector. The bank expects GDP growth to average just 2.0% next year, down from an estimated 2.9% in 2014, as the economy continues to search for new growth drivers.

The decline in mining investment will continue to be a major drag on the economy, leaving commodity exports and consumption to pick up the slack, the bank said. Australia’s third quarter GDP data published on Wednesday pointed to a sluggish domestic economy, suggesting rebalancing away from mining-driven growth is taking longer than hoped. The economy expanded 2.7% on year in the three months to September, undershooting expectations for growth of 3.1%, as construction spending fell while sliding export prices hit incomes. “This GDP result concurs broadly with the perceived wisdom on the Australian economy, albeit with perhaps a little more domestic weakness than expected, said David de Garis, director and senior economist at National Australia Bank.

A perfect example of why seeing deflation only as falling prices is so completely useless and dumbing. If you refuse to look a WHY prices fall, you never learn a thing, and you will always be behind. Apart from the fact that the idea of Greece and Spain doing well can easily be refuted by 1000 other data sources, looking at one day or week or month tells you nothing. You need to look at consumer spending over at least the past few years. That would also show more respect for the 25% of the working population, and 50% of youth, who are unemployed in both countries.

• If Deflation Is So Terrible, Why Are Spain, Greece Growing? (MarketWatch)

Prices are starting to fall across the European continent. Mass unemployment, and a grinding recession are forcing companies with too much capacity to charge less for their products. Company profits will soon be collapsing, while government debt ratios threaten to spiral out of control. The threat of deflation is so worrying, the European Central Bank is expected to throw everything in its armory to prevent it, and to get prices rising again. It may even move towards full-blown quantitative easing as early as Thursday. But here’s a puzzle. The two countries with the worst deflation in Europe are Greece and Spain. And two of the countries with the best growth? Funnily enough, that also happens to be Greece and Spain. So if deflation is so terrible, how come those two are recovering fastest?

The answer is that deflation is not nearly as bad as it sometimes made out to be by mainstream economists. The real problem is debt. But if that is true, perhaps the eurozone would be better off trying to fix its debt crisis than campaigning to raise prices — especially as it probably won’t have much success with that anyway. There is no question that the eurozone is sliding inexorably towards deflation. Only last week, we learned that the inflation rate across the zone ratcheted down to 0.3% last month, from 0.4% a month earlier, and a significantly lower figure than the market expected. It has been going steadily down for some time. Consumer inflation has not hit the ECB’s target level of 2% since the start of 2013. It has been falling steadily since it peaked at 3% in late 2011

It would be rash to expect that to change any time soon. The oil price has collapsed, and other commodity prices are coming down as well. That will all feed into the inflation rate. Retail sales are still weak, and unemployment is still rising. People who have lost their job don’t spend money — and companies don’t hike prices when the shops are empty.

Super Mario to the rescue.

• Eurozone Business Activity Slumps To 16-Month Low (CNBC)

Business activity in the euro zone fell to a 16-month low in November, according to data released on Wednesday, confirming fears that the region’s economy is faltering. Final euro zone composite Purchasing Manager’s Index (PMI) data from Markit came in at 51.1 in November, below flash estimates of 51.4 released last month. It marks a fall from October’s final reading of 52.1. The composite reading measures both manufacturing and services activity, with the 50-point mark separating contraction from expansion. The figures could put more pressure on the ECB to increase stimulus measures ahead of its next monetary policy announcement on Thursday. There is growing pressure on the bank to start buying government bonds, although Germany has opposed the move to date.

The euro zone data was preceded by disappointing services PMI figures for Germany and France, the euro zone’s largest and second-largest economies respectively. The slowdown across the 18-country region reflected weakness in new order inflows, as new business fell for the first time since July last year. Job creation also remained near-stagnant, Markit said. Chris Williamson, chief economist at Markit, said there were “worrying signs” of economic performance deteriorating in the euro zone’s core countries, which, if sustained, “could drive the region back into recession.” “France remains the biggest concern, suffering an ongoing decline in business activity, but growth has also slowed to the weakest for one-and-a-half years in Germany,” he added.

“ECB easing is necessary for us, we are closely related with the euro zone and ECB easing should, in the long run, generate more demand in the euro zone, which is helpful for us ..”

• Non-Eurozone Czech Central Banker: We Need ECB Easing Too (CNBC)

As the European Central Bank’s (ECB) next policy meeting looms, the governor of the Czech central bank has insisted that further euro zone easing will have “necessary” knock-on benefits for the Czech Republic. The ECB is expected to leave monetary policy unchanged on Thursday, although there are growing calls for the bank to launch a full-blown quantitative easing package. ECB President Mario Draghi is likely to wait until the new year before deciding on sovereign bond-buying measures – a move that Czech National Bank (CNB) Governor Miroslav Singer said he supported. “It (further easing) is helpful for us. ECB easing is necessary for us, we are closely related with the euro zone and ECB easing should, in the long run, generate more demand in the euro zone, which is helpful for us,” Singer told CNBC.

Speaking from the CNB in Prague, Singer said that easing could take some time to filter through to some weaker parts of the euro zone, but added that a weaker euro would help “shield” the Czech Republic’s economy by giving some of the region’s biggest countries a boost. The Czech Republic is a member of the European Union, but doesn’t yet use the euro. Its currency is called the Czech koruna. The euro has weakened against the dollar and other currencies since the summer, falling to a two-year low against the greenback last month after Draghi hinted that the bank was prepared to undertake more stimulus. Singer added that a weaker euro had helped boost countries like Germany, which price their exports in euros. A weaker euro makes euro zone exports cheaper in the global market.

Barry shares my worries.

• The Gold Fairy Tale Fails Again (Barry Ritholtz)

Yesterday, oil rallied 4.3% and gold gained 3.6% as commodities had an up day after a long and painful fall. The fascinating aspect of the trading wasn’t the $45 pop in gold, nor the even greater%age rally in oil, but the accompanying narrative. (As of this writing, each has giving up about half of those gains). When it comes to speculating, especially in precious metals, it is all about storytelling. Over the years, I have tried to remind investors of the dangers of the narrative form (See this, this and this). Following a storyline is a recipe for losing money. Why? The spoken word emerged eons ago and narration was a convenient way to pass along information from person to person, generation to generation. Your DNA is coded to love a good yarn of heroes and villains and conflicts to resolve, preferably in a way that is both exciting and memorable. However, your genetic makeup wasn’t created with the risks and rewards of capital markets in mind. When it comes to being suckers for storytelling, I have been especially critical of the gold bugs.

Since 2011, the gold narrative has been a money loser, the secular bull market for the metal clearly over. However, gold often provides a plethora of teachable moments. I want to point out several recent gold narratives that have been dangerous to investors. One of my favorite narratives involves the SPDR Gold Shares, an exchange-traded fund. The history of this ETF is a fascinating tale, well told by Liam Pleven and Carolyn Cui of the Wall Street Journal. Since its peak in September 2011, GLD has declined 37%. As we discussed almost a year ago, the most popular gold narrative was that the Federal Reserve’s program of quantitative easing would lead to the collapse of the dollar and hyperinflation. “The problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found,” I wrote at the time.

More recently, the narrative has shifted. Switzerland was going to save gold based on a ballot proposal stipulating that the Swiss National Bank hold at least 20% of its 520-billion-franc ($538 billion) balance sheet in gold, repatriate overseas gold holdings and never sell bullion in the future. This was going to be the driver of the next leg up in gold. Except for the small fact that the “Save Our Swiss Gold” proposal was voted down, 77% to 23%, by the electorate. Why anyone believed this fairy tale in the first place is beyond me. Surveys of voters suggested that the ballot proposal was likely to fail. And yet there’s muddled thinking about gold among the bears too. Short sellers loaded up on bets that gold would plummet, a mistake in its own right since the outcome was all but foretold. When the collapse failed to materialize as the ballot initiative lost, the shorts had to cover their errant bets, sending spot prices higher (temporarily it seems).

Why do these narratives all tend to fail? For the most part, they reflect information that is already in prices. Markets are far from perfectly efficient (they are kinda- sorta-eventually-almost efficient). But they are more efficient than many seem to assume. What’s that you say? Consumers in China and India are big buyers of gold? You mean, the way they always have been? Indeed, most of the recent narratives contain information that is already reflected in prices. Yesterday, I read a breaking news article that said India’s decision to lift gold import restrictions would have a big, positive impact on prices. The problem with that narrative is that India eased import limits in May – and it moved gold prices higher by all of 0.5%.

The Germans don’t like what NATO is up to.

• Stop Talking about NATO Membership for Ukraine (Spiegel)

Just to be sure there is no misunderstanding: Vladimir Putin bears primarily responsibility for the new Cold War between the West and Russia. These days, you have to make that clear before criticizing Western policies so as not to be shoved into the pro-Putin camp. When NATO foreign ministers meet in Brussels today, the question of Ukraine’s possible future membership in the alliance is not on the agenda. It will, however, overshadow the meeting — and that is the fault of two politicians. During an interview with German public broadcaster ZDF on Sunday night, Ukrainian President Petro Poroshenko said he would like to hold a referendum on NATO membership at some point in the future. And new NATO General Secretary Jens Stoltenberg apparently had nothing better to do than to offer Poroshenko his verbal support and to reiterate the right of every sovereign nation in Europe to apply for NATO membership.

As if that weren’t enough, Stoltenberg added in comments directed at Moscow that “no third country outside NATO can veto” its enlargement. In the current tense environment, open speculation about possible Ukrainian membership in NATO is akin to playing with fire. German Chancellor Angela Merkel proposed the former Norwegian prime minister as NATO chief because he is considered to be a far more level-headed politician than predecessor Anders Fogh Rasmussen. But since he took the helm, differences between the two have been difficult to identify. Hawkish statements made by NATO’s top military commander, Philip Breedlove, haven’t done much to ease the situation either. Why is it even necessary for NATO officers to comment so frequently about Ukraine? Since the outbreak of the crisis, the alliance has expressed the opinion that the conflict cannot be resolved through military means. If that’s true, then wouldn’t it be better if Stoltenberg, Breedlove and company kept quiet?

“David Cameron has been just as generous with our money: as he cuts essential services for the poor, he has almost doubled the public subsidy for English grouse moors, and frozen the price of shotgun licences, at a public cost of £17m a year.”

• We Are Starting To Learn Who Owns Britain (Monbiot)

Bring out the violins. The land reform programme announced last week by the Scottish government is the end of civilised life on Earth, if you believe the corporate press. In a country where 432 people own half the private rural land, all change is Stalinism. The Telegraph has published a string of dire warnings – insisting, for example, that deer stalking and grouse shooting could come to an end if business rates are introduced for sporting estates. Moved to tears yet? Yes, sporting estates – where the richest people in Britain, or oil sheikhs and oligarchs from elsewhere, shoot grouse and stags – are exempt from business rates, a present from John Major’s government in 1994. David Cameron has been just as generous with our money: as he cuts essential services for the poor, he has almost doubled the public subsidy for English grouse moors, and frozen the price of shotgun licences, at a public cost of £17m a year.

But this is small change. Let’s talk about the real money. The Westminster government claims to champion an entrepreneurial society of wealth creators and hardworking families, but the real rewards and incentives are for rent. The power and majesty of the state protects the patrimonial class. A looped and windowed democratic cloak barely covers the corrupt old body of the nation. Here peaceful protesters can still be arrested under the 1361 Justices of the Peace Act. Here the Royal Mines Act 1424 gives the crown the right to all the gold and silver in Scotland. Here the Remembrancer of the City of London sits behind the Speaker’s chair in the House of Commons to protect the entitlements of a corporation that pre-dates the Norman conquest. This is an essentially feudal nation.

It’s no coincidence that the two most regressive forms of taxation in the UK – council tax banding and the payment of farm subsidies – both favour major owners of property. The capping of council tax bands ensures that the owners of £100m flats in London pay less than the owners of £200,000 houses in Blackburn. Farm subsidies, which remain limitless as a result of the Westminster government’s lobbying, ensure that every household in Britain hands £245 a year to the richest people in the land. The single farm payment system, under which landowners are paid by the hectare, is a reinstatement of a medieval levy called feudal aid, a tax the vassals had to pay to their lords.

Sounds good, tastes good too.

• Mediterranean Diet Keeps People ‘Genetically Young’ (BBC)

Following a Mediterranean diet might be a recipe for a long life because it appears to keep people genetically younger, say US researchers. Its mix of vegetables, olive oil, fresh fish and fruits may stop our DNA code from scrambling as we age, according to a study in the British Medical Journal. Nurses who adhered to the diet had fewer signs of ageing in their cells. The researchers from Boston followed the health of nearly 5,000 nurses over more than a decade. The Mediterranean diet has been repeatedly linked to health gains, such as cutting the risk of heart disease. Although it’s not clear exactly what makes it so good, its key components – an abundance of fresh fruit and vegetables as well as poultry and fish, rather than lots of red meat, butter and animal fats – all have well documented beneficial effects on the body. Foods rich in vitamins appear to provide a buffer against stress and damage of tissues and cells. And it appears from this latest study that a Mediterranean diet helps protect our DNA.

The researchers looked at tiny structures called telomeres that safeguard the ends of our chromosomes, which store our DNA code. These protective caps prevent the loss of genetic information during cell division. As we age and our cells divide, our telomeres get shorter – their structural integrity weakens, which can tell cells to stop dividing and die. Experts believe telomere length offers a window on cellular ageing. Shorter telomeres have been linked with a broad range of age-related diseases, including heart disease, and a variety of cancers. In the study, nurses who largely stuck to eating a Mediterranean diet had longer, healthier telomeres. No individual dietary component shone out as best, which the researchers say highlights the importance of having a well-rounded diet.

But then this does not help. Especially for the poor in southern Europe.

• Olive Oil Prices Soar After Bad Harvest (Guardian)

Take it easy with the salad dressing: the price of Italian olive oil has more than doubled in the past year to its highest level in a decade as the impact of drought and a fruit fly infestation has hit production. The price of extra virgin oil from Spain, the world’s biggest producer, is also up 15% year-on-year after olive trees across the Mediterranean suffered from drought and extreme heat in May and June, their peak blooming period when moisture is vital to develop a good crop. Analysts began warning that prices would rise this summer, but the cost of Italian extra virgin olive oil soared by nearly a quarter in November compared with October as the poor state of the harvest became clear, according to market analysts Mintec. Loraine Hudson at Mintec said demand could outstrip supply over the next year as Italian production would be down 35% and global production down 19% to 2.5m tonnes at a time when global consumption is rising.

“It would take off on its own, and re-design itself at an ever increasing rate ..”

• Stephen Hawking Warns Artificial Intelligence Could End Mankind (BBC)

Prof Stephen Hawking, one of Britain’s pre-eminent scientists, has said that efforts to create thinking machines pose a threat to our very existence. He told the BBC:”The development of full artificial intelligence could spell the end of the human race.” His warning came in response to a question about a revamp of the technology he uses to communicate, which involves a basic form of AI. But others are less gloomy about AI’s prospects. The theoretical physicist, who has the motor neurone disease amyotrophic lateral sclerosis (ALS), is using a new system developed by Intel to speak.

Machine learning experts from the British company Swiftkey were also involved in its creation. Their technology, already employed as a smartphone keyboard app, learns how the professor thinks and suggests the words he might want to use next. Prof Hawking says the primitive forms of artificial intelligence developed so far have already proved very useful, but he fears the consequences of creating something that can match or surpass humans. “It would take off on its own, and re-design itself at an ever increasing rate,” he said. “Humans, who are limited by slow biological evolution, couldn’t compete, and would be superseded.”

Debt Rattle November 26 2014

Nov 262014

November 26, 2014 Posted by Raúl Ilargi Meijer at 11:11 am Finance Tagged with: banking, bonds, consumer, currencies, eurozone, gas, Growth, housing, Japan, oil, Shale, toxic 8 Responses »

Arthur Rothstein Oregon or Bust, family fleeing South Dakota drought Jul 1936

• Banking’s Toxic Culture ‘Will Take A Generation To Clean Up’ (Guardian)

• Consumer Confidence in US Unexpectedly Dropped in November (Bloomberg)

• Case Shiller Reports “Broad-Based Slowdown For Home Prices” (Zero Hedge)

• BEA Revises 3rd Quarter 2014 US GDP Growth Upwards to 3.89% (CMI)

• Refinancing Boom Exposing Risks in US Property Bonds (Bloomberg)

• Abe Sales Tax Backfiring With More Debt Not Less (Bloomberg)

• Japan Is Running Out of Options (Bloomberg)

• Eurozone ‘Major Risk To World Growth’: OECD (CNBC)

• Do German Bonds Face Japanification? (CNBC)

• UK Housing Market Cools Rapidly (Guardian)

• Commodity Exporters Like Cheaper Currencies (A. Gary Shilling)

• On This Day, 138 Years Ago, The Idea Of QE Was Born (Art Cashin)

• A Bearish Hedge Fund Bets Against the Bulls and Still Profits (NY Times)

• Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize

• Pre-OPEC Producer Meeting Fails to Deliver Oil Output Cut (Bloomberg)

• The Unbearable Over-Determination Of Oil (Ben Hunt)

• Who Will Wind Up Holding the Bag in the Shale Gas Bubble? (Naked Capitalism)

• US Oil Producers Can’t Kick Drilling Habit (FT)

• The Environmental Downside of the Shale Boom (NY Times)

• Obama Climate Envoy: Fossil Fuels Will Have To Stay In The Ground (Guardian)

• Cracks Form in Berlin Over Russia Stance (Spiegel)

• Europe Looks ‘Aged And Weary’: Pope Francis (CNBC)

Why should it? Just regulate the heebees out of them or close them down.

• Banking’s Toxic Culture ‘Will Take A Generation To Clean Up’ (Guardian)

Overhauling the broken culture of high street banking will take a generation to achieve, according to a report that found UK banks have received 20m customer complaints since the financial crisis. The report, by the thinktank New City Agenda, calculated that in the last 15 years the retail operations of banks had incurred £38.5m in fines and redress for mistreatment of customers. Andre Spicer, a professor at Cass Business School and the report’s lead author, said: “Most people we spoke to told us that real change will take at least five years. “There was some uncertainty as to how these changes were being translated into good practice at the customer coalface. Many culture change initiatives are fragile, and their success is not ensured. It’s clear to us that much work still needs to be done.”

The report concluded that it will take a generation to end a sales culture exposed by the 2008 crisis. It said UK banks did not address cultural change until the eruption of the Libor scandal in 2012, having failed to act after the emergence of mis-selling debacles such as the payment protection insurance scandal. “A toxic culture, decades in the making, will take a generation to clean up,” said the founders of New City Agenda, who are Labour peer Lord McFall, Conservative MP David Davis, and Liberal Democrat peer Lord Sharkey. They added: “Some frontline staff told us they still feel under significant pressure to sell. Complaints continue to rise and trust remains extremely low. Most of the people we talked to believed that real change, and as a consequence the better treatment of customers, will take some time to achieve.”

Will they ever stop using the word ‘unexpectedly’? It’s certainly a favorite over at Bloomberg, and not just there.

• Consumer Confidence in US Unexpectedly Dropped in November (Bloomberg)

Consumer confidence unexpectedly declined in November to a five-month low as Americans became less upbeat about the economy and labor market. The Conference Board’s index fell to 88.7 this month from an October reading of 94.1 that was the strongest since October 2007, the New York-based private research group said today. The figure last month was weaker than the most pessimistic estimate in a Bloomberg survey of economists. The decline this month interrupts a steady pickup in sentiment since the middle of the year and shows attitudes about the economy would benefit from bigger wage gains. While confidence slipped, buying plans picked up, indicating spending will be sustained on the heels of stronger job growth and lower fuel costs.

The drop this month “doesn’t change our view that the trend in consumer confidence is moving upwards,” said David Kelly, chief global strategist at JPMorgan Funds in New York. “Gasoline prices are down, the unemployment rate is down, home prices are gradually rising, and stock prices are certainly rising.” The median forecast of 75 economists in the Bloomberg survey called for a reading of 96, with estimates ranging from 93.5 to 99 after a previously reported October index of 94.5. The Conference Board’s measure averaged 96.8 during the last expansion and 53.7 during the recession that ended in June 2009.

I’m wondering how this squares with that GDP revision.

• Case Shiller Reports “Broad-Based Slowdown For Home Prices” (Zero Hedge)

While the just revised Q3 GDP surprised everyone to the upside, the Case Shiller index for September which was also reported moments ago, showed yet another month of what it called a “Broad-based Slowdown for Home Prices.” The bad news: the 20-City Composite gained 4.9% year-over-year, compared to 5.6% in August. However, this was modestly above the 4.6% expected. However, what was more troubling is that on a sequential basis, the Top 20 Composite MSA posted a modest -0.03% decline, the first sequential drop since February. And from the report itself: “The National Index reported a month-over-month decrease for the first time since November 2013. The Northeast region reported its first negative monthly returns since December 2013 and its worst annual returns since December 2012 due to weaknesses in Washington D.C. and Boston.”

Some useful details.

• BEA Revises 3rd Quarter 2014 US GDP Growth Upwards to 3.89% (CMI)

In their second estimate of the US GDP for the third quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +3.89% annualized rate, up +0.35% from their first estimate for the 3rd quarter but still down some -0.70% from the 4.59% annualized growth rate registered during the second quarter. The modest improvement in the headline number masks substantial changes in the reported sources of the annualized growth. The previously reported significant inventory draw-down almost vanished completely (dropping to a mere -0.12% impact on the headline number). Improving fixed investments added +0.23% to the headline, with nearly all of that improvement from spending for commercial equipment. Consumer spending for goods was also reported to be growing 0.27% in this report, while consumer spending for services was essentially unchanged (+0.02%).

Offsetting those upside revisions was a significant erosion in the previously reported export growth, which subtracted -0.38% from the headline. The contribution from imports in the headline number also weakened, taking the annualized growth down another -0.17%. Governmental spending was also revised down slightly, knocking another -0.07% from the headline. Nearly all of that downward revision to governmental spending was from reduced state and local investment in infrastructure. Despite the increased consumer spending, households actually took a disposable income hit in this revision – losing $146 in annualized per capita disposable income (now reported to be $37,525 per annum). This is down $344 per year from the 4th quarter of 2012. The spending growth reported above came exclusively from reduced household savings, which dropped a full 0.5% in this report.

As mentioned last month, softening energy prices play a major role in this report, since during the 3rd quarter dollar-based energy prices were plunging (and have continued their dive since). US “at the pump” gasoline prices fell from $3.68 per gallon to $3.32 during the quarter, a 9.8% quarter-to-quarter decline and a -33.8% annualized rate – pushing most consumer oriented inflation indexes into negative territory. During the third quarter (i.e., from July through September) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was actually mildly dis-inflationary at a -0.10% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably reflected the real experiences of American households) was slightly more dis-inflationary at -0.18% (annualized).

Yet for this report the BEA effectively assumed a positive annualized quarterly inflation of 1.40%. Over reported inflation will result in a more pessimistic growth data, and if the BEA’s numbers were corrected for inflation using the appropriate BLS CPI-U and PPI indexes the economy would be reported to be growing at a spectacular 5.42% annualized rate. If we were to use just the BPP data to adjust for inflation, the quarter’s growth rate would have been an astounding 5.52% annualized rate.

The smell of volatility on the morning.

• Refinancing Boom Exposing Risks in US Property Bonds (Bloomberg)

A $40 million penalty wasn’t enough to keep the owner of San Francisco’s Parkmerced apartment complex from the chance to lock in record-low interest rates and take advantage of the property’s $1.5 billion value. While a landlord willing to pay almost 63 times the average fee to refinance early is a bullish sign for commercial real estate, it’s less so for bond investors facing $295 billion of mortgages that come due during the next three years. That’s because the securities are increasingly tied to the market’s weakest properties, many of them financed during the peak of the real-estate boom in 2007, as the strongest are paid off. More property owners are jumping on a drop in financing costs and loosening terms to pay off their mortgages. That helped shrink the amount of debt maturing before the end of 2017 from $332 billion at the start of 2014, according to Bank of America data.

“If you’re a well-capitalized entity, you’re going to do it,” Richard Hill, a debt analyst at Morgan Stanley, said. That could leave commercial-mortgage bond investors “holding the bag on a bunch of lower-quality loans.” Properties such as skyscrapers, shopping malls, hotels and apartment complexes are attracting investors from sovereign wealth funds to insurance companies as they seek higher-yielding assets amid six years of Federal Reserve policies to hold short-term interest rates near zero. Wall Street banks are on pace to issue $100 billion of securities backed by commercial real estate this year after issuance doubled to $80 billion in 2013, according to data compiled by Bloomberg. Sales, which peaked at $232 billion in 2007, are poised to climb to $140 billion in 2015, Credit Suisse Group AG analysts led by Roger Lehman forecast in a Nov. 21 report.

Sales of the securities also are being fueled by rules that will require banks to retain some portion of loans that are sold to investors as securities, according to Morgan Stanley’s Hill. That may increase financing costs when they take effect in 2016. Ray Potter, founder of R3 Funding, a New York-based firm that arranges financing for landlords and investors, said he’s advising clients not to wait to refinance as economists forecast the Fed will raise rates next year for the first time since 2006. There has been a surge in borrowers looking to refinance in the past couple of months, Potter said. “If you like that coupon, lock it in for 10 years,” he said. While the interest rate could dip even lower, it’s not worth the risk because “when it moves higher it moves fast,” he said.

“Japan remains doomed by its demographics and, of course, by its horrible debt.”

• Abe Sales Tax Backfiring With More Debt Not Less (Bloomberg)

What started as a plan to reduce Japan’s debt is turning into a reason to issue more bonds. Prime Minister Shinzo Abe’s administration implemented a higher sales tax in April to boost revenue as government liabilities ballooned to 1 quadrillion yen ($8.5 trillion), more than double the nation’s yearly economic output. Consumption plunged and the economy fell into a recession, prompting companies including Mirae Asset Global Investments Co. and High Frequency Economics to predict even more sovereign debt sales to revive growth. “The government’s policies have failed,” Will Tseng, a money manager in Taipei at Mirae Asset, which manages about $62 billion, said in an e-mail Nov. 20. “They’re still issuing more debt and printing more money to try to help the economy. They’re in a really bad cycle.” He said he’s staying away from Japanese bonds.

The cost of protecting Japan’s debt from default surged for eight straight days and the yen tumbled to a seven-year low as Abe called a snap election and delayed plans to further increase the sales tax by 18 months. Bank of Japan Governor Haruhiko Kuroda on Oct. 31 boosted the amount of government bonds he plans to buy to as much as 12 trillion yen a month, a record. Japan will go back to its routine of borrowing more to fund plans to spur growth, said Carl Weinberg, the chief economist at High Frequency Economics in Valhalla, New York. What it needs to do is allow immigration to keep the population from shrinking, he said Nov. 18 on the “Bloomberg Surveillance” radio program. “The population and the economy are contracting, and the debt is growing, and that’s an unsustainable trend,” Weinberg said. “Japan remains doomed by its demographics and, of course, by its horrible debt.”

” .. Kuroda now has a budding mutiny on his hands. Many of his staffers think the central bank has already gone too far to weaken the yen and buy virtually every bond in sight.”

• Japan Is Running Out of Options (Bloomberg)

The New York Times recently lit up the Japanese Twittersphere with a cartoon that was a little too accurate for comfort. In it, a stretcher marked “economy” is loaded into an ambulance with “Abenomics” painted on the side; the vehicle lacks tires and sits atop cinder blocks. Prime Minister Shinzo Abe looks on nervously, holding an IV bag. The image aptly sums up Japan’s failure to gain traction in its push to end deflation. The Bank of Japan’s unprecedented stimulus and Abe’s pro-growth reforms have yet to spur a recovery in inflation and gross domestic product growth, and the country is yet again in recession. Worse, BOJ Governor Haruhiko Kuroda is rapidly running out of weapons in his battle to eradicate Japan’s “deflationary mindset.”

Minutes from the central bank’s Oct. 31 board meeting, at which officials surprised the world by expanding an already massive quantitative-easing program, show that Kuroda now has a budding mutiny on his hands. Many of his staffers think the central bank has already gone too far to weaken the yen and buy virtually every bond in sight. That’s a problem for Kuroda and Abe in two ways.

First, board members warned that the costs of further monetary stimulus outweigh the benefits. We already knew that Kuroda had only won approval for his shock-and-awe announcement by a paper-thin 5-4 margin, and that Takahide Kiuchi dissented when the BOJ boosted bond sales to about $700 billion annually. But the minutes suggest Kuroda came as close to any modern BOJ leader ever has to defeat on a policy move. Cautionary voices like Kiuchi’s worry that the BOJ could be “perceived as effectively financing fiscal deficits.” I’d say it’s too late for that. Of course the BOJ is acting as the Ministry of Finance’s ATM, just as Abe intended when he hired Kuroda. Still, the fact is that Kuroda’s odds of getting away with yet another Friday surprise are nil at best.

Second, maintaining stability in the bond market just got harder. The only way Kuroda can stop 10-year yields – currently 0.44% – from spiking as he tries to generate 2% inflation is by making ever bigger bond purchases. But fellow BOJ board members will be giving Kuroda less latitude to cap market rates. Japan is lucky in one way: Given that more than 90% of public debt is held domestically, Tokyo can the avoid wrath of the “bond vigilantes.” Kuroda further neutralized these activist traders by saying there’s “no limit” to what he can do to make Abenomics work. The fact that so many of his colleagues are skeptical of the policy, however, undermines Kuroda’s credibility. If markets begin to doubt his staying power, yields are sure to rise.

The entire world is a risk to world growth.

• Eurozone ‘Major Risk To World Growth’: OECD (CNBC)

The eurozone poses a serious danger for global growth, with the world’s economy already “in low gear”, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday. “The euro area is grinding to a standstill and poses a major risk to world growth, as unemployment remains high and inflation persistently far from target,” the OECD said in the 96th edition of its Economic Outlook. The euro zone’s fledgling recovery—which started at the end of 2013—has been a cause for concern over recent months, with gross domestic product (GDP) rising only 0.2% quarter-on-quarter between July and September. Policymakers are also battling with very low inflation and high unemployment—around one-quarter of Spaniards and Greek remain without jobs.

The OECD sees euro zone economic growth at 0.8% this year. This is better than the economic contraction the currency union suffered in 2012 and 2013, but below average growth of 1.1% between 2002 and 2011. By comparison, the OECD expects the world’s economy to expand by 3.3% this year. As with the euro zone, this is an improvement on 2012 and 2013, but below the 2002-2011 average of 3.8%.”A moderate improvement in global growth is expected over the next two years, but with marked divergence across the major economies and large risks and vulnerabilities,” the OECD said.

A euro zone analyst at the Economist Intelligence Unit said the risks to the world economy posed by the euro zone were even larger than the OECD forecast.”The euro zone’s fundamental institutional deficiencies are now exacting a damaging price, by hampering the formulation and implementation of policy responses to the ongoing slump,” said Aengus Collins in a research note emailed after the OECD report.”In addition, the OECD overlooks political risk, which is rising sharply in line with voter disaffection.” Major countries expected to post solid growth include the U.S., which the OECD predicts will expand by 2.2% this year and 3.1% next. China, meanwhile, is seen growing by an impressive 7.3% in 2014, before slowing to 7.1% in 2015.

More interestingly, where will that leave Spanish and Italian bonds?

• Do German Bonds Face Japanification? (CNBC)

The euro zone’s long disinflation has spurred fears it will tumble all the way to Japan-style deflation, with some concerned yields on the continent’s safe-haven bond, the German bund, could remain depressed for the long haul. “While we are still not convinced that the euro zone is the new Japan, despite the many similarities in their economic predicaments, we are increasingly of the view that the 10-year Bund yield will remain exceptionally low for at least the next couple of years,” John Higgins, chief markets economist at Capital Economics, said in a note Wednesday. The 10-year bund is yielding around 0.75%, around all-time lows, compared with the 10-year Japanese government bond (JGB) at around 0.45% after a decades-long downtrend.

Japan’s central bank cut its benchmark interest rate to 0.5% in 1995, a move that pushed the 10-year JGB yield below 1% after three years, Higgins noted. “Investors did not know in 1998 that Japan’s key policy rate would remain near zero for the next 16 years (and counting). But the prospect of it remaining there for the foreseeable future was enough to keep the 10-year yield quite firmly anchored,” he said. “We see no reason why a similar outcome couldn’t happen in Germany,” as the bund yield fell below 1% after the ECB cut its main rate to 0.5% in mid-2013.

” .. new mortgage approvals hit a 17-month low of 37,076 in October. That total was down nearly a quarter from January’s 76-month high of 48,649. It was also down 16% year on year ..”

• UK Housing Market Cools Rapidly (Guardian)

Britain’s housing market is cooling rapidly as a result of tougher Bank of England mortgage market requirements, high prices and the uncertainty caused by the coming general election. The prospect of higher interest rates at some point in 2015 is also dampening demand. Figures from the British Bankers’ Association showed a sharp slowdown in mortgage approvals, while Nationwide building society has reported a drop in lending volumes. The BBA said that new mortgage approvals hit a 17-month low of 37,076 in October. That total was down nearly a quarter from January’s 76-month high of 48,649. It was also down 16% year on year. However, a house price crash is unlikely, according to new forecasts. Halifax’s forecasts for 2015 point to a further rise in values of 3% to 5% next year, despite uncertainty about the general election. Earlier this month Halifax reported that house prices fell during October and recorded their smallest quarterly increase in nearly two years.

The October survey by the Royal Institution of Chartered Surveyors found that buyer inquires shrank for the fourth month running. Half-year results from Nationwide building society added to the gathering evidence of a weakening market, with net lending down by £2bn to £3.6bn in the six months to 30 September – although lending to landlords rose slightly. The society, which reported a doubling in pre-tax profits and higher savings inflows, said part of the reason net lending was down was tougher competition from other major mortgage providers, such as Halifax and Santander. “The BBA data add to now pretty widespread and compelling evidence that the housing market has come well off the boil,” said Howard Archer, an economist at IHS Insight. “The fact that mortgage approvals are substantially below their January peak levels – and falling – after lenders have got to grips with the new mortgage regulations points to an underlying moderation in housing market activity.”

“The Canadian, Australian and New Zealand dollars as well as the Brazilian real, Russian ruble and other emerging economies are all playing this game. Those countries want weaker currencies to offset declining commodity exports ..”

• Commodity Exporters Like Cheaper Currencies (A. Gary Shilling)

The U.S. dollar is strengthening for reasons that go beyond deliberate devaluations of the euro and yen. Major commodity exporters are also purposely pushing down their currencies as commodity prices drop. The Canadian, Australian and New Zealand dollars as well as the Brazilian real, Russian ruble and other emerging economies are all playing this game. Those countries want weaker currencies to offset declining commodity exports. In the past year, the head of the Reserve Bank of Australia has expressed sympathy for a weaker Aussie in view of soft mineral exports and a moderately growing economy.

Recently, the head of the Reserve Bank of New Zealand said that, even with the drop in the New Zealand dollar, the kiwi is at “unjustifiable” levels and isn’t reflecting the weakness in the global commodity market. Earlier, the kiwi was propelled by strong meat and dairy exports to China and robust prices for milk, which have plunged. New Zealand’s economic growth is in jeopardy. The Bank of Canada recently left its benchmark interest rate unchanged at 1% and expects inflation to be near its 2% target. But a decline in energy and other commodity prices has hurt the Canadian economy, which is growing at the same slow 2% rate as the U.S. The commodity bubble in the early 2000s prompted producers of industrial commodities, such as copper, zinc, iron ore and coal, to increase production. New output resulted just in time for the price collapse in the 2007 to 2009 recession.

The subsequent rebound didn’t hold and commodity prices have been falling since early 2011, no doubt due to excess supply of industrial commodities and slower growth in China, the world’s biggest commodity user. The price decreases are also due to sluggish expansions in developed countries and, in the case of agricultural products, good weather and more acreage being planted. So far this year, grain prices are falling, as are industrial commodity prices. Crude oil prices rose until mid-June, but have since dropped 25% and now are the lowest in six years. Spurred by fracking, U.S. oil output is exploding as economic softness in Europe and China and increased conservation have curtailed consumption. Copper, which is used in everything from plumbing fixtures to computers, is dropping in price as supply leaps and demand lags.

“Several months earlier, the stock market had begun to plunge violently. Soon there were layoffs and business closings and the economy was having a tough time getting back in gear.”

• On This Day, 138 Years Ago, The Idea Of QE Was Born (Art Cashin)

On this day in 1876, a group of influential, yet irate, Americans met in Indianapolis. Their primary purpose was to send a message to Washington on how to get the economy moving again. America at the time was going through a difficult and unusual period. Several months earlier, the stock market had begun to plunge violently. Soon there were layoffs and business closings and the economy was having a tough time getting back in gear. And for months now, strange things were happening, the money supply seemed not to be growing, real estate values were stagnant to slipping, and commodity prices were heading lower. (How unusual.)

So this group decided that what was needed was re-inflation (put more money in everyone’s hands, you see). The method they proposed was to issue more and more money. Cynics called them “The Greenback Party”. And on this day, the Greenbacks challenged Washington by running an independent for President of the United States. His name was Peter Cooper. He lost but several associate whackos were elected to Congress. To celebrate stop by the “Printing Press Lounge”. (It’s down the block from the Fed.) Tell the bartender to open the tap and just keep pouring it out till you say stop. Reassure the guy next to you (while you can still talk) that now we have more enlightened people in Washington. Try not to spill your drink if he falls off the stool laughing. There wasn’t much raucous laughter on Wall Street Monday, but the bulls were beaming with smiles as they managed to continue their string of bull runs.

” .. the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating ..”

• A Bearish Hedge Fund Bets Against the Bulls and Still Profits (NY Times)

The stock market has been rising for years, hitting new highs almost every week. So how is it that one of Wall Street’s most bearish investors can claim to have profited strongly over this period? Universa Investments, a hedge fund founded by Mark Spitznagel, is one of the few firms that is set up with the aim of making money in an economic and financial collapse. In the market turmoil of 2008, Mr. Spitznagel earned large returns. Large pessimistic bets usually lose a lot of money when stocks are rising, as they have ever since 2009. But Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30% return last year, according to firm materials that were reviewed by The New York Times.

In comparison, the benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32% with dividends reinvested. Insurance policies that pay out after disasters do not produce big returns when the catastrophe fails to occur. But since 2008, some investors have been looking for ways to ride the market higher while having bets in place that will notch up huge gains if the system teeters on the brink once again. At Universa, Mr. Spitznagel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating, he contends.

This theory holds that another crash will occur when the Fed stops being able to stoke the economy. Universa’s strategy seeks to profit when confidence in the central banks is strong — and when it evaporates. “The Fed has created a trap in this yield-chasing environment,” Mr. Spitznagel said in an interview, during which he gave an overview of Universa’s approach. “It allows you to be long, but it gets you in position to be short when it’s all over,” he said.

Beggar thy neighbor, oil edition.

• Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize

Saudi Arabia’s oil minister said tumbling crude prices will stabilize and there’s no need for producing nations to cut output. “No one should cut and market will stabilize itself,” Ali Al-Naimi told reporters a day before OPEC meets in Vienna. “Why Saudi Arabia should cut?The U.S. is a big producer too now. Should they cut?” Oil ministers from the 12 nations in the Organization of Petroleum Exporting Countries meet tomorrow in Vienna to discuss their combined production at a time when prices have fallen 30 percent since June. Crude fell in part on speculation that Saudi Arabia and other OPEC states wouldn’t take the necessary measures to curb a surplus. Venezuela’s Foreign Minister Rafael Ramirez met with officials from Saudi Arabia, Mexico and Russia yesterday. While they agreed to monitor prices, they made no joint commitment to lower their supplies.

It’s not going to happen. They are in too much distress.

• Pre-OPEC Producer Meeting Fails to Deliver Oil Output Cut (Bloomberg)

Nations supplying a third of the world’s oil failed to pledge output cuts after meeting in Vienna today. Russia can withstand prices even lower than they are now, the country’s biggest producer said. Officials from Venezuela, Saudi Arabia, Mexico and Russia said only that they would monitor prices. Crude futures sank to a four-year low in New York. OPEC meets in two days, with analysts split evenly over whether the group will lower output in response to the crash in prices. Crude fell into a bear market this year amid the highest U.S. production in 31 years and speculation that Saudi Arabia and other members of OPEC won’t do enough to curb a surplus. Prices are below what nine of group’s 12 members need to balance their national budgets, data compiled by Bloomberg show.

“All these countries are significantly affected by lower prices and want to see cuts, but it is a big step between having these talks and taking actual coordinated action to achieve this,” Richard Mallinson, geopolitical analyst at Energy Aspects, said by phone today. “The key is going to be what happens amongst OPEC members.” Brent, the global benchmark, fell as much as 2.1% in London, having gained 1% before the four-way meeting concluded. It settled at $78.33 a barrel. West Texas Intermediate sank 2.2% to $74.09, the lowest since Sept. 21, 2010. The discussions didn’t result in any joint commitment to reduce supplies, Rafael Ramirez, Venezuela’s Foreign Minister and representative to OPEC, told reporters after the meeting. All parties said they were worried about the oil price, he said.

“There is an overproduction of oil,” Igor Sechin, Chief Executive of OAO Rosneft, Russia’s largest oil company, said after the meeting. “Supply is exceeding demand, but not critically” and Russia wouldn’t need to cut production immediately even if oil fell below $60 a barrel, he said. Russia, Saudi Arabia, Mexico and Venezuela between them produced 27.8 million barrels a day of oil last year, according to data from BP Plc. Total global output was 86.8 million barrels daily, the oil company’s figures show. OPEC, which meets to discuss output in Vienna on Nov. 27, pumped 30.97 million barrels a day last month, according to data compiled by Bloomberg.

Too many opinions, too many variables.

• The Unbearable Over-Determination Of Oil (Ben Hunt)

You know you’re in trouble when the Fed’s Narrative dominance of all things market-related shows up in the New York Times crossword puzzle, the Saturday uber-hard edition no less. It’s kinda funny, but then again it’s more sad than funny. Not a sign of a market top necessarily, but definitely a sign of a top in the overwhelming belief that central banks and their monetary policies determine market outcomes, what I call the Narrative of Central Bank Omnipotence. There is a real world connected to markets, of course, a world of actual companies selling actual goods and services to actual people. And these real world attributes of good old fashioned economic supply and demand – the fundamentals, let’s call them – matter a great deal. Always have, always will. I don’t think they matter nearly as much during periods of global deleveraging and profound political fragmentation – an observation that holds true whether you’re talking about the 2010’s, the 1930’s, the 1870’s, or the 1470’s – but they do matter.

Unfortunately it’s not as simple as looking at some market outcome – the price of oil declining from $100/bbl to $70/bbl, say – and dividing up the outcome into some percentage of monetary policy-driven causes and some percentage of fundamental-driven causes. These market outcomes are always over-determined, which is a $10 word that means if you added up all of the likely causes and their likely percentage contribution to the outcome you would get a number way above 100%. Are recent oil price declines driven by the rising dollar (a monetary policy-driven cause) or by over-supply and global growth concerns (two fundamental-driven causes)? Answer: yes. I can make a case that either one of these “explanations” on its own can account for the entire $30 move. Put them together and I’ve “explained” the $30 move twice over. That’s not very satisfying or useful, of course, because it doesn’t help me anticipate what’s next.

Should I be basing my risk assessment of global oil prices on an evaluation of monetary policy divergence and what this means for the US dollar? Or should I be basing my assessment on an evaluation of global supply and demand fundamentals? If both, how do I weight these competing explanations so that I don’t end up overweighting both, which (not to get too technical with this stuff) will have the effect of sharply increasing the volatility of my forward projections, even if I’m exactly right in the ratio of the relative contribution of the potential explanatory factors. Here’s the short answer. I can’t.

Note: this is shale gas, not oil. That’s another bubble, and just as big.

• Who Will Wind Up Holding the Bag in the Shale Gas Bubble? (Naked Capitalism)

We’ve been writing off and on about how the sudden fall in gas prices has been expected to put a lot of shale gas development on hold. In fact, quite a few analysts believe that one of the big Saudi aims in refusing to support oil prices was to dent the prospects for competitive energy sources, not just renewables like wind and hydro power, but shale gas. Even though OilPrice reported that US rig count had indeed fallen as oil prices plunged, John Dizard at the Financial Times (hat tip Scott) gives a more intriguing piece of the puzzle: the degree to which production is still chugging along despite it being uneconomical. The oil majors have been criticized for levering up to continue developing when it is cash-flow negative; they are presumably betting that prices will be much higher in short order. But the same thing is happening further down the food chain, among players that don’t begin to have the deep pockets of the industry behemoths: many of them are still in “drill baby, drill” mode. Per Dizard:

Even long-time energy industry people cannot remember an overinvestment cycle lasting as long as the one in unconventional US resources. It is not just the hydrocarbon engineers who have created this bubble; there are the financial engineers who came up with new ways to pay for it.

And while the financial engineers will as always do just fine, lenders are another matter:

By now, though, there is an astonishing amount of debt that continues to build up on the smaller E&P companies’ balance sheets. According to Gavekal, the research group, even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

John Dizard from last Friday: the debt boom can’t stop without wreaking havoc across the industry.

• US Oil Producers Can’t Kick Drilling Habit (FT)

You would think, what with the recent oil price crash, the people who finance US oil and gas producers would have learnt their lesson. But not yet. For the past several years, and despite the once again widening gap between capital spending and cash flow, Wall Streeters have stepped in like an overindulgent parent to pay for the producers’ drilling habit. “Isn’t he cute!” they exclaim, as an exploration and production boy crashes another budget. “So talented! Did you see how many frac stages he can do now, and how tight his well spacing is?” Of course the exploration and production companies and their lenders have been to expensive accounting therapy sessions, where the concerned Wall Street family, accompanied by the sullen E&P operators, are told that they have to make a really sincere effort to match finding, drilling and completion expenditures to internally generated cash flow.

Everyone promises the accountant that that irresponsible land purchase or midstream commitment was the last mistake. From now on, cash flow break-even. Right. By now, though, there is an astonishing amount of debt that continues to build up on the smaller E&P companies’ balance sheets. According to Gavekal, the research group, even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

Particularly in the gas and natural gas liquids drilling directed sector, every operator (and their financier) is waiting for every other operator to stop or slow their drilling programmes, so there can be some recovery in the supply-demand balance. I have been hearing a lot of buzz about cutbacks in drilling budgets for 2015, but we will not really know until the companies begin to report in January and February. Then we will find out if they really are cutting back, using their profits on in-the-money hedge programmes to keep their debt under control, and taking impairment charges on properties that did not really pay off.

Nasty report.

• The Environmental Downside of the Shale Boom (NY Times)

Since 2006, when advances in hydraulic fracturing — fracking — and horizontal drilling began unlocking a trove of sweet crude oil in the Bakken shale formation, North Dakota has shed its identity as an agricultural state in decline to become an oil powerhouse second only to Texas. A small state that believes in small government, it took on the oversight of a multibillion-dollar industry with a slender regulatory system built on neighborly trust, verbal warnings and second chances. In recent years, as the boom really exploded, the number of reported spills, leaks, fires and blowouts has soared, with an increase in spillage that outpaces the increase in oil production, an investigation by The New York Times found. Yet, even as the state has hired more oil field inspectors and imposed new regulations, forgiveness remains embedded in the Industrial Commission’s approach to an industry that has given North Dakota the fastest-growing economy and lowest jobless rate in the country. [..]

Continental Resources hardly seems likely to walk away from its 1.2 million leased acres in the Bakken. It has reaped substantial profit from the boom, with $2.8 billion in net income from 2006 through 2013. But the company, which has a former North Dakota governor on its board, has been treated with leniency by the Industrial Commission. From 2006 through August, it reported more spills and environmental incidents (937) and a greater volume of spillage (1.6 million gallons) than any other operator. It spilled more per barrel of oil produced than any of the state’s other major producers. Since 2006, however, the company has paid the Industrial Commission $20,000 out of $222,000 in assessed fines.

Continental said in a written response to questions that it was misleading to compare its spill record with that of other operators because “we are not aware other operators report spills as transparently and proactively as we do.” It said that it had recovered the majority of what it spilled, and that penalty reductions came from providing the Industrial Commission “with precisely the information it needs to enforce its regulations fairly.” What Continental paid Mr. Rohr, the injured driller, is guarded by a confidentiality agreement negotiated after a jury was impaneled for a trial this September. His wife, Winnie, said she wished the trial had gone forward “so the truth could come out, but we just didn’t have enough power to fight them.”

You wish.

• Obama Climate Envoy: Fossil Fuels Will Have To Stay In The Ground (Guardian)

The world’s fossil fuels will “obviously” have to stay in the ground in order to solve global warming, Barack Obama’s climate change envoy said on Monday. In the clearest sign to date the administration sees no long-range future for fossil fuel, the state department climate change envoy, Todd Stern, said the world would have no choice but to forgo developing reserves of oil, coal and gas. The assertion, a week ahead of United Nations climate negotiations in Lima, will be seen as a further indication of Obama’s commitment to climate action, following an historic US-Chinese deal to curb emissions earlier this month. A global deal to fight climate change would necessarily require countries to abandon known reserves of oil, coal and gas, Stern told a forum at the Center for American Progress in Washington.

“It is going to have to be a solution that leaves a lot of fossil fuel assets in the ground,” he said. “We are not going to get rid of fossil fuel overnight but we are not going to solve climate change on the basis of all the fossil fuels that are in the ground are going to have to come out. That’s pretty obvious.” Last week’s historic climate deal between the US and China, and a successful outcome to climate negotiations in Paris next year, would make it increasingly clear to world and business leaders that there would eventually be an expiry date on oil and coal. “Companies and investors all over are going to be starting at some point to be factoring in what the future is longer range for fossil fuel,” Stern said.

Merkel has problems keeping her stance.

• Cracks Form in Berlin Over Russia Stance (Spiegel)

Within the European Union, the interests of the 28 member states are diverging in what are becoming increasingly clear ways. Taking a tough stance against Russia is generally less important to southern Europeans than it is to eastern Europeans. In the past, the German government had sought to serve as a bridge between the two camps. But in Berlin itself these days, significant differences in the assessment of the situation are starting to emerge within the coalition government pairing Merkel’s conservative Christian Democrats and the center-left Social Democrats (SPD). It’s one that pits Christian Democrat leaders like Merkel and Horst Seehofer, who heads the CDU’s Bavarian sister party, the Christian Social Union (CSU), against Foreign Minister Frank-Walter Steinmeier of the SPD and Social Democratic Party boss Sigmar Gabriel, who is the economics minister.

“The greatest danger is that we allow division to be sown between us,” the chancellor said last Monday in Sydney. And it’s certainly true to say that this threat is greater at present than at any other time since the crisis began. Is that what the Russian president has been waiting for? Last week, German Foreign Minister Steinmeier traveled to Moscow to visit with his Russian counterpart Sergey Lavrov. With Steinmeier standing at his side, the Russian foreign minister praised close relations between Germany and Russia. “It’s good my dear Frank-Walter that, despite the numerous rumors of recent days, you hold on to our personal contact.” Steinmeier reciprocated by not publically criticizing contentious issues like Russian weapons deliveries to Ukrainian separatists. Afterwards, Vladimir Putin received him, a rare honor. It was a prime example of just how the Russian strategy works.

Don’t want to be a prick, and I like the man, but so does he a bit.

• Europe Looks ‘Aged And Weary’: Pope Francis (CNBC)

Pope Francis has warned European politicians and policymakers that Europe is becoming less of a protagonist in the world as it looks “aged and weary.” Addressing the European Parliament in Strasbourg on Tuesday, Pope Francis, the spiritual leader of one billion Catholics worldwide, suggested that Europe risks becoming irrelevant. “Europe gives the impression of being aged and weary,feeling less and less a protagonist in a world which frequently looks on itwith aloofness, distrust and even, at times, suspicion…As a grandmother, no longer fertile and lively,” he said. “The great ideas that once inspired Europe…seem to have been replaced by the bureaucratic technicalities of Europe’s institutions.” Speaking at the plenary session of the parliament, he told lawmakers that they had the task of protecting and nurturing Europe’s identity “so that its citizens can experience renewed confidence in the institutions of the (European) Union and its project of peace and friendship that underlies it.”

Pope Francis’ visit to the European Parliament is the first by a pontiff since Pope John Paul II’s visit in 1988. He is also visiting the Council of Europe – the region’s human rights body – later on Tuesday. “I encourage you to work so that Europe rediscovers the best of its health,” he added. The pope also spoke about the importance of education and work. On the question of migration, a hot topic in Europe, Pope Francis said there needed to be a “united response.” “We cannot allow the Mediterranean to become a large graveyard,” he said, referring to the number of migrants who die during their attempts to cross the sea and reach Europe. “Rather than adopting policies that focus on self-interest which increase and feed conflicts, we need to act on the causes (for migration) and not only on the effects,” he added.

Where Is China On The Map Exactly?

Nov 232014

November 23, 2014 Posted by Raúl Ilargi Meijer at 8:42 pm Finance Tagged with: bankruptcy, China, control, Growth, Hendry, Roach, shadow banking, slowdown 5 Responses »

Arthur Siegel Bethlehem-Fairfield shipyards, Baltimore, MD May 1943

A lot of people these days vent their opinions on what’s happening with the Chinese economy, and the opinions are so all over the place they could hardly be more different. Which is interesting, to say the least. Apparently it’s still very hard to understand what does happen ‘over there’.

And I don’t at all mean to suggest that I would know better than Morgan Stanley’s former Asia go-to-man Stephen Roach, or hedge funder Hugh Hendry, or Bob Davis, who just spent 4 years in the country for the Wall Street Journal, or Gwynn Guilford at Quartz, or local Reuters correspondents. It’s just that between them, they disagree so vastly you’d think they’re playing a game with your mind.

Me, personally, I think China’s official economic data should be trusted even less – if possible – than those of most other nations, including Japan, EU+ and the US. And therefore the rate cut last week, and the ones that look to be in the offing soon, constitute neither an act of confidence nor an confident act. China may well already be doing a lot worse than we think.

So where are we right now with all this, what DO we know? The best approach seems to be, as always, to follow the money. Let’s start with Reuters today:

China Ready To Cut Rates Again On Fears Of Deflation

China’s leadership and central bank are ready to cut interest rates again and also loosen lending restrictions, concerned that falling prices could trigger a surge in debt defaults, business failures and job losses, said sources involved in policy-making. Friday’s surprise cut in rates, the first in more than two years, reflects a change of course by Beijing and the central bank, which had persisted with modest stimulus measures before finally deciding last week that a bold monetary policy step was required to stabilize the world’s second-largest economy.

Economic growth has slowed to 7.3% in the third quarter and policymakers feared it was on the verge of dipping below 7% – a rate not seen since the global financial crisis. Producer prices, charged at the factory gate, have been falling for almost three years, piling pressure on manufacturers, and consumer inflation is also weak. “Top leaders have changed their views,” said a senior economist at a government think-tank involved in internal policy discussions.

The economist, who declined to be named, said the People’s Bank of China had shifted its focus toward broad-based stimulus and were open to more rate cuts as well as a cut to the banking industry’s reserve requirement ratio (RRR), which effectively restricts the amount of capital available to fund loans. China cut the RRR for some banks this year but has not announced a banking-wide reduction in the ratio since May 2012. “Further interest rate cuts should be in the pipeline as we have entered into a rate-cut cycle and RRR cuts are also likely,” the think-tank’s economist said.

Friday’s move, which cut one-year benchmark lending rates by 40 basis points to 5.6%, also arose from concerns that local governments are struggling to manage high debt burdens amidst reforms to their funding arrangements, the sources said. Top leaders had been resisting a rate cut, fearing it could fuel debt and property bubbles and dent their reformist credentials, but were eventually swayed by signs of deteriorating growth as the property sector cooled.

This suggests a certain level of control on the part of China, but certainly not a full swagger. And yes, they’re at 5.6%, and so there seems to be a lot of leeway left if you look at the near zero rates we see all over the world.. But then again, China wants, or should we by now say pretends to want, a 7% growth level. The fact that they’re ready to cut more doesn’t bode well for that growth number, even as they pretend to boost growth with those exact same cuts.

We saw China’s largest corporate bankruptcy last week, of the Haixin Iron & Steel Group, and that is not a good sign. China has been borrowing beyond the pale, a process in which the shadow banking system has played a major role, to ‘invest’ in commodities with an eye to much more growth even than the 7% Beijing claims to aim for. The problem with that is that this overbuying has been a substantial part of that same growth number.

And we know the story, certainly after the Qingdao warehouse tale this spring, where nobody could figure out anymore who actually owned what piles of aluminum, copper and iron because they were all used as collateral for multiple loans. In that bleak light, that one of the principal iron and steel companies goes belly up can hardly be seen as a positive message. China may be buying a whole lot less metal. And a whole lot less oil too. Which may drive down global market prices a lot, because everybody’s last hope was China.

Stephen Roach of Morgan Stanley fame, however, think Beijing has it all down. Full control. If they say 7%, 7% it is. Now, I know Roach spent a lot of time over there, but perhaps that was in the days when 10% GDP growth was still a realistic number. And that may not have had much to do with Beijing control.

Now that growth is gone everywhere, other than in stock markets and private banks’ reserves at central banks, where would China get even a 7% number from? And to what extent would Beijing have any control over that at all? Roach has little doubt that whatever number Xi and Li Call will be the correct one:

China Cut Pegs Growth Floor At 7%,: Stephen Roach

After unexpectedly cutting interest rates for the first time in two years, Chinese leaders have revealed their floor for economic growth is around 7%, said Stephen Roach[..] In a surprise announcement Friday, the People’s Bank of China said it was cutting one-year benchmark lending rates by 40 basis points to 5.6%. It also lowered one-year benchmark deposit rates by 25 basis points. [..] The hyperbole about China being an ever-ticking debt bomb stacked with excesses and nonperforming loans is based on emotion rather than empirical data, he said.

Hugh Hendry arrives at a similar conclusion through different means, namely the central bank omnipotence theory. And sure enough, central banks can do a lot, spend a lot, and fake a lot. But if there’s one thing the present global deflation threat tells us they can’t do, it’s to make people spend money. Not in Japan, not in Europe, not stateside, and not in China. It would seem advisable to keep that in mind.

Hugh Hendry: “A Bet Against China Is A Bet Against Central Bank Omnipotence”

Merryn Somerset Webb: But you’re assuming that the correct policy will be followed [in China].

Hugh Hendry: Well, it has been to date. That they haven’t panicked and gone into that crazy splurge in 2009-2011, they haven’t done that. Then the other point with China it’s a bit like the US. It’s had its excess. The problem in the US was it was felt intently with the private banking system which went bankrupt. But, and this is not counter-factual, what if you owned, what if the state is the banking sector? Does it have a Minsky moment? I’d say it doesn’t. So the whole game with Fed QE was to underwrite the collateral values, to keep the credit system moving. So it aimed its fire at mortgage obligations more than Treasuries.

The whole deal with LTROs in Europe has been again when investors at volume banks at 40%-60% discounts to asset volume, the central bank’s coming in and saying, “Actually we’ll buy it from you at full value or something higher. So we are going to endorse the collateral of your assets.” In China it’s the same deal. They’re fiat currency and they can get away with this. So to bet against China or Chinese equities, or the Chinese currency is to bet against the omnipotence of central banks. One day that will be the right trade, just not ready or sure that that is the right trade today.

Gwynn Guilford at Quartz suspects that Beijing if not so much in control as it is freaking out, and that that’s why they’ve cut rates and are publicly suggesting they’ll do it again.

China’s Surprise Rate Cut Shows How Freaked Out The Government Is By The Slowdown

Earlier [this week], the People’s Bank of China slashed the benchmark lending rate by 40 basis points, to 5.6%, and pushed down the 12-month deposit rate 25 basis points, to 2.75%. Few analysts expected this. The PBoC – which, unlike many central banks, is very much controlled by the central government – generally cuts rates only as a last resort to boost growth.

The government has been rigorously using less broad-based ways of lowering borrowing costs (e.g. cutting reserve requirement ratios at small banks, and re-lending to certain sectors). The fact that the government finally cut rates suggests that these more “targeted” measures haven’t succeeded in easing funding costs for Chinese firms. The push that came to shove might have been the grim October data, which showed industrial output, investment, exports, and retail sales all slowing fast.

Those data suggest it will be much harder to get anywhere close to the government’s 2014 target of 7.5% GDP growth, given that the economy grew only 7.3% in the third quarter, its slowest pace in more than five years. But wait. Isn’t the Chinese economy supposed to be losing steam? Yes. The Chinese government has acknowledged many times that in order to introduce the market-based reforms needed to sustain long-term growth and stop piling on more corporate debt, it has to start ceding its control over China’s financial sector.

[..] But clearly, the economy’s not supposed to be decelerating as fast as it is. Tellingly, it’s been more than two years since the central bank last cut rates, when the economic picture darkened abruptly in mid-2012, the critical year that the Hu Jintao administration was to hand over power to Xi Jinping. The all-out push to boost growth that followed made the 2013 boom, but also freighted corporate balance sheets with dangerous levels of debt. But this could only last so long; things started looking ugly again in 2014.[..]

What hasn’t been mentioned yet, and that’s undoubtedly a huge oversight, whether you’re talking about the theoretical Beijing political control over growth numbers, or the nitty gritty of actual numbers in the real economy, is the power, both political and financial, of the Chinese shadow banking industry.

The guys who’ve been making a killing off loans to local officials who couldn’t get state bank loans but were still rewarded for achievements in their constituencies that would have been impossible without loans. Where would China be without shadow banking? What is it today, a third of the economy, half?

And the Xi-Li gang seeks to break its power, for a multitude of reasons. The shadow set-up only works as long as things are great, and the sky’s the limit. When that diminishes, not so much. You can borrow all the way to nowhere when you’re doing great, but when you go broke, all you’re left with is the debt.

That’s the reality a lot of Chinese officials and entrepreneurs find themselves in today. Which is why the next article below says ” .. city officials reminded residents that it is illegal to jump off the tops of buildings ..” They don’t just own money, they own it to the wrong people too. Not that I presume there’s right people to be indebted to in China, but those who volunteer to re-arrange your physical appearance must be last on the list.

Bob Davis spent a few recent years in China for the Wall Street Journal, and he has this to say:

The End of China’s Economic Miracle?

When I arrived, China’s GDP was growing at nearly 10% a year, as it had been for almost 30 years – a feat unmatched in modern economic history. But growth is now decelerating toward 7%. Western business people and international economists in China warn that the government’s GDP statistics are accurate only as an indication of direction, and the direction of the Chinese economy is plainly downward. The big questions are how far and how fast. My own reporting suggests that we are witnessing the end of the Chinese economic miracle.

We are seeing just how much of China’s success depended on a debt-powered housing bubble and corruption-laced spending. The construction crane isn’t necessarily a symbol of economic vitality; it can also be a symbol of an economy run amok. Most of the Chinese cities I visited are ringed by vast, empty apartment complexes whose outlines are visible at night only by the blinking lights on their top floors.

I was particularly aware of this on trips to the so-called third- and fourth-tier cities—the 200 or so cities with populations ranging from 500,000 to several million, which Westerners rarely visit but which account for 70% of China’s residential property sales. From my hotel window in the northeastern Chinese city of Yingkou, for example, I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation—the structures left standing but no people in sight.

The situation has become so bad in Handan, a steel center about 300 miles south of Beijing, that a middle-aged investor, fearing that a local developer wouldn’t be able to make his promised interest payments, threatened to commit suicide in dramatic fashion last summer. After hearing similar stories of desperation, city officials reminded residents that it is illegal to jump off the tops of buildings, local investors said.

[..] In the late 1990s, the party finally allowed urban Chinese to own their own homes, and the economy soared. People poured their life savings into real estate. Related industries like steel, glass and home electronics grew until real estate accounted for one-fourth of China’s GDP, maybe more.

Debt paid for the boom, including borrowing by governments, developers and all manner of industries. This summer, the IMF noted that over the past 50 years, only four countries have experienced as rapid a buildup of debt as China during the past five years. All four – Brazil, Ireland, Spain and Sweden – faced banking crises within three years of their supercharged credit growth.

[..] China’s immense scale has now become a limitation. As the world’s largest exporter, how much more growth can it count on from trade with the U.S. and especially Europe? [..] Will Mr. Xi’s campaign reverse China’s slowdown or at least limit it? Perhaps. It follows the standard recipe of Chinese reformers: remake the financial system so that it encourages risk-taking, break up monopolies to create a bigger role for private enterprise, rely more on domestic consumption.

But even powerful Chinese leaders have trouble enforcing their will. I reported earlier this year on the government’s plan to handle one straightforward problem: reducing excess steel production in Hebei, the province that surrounds Beijing. Hebei alone produces twice as much crude steel as the U.S., but China no longer needs so much steel, to say nothing of the emissions that darken the skies over Beijing.

It’s hard to say anything definitive about the Chinese economy and the official government numbers, for anyone but the rulers, because those numbers are clad in a murky veil. But what we do know from our experience here in the west is that the murkiness of numbers is invariably used by our ‘leaders’ to make things look better than they are. If anything, it seems reasonable to presume Beijing exaggerates its ‘achievements’ even more than our own clowns.

And in that light, I don’t see how or why the $30 oil I talked about yesterday would be all that far-fetched, given that China has driven most of the world’s growth expectations over the past decade or so, and that it seems to have very little chance of living up to those expectations. Even if for no other reason than because the rest of the world stopped growing.

And that seems to me to be where China’s growth fairy tale has stopped, and must have: ‘consumer spending’ (ugly term) across the world is falling. After all, that’s were all the lowflation and deflation comes from. And central banks can’t force their people to spend. Not in China and not in the west. They only need to look at Japan to see why that is true and how it plays out.

Growth in Japan is gone, and no QE can revive it. In Europe, it’s beyond life support. In the US, things look a little different on the surface, but the US can’t withdraw and do well in the present economic system if Japan and Europe don’t.

And that’s China’s story too. No growth anywhere to be seen, and they’re supposed to have 7%? It’s simply not possible. At least that we know.

Debt Rattle November 20 2014

Nov 202014

November 20, 2014 Posted by Raúl Ilargi Meijer at 12:26 pm Finance Tagged with: bad debt, climate, deflation, dishonesty, Fed, god, Growth, iron ore, oil, PMI, rates, yen 13 Responses »

Jack Delano Truck service station on US 1, NY Avenue, Washington DC Jun 1940

• Growth Isn’t God in Indonesia (Bloomberg)

• Federal Reserve In Easy Decision To End Stimulus (BBC)

• Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)

• The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)

• Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)

• Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)

• Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)

• China’s Factory Activity Stalls In November (CNBC)

• Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)

• The Yen Looks Like It’s Ready To Get Crushed (CNBC)

• BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)

• Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)

• Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)

• Eurozone PMI Falls To 16-Month Low In November (MarketWatch)

• French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)

• Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)

• Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)

• Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)

• Goldman Fires Staff For Alleged NY Fed Breach (FT)

• Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)

• New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

Is there still hope and sanity in the world?

• Growth Isn’t God in Indonesia (Bloomberg)

Joko Widodo’s rise from nowhere to Jakarta governor and then the presidential palace showed the wonders of Indonesia’s democracy. Now, he wants to democratize the economy as well, focusing as much on the quality of growth as the quantity. Sixteen years ago, Indonesia was cascading toward failed statehood. In 1998, as riots forced dictator Suharto from office, many wrote off the world’s fourth-most populous nation. Today, Indonesia is a stable economy growing modestly at 5%, with quite realistic hopes of more. There’s plenty for Widodo, known by his nickname “Jokowi,” to worry about, of course. Indonesia still ranks behind Egypt in corruption and near Ethiopia in ease-of-doing-business surveys. More than 40% of the nation’s 250 million people lives on less than $2 a day.

A dearth of decent roads makes it more cost-effective to ship goods to China than across the archipelago. Retrograde attitudes abound: to this day, female police recruits are subjected to humiliating virginity tests. But this week, Jokowi reminded us why Indonesia is a good-news story — one from which Asian peers could learn. His move to cut fuel subsidies, saving a cash-strapped nation more than $11 billion in its 2015 budget, showed gumption and cheered investors. Even more encouraging is a bold agenda focusing not just on faster growth, but better growth that’s felt among more than Jakarta elites. This might seem like an obvious focus in a region that’s home to a critical mass of the world’s extreme poor (those living on $1 or $2 a day).

But grand rhetoric about “inclusive growth” hasn’t even come close to meeting the reality on the ground. In India, for example, newish Prime Minister Narendra Modi boasts that he will return gross domestic product to the glory days of double-digit growth rates, as if the metric mattered more than what his government plans to do with the windfall. The “Cult of GDP,” the dated idea that booming growth lifts all boats, has long been decried by development economists like William Easterly. The closer growth gets to 10%, the more likely governments are to declare victory and grow complacent. In many cases rapid GDP growth masks serious economic cracks. In her recent book, “GDP: A Brief but Affectionate History,” Diane Coyle called the figure a “familiar piece of jargon that doesn’t actually mean much to most people.”

Janet Yellen lives in virtual reality.

• Federal Reserve In Easy Decision To End Stimulus (BBC)

Although the US Federal Reserve was worried about turmoil in emerging markets, the central bank reached an easy consensus to end its stimulus programme, its latest minutes reveal. Minutes from the central bank’s October meeting show officials were concerned about stock market fluctuations and weakness abroad. However, they worried that saying so could send the wrong message. Overall, officials were confident the US economy was on a strong footing. That is why they decided to end their stimulus programme – known as quantitative easing (QE) – in which the Fed bought bonds in order to keep long-term interest rates low and thus boost spending. “In their discussion of the asset purchase programme, members generally agreed … there was sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment,” read the minutes, referring to the decision to end QE. US markets reacted in a muted way to the news, with the Dow Jones briefly rising before falling once more into the red for the day.

However, to reassure markets that the Fed would not deviate from its set course, the central bank decided to keep its “considerable time” language in reference to when the Fed would raise its short term interest rate. That interest rate – known as the federal funds rate – has been at 0% since late 2008, when the Fed slashed rates in the wake of the financial crisis. Most observers expect that the bank will begin raising that rate in the middle of 2015, mostly in an effort to keep inflation in check as the US recovery gathers steam. However, US Fed chair Janet Yellen has sought to reassure market participants that the bank will not act in haste and remains willing to change its timeline should economic conditions deteriorate in the US. The minutes also show that the Fed is still concerned about possibly lower-than-expected inflation, particularly as oil prices continue to decline and wage growth remains sluggish.

They’re going to do it. Screw the real economy, it’s dead anyway.

• Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)

U.S. central bankers are weighing whether they should communicate more of their views about the probable pace of interest-rate increases after they lift off zero next year. “A number of participants thought that it could soon be helpful to clarify the committee’s likely approach” to the pace of increases, according to minutes of the Oct. 28-29 Federal Open Market Committee meeting released today in Washington. The discussion last month underscored how much officials will rely on forward guidance on the pace of tightening in the future. After bond purchases ended last month, guidance may be the most practical option left to assure investors that policy won’t become overly restrictive if officials decide to take a stand against inflation seen as too low. The pace of rate increases is “going to be slow until they are really convinced that inflation’s sustainably at target and the labor market’s in really, really good shape,” said Guy Berger, a U.S. economist at RBS Securities. “They are going to take their sweet time.”

The minutes showed that many FOMC participants last month felt the committee should stay on the lookout for signs that inflation expectations were declining. Declining expectations could herald an actual fall in prices. Such deflation does economic damage by encouraging consumers to delay spending in anticipation of lower prices in the future. The potency of the first rate increase could be diminished or increased, depending on what the FOMC says about how it views its subsequent moves, said Laura Rosner, U.S. economist at BNP Paribas SA in New York. “It isn’t just the timing of liftoff the Fed cares about, but the whole path of federal funds rate,” said Rosner, a former New York Fed staff member. “I think they do probably want to limit the extent of tightening that people expect, at least at the beginning.” While telegraphing the future rate path may be attractive to some officials, it may also be unpopular with those, such as Chair Janet Yellen, who recall the Fed’s experience in 2004 with language saying the pace of increases would be “measured.”

“Positioning for a deflationary boom is a binary event.”

• The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)

Deflation. And not just deflation, but a deflationary bust! At least, such is the goalseeked logic of Cornerstone Marco, which has released a bullish (no really) note titled the Coming Deflationary Boom in the U.S. In it the authors throw in the towel on the most conventional concept in modern economics, namely that for growth one needs stable inflation which in turn causes earnings growth and is low enough not to pressure multiples too high. Well, according to the BLS’ hedonic adjustments and courtesy of Japan’s epic exporting of deflation, inflation is nowhere to be seen (except if one eats pork or beef, or drinks milks), so it is time to give ye olde paragidm shift a try. The paradigm that the only thing more bullish for stocks than inflation, is deflation. To wit:

The concept of a deflationary boom is a controversial one in economics. Truth be told it will not work in every economy. Indeed, a prerequisite for this to unfold is an economy driven by consumers. In that sense, it does not get more consumer-centric than the US. The second, and necessary, condition calls for a major decline in commodity prices ideally compounded by a strong currency to provide the fuel for growth. In essence, a decline in commodity and import prices creates disposable income the same way the Fed Funds rate cuts used to a decade ago.

Positioning for a deflationary boom is a binary event. After all, “deflationary” implies that stocks levered to lower inflation will have a powerful tailwind, these are what we like to call early cyclicals such as consumer, transports and other similar segments. Meanwhile, the “boom” part of the story implies that segments levered to growth, US growth in this case, also find a tailwinds. This should help the beleaguered financials to a better year in 2015 and also provides support for sectors like technology and some of the industrials. As we see it, “deflation” is going to become the operative word on the street … that and PE expansion since they typically go hand in hand. As always, we shall see.

Indeed we shall. Then again the only thing we will see is how every time there is deflation somewhere in the world, one after another central bank somewhere will admit its only mandate is to keep stocks at record highs and inject a few trillion in risk-purchasing power into what was once called a market.

Wait till shale implodes, then we can talk again.

• Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)

A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others. Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine. “A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup, said in an e-mail.

“Undoubtedly some of the geopolitical changes will be momentous.” They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War. Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead. Oil is “the most geopolitically important commodity,” said Reva Bhalla, vice president of global analysis at Stratfor.

“It drives economies around the world” and is located in some “usually very volatile places.” Benchmark oil prices in New York have dropped more than 30% during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.

Petrobras was aiming to be the world’s first trillion-dollar company. Now it’s the most indebted company in the world.

• Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)

Brazil’s Petrobras is the most indebted company in the world, a perfect barometer of the crisis enveloping the global oil and fossil nexus on multiple fronts at once. PwC has refused to sign off on the books of this state-controlled behemoth, now under sweeping police probes for alleged graft, and rapidly crashing from hero to zero in the Brazilian press. The state oil company says funding from the capital markets has dried up, at least until auditors send a “comfort letter”. The stock price has dropped 87pc from the peak. Hopes of becoming the world’s first trillion dollar company have deflated brutally. What it still has is the debt. Moody’s has cut its credit rating to Baa1. This is still above junk but not by much. Debt has jumped by $25bn in less than a year to $170bn, reaching 5.3 times earnings (EBITDA). Roughly $52bn of this has been raised on the global bond markets over the last five years from the likes of Fidelity, Pimco, and BlackRock.

Part of the debt is a gamble on ultra-deepwater projects so far out into the Atlantic that helicopters supplying the rigs must be refuelled in flight. The wells drill seven thousand feet through layers of salt, blind to seismic imaging. The Carbon Tracker Initiative says the break-even price for these fields is likely to be $120 a barrel. It is much the same story – for different reasons – in the Arctic ‘High North’, off-shore West Africa, and the Alberta tar sands. The major oil companies are committing $1.1 trillion to projects that require prices of at least $95 to make a profit. The International Energy Agency (IEA) says fossil fuel companies have spent $7.6 trillion on exploration and production since 2005, yet output from conventional oil fields has nevertheless fallen. No big project has come on stream over the last three years with a break-even cost below $80 a barrel.

“The oil majors could not even generate free cash flow when oil prices were averaging $100 ,” said Mark Lewis from Kepler Cheuvreux. They have picked the low-hanging fruit. New fields are ever less hospitable. Upstream costs have tripled since 2000. “They have been able to disguise this by drawing down legacy barrels, but they won’t be able to get away with this over the next five years. We think the break-even price for the whole industry is now over $100,” he said. A study by the US Energy Department found that the world’s leading oil and gas companies were sinking into a debt-trap even before the latest crash in oil prices. They increased net debt by $106bn in the year to March – and sold off a net $73bn of assets – to cover surging production costs. The annual shortfall between cash earnings and spending has widened from $18bn to $110bn over the last three years. Yet these companies are still paying normal dividends, raiding the family silver to save face.

They’ve all invested for continuing huge growth numbers. And now growth is gone.

• Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)

Iron ore’s golden spending era is history. That’s the verdict of BHP Billiton, the world’s biggest mining company. BHP and rivals Rio Tinto and Vale are flooding the global iron ore market after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil. Now prices have slumped to the lowest in more than five years as surging supply coincides with a slowdown in China, the world’s biggest consumer. “Our company has been very clear that the time for massive expansions of iron ore are over,” BHP CEO Andrew Mackenzie told reporters today after a shareholder meeting in Adelaide, South Australia. While BHP is still increasing production, the company last approved spending on an iron ore expansion in 2011.

It’s shifting investment into copper and petroleum, he said Global seaborne output will exceed demand by 100 million metric tons this year from 16 million tons in 2013, HSBC said last month. Prices, which are trading around $70 a ton in China, may drop to below $60 a ton next year, according to Citigroup forecasts. “At these prices, we still have a very decent business,” Mackenzie said. “We’ve been fairly clear that prices at about these levels were what we were expecting for the longer term.” Investments in copper may help BHP seize on rising demand for energy in emerging economies. Demand from China, the biggest metals consumer, will be supported by electricity grid expansion and greater adoption of renewable energy sources, all of which require more copper wiring, according to Citigroup.

The prospects for an expansion of BHP’s Olympic Dam copper, gold and uranium mine in Australia are looking more promising after testing of new processing technology shows early signs of success, Mackenzie said. Olympic Dam in South Australia is the world’s largest uranium deposit and fourth-biggest copper deposit. BHP is pilot testing a heap leaching extraction process used in its copper mines in Chile. If the tests “are successful, and they are showing considerable promise, we will use this technology and phased expansions of the underground mine to further increase Olympic Dam’s output,” Mackeznie told the meeting. In 2012, BHP halted a proposed expansion of Olympic Dam, estimated by Deutsche Bank AG to cost $33 billion. Mackenzie was addressing the first annual meeting held in the state since the decision.

Flash PMI at zero growth.

• China’s Factory Activity Stalls In November (CNBC)

China’s factory activity stalled in November as output shrank for the first time in six months, a private survey showed on Thursday. The HSBC flash Purchasing Managers’ Index (PMI) for November clocked in at the breakeven level of 50.0 that separates expansion from contraction, compared with a Reuters estimate for 50.3 and following the 50.4 final reading in October. Overall, new orders picked up slightly but new export orders slowed markedly, dragging on activity. The factory output sub-index fell to 49.5, the first contraction since May.

The Australian dollar eased against the greenback on the news, trading at $0.8607. But shares in China and Hong Kong appear unaffected by the data. The reading is the latest evidence that the world’s second biggest economy continues to lose traction. Recent data on housing prices and foreign direct investments also missed forecasts. “China is slowing and we think it will continue to slow. A lot of it is structural, and in our view, growth will slow to about 4.5% over the next 10 years. We see some sectors that are very challenged; clearly real estate is one,” Robin Bew, MD of Economist Intelligence Unit, told CNBC.

“They keep reporting such a low number for so many years, there’s only one way it can go – up …”

• Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)

Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management. The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world’s biggest distressed debt traders. Nonperforming loans at Chinese banks jumped by the most since 2005 in the third quarter to 766.9 billion yuan ($125.3 billion), official statistics released earlier this month showed. The People’s Bank of China has injected 769.5 billion yuan into its banking system over the past two months to support an economy growing at the slowest pace in more than a decade.

“They keep reporting such a low number for so many years, there’s only one way it can go – up,” DAC co-founder Philip Groves said in an interview. “We’ve yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.” DAC manages about $400 million of its own and clients’ money onshore in China. It first bought Chinese bad loans in December 2001 from China Orient Asset Management, one of four asset management companies created by the government to buy, repackage and onsell soured debt, Groves said.

While China’s bad loan ratio is relatively small versus other countries in Asia – soured loans are equivalent to 1.16% of total advances compared with 3.88% in Vietnam and 0.86% in South Korea – their total is still in an order of magnitude greater than the funds raised by distressed investors, Groves said. There hasn’t been enough capital to soak up the nonperforming debt and much ends up being reabsorbed by the government, he said. That’s why distressed activity in China has been “sporadic” over the past 10 years and why some large investors aren’t participating. “It never became a market where you could put a billion dollars to work in a year,” Groves said. “But if the wave of bad debt comes, and there are things to buy, the money will follow.”

I’ve said it before, Japan is not going to be a nice place to be.

• The Yen Looks Like It’s Ready To Get Crushed (CNBC)

Japan has slipped back into recession, with the economy shrinking 1.6% in the third quarter, surprising economists who forecast it would grow 2%. The takeaway? Double down on the dollar versus the yen. How weak can the yen get? Forecasters are lowering their already bearish targets after the new disappointing economic data. “I’d expect another 20% drop next year, which would take us north of 140,” said Peter Boockvar of the Lindsey Group about the dollar-yen rate. The team at Capital Economics raised their forecast for dollar-yen to finish next year at 140 as well, up from 120 previously.

Those are bold calls, because it’s unusual for any currency to move more than 5% to 10% per year. Also, the yen has already tumbled 14% in the past 12 months and 19% the previous year, making it the worst-performing major currency against the dollar both years. But when it comes to the yen right now, it seems, no forecast is too bearish. “When I started in the business, dollar-yen was 230,” recalled David Rosenberg, chief economist and strategist at Gluskin Sheff. “For those that think this move is over, this is probably going to be a round trip, meaning that the dollar’s run-up against the yen has a lot further to go.”

Japan is a state of panic.

• BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)

If one were to look up the definition of hypocrisy, the image of BoJ head Kuroda should be front-and-center. Having tripled-down on his money-printing and ETF-buying largesse just last week, he came out swinging last night at the government’s fiscal irresponsibility blasting Abe’s policies by saying Japan’s fiscal health “is the responsibility of parliament and the government, not an issue for the central bank to be held responsible for.” Aside from the fact that he is directly monetizing all JGB issuance – thus enabling Abe’s arrogant fiscal stimulus plan (by issuing 30Y and 40Y debt), Bloomberg notes that “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ.” The world has truly gone mad. Seemingly paying the same lip-service as Bernanke and Yellen in the US and Draghi in Europe, BoJ’s Haruhiko Kuroda is carefully positioning the blame for lack of growth and economic chaos on the government’s lack of growth-oriented policies… and not the central bank’s enabling experiments… (via Bloomberg):

Bank of Japan chief Haruhiko Kuroda emphasized the onus is on the government to strengthen its finances after PM Shinzo Abe postponed a sales-tax hike and outlined plans to boost fiscal stimulus. “It’s the responsibility of parliament and the government, not an issue for the central bank,” Kuroda said when asked about risks to Japan’s fiscal health. The BOJ’s job is to achieve its inflation target, he said at a press conference in Tokyo. Kuroda’s repeated comments at a press conference today on the importance of fiscal discipline indicate the governor is unhappy and may signal a change in strategy, said Credit Suisse economist Hiromichi Shirakawa. “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ,” said Shirakawa, a former BOJ official. “This is true, but he used to highlight that the BOJ and the government were working together. Abe might have created an enemy by postponing the sales-tax hike.”

This is how you expose the madness in all those nonsensical plans and targets.

• Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)

The U.K. government needs to make radical changes to halt the slide in export growth, the head of British Chambers of Commerce told CNBC. “Exports are tailing off, the rate of growth is tailing off — it’s the one part of the economy we are failing on,” BCC’s Director- General John Longworth told CNBC Europe’s “Squawk Box” on Thursday. “They always say that the definition of madness is carrying on doing the same thing as before and expecting a different result. We need to do something radically different as a country.” His comments come as the BCC published its third-quarter Trade Confidence Index on Thursday. The survey, carried out with delivery company DHL Express, measures U.K. exporting activity and business confidence of more than 2,300 exporting firms.

It found that in the latest quarter, fewer exporters reported increased sales: 29% of exporters stated that sales had increased in the third quarter of 2014, a sharp drop from 47% in the second quarter. Of those exporters no longer seeing an increase in export sales, most said that sales have remained consistent. “There has a slowdown in the U.K.’s export potential because of the slowdown global economic circumstances,” Longworth said, or government export targets would be missed. The U.K. Prime Minister David Cameron said in his 2012 budget that he wanted the U.K. to double exports to £1 trillion ($1.5 trillion) by 2020. In order to achieve that, however, Longworth said the U.K. would have to see export growth of nearly 11% year-on-year growth every year. “So far since the beginning of the recovery in 2010, the total growth in those years has been 14%. So we’ve got a real issue and unless we do something different we’re not going to hit those targets.”

And so must Italy, Greece, and many others. Let the people debate it, and give them alll the information, not just choice bits.

• Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)

Michael Pettis has a very interesting article on the Spanish news site ABC regarding a possible default of Spain and the eventual breakup of the eurozone. [..] What follows is my heavily modified translation of key portions of Pettis’ article after reading both of the above translations.

In the Panic of 1837, two-thirds of the US, including several of the richest states, suspended payment of external debt. The United States survived. If the European Union is to survive, it will have to find a solution to the European debt. The more hope instead of action, the more likely there’s a permanent breakdown of the euro and the European Union. In a gesture more of faith than economic or historical data, Madrid assures us that with the right reforms, it will eventually be able to get out of debt. Other countries in debt crises have made the same promise, but the promise is rarely fulfilled. Excessive debt itself impedes growth. Even without the straitjacket of the euro, Spain probably cannot afford its debt. Even those who are against debt cancellation recognize that the only thing that shielded Germany from a Spanish default was the European Central Bank.

Despite their obnoxious policies, far-right parties across Europe flourish more than ever because the ECB protects the euro and European banks at enormous costs for the working and middle classes. These extremists exploit the refusal of European leaders to acknowledge their errors. The longer the economic crisis, greater their chances of winning, and then comes an end to Europe. The only thing that prevented a suspension of payments by Spain and other countries was the promise of the European Central Bank in 2012 to do “whatever it takes” to protect the euro. But debt continues to grow faster than GDP in Europe, and the ECB load increases inexorably month after month. There will come a time when rising debt and a weakening of the German economy will jeopardize the credibility of the guarantee of the ECB (which will be useless), little by little at first, and then suddenly later. In a matter of months Spain will suspend payments.

For now, with debt settlement postponed, German banks strengthen capital to protect themselves from bankruptcy that many predict. Berlin is playing the same game as Washington during the crisis in Latin America in the 1980s. Then US banks actively strengthened their capital, mainly at the covert expense of ordinary Americans, while insisting that Latin American countries needed further reforms and no debt forgiveness. However, multiple reforms led to extremely high rates of unemployment and enormous social upheaval throughout Latin America. From 1987 to 1988, when US banks finally had enough capital, Washington officially recognized that full payment of the debt in 1990 was impossible and forgave the debt of Mexico. In the years following, US banks forgave almost the entire debt of other Latin American countries.

It’s getting painful. Stop the experiment, it’s failed beyond repair.

• Eurozone PMI Falls To 16-Month Low In November (MarketWatch)

Activity in the eurozone’s private sector slowed in November, according to surveys of purchasing managers, an indication the currency area’s economy will continue to grow weakly, if at all, in the final quarter of the year. The surveys also found that businesses again cut their prices in the face of weak demand, a development that will concern the European Central Bank, which is struggling to raise the currency area’s inflation rate from the very low level it has settled at for more than a year. Data firm Markit on Thursday said its composite purchasing managers index – a measure of activity in the manufacturing and services sectors in the currency bloc – fell to 51.4 from 52.1 in October, reaching a 16-month low. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.

Preliminary results from Markit’s survey of 5,000 manufacturers and service providers also showed that a significant pickup in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged. The surveys also found that businesses continued to cut their prices, although at a slightly less aggressive pace. “The deteriorating trend in the surveys will add to pressure for the ECB to do more to boost the economy without waiting to gauge the effectiveness of previously announced initiatives,” said Chris Williamson, chief economist at Markit.

France toast.

• French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)

French manufacturing shrank more than analysts forecast in November and demand fell, signaling that an economic rebound seen in the third quarter might be short lived. A Purchasing Managers Index fell to 47.6, the lowest in three months, from 48.5 in October, London-based Markit Economics said today. That’s below the 50-point mark that divides expansion from contraction and compares with the median forecast of 48.8 in a Bloomberg News survey. A separate index showed services also contracted, while new business across both industries fell the most in 17 months. The euro area’s second-largest economy has barely grown in three years and recent data suggests that 2014 will be little different. With unemployment near a record and the budget deficit widening, President Francois Hollande is under pressure to deliver on his promises of business-friendly reforms.

“The continued softness in private-sector activity signaled by the PMIs suggests an ongoing drag on growth during the fourth quarter,” said Jack Kennedy, senior economist at Markit. “Another round of job shedding by companies during November meanwhile provides little hope of bringing down the high unemployment rate.” An index of services activity rose to 48.8 this month from 48.3 in October, while a composite gauge for the whole economy increased to 48.4 from 48.2, according to today’s report. Employment across both manufacturing and services fell for 13th month, though the rate of decline slowed compared with the previous month. The French economy grew 0.3% in the three months through September as a jump in public spending offset a fourth quarterly decline in investment. The unemployment rate stood at 10.5% in September, more than double than Germany’s 5%, according to Eurostat. Hollande, whose popularity is among the lowest ever registered for a French president, has said he won’t run for a second term if he is unable to bring down joblessness.

Please, let’s have some violent infighting in Brussels.

• Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)

In Luxembourg, corporate income taxes are as low as 1% for some companies. An average worker in Germany with a salary of €40,000 ($50,000) who doesn’t joint file with a spouse has to pay about €8,940 in taxes each year. At the Luxembourg rate, the worker would only have to pay €400. But some companies have even managed to finagle a tax rate of 0.1%, which would amount to a paltry €40 for the average German worker. As delightful as those figures may sound, normal workers will never have access to those kinds of tax discounts. That’s why it came across as obscene to many when Juncker defended Luxembourg’s tax arrangements on Wednesday as “legal”. They may be legal, but they are anything but fair. It also strengthens an impression that gained currency during the financial crisis – that capitalism favors banks and companies, not normal people, and that these institutions profit even more than previously known from tax loopholes.

But the Juncker case also sheds light on the two faces of European politics. Top Brussels politicians are recruited from the individual EU member states and, as such, have long representated their countries’ national interests. Then they move to Brussels, where they are expected to advocate for the European Union. At times like this, though, when dealings in Brussels are becoming increasingly politicized, the idea that these politicians are promoting the EU’s interests as a bloc loses credibility. And Juncker, the very man who had a hand in stripping Luxembourg’s neighbors of tax money, is supposed to be the main face representing the EU. It’s also very problematic that he, as the man who led a country that was one of the worst perpetrators of these tax practices, is now supposed to see to it that these schemes are investigated and curbed in the future.

Kudos Crapo. Let’s cut the crap, not reintroduce it.

• Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)

A controversial housing-finance proposal quickly came under fire during a Wednesday Capitol Hill hearing, with a top committee Republican questioning whether it’s a good idea to allow federally controlled mortgage-finance giants Fannie Mae and Freddie Mac to back mortgages with very low down payments. “I’m troubled,” said Idaho Sen. Mike Crapo, the leading Republican member of the Senate Banking, Housing and Urban Affairs Committee, by a plan from the Federal Housing Finance Agency to enable Fannie and Freddie to buy mortgages with down payments as low as 3%. “After the problems we’ve seen” it could be risky for Fannie and Freddie to buy loans when borrowers have little equity, Crapo said.

In response, Mel Watt, who became FHFA’s director in January and was the sole witness at the agency-oversight hearing, told senators that mortgages with low down payments will require insurance, and that borrowers will be required to have relatively strong credit profiles otherwise. He added that FHFA will provide more details in December about the types of borrowers who would be eligible for such mortgages. “We are not making credit available to people that we cannot reasonably predict, with a high degree of certainty,” will make their mortgage payments, Watt said. Decisions over who can qualify for loans bought by Fannie and Freddie can have a large impact on the housing market. Together Fannie and Freddie back about half of new U.S. mortgages. The FHFA must carefully craft rules that support the housing market’s somewhat erratic recovery without creating too much risk.

This could make plenty waves, it’s a high stakes game.

• Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)

The explosion of brokers plowing into the lucrative junk-bond underwriting business may be fading. The number of firms managing U.S. high-yield bond sales isn’t growing for the first year since 2008, according to data compiled by Bloomberg. The ranks will likely thin in upcoming years as yields rise, making it more expensive for speculative-grade companies to borrow, according to Charles Peabody, a banking analyst at research firm Portales Partnersin New York. “You’re going to see fewer and fewer deals,” he said in a telephone interview. “Underwriting volumes are probably going to decline from here and you’re going to see more of a consolidation or exodus.” So far, the decline has been small, with 87 firms managing high-yield bond sales this year, down from the record 92 in the same period in 2013, Bloomberg data show.

The number of underwriters is still about twice as many as in 2009, when a slew of bankers founded their own firms to grab business from Wall Street firms that were shrinking as the credit crisis caused trillions of dollars of losses and writedowns. The new firms sought to win assignments managing smaller deals that bigger banks didn’t have the appetite for anymore. Five years later, the scene is changing. The least-creditworthy companies have borrowed record amounts of debt, spurred by central-bank stimulus that pushed borrowing costs to all-time lows. Now, the Federal Reserve is preparing to raise rates and junk-bond buyers are getting jittery.

The notes have declined 1.7% since the end of August as oil prices plunged, eroding the value of debt sold by speculative-grade energy companies, Bank of America Merrill Lynch index data show. While junk-bond sales are still on track for a new record this year, issuance has been choppy, with deals being canceled one week and then a flood of sales going through the next. For the past few years, high-yield underwriting has been a bright spot for banks, especially compared with flagging trading revenues. Speculative-grade companies have sold $1.2 trillion of dollar-denominated debt since the end of 2010 to lock in historically low borrowing costs. That’s also meant there have been a swelling number of firms elbowing each other out of the way for a chance to manage those deals, vying for fees that have been almost three times as much as those on higher-rated deals.

Pot and kettle.

• Goldman Fires Staff For Alleged NY Fed Breach (FT)

Goldman Sachs has fired an investment banker who allegedly accessed confidential information from the Federal Reserve Bank of New York, his former employer. Goldman said it had fired Rohit Bansal, a junior employee, in September and then fired his supervisor Joe Jiampietro, a better-known senior banker in the financial institutions group, which advises other banks. Mr Jiampietro was himself a former government official – a top adviser to Sheila Bair when she was chairman of the Federal Deposit Insurance Corporation. The New York Fed said: “As soon as we learned that Goldman Sachs suspected one of its employees may have inappropriately obtained confidential supervisory information, we alerted law enforcement authorities.”

The news, first reported by the New York Times, comes ahead of a congressional hearing on Friday that is examining whether there is too “cosy” a relationship between regulators and banks. Goldman has been nicknamed “Government Sachs” as the epitome of the “revolving door” between government and banking. Several of its employees formerly worked at government agencies, including the Fed and US Treasury. Hank Paulson, Goldman’s former chief executive, left the bank to become US Treasury secretary under President George W. Bush. On Friday, the Senate banking committee is due to examine allegations from a former New York Fed examiner, who says that she was fired because her bosses wanted her to water down criticism of Goldman. Bill Dudley, president of the New York Fed and himself a former Goldman employee, is due to testify.

A little skimpy perhaps, but who would doubt the premise?

• Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)

How do you tell if a group of bankers is dishonest? Simply by getting them all to toss a coin. That may not seem like in-depth research, but it is the basis of an academic paper published in Nature magazine this week, which investigates whether the financial sector’s culture encourages dishonesty – and concludes that it does. The academics from the University of Zurich used a sample of 128 employees of a large bank, and split them into two groups. The first set of bankers were primed to start thinking about their job, with questions such as “what is your function at this bank?”. They were then asked to toss a coin 10 times, in private, knowing which outcome would earn them $20 a flip. They then had to report their results online to claim any winnings. Unsurprisingly perhaps, there was cheating – with the percentage of winning tosses coming in at an incredibly fortunate 58.2% (although the research omitted to say how many bankers also trousered the coin).

Meanwhile, the second group completed a survey about their wellbeing and everyday life, that did not include questions relating to their professional life. They then performed the coin-flipping task, which threw up a quite astonishing finding: these bankers proved honest. Identical exercises in other industries did not produce the same skewing in results when participants were primed to start thinking about their work. The research does not reveal which institution took part in the survey, presumably to avoid it suing the authors for unearthing some decent behaviour among the cheating. “The effect induced by the treatment could be attributable to several causes,” the authors muse, “including the competitiveness expected from bank employees, the exposure to competitive bonus schemes, the beliefs about what other employees would do in the same situation or the salience of money in the questionnaire.”

Anti-tax rant. Simon Black knows quite a bit about moving abroad.

• New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

This past month, a real-life guild of thieves was formed. With 51 governments pledging their support to each other for the protection of their ignoble craft of theft. And another 30 pledging to join by 2018. From day one, governments have been pilfering their citizens’ assets through taxation, claiming a monopoly on thievery. From the largest institution to the pettiest pickpocket, anyone else who tries to engage in theft is severely punished, as governments work to protect their exclusive right to steal. Frighteningly, they do this all out in the open, believing that they actually have a moral right to commit theft. You can see this delusion in the US government’s claims that last year they “lost out” on $337 billion from people avoiding taxes. As if they have some moral claim to the money they’d failed to pilfer. Nonetheless, they use this claim to justify actively hunting down and penalizing anyone who takes action to avoid being stolen from.

The ones that are doing this are the bankrupt countries, and the deeper they slide into debt, the more desperate they become. Which is why these broke governments are now joining forces, pledging to to collect and share information amongst themselves about citizens’ bank accounts, taxes, assets and income outside local tax jurisdictions. Basically – I’ll help you steal from your citizens if you help me steal from mine. Both the punishment and the likelihood of getting caught for tax evasion are growing. Don’t even bother trying. However that doesn’t mean that you have no choice but to sit there and let your self be stolen from. While there are still ways of legally reducing your tax burden from within a country, your best option is to move and diversify. Diversification is key, because if you have all your eggs in one bankrupt basket, you are really taking on extraordinary risk. Moving some assets abroad can legitimately reduce some of this risk. And an even greater strategy is considering moving yourself.

The World Is Run By Fools, And We Let Them

Nov 162014

November 16, 2014 Posted by Raúl Ilargi Meijer at 10:25 pm Finance Tagged with: Abbott, Cameron, Dumb, Dumber, G20, Growth, Harper, lies, propaganda, Putin 6 Responses »

Dorothea Lange Negro woman carrying shoes home from church Mississippi Delta July 1936

Dumb and Dumber To, the sequel after 20 years, was released recently. Unfortunately for Jim and Jeff and the Farrelly brothers, unintended humor will always be funnier than the scripted kind, no matter how hard Hollywood tries. Case in point: the Dumber slapstick was easily upstaged over the past few days by the G20 summit in Brisbane.

Not only did the pedantic Anglo-Saxon power hungry freak show of Harper, Cameron and Abbott (nobody even noticed Obama) give Vladimir V. Putin a good laugh with their empty chest thumping, entirely spin doctor scripted and entirely aimed at their domestic media and audiences, these so-called leaders also came up with no less than 800(!) measures they claim will boost global economic growth by 2.1%, or $2 trillion. Over 5 years, or some useless and opaque number like that (2018?).

It would seem to be painfully obvious that what the world needs really urgently badly today is not so much economic growth, but growth in the dendrites, synapses and neurons in the heads of both our leaders and of those who put them where they are, ourselves. No use holding your breath. As things are, none of us are any smarter than either Dumb or Dumber.

As Brussels and the leaders of the allegedly healthy economies in the North sacrifice southern Europe on the altar of their megalomania, the G20 does the same with emerging economies and the even poorer rest of the world. The formerly rich part of the world has gotten stuck in its own dreams and faulty models, and the only place left to eke out any semblance of growth is weaker nations. The Roman empire revisited.

If the G20 nations could have ‘grown’ growth at a 2.1% clip with the sort of ease with which their reports were issued this weekend, they would have done so already, all along, long ago. The fact that they haven’t, it doesn’t get any simpler, implies that they can’t this time either. It’s all hot air, and perhaps that’s too positive still, make that tepid.

Still, when the Anglo-Saxon dipshits are together they have the guts to make such claims, just as when they’re together they have the guts to ‘shirtfront’ Putin. Canada’s Harper reportedly shook hands with Putin and told him to get out of Ukraine. Nobody present wanted to quote the reaction he got, but I’m thinking a simple ‘You first’ is a distinct possibility. None of these guys have anything on Putin, and they all know it. So does he.

Meanwhile, their home media have cooked up the Putin is Bad story to such heights that they can’t be seen as doing nothing, even if proof for any of the allegations concerning what Russia is supposed to be guilty of is still sorely lacking. The Anglo-Saxons need enemies to make their stories stick, so the ‘he probably shot down that plane’ line is awfully helpful.

And that dumber-ass approach is the same one they use for their economic, what shall we call it, ‘policies'(?), it’s the exact same thing. It’s the surface that counts, not what’s underneath it. It’s the storyline, not the veracity of it. Who in the west still doubts that Putin is a bad man? Very few. Though he hasn’t done anything for which the west has provided any proof.

It’s a tale in the spirit of Little Red Riding Hood, and just as credible. The 2.1% growth story doesn’t even attain that level of credulity, because it’s made up out of nothing at all. It would sound cute to say that the nonsense that emanated from the G20 summit is unrivaled, but it’s not. These boyos rival their own emptiness at every single occasion they get.

All they do is make sure that their access to the public (our) coffers is used to garner profit for their paymasters, at the cost of the taxpayer (again, us). That’s both their mission and their MO. And we all know that once you’ve been PM or FM and you served your superiors well, your life will be comfortable ever after.

That said, there is no vision, there is nothing. There’s a desire to amass power, and then to hold on to it and serve the bankrupt system, but none of it has anything to do with the people these guys and dolls are supposed to represent. And it can only lead to things like what the London School of Economics claims in a new report:

How The UK Coalition Has Helped The Rich By Hitting The Poor

A landmark study of the coalition’s tax and welfare policies six months before the general election reveals how money has been transferred from the poorest to the better off, apparently refuting the chancellor of the exchequer’s claims that the country has been “all in it together”. According to independent research to be published on Monday and seen by the Observer, George Osborne has been engaged in a significant transfer of income from the least well-off half of the population to the more affluent in the past four years.

That whole growth target is nothing but a way to justify more of what the LSE has noticed. A way to take away more money from the poor, through austerity, and through so-called reform IMF-style, after which the conclusion will be that the policies have failed, but the reality will be that the poor have gotten poorer and the rich have gotten richer. In the eyes of the G20 policy makers that will mean a success, even if it will be 180º different from what their public utterances have been.

We’re not only being fooled all the time and wherever we look, we’re being fooled by a bunch of stupid spin-scripted programmed assclowns. But we are the ones who put them where they are. As long as we hang on to our existing procedures for electing our leaders, only megalomaniac assclowns will float to the surface.

And they will, to a man, use their positions to rob us blind while pretending to have our best interests at mind. It’s what allowing money to enter your political system will always lead to: you can elect only made men. Which leads to Tony Blair, Bill Clinton, Obama, and Jeb Bush or Hillary. What about how this works is not clear?

The OECD even wants to do the G20 one better, they want 4% growth. I’ll tell you one thing: the western world will NEVER have a 4% growth rate again. Or at least not this century. And not before many millions of Europeans and Americans have gone down in hunger and misery.

We Need To Ramp Up Global Growth: OECD

The global economy should be growing at a much faster pace, the chief economist of the Organization for Economic Co-operation and Development (OECD) warned on Sunday, as world leaders agreed on hundreds of measures they hope will boost expansion. “As the emerging markets become a greater share of the global economy, we really ought to be seeing the global economy growing at 4% or more, so the tone is dour,” said OECD Chief Economist Catherine Mann, speaking to CNBC at the G-20 summit in Brisbane over the weekend.

Growth of 4% is well behind the group’s projected global gross domestic product (GDP) of 3.3% for this year. In its latest Economic Outlook, published earlier this month, the OECD warned of “major risks on the horizon” for the world’s economy, such as further market volatility, high levels of debt and a stagnation in the euro zone recovery.

Mann’s comments come as world leaders at the G-20 agreed on measures they said will equate to 2.1% new growth, inject $2 trillion into the world economy and create millions of jobs. The Paris-based OECD has previously outlined a target of adding around 2 percentage points to global GDP by 2018, relative to the 2013 level. [..]

Mann was optimistic that job creation would increase in tandem with global growth, as countries ramped up infrastructure investment. “We know that there’s usually a relationship between growth and jobs. It’s not always a tight relationship. There’s always an issue about the distribution, where the jobs are being created, what sectors, what countries and some of the disconnect there can be,” she said. “Mismatch can be a problem, but I do think we are going to see job creation go hand in hand with global growth.”

Need I say more after reading that? The lunatics are guiding us off the cliff. I know most people feel there’s nothing they can do to change the course their countries and governments have taken, but I also think that perhaps all these people need to realize they don’t have much of a choice anymore. If getting up from your couch for your own sake isn’t enough of a incentive, how about doing it for your kids and grandkids? How about doing it just because it feels right, because silently supporting assclowns while gobbling up cheese doodles in your comfy chair should never have been your thing? Didn’t you once have promise?

Debt Rattle November 16 2014

Nov 162014

November 16, 2014 Posted by Raúl Ilargi Meijer at 1:15 pm Finance Tagged with: austerity, bonus, clawback, eurozone, G20, Growth, OECD, oil, Putin 1 Response »

Wyland Stanley Indian guides and Nash auto at Covelo stables, Mendocino County, CA 1925

• We Need To Ramp Up Global Growth: OECD (CNBC)

• G-20 Plans $2 Trillion Growth Boost to Uneven Global Economy (BW)

• The G-20 Doesn’t Need a Growth Target (Bloomberg)

• How The UK Coalition Has Helped The Rich By Hitting The Poor (Observer)

• The Centre Is Falling Apart Across Europe (Observer)

• Across Europe Disillusioned Voters Turn To Outsiders For Solutions (Observer)

• How Can The Eurozone Escape A Lost Decade? (Guardian)

• Europe Should Fear The Spectre Of Austerity, Not Communism (Observer)

• Putin Leaves G20 After Leaders Line Up To Browbeat Him Over Ukraine (Guardian)

• Why We Need Stock Prices To Fall 25% (MarketWatch)

• Time to Hide Under the Covers (Martin Armstrong)

• Forex Banks Prepare To Claw Back Bonuses (FT)

• JPMorgan Settles Claims It Cheated Shale-Rights Owners (Bloomberg)

• EC Says Starbucks’ Dutch Tax Deal At Odds With Competition Law (Guardian)

• Shipbrokers In Merger Talks After 30% Plunge In Oil Price (Guardian)

Blind clowns run this world, and we let them. Don’t tell me you don’t deserve what you’re going to get.

• We Need To Ramp Up Global Growth: OECD (CNBC)

The global economy should be growing at a much faster pace, the chief economist of the Organization for Economic Co-operation and Development (OECD) warned on Sunday, as world leaders agreed on hundreds of measures they hope will boost expansion. “As the emerging markets become a greater share of the global economy, we really ought to be seeing the global economy growing at 4% or more, so the tone is dour,” said OECD Chief Economist Catherine Mann, speaking to CNBC at the G-20 summit in Brisbane over the weekend. Growth of 4% is well behind the group’s projected global gross domestic product (GDP) of 3.3% for this year. In its latest Economic Outlook, published earlier this month, the OECD warned of “major risks on the horizon” for the world’s economy, such as further market volatility, high levels of debt and a stagnation in the euro zone recovery.

Mann’s comments come as world leaders at the G-20 agreed on measures they said will equate to 2.1% new growth, inject $2 trillion into the world economy and create millions of jobs. The Paris-based OECD has previously outlined a target of adding around 2 percentage points to global gross domestic product (GDP) by 2018, relative to the 2013 level. To achieve a faster growth rate, Mann said that countries had given the OECD a range of commitments – and the focus was now on holding them accountable. “Our job is to say to countries: OK, you’ve told us what you’re going to do, so next year we’re going to look at what you’ve said you’re going to do and determine whether or not you’ve done it. It’s challenging. It’s absolutely a process,” she said. World leaders at the summit in Brisbane agreed on around 800 new measures on issues including employment, global competition and business regulations.

Mann was optimistic that job creation would increase in tandem with global growth, as countries ramped up infrastructure investment. “We know that there’s usually a relationship between growth and jobs. It’s not always a tight relationship. There’s always an issue about the distribution, where the jobs are being created, what sectors, what countries and some of the disconnect there can be,” she said. “Mismatch can be a problem, but I do think we are going to see job creation go hand in hand with global growth.” One way to boost global growth is a renewed focus on infrastructure, and Mann stressed there was a “significant deterioration” in infrastructure around the world. “Every country needs to have more bridges, or rebuild bridges and ports,” she said.

Because, as we all know, all it takes to foster growth is deciding to have some. The emptiness that emanates from this is blinding.

• G20 Says Growth Plans To Boost GDP By 2.1% If Implemented (BW)

Group of 20 leaders agreed to take measures that would boost their economies by a collective $2 trillion by 2018 as they battle patchy growth and the threat of a European recession. Citing risks from financial markets and geopolitical tensions, the leaders said the global economy is being held back by lackluster demand, according to their communique following a two-day summit in Brisbane. The group submitted close to 1,000 individual policy changes that they said would lift growth and said they would hold each other to account to ensure they are implemented. “There are some worrying warning signs in the global economy that are threats to us and our growth,” U.K. Prime Minister David Cameron said after the meeting ended. “If every country that has come here does the things they said they would in terms of helping to boost growth,” including trade deals, then growth will continue, he said.

Action to bolster growth comes as policies around the world are diverging with the U.S. tapering its monetary easing as it boasts the strongest economy among advanced nations, while Europe and Japan add further stimulus to ward off deflation. The IMF last month cut its projection for world economic growth next year to 3.8%. The mostly structural policy commitments spelled out in each country’s individual growth strategy include China’s plan to accelerate construction of 4G mobile communications networks, a A$476 million ($417 million) industry skills fund in Australia and 165,000 affordable homes in the U.K. over four years.

IMF Managing Director Christine Lagarde told the leaders that in order to avoid the “new mediocre” of low growth, low inflation, high unemployment and high debt, all tools should be used at all levels. “That includes not just monetary policy, which is being significantly used, particularly in the euro zone, but also fiscal policy, structural reforms and, under certain conditions, infrastructure,” she said. The IMF and OECD assessed the policy commitments and said they would raise G-20 gross domestic product by an additional 2.1% from current trajectories by 2018, according to the communique. “It’s a worthy objective for the G-20 as global growth is still lagging,” said Shane Oliver, head of investment strategy at AMP Capital, which manages about $125 billion. “But a lot of those measures might not be fully implemented and, even if they do, they may not deliver the results.”

But Pesek still thinks it needs growth.

• The G-20 Doesn’t Need a Growth Target (Bloomberg)

Group of 20 host Tony Abbott went to great lengths to keep one topic — climate change — off the agenda at this weekend’s confab in Brisbane. There’s little mystery why: While the world hails China and the U.S. for moving forward on curbing carbon emissions, Australia is backsliding by scrapping a tax on carbon and resisting pressure to expand the use of renewables. Abbott’s justification? The need for growth. In fact, Australia’s prime minister wants the rest of the G-20 also to pledge to grow by an additional 2% or more over five years. The goal sounds unobjectionable, until one considers how much trouble arbitrary growth targets are already causing China. The mainland government’s annual pledge to generate a fixed expansion in gross domestic product – 7.5% this year – is also the biggest roadblock to clearing its air and eventually reducing emissions.

Pressure to meet that arbitrary target leads local officials to ignore anti-pollution directives. It could prompt additional stimulus, a second wind for investment in smokestack industries and even more smog. China may be considering a reduction in next year’s target; it shouldn’t set one at all. Neither should the broader G-20. This indiscriminate emphasis on a specific data point encourages short-term policy behavior. In the quest for higher growth at the lowest political cost, governments from Washington to Tokyo have abdicated their responsibility to unelected central bankers. The reliance on monetary easing to prop up growth is clearly dangerous. Too much liquidity chasing too little demand for credit and too few productive investments can only lead to fresh bubbles in a world already filled with them. The consequences are worryingly unpredictable.

Chinese officials like Vice Finance Minister Zhu Guangyao have begun to warn that “divergence” in monetary policies – ultra-loose ones among developed economies, tighter conditions among emerging ones – could have unforeseen effects. “It will create new risks and uncertainties for the global economy,” Zhu told Bloomberg yesterday, calling the global financial environment “uneven and brittle.” Ceding control to central banks relieves political leaders of the pressure to make more difficult changes – the kind that will sustain growth in the long run and broaden its benefits. The only way China can make good on its climate targets, for example, is by rebalancing the economy way from heavy industry. That requires a level of political will Xi has yet to display.

All the talk about growth serves only to implement more of this.

• How The UK Coalition Has Helped The Rich By Hitting The Poor (Observer)

A landmark study of the coalition’s tax and welfare policies six months before the general election reveals how money has been transferred from the poorest to the better off, apparently refuting the chancellor of the exchequer’s claims that the country has been “all in it together”. According to independent research to be published on Monday and seen by the Observer, George Osborne has been engaged in a significant transfer of income from the least well-off half of the population to the more affluent in the past four years. Those with the lowest incomes have been hit hardest. In an intervention that will come as a major blow to the government’s claim to have shared out the burden of austerity equally, the report by economists at the London School of Economics and the Institute for Social and Economic Research at the University of Essex finds that:

• Sweeping changes to benefits and income tax have had the effect of switching income from the poorer half of households to most of the richer half, with the poorest 5% in the country in terms of income losing nearly 3% of what they would have earned if Britain s tax and welfare system of May 2010 had been retained.

• With the exception of the top 5%, who lost 1% of their potential income, it is the better-off half of the country that has gained financially from the changes, with an increase of between 1.2% and 2% in their disposable income.

• The top 1% in terms of income have also been small net gainers from the changes brought in by David Cameron’s government since May 2010, which include a cut in the top rate of income tax.

• Two-earner households, and those with elderly family members, were the most favourably treated, as a result of direct tax changes and state pensions respectively.

• Lone-parent families did worst, losing much more through cuts in benefits and tax credits and higher council tax than they gained through higher income tax allowances. Families with children in general, and large families in particular, also did much worse than the average.

• A quarter of the lowest paid 10% have shouldered a particularly heavy burden, losing more than 5% of what would have been their income without the coalition’s reforms.

Brussels is blowing itself up. It’s not going to be pretty.

• The Centre Is Falling Apart Across Europe (Observer)

Wednesday morning in Brussels and Beppe Grillo has brought his anti-establishment roadshow to the European parliament. The committee room is packed, standing room only for the former standup act. Once he gets going, Grillo resembles a force of nature. He declines to sit on the parliamentary rostrum alongside the other participants. Instead he prowls the floor, spitting out a staccato torrent of abuse and grievance, unscripted, unstoppable, laugh-a-minute. “I’m a bit over the top,” Grillo admits when he first pauses to draw breath after half an hour. “Maybe I should stop here.” Grillo is the Mr Angry of Italian and, increasingly, European politics. His Five Star Movement is running a consistent second in the opinion polls at around 20% behind the modernising centre-left of the Democratic Centre of prime minister Matteo Renzi.

If Grillo is hammering on the establishment’s doors, across Europe upstarts, populists, mavericks, iconoclasts and grassroots movements are performing even more strongly, radically changing the face of politics, consigning 20th-century bipartisan systems to the history books, and making it ever trickier to construct stable governing majorities. Fragmentation is the new norm in the parliaments and politics of Europe. Voter volatility, the death of deference, the erosion of party loyalties,, the dissolution of the ties of class make for a chaotic cocktail and highly unpredictable outcomes. Especially during and in the aftermath of economic slump.

“The crisis has shredded voters’ trust in the competence, motives and honesty of establishment politicians who failed to prevent the crisis, have so far failed to resolve it, and who bailed out rich bankers while imposing misery on ordinary voters, but not on themselves,” said Philippe Legrain, a former adviser to the head of the European commission and author of European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right. If elections were held tomorrow in half a dozen EU countries, according to current polls, the biggest single parties would be neither the traditional Christian nor social democrats of the centre-right and centre-left, but relative newcomers on the far right or hard left who have never been in government – from Greece and Spain, where far-left anti-austerity movements top the polls, to anti-EU, nationalist, anti-immigrant parties of the extreme right in France, the Netherlands, Austria and Denmark.

Lengthy article with reports fom France, Italy, Greece, Germany, Sweden, Ireland, Spain.

• Across Europe Disillusioned Voters Turn To Outsiders For Solutions (Observer)

Ever since Matteo Renzi became Italy’s youngest prime minister at 39 in February, styling himself as a political outsider and promising to prise open Italy’s closed-shop economy, commentators have been writing off Italy’s other great anti-establishment figure, Beppe Grillo. The former standup comedian, who rose to fame with rants at the establishment and a wildly popular blog, won a staggering 8.7 million votes in the 2013 elections to Italy’s lower house, running the centre-left Democratic Party a close second. But since then, the MPs and senators who flooded into parliament to represent him have been criticised for refusing to team up with other parties on key legislation. The few that did risked expulsion from his Five Star Movement. “There are continual divisions within Grillo’s parliamentary group – it’s pretty chaotic,” says Roberto D’Alimonte, a professor of politics at LUISS university in Rome. “They are still waiting for Renzi to fail so they can inherit whatever’s left after the disaster.”

Furthermore, Grillo’s anti-Europe rhetoric is now being matched by a resurgence of the rightwing Northern League. After being decimated by scandals, this party has dropped its focus on autonomy for northern Italy, and charismatic new leader Matteo Salvini is now picking up votes nationally with attacks on immigration. So why, despite the setbacks, are Grillo’s poll ratings still healthy? A survey of voting intentions this month put his movement at 19.9%, more than double the Northern League’s, albeit trailing Renzi’s 38.9%. “Until the economy turns around, Grillo will win votes – there is so much frustration in Italy,” says D’Alimonte, who adds that Grillo’s raging against corruption continues to strike a chord. “We still read every day about scandalous misuses of public funds.” Silvio Berlusconi’s decline is also helping the tousle-haired comedian, says D’Alimonte. “Grillo cuts across the political spectrum, taking votes from the left and the right, just like Ukip.”

There’s only one answer to that question: by disbanding itself.

• How Can The Eurozone Escape A Lost Decade? (Guardian)

It says something about the diminished expectations that the reaction to the latest growth figures for Germany and France was one of relief. Such is the gloom that has descended on the eurozone in the past few months, there was a fear that the data from the eurozone’s two biggest economies could have been worse. That’s true. Germany might now be in technical recession had the 0.1% contraction in the second quarter been followed by a further fall in gross domestic product in the third. As it was, growth of 0.1% was eked out. Similarly, France’s 0.3% expansion was a tad better than feared. But the headline growth number disguised underlying weakness. The growth was entirely due to government spending and the build-up of unsold stocks of goods.

The private sector in France remains painfully weak. What’s true of Germany and France is true of the 18-nation eurozone as a whole. Unlike the US and the UK, the eurozone has never really shown signs of emerging strongly from the financial crisis and recession of 2008-09. The recovery that began in 2013 has petered out. There are a number of reasons for that. The European Central Bank has been slower than the Bank of England and the Federal Reserve in taking action to boost growth – and less imaginative in its choice of weapons. Quantitative easing is now in the offing for the eurozone – almost six years after it was deployed in Britain and America. Blanket austerity for the eurozone has weakened domestic demand.

Attempting to slash budget deficits before growth returned has been a terrible mistake, and one for which Germany has to take the blame. With consumers not spending and businesses not investing, the eurozone has been dependent on exports to keep growth ticking over. But the slowdown in some of the world’s leading emerging markets this year – China, Brazil and Russia to name but three – has made it harder to sell goods overseas. Internal eurozone trade has also faltered. All is not completely lost. The plunge in oil prices will reduce energy bills and boost the real disposable incomes of consumers. A sharp fall in the value of the euro will make exports to the rest of the world more competitive.

The Observer sounds as hollow as the rest of them here.

• Europe Should Fear The Spectre Of Austerity, Not Communism (Observer)

The approach to macroeconomic policy in Brussels is dominated by Germany. The problem is that the Germans are urging further cuts on economies that are rapidly nearing the end of their tether. One close observer of policymaking in Germany says, only half jokingly, that advice is dominated by a combination of “those who don’t understand Keynes and those who do but are too scared to admit it”. The Tories, who may yet save the beleaguered Ed Miliband by tearing themselves apart over Europe, would be well advised to heed the words of one George Soros, who has pointed out that by being members of the European Union but not of the eurozone, we in Britain enjoy “the best of both worlds”. The Bank of England pointed out in the inflation report that “the potential positive impact of ECB policy actions” is likely to be outweighed in the near term by the factors that are already depressing growth in the euro area.

Carney, who has not hesitated on occasion to acknowledge that Osborne’s fiscal policy impeded the British recovery, manifested some sympathy with Draghi’s view that there needs to be a relaxation of fiscal policy. This means at the very least going easy on budget cuts, but ideally adopting a major expansionary policy involving much-needed infrastructure projects. Indeed, even Germany itself is crying out for renewal of its infrastructure. For “structural reform” read “infrastructure reform”! This does not seem to be understood in Berlin – or, for that matter, in Brussels. They go on relentlessly about the need to honour the EU’s “stability and growth pact”, with its strict targets for budgets and debt. But that pact was drawn up in what were reasonably normal times. The financial crisis changed everything. I always thought it significant that the word “stability” came before “growth” when the pact was signed. The problem now is that there is precious little growth, even in Germany itself, and the danger is that stability may soon turn into deflationary instability.

Fools like Harper, Cameron, Abbott are not going to make Putin nervous. All they’ve done over the summit is show him face to face just how stupid they are. Harper allegedly told Putin to get out of Russia. Nobody in the room wanted to provide his reply, but it may well have been: ‘You first’.

• Putin Leaves G20 After Leaders Line Up To Browbeat Him Over Ukraine (Guardian)

Vladimir Putin quit the G20 summit in Brisbane early saying he needed to get back to work in Moscow on Monday after enduring hours of browbeating by a succession of Western leaders urging him to drop his support for secessionists in eastern Ukraine. With the European Union poised this week to extend the list of people subject to asset freezes, the Russian president individually met five European leaders including the British prime minister, David Cameron, and the German chancellor, Angela Merkel, where he refused to give ground. Putin instead accused the Kiev government of a mistaken economic blockade against the cities in eastern Ukraine that have declared independence in votes organised in the past month. He said that action was short-sighted pointing out that Russia continued to pay the salaries and pensions of Chechenya throughout its battle for independence.

Justifying his early departure Putin said: “It will take nine hours to fly to Vladivostok and another eight hours to get Moscow. I need four hours sleep before I get back to work on Monday. We have completed our business.” In an interview with German TV he also accused the west of switching off their brains by imposing sanctions that could backfire. Putin said: “Do they want to bankrupt our banks? In that case they will bankrupt Ukraine. Have they thought about what they are doing at all or not? Or has politics blinded them? As we know eyes constitute a peripheral part of brain. Was something switched off in their brains?” The Russian leader also complained he had not been consulted by the EU about the recognition of Ukraine. However, British officials insisted behind Putin’s bluster, that they detected a new flexibility about the Ukraine orientating towards the EU so long as this did not extend to Nato assets being placed on Ukrainian soil.

Because that’s by how much, at the very least, they have been distorted (?!)

• Why We Need Stock Prices To Fall 25% (MarketWatch)

In early October, as share prices wobbled, I had high hopes that U.S. stocks would plummet to attractive levels. Instead, shares have shot higher, adding to the rip-roaring bull market that has seen stocks triple since March 2009. The long rally has done wonders for my portfolio’s value. But it also means stocks are now more richly valued—and expected returns are lower. Unless you never again plan to add to your stock portfolio, you should have mixed feelings about the market’s heady gains. Think about all the money you’ll invest in stocks in the years ahead, whether it’s with new savings, reinvested dividends or by shifting money from elsewhere in your portfolio. Wouldn’t you rather buy at 2009 prices than at today’s nosebleed valuations? Indeed, I find it hard to get enthused about the prospects for U.S. stocks over the next 10 years. Consider the three components of the market’s return: the dividend yield, corporate-earnings growth and the value put on those earnings, as reflected in the market’s price/earnings ratio.

We already know the dividend yield: It’s 2% for the S&P 500. But big question marks hang over the other two components of the market’s return. How fast will earnings grow? Over the 10 years through mid-2014, the per-share earnings of the S&P 500 companies grew 6.3% a year, far ahead of the 3.6% nominal (including inflation) growth in GDP. But there are three reasons to fear slower earnings growth over the next 10 years. First, the recent gains have been driven by rising profit margins. After-tax corporate profits rose from 7.9% of GDP in mid-2004 to 10.6% in early 2014. Without that boost, the S&P 500’s earnings would have lagged behind GDP growth. Suppose profits remain at 10.6% of GDP, rather than reverting to 7.9%. Even in that scenario, investors likely wouldn’t be happy, because corporate profits would grow no faster than the economy. That brings us to the second reason for worry: Economic growth may disappoint.

Over the past 50 years, roughly half the economy’s 3% after-inflation growth has come from increases in the working population and half from productivity gains. But the labor force is now growing more slowly, as the entrance of new workers barely outpaces retiring baby boomers. The Bureau of Labor Statistics projects that the civilian labor force will expand 0.5% a year over the 10 years through 2022, versus 0.7% for 2002-12 and 1.2% for 1992-2002. On top of that, many American families simply can’t afford to spend freely, either because they’re unemployed or underemployed or they remain handcuffed by hefty amounts of debt. That, too, could crimp economic growth. A third reason to worry: Over the past 10 years, companies have bought back as much stock as they’ve issued. That’s unusual—and it may not last. Historically, shareholders have seen their claim on the nation’s profits diluted by two percentage points a year, as new companies emerge and existing companies issue new shares.

“The liquidity is still off by 50% from 2007. Retail participation in the US share market is at historic lows. When the global economy turns down, it will drop faster than ever before BECAUSE liquidity is not there. We NEED to RESTRUCTURE the world economy NOW – RIGHT THIS VERY INSTANT.”

• Time to Hide Under the Covers (Martin Armstrong)

The USA may not be as all-powerful as its tells its people or our politicians believe. For all the spying going on against American citizens to hunt them down for taxes intercepting all cell phone calls, the USA is vulnerable on many fronts. The Chinese have been able to compromise the US defense systems. Meanwhile, in the Black Sea, Russia sent a Su-24 jet which then simulated a missile attack against the USS Donald Cook. It carried a new device that rendered the ship literally deaf, dumb, and blind. The Russian aircraft repeated the same maneuver 12 times before flying away. Obama better wake up. This is not some video game. The world is on the brink of war and governments need this war because they are dead in the water economically. The government in Ukraine has told its people it cannot reform now, it is in war. So be patient. We will see this same excuse migrate to Europe and the USA. Government NEED such a diversion. It also does not hurt to kill off those anticipating being taken care of by the state.

The US economy is holding up the entire world economy right now and the growth rate is minimal. When we turn the economy down, look out below. These morons have been hunting taxes everywhere and as a result they have shut down global capital flows. Government lives in an illusion. They simply assumed they could always tax and never funded anything presuming they could always shake money from us. It has been the FREEDOM of investment capital on a global basis that built the economies of the world after World War II. This was the same aspect that built the Roman Empire. Conquering everything enabled global capital flows. Capital flows around the globe at all times and has done so since ancient times. Cicero commented that any event in Asia (Turkey) be it financial or natural disaster, sent waves of panic running through the Roman Forum. If capital has been restricted in movement as it is today, no American would have ever been able to invest in Europe or Asia. Where would the world be today had FATCA been around in 1945?

These idiots have destroyed the world economy and we will only understand this full impact after 2015.75. If you outlaw short-selling, there is nobody to buy during a panic. This is the same problem. The liquidity is still off by 50% from 2007. Retail participation in the US share market is at historic lows. When the global economy turns down, it will drop faster than ever before BECAUSE liquidity is not there. We NEED to RESTRUCTURE the world economy NOW – RIGHT THIS VERY INSTANT. Raising taxes and stopping global flows is the absolute worse case scenario you can possibly ever do in times like the present. This is turning VERY ugly. You better buy some extra heavy blankets because you are going to want to just hide in your bed when this chaos erupts. There are boggy-men under the bed and in the closet and he is listening and watching everything you do. Why? Because he is scared to death he may be losing power. They are in the final stages of insanity – the Stalin Phase where they are paranoid about what everyone even thinks and says.

Let’s hope this pisses off the traders enough to tell on their bosses.

• Forex Banks Prepare To Claw Back Bonuses (FT)

Five banks at the heart of the forex rate rigging probe are preparing to claw back millions of dollars in bonuses from traders as the City seeks to shore up its reputation in the wake of the latest scandal to hit the banking industry. This would be the first time that banks have applied this draconian measure on such a large scale. Under European rules, they have the power to take this step, but in practice they have largely restricted themselves to withholding as yet unpaid bonuses. This week’s move, however, by UK, US and Swiss regulators to fine six banks $4.3bn for their role in the global foreign exchange scandal has reignited calls for the sector to take tougher action against wrongdoers.

Royal Bank of Scotland, Citigroup, HSBC, JPMorgan Chase and UBS, five of the banks fined this week, are all looking at taking back bonuses from dozens of traders – although people familiar with their thinking say the plans are subject to internal reviews of the individuals’ cond[uit]. RBS is considering going even further by reducing this year’s overall bonus pool for the whole investment bank. Such a move would echo RBS’s stance last year after the Libor rate-rigging scandal, when the state-owned bank reduced its incentive pool by £300m after paying a £390m penalty to UK and US regulators. The forex scandal revealed that groups calling themselves “the players”, “the three musketeers” and “a co-operative” tried to rig key currency benchmarks including at least one provided by central banks, according to the UK’s Financial Conduct Authority.

JPMorgan fraud no. 826.

• JPMorgan Settles Claims It Cheated Shale-Rights Owners (Bloomberg)

JPMorgan settled a lawsuit by Texas mineral-rights owners who accused it of cutting sweetheart deals with oil company clients to cheat them out of $681 million in compensation. The dispute centered on payments for rights to drill in the Eagle Ford, a shale formation underlying much of central and southwest Texas that has helped put the U.S. in competition with Saudi Arabia and Russia for title of world’s largest oil producer. Beneficiaries of the South Texas Syndicate Trust accused the bank, which was supposedly working on their behalf, of instead hatching favorable deals with commercial-banking clients Petrohawk Energy and Hunt Oil for cut-rate prices on the trust’s rights in the Eagle Ford, the highest-yielding oil field in the U.S. Deal talks between the bank and the trust stalled and forced the start of a trial Nov. 12 in state court in San Antonio while negotiations continued.

The settlement was completed Nov. 14 as jurors heard a third day of testimony, according to lawyers for both the bank and trust’s beneficiaries. “The case was resolved with some conditions, and the jury was excused,” Dan Sciano, a lawyer for the trust beneficiaries, said yesterday in a phone interview. Sciano said he was optimistic “a sufficient number of beneficiaries” will sign the accord at their annual meeting in San Antonio this weekend. “Otherwise, we would not have dismissed the jury,” he said. Sciano declined to discuss the amount of the settlement. [..] The San Antonio Express News reported that the beneficiaries would receive $40 million from the bank. The trust beneficiaries claimed they got only $32.5 million on rights that yielded benefits worth $1.1 billion because JPMorgan wanted to curry favor with its oil company clients at their expense. The bank rejected the claims as speculation and hindsight.

Luxembourg, Holland, Ireland, they’re all doing the same, and they all claim it’s fully legal. Morals don’t enter the picture.

• EC Says Starbucks’ Dutch Tax Deal At Odds With Competition Law (Guardian)

Brussels has accused the Dutch government of cooking up an illegal deal with Starbucks that allowed the coffee chain to pay a very low rate of tax. In a preliminary report into an alleged sweetheart deal the European commission said the coffee shop’s tax arrangements in the Netherlands were at odds with EU rules on competition, which are intended to stop a government using state funds to give a company an unfair advantage. The report, published today, had been sent to the Dutch government on 11 June, when the commission officially launched its investigation into the tax affairs of Apple, Starbucks and Fiat. Starbucks ran into a political furore when it emerged in 2012 that it had paid just £8.3m in corporate taxes since coming to the UK in 1998, despite racking up sales of more than £3bn.

The British subsidiary of the coffee chain was classified as loss-making – so did not pay taxes on profits – largely because it made payments to other companies in the Starbucks group for its coffee supplies, use of the Starbucks logo and shop format, and interest on loans within the group. The commission’s investigation is focusing on these so-called transfer payments and has homed in on the role of the coffee chain’s roasting facility in Amsterdam and its relationship with other parts of the Starbucks business. Officials have also expressed doubts about the legality of a decision by the Dutch tax authorities to allow Starbucks to book in the Netherlands revenues it has earned in other countries. In 2012, Starbucks’ chief financial officer, Troy Alstead, told the UK’s public accounts committee of MPs that the group had legitimately secured a tax deal with the Netherlands that allowed it to pay tax at a “very low rate”. According to the commission, the coffee chain’s Dutch companies paid €716,000 (£570,000) of tax in 2011 in the Netherlands and between €600,000 and €1m in 2012.

An insanely overbuilt market faces reality.

• Shipbrokers In Merger Talks After 30% Plunge In Oil Price (Guardian)

Plunging oil prices have triggered merger talks among London’s shipping and offshore brokers, with key companies including Clarkson, Icap and Howe Robinson all in discussions. With shipping in the doldrums, brokers have been relying over the last couple of years on the offshore oil industry to boost profits but a 30% plunge in the crude price has caused panic. Clarkson, the world’s largest shipbroker, confirmed on Friday it was hoping to acquire RS Platou, a major Norwegian-based rival which also controls a significant operation in the UK. Icap and Howe Robinson are also understood to be looking at options and sources predicted some kind of merger deal between those firms could be unveiled as early as next week.

Clarkson said the purchase of privately-owned Platou, which some believe could cost up to £200m, made commercial sense: “Given the complementary activities, in terms of geographic locations, operations and industry specialisation, the boards of both Clarksons and Platou believe the enhanced offering of the combined business positions the enlarged group as a leading integrated global shipping and offshore group.” The move could have reunited Clarkson with its flamboyant former chief executive, Richard Fulford-Smith, who left and joined Platou, but the Ferrari-driving shipbroker has unveiled his own plans to buy out Platou’s UK business. While key parts of the shipping market such as dry bulk carriers and container ships have continued to struggle against massive overbuilding of tonnage and tepid volume growth, Clarkson has continued to prosper.

Debt Rattle November 14 2014

Nov 142014

November 14, 2014 Posted by Raúl Ilargi Meijer at 12:13 pm Finance Tagged with: Aboriginals, cities, deflation, foreclosures, fracking, gas, GDP, Growth, Keystone, oil, prices 1 Response »

DPC St. Catherine Street, Montréal, Québec 1916

• Most US Cities Unaffordable For Average Americans To Live In (MarketWatch)

• US Wealth Inequality: Top 0.1% Worth As Much As The Bottom 90% (Guardian)

• US Foreclosure Filings Climb 15% In October (MarketWatch)

• Sub-$2-a-Gallon Gasoline Futures Hand US Motorists Gift (Bloomberg)

• Albert Edwards: USDJPY 145, “Tidal Wave Of Deflation Westward” (Zero Hedge)

• Oil, Other Commodities Will Be In The Dumps For Another Decade (MarketWatch)

• Oil Price Rout To Deepen Amid Supply Glut, Warns IEA (Telegraph)

• Keystone Left Behind as Canadian Oil Pours Into US (Bloomberg)

• Putin Stockpiles Gold As Russia Prepares For Economic War (Telegraph)

• It May Be Too Late for Japan PM to Fix World’s Third Largest Economy (TIME)

• Europe’s Debt Fight May Undermine Push for Growth Deal (Bloomberg)

• Cold Comfort As France, Germany Eke Out Tiny Q3 Growth (Reuters)

• Italy’s Slump Enters Fourth Year, Complicating Renzi’s Plans (Bloomberg)

• World Outlook Darkening as 89% in Poll See Europe Deflation Risk (Bloomberg)

• China Busts Underground Banks Linked to $23 Billion Transactions (Bloomberg)

• Stock Market Fear, Stress And Tensions Climbing (MarketWatch)

• Apple Could Swallow Whole Russian Stock Market (Bloomberg)

• Fracking Boom Spurs Demand for Sand and Clouds of Dust (Bloomberg)

• Massive OW Bunker Bankruptcy: Questions Of Governance And Oversight (SeaTrade)

• Aboriginals Decry G-20 Host Australia as Leaders Gather (Bloomberg)

This is what we’ve come to, and it’s hardly surprising. Where are the raised voices, though?

• Most US Cities Unaffordable For Average Americans To Live In (MarketWatch)

Most big American cities are no longer affordable for the average worker. Home buyers earning a median income can only afford a median-priced home in 10 of the 25 largest metropolitan areas in the U.S., according to a survey by personal finance site Interest.com. That’s still a slight improvement on last year when only 8 of those metropolitan areas were affordable, but still lower than 2012 when 14 of those 25 areas were affordable for people on a median income in those regions. Being priced out of buying a home in the country’s major cities means more multi-family buildings in big cities and more people moving into second-tier cities and rural areas, says Stuart Gabriel, director of UCLA’s Richard S. Ziman Center for Real Estate.

“The consequences are large,” he says, “and they’re not just about affordability. It affects economic growth and economic viability of our major metropolitan areas.” While some people will find ways to work from home, for instance, spiraling housing costs also hurt people who need to work in cities. “Teachers, firefighters and police, these are people who are absolutely essential to the functioning of our urban areas, are priced out of those areas and have to commute long distances to get to work,” Gabriel says. “It’s certainly true here in L.A.” Sacramento had the biggest drop in home affordability over the past 12 months, falling to No. 18 this year from No. 12 in 2013. But it’s still more affordable than the other three California metro areas on the list: Los Angeles (No. 22), San Diego (No. 24) and San Francisco (No. 25) where the median income is 46% less than what is required to buy a median-priced home here. New York is No. 23 on the list.

The cheapest areas are Minneapolis, Atlanta, St. Louis and Detroit. “Low mortgage rates are helping home affordability to some extent, but the key ingredient — which has been missing to this point — is substantial income growth,” says Mike Sante, managing editor of Interest.com. “Millennials, in particular, are struggling to overcome their student loans and save enough money for a down payment.” The Interest.com survey reflects a broader trend: 52% of Americans have made at least one major sacrifice to cover their rent or mortgage over the last three years, according to research commissioned by the nonprofit John D. and Catherine T. MacArthur Foundation released earlier this year. These sacrifices include getting a second job, deferring saving for retirement and cutting back on health care.

Here’s why Americans can’t afford their own cities anymore.

• US Wealth Inequality: Top 0.1% Worth As Much As The Bottom 90% (Guardian)

Wealth inequality in the US is at near record levels according to a new study by academics. Over the past three decades, the share of household wealth owned by the top 0.1% has increased from 7% to 22%. For the bottom 90% of families, a combination of rising debt, the collapse of the value of their assets during the financial crisis, and stagnant real wages have led to the erosion of wealth. The research by Emmanuel Saez and Gabriel Zucman [pdf] illustrates the evolution of wealth inequality over the last century. The chart shows how the top 0.1% of families now own roughly the same share of wealth as the bottom 90%. The picture actually improved in the aftermath of the 1930s Great Depression, with wealth inequality falling through to the late 1970s. It then started to rise again, with the share of total household wealth owned by the top 0.1% rising to 22% in 2012 from 7% in the late 1970s. The top 0.1% includes 160,000 families with total net assets of more than $20m (£13m) in 2012.

In contrast, the share of total US wealth owned by the bottom 90% of families fell from a peak of 36% in the mid-1980s, to 23% in 2012 – just one percentage point above the top 0.1%. The growing indebtedness of most Americans is the main reason behind the erosion of the wealth share of the bottom 90%, according to the report’s authors. Many middle-class families own their homes and have pensions, but too many have higher mortgage repayments, higher credit card bills, and higher student loans to service. The average wealth of bottom 90% jumped during the stock market boom of the late 1990s and the housing bubble of the early 2000s. But it then collapsed during and after the most recent financial crisis. Since then, there has been no recovery in the wealth of the middle class and the poor, the authors say. The average wealth of the bottom 90% of families is equal to $80,000 in 2012— the same level as in 1986. In contrast, the average wealth for the top 1% more than tripled between 1980 and 2012.

No surprise here either.

• US Foreclosure Filings Climb 15% In October (MarketWatch)

The pace of new foreclosures picked up last month as more troubled properties were pushed through the system, according to data released Thursday. In October, there were default notices and other foreclosure filings reported on more than 123,000 U.S. homes, up 15% from September — the largest monthly growth since foreclosure activity peaked in early 2010, online foreclosure marketplace RealtyTrac reported. Last month’s pop was driven by seasonal factors — banks were trying to “get ahead of the usual holiday foreclosure moratoriums,” said Daren Blomquist, vice president at RealtyTrac.

October’s spike narrowed the year-over-year contraction in foreclosure filings to 8%, the slowest annual drop since May 2012. “Distressed properties that have been in a holding pattern for years are finally being cleared for landing at the foreclosure auction,” Blomquist said. Despite October’s increase in filings, the pace of the foreclosure-related notices is trending closer to levels seen before the U.S. housing bubble burst. In 2006, as home prices were near their peak, there were average monthly foreclosure filings on 105,000 properties. October’s 123,000 foreclosure filings were down about 66% from a peak of 367,000 hit in 2010.

Not going to boost holiday sales.

• Sub-$2-a-Gallon Gasoline Futures Hand US Motorists Gift (Bloomberg)

U.S. drivers will have some extra money in their pockets this holiday season as gasoline futures tumbling below $2 a gallon mean lower prices at the pump. “The drop in futures is eventually going to translate into further declines at the pump,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone yesterday. “There will be a little extra discretionary spending that consumers can use somewhere else this holiday season.” The nation’s largest motoring club says retail prices “have a very good chance” of being the lowest for the Nov. 28 Thanksgiving holiday in five years. Motorists are already paying the least since 2010 after crude oil tumbled more than 20% in the past four months. Gasoline futures added 0.7 cent, or 0.3%, to $2.0085 a gallon in electronic trading at 12:12 p.m. Singapore time.

Yesterday the contract closed at the lowest since September 2010. The average retail price for regular gasoline fell 0.6 cent to $2.917 a gallon on Nov. 12, the least since December 2010, according to Heathrow, Florida-based AAA. Based on the drop in the futures market, pump prices could fall to $2.70 or thereabouts, Michael Green, a Washington-based spokesman for AAA, said by telephone yesterday. “At this point, the market refuses to stabilize, the price of crude oil continues to fall and refiners are making more gasoline. There’s no end in sight.” Almost one-fourth of filling stations in the U.S. are selling gasoline for less than $2.75 a gallon, Green said. Less than 1% are under $2.50, he said. “We’re still a long way from getting down to $2,” Green said. “But I didn’t think it was going below $3, and here we are.”

Edwards is one scary guy. Because he’s mostly right.

• Albert Edwards: USDJPY 145, “Tidal Wave Of Deflation Westward” (Zero Hedge)

Less than two months ago, Albert Edwards presented “The Most Important Chart For Investors” in which he predicted, correctly, that the real action will come not in the Euro but the Japanese Yen, and at a time when the USDJPY was trading around 108, Edwards forecast a sharp move to 120. A month later, Abe’s just as shocking “all in” bet on boosting QE to a level where it matches the Fed’s peak monthly POMO despite an economy that is a third the size of the US, proved Edwards correct and has since sent the USDJPY some 800 pips higher and just 400 pips shy of Edwards’ 120 forecast. At this rate, the 120 target may be taken out within weeks not months. So what happens next? Here, straight from the horse’s mouth that got the first part of the rapid Yen devaluation so right, is the answer.

As Edwards updates with a note from this morning, “the yen is set to follow the US dollar DXY trade-weighted index by crashing through multi-decade resistance – around ¥120. It seems entirely plausible to me that once we break ¥120, we could see a very quick ¥25 move to ¥145, forcing commensurate devaluations across the whole Asian region and sending a tidal wave of deflation westwards.” Edwards, never one to beat around the bush, slams strategists who are at best willing to get the direction of a given move, if not the magnitude. So he will be the outlier:

… in the foreign exchange (FX) world, extreme volatility is often readily apparent but seldom ever predicted. We explained recently that investors were overly focusing on the euro/US$ when a further round of Japanese QE would make the yen the dominant currency story. I expect the key ¥120/$ support level to be broken soon and the lows of June 2007 (¥124) and Feb 2002 (¥135) to be rapidly taken out. If you want a target to reflect historic volatility, think about the Y145 low of August 1998 (see chart). That is my Q1 forecast.

I see little value in predicting anything 10 years out today. The US dollar looks strongest, stocks definitely do not, they’re way too overvalued. in 2024, who says there’ll be much of any financial markets remaining? But hey, someone has to lose all that money going forward. Might as well this guy.

• Oil, Other Commodities Will Be In The Dumps For Another Decade (MarketWatch)

Remember the commodities supercycle, that seemingly endless 2000s commodities boom? It drove oil, gold, copper and other commodities to record levels. The supercycle was driven by exploding demand from China and other emerging countries, supply bottlenecks caused by years of not developing wells and mines, and rock-bottom interest rates that inflated demand for hard assets all around the world. But now gold, oil and other commodities are well off their peaks, so far off, in fact, and for so long that they can only be described as in a supercycle in reverse, or a secular bear market. If that’s true – and I’m pretty sure it is – investors who piled in to commodities are in for a bruising decade ahead unless they take profits or cut their losses.

Meanwhile, stocks, which run counter to commodities, may well go much higher, along with the U.S. dollar. “We believe that we are in the initial years of a secular down cycle in commodities,” wrote Shawn Driscoll, manager of the natural resource-focused T. Rowe Price New Era Fund in the fund’s most recent semiannual report. “Commodity cycles are very long on the way up and the way down,” he told me in a phone interview. They last around 13 to 15 years, because it takes that long for fundamentals of supply and demand to go to extremes. When the most recent supercycle began in 1998, Driscoll said, commodities prices had plummeted, so producers shuttered old mines and wells and hadn’t opened new ones in a while. But when demand revived, it took years for producers to catch up. Ultimately, companies built too much capacity just in time for the next peak.

“With this key level out of the way a move towards $75 now looks likely as the hunt for a real floor in oil prices goes on.” WTI at $74 this morning, Brent at $78.

• Oil Price Rout To Deepen Amid Supply Glut, Warns IEA (Telegraph)

The rout which has sent oil prices to a four-year low is expected to deepen, the International Energy Agency warned in its latest monthly market report. The Paris-based watchdog said Friday: “While there has been some speculation that the high cost of unconventional oil production might set a new equilibrium for Brent prices in the $80 to $90 range, supply/demand balances suggest that the price rout has yet to run its course.” Against a backdrop of weakening demand, oil supply in October increased adding further downward pressure on prices, the IEA said in its monthly market report. According to the watchdog, global oil supply inched up by 350,000 barrels per day (bpd) in October to 94.2m bpd.

However, in London Brent crude bounced at the open up almost 1pc at around $78 per barrel after heavy losses overnight in the US saw West Texas Intermediate blend crude fall to $74 per barrel. “Crude prices are enduring another hefty move lower, with Brent shifting below $80 for the first time since late 2010,” said Chris Beauchamp, Market Analyst, IG. “With this key level out of the way a move towards $75 now looks likely as the hunt for a real floor in oil prices goes on.” The supply glut will add to pressure on the Organisation of Petroleum Exporting Countries to sharply cut back on production at their meeting on November 27. However, the group’s major producers may be reluctant to do so due to the risk of losing more market share to shale oil drillers in the US.

The IEA’s warning on prices follows the US Energy Department, which this week pared back its forecasts for prices in 2015. The US Energy Information Administration (EIA) – part of the Department of Energy – has slashed its price forecasts for 2015. The EIA now expects US crude blends to average $77.75 per barrel next year, down from a previous forecast of $97.72, and Brent to average $83.42 in 2015, down from its old estimate of $101.67. The EIA has also revised down its global demand forecast by 200,000 barrels per day (bpd) to average 92.5m bpd in 2015, based on weaker global economic growth prospects for next year.

The US doesn’t produce enough domestically yet, or so I guess.

• Keystone Left Behind as Canadian Oil Pours Into US (Bloomberg)

Delays of the Keystone XL pipeline are providing little obstacle to Western Canadian oil producers getting their crude to the U.S. Gulf Coast, with shipments set to more than double next year. The volume of Canadian crude processed at Gulf Coast refineries could climb to more than 400,000 barrels a day in 2015 from 208,000 in August, according to Jackie Forrest, vice president of Calgary-based ARC Financial. The increase comes as Enbridge’s Flanagan South and an expanded Seaway pipeline raise their capacity to ship oil by as much as 450,000 barrels a day. Canadian exports to the Gulf rose 83% in the past four years.

The expansion shows Canadians are finding alternative entry points into the U.S. while the Keystone saga drags on. In the latest chapter, a Democratic senator and a Republican representative are seeking votes in their chambers to set the project in motion. The two are squaring off in a runoff election for a Senate seat from Louisiana, a state where support for the project is strong. “Keystone is kind of old news,” Sandy Fielden, director of energy analytics at Austin, Texas-based consulting company RBN Energy, said Nov. 12 in an e-mail. “Producers have moved on and are looking for new capacity from other pipelines.” TransCanada’s Keystone XL, which would transport Alberta’s heavy oil sands crude to refineries on the Gulf, has been held up for six years, awaiting Obama administration approval.

Over the top headline and commentary. Russia buys gold because sanctions make access to dollar markets harder.

• Putin Stockpiles Gold As Russia Prepares For Economic War (Telegraph)

Russia has taken advantage of lower gold prices to pack the vaults of its central bank with bullion as it prepares for the possibility of a long, drawn-out economic war with the West. The latest research from the World Gold Council reveals that the Kremlin snapped up 55 tonnes of the precious metal – far more than any other nation – in the three months to the end of September as prices began to weaken. Vladimir Putin’s government is understood to be hoarding vast quantities of gold, having tripled stocks to around 1,150 tonnes in the last decade. These reserves could provide the Kremlin with vital firepower to try and offset the sharp declines in the rouble. Russia’s currency has come under intense pressure since US and European sanctions and falling oil prices started to hurt the economy.

Revenues from the sale of oil and gas account for about 45pc of the Russian government’s budget receipts. The biggest buyers of gold after Russia are other countries from the Commonwealth of Independent States, led by Kazakhstan and Azerbaijan. In total, central banks around the world bought 93 tonnes of the precious metal in the third quarter, marking it the 15th consecutive quarter of net purchases. In its report, the World Gold Council said this was down to a combination of geopolitical tensions and attempts by countries to diversify their reserves away from the US dollar. By the end of the year, central banks will have acquired up to 500 tonnes of gold during the latest buying spell, according to Alistair Hewitt, head of market intelligence at the World Gold Council.

“Central banks have been consistently adding to their gold holdings since 2009,” Mr Hewitt told the Telegraph. In the case of Russia, Mr Hewitt said that the recent increases in its gold holdings could be a sign of greater geopolitical risk that has arisen since it seized Crimea sparking a dispute with Ukraine and the West. Overall, the World Gold Council said that global demand for gold was down 2pc year-on-year to 929 tonnes in the third quarter amid signs that buying in China, one of the main markets, had tailed off. Jewellery demand in the quarter ending in September was down 39pc to 147 tonnes, signalling weaker consumer sentiment in the world’s second-largest economy.

After 2.5 years, and countless comments at TAE about Abe’s inevitable failure, mainstream America is catching on. Even a jibe at Krugman here.

• It May Be Too Late for Japan PM to Fix World’s Third Largest Economy (TIME)

Tokyo is abuzz with speculation that Prime Minister Shinzo Abe is about to dissolve the Diet, as the country’s legislature is known, and call a snap election. He by no means has to take such action. It has only been two years since his Liberal Democratic Party, or LDP, swept to power in a massive landslide, and the opposition is in such disarray that there is little doubt Abe would be returned to office in a new election. Nevertheless, Abe apparently feels the need for another vote of confidence from the public, likely in part to bolster support for his radical program to revive Japan’s economy, nicknamed Abenomics. The problem is that it could already be too late. Abenomics is a failure, and Abe isn’t likely to fix it, no matter how many seats his party holds in parliament.

When Abe first introduced Abenomics, many economists – most notably, Nobel laureate Paul Krugman – believed the unconventional program would finally end the economy’s two-decade slump. The plan: the Bank of Japan (BOJ), the country’s central bank, would churn out yen on a biblical scale to smash through the economy’s endemic and destructive cycle of deflation, while Abe’s government would pump up fiscal spending and implement long-overdue reforms to the structure of the economy. Advocates argued that Abenomics was just the sort of bold action to jump-start growth and fix a broken Japan, and we all had reason to hope that it would work. Japan is still the world’s third largest economy, and a revival there would add another much-needed pillar to hold up sagging global economic growth.

However, I had my concerns from the very beginning. In my view, Japan’s economy doesn’t grow because there is a lack of demand. Pumping more cash into the economy, therefore, will not restart growth. Only deep reform to raise the potential of the economy can do that — by improving productivity and unleashing new economic energies. Unless Abe changed the way Japan’s economy works — and I doubted he would — all of the largesse from the BOJ would at best come to nothing. In a worst-case scenario, Abe’s program could turn Japan into an even bigger economic mess than it already is.

The G20 is the most useless gathering on the planet. They see one thing only, growth, whether it’s there or not.

• Europe’s Debt Fight May Undermine Push for Growth Deal (Bloomberg)

Europe’s infighting over debt rules may be the biggest challenge to its ambitions for a new commitment to growth at the Group of 20 summit in Australia. World leaders have already expressed their frustration with the European Union’s German-mandated obsession with budget deficits. When they sit down in Brisbane this weekend to consider the 28-nation bloc’s call for a “comprehensive” growth strategy that seeks to boost private investment and rein in fiscal excess, the G-20 group will include France and Italy, the euro nations that have most publicly fought the EU view. Germany and its allies say the debt rules are essential for the EU’s credibility yet the euro area’s six-year slump has already weakened the bloc’s reputation for economic management, regardless of whether the 18 euro members can eventually wrestle their budget deficits under control.

As global growth wanes, the rest of the world’s capacity to keep indulging Europe’s budget focus is narrowing too. “Europe has, from a global perspective, been too tight for years,” said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington. Even if the euro area relaxes its stance somewhat, “the global economy is growing slower now, so any undershoot matters more.” Behind the united facade European leaders will present in Brisbane, France and Italy are straining at the budget limits they’ve been set, spurred on by calls from European Central Bank President Mario Draghi for nations to supplement his “whatever it takes” monetary policy stance.

A big relief, was the announcement. So why are EU stocks falling?

• Cold Comfort As France, Germany Eke Out Tiny Q3 Growth (Reuters)

European stocks were flat on Friday after gross domestic product numbers showed both France and Germany grew marginally in the third quarter, while the dollar rose further against the yen on expectations of a snap election in Japan. The European data confirmed that the outlook for much of the world economy still looks much shakier than for the United States, although France beat expectations. Asian stocks fell following the latest signs that growth in China is slowing. Energy stocks were depressed as crude oil hovered near a four-year low in an oversupplied market and the Russian ruble, hammered in recent weeks as world oil prices fell, was again testing record lows around 48 rubles per dollar. Germany’s economy eked out growth of 0.1% on the quarter, while France – generally seen as in deeper trouble than its neighbor – grew by 0.3%. Overall euro zone data was due later. “The German number is slightly positive in line with expectations but it’s still soft,” said Patrick Jacq, a rate strategist at BNP Paribas in Paris.

“The (French) growth in Q3 is only driven by inventories. It’s just a one-off positive figure in a very weak environment and therefore this is not something which could lead the market to think that the economic situation is improving in France.” A Reuters poll showed Japanese companies overwhelmingly want Prime Minister Shinzo Abe to delay or scrap a planned tax increase, a move expected to come along with a decision, expected by many, to call a new election. The yen, down more than 3% against a stronger dollar this month, fell another half% to a seven-year low of 116.385 yen per dollar. “The argument is that delaying the sales tax hike means the impulse to CPI inflation will start to drop,” said Alvin Tan, a currency strategist at French bank Societe Generale in London. “If there’s no additional sales tax hike, the impulse to higher inflation starts to fade away quite rapidly. So in order to push inflation higher, which is what everybody wants, you need the currency to weaken a lot more.”

All those years lost for growth that will never come. Renzi is not a smart guy.

• Italy’s Slump Enters Fourth Year, Complicating Renzi’s Plans (Bloomberg)

Italy’s economy shrank in the third quarter pushing the nation into a fourth year of a slump that has complicated Prime Minister Matteo Renzi’s efforts to revive growth and keep public finances in check. Gross domestic product fell 0.1% from the previous three months, when it declined 0.2%, the national statistics institute Istat said in a preliminary report in Rome today. That matched the median forecast in a Bloomberg survey of 22 economists. Output was down by 0.4% from a year earlier. GDP in the euro region’s third-biggest economy has fallen in all but two of the last 13 quarters as the jobless rate rose to the highest on record.

Renzi is relying on estimated 0.6-percent growth next year to rein in a public debt of more than €2 trillion ($2.50 trillion) and preserve a tax rebate to low-paid employees aimed at reviving consumer demand. The Bank of Italy said yesterday in a report that the country needs to avoid a “recessionary demand spiral” due to the “persistence of economic difficulties, which have been exceptional in terms of duration and depth.” Italians rallied in Rome last month to protest an overhaul of labor market rules tha Renzi proposed to make it easier for businesses to hire and fire workers. The premier has repeatedly said the plan is a way to attract investments and that its framework will get parliamentary approval by year’s end before being fully implemented in 2015.

Finally a Bloomberg poll that gets something right?

• World Outlook Darkening as 89% in Poll See Europe Deflation Risk (Bloomberg)

The world economy is in its worst shape in two years, with the euro area and emerging markets deteriorating and the danger of deflation rising, according to a Bloomberg Global Poll of international investors. A plurality of 38% of those surveyed this week described the global economy as worsening, more than double the number who said that in the last poll in July and the most since September 2012, when Europe was mired in a recession. Much of the concern is again focused on the euro area: Almost two-thirds of those polled said its economy was weakening while 89% saw disinflation or deflation as a greater threat there than inflation over the next year. Respondents said the European Central Bank and the region’s governments are making the situation worse by pursuing too-tight policies, and fewer expressed confidence in ECB President Mario Draghi and German Chancellor Angela Merkel.

“The euro-zone economy has deteriorated and will get worse if there are no fiscal policy actions from core European countries, mainly Germany,” poll participant Sanwook Lee, a senior portfolio manager at Shinhan Bank in Seoul, said in an e-mail. Europe isn’t the only source of concern in the global economy, according to the quarterly poll of 510 investors, traders and analysts who are Bloomberg subscribers. More than half of those contacted said conditions in the BRIC economies – Brazil, Russia, India and China – are getting worse, compared with 36% who said so in July.

China is filled to its credit boom with this kind of shady deals.

• China Busts Underground Banks Linked to $23 Billion Transactions (Bloomberg)

Beijing police raided and shut down more than 10 underground banks that were involved in 140 billion yuan ($23 billion) of transactions over the past few years. The banks were raided on Sept. 18, with 59 people arrested and 264 bank accounts frozen, Beijing Municipal Public Security Bureau said in a statement today. The investigation started in February when Beijing police found that a man with surname Yao had transferred more than $5 million abroad in a year, according to the statement. Yao, who had a number of bank accounts, frequently bought $50,000 of foreign exchange, the police said. That’s the most overseas currency that a Chinese citizen can buy annually. The underground banks, most of which are family-run and operating out of homes, use online and mobile payment devices to buy or sell foreign exchange and illegally transfer funds abroad, according to the statement. Beijing police said they would continue to crackdown on crimes that threaten China’s economic and financial security.

Investors are clueless and befuddled. Ideal patsies.

• Stock Market Fear, Stress And Tensions Climbing (MarketWatch)

What happens if we get another melt-up, maybe to 18,000 on the Dow Jones Industrial Average before we see 17,000 again? I’m in a less aggressive mode for now, but feet to fire, if this bubble-blowing bull market is to keep on blowing, why not a total melt-up into and above 18,000 before year-end? Stranger things have happened. I often ask, who’s more scared right now, the bulls or the bears because when there’s an overwhelming consensus in the answer to that question, it’s often time for the markets to put on a big contrarian move opposite that sentiment. Are you a bull or one of the few bears remaining? Are you scared right now? Do you think most bulls are scared right now?

Fear, stress and tensions have been climbing along with the markets, which isn’t what you’d expect, is it? I’ve noticed throughout this week that tensions have been very high on Latest Scuttles and that’s a reflection of the stress felt by most traders and investors right now. There’s likely a lot of money managers who missed this last leg higher from the Ebola lows and now find themselves drastically behind their market benchmarks with just 45 days to go into year-end. That kind of technical setup into year-end could be a catalyst for the winners to keep their momentum heading higher. I personally am not trying and wouldn’t suggest trying to game the next market move, but it’s something to think about.

And what if you’ve missed this bull run over the last five years and still aren’t in the markets or even if you just find yourself like the aforementioned money managers and feel underinvested here? Like I said, I don’t think the continuing bubble-blowing bull market that I’ve predicted would play out like this is over yet. I wouldn’t be aggressive, but if you don’t think you own enough stocks (or any for that matter) then I do suggest scaling into some of the best stocks you can find, including some of the very best, most revolutionary growth stocks you can find.

The take-away: Apple is an 800-pound bubble.

• Apple Could Swallow Whole Russian Stock Market (Bloomberg)

If you owned Apple Inc., and sold it, you could purchase the entire stock market of Russia, and still have enough change to buy every Russian an iPhone 6 Plus. The CHART OF THE DAY shows the total market capitalization of all public companies in the world’s largest country slipped below that of the world’s most-valued company for the first time on record. The gap, at $121 billion on Nov. 12, is about the price of 143 million contract-free 64-gigabyte iPhones, based on Apple Store prices. The value of Russian equities has slumped $234 billion to $531 billion this year, while Apple gained $147 billion to $652 billion, according to data compiled by Bloomberg.

The technology company’s innovation and brand value attract investors, while Russia’s political conflicts, sanctions and the threat of economic stagnation next year make them nervous, according to Vadim Bit-Avragim, a portfolio manager who helps oversee about $4 billion at Kapital Asset Management LLC in Moscow. “Apple works with shareholders to maximize returns and is based where property is protected by law,” Bit-Avragim said. “In Russia, the legislative protection for property is not as good, most state-run companies have poor corporate governance, resources are concentrated in state hands and borrowing costs are shooting up. After all this, when you get involved in conflicts with your neighbors, it becomes very hard to persuade investors from all over the world to invest here.”

Destruction is our middle name.

• Fracking Boom Spurs Demand for Sand and Clouds of Dust (Bloomberg)

A little sand mine down the road didn’t seem like a big deal 17 years ago, when Alphonse Dotson picked the site for a vineyard in the Texas Hill Country. Today he’s surrounded by four mines blasting sand from the earth, filling the air with a fine dust that drifts across acres of sensitive grape vines. A fifth will open soon, and he says he’s worried. “I don’t want us to be smothered to death,” he said. Add sand mining to the list of industries transformed by the U.S. oil boom. The tiny grains of silica are what keep frackers fracking, propping open cracks punched into rock so oil and natural gas can flow. As drilling surged, so has demand for sand. Sand production has more than doubled in the U.S. over the past seven years. By the end of 2016, oil companies in North America will be pumping 145 billion pounds (66 billion kilograms) of it down wells annually. That’s enough to fill railcars stretching from San Francisco to New York – and back.

That’s triggering complaints from local communities, according to a Grant Smith, senior energy policy adviser at the Civil Society Institute. Dust from sand can penetrate deep into lungs and the bloodstream; mines consume massive amounts of water; sand-laden trucks are damaging roads; and property values can be affected. The surge in mining is a “little-understood danger of the fracking boom,” Smith said in a September call with reporters. Energy companies are paying 6% more for sand this year at a time when oil prices are plunging. While low prices may slow down drilling, that won’t make up for a supply bottleneck, said Samir Nangia, a principal at the Houston-based research company PacWest Consulting Partners. Fracking companies are struggling to get enough sand because there aren’t enough trucks and railcars to deliver it. Higher transportation costs are eating into profits at oil-services companies like Schlumberger, Halliburton and Baker Hughes.

A company that had revenues of $17 billion in 2013 just topples over, and no-one pays attention, because it happened to be in Denmark and SIngapore.

• Massive OW Bunker Bankruptcy: Questions Of Governance And Oversight (SeaTrade)

The rapid collapse into bankruptcy of OW Bunker just 48 hours after it revealed a $125m fraud at Singapore subsidiary Dynamic Oil Trading, as well as $150m in risk management losses announced at the same time, leaves an awful lot of unanswered questions. OW Bunker was not a two-bit marine fuel supplier, it had revenues of $17bn in 2013 and claimed a 7% share of the global marine fuel supply market. In March this year its IPO on Copenhagen’s NASDAQ exchange valued the company at DKK5.33bn ($900m), making it one of Denmark’s largest IPOs in recent years. In May this year OW Bunker made Forbes list of top 2,000 list of the world’s biggest public companies. As it stands just seven months on the from the IPO some 20,000 investors will have lost everything they put into the company, based on the statement when it filed for in-court restructuring of its main operating subsidiaries that it “must be assumed that the group’s equity is lost”.

Suppliers and sub-contractors will find themselves with large unpaid bills, something which P&I insurers Skuld have warned shipowners about. And more than 600 employees of the group worldwide face a very uncertain future. Trading is a risky business, and anyone investing in it needs to understand this, but this is also why corporate governance and oversight are so important. It is worth noting that according to reports in the Danish media the company did not actually uncover the fraud at Dynamic itself; one of its senior executives flew to Denmark and tearfully confessed to it. How long it would have gone on if this had not happened we can only speculate. Two employees have since been reported to the Danish police as OW Bunker filed for bankruptcy. What fraud was actually committed we do not know, although we do know it was over a six month period, so its open to question whether it was actual embezzlement or the hiding of losses as the market turned against the executives involved.

Certainly the recent sharp falls in the oil and bunker price point to the latter as a possibility. The case bears certain parallels to then Singapore-based, British national, rogue trader Nick Leeson who caused the collapse of Barings Bank in 1995 having run up losses on speculative trades that eventually totaled in the region of $1.4bn. Indeed the BBC is reporting the fraud at Dynamic could be one of Singapore’s largest financial scandals in the last 10 years, joining what is already a huge scandal in Denmark. The fraud revelations came on top of the $150m in risk management losses that resulted in the firing of OW Bunker head of risk management and evp Jane Dahl Christensen. The full extent of the fallout of OW Bunker’s sudden bankruptcy will most likely take years to unravel. However, lessons do need to be learned on corporate governance and oversight for the benefit of all going forward.

That Tony Abbott is one dumb f*ck: “Sydney before British settlement was “nothing but bush.”

• Aboriginals Decry G-20 Host Australia as Leaders Gather (Bloomberg)

Across the Brisbane River from where some of the world’s biggest leaders will soon gather, a group of 200 indigenous Australians is seeking to present another side to the country’s image as host and regional power. “We want to talk to the people of the world,” said twenty-seven-year-old Meriki Onus, who joined the Aboriginal people protesting in a city park after a two-day, 1,100-mile bus ride to the Queensland state capital. “The police system here is racist, the government systems here are racist and we’ve used the G-20 as an opportunity to tell the world that it’s not OK.” Australia’s first inhabitants – who lived on the continent at least 40,000 years prior to British settlement in 1788 and now make up about 3% of the population – are among groups using the draw of leaders like U.S. President Barack Obama at the Group of 20 meetings to highlight their causes.

The indigenous people gathered in the subtropical city, where police outnumber the 7,000 delegates and media, say the system of government has entrenched poverty. “This country is occupied by force, like what happened in Poland and France during War War II, but for us this has been going on for more than two centuries,” Wayne Wharton, spokesman for the Brisbane Aboriginal Sovereign Embassy, said today at the park protest. “Our people want our rightful place in the world, and that means economic benefits, social benefits, responsibility and services.” Speaking at a business breakfast today in Sydney with U.K. Prime Minister David Cameron, Australia’s leader Tony Abbott, a self-declared prime minister for Aborigines and host of this weekend’s G-20 summit, said Sydney before British settlement was “nothing but bush.”

“As we look around this glorious city, as we see the extraordinary development, it’s hard to think that back in 1788 it was nothing but bush and that the marines and the convicts and the sailors that straggled off those 12 ships just a few hundred yards from where we are now must have thought they’d come almost to the moon,” Abbott said. Daubed with “mourning paint” across his face and torso to highlight indigenous deaths in police custody, Wharton said the G-20 won’t help his people or other Aboriginal races throughout the world because it’s designed to make rich nations wealthier at the expense of the poor. “It all comes back to having the ability to accumulate and then distribute wealth – my people have never had that,” he said.

The Last Days Of The Growth Story

Oct 212014

October 21, 2014 Posted by Raúl Ilargi Meijer at 8:10 pm Finance Tagged with: debt, denial, Freud, Growth, Keynes 7 Responses »

Dorothea Lange Rear window tenement dwelling, 133 Avenue D, NYC June 1936

I am thinking about the similarities between a financial crisis and for instance a family crisis, the death of a loved one or close friend, a divorce, or a personal bankruptcy.

And I wonder why in the case of our recent (aka current) financial crisis, we allow nothing to enter our communications, and our train of thought, but the idea of recovery and a return to growth. Has everyone always reacted that way after earlier financial crises – history is full of them -, or is something else going on?

Why do we insist on returning to something we once had, even if we have no way of knowing whether we can ever return? Why don’t we focus – more – on what lies ahead, instead of what is behind us? Is it because we loved what we had so much? Or is something else going on?

Even if we do love what once was so much, there’s a time to move on after every disaster, every death in the family, every bankruptcy. And deep down we know that very well. Life will never be the same, but it’ll still be life. It seems safe to say that in general, life is about turning, not returning. Life changes, we change, every day, every minute, every millisecond.

This refusal to turn a new leaf and find out what’s on the other side of the hill has enormous consequences. We are actively digging ourselves so deep into debt that it’s preposterous to claim this debt is ours only, because it’s painfully clear, though we would never admit it (too painful perhaps?), that we can never pay it back. We leave that honor to our children, and to the generations after them.

We should undoubtedly have protected us from ourselves, by making it illegal and punishable by law to engage in such behavior (something along the lines of Child Protection Services). We chose instead to be blind to it. We still could – should – write such legislation, but it looks as if present politics and economic ‘thinking’ will only exacerbate a situation that is already far worse than we care to know.

The overruling ‘wisdom’ looks to be that we miraculously freed ourselves from the yoke of a balanced budget, an idea seemingly justified by the fact that a return to growth has been elevated to the status of a law, of either physics or a deity of our choice, growth that will subsequently make all debts melt like the snow on the Kilimanjaro.

That overruling wisdom, as should be obvious, is at best wishful thinking, but far more likely pure fantasy. Which has become our main, make that only, approach of the crisis we find ourselves in. If only we believe, our leaders will deliver us to growth heaven.

But what if this is the end of the growth story? What if it’s already behind us? It’s not as if growth has been a constant factor in the lives of our ancestors. And it’s not as if the laws of physics put no limits on everlasting growth. Growth is a passing thing, it’s a phase.

Most of us have heard of the seven stages of grief. Shock, Denial, Anger, Bargaining, Guilt, Depression, Acceptance. Where are we in our journey through these stages when it come to the financial crisis, and to growth? There’s only one stage that even remotely sounds right: Denial. We’re not even close to Anger yet, not when it comes to the larger population.

We simply deny that something has really changed. And even if you wish to claim that it hasn’t, no-one can deny the possibility that it has. Still, that is exactly what happens. Denial, everywhere you look.

The something else that is going on is that our brains have been kidnapped by those who (probably not even always consciously) seek to strengthen their – power – political and financial positions by making us believe in the growth story long after it has – for all we can see – died. That’s why we listen only to the growth story, to the exclusion of any and all other stories.

It’s a form of progress, though not a benign one. Freud’s ideas are (ab)used to hide reality from us (to ‘sell’ the message), while Keynes’ ideas are abused to hide the reality that you can’t buy growth with debt your children will have to pay back. Pretty simple, when you think about it.

If you know how to sell people detergents and presidents, abstract ideas is easy. And if those ideas are about economics, that nobody knows much about and all the trusted experts and press have the same message about 24/7, the circle is pretty much closed. All that’s left then is places like the Automatic Earth and others to get your alternative stories, but that’s no match for full blown propaganda.

Still we’re seeing, we’re living in, the last days of the growth story. And when the master class decides to drop that story, watch out. The emperor is one ugly wrinkled old duckling when he’s naked. You don’t want your kids to see that.

The Disgrace of Sacrificing a Generation

Oct 082014

October 8, 2014 Posted by Raúl Ilargi Meijer at 9:44 pm Finance Tagged with: children, Growth, power, sacrifice 19 Responses »

DPC Launch of the Western Star, Wyandotte, Michigan Oct 3 1903

Would you like to know how bankrupt our societies are? Financially AND morally? Before you say yes, please do acknowledge that you too ar eparty to the bankruptcy. Even if you have means, or you have no debt, or you’re under 25, you’re still letting it happen. And you may have tons of reasons or excuses for that, but you’re still letting it happen.

Our financial and moral bankruptcy shows – arguably – nowhere better than in the way we treat our children. A favorite theme of mine is that any parent you ask will swear to God and cross and hope to die that they love their kids to death, but the facts say otherwise. We only love them as far as the tips of our noses, or as far as the curb. That means you too.

While we swear on our mother’s graves that we love them so much, we leave them with a world that lost half of its wildlife species in 40 years, that can expect to make coastal areas around the globe uninhabitable during their lifetimes, and a world that is so mired in debt just so we can hang on to our dreams of oversized homes and cars and gadgets that all there will be left for them are nightmares.

But I always wanted what was best for them! Yeah, well, you always chose to not pay too much attention, too, and instead elected to work that job you hate and keep up with the Joneses and tell yourself there was nothing you could do about it anyway other than a yearly donation to some socially accepted charity in bed with corporations (you didn’t know? well, did you try to find out?)

You elected leaders that promised to let you keep what you had, and provide more of the same on top. You voted for the people who promised you growth, but you never questioned that promise. You never wondered, sitting in your home, the size of which would only 100 years ago have put aristocracy to shame, what would be the price to pay for your riches.

And you certainly never asked yourself if perhaps it would be your own children who were going to pay that price. Well, ‘Ich hab es nicht gewüsst’ has not been a valid defense since the Nuremberg trials, in case you were going for that.

The fact of the matter is, we can continue our lifestyles, best as we can, because we are able to make our children pay for it. We allow ourselves to continue to kill more species, at home but mostly abroad, because we never get in touch with any of those species anyway. Other than mosquitoes, which we swat. We can drive our 3 cars per family because we only see the ice melt in the Arctic on TV.

And we allow ourselves, and our governments, to get deeper into debt everyday, because we’ve been told that without – ever – more debt we would all die, that debt is the lifeblood of our very existence. We don’t understand what it means that our governments increase their debt levels by trillions every year, and we choose not to find out.

That’s a matter for the next generation; we’re good with our oversized flatscreens and coal powered central heating and all of that stuff. We are better off than the generation of our parents, and isn’t life always supposed to be like that?

Which brings us back to your kids. Because no, life is not supposed to be like that. Not every generation can be better off than the one before. In fact, you are the last one for whom that is true. It’s been a short blip in human history, let alone in the earth’s history, and now it’s over. And you must figure out what you’re going to do, knowing that not doing anything will make your sons and daughters futures even bleaker than they already are.

Europe Sacrifices a Generation With 17-Year Unemployment Impasse

Seventeen years after their first jobs summit European Union leaders are divided on how to create employment and a fifth of young people are still out of work. At a meeting in Milan today Italian Prime Minister Matteo Renzi plans to tout the new labor laws he’s pushing through. French President Francois Hollande will argue for more spending, a proposal German Chancellor Angela Merkel intends to reject. Britain’s prime minister David Cameron isn’t coming.

Their lack of progress may increase the frustration of ECB President Mario Draghi’s calling on the politicians to do their bit now and loosen the continent’s rigid labor markets even if that means facing the ire of protected workers. “An entire generation is being sacrificed in countries such as Spain,” economist Ludovic Subran said. “That has a real impact on productivity in the long run.”

How someone can talk about “a real impact on productivity” in the face of millions of lost and broken lives is completely beyond me. You have to be really dense to do that. And they pay people like that actual salaries.

When EU leaders met in Luxembourg in November 1997, the soon-to-be-born euro zone’s unemployment rate was about 11%. Jean-Claude Juncker, then prime minister of the host country, now president designate of the European Commission, promised a mix of free-market solutions and government plans would mean a “new start” for young people. Today the jobless rate is 11.5%. The Milan summit will focus on youth unemployment, which afflicts 21.6% of people under 25 across Europe, according to Eurostat. Even this number is almost identical to 1997, when it stood at 21.7%.

Average European youth unemployment numbers may not have changed much since 1997, which is bad enough, but plenty numbers did change. The young people of Greece, Spain, Italy and Portugal were not nearly as poorly off 17 years ago as they are today. That’s what the eurozone project has accomplished.

The leaders “need to discuss meaningful job creation,” Subran said. “It’s about avoiding the neither-nor situation of people being out of both work and school. This means providing jobs in the short term and training to improve skills and employability in the long term.” In February 2013, the EU allotted €6 billion ($7.6 billion) for youth-employment initiatives between 2014 and 2020, with the bulk of the spending in the first two years.

The centerpiece of the initiative is a “Youth Guarantee” that anyone under 25 should have either a job, apprenticeship, or training program within four months of leaving formal education or becoming unemployed. The initiative focuses on regions with over 25% youth unemployment, which is the whole of Spain, Greece, and Portugal, all but the north-east of Italy, about half of France, and a few regions of eastern Germany.

Lofty words. But nothing has come of them in many years, and nothing will. Politicians vie for the votes and campaign donations of the parents, not the children. Until the children are the majority block, but by then present day leaders will be gone.

Germany is opposed to discussing new spending until already allotted sums have been spent. Instead, Merkel’s government has stressed liberalization of labor markets as the best path to create jobs. France and Italy argue they are already taking steps to loosen their labor markets and those efforts won’t work without a background of growth.

Italy’s proposed rules, opposed by some lawmakers from Renzi’s Democratic Party, aim at making firing easier while providing a new system of income support for those who lose their job. European employment did improve after 1997, with the unemployment rate bottoming between 2007 and 2008 at 7%, and 15.7% for young people, as a credit bubble boosted growth in Spain and Greece.

It ballooned during the subsequent financial crisis. “I’m worried how the euro zone has detached itself from the rest of the world economy,” French Prime Minister Manuel Valls told business leaders in London Oct. 6. “If there is no strategy to support growth at the eurozone, we will be in even greater trouble.”

The only solutions in the minds of the leadership are reforms (make it easier to get rid of the older people and let the young do their jobs at half the price) and growth. Both of which have failed for all those years, but that’s all folks so they press for more of the same. Who cares about the young until they can unseat you?

The present leadership selects for a future in which they – and theirs – will still be the leadership. It’s only natural. Any victims made along the way there are seen as necessary collateral damage. Reforms and growth. Reforms being break down what generations of workers have built up in rights. Fighting squalid working conditions and miserable low pay. Think about that what you like.

But growth? What if there is no growth? Hey, even the IMF just said growth won’t return to levels of old. And then called for more reforms. But what lives will your children have if growth is gone, and what are you prepared to for them is it is? How are you going to soften the blow for them? How much are you willing to sacrifice for your children lest they be sacrificed by society?

One last thing: it seems obvious that we teach our kids the wrong skills. Or there wouldn’t be so many unemployed or in low-paying jobs. So if we want our kids to get a job, what should change in our education systems? Now, I must be honest with you, I’ve found our education so bad ever since I was even younger than I am now that I up and left.

I simply noticed that it was meant for people happy to be pawns in someone else’s game, and I knew that wasn’t me. Colleges and universities mold people into usable – not even useful – ‘things’, provided there is no independent thinking going on. Because that kills the entire set-up. It’s all been an utter disgrace for decades.

But this is not about me. The question is, what are we going to teach our kids? Well, with our present power structure, it will be a mere extension of what there is today. The overriding idea is that tomorrow will be like today, just with more of the same. That’s all we know, and all we have. And that’s what keeps our leaders happy too: a world in which they feel they can be safely settled into their comfy seats. Progress while sitting still. Don’t think I’m right? THink about it.

So would do you think the consensus would be when it comes to education? I think it would be having our kids be managers, lawyers, programmers, the same things that are ‘in’ today. More of the same, just more. But is that so wise if even the IMF says growth will never be the same it once was? What if things get really bad? What skills will they have that can help them through times like that?

Shouldn’t we perhaps teach our kids basic skills first, just in case? So they can grow and preserve food, build a home, repair machinery, that kind of thing? And only after that deal with the fancier stuff?

We have become utterly dependent on the ‘system’. Is it a good idea for our kids to be too? We lost our basic skills – or at least our parents did – at the exact same time that ‘growth’ became the magic word du jour. The idea was that we didn’t need them anymore, that other people would grow our food and take care of all the other basic necessities for us.

But what if that was just a temporary bubble, and it’s gone now? The data sure point to it. In that case, should we rush to move back our sons and daughters to the skillset our grandparents had?

And just in case you think this is all and only about Europe, this is a great portrait of America:

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