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America Can’t Afford to Rebuild

Sep 092017
 
 September 9, 2017  Posted by at 1:21 pm Finance Tagged with: , , , , , , , , , ,  8 Responses »


Adolphe Yvon Genius of America c1870

 

A number of people have argued over the past few days that Hurricane Harvey will NOT boost the US housing market. As if any such argument would or should be required. Hurricane Irma will not provide any such boost either. News about the ‘resurrection’ of New Orleans post-Katrina has pretty much dried up, but we know scores of people there never returned, in most cases because they couldn’t afford to.

And Katrina took place 12 years ago, well before the financial crisis. How do you think this will play out today? Houston is a rich city, but that doesn’t mean it’s full of rich people only. Most homeowners in the city and its surroundings have no flood insurance; they can’t afford it. But they still lost everything. So how will they rebuild?

Sure, the US has a National Flood Insurance Program, but who’s covered by it? Besides, the Program was already $24 billion in debt by 2014 largely due to hurricanes Katrina and Sandy. With total costs of Harvey estimated at $200 billion or more, and Irma threating to cause far more damage than that, where’s the money going to come from?

It took an actual fight just to push the first few billion dollars in emergency aid for Houston through Congress, with four Texan representatives voting against of all people. Who then will vote for half a trillion or so in aid? And even if they do, where would it come from?

 

 

Trump’s plans for an infrastructure fund were never going to be an easy sell in Washington, and every single penny he might have gotten for it would now have to go towards repairing existing roads and bridges, not updating them -necessary as that may be-, let alone new construction.

Towns, cities, states, they’re all maxed out as things are, with hugely underfunded pension obligations and crumbling infrastructure of their own. They’re going to come calling on the feds, but Washington is hitting its debt ceiling. All the numbers are stacked against any serious efforts at rebuilding whatever Harvey and Irma have blown to pieces or drowned.

As for individual Americans, two-thirds of them don’t have enough money to pay for a $500 emergency, let alone to rebuild a home. Most will have a very hard time lending from banks as well, because A) they’re already neck-deep in debt, and B) because the banks will get whacked too by Harvey and Irma. For one thing, people won’t pay the mortgage on a home they can’t afford to repair. Companies will go under. You get the picture.

There are thousands of graphs that tell the story of how American debt, government, financial and non-financial, household, has gutted the country. Let’s stick with some recent ones provided by Lance Roberts. Here’s how Americans have maintained the illusion of their standard of living. Lance’s comment:

This is why during the 80’s and 90’s, as the ease of credit permeated its way through the system, the standard of living seemingly rose in America even while economic growth rate slowed along with incomes. Therefore, as the gap between the “desired” living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage. It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.

 

 

There’s no meat left on that bone. There isn’t even a bone left. There’s only a debt-ridden mirage of a bone. If you’re looking to define the country in bumper-sticker terms, that’s it. A debt-ridden mirage. Which can only wait until it’s relieved of its suffering. Irma may well do that. A second graph shows the relentless and pitiless consequences of building your society, your lives, your nation, on debt.

 

 

It may not look all that dramatic, but look again. Those are long-term trendlines, and they can’t just simply be reversed. And as debt grows, the economy deteriorates. It’s a double trendline, it’s as self-reinforcing as the way a hurricane forms.

 

Back to Harvey and Irma. Even with so many people uninsured, the insurance industry will still take a major hit on what actually is insured. The re-insurance field, Munich RE, Swiss RE et al, is also in deep trouble. Expect premiums to go through the ceiling. As your roof blows off.

We can go on listing all the reasons why, but fact is America is in no position to rebuild. Which is a direct consequence of the fact that the entire nation has been built on credit for decades now. Which in turn makes it extremely vulnerable and fragile. Please do understand that mechanism. Every single inch of the country is in debt. America has been able to build on debt, but it can’t rebuild on it too, precisely because of that.

There is no resilience and no redundancy left, there is no way to shift sufficient funds from one place to the other (the funds don’t exist). And the grand credit experiment is on its last legs, even with ultra low rates. Washington either can’t or won’t -depending on what affiliation representatives have- add another trillion+ dollars to its tally, state capitals are already reeling from their debt levels, and individuals, since they have much less access to creative accounting than politicians, can just forget about it all.

Not that all of this is necessarily bad: why would people be encouraged to build or buy homes in flood- and hurricane prone areas in the first place? Why is that government policy? Why is it accepted? Yes, developers and banks love it, because it makes them a quick buck, and then some, and the Fed loves it because it keeps adding to the money supply, but it has turned America into a de facto debt colony.

If you want to know what will happen to Houston and whatever part of Florida gets hit worst, think New Orleans/Katrina, but squared or cubed -thanks to the 2007/8 crisis.

 

 

Debt Rattle September 9 2017

Sep 092017
 
 September 9, 2017  Posted by at 9:04 am Finance Tagged with: , , , , , , , , , , , ,  4 Responses »


Irma projections took a slight deflection west

 

• Hurricane Irma Becomes Category 5 Storm Again (CNN)
• 5.6 Million People Told To Evacuate Florida Due To Irma (AP)
• Hurricane Irma Thrives On Fateful Mix Of ‘Ideal’ Conditions (R.)
• Harvey Won’t Help Flagging Housing Market (DDMB)
• Swamp Fever (Jim Kunstler)
• Capitalism, the State and the Drowning of America (CP)
• The “Real” Vampire Squid (Roberts)
• Venezuela’s Maduro Says Will Shun US Dollar In Favor Of Yuan, Others (R>)
• What Happens To Nations That Try To Ditch The Dollar (TAM)
• Bitcoin Tumbles On Report China To Shutter Digital Currency Exchanges (R.)
• Russia Faces Internal Battle Over Bitcoin (Forbes)
• Artificial Intelligence Fuels New Global Arms Race (Wired)
• Data Swamped US Spy Agencies Put Hopes On Artificial Intelligence (AFP)
• EU Brushes Off ‘Democratic Scandal’ Of Greek Bailout (EUO)

 

 

Irma took a light dip south towards Cuba last night. This may save Miami from a direct hit – but not Tampa. Irma’s the first Category 5 hurricane to make landfall in Cuba since 1924. 3 storms making landfall at the same time has never been recorded before.

• Hurricane Irma Becomes Category 5 Storm Again (CNN)

Hurricane Irma regained Category 5 status late Friday as the core of the storm made landfall in Cuba with maximum sustained winds of 160 mph, the US National Hurricane Center said. Irma made landfall on the Camaguey archipelago of Cuba, the center said late Friday night. The massive storm edged closer to US landfall in the Florida Keys after leaving a trail of devastation and death in much of the Caribbean as it advanced toward South Florida. Forecasters with the National Hurricane Center say the storm’s wind speeds will increase after Irma passes Cuba then slips into the extremely warm waters near the Keys. “Nowhere in the Florida Keys will be safe,” the National Weather Service tweeted.

There were worries the storm’s most powerful winds, on the northeastern side of the core, could pummel Miami, but it appears the city will avoid a direct hit, while still getting pounded by strong winds, storm surge and heavy rains. At least 24 people were killed this week when Irma pummeled northern Caribbean islands such as Barbuda and the Virgin Islands. In Puerto Rico, hundreds of thousands of people – nearly 70% of the US territory’s utility customers – were left without power, the governor’s office said. Irma slammed the Turks and Caicos, and southeastern Bahamas early before it was off to pound northern Cuba and the central Bahamas.

Irma is expected be near the Florida Keys and South Florida by early Sunday, and many residents there have moved inland or to shelters. Many counties are under evacuation orders. “If you have been ordered to evacuate, leave now. Not tonight, not in an hour, now,” Gov. Rick Scott said Friday night. Staying in homes could subject residents to storm surge as high as 12 feet, the governor added. Forecasters have advised that the storm’s potential path could change and residents should realize that most of Florida will feel its impact.

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How do you evacuate millions? The logistics are staggering.

• 5.6 Million People Told To Evacuate Florida Due To Irma (AP)

Florida has asked 5.6 million people to evacuate ahead of Hurricane Irma, or more than one-quarter of the state’s population, according to state emergency officials. Andrew Sussman, the state’s hurricane program manager, said Friday the total includes people throughout the southern half of the state as well as those living in inland Florida in substandard housing who were also told leave due to the dangerous storm that will slam the state this weekend. Florida is the nation’s third-largest state with nearly 21million people according to the U.S. Census. For days Gov. Rick Scott has been urging residents to evacuate, especially those who live in coastal areas that could be flooded due to the walls of water expected from Irma’s arrival. The National Hurricane Center is warning Floridians that even if the storm seems to moving away from the East Coast in the latest tracks, don’t get complacent.

“This is a storm that will kill you if you don’t get out of the way,” said National Hurricane Center meteorologist and spokesman Dennis Feltgen. Feltgen says the storm has a really wide eye, with hurricane-force winds that cover the entire Florida peninsula and potentially deadly storm surges on both coasts. “Everybody’s going to feel this one,” Feltgen said. As Florida deals with a catastrophic, dangerous hurricane, it may have a financial storm to deal with. The annual budget forecast released this week shows, despite an ongoing economic recovery, Florida is expected to bring in just enough money to meet its spending needs. That forecast shows the state will have a surplus of just $52 million during the fiscal year that starts in July 2018. The new estimate does not take into account the potential effects that will come from Hurricane Irma.

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Ironically, Irma has sucked up so much warm surface water, it is lowering water temperatures and thereby ‘hampering’ the next storm up, José. Who was still noted as ‘close to Category 5’ overnight.

• Hurricane Irma Thrives On Fateful Mix Of ‘Ideal’ Conditions (R.)

Hurricane Irma, a deadly, devastating force of nature, rapidly coalesced from a low-pressure blip west of Africa into one of the most powerful Atlantic storms on record, following an unhindered atmospheric path and fed by unusually warm seas. A combination of many factors, experts said on Friday, set the stage for Irma’s formation and helped the storm achieve its full thermodynamic potential, creating the monster tropical cyclone that wreaked havoc on the eastern Caribbean and may inflict widespread damage on Florida. “It got lucky,” said John Knaff, a meteorologist and physical scientist for the National Oceanic and Atmospheric Administration (NOAA). “This storm is in the Goldilocks environment for a major hurricane. It’s bad luck for whoever is in its path, but that’s what going on here.”

Brian Kahn, an atmospheric scientist and cloud specialist for NASA’s Jet Propulsion Laboratory, called the ocean conditions that spawned Irma “absolutely ideal.” Balmy water temperatures along Irma’s trajectory ran deep beneath the surface and slightly higher than normal, by as much as a degree Fahrenheit in places, providing ample fuel for the storm’s development, scientists said. Irma also encountered little if any interference in the form of wind shear – sudden changes in vertical wind velocity that can blunt a storm’s intensity – as it advanced at about 10 to 18 miles per hour, an ideal pace for hurricanes. Its fortuitous path of least resistance was essentially ordained by a well-placed atmospheric ridge of high pressure that steered the storm by happenstance through some of the Caribbean’s warmest waters as well as an area mostly devoid of wind shear.

The result was a gargantuan storm that rapidly grew to a Category 5, the top of the Saffir-Simpson scale of hurricane strength, with sustained winds of 185 miles per hour, the most forceful ever documented in the open Atlantic. It also ranks as one of just five Atlantic hurricanes known to have achieved such wind speeds during the past 82 years.

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“..of the 1 million or so mortgaged homeowners in the disaster area, more than 300,000 could become delinquent within two months..”

• Harvey Won’t Help Flagging Housing Market (DDMB)

Something is up, or more likely down, with the U.S. housing market. And the reconstruction after Hurricane Harvey may not do much to help. Here’s the evidence: The latest take on home-builder sentiment showed that buyer traffic stubbornly remains in negative territory, despite some of the highest readings of the current cycle on builders’ expectations for sales gains in the next six months. In addition, recent mortgage rate declines have not led to an increase in applications to buy a home. Over the past few weeks, purchase activity has slumped to a six-month low, even though rates are at their lowest level since November. This defies a central tenet of the housing market that falling rates naturally lead to an uptick in sales. As for actual sales volumes, both new and existing July home sales missed forecasts by wide margins.

At an annualized rate of 571,000, new home sales dropped to a seven-month low, well off their long-term average pace of 727,000. The number of homes on the ground rose to 276,000 units, the highest since June 2009. At July’s pace, it would take 5.8 months to clear the inventory. The existing home sales report that followed was similarly weak, with closings sliding to the lowest since August 2016. Not only was the 5.44-million annualized pace 110,000 units below forecast, July’s figures reveal the all-important spring selling season was something of a bust, given July’s data captured contracts signed from April through June. Prices have been and remain the main impediment. The median new home sales price of $313,700 marked the highest July price on record and is up more than 6% over last year’s level.

At an annual gain of 6.2%, the best that can be said of the median sales price for previously occupied homes is that it’s off the record pace it set in June. Corroborating the slowdown in sales, both the Federal Housing Finance Agency and S&P Case-Shiller home-price indexes have softened unexpectedly. [..] About 1.2 million homes in and around Houston were at moderate to high risk for flooding but aren’t in a designated flood zone that would have required insurance. Many will qualify for federal disaster relief. Still, the government program comes in the form of low-interest rate loans to help shoulder the burden of repair costs at a time when many households are already buried in debt with precious little in savings; as the third quarter got underway, the saving rate fell to 3.5%, a fresh low for the current cycle.

Although many have drawn comparisons to the aftermath of Hurricane Katrina, Harvey will affect more than twice as many mortgaged properties. According to Black Knight Financial Services, of the 1 million or so mortgaged homeowners in the disaster area, more than 300,000 could become delinquent within two months, and 160,000 are at risk of becoming seriously delinquent inside a four-month period. As per the Mortgage Bankers Association, homes in foreclosure nationwide totaled 502,437 in the second quarter, exemplifying the very real potential for Harvey to leave a huge scar on the housing market.

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“A week or so after Irma has gone away, the ill-feeling that heaps this country like a swamp fever will still be there, driving the new American madness into precincts yet unknown.”

• Swamp Fever (Jim Kunstler)

The destruction of Florida (and whatever else stands in the way up the line) will be as real as it gets. You’ve heard the old argument, I’m sure, that a natural disaster turns out to be a boon for the economy because so many people are employed fixing the damage. It’s not true, of course. Replacing things of value that have been destroyed with new things is just another version of the old Polish Blanket Gag: guy wants to make his blanket longer, so he cuts a foot off the top and sews it onto the bottom. The capital expended has to come from something and somewhere, and in this case it probably represents the much talked-about necessary infrastructure spending that is badly needed for bridges, roads, water and sewer systems, et cetera, in all the other parts of the USA that haven’t been hit by storms.

Instead, these places and the things in them will quietly inch closer to criticality without drawing much notice. The second major weather disaster this year may not be enough to induce holdouts to reconsider the issue of climate change, but it ought to provoke some questioning about the development pattern known as suburban sprawl, which even in its pristine form can be described as the greatest misallocation of resources in the history of the world. Surely there will be some debate as to whether Florida, or at least parts of it, gets rebuilt at all. The wilderness of strip malls, housing subdivisions, and condo clusters deployed along the seemingly endless six-lane highways that accumulated in the post-war orgy of development was an affront to human nature, if not to a deity, if one exists.

There are much better ways to build towns and we know how to do it. Ask the shnooks who paid a hundred bucks to walk down Disney’s Main Street the week before last. Apart from all that remains the personal tragedy that awaits, the losses of many lifetimes of work invested in things of value, of homes, of meaning, and of life itself. Many people who evacuated will return to… nothing, and perhaps many of them will not want to stay in such a fragile place. But the America they roam into in search of a place to re-settle is going to be a more fragile place, too. A week or so after Irma has gone away, the ill-feeling that heaps this country like a swamp fever will still be there, driving the new American madness into precincts yet unknown.

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Is it really capitalism that’s to blame? Do other systems not build where they should not? It seems a general human propensity to look at a desert or a swamp and declare ‘there’s nothing there’, so let’s build and exploit.

• Capitalism, the State and the Drowning of America (CP)

What we need to understand is how capitalism has managed to reproduce itself since the Great Depression, but in a way that has put enormous numbers of people and tremendous amounts of property in harm’s way along the stretch from Texas to New England. The production of risk began during the era of what is sometimes called regulated capitalism between the 1930s and the early 1970s. This form of capitalism with a “human face” involved state intervention to ensure a modicum of economic freedom but it also led the federal government to undertake sweeping efforts to control nature. The motives may well have seemed pure. But the efforts to control the natural world, though they worked in the near term, are beginning to seem inadequate to the new world we currently inhabit.

The U.S. Army Corps of Engineers built reservoirs to control floods in Houston just as it built other water-control structures during the same period in New Orleans and South Florida. These sweeping water-control exploits laid the groundwork for massive real estate development in the post–World War II era. All along the coast from Texas to New York and beyond developers plowed under wetlands to make way for more building and more impervious ground cover. But the development at the expense of marsh and water could never have happened on the scale it did without the help of the American state. Ruinous flooding of Houston in 1929 and 1935 compelled the Corps of Engineers to build the Addicks and Barker Dams. The dams combined with a massive network of channels—extending today to over 2,000 miles—to carry water off the land, and allowed Houston, which has famously eschewed zoning, to boom during the postwar era.

The same story unfolded in South Florida. A 1947 hurricane caused the worst coastal flooding in a generation and precipitated federal intervention in the form of the Central and Southern Florida Project. Again, the Corps of Engineers set to work transforming the land. Eventually a system of canals that if laid end to end would extend all the way from New York City to Las Vegas crisscrossed the southern part of the peninsula. Life for the more than five million people who live in between Orlando and Florida Bay would be unimaginable without this unparalleled exercise in the control of nature. It is not simply that developers bulldozed wetlands with reckless abandon in the postwar period. The American state paved the way for that development by underwriting private accumulation.

Concrete was the capitalist state’s favored medium. But as the floods mounted in the 1960s, it turned to non-structural approaches meant to keep the sea at bay. The most famous program along these lines was the National Flood Insurance Program (NFIP) established in 1968, a liberal reform that grew out of the Great Society. The idea was that the federal government would oversee a subsidized insurance program for homeowners and in return state and local municipalities would impose regulations to keep people and property out of harm’s way.

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Central bankers lie when they say there is a recovery, but still keep buying assets by the trillions.

• The “Real” Vampire Squid (Roberts)

According to the Bank for International Settlements: “Policy tools that involve the active use of central bank balance sheets – both the assets and the liabilities – can help monetary authorities to navigate the policy challenges during times of financial stress and when interest rates are close to zero.“ But wait, this is what Draghi said next: “The economic expansion, which accelerated more than expected in the first half of 2017, continues to be solid and broad-based across countries and sectors.” So, what is it?

If you actually have “solid and broad-based” economic growth across countries and sectors, why are you still flooding the system with “emergency measures,” and keeping interest rates near zero? That’s a rhetorical question. The reality is that Central Banks are keenly aware of the underlying economic weakness that currently exists as evidenced by the inability to generate inflationary pressures. They also understand that if the financial markets falter, the immediate feedback loop into the global economic environment will be swift and immediate. This is why there continue to be direct purchases of equities by the ECB and the BOJ. Which is also the reason why, despite nuclear threats, hurricanes, geopolitical tensions and economic disconnects, the markets remain within a one-day striking distance of all-time highs.

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Maduro trying to stay ahead of the CIA.

• Venezuela’s Maduro Says Will Shun US Dollar In Favor Of Yuan, Others (R>)

Venezuelan President Nicolas Maduro said on Thursday his cash-strapped country would seek to “free” itself from the U.S. dollar next week, using the weakest of two official foreign exchange regimes and a basket of currencies. Maduro was refering to Venezuela’s “DICOM” official exchange rate in which the dollar buys 3,345 bolivars, according to the central bank. At the strongest official rate, one dollar buys just 10 bolivars, but on the black market the dollar fetches 20,193 bolivars, a spread versus the official rate that economists say has fostered corruption. A thousand dollars of local currency bought when Maduro came to power in 2013 would now be worth $1.20. “Venezuela is going to implement a new system of international payments and will create a basket of currencies to free us from the dollar,” Maduro said in an hours-long address to a new legislative superbody, without providing details of the new mechanism.

“If they pursue us with the dollar, we’ll use the Russian ruble, the yuan, yen, the Indian rupee, the euro,” Maduro said. The oil-rich nation is undergoing a major economic and social crisis, with millions suffering food and medicine shortages and what is believed to be the world’s highest inflation. Monthly inflation quickened to 34%, according to the opposition-controlled National Assembly. Critics say that instead of overhauling Venezuela’s failing currency controls or enacting reforms to shake the economy out of a fourth straight year of recession, Maduro has dug in and increased controls. On Thursday night, he increased the country’s minimum wage by 40%, taking it to just over $7 per month at the black market exchange rate. He also announced that around 50 “essential” products and services would have their prices frozen at new levels, auguring higher inflation and more shortages.

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Sorry, but this isn’t “a theory advanced in William R. Clark’s book Petrodollar Warfare”. This is general knowledge, has been for many years.

• What Happens To Nations That Try To Ditch The Dollar (TAM)

Venezuela sits on the world’s largest oil reserves but has been undergoing a major crisis, with millions of people going hungry inside the country which has been plagued with rampant, increasing inflation. In that context, the recently established economic blockade by the Trump administration only adds to the suffering of ordinary Venezuelans rather than helping their plight. A theory advanced in William R. Clark’s book Petrodollar Warfare essentially asserts that Washington-led interventions in the Middle East and beyond are fueled by the direct effect on the U.S. dollar that can result if oil-exporting countries opt to sell oil in alternative currencies. For example, in 2000, Iraq announced it would no longer use U.S. dollars to sell oil on the global market. It adopted the euro, instead. By February 2003, the Guardian reported that Iraq had netted a “handsome profit” after making this policy change. Despite this, the U.S. invaded not long after and immediately switched the sale of oil back to the U.S. dollar.

In Libya, Muammar Gaddafi was punished for a similar proposal to create a unified African currency backed by gold, which would be used to buy and sell African oil. Though it sounds like a ludicrous reason to overthrow a sovereign government and plunge the country into a humanitarian crisis, Hillary Clinton’s leaked emails confirmed this was the main reason Gaddafi was overthrown. The French were especially concerned by Gaddafi’s proposal and, unsurprisingly, became one of the war’s main contributors. (It was a French Rafaele jet that struck Gaddafi’s motorcade, ultimately leading to his death). Iran has been using alternative currencies like the yuan for some time now and shares a lucrative gas field with Qatar, which may ultimately be days away from doing the same. Both countries have been vilified on the international stage, particularly under the Trump administration.

Nuclear giants China and Russia have been slowly but surely abandoning the U.S. dollar, as well, and the U.S. establishment has a long history of painting these two countries as hostile adversaries. Now Venezuela may ultimately join the bandwagon, all the while cozying up to Russia, as well (unsurprisingly, Venezuela and Iran were identified in William R. Clark’s book as attracting particular geostrategic tensions with the United States). The CIA’s admission that it intends to interfere inside Venezuela to exact a change of government — combined with Trump’s recent threat of military intervention in Venezuela and Vice President Mike Pence’s warning that the U.S. will not “stand by” and watch Venezuela deteriorate — all start to make a lot more sense when viewed through this geopolitical lens.

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It’s still unclear what exactly Beijing is banning.

• Bitcoin Tumbles On Report China To Shutter Digital Currency Exchanges (R.)

Bitcoin fell sharply on Friday after a report from a Chinese news outlet said China was planning to shut down local crypto-currency exchanges, although analysts said this was just a temporary setback. Sources close to a cross regulators committee that oversees online finance activities told Chinese financial publication Caixin that authorities plan to shut key bitcoin exchanges in China. [..] two sources in direct contact with officials at three Chinese bitcoin exchanges – Beijing-based OKCoin, Shanghai-based BTC China, and Beijing-based Huobi – said the platforms told them that they have not heard anything from the Chinese government.

The news follows China’s move earlier this week to ban so-called “initial coin offerings,” or the practice of creating and selling digital currencies or tokens to investors in order to finance start-up projects. Greg Dwyer, business development manager at crypto-currency trading platform BitMEX, said there was confusion over whether China would close bitcoin exchanges following the ICO ban. [..] China’s Bitcoin exchanges said on Saturday they are still awaiting clarification from the authorities on a media report that they will be shut down.

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Nabiullina, the world’s smartest central banker, doesn’t seem to be seeing eye to eye with Putin on this.

• Russia Faces Internal Battle Over Bitcoin (Forbes)

A lot can happen in month. Russian institutions went from preparing the Moscow Stock Exchange for the legal trading in crypto-currencies like bitcoin and ether, the two most popular ones used in Russia, to coming a hair away from following in China’s footsteps and banning initial coin offerings (ICO), a crypto-currency funding mechanisms for new tech companies. “The use of crypto-currency as a surrogate for the ruble in trading in goods and services, in our opinion, has a risk of undermining the circulation of money,” central banker Elvira Nabiullina told Russian newswire Tass on Friday. “We will not allow the use of crypto-currency as a surrogate money,” she said without mentioning ICOs in particular. One can only speculate that those crowdfunding platforms are on her radar.

Nabiullina is arguably one of the most powerful women in Russia. She has Vladimir Putin’s ear on all things economic and financial. Putin defers to her on such matters. This summer, Putin met with Ethereum developer and CEO Vitalik Buterin to discuss developments in so-called blockchain technologies, the tech platforms that provide the backbone to digital money. Buterin later told a local newspaper in Tatarstan that he felt Putin was opening to these new technologies as a matter of Russian national tech strategy. “Many people at different levels of the Russian government are open to crypto-currencies. I think my meeting with Putin helped him see things clearer,” Buterin was quoted as saying in Tatarstan’s online daily Realnoe Vremya. This is the second time this week that the Russian Central Bank has come out against crypto-currencies.

“Crypto-currencies are issued by an unlimited circle of anonymous entities. Due to the anonymous nature of the issuance of crypto-currency, citizens and legal entities can be involved in illegal activities, including legalization (laundering) of proceeds from crime and financing of terrorism,” the Russian central bank said in a statement issued on September 4. “Given the high risks of circulation and use of crypto-currency, the Bank of Russia considers it premature to admit crypto-currencies, as well as any financial instruments nominated or associated with crypto-currencies, into circulation and used at organized trades such as clearing and settlement infrastructure within the territory of the Russian Federation.” Nabiullina likened the rapid expansion of crypto-currency to the gold rush. Others have referred to it as a bubble. “For a long time there was very little growth (in this technology), and now we see something like a gold rush,” she warned.

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Why Google and Facebook won’t be regulated anythime soon. They’re part of the CIA now.

• Artificial Intelligence Fuels New Global Arms Race (Wired)

For many Russian students, the academic year started last Friday with tips on planetary domination from President Vladimir Putin. “Artificial intelligence is the future, not only for Russia but for all humankind,” he said, via live video beamed to 16,000 selected schools. “Whoever becomes the leader in this sphere will become the ruler of the world.” Putin’s advice is the latest sign of an intensifying race among Russia, China, and the US to accumulate military power based on artificial intelligence. All three countries have proclaimed intelligent machines as vital to the future of their national security. Technologies such as software that can sift intelligence material or autonomous drones and ground vehicles are seen as ways to magnify the power of human soldiers.

“The US, Russia, and China are all in agreement that artificial intelligence will be the key technology underpinning national power in the future,” says Gregory C. Allen, a fellow at nonpartisan think tank the Center for a New American Security. He coauthored a recent report commissioned by the Office of the Director of National Intelligence that concluded artificial intelligence could shake up armed conflict as significantly as nuclear weapons did. In July, China’s State Council released a detailed strategy designed to make the country “the front-runner and global innovation center in AI” by 2030. It includes pledges to invest in R&D that will “through AI elevate national defense strength and assure and protect national security.” The US, widely recognized as home to the most advanced and vibrant AI development, doesn’t have a prescriptive roadmap like China’s.

But for several years the Pentagon has been developing a strategy known as the “Third Offset,” intended to give the US, through weapons powered by smart software, the same sort of advantage over potential adversaries that it once held in nuclear bombs and precision-guided weapons. In April, the Department of Defense established the Algorithmic Warfare Cross-Functional Team to improve use of AI technologies such as machine vision across the Pentagon. Russia lags behind China and the US in sophistication and use of automation and AI, but is expanding its own investments through a military modernization program begun in 2008. The government’s Military Industrial Committee has set a target of making 30 percent of military equipment robotic by 2025. “Russia is behind the curve—they are playing catchup,” says Samuel Bendett, a research analyst who studies the country’s military at the Center for Naval Analyses.

Algorithms good at searching holiday photos can be repurposed to scour spy satellite imagery, for example, while the control software needed for an autonomous minivan is much like that required for a driverless tank. Many recent advances in developing and deploying artificial intelligence emerged from research from companies such as Google. China’s AI strategy attempts to directly link commercial and defense developments in AI. For example, a national lab dedicated to making China more competitive in machine learning that opened in February is operated by Baidu, the country’s leading search engine.

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It’s not just about warfare either, it’s about tracking your own people.

• Data Swamped US Spy Agencies Put Hopes On Artificial Intelligence (AFP)

Swamped by too much raw intel data to sift through, US spy agencies are pinning their hopes on artificial intelligence to crunch billions of digital bits and understand events around the world. Dawn Meyerriecks, the Central Intelligence Agency’s deputy director for technology development, said this week the CIA currently has 137 different AI projects, many of them with developers in Silicon Valley. These range from trying to predict significant future events, by finding correlations in data shifts and other evidence, to having computers tag objects or individuals in video that can draw the attention of intelligence analysts. Officials of other key spy agencies at the Intelligence and National Security Summit in Washington this week, including military intelligence, also said they were seeking AI-based solutions for turning terabytes of digital data coming in daily into trustworthy intelligence that can be used for policy and battlefield action.

AI has widespread functions, from battlefield weapons to the potential to help quickly rebuild computer systems and programs brought down by hacking attacks, as one official described. But a major focus is finding useful patterns in valuable sources like social media. Combing social media for intelligence in itself is not new, said Joseph Gartin, head of the CIA’s Kent School, which teaches intelligence analysis. “What is new is the volume and velocity of collecting social media data,” he said. In that example, artificial intelligence-based computing can pick out key words and names but also find patterns in data and correlations to other events — and continually improve on that pattern finding.

AI can “expand the aperture” of an intelligence operation looking for small bits of information that can prove valuable, according to Chris Hurst, the chief operating officer of Stabilitas, which contracts with the US intelligence community on intel analysis. “Human behavior is data and AI is a data model,” he said at the Intelligence Summit. “Where there are patterns we think AI can do a better job.” The volume of data that can be collected increases exponentially with advances in satellite and signals intelligence collection technology. “If we were to attempt to manually exploit the commercial satellite imagery we expect to have over the next 20 years, we would need eight million imagery analysts,” Robert Cardillo, director of the National Geospatial-Intelligence Agency, said in a speech in June.

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The EU is full of people who have no say. Ultimately, only Merkel does, or rather, those who keep her in power. The Eurogroup is not accountable to anyone but her, because it doesn’t even officially exist.

• EU Brushes Off ‘Democratic Scandal’ Of Greek Bailout (EUO)

The European Commission has defended its role in the Greek bailout despite Pierre Moscovici, the EU finance commissioner, having called the Eurogroup “a democratic scandal.” The Eurogroup is a club of eurozone states’ finance ministers presided over by Dutch finance minister Jeroen Dijsselbloem but dominated in practice by his German counterpart, Wolfgang Schaeuble. It imposed its will on Greece when the country was teetering on the verge of economic collapse and a eurozone exit in 2015, in exchange for access to bailout funds from the European Commission, the ECB, and IMF. A Commission spokesperson on Tuesday (5 September) noted that the EU executive had “invested a lot of time and effort and resources to keep Greece in the eurozone.” But Pierre Moscovici, the EU finance commissioner, took a more critical line.

Over the weekend, he described the Eurogroup as a “democratic scandal”, given that its talks are held behind closed doors and without any public accountability. “Let’s face it, the Eurogroup as we know it is rather a pale imitation of a democratic body,” he said in his blog on Saturday (2 September). Moscovici said the governance behind the EU’s economic and monetary union had also lacked proper democratic oversight. “Sometimes in the past, when we look at Greece, it has been close to a democratic scandal,” he said. Moscovici’s admission is all the more striking given the recent publication of a book by Greece’s former finance minister, Yanis Varoufakis. Varoufakis, who steered Greek talks at the Eurogroup until his resignation in July 2015, provides a detailed account of the Commission’s double-standards during the initial rounds.

He said that Moscovici would agree in private to easing the austerity measures but, in the Eurogroup, the Commission’s representative would then reject everything in favour of harsh measures driven by Dijsselbloem and Schaeuble. In one private meeting in Dijsselbloem’s office, Varoufakis said that Moscovici had even capitulated to Dijsselbloem, despite having previously agreed to concessions that would render the Greek programme more flexible. Dijsselbloem refused to agree to the measures proposed by the Commission. Varoufakis said that Moscovici had responded to Dijsselbloem with “whatever the Eurogroup president says” in a voice that quavered with dejection. “During the Eurogroup meeting, whenever I looked at him [Moscovici] I imagined the horror Jacques Delors or any of the EU’s founding fathers would have felt had they observed the scene in Jeroen’s [Dijsselbloem’s] office,” writes Varoufakis.

[..] Most of the bailout funds have gone towards paying off international loans and proved beneficial to German and French banks that were massively exposed to Greek public debt in the lead up to the financial crisis. According to one study, Germany had also ended up with large profits, yielding interest savings on German bonds of more that €100 billion during the period of 2010 to 2015 from the Greek debt crisis.

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Debt Rattle September 5 2017

Sep 052017
 
 September 5, 2017  Posted by at 7:43 am Finance Tagged with: , , , , , , , , , ,  1 Response »


Irma

 

• The Supernova Nature Of Asset Bubbles (CHS)
• Bitcoin Tumbles as PBOC Declares Initial Coin Offerings Illegal (BBG)
• China ICO Crackdown May Just Be The Start (R.)
• Caribbean, Florida Brace For Hurricane Irma (BBC)
• Landlords Demand Rent On Flooded Houston Homes (G.)
• Germany Must Pay Poland Up To $1 Trillion In Reparations – Minister (Ind.)
• Populist Hopeful Shunned by Italian Elite on Shores of Lake Como (BBG)
• China May Be The Real Target Of North Korea’s Pressure (AFP)
• Nuclear-Armed Nations Brought The North Korea Crisis On Themselves (G.)
• New Kind Of Black Hole Found At The Centre Of The Milky Way (RT)
• Established Story That Humans Came From Africa May Be Wrong (Ind.)

 

 

It takes ever more effort to keep a bubble inflated.

• The Supernova Nature Of Asset Bubbles (CHS)

The trouble with inflating asset bubbles is that you have to keep inflating them or they pop. Unfortunately for the bubble-blowing central banks, asset bubbles are a double-bind: you cannot inflate assets forever. At some unpredictable point, the risk and moral hazard that are part and parcel of all asset bubbles trigger an avalanche of selling that pops the bubble. This is another facet of The Fed’s Double-Bind: if you stop pumping asset bubbles, they pop as participants realize the music has stopped, and if you keep pumping them, they expand to super-nova criticality and implode.

There are several dynamics at play in this double-bind.

1. The process of inflating a bubble (for example, the current bubbles in stocks and real estate) requires pushing investors and speculators alike into risky asset classes. This puts the market at increasing risk as everyone is pushed to one side of the boat.

2. Those on the other side of the boat (i.e. shorts) are slowly but surely eradicated as the pumping keeps inflating the bubble. When the bubble finally bursts, there are no shorts left to cover, i.e. buy stocks at lower prices to reap their profits.

3. As the bubble continues to expand, the money available to enter the market and keep prices rising declines. The very success of the pumping process strips the markets of new sources of new money, leading to a point where normal selling exceeds new-money buying and the bubble collapses.

4. Money pumping by central banks and governments follows a curve of diminishing return. One analogy is insulin insensitivity: as the systemic distortions build, markets become increasingly insensitive to money pumping. Authorities respond to this intrinsic process of increasing insensitivity by pumping even more money into the system. But as with insulin insensitivity, at some point the system loses all sensitivity to money pumping: no matter how much money central authorities inject, the markets refuse to go higher. At this point, the stick-slip nature of bubbles manifests and modest selling triggers a collapse as participants all rush for the exits. Buyers have vanished and there is no longer a bid at any price.

5. Having pumped the assets higher with ever-greater injections of speculative risk and pumping, central banks and states have exhausted their ability to re-inflate assets as they collapse.

Systems cannot be controlled once risk and moral hazard have been raised to levels where instability is an intrinsic feature of the system. Those who actually believe the Fed can keep asset bubbles inflated at a permanently high plateau will discover their error in dramatic fashion, as the bigger the bubble, the more violent the implosion. This is the super-nova nature of asset bubbles: if you try to deflate the bubble slowly, it implodes, but if you keep inflating the bubble it eventually implodes from its internal extremes.

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China needs its foreign reserves. The last thing it needs is a way for money to leave the country that it has no control over. Other countries have no choice but to follow suit.

• Bitcoin Tumbles as PBOC Declares Initial Coin Offerings Illegal (BBG)

Bitcoin tumbled the most since July after China’s central bank said initial coin offerings are illegal and asked all related fundraising activity to be halted immediately, issuing the strongest regulatory challenge so far to the burgeoning market for digital token sales. The People’s Bank of China said on its website Monday that it had completed investigations into ICOs, and will strictly punish offerings in the future while penalizing legal violations in ones already completed. The regulator said that those who have already raised money must provide refunds, though it didn’t specify how the money would be paid back to investors. It also said digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies. Digital tokens can’t be used as currency on the market and banks are forbidden from offering services to initial coin offerings.

“This is somewhat in step with, maybe not to the same extent, what we’re starting to see in other jurisdictions – the short story is we all know regulations are coming,” said Jehan Chu at Kenetic Capital in Hong Kong, which invests in and advises on token sales. “China, due to its size and as one of the most speculative IPO markets, needed to take a firmer action.” Bitcoin tumbled as much as 11.4%, the most since July, to $4,326.75. The ethereum cryptocurrency was down more than 16% Monday, according to data from Coindesk. ICOs are digital token sales that have seen unchecked growth over the past year, raising $1.6 billion. They have been deemed a threat to China’s financial market stability as authorities struggle to tame financing channels that sprawl beyond the traditional banking system. Widely seen as a way to sidestep venture capital funds and investment banks, they have also increasingly captured the attention of central banks that see in the fledgling trend a threat to their reign.

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The Chinese know how corrupt their countrymen are.

• China ICO Crackdown May Just Be The Start (R.)

China is poised to further tighten rules on virtual currencies after regulators on Monday banned virtual coin fundraising schemes, Chinese financial news outlet Yicai reported, citing sources. China banned and deemed illegal the practice of raising funds through launches of token-based digital currencies, targeting so-called initial coin offerings (ICO) in a market that has exploded since the start of the year. Yicai’s report late Monday cited a source close to decision-makers as saying the announcement on the ban was just the start of further follow-up regulations of virtual currencies. In total, $2.32 billion has been raised through ICOs globally, with $2.16 billion of that being raised since the start of 2017, according to cryptocurrency analysis website Cryptocompare.

Bitcoin rival ethereum, which token-issuers usually ask to be paid in and which has seen dramatic growth this year, fell sharply on the news. It was down almost 20% on Monday at $283, according to trade publication Coindesk. Bitcoin was also down 8%, while the total value of all cryptocurrencies was down around 10% after China’s ban was announced, according to industry website Coinmarketcap.com.

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Wonder what reporting will look like if islands are destroyed but US mainland is not.

• Caribbean, Florida Brace For Hurricane Irma (BBC)

Hurricane Irma has been upgraded to a powerful category four storm as warnings have been issued for several Caribbean islands. The hurricane had sustained winds of up to 220km/h (140mph) and was likely to strengthen in the next 48 hours, the US National Hurricane Center (NHC) said. Irma was projected to hit the Leeward Islands, causing storm surges, life-threatening winds and torrential rain. The US state of Florida has declared a state of emergency. It comes as residents in Texas and Louisiana are reeling from the effects of Hurricane Harvey, which struck as a category four storm, causing heavy rain and destroying thousands of homes. However the NHC warned that it was too early to forecast Irma’s exact path or effects on the continental US. Irma was set to reach the Leeward Islands, east of Puerto Rico, by late Tuesday or early Wednesday (local time), the centre added.

The storm was moving at a speed of 20km/h (13mph). It may cause rainfall of up to 25cm (10in) in some northern areas and raise water levels by up to 3m (9ft) above normal levels, the NHC said. Puerto Rico also declared a state of emergency and activated the National Guard. Governor Ricardo Rossello announced the opening of emergency shelters able to house up to 62,000 people, and schools would be closed on Tuesday. Long queues of people formed in shops, with residents stocking water, food, batteries, generators and other supplies. Hurricane warnings have been issued for the islands of Antigua and Barbuda, Anguilla, Montserrat, St Kitts and Nevis, St Martin, Sint Maarten, St Barthelemy, Saba, St Eustatius, Puerto Rico, British Virgin Islands and US Virgin Islands. It means that hurricane conditions are expected in the next 36 hours.

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Absurdity.

• Landlords Demand Rent On Flooded Houston Homes (G.)

An acute housing crisis is starting to grip thousands of other families in south-east Texas as the floodwaters ebb away, with a death toll put at 60 on Monday. More than 180,000 houses in the Houston area have been badly damaged, with only a fraction of occupants owning any flood insurance. And under Texas law, rent must still be paid on damaged dwellings, unless they are deemed completely uninhabitable. A spokeswoman for the city of Houston’s housing department said city officials “are aware these problems exist” but said that state law deals with the situation. She said the city was still assessing the total number of people in need of housing assistance. Under the Texas property code, if a rental premises is “totally unusable” due to an external disaster then either the landlord or tenant can terminate the lease through written notice.

But if the property is “partially unusable” because of a disaster, a tenant may only get a reduction in rent determined by a county or district court. “There are a lot of property owners who aren’t conscious of what has gone on; they are being rude and kicking people out,” said Isela Bezada, an unemployed woman who lived with 10 family members in a Houston house until her landlord took her to court to evict her after the hurricane hit. Bezada, like Fuentes, has had almost every area of her life touched by the flood. Her relatives, who work in home renovations, have little opportunity to bring in money until the full gutting of sodden houses – piles of torn up carpet, broken chairs and children’s toys have become a common adornment to the front of Houston homes – and she worries about other family members stranded in Port Arthur by a flooded highway.

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Greece first.

• Germany Must Pay Poland Up To $1 Trillion In Reparations – Minister (Ind.)

Germany should consider paying Poland as much as $1 trillion in World War II reparations, according to the Polish foreign minister. Poland’s foreign minister Witold Waszczykowski told local radio station RMF that “serious talks” were needed with Germany to “find a way to deal with the fact that German-Polish relations are overshadowed by the German aggression of 1939 and unresolved post-war issues.” He said Poland’s material losses were about $1 trillion, or higher. Polish defense minister Antoni Macierewicz also accused European critics of trying to “erase” the fate of the Poles at German hands during the war “from the historical memory of Europe”.

The country’s right-wing government has dismissed a 1953 resolution by Poland’s former communist government which dropped any claim to reparations from Germany, and are instead claiming that Germany is “shirking” its moral responsibility. Critics of the government say they are talking about reparations to divert attention from their nationalistic agenda. Around six million Polish citizens, including about three million Jews, were killed during the war and much of Warsaw was destroyed. Mr Waszczykowski did not say when Poland would make public its formal position on repatriations.

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Just keep saying populist often enough. He’s right about the euro: “a currency tailor-made for the German economy.”

• Populist Hopeful Shunned by Italian Elite on Shores of Lake Como (BBG)

Populist would-be premier Luigi Di Maio had an awkward introduction to the Italian elite. The Five Star Movement’s most likely candidate for next year’s election was ignored by Italy’s business and financial establishment when he arrived at an exclusive networking event by Lake Como on Sunday. Di Maio, 31, was reduced to posing for photographers, while a passing banking executive muttered that he hoped the populist might learn something from his visit. His group, which wants a referendum on Italy’s euro membership, is virtually tied in opinion polls with the Democratic party of ex-premier Matteo Renzi, and with a possible center-right alliance including the Forza Italia party of Silvio Berlusconi. Di Maio sought to reassure.

Those opinion polls – as well as the possibility of a hung parliament – are prompting fears of political instability and financial turbulence with elections due by late May, even as the third-biggest economy in the euro area recovers from its worst recession since World War II. “We don’t want a populist, extremist or anti-European Italy,” he told the Ambrosetti Forum in Cernobbio, in a bid to win round his skeptical audience. The euro referendum plan is simply “a last resort,” he added, to force reforms of the European Union and “a currency tailor-made for the German economy.”

The proposals of Five Star, co-founded by ex-comic Beppe Grillo, also include a monthly €780 “citizen’s income” for the poor and the jobless, purging private lenders from control of the Bank of Italy, and tougher penalties for managers of bankrupt banks. “We want to stay in the EU and discuss some of the rules which are suffocating and damaging our economy,” Di Maio said. “And the money we’re giving the EU budget every year must be one of the themes to put forward to the other countries.” Many of those ideas were anathema to those debating world affairs at the luxury Villa D’Este hotel – a five-star institution with which the assembled ruling class was altogether more comfortable.

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Xi has to polish his image before the Congress in October. He can’t let this continue.

• China May Be The Real Target Of North Korea’s Pressure (AFP)

North Korea’s escalating nuclear provocations are putting putative ally China in an increasing bind, and may be part of a strategy to twist Beijing’s arm into orchestrating direct talks between Pyongyang and Washington, analysts said. The North’s Kim dynasty has repeatedly used nuclear brinkmanship over the years in a push to be taken seriously by the United States but traditionally avoided causing major embarrassment to China, its sole major ally and economic lifeline. But leader Kim Jong-Un’s detonation Sunday of what he called a hydrogen bomb marked the second time this year that the 33-year-old family scion upstaged Chinese President Xi Jinping just as he was hosting a carefully choreographed international gathering.

Communist propaganda deifies Xi as an infallible father figure, but Kim’s actions are puncturing the facade and exposing the Chinese leader’s impotence toward the nuclear crisis on his doorstep. “North Korea’s repeated nuclear and missile tests have put China in a more and more difficult position,” said Shi Yinhong, Director of the Center for American Studies at Renmin University in Beijing. Shi said Kim – who has never met Xi – had become “more and more hostile towards China” after Beijing signed on to tougher new international sanctions against Pyongyang. That has apparently made Kim more willing to bring pressure on Xi, said Jean-Pierre Cabestan, a political science professor at Hong Kong Baptist University. Kim may be using Xi “like a cue ball in billiards,” Cabestan said, “in order to get negotiations with the United States.” “But he has to be careful not to infuriate Xi as China is his only lifeline.”

Pyongyang’s sixth nuclear test, by far its most powerful to date, came just as leaders of the five BRICS emerging economies – Brazil, Russia, India, China, and South Africa – gathered for a summit. The meeting in the southeastern city of Xiamen was intended to be the typical China-hosted event — micromanaged to the smallest detail to portray Xi at home as a wise and benevolent world leader. But Kim stole the spotlight, just as he did in May when the North conducted a missile test that embarrassed Xi as he hosted a large international summit on trade.

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Valid points.

• Nuclear-Armed Nations Brought The North Korea Crisis On Themselves (G.)

North Korea’s defiant pursuit of nuclear weapons capabilities, dramatised by last weekend’s powerful underground test and a recent long-range ballistic missile launch over Japan, has been almost universally condemned as posing a grave, unilateral threat to international peace and security. The growing North Korean menace also reflects the chronic failure of multilateral counter-proliferation efforts and, in particular, the longstanding refusal of acknowledged nuclear-armed states such as the US and Britain to honour a legal commitment to reduce and eventually eliminate their arsenals. In other words, the past and present leaders of the US, Russia, China, France and the UK, whose governments signed but have not fulfilled the terms of the 1970 nuclear non-proliferation treaty (NPT), have to some degree brought the North Korea crisis on themselves.

Kim Jong-un’s recklessness and bad faith is a product of their own. The NPT, signed by 191 countries, is probably the most successful arms control treaty ever. When conceived in 1968, at the height of the cold war, the mass proliferation of nuclear weapons was considered a real possibility. Since its inception and prior to North Korea, only India, Pakistan and Israel are known to have joined the nuclear “club” in almost half a century. To work fully, the NPT relies on keeping a crucial bargain: non-nuclear-armed states agree never to acquire the weapons, while nuclear-armed states agree to share the benefits of peaceful nuclear technology and pursue nuclear disarmament with the ultimate aim of eliminating them. This, in effect, was the guarantee offered to vulnerable, insecure outlier states such as North Korea. The guarantee was a dud, however, and the bargain has never been truly honoured.

Rather than reducing their nuclear arsenals, the US, Russia and China have modernised and expanded them. Britain has eliminated some of its capability, but it is nevertheless renewing and updating Trident. France clings fiercely to its “force de frappe”. Altogether, the main nuclear-weapon states have an estimated 22,000 nuclear bombs. A report by the non-governmental British-American Security Information Council in May said nuclear security was getting worse. “The need for nuclear disarmament through multilateral diplomacy is greater now than it has been at any stage since the end of the cold war. Trust and confidence in the existing nuclear non-proliferation regime is fraying, tensions are high, goals are misaligned and dialogue is irregular,” the report said.

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It’s only 100,000 suns. The biggest one is 4,000 times larger.

• New Kind Of Black Hole Found At The Centre Of The Milky Way (RT)

A new kind of black hole has been found at the centre of the Milky Way – a find that may help explain the evolution of the phenomena. In research conducted by Japanese astronomers using the ALMA Observatory in northern Chile, a black hole 100,000 times the size of our sun was found within a molecular gas cloud. Its relatively small size means that it is the first to be identified as an intermediate-mass black hole (IMBH). Professor Tomoharu Oka of Japan’s Keio University believes that black holes with masses greater than a million solar masses are at the centre of all galaxies and are essential to their growth. The origins of supermassive black hole, however, remain a mystery. “One possible scenario is IMBHs – which are formed by the runaway coalescence of stars in young compact star clusters – merge at the centre of a galaxy to form a supermassive black hole,” said Prof Oka.

Using the ALMA telescope, the team observed the cloud more than 195 light years from the centre of the Milky Way. In findings published in the journal Nature Astronomy, Prof Oka then used computer simulations to show the high speed motion of the gas cloud, which the team concluded was a sign that it is surrounding a black hole. “Based on the careful analysis of gas kinematics, we concluded a compact object with a mass of about 100,000 solar masses is lurking in this cloud,” Prof Oka added. The IMBH is the second-largest black hole discovered in the Milky Way next to Sagittarius A*, which is 400 million times the size of our sun. According to theories, the Milky Way should be home to about 100 million smaller black holes, but only 60 have been found.

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“.. the absence of evidence for later humans could suggest that the journey “may not have ended well..”

• Established Story That Humans Came From Africa May Be Wrong (Ind.)

The belief that humans came out of Africa millions of years ago is widely believed. But it might be about to be entirely re-written, according to the authors of a new study. They claim to have found a footprint in Crete that could change the narrative of early human evolution, suggesting that our ancestors were in modern Europe far earlier than we ever thought. The accepted story of the human lineage has been largely set since researchers found fossils of our early ancestors in South and East Africa, in the middle of the 20th century. Later discoveries appeared to suggest that those that followed remained isolated in Africa for millions of years before finally moving out and into Europe and Asia. But the new discovery of a footprint that appears to have belonged to a human that trod down in Crete 5.7 million years ago challenges that story.

Humans may have left and been exploring other continents including Europe far earlier than we knew. “This discovery challenges the established narrative of early human evolution head-on and is likely to generate a lot of debate,” said Professor Per Ahlberg, who was an author on the study. “Whether the human origins research community will accept fossil footprints as conclusive evidence of the presence of hominins in the Miocene of Crete remains to be seen.” The study looked at the characteristics of the footprint, in particular examining its toes. It found that the footprint didn’t have claws, walked on two feet and had inner toes that went out further than its outer ones. All of that led them to conclude that the foot appeared to belong to our early human ancestors, who could have been walking around Europe at an early time than we ever knew.

They also make clear that the owner of the footprint and their species could have developed the same traits separately from those in Africa. At the time the footprint was made, the Sahara Desert didn’t exist and lush, savannah-like environments went all the way from North Africa to the eastern Mediterranean, and Crete hadn’t yet detached from the Greek mainland. All of that makes it easier to see how those early hominins made their way to the island. But the journey might not run into problems. Mark Maslin from University College London told The Times that while the discovery supports the idea that our ancestors used their new found bipedalism to walk into modern Europe, the absence of evidence for later humans could suggest that the journey “may not have ended well”.

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Debt Rattle September 3 2017

Sep 032017
 
 September 3, 2017  Posted by at 9:24 am Finance Tagged with: , , , , , , , ,  5 Responses »


Edward Hopper Sunday 1926

 

• America’s Superstar Companies Are a Drag on Growth (BBG)
• Forget Wall Street – Silicon Valley Is The New Political Power In DC (G.)
• Google To Be Hit With Record EU Fine Over Claims Of Phone Software Abuse (T.)
• North Korea Quake Seems Related To Nuclear Test (BBG)
• Bitcoin Tumbles To Pre Korea-Missile-Launch Level After Topping $5000 (ZH)
• China Sees New World Order With Oil Benchmark Backed By Gold (ANR)
• Why Houston Doesn’t Need Federal Flood Relief (Mises)
• Harvey Could Bankrupt The Federal Flood-Insurance Program (ZH)
• Harvey Makes Landfall in Saudi Arabia (BBG)
• Pesticides Linked To Birth Abnormalities In Major New Study (Ind.)
• France Votes Against The Use Of Pesticide Glyphosate (FarmingUK)

 

 

The perfect recipe for strangling an economy: “..as a result of this increased market power, the big superstar companies have been raising their prices and cutting their wages. This has lifted profits and boosted the stock market, but it has also held down real wages, diverted more of the nation’s income to business owners, and increased inequality. It has also held back productivity, since raising prices restricts economic output.”

• America’s Superstar Companies Are a Drag on Growth (BBG)

Here’s a story about the U.S. economy that more people are telling these days. Since the 1980s, antitrust enforcement has gotten weaker. As a result, a few big companies have managed to capture a much bigger share of the market in various industries. Technology may have helped too, by letting big companies spread their geographic reach, and by creating network effects that keep customers locked in to platforms like Facebook. Anyway, as a result of this increased market power, the big superstar companies have been raising their prices and cutting their wages. This has lifted profits and boosted the stock market, but it has also held down real wages, diverted more of the nation’s income to business owners, and increased inequality. It has also held back productivity, since raising prices restricts economic output.

Like all big, sweeping theses about the economy, this story can’t be proven or disproven with a single research paper, or even a dozen papers. But like detectives, economists can probe various pieces and see how each one checks out. In the past few years, researchers have found that industrial concentration – measured by the market share of the four biggest companies in an industry – has indeed been increasing in most parts of the U.S. economy. They’ve documented a correlation between industrial concentration and a decline in labor’s share of national income. They’ve confirmed that profits have risen substantially. They’ve documented a slackening in the enforcement of antitrust law. And they’ve found some evidence that after mergers, prices go up while productivity doesn’t improve.

Now, a series of new papers provides even more support for key aspects of the story. The first, a paper by economists Jan de Loecker and Jan Eeckhout, has caused quite a stir in the economics press and on the blogs. De Loecker and Eeckhout find that markups – the amount that companies charge over and above their costs – have been on the rise since about 1980. Back then, according to the authors’ estimates, the average company charged a price that was about 18% above costs – now, the number is 67%.

The authors then use some very simple econ models to link a rise in markups to declines in labor’s share of national income, low-skilled workers’ wages, reduced labor force participation and a slowdown in the broader economy. It all fits with basic economic theory – less competition leads to increased market power, leading in turn to all sorts of bad economic outcomes. The second paper, by German Gutierrez and Thomas Philippon, looks at declining levels of business investment. Basic theory suggests that when top companies get more market power, they invest less in their businesses as they restrict output and raise prices. Market power could therefore be one big reason for the decline in U.S. business investment:

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But these ‘superstar’ companies can do what they want; they have the power, both politically and economically.

• Forget Wall Street – Silicon Valley Is The New Political Power In DC (G.)

Funding thinktanks is just one of the ways that America’s most powerful industries exert their influence over policymakers. Much of the work takes place a quarter of a mile from the White House, in a lesser-known political power base: Washington’s K Street corridor, the epicenter of the lobbying industry. In addition to thinktanks, K Street is packed with slick corporate representatives, hired guns, and advocacy groups. The lobbyists spend their days swarming over members of Congress to ensure their private interests are reflected in legislation and regulation. While the big banks and pharma giants have flexed their economic muscle in the country’s capital for decades, there’s one relative newcomer that has leapfrogged them all: Silicon Valley. Over the last 10 years, America’s five largest tech firms have flooded Washington with lobbying money to the point where they now outspend Wall Street two to one.

Google, Facebook, Microsoft, Apple and Amazon spent $49m on Washington lobbying last year, and there is a well-oiled revolving door of Silicon Valley executives to and from senior government positions. Tech companies weren’t always so cozy with Capitol Hill. During its 1990s heyday, Microsoft accumulated enormous wealth and market share. Despite being one of the world’s largest companies, the PC software pioneer mostly kept away from Washington, spending just $2m on lobbying in 1997. However, the company’s size and anticompetitive business practices attracted the scrutiny of regulators in Clinton’s administration, whipped up by the lobbying of disgruntled competitors including Sun Microsystems, IBM and a company called Novell. The following year, the Department of Justice sued Microsoft, accusing it of using a Windows operating system monopoly to push its Internet Explorer browser to the disadvantage of rivals.

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US ‘superstar’ companies’ power has not yet fully pervaded Europe. A matter of time?!.

• Google To Be Hit With Record EU Fine Over Claims Of Phone Software Abuse (T.)

Google faces a multibillion-euro fine by the European Commission for using its Android smartphone software to stifle competition. The record-breaking penalty could be imposed as soon as this month, according to industry and legal sources in Brussels. Other insiders said the commission may wait until later in the year before sanctioning Google. Brussels has accused the world’s second-biggest company of breaking anti-trust laws by forcing mobile phone manufacturers to pre-load Google apps on their devices. The fine will escalate the company’s regulatory woes in Europe, where the commission has waged a long-running campaign to try to ensure competition flourishes in the digital economy. In June, the competition commissioner Margrethe Vestager fined Google €2.4bn (£2.2bn) for doctoring search results to favour its price-comparison shopping service.

Vestager also ordered the company to change how it presents search results. It has until the end of the month to comply with the demand, or face daily fines of 5% of its global turnover. Sources expect the Android fine to be substantially higher than the shopping penalty. The software is a central pillar of the $650bn (£502bn) empire of Alphabet, Google’s owner. It powers an estimated 80% of smartphones. About half of all internet traffic is through phones. Last year Vestager, 49, accused Google of using Android as a tool to “protect and expand its dominant position in internet search”. The company allows handset makers to use the software without paying a fee, but they must pre-install Google’s Chrome browser, search bar and other apps. This stipulation “harms consumers” and prevents digital rivals “from competing on their own merits”, according to Vestager.

In addition to fining Google, she is expected to demand a fundamental overhaul of its relationship with smartphone makers, such as Samsung. That could undermine the big profits Google earns through Android. It monetises the software platform by analysing the mountains of data generated by its apps and selling targeted adverts to clients. [..] the company has strenuously denied breaking competition laws. Last year it said giving away Android “keeps manufacturers’ costs low, while giving consumers unprecedented control of their mobile devices”.

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The pressure on Xi will rise a lot. And US should sit down with Putin. Urgently.

• North Korea Quake Seems Related To Nuclear Test (BBG)

North Korea said it successfully tested a hydrogen bomb with “unprecedentedly big power” on Sunday that can be loaded onto an intercontinental ballistic missile, in its first nuclear test under U.S. President Donald Trump’s watch. The test, ordered by Kim Jong Un, was a “perfect success” and confirmed the precision and technology of the hydrogen bomb, according to the Korean Central News Agency. Kim’s regime has defied Trump’s warnings as it seeks the capability to strike America with an atomic weapon. “The creditability of the operation of the nuclear warhead is fully guaranteed,” KCNA said. South Korea’s weather agency said it detected a magnitude 5.7 earthquake around 12:29 p.m. local time near the Punggye-ri nuclear test site in northeast North Korea. Energy from Sunday’s explosion was about six times stronger in force than the nuclear test conducted by Pyongyang last September, the weather agency said.

“All options are on the table,” Japanese Foreign Minister Taro Kono said on public broadcaster NHK. Prime Minister Shinzo Abe said a North Korea nuclear test would be “absolutely unacceptable and we must protest it strongly.” Pyongyang’s actions are set to further increase tensions in Northeast Asia, where concerns have grown this year that a war of words between Trump and Kim could set off a military conflict. It was the sixth nuclear test by Pyongyang since 2006 and the first since the U.S. and South Korea elected new leaders. Trump had no immediate response to the nuclear test, though he sent a tweet thanking relief workers after Hurricane Harvey devastated states in the southern U.S. He has repeatedly lashed out at North Korea since taking office, warning last month of “fire and fury” if Kim’s regime continues to threaten the U.S.

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“Chinese market regulators have begun cracking down on ICOs as “illegal fundraising vehicles” in disguise..“

• Bitcoin Tumbles To Pre Korea-Missile-Launch Level After Topping $5000 (ZH)

Shortly after topping $5,000 (according to several exchanges), Bitcoin began to tumble dramatically – now down almost $500 – erasing all the post-North-Korea missile anxiety gains.

Ethereum has crashed even more.

Meanwhile, one of the world’s largest bitcoin exchange, Shanghai-based BTC China, announced it had suspended ICOCoin deposits as well as trading and withdrawals, starting 6pm on Sunday, while Caixin reports that authorities shut down a blockchain conference over the weekend on concerns unregulated Initial Coin Offerings were being used to raise funds illegally, adding that Chinese market regulators have begun cracking down on ICOs as “illegal fundraising vehicles” in disguise, and in taking a page out of the SEC playbook, will soon issue official rules on ICOs. As CoinTelegraph adds, the self-regulatory group National Internet Finance Association of China warned its members about the dangers in participating in initial coin offerings (ICO).

The group claimed that ICOs could be using misleading information as part of fundraising campaigns. In a statement in late August 2017, the online finance organization further warned its member companies to exercise extreme caution when dealing with the new fundraising mechanism. Part of the statement reads: “China Internet Finance Association members should take the initiative to strengthen self-discipline, to resist illegal financial behavior.” [..] an official for Russia’s national legislature said that new laws regulating the exchange of cryptocurrencies will be complete by the end of the fall. Anatoly Aksakov, who leads the State Duma’s financial markets committee, told Russian media this week that next steps involve the formation of a dedicated working group to address the issue.

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Sounds overcooked. But yes, US sanctions are not helping. Still, physical delivery in gold is not what anyone wants, far too clumsy for real trade. And who trusts paper gold? Even better: no-one trusts the yuan.

• China Sees New World Order With Oil Benchmark Backed By Gold (ANR)

China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry. The contract could become the most important Asia-based crude oil benchmark, given that China is the world’s biggest oil importer. Crude oil is usually priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars. China’s move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong. “The rules of the global oil game may begin to change enormously,” said Luke Gromen, founder of U.S.-based macroeconomic research company FFTT.

The Shanghai International Energy Exchange has started to train potential users and is carrying out systems tests following substantial preparations in June and July. This will be China’s first commodities futures contract open to foreign companies such as investment funds, trading houses and petroleum companies. Most of China’s crude imports, which averaged around 7.6 million barrels a day in 2016, are bought on long-term contracts between China’s major oil companies and foreign national oil companies. Deals also take place between Chinese majors and independent Chinese refiners, and between foreign oil majors and global trading companies. Alan Bannister, Asia director of S&P Global Platts, an energy information provider, said that the active involvement of Chinese independent refiners over the last few years “has created a more diverse marketplace of participants domestically in China, creating an environment in which a crude futures contract is more likely to succeed.”

China has long wanted to reduce the dominance of the U.S. dollar in the commodities markets. Yuan-denominated gold futures have been traded on the Shanghai Gold Exchange since April 2016, and the exchange is planning to launch the product in Budapest later this year. Yuan-denominated gold contracts were also launched in Hong Kong in July – after two unsuccessful earlier attempts – as China seeks to internationalize its currency. The contracts have been moderately successful. The existence of yuan-backed oil and gold futures means that users will have the option of being paid in physical gold, said Alasdair Macleod, head of research at Goldmoney, a gold-based financial services company based in Toronto. “It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either,” Macleod said.

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The size of both Texas and Houston Metro GDP is quite something.

• Why Houston Doesn’t Need Federal Flood Relief (Mises)

In his article today, Christopher Westley noted that Texas’s economy — when measured by GDP — is larger than Canada’s. In other words: If Texas were an independent country, it would be the world’s 10th largest economy (totaling $1.6 trillion), and its citizens would be more than capable of addressing natural disasters of the magnitude of a major flood. Texas’s economy is also larger than those of Russia and Australia. By why stop our analysis at the state of Texas? Indeed, if we look at the GDP of the Houston metropolitan area, we find it comes in at $503 billion. This total is similar to the GDPs of Poland, Belgium, and Austria. It’s significantly larger than the GDPs of Norway and Denmark. Nor is Texas’s GDP largely driven by federal spending — so we can’t say that Texas’s economy depends on federal spending to stay afloat.

When we look at federal spending in Texas compared to the federal taxes paid by Texans, we find it’s nearly a one-for-one relationship. So, if the Federal government stopped spending in Texas — but allowed Texans to keep their money, Texas would be fine. [..] Of course, we’ll be told that federal disaster relief programs are all about “sharing” and “cooperation” and “kindness.” In reality, it’s all just about forcing one group of people to hand over money to another group of people. There is no doubt that Texas and Houston now face significant challenges in rebuilding after the flood. But, when we demand that other regions and states pay for the rebuilding of Texas, we’re acting as if those other states and communities don’t have problems of their own. Needs related to poverty, infrastructure, and education in, say, Michigan did not magically disappear because Texas experienced a flood.

The only reason it now seems right to take money from people in Michigan, and hand it over to Houstonians, is because Houston’s problems are in the headlines, and Michigans mundane daily problems are not. The central planners have decided that Houstonians deserve Michigan’s money. But the rationale for this decision is purely political, and thus arbitrary. This isn’t to say real sharing and kindness are a bad thing. It’s excellent that private charities have already been hard at work helping with the cleanup in Houston. If one wants to insist that governments be involved, there’s nothing stopping other states from handing over funds to Texas directly. The federal government need not be involved at all.

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Which is why the possibility of a second hurricane hitting the US this year is intriguing.

• Harvey Could Bankrupt The Federal Flood-Insurance Program (ZH)

Hurricane Harvey may solve the auto industry’s inventory problem. But right now, it’s about to create a giant headache for the federal government. Based on the latest estimates from Irvine, California-based CoreLogic, insured flood losses for homes in the affected areas of Texas and Louisiana could total between $6.5 billion to $9.5 billion. Since private insurers typically don’t provide personal flood insurance, all but $500 million of that will fall to the Federal Emergency Management Agency’s National Flood Insurance Program, or NFIP. According to the Street, if insured damages reach the high end of this range, it would totally deplete the $7.5 billion of cash and available credit available to the 49-year-old government program, which provides about 98% of residential flood insurance. The program is already about $25 billion in debt to the US Treasury Department and would need Congressional authorization for additional funding.

To be sure, final totals could be much, much higher given the severity of the the “1-in-1000-year” flood. The potential funding shortfall could create problems if Congress doesn’t act quickly this month to shore up the financially-troubled flood-insurance program. As we’ve reported, Congress already has a full agenda in September – a month where lawmakers must pass a funding bill to keep the government open, and another to raise the debt limit and stave off a technical default on US debt. Initially, President Trump said he would force a government shutdown if Congress didn’t approve funding for his border wall in its next budget. However, it appears that he has backed away from this, as the Washington Post reported today that the administration has quietly notified Congress that the $1.6 billion in wall funding would not need to be included in the September continuing resolution.

Furthermore, Congress must explicitly pass legislation to keep the NFIP intact. Without it, the entire program will lapse. To be sure, there are some signs that Republicans are taking steps to ensure that emergency disaster-relief funding is approved as quickly as possible. According to a report in the Wall Street Journal, some Republican lawmakers are raising the possibility that funding for the cleanup effort could be attached to the debt-ceiling bill, giving both measures a strong chance of passing. But it didn’t say if funding for the flood-insurance program would be included. Thanks, in part, to the hurricane, and the perceived political consequences of failing to aid the disaster victims (though Texas has proven to be a reliably red state), Goldman has cut its odds of a government shutdown to 15%.

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“..even as Saudi Arabia sees prices of the end products of its industry spiking, by and large it is not capturing that windfall for itself..”

• Harvey Makes Landfall in Saudi Arabia (BBG)

Hurricane Harvey has devastated the Gulf Coast, and its impact is now spreading out to the rest of the U.S., chiefly at gas pumps. But America’s resurgent role in the global energy trade means the ripples extend far beyond its own shores. One place they are lapping onto is Saudi Arabia.In theory, the de-facto leader of efforts by OPEC, Russia and other members of the so-called Vienna Group stands to gain from disruption at the nerve center of the shale boom that has helped to suppress oil prices. In practice, things are a bit more complicated.

The shale boom has moved a lot of U.S. oil production inland and contributed to a glut of barrels building up in storage. So Harvey’s biggest impact on the region’s energy industry has been the closure of ports, refineries and pipelines – and keeping many drivers off highways that have turned into lakes and streams.The net result is depressed demand for crude oil due to absent refiners and panic buying of refined products such as gasoline for the same reason. So even as Saudi Arabia sees prices of the end products of its industry spiking, by and large it is not capturing that windfall for itself:

The disruption should cause U.S. inventories of refined products to fall as they are used to cover shortages and stocks of crude oil and products to drop elsewhere as, for example, European refiners run flat-out to send fuel to the U.S. to capture higher prices. This ultimately helps Saudi Arabia.Again, though, there’s a complicating factor.Saudi Arabia has explicitly targeted the U.S. in its strategy to drain the glut; shipments of its oil to America have dropped noticeably this summer:

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Will we ever stop poisoning ourselves? No high hopes here.

• Pesticides Linked To Birth Abnormalities In Major New Study (Ind.)

High exposure to pesticides as a result of living near farmers’ fields appears to increase the risk of giving birth to a baby with “abnormalities” by about 9%, according to new research. Researchers from the University of California, Santa Barbara, compared 500,000 birth records for people born in the San Joaquin Valley between 1997 and 2011 and levels of pesticides used in the area. The average use of pesticides over that period was about 975kg for each 2.6sq km area per year. But, for pregnant women in areas where 4,000kg of pesticides was used, the chance of giving birth prematurely rose by about 8% and the chance of having a birth abnormality by about 9%. Writing in the journal Nature Communications, the researchers compared this to the 5 to 10% increase adverse birth outcomes that can result from air pollution or extreme heat events.

“Concerns about the effects of harmful environmental exposure on birth outcomes have existed for decades,” they wrote. “Great advances have been made in understanding the effects of smoking and air pollution, among others, yet research on the effects of pesticides has remained inconclusive. “While environmental contaminants generally share the ethical and legal problems of evaluating the health consequences of exposure in a controlled setting and the difficulties associated with rare outcomes, pesticides present an additional challenge. “Unlike smoking, which is observable, or even air pollution, for which there exists a robust network of monitors, publicly available pesticide use data are lacking for most of the world.”

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Addicted farmers: “More than half of British farmers say they are concerned that a ban could cost them more than £10,000 every year.”

• France Votes Against The Use Of Pesticide Glyphosate (FarmingUK)

The French government has voted against the renewal of an EU Commission license for the pesticide glyphosate. The decision by the French government comes as evidence emerges of the risk of birth defects caused by exposure to pesticides. Monsanto is the major supplier of products containing glyphosate, with ‘Roundup’ being the best-known product. The product is widely used by farmers, gardeners and local authorities to control weeds. In 2015 the World Health Organisation’s (WHO) classified glyphosate as a probable carcinogen. But in March, the EU’s chemicals agency said glyphosate should not be classed as a carcinogen. And a survey has shown that a ban on glyphosate in the UK could force one in five wheat farms into ‘serious financial difficulty’. More than half of British farmers say they are concerned that a ban could cost them more than £10,000 every year.

Speaking at Cereals 2017, NFU Vice President Guy Smith said: “This year looks like being a watershed year for classical chemistry for arable farms with these three decisions on the horizon from Europe. “A poor decision on endocrine disruptor definition could see an end to the availability of around 26 active ingredients; the European Commission is proposing a ban on the use of neonicotinoids on all outdoor crops; and a decision on the reauthorisation of glyphosate is due by the end of the year. “The NFU will continue to make the case for evidence-based decisions to be made in all three of these areas, and we will continue to work with our members to help them make the case to politicians and other decision makers about the importance of these products and to demonstrate the damage that bad decisions will have on farming and our food supply.”

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Debt Rattle September 2 2017

Sep 022017
 
 September 2, 2017  Posted by at 8:58 am Finance Tagged with: , , , , , , , , , ,  4 Responses »


René Magritte Promenades d’Euclid 1955

 

• Whoever Leads In AI Will Rule The World – Putin (RT)
• Deflation Is Already Here – Albert Edwards (ZH)
• Fiscal Austerity After The Great Recession Was A Catastrophic Mistake (Coppola)
• Ugly Jobs Report: August Payrolls Miss (ZH)
• Deciphering The Swamp’s Unemployment Deception (Feierstein)
• The Working Class Can’t Afford the American Dream (HowMuch)
• Central Banks Must Be Ready With Cash To Calm Brexit Nerves – Bank Lobby (R.)
• How to Crack the Code on Gold – Rickards (DR)
• Trump Seeks $7.85 Billion For Harvey Relief, Warns On Debt Ceiling (R.)
• Harvey: “Unprecedented” Disruptions To Supplies Of “Essential” Chemicals (ZH)
• Irma Intensifies Over The Atlantic (R.)

 

 

Plenty scary thought.

• Whoever Leads In AI Will Rule The World – Putin (RT)

Vladimir Putin spoke with students about science in an open lesson on September 1, the start of the school year in Russia. He told them that “the future belongs to artificial intelligence,” and whoever masters it first will rule the world. “Artificial intelligence is the future, not only for Russia, but for all humankind. It comes with colossal opportunities, but also threats that are difficult to predict. Whoever becomes the leader in this sphere will become the ruler of the world,” Russian President Vladimir Putin said. However, the president said he would not like to see anyone “monopolize” the field.

“If we become leaders in this area, we will share this know-how with entire world, the same way we share our nuclear technologies today,” he told students from across Russia via satellite link-up, speaking from the Yaroslavl region. During the 45-minute open lesson (the standard academic hour in Russia), Putin also discussed space, medicine, and the capabilities of the human brain, pointing out the importance of cognitive science. “The movement of the eyes can be used to operate various systems, and also there are possibilities to analyze human behavior in extreme situations, including in space,” Putin said, adding that he believes these studies provide unlimited opportunities. The open lesson was attended by students and teachers from 16,000 schools, Rossiyskaya Gazeta reports. The total audience exceeded one million.

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“..never since the mid-1960s, when records began, has core CPI (less food, energy and shelter) declined over a six-month period..”

• Deflation Is Already Here – Albert Edwards (ZH)

At the start of the year, we were surprised when SocGen’s Albert “Ice Age” Edwards, the biggest perma-deflationist on Wall Street, flipped his outlook on the US economy, and said he now expected a fast spike in inflation driven by wage growth, which in turn would prompt an even more accelerated tightening cycle by the Fed. We did not see it, and said so, pointing out that the bulk of US job growth in recent years has been among industries that have little to no wage power. More than half a year later, and several months after a puzzled Edwards asked “Where Is The Wage Inflation?”, the SocGen strategist has finally thrown in the towel, and in a note released this morning, admits he was wrong, or as he puts it “I was too optimistic”, to wit:

“At this point in the US economic cycle a tight labour market would normally be producing a notable upturn in wage and CPI inflation. This would usually prompt the Fed into a tightening cycle that would typically end in a surprise recession. This is exactly what I expected to occur at the start of this year and I thought it would be that recession that would tip the US into outright deflation ? but I was wrong. I was too optimistic!” And while there has been a modest improvement in average hourly earnings according to the BLS, if not according to the BEA’s wage data, which according to the just released Personal Income data showed another drop in both private and government worker wages…

… broader inflation trends continue to disappoint. Furthermore, when digging through the recent CPI data, Edwards noticed something unexpected: as he writes, although wages have accelerated due to the tight labor market, the last six months has seen consistent downside surprises. And then this: “this has come hand-in-hand with an unprecedented slump in underlying US CPI inflation into outright deflation – in stark contrast to the eurozone where core CPI inflation has decisively risen.” Putting the finding in context, the “wrong, too optimistic” Edwards writes that never since the mid-1960s, when records began, has core CPI (less food, energy and shelter) declined over a six-month period, as demonstrated by the red line in the chart below. Or, as he summarizes, “Deflation did not need another US recession to emerge. It is already here.”

the SocGen strategist has some advice to the Fed: “If I were a Fed Governor I would be pretty shocked/concerned/bemused at inflation developments this year. However confident the Fed is of a self-sustaining-recovery, there is growing evidence of a slide into outright deflation even ahead of the next recession which will likely unambiguously take us deep into deflationary territory.” Imminent deflationary prints notwithstanding, Edwards still thinks rates should be normalised. Why? “Well, because the longer the current credit excesses are allowed to continue, the deeper the next recession and deflationary bust will ultimately be.”

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“What a complete, utter, disastrous failure of public policy, not just for Greece but for the world.”

• Fiscal Austerity After The Great Recession Was A Catastrophic Mistake (Coppola)

In a new paper presented at Jackson Hole last week, the economists Alan Auerbach and Yuriy Gorodnichenko showed that, contrary to popular belief, fiscal expansion after a major financial shock such as that in 2008 did not cause debt/GDP ratios to rise. In fact, the researchers found that debt could become more sustainable, not less, after fiscal stimulus: For a sample of developed countries, we find that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness. Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study. Fiscal stimulus works. What a pity we did not allow ourselves to do it, much. But what about Greece? Surely fiscal austerity was necessary there?

Well, maybe. “The experience of Greece and other countries in Southern Europe is a grave warning about the political risks and limits of fiscal policy,” say the researchers. “Bridges to nowhere, “pet” projects and other wasteful spending can outweigh any benefits of countercyclical fiscal policy.” But they nevertheless find that fiscal expansion works even when debt/GDP levels are high. “The penalty for a high debt-to-GDP ratio does not appear to be high at the debt levels experienced historically for developed countries,” they say. So when Greece’s debt was a mere 100% of GDP, fiscal expansion could have been a good strategy. Now, of course, Greece’s debt/GDP ratio is off the chart, because of the aforementioned catastrophic failure of public policy. The researchers warn that their results are uncertain at very high debt/GDP levels. So fiscal expansion might now be too late for Greece. What a tragedy.

“We have been giving catastrophically bad advice to countries with high debt to GDP ratios”, said Jason Furman, the former chair of Barack Obama’s Council of Economic Advisers who is now at Harvard. Too right. And Greece has paid the price. But it is not just Greece that has paid. If Auerbach and Gorodnichenko are right, then the policy path since 2010 has been wrong for many more countries. They have truncated their recoveries and hurt their populations by embarking on premature fiscal consolidation, while cudgeling central banks into somehow conjuring up a recovery that monetary policy is incapable of producing at the lower bound. As a result, there has been a prolonged and wholly unnecessary global slowdown, which will leave lasting scars, particularly on the young. What a complete, utter, disastrous failure of public policy, not just for Greece but for the world.

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Pre-Harvey ugly.

• Ugly Jobs Report: August Payrolls Miss (ZH)

[..] moments ago the BLS reported that in August just 156K jobs were created, a big miss to the 180K expected, and following a sharp downward revision to June and July, which were revised to 210K and 189K, respectively, a 41K drop combined. But don’t worry, the worse, the better as the more disappointing the economic data, the less likely the Fed will hike in September, December, or ever for that matter. And keep in mind, today’s data did not include the Harvey devastation, which will assure no rate hikes from the Fed for months, if not decades to come. Not helping matters – for the economy, if not the stock market which now once again loves bad data – was the Household Survey, according to which the number of employed Americans declined by 74,000 to 153,439K. On an annual basis, the increase in the employment level dropped to 1.2%, the lowest since March.

The unemployment rate also disappointed, rising from 4.3% to 4.4%, while the avg hourly earnings missed, increasing by 2.5% Y/Y in August, below the 2.6% estimate and the same as July. The sequential increase in earnings was just 0.1%, also below the 0.2% expected, and far below the 0.3% in July. Furthermore, since average weekly hours declined also, from 34.5 to 34.4, average weekly earnings declined outright from $909.42 to $907.82 in August. Furthermore, average weekly earnings rose just 2.2% Y/Y, the lowest rate of increase since January.

While the labor force participation rate remained unchanged at 62.9%, the number of Americans not in the labor force increased once again, growing by 128K in August to 94.785 million.

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Mitch wants investigations. And not the ones going on right now.

• Deciphering The Swamp’s Unemployment Deception (Feierstein)

I strongly see the need for a full and open inquiry into Hillary’s illegal server, Clinton’s leaking of top secret documents, the pay-to-play Clinton Foundation, the entire ‘Fake news’ Russian collusion affair and James Comey’s ‘Fake FBI investigation’ with a predetermined outcome. I am not taking a partisan position here. However, I am guessing many people will reason: ‘The Republicans are bashing the Democrats over these inquiries; this guy Feierstein wants an inquiry, so he must be a Republican.’ I don’t blame people for making these assumptions. Our whole country has become infected with this kind of twisted logic. Our entire political debate has caught the virus. Yet, it makes no sense. No sense at all. Here are two facts and one conclusion:

Fact One : Hillary had an illegal server in the basement of her home that contained ‘Top-Secret Emails.’ Fact Two : Senators Grassley and Graham’s statement regarding FBI’s James Comey’s exoneration of Clinton read: “Conclusion first, fact-gathering second—that’s no way to run an investigation. The FBI should be held to a higher standard than that, especially in a matter of such great public interest and controversy.” Conclusion : These allegations are serious enough to deserve an open investigation, period. Partisan bickering and political spin is simply a diversion from the action that American people deserve — and the truth that the American people require.

I say all this because I’m about to call attention to another government department: the Bureau of Labor Statistics. Now, I know that Democrats are currently bashing President Trump over everything he does. I know that Trump is bashing back. But, people, the issue at stake is the creation of jobs in America and the way those things are being recorded and reported. The issues I’m about to address were present under George W. Bush and Barack Obama. They haven’t changed under Donald Trump. The depression which struck this country in the wake of financial crisis 1.0 might have peaked under a Democrat, but it was born in a Republican era. If you yourself are so partisan that you want to make fine distinctions about these things, you should go ahead and make them. Me: I see two peas in a pod.

Good. Preamble over. Here’s the issue: “The number of jobs created in America declined by 74,000 to 153,439 in August. A horrible number, far below expectations. The jobless rate rose to 4.4 and hourly earnings missed increasing only 2.5% year-over-year. Average hours worked also declined, seeing as weekly wages followed suit.” Yet, central bank manipulated stocks are surging, on the terrible economic news, in anticipation of more global central bank easing. News and economic data are irrelevant in our “rigged” system as market participants eagerly line up like heroin addicts awaiting another federal reserve fix.

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As if anyone still believes in that dream.

• The Working Class Can’t Afford the American Dream (HowMuch)

The national conversation in the U.S. is focused squarely on improving the lives of people in the working class. The debate revolves around exactly how to do that. Politicians and pundits have all sorts of ideas, from efforts to save jobs, create tax cuts, subsidize housing, and provide universal healthcare. Thing is, people don’t even agree on how to define the working class, much less how their living conditions stack up across the country. We created a data visualization to illustrate this complex situation. Each bubble represents a city. The color corresponds to the amount of money a typical working-class family would have left over at the end of the year after paying for their living costs, like housing, food and transportation.

The darker the shade of red, the worse off you are. The darker the shade of green, the better off you are. The size of the bubble also fits on a sliding scale—large and dark red means the city is totally unaffordable. Bigger dark green bubbles likewise indicate a city where the working class can get by. The data come from our new True Cost of Living Tool. It’s kind of a big deal because it lets you drill down to a specific city and search through layers of relevant information to understand exactly how much money it takes to live in any given area. We stitched together a variety of different reputable sources, like the Bureau of Labor Statistics for income levels, the National Bureau of Economic Research for tax data, and the U.S. Department of Agriculture for the cost of food. Basically, you can check our work.

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Banks say central banks must be ready to give money to … banks.

• Central Banks Must Be Ready With Cash To Calm Brexit Nerves – Bank Lobby (R.)

Central banks should be ready to inject cash into the financial markets to keep them stable after Britain leaves the European Union in 2019, a draft report from a bank industry lobby said. The Association for Financial Markets in Europe (AFME), in a draft report seen by Reuters, said that regulators, central banks and national governments should continue to support financial market stability between Britain’s departure from the EU and start of new trading terms. “This may require particular attention during the uncertain period around Brexit, and in particular during the transition, and may involve more regular market communications and targeted support in case of market need, for example, access to liquidity schemes,” the report said. This and other steps would be needed to minimise disruption, it said. AFME’s report also provides a blueprint for a transition phase after Britain’s EU exit in March 2019.

This would include a “bridging phase” to avoid “short-term disruption” until new trading terms are ratified and an “adaptation phase” for moving to the new terms. The report did not specify a time frame for the transition but said it should be limited. “It is crucial that clarity is provided as soon as possible on a transitional period, and ideally before the end of this year,” AFME said. AFME wants existing market arrangements maintained throughout the transitional period, reflecting worries among bankers that they might have to comply first with a transition period and then the new trading terms. “This means that existing legislation, regulation, permissions and authorisations should continue to be effective during the transitional period,” it said. Company bosses also want Britain to negotiate a staggered departure from the EU by the end of this year or they will have to push ahead with plans that assume they will lose all access to the single market after March 2019.

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Rickards sticks to his guns.

• How to Crack the Code on Gold – Rickards (DR)

“Don’t underestimate the extent to which gold is being impacted by hedge funds, leverage players, and others that are in the mix for the current high in gold. They don’t really care if it is gold, soybeans, etc. but it is simply another commodity. They receive a nice profit with tight profits, tight stops.” “The bigger picture to look as here is that gold hit an interim low last December and has been grinding higher ever since. Now gold is up over $200 an ounce and is one of the best performing assets in 2017. There’s a pattern of higher highs and shows a very positive occurrence.” [..] “This all relates to currency wars. I think of gold by weight.”

“When most people look at the cost of gold they relate it to the dollar. That gives the dollar a privilege to say that it is the way to count everything. It is also possible to count gold in euro, yen or even bitcoin. I think of gold as money. These are all just cross rates. When I see a higher dollar price for gold, I think of the dollar as being weaker. Likewise, if I see a lower price for gold it just shows that gold is constant and the dollar got stronger.” “There are three things going on right now in gold. There’s a fear trade, there’s technicals with supply shortages and ultimately a weaker dollar. If you want to know where the dollar price for gold is going, ask yourself where the dollar is headed. As the dollar gets weaker due to Federal Reserve Chair Yellen’s plan to tighten rates into weakness. We’re getting disinflation, not inflation and the desire from the Fed is a weaker dollar.”

[..] “I expect to see gold hit $5,000 and eventually to $10,000 an ounce. Maybe not tomorrow or a couple of years but that is the fundamental price of gold as money.” [..] “Bitcoin is a very small market cap compared to gold. I don’t think it has much impact on gold and looks like a bubble right now.” “As someone who has been around Wall Street a long time I’ve seen a lot of different tricks of the trade and frauds that come and go. I am seeing all of the various schemes in bitcoin right now. There’s good forensic evidence that there are people doing wash sales right now and the suckers don’t know they are getting sucked in. Gold is still the ultimate safe haven.”

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That’s just emergency funding. Washington will need to find ways to help the uninsured.

• Trump Seeks $7.85 Billion For Harvey Relief, Warns On Debt Ceiling (R.)

U.S. President Donald Trump has asked Congress for an initial $7.85 billion for Hurricane Harvey recovery efforts, the White House budget director said on Friday, adding that failure to raise the budget ceiling may hinder disaster relief spending. In a letter to U.S. House of Representatives Speaker Paul Ryan, White House budget director Mick Mulvaney said the request included $7.4 billion for the Federal Emergency Management Agency’s Disaster Relief Fund and $450 million for the Small Business Administration’s disaster loan program. “This request is a down-payment on the president’s commitment to help affected states recover from the storm, and future requests will address longer-term rebuilding needs,” Mulvaney said. Trump had been expected to request $5.95 billion for the recovery effort after Harvey flooded areas of Houston and other parts of Texas.

The White House has said that it would make multiple requests for aid from Congress to fund the Harvey recovery effort. White House homeland security adviser Tom Bossert told reporters on Thursday aid funding requests would come in stages as more became known about the impact of the storm. Texas Governor Greg Abbott has said that his state may need more than $125 billion. Bossert said the Trump administration wanted Congress to pass the disaster relief measure on its own and not add it to other measures, such as the effort to raise the debt ceiling. The U.S. government has a statutory limit on how much money it can borrow to cover the budget deficit that results from Washington spending more than it collects in taxes. Only Congress can raise that limit. Mulvaney urged Congress to act “expeditiously to ensure that the debt ceiling does not affect these critical response and recovery efforts.”

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Ethylene, polypropylene. It’s silly, but we ‘need’ them.

• Harvey: “Unprecedented” Disruptions To Supplies Of “Essential” Chemicals (ZH)

The unprecedented destruction wrought by Hurricane Harvey will impact the US economy in ways may not be immediately apparent. Until recently, coverage of the storm’s impact has focused on property damage and the impact on the energy industry. But in a story published Friday, Bloomberg explains the devastating impact the storm has had on Texas’s chemicals industry, which is already causing supply-chain headaches for American manufacturers who’re struggling to source the chemicals required to produce plastics and other components used in everything from milk jugs to car parts. Indeed, if Texas’s chemicals plants are closed for an extended period, production at a potentially huge number of American manufacturers to grind to a halt.

More than 60% of the US’s production capacity for ethylene – one of the most important chemical building blocks for American manufacturers – has been taken offline by the storm, a development that could ripple across the US manufacturing industry. “Texas alone produces nearly three quarters of the country’s supply of one of the most basic chemical building blocks. Ethylene is the foundation for making plastics essential to U.S. consumer and industrial goods, feeding into car parts used by Detroit and diapers sold by Wal-Mart. With Harvey’s floods shutting down almost all the state’s plants, 61% of U.S. ethylene capacity has been closed, according to PetroChemWire.” Ethylene, the gas given off by fruit as it ripens, occurs naturally, but it’s also a crucial product of the $3.5 trillion global chemical industry, with factories pumping out 146 million tons last year.

Processing plants turn the chemical into polyethylene, the world’s most common plastic, which is used in garbage bags and food packaging. When transformed into ethylene glycol, it’s the antifreeze that keeps engines and airplane wings from freezing in winter. It’s used to make polyester for both textiles and water bottles. Ethylene is an ingredient in vinyl products such as PVC pipes, life-saving medical devices and sneaker soles. It helps combat global warming with polystyrene foam insulation and lighter, fuel-saving plastic auto parts. It’s used to make the synthetic rubber found in tires. It’s even an ingredient in house paints and chewing gum. Ethylene and its derivatives account for about 40% of global chemical sales, according to Hassan Ahmed, an analyst at Alembic Global Advisors. And the Gulf Coast is a crucial player in the global market: US production accounts for one of every five tons on the market. International ethylene plants were running nearly full out to meet rising demand before Harvey.

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‘T is the season. The lesser Antilles could get hit bigtime.

• Irma Intensifies Over The Atlantic (R.)

As Harvey diminishes a new storm has emerged. Irma, the fourth hurricane of the 2017 Atlantic hurricane season, has strengthened over the eastern Atlantic to become a Category 3 storm, the U.S. National Hurricane Center said in its latest advisory Thursday. Irma is forecast to intensify Thursday night and is projected to be a very dangerous hurricane for the next few days, the Miami-based center said. Irma is located about 1,845 miles east of the Leeward Islands and has maximum sustained winds of 115 mph, the NHC said. NHC forecast models were showing it heading for the U.S. territory of Puerto Rico, the Dominican Republic, and neighboring Haiti with possible landfall by the middle of next week.

While currently a Category 3 storm, Irma’s winds could strengthen to become a Category 4 storm in five days’ time, the Miami Herald reported. Irma will not reach the eastern Caribbean Lesser Antilles islands until the middle of next week, and it is too soon to determine whether or not the storm will pose a threat to the U.S., according to The Weather Channel. Still, the potential for a U.S. landfall should prompt all who may be affected in those areas to closely monitor the storm in the coming days, The Weather Channel said. “Irma is forecast to become a major hurricane by tonight and is expected to be an extremely dangerous hurricane for the next several days,” the NHC said Thursday, while adding there is no current risk to land from the storm.

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Debt Rattle September 1 2017

Sep 012017
 
 September 1, 2017  Posted by at 9:40 am Finance Tagged with: , , , , , , , , ,  5 Responses »


Vincent van Gogh Seine with Pont de Clichy 1887

 

• Monetary Stimulus: How Much Is Too Much? (Lebowitz)
• Yes, You Should Be Concerned With Consumer Debt (Roberts)
• Why We’re Doomed: Stagnant Wages (CHS)
• US Fuel Shortages From Harvey To Hamper Labor Day Travel (R.)
• Wells Fargo Says 3.5 Million Accounts Involved In Scandal (AP)
• World’s Biggest Wealth Fund Reveals Bleak View on Global Trade (BBG)
• New Math Deals Minnesota’s Pensions the Biggest Hit in the US (BBG)
• Six Big Banks To Create A Blockchain-Based Cash System (R.)
• Putin Warns Of ‘Major Conflict’ Over North Korea, Urges Talks (AFP)
• Trump, Nuclear War And Climate Change Among Gravest Threats To Humanity (PA)
• Greece Doesn’t Want Any More Rescues – But It Does Need Something Else (CNBC)
• Hurricane Irma Turning Into Monster (ZH)

 

 

Take their power away or else.

• Monetary Stimulus: How Much Is Too Much? (Lebowitz)

The amount of monetary stimulus increasingly imposed on the financial system creates false signals about the economy’s true growth rate, causing a vast misallocation of capital, impaired productivity and weakened economic activity. To help quantify the amount of stimulus, please consider the graph. Federal Reserve (Fed) monetary stimulus comes in two forms. First in the form of targeting the Fed Funds interest rate at a rate below the nominal rate of economic growth (blue). Second, it stems from the large scale asset purchases QE) by the Fed (orange). When these two metrics are quantified, it yields an estimate of the average amount of monetary stimulus (red) applied during each post-recession period since 1980. It has been almost ten years since the 2008 financial crisis and the Fed is applying the equivalent of 5.25% of interest rate stimulus to the economy, dwarfing that of prior periods.

The graph highlights that the Fed has been increasingly aggressive in both the amount of stimulus employed as well as the amount of time that such monetary stimulus remains outstanding. Amazingly few investors seem to comprehend that despite the massive level of monetary stimulus, economic growth is trending well below recoveries of years past. Additionally, as witnessed by historically high valuations, the rise in the prices of many financial assets is not based on improving economic fundamentals but simply the stimulative effect that QE and low interest rates have on investor confidence and financial leverage. Now consider the ramifications of a Fed that continues to increase the Fed Funds rate and moves forward with plans to slowly remove QE.

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America: the House that Debt Built.

• Yes, You Should Be Concerned With Consumer Debt (Roberts)

First, the calculation of disposable personal income, income less taxes, is largely a guess and very inaccurate due to the variability of income taxes paid by households. Secondly, but most importantly, the measure is heavily skewed by the top 20% of income earners, needless to say, the top 5%. As shown in the chart below, those in the top 20% have seen substantially larger median wage growth versus the bottom 80%.

Lastly, disposable incomes and discretionary incomes are two very different animals. Discretionary income is what is left of disposable incomes after you pay for all of the mandatory spending like rent, food, utilities, health care premiums, insurance, etc. According to a Gallup survey, it requires about $53,000 a year to maintain a family of four in the United States. For 80% of Americans, this is a problem even on a GROSS income basis.

This is why record levels of consumer debt is a problem. There is simply a limit to how much “debt” each household can carry even at historically low interest rates. It is also the primary reason why we can not have a replay of the 1980-90’s. “Beginning 1983, the secular bull market of the 80-90’s began. Driven by falling rates of inflation, interest rates, and the deregulation of the banking industry, the debt-induced ramp up of the 90’s gained traction as consumers levered their way into a higher standard of living.”

“While the Internet boom did cause an increase in productivity, it also had a very deleterious effect on the economy. As shown in the chart above, the rise in personal debt was used to offset the declines in personal income and savings rates. This plunge into indebtedness supported the ‘consumption function’ of the economy. The ‘borrowing and spending like mad’ provided a false sense of economic prosperity. During the boom market of the 1980’s and 90’s consumption, as a%age of the economy, grew from roughly 61% to 68% currently. The increase in consumption was largely built upon a falling interest rate environment, lower borrowing costs, and relaxation of lending standards. (Think mortgage, auto, student and sub-prime loans.) In 1980, household credit market debt stood at $1.3 Trillion. To move consumption, as a% of the economy, from 61% to 67% by the year 2000 it required an increase of $5.6 Trillion in debt. Since 2000, consumption as a% of the economy has risen by just 2% over the last 17 years, however, that increase required more than a $6 Trillion in debt.

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Doomed growth projections.

• Why We’re Doomed: Stagnant Wages (CHS)

Despite all the happy talk about “recovery” and higher growth, wages have gone nowhere since 2000–and for the bottom 20% of workers, they’ve gone nowhere since the 1970s. GDP has risen smartly since 2000, but the share of GDP going to wages and salaries has plummeted: this is simply an extension of a 47-year downtrend. [..] .. our system requires ever-higher household incomes to function–not just in the top 5%, but in the top 80%. Our federal social programs–Social Security, Medicare and Medicaid–are pay-as-you-go: all the expenditures this year are paid by taxes collected this year. As I have detailed many times, the so-called “Trust Funds” are fictions; when Social Security runs a deficit, the difference between receipts and expenses are filled by selling Treasury bonds in the open market–the exact same mechanism ther government uses to fund any other deficit.

The demographics of the nation have changed in the past two generations. The Baby Boom is retiring en masse, expanding the number of beneficiaries of these programs, while the number of full-time workers to retirees is down from 10-to-1 in the good old days to 2-to-1: there are 60 million beneficiaries of Social Security and Medicare and about 120 million full-time workers in the U.S. Meanwhile, medical expenses per person are soaring. Profiteering by healthcare cartels, new and ever-more costly treatments, the rise of chronic lifestyle illnesses–there are many drivers of this trend. There is absolutely no evidence to support the fantasy that this trend will magically reverse.

Costs are skyrocketing and the number of retirees is ballooning, but wages are going nowhere. Do you see the problem? All pay-as-you-go programs are based on the assumption that the number of workers and the wages they earn will both rise at a rate that is above the underlying rate of inflation and equal to the rate of increase in pay-as-you-go programs. If 95% of the households are earning less money when adjusted for inflation, and their wealth has also declined or stagnated, then how can we pay for programs which expand by 6% or more every year? The short answer is you can’t.

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Are we going to add this to the cost of Harvey?

• US Fuel Shortages From Harvey To Hamper Labor Day Travel (R.)

Travelers and fuel suppliers across the United States braced for higher prices and shortages ahead of the Labor Day holiday weekend as the country’s biggest fuel pipelines and refineries curb operations after Hurricane Harvey. Just six days after Harvey slammed into the heart of the U.S. energy industry in Texas, the effects are being felt not just in Houston, but also in Chicago and New York, and prices at the pump nationwide have hit a high for the year. Supply shortages have developed even though there are nearly a quarter of a billion barrels of gasoline stockpiled in the United States. But much of it is held in places where it cannot be accessed due to massive floods, or too far away from the places it is needed. Some of it is unfinished, meaning it needs to be blended before it can go to gas stations.

Harvey has highlighted another weakness in the system: pipeline terminals typically only have a five-day supply in storage to load into the lines. Some of the biggest pipelines in the United States, supplying the northeast market and the Chicago area, have already shut down or reduced operations because they have no fuel to pump. “Gasoline is very much a ‘just-in-time’ fuel, for as many million barrels as they think we have,” said Patrick DeHaan, petroleum analyst at GasBuddy. “Sure, they are somewhere, but they still have to be mixed and blended together.” At least two East Coast refiners, including Philadelphia Energy Solutions and Irving Oil, have already run out of gasoline for immediate delivery as they have rushed to send supplies to the U.S. Southeast, Caribbean, Mexico and South America to offset the lack of exports since Harvey.

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Lock them up!

• Wells Fargo Says 3.5 Million Accounts Involved In Scandal (AP)

The scope of Wells Fargo’s fake accounts scandal grew significantly on Thursday, with the bank now saying that 3.5 million accounts were potentially opened without customers’ permission between 2009 and 2016. That’s up from 2.1 million accounts that the bank had cited in September 2016, when it acknowledged that employees under pressure to meet aggressive sales targets had opened accounts that customers might not have even been aware existed. People may have had different kinds of accounts in their names, so the number of customers affected may differ from the account total. Wells Fargo said Thursday that about half a million of the newly discovered accounts were missed during the original review, which covered the years 2011 to 2015.

After Wells Fargo acknowledged the fake accounts last year, evidence quickly appeared that the sales practices problems dated back even further. So Wells Fargo hired an outside consulting firm to analyze 165 million retail bank accounts opened between 2009 and 2016. Wells said the firm found that, along with the 2.1 million accounts originally disclosed, 981,000 more accounts were found in the expanded timeline. And roughly 450,000 accounts were found in the original window. The scandal was the biggest in Wells Fargo’s history. It cost then-CEO John Stumpf his job, and the bank’s once-sterling industry reputation was in tatters. The company ended up paying $185 million to regulators and settled a class-action suit for $142 million. New managers have been trying to amends with customers, politicians and the public.

But it’s been tough, as new revelations keep coming. Wells Fargo said last month that roughly 570,000 customers were signed up for and billed for car insurance that they didn’t need or necessarily know about. Many couldn’t afford the extra costs and fell behind in their payments, and in about 20,000 cases, cars were repossessed. Other customers have filed lawsuits against Wells Fargo saying they were victims of unfair overdraft practices. Wells Fargo is also still under several investigations for its sales practices problems, including a congressional inquiry and one by the Justice Department. Wells Fargo said Thursday that of the 3.5 million accounts potentially opened without permission, 190,000 of those incurred fees and charges. That’s up from 130,000 that the bank originally said. Wells Fargo will refund $2.8 million to customers, in addition to the $3.3 million it already agreed to pay.

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Wise.

• World’s Biggest Wealth Fund Reveals Bleak View on Global Trade (BBG)

Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, as the fund is known, says the heyday of cross-border trade is probably behind us. “The question investors are asking themselves is if the easy wins already have been made,” Slyngstad said in an Aug. 29 interview from his office on the top floor of Norway’s central bank in Oslo. “The global supply chains have in a way had a one-time gain primarily through outsourcing of multinationals to China.” Norway’s wealth fund owns 1.3% of globally listed stocks, spread out over almost 80 countries. And with interest rates at record lows, the investor has cut its long-term return expectations to about 3% from 4%, even after winning approval from parliament to raise its share of equities to 70% from 60%.

Slyngstad, who became CEO in 2008 just as the global economy was sinking into the worst crisis since the Great Depression, noted that back then the fund rode out the turmoil by dumping bonds and buying stocks. “I don’t expect that we will act differently in any similar crisis in the future,” he said. During a recent conference on globalization, the fund’s chief strategist, Bjorn Erik Orskaug, suggested the world might be at an “inflection point” in trade, with shallower value chains and less cross-border production. And then there’s the protectionist agenda some governments are pursuing. “Is there also a political situation that could make it more challenging?” Slyngstad said. “Time will tell, but there’s of course a risk on the horizon.” He says the wealth fund’s extremely long-term investment timeline allows it to look past the noise coming from governments that come and go.

The fund will probably stay over-weighted in Europe, where it’s more of an active investor. But the only two economies that really matter are the U.S. and China, Slyngstad said. [..] As the fund approaches $1 trillion in value, its stated goal is to safeguard today’s oil wealth for future generations of Norwegians. It has surged in size since its inception two decades ago, generating an annual nominal return of 5.89%. Norway’s government last year started taking cash out of the fund for the first time, to make up for lower oil revenue. Withdrawals are set to hit about 72 billion kroner ($9.3 billion) in 2017, and remain at that level in coming years amid stricter fiscal rules.

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Once the creative accounting is removed, there won’t be much left.

• New Math Deals Minnesota’s Pensions the Biggest Hit in the US (BBG)

Minnesota’s debt to its workers’ retirement system has soared by $33.4 billion, or $6,000 for every resident, courtesy of accounting rules. The jump caused the finances of Minnesota’s pensions to erode more than any other state’s last year as accounting standards seek to prevent governments from using overly optimistic assumptions to minimize what they owe public employees decades from now. Because of changes in actuarial math, Minnesota in 2016 reported having just 53% of what it needed to cover promised benefits, down from 80% a year earlier, transforming it from one of the best funded state systems to the seventh worst, according to data compiled by Bloomberg. “It’s a crisis,” said Susan Lenczewski, executive director of the state’s Legislative Commission on Pensions and Retirement.

The latest reckoning won’t force Minnesota to pump more taxpayer money into its pensions, nor does it put retirees’ pension checks in any jeopardy. But it underscores the long-term financial pressure facing governments such as Minnesota, New Jersey and Illinois that have been left with massive shortfalls after years of failing to make adequate contributions to their retirement systems. The Governmental Accounting Standards Board’s rules, ushered in after the last recession, were intended to address concern that state and city pensions were understating the scale of their obligations by counting on steady investment gains even after they run out of cash – and no longer have money to invest. Pensions use the expected rate of return on their investments to calculate in today’s dollars, or discount, the value of pension checks that won’t be paid out for decades.

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Everybody wants their share of the pie.

• Six Big Banks To Create A Blockchain-Based Cash System (R.)

Six new banks have joined a UBS-led effort to create a digital cash system that would allow financial markets to make payments and settle transactions quickly via blockchain technology. The group aims to launch the system late next year. Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street have joined the group developing the “utility settlement coin” (USC), a digital cash equivalent of each of the major currencies backed by central banks, UBS said on Thursday. The group is in discussions with central banks and regulators and is aiming for a “limited ’go live’” in the latter part of 2018, UBS’s head of strategic investment and fintech innovation told the Financial Times.

The Swiss bank first launched the concept in September 2015 with London-based blockchain company Clearmatics, and was later joined on the project by BNY Mellon, Deutsche Bank, Santander and brokerage ICAP. The USC would be convertible at parity with a bank deposit in the corresponding currency, making it fully backed by cash assets at a central bank. Spending a USC would be the same as spending the real currency it is paired with. Blockchain works as a tamper-proof shared ledger that can automatically process and settle transactions using computer algorithms, with no need for third-party verification. Because it does not require manual processing, nor authentication through intermediaries, the technology can make payments faster, more reliable and easier to audit.

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Better talk with him.

• Putin Warns Of ‘Major Conflict’ Over North Korea, Urges Talks (AFP)

Russian President Vladimir Putin warned Friday of a “major conflict” looming on the Korean Peninsula, calling for talks to alleviate the crisis after Pyongyang fired a missile over Japan this week. “The problems in the region will only be solved via direct dialogue between all concerned parties, without preconditions,” Putin said. “Threats, pressure and insulting and militant rhetoric are a dead end,” a statement from his office said, adding that heaping additional pressure on North Korea in a bid to curb its nuclear programme was “wrong and futile.” Tensions on the Korean Peninsula are at their highest point in years after a series of missile tests by Pyongyang.

Early on Tuesday, the reclusive state fired an intermediate-range Hwasong-12 over Japan, prompting US President Donald Trump to insist that “all options” were on the table in an implied threat of pre-emptive military action. The UN Security Council denounced North Korea’s latest missile test, unanimously demanding that Pyongyang halt the programme. US heavy bombers and stealth jet fighters took part in a joint live fire drill in South Korea on Thursday, intended as a show of force against the North, Seoul said. Putin said he feared the peninsula was “on the verge of a major conflict” and called for all sides to sign up to a mediation programme drawn up by Moscow and Beijing. He echoed comments by Foreign Minister Sergei Lavrov who in a Wednesday telephone call with US counterpart Rex Tillerson “underscored… the need to refrain from any military steps that could have unpredictable consequences.”

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Prime candidate for worst report ever. The Independent tweeetd: “12 Nobel Prize winners just warned Trump is one of the gravest threats to humanity “. But that’s not what the article by the Press Association says. It says two.

• Trump, Nuclear War And Climate Change Among Gravest Threats To Humanity (PA)

Nobel Prize winners consider nuclear war and US President Donald Trump as among the gravest threats to humanity, a survey has found. More than a third (34%) said environmental issues including over-population and climate change posed the greatest risk to mankind, according to the poll by Times Higher Education and Lindau Nobel Laureate Meetings. But amid rising tensions between the US and North Korea, almost a quarter (23%) said nuclear war was the most serious threat. Of the 50 living Nobel Prize winners canvassed, 6% said the ignorance of political leaders was their greatest concern – with two naming Mr Trump as a particular problem. Peter Agre, who won the Nobel Prize for chemistry in 2003, described the US President as “extraordinarily uninformed and bad-natured”. He told Times Higher Education: “Trump could play a villain in a Batman movie – everything he does is wicked or selfish.”

Laureates for chemistry, physics, physiology, medicine and economics took part in the survey, with some highlighting more than one threat. Peace Prize and Literature Prize recipients were not canvassed. Infectious diseases and drug resistance were considered the gravest threats to humankind by 8% of respondents, while 8% cited selfishness and dishonesty and 6% cited terrorism and fundamentalism. Another 6% spoke of the dangers of “ignorance and the distortion of truth”. Despite high-profile figures Elon Musk and Professor Stephen Hawking expressing concern about the dangers associated with artificial intelligence, just two of those surveyed identified it as among the biggest threats facing humans.

John Gill, editor of Times Higher Education, said the survey offers “a unique insight into the issues that keep the world’s greatest scientific minds awake at night”. He said: “There is a consensus that heading off these dangers requires political will and action, the prioritisation of education on a global scale, and above all avoiding the risk of inaction through complacency.”

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Stockholm Syndrome?

• Greece Doesn’t Want Any More Rescues – But It Does Need Something Else (CNBC)

Greece wants nothing more than to avoid another bailout — which means it needs debt relief. And so far, that’s the sticking point. “There is now light at the end of the tunnel,” Greek Finance Minister Euclid Tsakalotos said hopefully in June. After months of wrangling, the European Union and International Monetary Fund had just agreed to release more rescue funds to the perennially troubled nation, bringing the total from its third bailout alone to €40.2 billion ($47.75 billion). Euro zone finance ministers took very light steps toward debt relief at that time — they said they were willing to keep deferring interest on financial assistance Greece had already received — but those measures fell short of the relief Greek Prime Minister Alexis Tsipras was pressing for.

The current bailout program is set to end in September of next year. Greece has been wracked by perennial financial crises since 2010, and it even appeared at risk of leaving the euro zone altogether in 2015. Tsipras’s objective is to re-gain full market access to international bond markets and to leave institutional help behind, so the subject of long-term debt is one that will continue to dominate discussions as it draws closer to September 2018. In July, Greece dipped into bond markets after a 3-year hiatus, issuing 5-year debt at an average yield of 4.66%. Greece is expected to return to the market again in the next 12 months. But Greece’s debt isn’t manageable in the long-run without being either extended or forgiven, according to the IMF, which is pressing for easier budgetary targets for Greece while simultaneously undertaking reforms.

Its European creditors currently require it to achieve a primary surplus before debt service of 3.5% of gross domestic product. The ECB has also been emphatic that it will not include Greek government bonds in its own debt-buying mechanism, the Public Sector Purchase Program. In a June letter, ECB President Mario Draghi ruled out that possibility, saying the central bank’s staff wasn’t in a position to fully analyze Greece’s public debt. Analysts at Barclays have estimated that the inclusion of Greek debt into ECB’s bond-buying program would entail monthly purchases of around 115 million euros ($136.5 million).

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Not looking good.

• Hurricane Irma Turning Into Monster (ZH)

Hurricane Irma continues to strengthen much faster than pretty much any computer model predicted as of yesterday or even this morning. Per the National Hurricane Center’s (NHC) latest update, Irma is currently a Cat-3 storm with sustained winds of 115 mph but is expected to strengthen to a devastating Cat-5 with winds that could top out at 180 mph or more. Longer term computer models still vary widely but suggest that Irma will make landfall in the U.S. either in the Gulf of Mexico or Florida. Meteorological Scientist Michael Ventrice of the Weather Channel is forecasting windspeeds of up to 180 mph, which he described as the “highest windspeed forecasts I’ve ever seen in my 10 yrs of Atlantic hurricane forecasting.”

In a separate tweet, Ventrice had the following troubling comment: “Wow, a number of ECMWF EPS members show a maximum-sustained windspeed of 180+mph for #Irma, rivaling Hurricane #Allen (1980) for record wind”. The Weather Channel meteorologist also calculated the odds for a landfall along the eastern seaboard at 30%. Meanwhile, the Weather Channel has the “most likely” path of Irma passing directly over Antigua, Puerto Rico and Domincan Republic toward the middle of next week.

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Debt Rattle August 31 2017

Aug 312017
 
 August 31, 2017  Posted by at 8:25 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


Prohibition sale June 24 1920

 

• Hurricane Harvey the Costliest Natural Disaster in US History (H.)
• “No Way To Prevent Imminent Explosion” At Texas Chemical Plant (ZH)
• Texans To Be Hit With New Insurance Law (Ind.)
• A Decade of G7 Central Bank Collusion – And Counting… (Nomi Prins)
• It’s Time For Your Reminder That Most Commodities Are Priced In US Dollars (BI)
• A Universal Basic Income Would Grow The Economy (Vox)
• The Promise of Fiscal Money (Varoufakis)
• America and China’s Codependency Trap (Stephen Roach)
• Financial Firms Fear Turmoil Over Fraught US Debt Ceiling Talks (R.)
• Weird Things Are Happening With Gold (Rickards)
• ‘More Europe’ Won’t Solve Europe’s Fiscal Quandary (BBG)
• Victory For Assad Increasingly Likely As World Loses Interest In Syria (G.)
• ‘Our Society Is Broken’: Canada’s First Nations Suicide Epidemic (G.)

 

 

$160 billion and counting.

• Hurricane Harvey the Costliest Natural Disaster in US History (H.)

Hurricane Harvey is predicted to be the costliest natural disaster in the history of the U.S., with a damage cost exceeding Hurricanes Sandy and Katrina. AccuWeather predicts that the damage cost will hit $160 billion. AccuWeather, a private weather firm, notes that the storm’s cost represents 0.8% of the national GDP, which is now at $19 trillion. “Business leaders and the Federal Reserve, major banks, insurance companies, etc. should begin to factor in the negative impact this catastrophe will have on business, corporate earnings and employment. The disaster is just beginning in certain areas,” AccuWeather founder Dr. Joel N. Myers said in a statement.

“Parts of Houston, the United States’ fourth largest city will be uninhabitable for weeks and possibly months due to water damage, mold, disease-ridden water and all that will follow this 1,000-year flood.” Before Harvey, the costliest hurricane to hit the U.S. was Hurricane Katrina, which caused $108 billion in damage along the Gulf Coast in 2005. The second-costliest was Hurricane Sandy, which caused $75 billion in damage in 2012. Hurricane Ike, the last storm to make landfall in Texas before Harvey, caused $37.5 billion in damage in 2008. [..] The Associated Press reports that 80% of Harvey’s victims do not have flood insurance. Thousands of families will have to take on more debt or spend much more to fix their homes. Others will sell their property to move out.

Robert Hunter, director of insurance at the Consumer Federation of America, estimated that flood damage alone cost at least $35 billion. Hunter explained to the AP that if you don’t have flood insurance, you can apply for federal disaster benefits. However, these are low interest loans that will add more debt. Homeowners insurance covers water damage caused by wind damage, but not if the water comes through the floor or walls, the AP explains. “Homeowners with water damage can get paid through their homeowners insurance but only if wind blows out a window or sends a roof aloft first, allowing the water in,” the AP notes. “If the water rushes through the floorboard or walls, you’re not covered.”

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There have been scores of chemicals released into the air already in the area.

• “No Way To Prevent Imminent Explosion” At Texas Chemical Plant (ZH)

[..] in a potentially disastrous outcome from the Harvey flooding, a chemical plant in Crosby, Texas belonging to French industrial giant Arkema, has announced it is evacuating workers due to the risk of an explosion, after primary power was knocked out and flooding swamped its backup generators. The French company said the situation at the plant “has become serious” and said that it is working with the Department of Homeland Security and the State of Texas to set up a command post in a suitable location near our site. The plant, which produces explosive organic peroxides and ammonia, was hit by more than 40 inches of rain and has been heavily flooded, running without electricity since Sunday. The plant was closed since Friday but has had a skeleton staff of about a dozen in place.

Following the flood surge, the plant’s back-up generators also failed. The threat emerged once the company could no longer maintain refrigeration for chemicals located on site, which have to be stored at low temperatures. The plant lost cooling when backup generators were flooded and then workers transferred products from the warehouses into diesel-powered refrigerated containers. On Tuesday afternoon, the company released a statement which admitted that “refrigeration on some of our back-up product storage containers has been compromised due to extremely high water, which is unprecedented in the Crosby area. We are monitoring the temperature of each refrigeration container remotely.” It then warned that “while we do not believe there is any imminent danger, the potential for a chemical reaction leading to a fire and/or explosion within the site confines is real.”

One day later, and with the torrential rains finally over, has the situation at the giant peroxide chemical plant stabilized? Unfortunately, according to Reuters, the answer is no. Speaking to reporters on Wednesday afternoon, Richard Rowe, the chief executive of Arkema’s American operations said that “the company has no way of preventing chemicals from catching fire or exploding at its heavily flooded plant.” Rowe added that the company now expects chemicals on site to catch fire or explode within the next six days. Since the plant remains flooded by about six feet of water, “the company has no way to prevent” this worst-case outcome. Anticipating the worst, the company earlier evacuated all remaining workers, while Harris County ordered the evacuation of residents in a 1.5-mile radius of the plant that makes organic chemicals.

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Insult. Injury.

• Texans To Be Hit With New Insurance Law (Ind.)

The embattled populations of southeastern Texas, may soon encounter a new obstacle in their quests to rebuild their lives after Harvey when a new state insurance law that makes it harder for consumers to receive full claims goes into effect Friday. The new law decreases the chances that an insurance company will be forced to pay claim delay penalties and plaintiff attorneys’ fees related to weather-involved claims — a protection that may discourage struggling households from pursuing legal action even if they think the insurance companies are offering less of a payout than they should. Under the new regulations, insurance companies will enjoy greater freedoms to push back on insurance claims, and the first wave of such claimants are likely to be coming from areas impacted by Harvey.

Residents reeling from Harvey now have until just Friday to assess the damages to their homes that may still be under water, and to notify their insurance company of nay damages if they want to avoid navigating that new law. After Friday, new legal restrictions will be in place that make things more difficult for consumers, and interest rates imposed on insurance companies to deter late payments will be cut nearly in half. “Without this law, and as the law currently is until Friday, I think insurance companies would be more responsive to claims,” Kir Pittard, a Dallas attorney, wrote on Facebook of the new law. “After Friday, there won’t be the incentive because the penalty for delays have been reduced.” To put it bluntly, a lot of residents in the impact area of Harvey may face a long battle ahead to replace the roofs torn off their homes from high winds, activists say.

“Insurance companies already had a lot of power, and the bill gives them a lot more power. As we know, too often insurance companies wrongfully withhold payments, they delay payments, they deny claims,” Ware Wendell, the executive director of consumer watchdog group Texas Watch, told The Independent. “So, we’re very concerned that people are going to have blue tarps on their homes instead of roofs.”

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Nomi sees central banks the same way I do.

• A Decade of G7 Central Bank Collusion – And Counting… (Nomi Prins)

Since late 2007, the Federal Reserve has embarked on grand-scale collusion with other G-7 central banks to manufacture a massive amount of money. The scope and degree of this collusion are historically unprecedented and by admission of the perpetrators, unconventional in approach, and – depending on the speech – ineffective. Central bank efforts to provide liquidity to the private banking system have been delivered amidst a plethora of grandiose phrases like “unlimited” and “by all means necessary.” Central bankers have played a game with no defined goalposts, no clock rundown, no max scores, and no true end in sight. At the Fed’s instigation, central bankers built policy on the fly. Their science experiment morphed into something even Dr. Frankenstein couldn’t have imagined.

Confidence in the Fed and the U.S. dollar (as well as in other major central banks globally) has dropped considerably, even as this exercise remains in motion, and even though central bankers have tactiltly admitted that their money creation scheme was largely a bust, though not in any one official statement. On July 31, 2017, Stanley Fischer, vice chairman of the Fed, delivered a speech in Rio de Janeiro, Brazil. There, he addressed the phenomenon of low interest rates worldwide. Fischer admitted that “the effects of quantitative easing in the United States and abroad” are suppressing rates. He also said there was “a heightened demand for safe assets affecting yields on advanced-economy government securities.” (Actually, there’s been heighted demand for junky assets, as well, which has manifested in a bi-polarity of saver vs. speculator preference.)

What Fischer meant was that investors are realizing that low rates since 2008 haven’t fueled real growth, just asset bubbles. Remember, Fischer is the Fed’s No. 2 man. He was also a professor to former Fed Chair Ben Bernanke and current European Central Bank President Mario Draghi. Both have considered him to be a major influence in their economic outlook. The “Big Three” central banks – the Fed, the European Central Bank and the Bank of Japan – have collectively held rates at a zero% on average since the global financial crisis began. For nearly a decade, central banks have been batting about tens of trillions of dollars to do so. They have fueled bubbles. They have amassed assets on their books worth nearly $14 trillion. That’s money not serving any productive, real-economy purpose – because it happens to be in lock-down.

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When the reserve currency sinks, strange things can happen.

• It’s Time For Your Reminder That Most Commodities Are Priced In US Dollars (BI)

The commodity rally since June has been impressive, and it could be tied to weakness in the US dollar. Those sharp increases — ranging between 15-40% — have had Morgan Stanley strategists slightly puzzled. On one hand, bulk commodities such as iron ore and coal have benefited from steady increases in demand. “Similarly, restocking in zinc and nickel markets have helped lift prices of those trades,” the analysts said. However, they added that fundamentals alone can’t explain the rise in the prices of copper, aluminium and lead. That suggests some of the price action is being driven by an external factor: the recent weakness in the US dollar. The analysts noted that this is the second commodity rally within the last year that’s been directly connected to the US dollar.

But the first one was the other way round — commodities staged a 4-week rally in the wake of the US election last November, when the US dollar was also rising. So why the difference? According to Price and Bates, it’s because the outlook for inflation has now largely reversed. “Post-election, markets positioned for new inflation risk, on the promise of a US infra-build story,” they said. But infrastructure reform is yet to get off the ground amid political gridlock in Washington, and US inflation remains stuck below the Federal Reserve’s target rate of 2-3%. Currency markets have reacted by driving the US dollar lower throughout most of 2017. So it follows that commodities priced in US dollars have benefited from a fall in the greenback while overall commodity-demand remains unchanged.

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Try it in a smaller country first?!

• A Universal Basic Income Would Grow The Economy (Vox)

A universal basic income could make the US economy trillions of dollars larger, permanently, according to a new study by the left-leaning Roosevelt Institute. Basic income, a proposal in which every American would be given a basic stipend from the government no strings attached, is often brought up as a potential solution to widespread automation reducing demand for labor in the future. But in the meantime, its critics typically allege that it is far too expensive to be practical, or else that it would spur millions of Americans to drop out of the labor force, wrecking the economy and depriving the government of a tax base for funding the plan. The Roosevelt study, written by Roosevelt research director Marshall Steinbaum, Michalis Nikiforos at Bard College’s Levy Institute, and Gennaro Zezza at the University of Cassino and Southern Lazio in Italy, comes to a dramatically different conclusion.

And it does so using some notably rosy assumptions about the effects of large-scale increases to government spending, taxes, and deficits, assumptions that other analysts would dispute vociferously. Their paper analyzes three different models for a universal basic income: • A full universal basic income, in which every adult gets $1,000 a month ($12,000 a year) • A partial basic income, in which every adult gets $500 a month ($6,000 a year) • A child allowance, in which every child gets $250 a month ($3,000 a year) They find that enacting any of these policies by growing the federal debt — that is, without raising taxes to pay for it — would substantially grow the economy. The effect fades away within eight years, but GDP is left permanently higher. The big, $12,000 per year per adult policy, they find, would permanently grow the economy by 12.56 to 13.10% — or about $2.5 trillion come 2025.

It would also, they find, increase the%age of Americans with jobs by about 2%, and expand the labor force to the tune of 4.5 to 4.7 million people. They also model the impact of the plan if it’s paid for with taxes. That amounts to large-scale income redistribution, which, the authors argue, would stimulate the economy, because lower-income people are likelier to spend their money in the near-term than rich people are. Thus, they find that a full $12,000 a year per adult basic income, paid for with progressive income taxes, would grow the economy by about 2.62% ($515 billion) and expand the labor force by about 1.1 million people.

These are extremely contentious estimates, borne of controversial assumptions about the way the economy works and the effects that a basic income would have on it. Many, if not most, economic modelers would come to very different conclusions: that a basic income discourages work, that raising taxes to pay for it could have profound negative economic impacts, and that not paying for it and exploding the deficit is a recipe for fiscal and economic ruin. But the authors argue that the economic model they’re using, run by the Bard College Levy Economics Institute, uses more realistic assumptions than alternative models, and is particularly well-suited for predicting a UBI’s impact.

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Part of Yanis’ plans for Greece. A parallel system.

• The Promise of Fiscal Money (Varoufakis)

any attempt to bring treasuries and central banks back under one roof would expose politicians to accusations of trying to get their grubby hands on the levers of monetary policy. But another response to the new reality is available: Leave central banks alone, but give governments a greater say in domestic money creation – and, indeed, greater independence from the central bank – by establishing a parallel payments system based on fiscal money or, more precisely, money backed by future taxes. How would fiscal money work? For starters, it would “live” on the tax authority’s digital platform, using the existing tax file numbers of individuals and companies. Anyone with a tax file number (TFN) in some country receives a free account linked to their TFN.

Individuals and firms will then be able to add credit to their TFN-linked account by transferring money from their normal bank account, in the same way that they do today to pay their taxes. And they will do so well in advance of tax payments because the state guarantees to extinguish in, say, a year €1,080 of the tax owed for every €1,000 transferred today – an effective annual interest rate of 8% payable to those willing to pay their taxes a year early. In practice, once, say, €1,000 has been transferred to one’s TFN-linked account, a personal identification number (the familiar PIN) is issued, which can be used either to transfer the €1,000 credit to someone else’s TFN-linked account or to pay taxes in the future. These time-stamped future tax euros, or fiscal euros, can be held for a year until maturity or be used to make payments to other taxpayers.

Smartphone apps and even government-issued cards (doubling as, say, social security ID) will make the transactions easy, fast, and virtually indistinguishable from other transactions involving central bank money. In this closed payments system, as fiscal money approaches maturity, taxpayers not in possession of that vintage will fuel rising demand for it. To ensure the system’s viability, the Treasury would control the total supply of fiscal money, using the effective interest rate to guarantee that the nominal value of the total supply never exceeds a%age of national income, or of aggregate taxes, agreed by the legislature. To ensure full transparency, and thus trust, a blockchain algorithm, designed and supervised by an independent national authority, could settle transactions in fiscal money.

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Is it low savings or high debt levels?

• America and China’s Codependency Trap (Stephen Roach)

Caught up in the bluster of the US accusations being leveled at China, little attention is being paid to the potential consequences of Chinese retaliation. Three economic consequences stand out. First, imposing tariffs on imports of Chinese goods and services would be the functional equivalent of a tax hike on American consumers. Chinese producers’ unit labor costs are less than one fifth those of America’s other major foreign suppliers. By diverting US demand away from Chinese trade, the costs of imported goods would undoubtedly rise sharply. The possibility of higher import prices and potential spillover effects on underlying inflation would hit middle-class US workers, who have faced more than three decades of real wage stagnation, especially hard.

Second, trade actions against China could lead to higher US interest rates. Foreigners currently own about 30% of all US Treasury securities, with the latest official data putting Chinese ownership at $1.15 trillion in June 2017 – fully 19% of total foreign holdings and slightly higher than Japan’s $1.09 trillion. In the event of new US tariffs, it seems reasonable to expect China to respond by reducing such purchases, reinforcing a strategy of asset diversification away from US dollar-based assets that has been under way for the past three years. In an era of still-large US budget deficits – likely to go even higher in the aftermath of Trump administration tax cuts and spending initiatives – the lack of demand for Treasuries by the largest foreign owner could well put upward pressure on borrowing costs.

Third, with growth in US domestic demand still depressed, American companies need to rely more on external demand. Yet the Trump administration seems all but oblivious to this component of the growth calculus. It is threatening trade sanctions not only against China – America’s third-largest and fastest-growing major export market – but also against NAFTA partners Canada and Mexico (America’s largest and second-largest export markets, respectively). As the reactive pathology of codependency would suggest, none of these countries can be expected to acquiesce to such measures without curtailing US access to their markets – a counter-response that could severely undermine the manufacturing revival that seems so central to the Trump presidency’s promise to “Make America Great Again.”

In the end, China’s economic leverage over America is largely the result of low US domestic saving. In the first quarter of 2017, the so-called net national saving rate – the combined depreciation-adjusted saving of businesses, households, and the government sector – stood at just 1.9% of national income, well below the longer-term average of 6.3% that prevailed over the final three decades of the twentieth century. Lacking in saving and wanting to consume and grow, the US must import surplus saving from abroad to close the gap, forcing it to run massive current-account and trade deficits with countries like China to attract the foreign capital.

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“..the now-notorious 2011 standoff led S&P Global Ratings to downgrade U.S. sovereign debt for the first time. The episode wiped $2.4 trillion off U.S. stocks.”

• Financial Firms Fear Turmoil Over Fraught US Debt Ceiling Talks (R.)

Financial firms are sounding alarm bells and dusting off contingency plans over fears an increasingly dysfunctional U.S. Congress may fail to reach a deal to raise the country’s debt limit. Several lobbyists, representing dozens of bankers, investors and credit rating agencies, told Reuters they are worried that dynamics at play in Washington – a bitterly divided Republican party and unpredictable President Donald Trump – could rule out a deal before an October deadline. Policymakers have vowed to provide disaster relief to areas affected by Hurricane Harvey, boosting hopes the debt limit battle could be included in an agreement on a legislative package.

But the acrimonious atmosphere following Trump’s remarks about the Charlottesville protests this month, which cost him key backers in the business community and raised worries about his ability to broker a deal, still lingers. The debt ceiling is a legal cap on how much money the government can borrow to fund its budget deficits and meet debt obligations. Failure to raise it from the current $19.8 trillion could lead to default, sending shockwaves across global markets. “The stakes here are incredibly high. The economic impact associated with debt default is so immense,” said Rob Nichols, president and CEO of the American Bankers Association (ABA), one of the country’s key financial lobby groups. “We’re monitoring this extremely closely and we will mobilize as needed throughout September.”

While leading lawmakers and the administration have pledged it will get done, some corners of financial markets are already on edge. After all, Goldman Sachs estimated that failure to lift the cap would force a government spending cut equal to between 3 and 4% of U.S. gross domestic product, which would have crippling economic consequences. Moreover, previous debt limit negotiations went down to the wire, and the now-notorious 2011 standoff led S&P Global Ratings to downgrade U.S. sovereign debt for the first time. The episode wiped $2.4 trillion off U.S. stocks.

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“U.S. gold is currently officially valued at $42.22 per ounce on the Treasury’s books versus a market price of $1,285 per ounce”

• Weird Things Are Happening With Gold (Rickards)

The first strange gold story involves Germany… The Deutsche Bundesbank, the central bank of Germany, announced that it had completed the repatriation of gold to Frankfurt from foreign vaults. The German story is the completion of a process that began in 2013. That’s when the Deutsche Bundesbank first requested a return of some of the German gold from vaults in Paris, in London and at the Federal Reserve Bank of New York. Those gold transfers have now been completed. This is a topic I first raised in the introduction to Currency Wars in 2011. I suggested that in extremis, the U.S. might freeze or confiscate foreign gold stored on U.S. soil using powers under the International Emergency Economic Powers Act, the Trading With the Enemy Act or the USA Patriot Act.

This then became a political issue in Europe with agitation for repatriation in the Netherlands, Germany and Austria. Europeans wanted to get gold out of the U.S. and safely back to their own national vaults. The German transfer was completed ahead of schedule; the original completion date was 2020. But the German central bank does not actually want the gold back because there is no well-developed gold-leasing market in Frankfurt and no experience leasing gold under German law. German gold in New York or London was available for leasing under New York or U.K. law as part of global price-manipulation schemes. Moving gold to Frankfurt reduces the floating supply available for leasing, making it more difficult to keep the manipulation going.

Why did Germany do it? The driving force both in 2013 (date of announcement) and 2017 (date of completion) is that both years are election years in Germany. Angela Merkel’s position as chancellor of Germany is up for a vote on Sept. 24, 2017. She may need a coalition to stay in power, and there’s a small nationalist party in Germany that agitates for gold repatriation. Merkel stage-managed this gold repatriation with the Deutsche Bundesbank both in 2013 and this week to appease that small nationalist party and keep them in the coalition. That’s why the repatriation was completed three years early. She needs the votes now.

The truly weird gold story comes from the United States… Secretary of the Treasury Steve Mnuchin and Senate Majority Leader Mitch McConnell just paid a visit to Fort Knox to see the U.S. gold supply. Mnuchin is only the third Treasury secretary in history ever to visit Fort Knox and this was the first official visit from Washington since 1974. The U.S. government likes to ignore gold and not draw attention to it. Official visits to Fort Knox give gold some monetary credence that central banks would prefer it does not have. Why an impromptu visit by Mnuchin and McConnell? Why now? The answer may lie in the fact that the Treasury is running out of cash and could be broke by Sept. 29 if Congress does not increase the debt ceiling by then. But the Treasury could get $355 billion in cash from thin air without increasing the debt simply by revaluing U.S. gold to a market price. (U.S. gold is currently officially valued at $42.22 per ounce on the Treasury’s books versus a market price of $1,285 per ounce.)

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Naked power plays.

• ‘More Europe’ Won’t Solve Europe’s Fiscal Quandary (BBG)

To a certain cast of people, the solution to every problem in Europe is “more Europe” – even, or especially, those problems that have been caused by Europe. The economic crisis that began a decade ago has exposed many flaws in the European economic model. The solution? Some are calling for a euro-zone budget and a euro-zone finance minister. France’s new president, Emmanuel Macron, is dedicated to the idea. Berlin has signaled conditional support. And Brussels is always happy to accrue more power. The idea makes superficial sense: Monetary union, most people now accept, doesn’t really work without fiscal union. The European Central Bank is constantly under pressure to loosen monetary policy to help the weakest euro members, and to keep it tight to help the strongest. But currency is a blunt instrument.

The “more Europe” thinking is that if the EU had a large budget, it could redistribute wealth to more directly help struggling members. (This is what happens in the U.S.) A powerful finance minister would oversee member countries to keep deficits and debts down and prevent debt crises. Except that that doesn’t make much sense: As Martin Sandbu points out, the U.S. federal budget, hovering at around 20% of GDP, isn’t enough to act as much of a macro-economic stabilizer, and nobody contemplates an EU budget of even that scale in the foreseeable future. Regardless, the so-called debt crises in the euro zone were not ultimately caused by deficits and debts as such, but by monetary phenomena. The euro made Mediterranean countries uncompetitive, leading to slow growth and debt and deficits, and the interest on those debts spiked only when the implicit euro-zone-wide guarantee on those debts was called into question by Germany.

What of Germany, which is essential to any EU reform effort? Germany historically, and Angela Merkel especially, has always been keen on more European integration – but also doesn’t want to pay for it. German Finance Minister Wolfgang Schaeuble has favored the idea of an EU budget – with a little-noticed but all-important asterisk. EU countries’ access to a European macroeconomic stabilization fund would be conditioned on “the bailout fund having more say over national debt and budgets,” he told the German Bild newspaper. In other words, Germany would be happy to pay a little something toward a macro-economic stabilization fund in exchange for having practical control over the budgets of all the euro-zone countries.

The commitment to pay into the fund is probably not daunting, because the budgetary orthodoxy rules Germany would come up with would be unattainable, and the money would probably never be spent. In other words, Macron and the “more Europe” camp are willing to hand Germany control over the euro zone’s finances, in exchange for … well, perhaps nothing. It’s an offer that Merkel can’t refuse.

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No, it’s not ideal. But at least all-out chaos like in Libya has been prevented.

• Victory For Assad Increasingly Likely As World Loses Interest In Syria (G.)

In recent months, as supplies of aid, money and weapons to Syria’s opposition have dwindled, it had clung to the hope that ongoing international political support would prevent an outright victory for Bashar al-Assad and his backers. Not any more. An announcement earlier this week by Jordan – one of the opposition’s most robust supporters – that “bilateral ties with Damascus are going in the right direction” has, for many, marked a death knell for the opposition cause. Within the ranks of the political opposition, and regional allies, the statement was the opening act of something that all had dreaded: normalisation with a bitter foe. And without anything much to show for it.

Emphasising his words, Jordanian government spokesman Mohammad al-Momani said: “This is a very important message that everyone should hear.” And indeed, the about-face in Amman was quickly noted in Ankara, Doha, and Riyadh, where – after seven and a-half years of war – states that were committed to toppling the Syrian leader are now resigned to him staying. Returning from a summit in the Saudi capital last week, opposition leaders say they were told directly by the foreign minister, Adel al-Jubeir, that Riyadh was disengaging. “The Saudis don’t care about Syria anymore,” said a senior western diplomat. “It’s all Qatar for them. Syria is lost.”

In Britain too, rhetoric that had demanded Assad leave the Presidential Palace, as a first step towards peace, has been replaced by what Whitehall calls “pragmatic realism”. The foreign secretary, Boris Johnson, last week couched Assad’s departure as “not a precondition. But part of a transition.” Rex Tillerson, the US secretary of state, has openly delegated finding a solution to Syria to Russia. Donald Trump, meanwhile, has pledged to close a CIA-run programme, which had sent weapons from Jordan and Turkey to vetted Syrian rebel groups for much of the past four years. Washington has adopted a secondary role in twin, ailing, peace processes in Geneva and Astana and has focused its energies on fighting Isis, not Assad.

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How long ago is it that Justin vowed to fix this? “.. more than 100 reserves still lack housing, electricity or running water “

• ‘Our Society Is Broken’: Canada’s First Nations Suicide Epidemic (G.)

The suicide epidemic affecting First Nations communities across Canada has been a national crisis for decades, but it attracted international headlines after three indigenous communities were moved to declare a state of emergency in response to a series of deaths. In the spring of 2016, Attawapiskat First Nation reserve in Ontario declared a state of emergency after 11 young people tried to commit suicide in one night – adding to the estimated 100 attempts made over 10 months among this community of 2,000 people. Not long after, it was revealed that six people, including a 14-year-old girl, had killed themselves over a period of three months in the Pimicikamak Cree Nation community of northern Manitoba. In the aftermath, more than 150 youths in this remote community of 6,000 were put on suicide watch.

Then in June this year, another First Nations reserve in Ontario lost three 12-year-old girls who had reportedly agreed a suicide pact. This string of tragic events has seen media and government turn the spotlight on an issue too often ignored in Canada. Across the country, suicide and self-inflicted injury is the leading cause of death for First Nations people below the age of 44. Studies show young indigenous males are 10 times more likely to kill themselves than their non-indigenous male counterparts, while young indigenous females are 21 times more likely than young non-indigenous females. [..] The government has been criticised for its lack of support and funding for First Nations communities, which total 1.4 million people – just under 4.3% of Canada’s population. “We call that injustice,” says Roderick McCormick, an expert in indigenous health and suicide at Thompson Rivers University in Kamloops BC.

He suggests a complex web of severe poverty plus lack of education and basic necessities underpins the rise in suicides among indigenous youths. “In terms of educational opportunities, healthcare and child welfare, the government is doing an injustice by not adequately funding our communities,” McCormick says. “When these remote reserves compare themselves to other communities across Canada, there is a huge gap that has become really evident.” Recent research has found more than 100 reserves still lack housing, electricity or running water – with almost 90 of them being advised to boil their drinking water. Another study by the Canadian Centre for Policy Alternatives found that 60% of children on these reserves are living in poverty. “The communities I represent are living in abject poverty,” Wilson says. “My people are the poorest in this country, and that’s not right.”

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Debt Rattle August 30 2017

Aug 302017
 
 August 30, 2017  Posted by at 8:39 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


Elliott Erwitt Crowd at Armistice Day Parade, Pittsburgh 1950

 

• The Economy Minus Houston (Slate)
• Harvey Didn’t Come Out Of The Blue (Naomi Klein)
• The US Cities with the Biggest Housing Bubbles (WS)
• “Crazy” House Prices Are Firing Up New Zealand’s Voters (BBG)
• China’s $2 Trillion of Shadow Lending Throws Focus on Rust Belt (BBG)
• Homeowner’s Lawsuit Says Wells Fargo Charged Improper Mortgage Fees (R.)
• The Battle for India’s $45 Billion Gold Industry Has Begun (BBG)
• US Defense Boost May Unravel Into a $65 Billion Cut (BBG)
• England’s Fire Services Suffer 25% Cut To Safety Officers Numbers (G.)
• UK’s Leading Companies’ Pension Deficit Rises To 70% Of Their Profits (G.)
• We Need To Nationalise Google, Facebook and Amazon (G.)
• As Poverty Surges in Italy, Five Star Propose a ‘Citizens’ Income’ (BBG)
• Why Every European Country Has A Trump Or Sanders Candidate (Drake)

 

 

A huge number of people will not be able to rebuild, because they lack insurance. And in many cases, rebuilding on the same -flood prone- spot wouldn’t be a good idea to begin with. But where will the people go?

Time to stop talking about the damage to the economy, and focus on the people.

• The Economy Minus Houston (Slate)

Houston, America’s fourth-largest city, has a massive, diversified economy. Sure, New Orleans sits near the mouth of the mighty Mississippi River and is an important entrepôt and site for export of raw materials, agricultural commodities chemicals, and petroleum products. But Houston is a larger, busier, and far more important node in the networked economy. Economies derive their power and influence from their connections to other cities, countries, and markets. And Houston is one of the more connected. It is one of the global capitals of the energy and energy services industries. Yes, there’s a degree to which consumption and other economic activity that is forestalled or foregone during a flood is consumption and economic activity deferred. And cleanup efforts tend to be additive to local economies. But in today’s economy, a lot of value can easily be destroyed very quickly.

With only a small portion of the housing stock carrying flood insurance, billions of dollars in property will simply be destroyed and not immediately replaced. People who get paid by the hour, or who work for themselves, won’t be able to make up for the income they’re losing a few weeks from now. Hotel rooms and airplane seats are perishable goods—once canceled, they can’t simply be rescheduled. Refineries won’t be able to make up all the time offline—they can’t run more than 24 hours per day. And given that supply chains rely on a huge number of shipments making their connections with precision, the disruption to the region’s shipping, trucking, and rail infrastructure will have far-reaching effects. If you’re a business in Oklahoma or New Mexico, there’s a pretty good chance the goods you are importing or exporting pass through the Port of Houston.

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Sorry, Naomi, but you can’t take individual events and blame them on cllmate change. The system is far too complex for that. We must stick to science, not lose ourselves in assumptions.

• Harvey Didn’t Come Out Of The Blue (Naomi Klein)

Now is exactly the time to talk about climate change, and all the other systemic injustices — from racial profiling to economic austerity — that turn disasters like Harvey into human catastrophes. Turn on the coverage of the Hurricane Harvey and the Houston flooding and you’ll hear lots of talk about how unprecedented this kind of rainfall is. How no one saw it coming, so no one could adequately prepare. What you will hear very little about is why these kind of unprecedented, record-breaking weather events are happening with such regularity that “record-breaking” has become a meteorological cliche. In other words, you won’t hear much, if any, talk about climate change.

This, we are told, is out of a desire not to “politicize” a still unfolding human tragedy, which is an understandable impulse. But here’s the thing: every time we act as if an unprecedented weather event is hitting us out of the blue, as some sort of Act of God that no one foresaw, reporters are making a highly political decision. It’s a decision to spare feelings and avoid controversy at the expense of telling the truth, however difficult. Because the truth is that these events have long been predicted by climate scientists. Warmer oceans throw up more powerful storms. Higher sea levels mean those storms surge into places they never reached before. Hotter weather leads to extremes of precipitation: long dry periods interrupted by massive snow or rain dumps, rather than the steadier predictable patterns most of us grew up with.

The records being broken year after year — whether for drought, storm surges, wildfires, or just heat — are happening because the planet is markedly warmer than it has been since record-keeping began. Covering events like Harvey while ignoring those facts, failing to provide a platform to climate scientists who can make them plain, all while never mentioning President Donald Trump’s decision to withdraw from the Paris climate accords, fails in the most basic duty of journalism: to provide important facts and relevant context. It leaves the public with the false impression that these are disasters without root causes, which also means that nothing could have been done to prevent them (and that nothing can be done now to prevent them from getting much worse in the future).

It’s also worth noting that the Harvey coverage has been highly political since well before the storm made landfall. There has been endless talk about whether Trump was taking the storm seriously enough, endless speculation about whether this hurricane will be his “Katrina moment” and a great deal of (fair) point-scoring about how many Republicans voted against Sandy relief but have their hands out for Texas now. That’s politics being made out of a disaster — it’s just the kind of partisan politics that is fully inside the comfort zone of conventional media, politics that conveniently skirts the reality that placing the interests of fossil fuel companies ahead of the need for decisive pollution control has been a deeply bipartisan affair.

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Wolf Richter with a whole series of US cities, all with record new highs. How people can keep saying there is no bubble in the US, I don’t know.

• The US Cities with the Biggest Housing Bubbles (WS)

For the good folks who hope fervently that the Fed doesn’t have reasons to raise rates or unwind QE because there isn’t enough inflation, here is an update on one aspect of inflation – asset price inflation, and particularly house price inflation – where the value of your hard-earned dollars has collapsed over a given number of years to where it takes a whole lot more dollars to pay for the same house. So here are some visuals of amazing house price bubbles, city by city. Bubbles really aren’t hard to recognize, if you want to recognize them. What’s hard to predict accurately is when they will burst. Normally the Fed doesn’t want to acknowledge them. But now it has its eyes focused on them.

The S&P CoreLogic Case-Shiller National Home Price Index for June was released today. It jumped 5.8% year-over-year, not seasonally adjusted, once again outpacing growth in household incomes, as it has done for years. At 192.6, the index has surpassed by 5% the peak in May 2006 of crazy Housing Bubble 1, which everyone called “housing bubble” after it imploded (data via FRED, St. Louis Fed). The Case-Shiller Index is based on a rolling-three month average; today’s release was for April, May, and June data. Instead of median prices, it uses “home price sales pairs,” for example, a house sold in 2011 and then again in 2017. Algorithms adjust this price movement and add other factors. The index was set at 100 for January 2000. An index value of 200 means prices have doubled in the past 17 years, which is what most of the metros in this series have accomplished, or are close to accomplishing.

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There is no easy way out for New Zealand.

• “Crazy” House Prices Are Firing Up New Zealand’s Voters (BBG)

As ownership falls to the lowest since 1951, housing affordability is firing up voters ahead of New Zealand’s general election on Sept. 23. The government is under attack for failing to respond to price surges that have forced many to ditch their property dreams. New Labour leader Jacinda Ardern has made housing a key issue, helping restore the main opposition party in opinion polls and leaving the election too close to call. “The government’s response has been too slow and inadequate for many because they’ve seen house prices rising very fast,” said Raymond Miller, professor of politics at Auckland University. “Some voters might well have a feeling of being let down by what they see as indifference to their plight. It’s the government’s Achilles’ heel.” Prices across New Zealand have risen 34% the past three years, fanned by record immigration, historically low interest rates and a supply shortage.

That’s seen the portion of owner-occupied properties slump to 63% of the nation’s 1.8 million homes in the second quarter, down from a peak of 74% in the early 1990s. In response, the ruling National Party has made more land available for development and increased deposit grants to first-home buyers. But it’s done little to curb immigration that’s added 201,000 to the population the past three years, while a policy of taxing profits on investment properties sold within two years of purchase has been criticized as too mild. Labour is pledging a more aggressive solution. It’s promising to ban property sales to non-resident foreigners who it says have fanned price pressures, and will extend the period in which investors will be subject to tax to five years. It wants to curb immigration, and plans to build 100,000 homes over 10 years and sell them at affordable prices.

“We’re going to get the government back into the business of building large numbers of affordable homes for first-home buyers like governments used to in this country,” Labour’s housing spokesman Phil Twyford said in a Television New Zealand interview. “The government has had nine years and they’ve just tinkered around the edges.” Many New Zealanders are motivated to save for a home where they can bring up a family just as their parents and grandparents did. National will be wary that disillusioned home-buyers may turn their back on the party, thwarting its efforts to win a rare fourth term. No party has won an outright majority since the South Pacific nation introduced proportional representation in 1996. National had 44% support in a poll published Aug. 17. Labour had 37% but could get across the line with the additional support of ally the Green Party, which had 4%, and New Zealand First, which got 10%.

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I think the estimates are still low.

• China’s $2 Trillion of Shadow Lending Throws Focus on Rust Belt (BBG)

Regional banks in China’s rust-belt provinces are driving the rapid expansion of shadow banking in the country, fueling a web of informal lending that poses wider risks to the financial system, according to a study by UBS. Smaller rust-belt banks like Bank of Tangshan Co. and Baoshang Bank have been using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions, the study by analyst Jason Bedford said. Others have been using the shadow loan instruments to diversify away from lending in their struggling home provinces, exposing themselves to a much wider spectrum of Chinese corporate risk in the event of a default, according to the report. By analyzing 237 Chinese banks, many of them small and unlisted regional lenders, Bedford casts a new spotlight on underground financing and the risks it poses to the nation’s $35 trillion banking industry.

Shadow loans grew almost 15% to 14.1 trillion yuan ($2.3 trillion) by December from a year earlier, equal to about 19% of economic output, he estimates. “This is a sleeper issue,” Bedford wrote. “The remarkable level of concentration in regional banks in rust-belt region banks, combined with evidence that these assets are increasingly being used to roll over loans to existing borrowers as well as being swapped between banks without a clear transfer of risk are alarming.” Accounting for this financing, Chinese banks’ nonperforming loans could be three times higher than the official published level, he said. By recording such lending under “investment receivables” rather than “loans” on their financial statements, banks were able to disguise what is in effect lending, to get around regulatory lending curbs or heavy reliance on wholesale funding.

Such financial engineering also enabled some lenders to overstate their capital adequacy ratios, understate nonperforming loans and reduce provision charges. [..] Bank of Tangshan is an unlisted lender in the struggling northeast city of the same name, which produces more steel than any other city around the world. The firm’s shadow loans grew 86% last year to a size equal to 308% of its formal book, the highest of any bank in China, according to Bedford’s report. Still, the bank reported a bad-loan ratio of just 0.05% last year, the lowest of any bank in UBS’ analysis, exemplifying the “distortion” shadow loan books create in assessing asset quality, Bedford said.

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How is this NOT criminal intent? Where are the indictments?

• Homeowner’s Lawsuit Says Wells Fargo Charged Improper Mortgage Fees (R.)

A homeowner has filed a lawsuit accusing Wells Fargo of improperly charging thousands of customers nationwide to lock in interest rates when their mortgage applications were delayed. Filed on Monday in San Francisco federal court, the lawsuit said Wells Fargo managers pressured employees to blame homeowners for the delays, sometimes by falsely stating that paperwork was missing, so homeowners could be stuck with extra fees. Wells Fargo Spokesman Tom Goyda said the bank is reviewing past practices on rate lock extensions and will take steps for customers as appropriate. The lawsuit, which will request the court grant class action status, comes as Wells Fargo is trying to recover from a scandal last year when the bank was fined for opening accounts for customers without their authorization in order to boost sales figures.

Last month, a new lawsuit accused it of charging several hundred thousand borrowers for auto insurance they did not request. Monday’s lawsuit accuses the bank of violating state and federal consumer protection laws, including the U.S. Real Estate Settlement Procedures Act and the U.S. Truth in Lending Act. Earlier this month, Wells Fargo disclosed that the Consumer Financial Protection Bureau was investigating the fees the company charged to lock in interest rates for delayed mortgage loans. In a securities filing, the bank said it was working with regulators to see if customers had been harmed by the fees. Interest rate locks are guarantees by a lender to lock in a set interest rate, usually for several weeks, while a loan is processed. If the rate lock expires before a loan closes, lenders often cover the cost of extending the lock if the delay was their fault.

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Modi taking people’s incomes away. Reforms. Here’s thinking India is nowhere near ready for this.

• The Battle for India’s $45 Billion Gold Industry Has Begun (BBG)

India’s past and future are colliding in Anand Ghugre’s family jewelry shop in Mumbai. “We still operate the way my father did for 50 years,” said Ghugre, 52, explaining that transactions were typically in cash and were not always recorded. “For small jewelers and the unorganized sector, most of our sales happen through personal connections. Sometimes they don’t want bills, but the jewelers can’t say no to them.” That way of doing business is under threat as the world’s second-largest gold market faces Prime Minister Narendra Modi’s campaign to bring India’s informal economy to book. About three quarters of the estimated $45 billion of the precious metal that is traded in the country each year makes its way through thousands of family-run jewelry shops that have catered for centuries to the nation’s love of gold.

Modi’s financial reforms, including demonetization and a new goods and services tax, combined with a younger generation that shops online, may usher in a wave of takeovers and mergers by big state-wide and national chains as small shops are swallowed up or close. “The one story that we hear is that the business is becoming problematic for smaller jewelers,” said Chirag Sheth at London-based precious metals consultancy Metals Focus. “The bigger jewelers have deeper pockets, they have larger shops, better designs and better margins. It is very difficult for a smaller guy to compete.” Modi in November banned higher denomination notes to bring unaccounted cash back into the system and introduced tougher proof of identity for purchases, capped the amount of cash used in transactions and topped it off with the uniform goods and services tax last month.

An overhaul of the fragmented industry is also on the cards with the government said to be planning a new policy on gold that will bolster confidence among consumers, where the gifting of gold at weddings and festivals or its purchase as a store of value are deeply held traditions. Fixing quality standards and allowing supply chains to be easily tracked are ways to enhance trust.

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Well, we can’t have that, can we?

• US Defense Boost May Unravel Into a $65 Billion Cut (BBG)

U.S. national security funding may be slashed by about $65 billion in January as lawmakers forge ahead with a spending plan that collides with a budget ceiling under a six-year-old law. A $614 billion bill passed by the U.S. House in H.R. 3219 is caught in a political vise: President Donald Trump and most lawmakers want to see increases in Pentagon spending, yet that intention isn’t backed up by an agreement to undo the 2011 Budget Control Act. Without another budget agreement in place, the Defense Department faces automatic across-the-board cuts of 9% to 10% starting in mid-January, according to Chris Sherwood, a Pentagon spokesman. That’s about $65 billion, the Congressional Budget Office estimates.

Enforcement of the act’s caps are returning for the coming fiscal year that begins Oct. 1 after they were adjusted in fiscal 2016 and 2017 for discretionary domestic and national security spending. That was the third time since the act passed that the limits were adjusted, in those cases for both defense and domestic discretionary spending. Trump wants to cut domestic spending while adding to defense, a proposal opposed by Democrats and many Republicans. If the mandatory cuts go ahead, they would be leveled across thousands of Pentagon programs. The White House would have the option of exempting military personnel funds from the automatic cuts, known as sequestration. Such cuts are likely because all of the pending congressional defense bills so far propose busting the cap of $549 billion in national security spending for fiscal year 2018, or $522 billion for the Pentagon alone.

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Cameron and Osborne and May have gutted the entire country.

• England’s Fire Services Suffer 25% Cut To Safety Officers Numbers (G.)

Fire services in England have lost more than a quarter of their specialist fire safety staff since 2011, a Guardian investigation has found. Fire safety officers carry out inspections of high-risk buildings to ensure they comply with safety legislation and take action against landlords where buildings are found to be unsafe. Figures released to the Guardian under the Freedom of Information Act showed the number of specialist staff in 26 fire services had fallen from 924 to 680, a loss of 244 officers between 2011 and 2017. Between 2011 and 2016, the government reduced its funding for fire services by between 26% and 39%, according to the National Audit Office, which in turn resulted in a 17% average real-terms reduction in spending power.

Warren Spencer, a fire safety lawyer, said the figures showed a “clear culture of complacency” about fire safety. “The government has tended to take the view that fewer people are dying in fires, fires occur less frequently, and therefore there’s no need to invest in fire prevention. So there’s been a total brain drain in fire safety knowledge and many experienced specialist officers have left the force,” he said. “But fire safety officers have been saying to me for years that one day, there would be a big fire in a multiple occupancy building, which would make everyone sit up and take notice of the lack of fire safety provision. Tragically, that’s what happened at Grenfell Tower.”

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As dividends keep being paid out.

• UK’s Leading Companies’ Pension Deficit Rises To 70% Of Their Profits (G.)

The combined pension deficit of FTSE 350 companies has risen to £62bn, accounting for 70% of their profits. The deficit as a proportion of profits recorded for 2016 is higher than at any time since the financial crisis, following a £12bn rise since 2015. The 25% increase came in a second year of comparatively low profit for UK publicly listed companies. The deficit is the gap between the expected liabilities of pension commitments and the funds that companies hold to pay for pensions. While many have set aside billions in recent years, a trend towards rising life expectancy, combined with lower expectations for returns on investment, has put more pressure on pension schemes and seen the deficit grow. Actuaries have warned that even a slight fall in bond yields would see the pension deficit of the plcs outstrip their aggregate profits by 2019.

The figures, in a report from the actuarial consultancy Barnett Waddingham, show the deficit has risen sharply as a proportion of profits in the past five years, from 25% of the £214bn pre-tax profits of the FTSE 350 in 2011. Even in the aftermath of the financial crisis in 2009, the deficit was lower at 60%. For 21 plcs, the pensions shortfall is more than 10% of their value, which Barnett Waddingham described as alarming. However, the actuaries said recent data suggesting years of austerity had seen gains in UK life expectancy grind to a halt could provide “welcome respite for companies”. It showed that after a century in which the rate of increase in life expectancy had accelerated, the average age of death was levelling off at 79 for men and 83 for women.

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A discussion that must take place. But the political climate doesn’t lean towards nationalization. Besides, how do you nationalize companies that operate in many dozens of countries?

• We Need To Nationalise Google, Facebook and Amazon (G.)

At the heart of platform capitalism is a drive to extract more data in order to survive. One way is to get people to stay on your platform longer. Facebook is a master at using all sorts of behavioural techniques to foster addictions to its service: how many of us scroll absentmindedly through Facebook, barely aware of it? Another way is to expand the apparatus of extraction. This helps to explain why Google, ostensibly a search engine company, is moving into the consumer internet of things (Home/Nest), self-driving cars (Waymo), virtual reality (Daydream/Cardboard), and all sorts of other personal services. Each of these is another rich source of data for the company, and another point of leverage over their competitors.

Others have simply bought up smaller companies: Facebook has swallowed Instagram ($1bn), WhatsApp ($19bn), and Oculus ($2bn), while investing in drone-based internet, e-commerce and payment services. It has even developed a tool that warns when a start-up is becoming popular and a possible threat. Google itself is among the most prolific acquirers of new companies, at some stages purchasing a new venture every week. The picture that emerges is of increasingly sprawling empires designed to vacuum up as much data as possible. But here we get to the real endgame: artificial intelligence (or, less glamorously, machine learning). Some enjoy speculating about wild futures involving a Terminator-style Skynet, but the more realistic challenges of AI are far closer.

In the past few years, every major platform company has turned its focus to investing in this field. As the head of corporate development at Google recently said, “We’re definitely AI first.” All the dynamics of platforms are amplified once AI enters the equation: the insatiable appetite for data, and the winner-takes-all momentum of network effects. And there is a virtuous cycle here: more data means better machine learning, which means better services and more users, which means more data. Currently Google is using AI to improve its targeted advertising, and Amazon is using AI to improve its highly profitable cloud computing business. As one AI company takes a significant lead over competitors, these dynamics are likely to propel it to an increasingly powerful position.

What’s the answer? We’ve only begun to grasp the problem, but in the past, natural monopolies like utilities and railways that enjoy huge economies of scale and serve the common good have been prime candidates for public ownership. The solution to our newfangled monopoly problem lies in this sort of age-old fix, updated for our digital age. It would mean taking back control over the internet and our digital infrastructure, instead of allowing them to be run in the pursuit of profit and power. Tinkering with minor regulations while AI firms amass power won’t do. If we don’t take over today’s platform monopolies, we risk letting them own and control the basic infrastructure of 21st-century society.

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Of course the headline said “populists”… Fixed that.

• As Poverty Surges in Italy, Five Star Propose a ‘Citizens’ Income’ (BBG)

“Poverty will be center stage in the campaign,” says Giorgio Freddi, professor emeritus of political science at the University of Bologna. The populist Five Star Movement “has imposed the issue on national politics. The mainstream parties are being forced to play catch-up.” Five Star is a fast-growing group fueled by anger at the old political class. Three years ago the movement rode economic concerns to power in Livorno, ending 70 years of rule by the Communists and other left-leaning parties. The new mayor, a former engineer named Filippo Nogarin, introduced a €500 ($590) monthly subsidy to the disadvantaged. That idea is a key plank in Five Star’s national platform, and the group’s leaders have promised to quickly implement such a program if they take power. Beppe Grillo, the former television comedian who co-founded the party, says fighting poverty should be a top priority.

A basic income can “give people back their dignity,” Grillo’s blog declared in April. “The current government is ignoring millions of families in difficulty.” The Five Star program echoes universal basic income schemes being considered around the world. Finland in January started an experiment in which 2,000 unemployed people receive a stipend of €560 per month. And the Canadian province of Ontario this summer began trials in three cities in which individuals can get almost C$17,000 ($13,600) per year. Five Star’s version would give Italians below the poverty line as much as €780 a month. Recipients must perform several hours of community service each week and actively seek work, and they’d be cut off after rejecting three job offers. Five Star says the plan would cost €17 billion a year, funded in part by spending cuts as well as tax hikes on banks, insurance companies, and gambling.

Opinion polls show Five Star neck and neck with the Democratic Party, led by ex-Premier Matteo Renzi, and a center-right bloc including Forza Italia, the party of former Premier Silvio Berlusconi. To keep Five Star from dominating the debate, Prime Minister Paolo Gentiloni, a Renzi ally, has approved a less ambitious plan he calls “the first universal tool against poverty.” The scheme, dubbed “inclusion income,” would give 1.7 million people as much as €485 a month as long as they’re actively seeking work, at a cost of about €2 billion a year. With industrial output down by about 25% from 2008 to 2013 in Italy’s worst postwar recession, either plan could be helpful, says Giuseppe Di Taranto, a professor of economic history at Rome’s Luiss University. “We lost lots of jobs, and poverty has risen so much that we’ve got to experiment.”

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More of the same. But the anti-EU, anti-globalization mood is obvious: “77% of the people questioned in a recent poll could see no advantage to them at all from the country’s membership in the European Union.” While Macron and Merkel are planning a lot more EU. And claiming that the EU is doing fine.

• Why Every European Country Has A Trump Or Sanders Candidate (Drake)

As a result of the methods used to promote globalization, the consequences for the West have been tragic. Work is becoming increasingly uncertain and insecure, or it is in the process of disappearing altogether. It would take Veblen’s talents for social satire, which are unsurpassed in all of American literature, to depict with the essential exactitude of artistic synthesis how far the United States has fallen away from democratic grace, the country’s dramatically widening gap between the haves and the have-nots being what it is. Clearly, we are on the wrong course. What the robotics revolution, now at an incipient stage, will do to further diminish opportunities for Western peoples to work can be easily imagined, if the economic imperative of corporate capitalism is the rule to go by.

The same desolating trends can be seen in Europe, where people increasingly regard the European Union as a Trojan horse. The economic elites and their political front-men responsible for this image-challenged contraption lose public support with each new poll. The people by and large blame the European Union and the other accessories of globalization for their worsening standard of living. When informed by the establishment media that thanks to globalization Europe has never been more prosperous and peaceful, Europeans in historic numbers are reacting with disbelief. Their deepening sense of betrayal propels the surge of populism that defines the politics of Europe today. Arguments long-settled in favor of deregulation, liberalization, open borders, and other globalization watchwords have been reopened.

The constituency is growing for a politics that puts the well-being of Europeans first. Political measures calling for the protection of European jobs and cultures have gained a following unforeseen prior to 2008. In Italy, for example, 77% of the people questioned in a recent poll could see no advantage to them at all from the country’s membership in the European Union. 64% of them expressed hostility toward it. Eight Italian businesses out of 10 can find nothing positive to say about the European Union. It is seen to be a creature of the banks and the big financial houses. As public relations disasters go, this one has unfolded on an epic scale as the underlying populations, long left out of consideration by the economic elites, have begun to sense the fate their masters have in store for them.

Leaving underlying populations out of consideration was a special feature of the planning that went into globalization. They have been voiceless. In America, Trump gave them a voice, and they responded to him with their political support. It did not matter that he came before them without a plan for their deliverance. That he came to them at all mattered. He understood the depth of the anger and alienation in America against a status quo personified by his opponent, Hillary Clinton, whose repeated and munificently rewarded speeches before the captains of finance on Wall Street effectively branded her as the safe candidate for all who wanted to leave existing economic arrangements fundamentally undisturbed.

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Debt Rattle August 29 2017

Aug 292017
 
 August 29, 2017  Posted by at 8:15 am Finance Tagged with: , , , , , , , , ,  4 Responses »


MC Escher Still life and street 1937

 

• China Is Going To Hit A Wall (FuW)
• Nomi Prins: Big Bank Concentration and Counterparty Risk Expands (DR)
• China’s Central Bank Is Working Hard to Stand Still (BBG)
• Pundits And Politicians Are Tacitly Admitting They Lied About Russia (M.)
• The Media Is the Villain – for Creating a World Dumb Enough for Trump (Taibbi)
• The 5 Steps to World Domination (CHS)
• Pure Rubbish? What The Buffett Indicator Is Really Predicting (Roberts)
• When the Butterfly Flaps Its Wings (Jim Kunstler)
• France, Germany, Italy, Spain Agree on Plan to Stem Migration Flows (BBG)
• Debt Cut For Greece Not On Agenda For Now, Schaeuble Says (R.)
• Chastised by EU, a Resentful Greece Embraces China’s Cash and Interests (NYT)
• Kenya Gets World’s Toughest Plastic Bag Ban: 4 Years Jail Or $40,000 Fine (R.)

 

 

How much longer?

• China Is Going To Hit A Wall (FuW)

Anne Stevenson-Yang, co-founder and research director at J Capital, warns that the monster bubble in the Chinese housing market is ripe to pop and that the Chinese currency will crash. There have been warnings about a bubble in China’s housing market for some time now. How hot is the real estate market? So far this year has been crazy, particularly in the area around Beijing. Just a few weeks ago I was in this little rustbelt city called Zhuozhou in the Hebei province where the steel mills are. It’s a very unpleasant place to spend time. It’s very polluted, there’s nothing to do, the food is bad and the landscape is awful. It’s just no place you want to be and yet property prices have doubled, tripled and in some places even quadrupled in a year.

What’s fueling this boom? It’s like in every property bubble: People build these stories. In Florida for example, the idea in the housing bubble was that all Americans are going to retire there. Florida has nice beaches, it’s warm and Americans are getting older, so everybody’s going to retire there. In China, the idea is that all these areas 200 miles outside of Beijing are going to be bedrooms for the working class of Beijing. So they’re going to build subways, schools, hospitals and other public facilities there and the prices are going to go up. The story goes that all these people who can’t afford to live in Beijing but work there are going to live in places like Zhuozhou instead and that they are going to take the high speed rail into Beijing. Everybody is speculating like mad but in the end nobody wants to live there.

And how are such ghost towns financed? There is probably no company that is more representative of the investment bubble than Evergrande. It’s the biggest pyramid scheme the world has yet seen. Evergrande is highly leveraged and has like 270 projects all over the country. I have been easily to 40 of them yet I have only seen one that was fully occupied. Many of these projects are megalomaniac visions and totally empty. Yet you go to these places and you see their sales room filled with young buyers. When I open my eyes I see crumbling stone and empty jungles or deserts. What they see is a future with wealthy Europeanized people strolling on modern paths. It’s just amazing. It’s a mass illusion and Evergrande more than any of these developers plays to this illusion by building developments that are specifically positioned for the investor, not to live there but to buy for some future appreciation in price.

How long can these crazy times last? I’ve been wondering that for years now. In a few places, property bubbles already have popped but the government keeps information from going out. Back in 2011 for instance, there was a property bust in the region of Ordos where most of China’s coal is. Prices dropped like 50% but if you looked at the official statistics they may have dropped 4%. Another place was in Wenzhou which is a place in China’s Zhejiang province where there is a lot of private money. After the bubble popped the central government had to go in and had to create a bailout fund. But nobody ever got information about it. In fact, all the newspapers put out information about how actually Wenzhou is fine. So will China’s housing frenzy ever come to an end at all? China is going to hit a wall. They’re not positioned to take the political pain that’s entailed by just stopping with all that madness.

So there will be a bust but it’s very hard to say exactly how long it takes. Basically, there are two paths. One of them is you break public confidence in some way. For that to happen you have to have a bank failure, a well-known investment product that doesn’t pay or some property developer that goes bust. You’ve had that locally in all sorts of places but you have to have a really big bust that everyone is aware of. And what would be the other path? The other thing that eventually has to happen is that the Chinese currency has to devalue. The reason why the developers can just keep on selling is because they keep getting refinanced. All the refinancing means that China has to keep on expanding the money supply and when you keep on expanding the money supply you have too much money and the value of the money declines. Obviously it’s not quite that simple but that’s basically what’s going on.

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Nomi is asked the same question: how much longer? She thinks it could be a few years yet.

• Nomi Prins: Big Bank Concentration and Counterparty Risk Expands (DR)

Prins notes, “As we learned from the global financial crisis, the Federal Reserve has done a lousy job at regulating the risks that were coming into the financial system from the major private banks.” “Not only did it do a bad job at detecting risks, it did the opposite and deflected concerns from those highlighting the risks. From the standpoint of monetary policy, looking ten years out, its pursuit of policy with absolutely no limitation from the outside (printing money, buying securities) was a failure.” “If the Federal Reserve policies were able to make a real impact, we wouldn’t have needed them to go on for ten years following the financial crisis. What we are seeing right now is that there is no particular end in sight. The fact that there is no jurisdiction that can instruct the Fed what to do, where it is currently working under unconventional policy for artificial markets, has created more risk instead of less.”

“If we were to create an external benchmark that at the very least pulls them into some coordinated approach, that would be a better way of maintaining stability. Whether that is a standard currency approach or whatever that might be.” When speaking on how long the central banks might be able to stall and what tools in the face of another crisis Nomi Prins elaborates on her most recent research. “There has been collusion and collaboration amongst the G7 central banks. They have been ensuring that central banks like the Federal Reserve and others coordinate in their policy consortium moves. In effect we have seen a consistent global zero % interest rate policy and ongoing quantitative easing policy be unveiled, even if some banks reduce their engagement. That’s why we have been able to perpetuate this system for so long.”

“This is not one individual central bank but a coordinated, collusive approach. Can that continue? The guidance, as well as the actions of the central banks has indicated there could be multiple years of this to come. Because there is no external limitation on their policy and there’s no voting them out I’d say this could go on for at least a few more years. For the most part the people in power are going to stay in power. Even in the case of the U.S, if we were to see Janet Yellen leave and Gary Cohn step in at the Fed, I’d expect we would see much of the same.”

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Control illusion.

• China’s Central Bank Is Working Hard to Stand Still (BBG)

While some of the biggest central banks are agonizing over changing direction, the People’s Bank of China is working hard to stay right where it is. That’s because, as the U.S. Federal Reserve or the European Central Bank are heading into phases of tighter policy, China’s monetary authority is engaged in an increasingly complex effort to preserve the status quo while the world changes around it. According to 60 % of economists in a Bloomberg survey conducted this month, the PBOC’s broad policy stance will remain “roughly the same” through the end of 2017. It’s how they maintain the hold, though, that matters. Through the use of a wide range of monetary instruments, the PBOC is attempting to meet two seemingly conflicting goals at once – weed out excessive borrowing in the financial system while ensuring credit to an economy that’s on a long-term slowdown.

The need to maintain the balance is especially acute amid the political sensitivity around the approaching leadership transition of the 19th Party Congress in the fall. “High leverage has put the central bank in a dilemma where easing could further expand the scale of debt and where tightening pushes up interest expenses and weighs on growth,” said Wen Bin at China Minsheng Banking in Beijing. “The PBOC is using open-market monetary tools to stay flexible and strike a balance.” Achieving those aims, without a change in the benchmark lending rate, in practice means constant fine-tuning of daily conditions in the inter-bank money market. Over the past year, the PBOC has poked and prodded traders using an array of lending and cash-absorbing instruments of different maturities. Here’s that process in charts:

Using different tenors to inject and withdraw funds from markets is the practical aspect of the PBOC’s stated policy of keeping liquidity “neither tight nor loose.” Yet at the same time, for much of the past year, gradually-rising interbank rates have been desirable amid a push to stabilize debt — crimping incentives to lend short-term within the financial system, while remaining wary of choking off credit to the real economy. The PBOC’s preference for longer-dated tools such as 28-day reverse repo has raised borrowing costs. Now, as the economy may be set for deceleration in the second half of the year and some progress in debt reduction has been achieved, use of longer-dated repurchase agreements has been pared back.

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“You need to either thoroughly refute every single argument against the narrative you’ve been spinning or admit publicly that you’ve been catastrophically wrong. ”

• Pundits And Politicians Are Tacitly Admitting They Lied About Russia (M.)

It has been nearly three weeks since The Nation pushed an explosive memo from the Veteran Intelligence Professionals for Sanity into mainstream consciousness with an article detailing the evidence that the DNC leaks last year could not have been the result of a Russian hack. By continuing to ignore it, the US intelligence community and all the pundits and politicians who have advanced the Russian hacking narrative are tacitly admitting that they lied. The report is unequivocal. Not only could Russian hackers not have obtained the DNC emails in the way they are alleged to have obtained them, but metadata was in fact manipulated to implicate Russia in the leak. Since publication of the viral Nation article, even more evidence has come to light showing that a hack is far more improbable even than originally suspected. This means that there is currently more publicly-available evidence indicating that Russia did not hack the DNC than there is that it did.

These earth-shattering revelations have gone all but ignored by the mainstream media, which had until the report surfaced been pummelling the American psyche with relentless fearmongering about the Great Russian Menace. The unquestioned narrative that Russia attacked American democracy in what many establishment politicians have horrifyingly labeled an “act of war” quickly transformed into ridiculous unsubstantiated claims about the Kremlin having taken over the highest levels of the US government and McCarthyite witch hunts against anyone who questioned these baseless assertions. This fact-free hysteria was used to manufacture support for new cold war escalations which remain in place to this day, threatening the existence of all life on earth.

Far from addressing the massive, gaping plot holes that have suddenly emerged in its frenzied narrative, the mass media has all but ghosted from the scene. Russia gets an occasional mention now and again, but the fever-pitch shrieking panic has unquestionably been dialed down by several orders of magnitude. This is unacceptable. You don’t get to lie to the American people for nine months, terrify them with fact-free ghost stories that their nation has been taken over by a hostile foreign body, use their terror to manufacture support for a new cold war, and then change the subject to Nazis and Joe Arpaio as soon as evidence emerges that you’ve been reporting blatant falsehoods. That is not a thing. You need to either thoroughly refute every single argument against the narrative you’ve been spinning or admit publicly that you’ve been catastrophically wrong.

You need to either (A) prove that you have not knowingly and/or unknowingly deceived the world, or (B) do everything you can to fix the damage that you have done. Until the US intelligence community, the mainstream media, and the politicians who’ve been advancing this Russian hacking narrative do one of these two things, their silence on the matter should be interpreted as a tacit admission that they’ve been lying to us this entire time. After Iraq there was already no reason to give these institutions the benefit of the doubt, and since the VIPS report there is every reason in the world to believe that they’ve been lying to advance domestic and foreign agendas. They either refute the VIPS report in its entirety, or we must treat their refusal to do so as a tacit admission of nothing less than a crime against humanity.

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I like Taibbi. He’s a good writer. But he’s gotten awkwardly close to the whole anti-Trump frenzy. Suggesting that CNN has been covering Trump ‘responsibly’ is simply not credible. See article above. CNN et al go after Trump because it’s profitable in the echo chamber. Where it doesn’t matter whether what you say is true.

• The Media Is the Villain – for Creating a World Dumb Enough for Trump (Taibbi)

No news director would turn off the feed in the middle of a Trump-meltdown. This presidency has become the ultimate ratings bonanza. Trump couldn’t do better numbers if he jumped off Mount Kilimanjaro carrying a Kardashian. This was confirmed this week by yet another shruggingly honest TV executive – in this case Tony Maddox, head of CNN International. Maddox said CNN is doing business at “record levels.” He hinted also that the monster ratings they’re getting have taken the sting out of being accused of promoting fake news. “[Trump] is good for business,” Maddox said. “It’s a glib thing to say. But our performance has been enhanced during this news period.” Maddox, speaking at the Edinburgh TV festival, added that most of the outlets that have been singled out by Trump are doing a swimming business.

“If you look at the groups that Trump has primarily targeted: CNN, The New York Times, The Washington Post, Saturday Night Live, Stephen Colbert,” he said, “every single one of those has seen a quite remarkable growth in their viewing figures, in their sales figures.” Everyone hisses whenever they hear quotes like these. They recall the infamous line from last year by CBS chief Les Moonves, about how Trump “may not be good for America, but he’s damn good for CBS.” Moonves was even cheekier than Maddox. He laughed and added, “The money’s rolling in, and this is fun. They’re not even talking about issues, they’re throwing bombs at each other, and I think the advertising reflects that.” For more than two years now, it’s been obvious that Donald Trump is a disaster on almost every level except one – he’s great for the media business.

Most of us who do this work have already gone through the process of working out just how guilty we should or should not feel about this. Many execs and editors – and Maddox seems to fall into this category – have convinced themselves that the ratings and the money are a kind of cosmic reward for covering Trump responsibly. But deep down, most of us know that’s a lie. Donald Trump gets awesome ratings for the same reason Fear Factor made money feeding people rat-hair tortilla chips: nothing sells like a freak show. If a meteor crashes into jello night at the Playboy mansion, it doesn’t matter if you send Edward R. Murrow to do the standup. Some things sell themselves.

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All you need is the power to print money.

• The 5 Steps to World Domination (CHS)

1. Turn everything into a commodity that can be traded on the global market: land, leases on land, options to purchase land, houses, buildings, rooms in slums, labor, tools, robots, water, water rights, mineral rights, rights to air routes, ships, aircraft, political power, shares in corporations, government bonds, municipal bonds, corporate bonds, student loans that have been bundled into debt-based instruments, the income from city parking meters, electricity, software, advertising, marketing, media, social media, food, energy, insurance, gold, metals, credit, interest-rate swaps and last but not least, financial instruments that control and/or pyramid all the real-world goods and assets that have been commoditized (i.e. almost everything).

Why is this the essential first step in World Domination? Once something has been commoditized, it can be bought and sold in the global marketplace in fiat currencies–currencies that are not backed by any real-world asset and that can be created out of thin air by central and private banks. You see the dynamic, right? Create credit-currency out of thin air, and then use this “free money” to buy up the real world. Quite a trick, isn’t it? Get a means of exchange for essentially nothing (i.e. money at near-zero interest rates) and then trade this for assets that produce goods and services everyone else needs or wants. Now we understand steps 2 and 3:

2. Enable private banks to create money out of thin air via fractional reserve banking. You know the drill: banks can issue $15 in new loans for every $1 in cash they hold in reserve. (Depending on the current regulations, it might as little as $10 or as much as $35 that can be created and lent out for every $1 held in cash reserve.) In the current zero-interest rate environment, this new money can be borrowed for near-zero carrying costs by corporations and financiers.

3. Establish a central bank with essentially unlimited ability to bring money into existence and use it to backstop the private banking sector. If the private banks get in trouble, no problem, the central bank is there to bail them out with unlimited lines of credit and an unlimited ability to create new money.

4. Undermine/destroy local economies’ ability to organize production and consumption without using credit and fiat currencies (i.e. money controlled and issued by central and private banks). Trading goods on barter? Get rid of that. Using social ties rather than cash or bank credit to organize production and consumption? Eliminate that capability. Locally issued currencies? That’s against the law. Using cash? bad, very bad–everyone must use banks and bank credit instead. Once these four steps are in place, the 5th step is easy:

5. Buy up all the productive assets and income streams of the world with nearly free credit-money. No saver can compete with corporations and financiers with access to billions of dollars in nearly-free credit-money. It doesn’t matter if you earn $1,000 or $100,000 a year–you will be outbid.

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Too much focus on Buffett. Like there was on Greenspan.

• Pure Rubbish? What The Buffett Indicator Is Really Predicting (Roberts)

While we are indeed currently in a very bullish trend of the market, there are two halves of every market cycle. “In the end, it does not matter IF you are ‘bullish’ or ‘bearish.’ The reality is that both ‘bulls’ and ‘bears’ are owned by the ‘broken clock’ syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being ‘right’ during the first half of the cycle, but by not being ‘wrong’ during the second half.” Will valuations currently pushing the 3rd highest level in history, it is only a function of time before the second-half of the full-market cycle ensues. That is not a prediction of a crash. It is just a fact.

[..] valuations DO NOT predict market crashes. Valuations are predictive of future returns on investments from current levels. Period. I recently quoted Cliff Asness on this issue in particular: “Ten-year forward average returns fall nearly monotonically as starting Shiller P/E’s increase. Also, as starting Shiller P/E’s go up, worst cases get worse and best cases get weaker. If today’s Shiller P/E is 22.2, and your long-term plan calls for a 10% nominal (or with today’s inflation about 7-8% real) return on the stock market, you are basically rooting for the absolute best case in history to play out again, and rooting for something drastically above the average case from these valuations.” We can prove that by looking at forward 10-year total returns versus various levels of PE ratios historically.

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“Ordinarily, failure to raise the debt ceiling would lead to a government shut-down, including hurricane recovery operations, unless the president invoked some kind of emergency powers.”

• When the Butterfly Flaps Its Wings (Jim Kunstler)

It remains to be seen what the impact will be from Mother Nature putting the nation’s fourth largest city out-of-business. And for how long? It’s possible that Houston will never entirely recover from Hurricane Harvey. The event may exceed the physical damage that Hurricane Katrina did to New Orleans. It may bankrupt large insurance companies and dramatically raise the risk of doing business anywhere along the Gulf and Atlantic coasts of the USA — or at least erase the perceived guarantee that losses are recoverable. It may even turn out to be the black swan that reveals the hyper-fragility of a US-driven financial system.

Houston also happens to be the center of the US oil industry. Offices can be moved elsewhere, of course, but not so easily the nine major oil refineries that sprawl between Buffalo Bayou over to Beaumont, Port Arthur, and then Lake Charles, Louisiana. Harvey is inching back out to the Gulf where it will inhale more energy over the warm ocean waters and then return inland in the direction of those refineries. The economic damage could be epic. Much of the supply for the Colonial Pipeline system emanates from the region around Houston, running through Atlanta and clear up to Philadelphia and New York. There could be lines at the gas stations along the eastern seaboard in early September.

The event is converging with the US government running out of money this fall without new authority to borrow more by congress voting to raise the US debt ceiling. Perhaps the emergency of Hurricane Harvey and its costly aftermath will bludgeon congress into quickly raising the debt ceiling. If that doesn’t happen, and the debt ceiling is not raised, the federal government might have to pretend that it can pay for emergency assistance to Texas and Louisiana. That pretense can only go so far before government contractors balk and maybe even walk.

Ordinarily, failure to raise the debt ceiling would lead to a government shut-down, including hurricane recovery operations, unless the president invoked some kind of emergency powers. That would be decisive action, but it could also be the beginning of something that looks like a full-out dictatorship. Powers assumed are often not surrendered when the original emergency is over. And what would the president use for money if a substantial enough number of congresspersons and senators are prompted by their distaste for Mr. Trump to drag out the process of financially re-liquefying the government? (And nevermind even passing a budget.)

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Kabuki theater for the home front. Empty nonsense.

• France, Germany, Italy, Spain Agree on Plan to Stem Migration Flows (BBG)

France, Germany, Italy and Spain agreed a plan to stem migration across the Mediterranean at talks with Libya, Chad and Niger in Paris, as summit host President Emmanuel Macron called for asylum seekers to be processed on African soil. Safe zones should be set up in Chad and Niger to “identify” asylum seekers in Africa, under the supervision of the United Nations High Commissioner for Refugees, Macron told reporters after the talks in the Elysee Palace Monday. “There’s a lot of work to be done, but I think we have a framework in which we can move forward,” German Chancellor Angela Merkel said at the briefing.

Leaders said in a joint statement that they would work with countries of origin and transit to boost the fight against smuggler networks. France, Germany, Italy and Spain stressed their commitment “to stopping irregular migration flows well ahead of the Mediterranean coast.” In reaction to reports about poor humanitarian conditions in refugee camps in Libya, leaders also promised to set up “facilities with adequate humanitarian standards” for refugees stranded there. France, Germany and Spain remained committed to giving further help to Italy – which has often complained in the past that it was left alone to cope with the migrant flows – by stepping up relocations and appropriately staffing the European Union’s Frontex border management force, they said.

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Maybe Greece’s best hope is for Merkel to dump him.

• Debt Cut For Greece Not On Agenda For Now, Schaeuble Says (R.)

Greece must press ahead with implementing its reforms-for-aid program and become more competitive, German Finance Minister Wolfgang Schaeuble was quoted as saying, adding that debt relief for Athens was “currently” not on the agenda. Eurozone finance ministers and the IMF reached an agreement on Greece in June, paving the way for new emergency loans for Athens while leaving the contentious issue of debt relief for later. Asked in an interview with the newspaper Mannheimer Morgen if he could envisage a partial cut in debt for Greece, Schaeuble said, “That’s currently not on the agenda at all.” Chancellor Angela Merkel and Schaeuble do not want to discuss any details of debt relief for Greece before federal elections on September 24, in which the far-right euro-skeptic AfD party is forecast to enter parliament for the first time.

Starting a discussion about debt relief would send the wrong signal to Athens at a time when the economy was doing better and recovering, Schaeuble told Mannheimer Morgen. “The country doesn’t need a debt cut now, but it must continually work on its competitiveness,” Schaeuble said. He pointed out that Greece’s borrowing costs for the next 10 to 15 years were already relatively low. “Above all, as long as member states are responsible for financial and economic policy, they must also bear the consequences of their own decisions themselves”, he said. Schaeuble, whose insistence on reforms to public finances in Athens have long made him a hate figure for many Greeks, has signaled his readiness to deepen eurozone integration as long as risks and liabilities arising from political decisions remain linked.

Merkel’s conservative Christian Democrats are leading the center-left Social Democrats by about 15 percentage points in opinion polls and are the heavy favorites to retain power after the election. Schaeuble, who has been finance minister since 2009 and will turn 75 on September 18, has signaled his willingness to continue as finance minister. But Merkel could be forced to sacrifice him to secure a coalition deal.

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Strange innuendo-laced piece from NYT. It’s all they do these days. “While the Europeans are acting towards Greece like medieval leeches, the Chinese keep bringing money..” Varoufakis made a deal with China in spring 2015. Merkel called Beijing to say: keep your hands off. That should have been part of this article.

• Chastised by EU, a Resentful Greece Embraces China’s Cash and Interests (NYT)

After years of struggling under austerity imposed by European partners and a chilly shoulder from the United States, Greece has embraced the advances of China, its most ardent and geopolitically ambitious suitor. While Europe was busy squeezing Greece, the Chinese swooped in with bucket-loads of investments that have begun to pay off, not only economically but also by apparently giving China a political foothold in Greece, and by extension, in Europe. Last summer, Greece helped stop the European Union from issuing a unified statement against Chinese aggression in the South China Sea. This June, Athens prevented the bloc from condemning China’s human rights record. Days later it opposed tougher screening of Chinese investments in Europe.

Greece’s diplomatic stance hardly went unnoticed by its European partners or by the United States, all of which had previously worried that the country’s economic vulnerability might make it a ripe target for Russia, always eager to divide the bloc. Instead, it is the Chinese who have become an increasingly powerful foreign player in Greece after years of assiduous courtship and checkbook diplomacy. Among those initiatives, China plans to make the Greek port of Piraeus the “dragon head” of its vast “One Belt, One Road” project, a new Silk Road into Europe. When Germany treated Greece as the eurozone’s delinquent, China designated a recovery-hungry Greece its “most reliable friend” in Europe. “While the Europeans are acting towards Greece like medieval leeches, the Chinese keep bringing money,” said Costas Douzinas, the head of the Greek Parliament’s foreign affairs and defense committee and a member of the governing Syriza party.

China has already used its economic muscle to stamp a major geopolitical footprint in Africa and South America as it scours the globe for natural resources to fuel its economy. If China was initially welcomed as a deep-pocketed investor — and an alternative to America — it has faced growing criticism that it is less an economic partner than a 21st-century incarnation of a colonialist power. If not looking for natural resources in Europe, China has for years invested heavily across the bloc, its largest trading partner. Yet now concerns are rising that Beijing is using its economic clout for political leverage. Mr. Douzinas said China had never explicitly asked Greece for support on the human rights vote or on other sensitive issues, though he and other Greek officials acknowledge that explicit requests are not necessary. “If you’re down and someone slaps you and someone else gives you an alm,” Mr. Douzinas said, “when you can do something in return, who will you help, the one who helped you or the one who slapped you?”

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We need Kenya to show us how to do this?!

• Kenya Gets World’s Toughest Plastic Bag Ban: 4 Years Jail Or $40,000 Fine (R.)

Kenyans producing, selling or even using plastic bags will risk imprisonment of up to four years or fines of $40,000 (£31,000) from Monday, as the world’s toughest law aimed at reducing plastic pollution came into effect. The east African nation joins more than 40 other countries that have banned, partly banned or taxed single use plastic bags, including China, France, Rwanda, and Italy. Many bags drift into the ocean, strangling turtles, suffocating seabirds and filling the stomachs of dolphins and whales with waste until they die of starvation. “If we continue like this, by 2050, we will have more plastic in the ocean than fish,” said Habib El-Habr, an expert on marine litter working with the UN environment programme in Kenya.

Plastic bags, which El-Habr says take between 500 to 1,000 years to break down, also enter the human food chain through fish and other animals. In Nairobi’s slaughterhouses, some cows destined for human consumption had 20 bags removed from their stomachs. “This is something we didn’t get 10 years ago but now it’s almost on a daily basis,” said county vet Mbuthi Kinyanjui as he watched men in bloodied white uniforms scoop sodden plastic bags from the stomachs of cow carcasses. Kenya’s law allows police to go after anyone even carrying a plastic bag. But Judy Wakhungu, Kenya’s environment minister, said enforcement would initially be directed at manufacturers and suppliers.[..] Kenya is a major exporter of plastic bags to the region.

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Debt Rattle August 28 2017

Aug 282017
 
 August 28, 2017  Posted by at 9:01 am Finance Tagged with: , , , , , , , , ,  5 Responses »


Lou Reed New York City 1966

 

• Harvey’s Cost Reaches Catastrophe: Only 15% Of Homes Have Flood Insurance (BBG)
• Gasoline Surges, Oil Holds Near $48 as Harvey Shuts Refineries (BBG)
• Mammoth Flood Disaster in Houston: More Rain Yet to Come (WU)
• The Coming Collapse Of China’s Ponzi Scheme Economy (SCMP)
• What’s Driving The Growth In US ‘Shadow Banking’ (CBR)
• Volatility Makes a Comeback (Rickards)
• YouTube “Economically Censors” Ron Paul (ZH)
• Should The Rich Be Taxed More? (G.)
• The West’s Wealth Is Based On Slavery. Reparations Should Be Paid (G.)
• Danone Sends 5,000 Cows to Siberia in Quest for Cheaper Milk (BBG)

 

 

The real tragedy takes place below the surface. Sort of literally. Much more rain to come.

• Harvey’s Cost Reaches Catastrophe: Only 15% Of Homes Have Flood Insurance (BBG)

Hurricane Harvey’s second act across southern Texas is turning into an economic catastrophe – with damages likely to stretch into tens of billions of dollars and an unusually large share of victims lacking adequate insurance, according to early estimates. Harvey’s cost could mount to $24 billion when including the impact of relentless flooding on the labor force, power grid, transportation and other elements that support the region’s energy sector, Chuck Watson, a disaster modeler with Enki Research, said by phone on Sunday. That would place it among the top eight hurricanes to ever strike the U.S. “A historic event is currently unfolding in Texas,” Aon wrote in an alert to clients. “It will take weeks until the full scope and magnitude of the damage is realized,” and already it’s clear that “an abnormally high portion of economic damage caused by flooding will not be covered,” the insurance broker said.

[..] Most people with flood insurance buy policies backed by the federal government’s National Flood Insurance Program. As of April, less than one-sixth of homes in Houston’s Harris County had federal coverage, according to Aon. That would leave more than 1 million homes unprotected in the county. Coverage rates are similar in neighboring areas. Many cars also will be totaled. “A lot of these people are going to be in very serious financial situations,” said Loretta Worters, a spokeswoman for the Insurance Information Institute. “Most people who are living in these areas do not have flood insurance. They may be able to collect some grants from the government, but there are not a lot, usually they’re very limited. There are no-interest to low-interest loans, but you have to pay them back.”

The federal program itself is already struggling with $25 billion of debt. The existing program is set to expire on Sept. 30 and is up for review in Congress, which ends its recess Sept. 5. Costs still will likely soar for insurance companies and their reinsurers, biting into earnings. As Harvey bore down on the coastline Friday, William Blair, a securities firm that tracks the industry, said the storm could theoretically inflict $25 billion of insured losses if it landed as a “large category 3 hurricane.” Policyholder-owned State Farm Mutual Automobile Insurance has the largest share in the market for home coverage in Texas, followed by Allstate, which is publicly traded. William Blair estimated that, in that scenario, Allstate could incur $500 million of pretax catastrophe losses, shaving 89 cents off of earnings per share.

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Most shutdowns so far are precautionary. But…

• Gasoline Surges, Oil Holds Near $48 as Harvey Shuts Refineries (BBG)

Gasoline surged to the highest in two years and oil was steady as flooding from Tropical Storm Harvey inundated refining centers along the Texas coast, shutting more than 10% of U.S. fuel-making capacity. Motor fuel prices rose as much as 6.8%, while oil held gains near $48 a barrel. Harvey, the strongest storm to hit the U.S. since 2004, made landfall as a hurricane Friday, flooding cities and shutting plants able to process some 2.26 million barrels of oil a day. Pipelines were closed, potentially stranding some crude in West Texas and starving New York Harbor of gasoline. Gasoline prices are going to continue to rise this week as we expect another three days of rain in the Houston area,” Andy Lipow, president of consultant Lipow Oil in Houston, said by phone.

“With pipeline operators beginning to shut down their crude oil and refined product infrastructure, I expect to see further curtailment of refinery operations. A spike in gasoline and diesel prices will drag up crude oil prices.” Oil has traded this month in the tightest range since February as investors weigh rising global supply against output cuts by members of OPEC and its allies. As Harvey led to widespread flooding, Shell shut its Deer Park plant, while Magellan Midstream suspended its inbound and outbound refined products and crude pipeline transportation services in the Houston area. Gasoline for September delivery climbed as much as 11.33 cents to $1.7799 a gallon on the New York Mercantile Exchange, the highest intraday price for a front-month contract since July 2015.

It traded at $1.7621 at 12:36 p.m. in Hong Kong. West Texas Intermediate oil for October delivery fell 16 cents to $47.71 a barrel after advancing 0.9% on Friday. Brent crude’s premium to WTI widened to the largest in two years with the global benchmark trading at as much as $4.96 above the U.S. marker. Brent for October settlement gained 18 cents, or 0.3%, to $52.59 a barrel on the London-based ICE Futures Europe exchange.

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Waether Underground is probably the best source.

• Mammoth Flood Disaster in Houston: More Rain Yet to Come (WU)

Harvey’s winds are expected to remain modest, and it could become a tropical depression at any point, but winds are not the problem here. The NOAA/NWS National Hurricane Center now predicts that Harvey will inch its way into the Gulf of Mexico—though just barely—by Monday night, then arc northeast and make a second landfall just west of Houston on Wednesday. The 12Z GFS and 00Z European model runs agree on a general northward motion for Harvey across eastern Texas, beginning around midweek. At this point it may make little difference whether Harvey stays just inland or moves just offshore, since rainbands would continue to be funneled toward Houston either way. The fine-scale particulars of this outlook may shift over time, but the overall message is consistent: Harvey will be a devastating rainmaking presence in southeast Texas for days to come.

Harvey’s circulation is located in a near-ideal spot for funneling vast amounts of moisture from the Gulf of Mexico toward the upper Texas coast. Here, converging winds at low levels have been concentrating the moisture into north-south-oriented bands of intense thunderstorms with torrential rain. Since Harvey is barely moving, these bands are creeping only slowly eastward as individual cells race north along them—a “training” set-up that is common in major flood events. Mesoscale models, our best guidance for short-term, small-scale behavior of thunderstorms, show little sign of relief for southeast Texas anytime soon. Convection-resolving mesoscale models, which have a tight enough resolution to depict individual thunderstorms, are an invaluable tool in situations like this. The mesoscale nested NAM model predicts that 20” – 30” of additional rainfall is likely through Tuesday across the Houston metro area, with even larger totals at some points.

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Hmm. But what if China manages to unload all its overcapacity on the Belt Road, and makes other countries pay?

• The Coming Collapse Of China’s Ponzi Scheme Economy (SCMP)

Friends who have a greater interest than I do in reading the tea leaves in Beijing tell me that the emphasis in relations with Hong Kong from now on will be on one country rather than two systems. I think this phrases things the wrong way. The one country bit was never in issue. What they actually mean to say is that Beijing’s system of state command of the economy will become dominant and Hong Kong’s more freewheeling system will fade away. I don’t think it will happen. In my view human society is so dynamic that no command system can last long in charge of an economy. Attempts at this particular form of hubris inevitably end in either war or financial crisis. For the Soviet Union it was financial crisis. I think the same fate awaits Beijing.

Consider crude steel production, a test-tube example of how command economies get it wrong. In the mainland this stood in June at an all time monthly record of 73 million tonnes, five times the total production in all of Europe. Steel was recently targeted for a reduction in capacity but then a regime of easy money intended to help the industry overcome a difficult period of contraction instead stimulated production. It has happened across the mainland’s rust belt industries. Why is so much steel needed? Simple. It is needed to build more steel mills so as to build more shipyards, ports, railways and bridges so that more ships can be built to carry more iron ore to more ports and thence along more rails and bridges to more steel mills so as to build more shipyards, ports, railways …

What we have here, in short, is a giant Ponzi scheme. In a Ponzi scheme you pay out the winnings of the first entrants with what others later pay into it. As long as it keeps growing everything is fine. When it stops growing it collapses. In this case you justify production with demand based purely on more production. As long as you keep pushing production up everything looks fine. At its peak in 2014 China turned out 30 times more cement than the United States, and the latest production figures are only a smidgen less than 2014’s.

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What do you think? A good sign? It isn’t in China….

• What’s Driving The Growth In US ‘Shadow Banking’ (CBR)

In the wake of the 2007–10 financial crisis, there’s been sizeable growth of “shadow banking”— companies without banking charters entering lines of business traditionally associated with deposit-taking banks. Hedge funds that make direct loans to midsize businesses, online mortgage originators, peer-to-peer lending platforms, and payday lenders have all been on the rise. What’s behind this? According to Chicago Booth’s Gregor Matvos, Booth PhD candidate Greg Buchak, Columbia’s Tomasz Piskorski, and Stanford’s Amit Seru, much of the growth is due to regulations that have pushed banks out of traditional lending businesses. The researchers also attribute some growth to online technology that has lowered the barrier to entry in markets where lenders once needed networks of physical branches to have any hope of building business.

The researchers focus on the US residential lending market, the largest consumer loan market in the country—and the market that drew the most attention from regulators after 2008. Between 2007 and 2015, shadow banks nearly tripled their market share, from 14% to 38%. They gained the most in the Federal Housing Administration (FHA) mortgage market, which serves lower-quality borrowers and is where shadow banks’ share rose from 20% to 75%. Traditional banks retreated from sectors of the mortgage market where the regulatory burden grew the most, the researchers note. Traditional banks have been particularly hindered by rules that increased monitoring of balance-sheet holdings and constrained what banks could hold in their own accounts.

Their retreat helped shadow banking succeed in the riskier FHA market and in more-traditional, conforming mortgages. The researchers also separated shadow banks into those that did and didn’t originate loans online. During the study period, lenders that originated loans online (fintech lenders) saw market share rise from 4% to 13%—but that remains less than half of the shadow-banking sector.

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Super spikes.

• Volatility Makes a Comeback (Rickards)

Volatility has languished near all-time lows for months on end. That’s about to change. For almost a year, one of the most profitable trading strategies has been to sell volatility. Since the election of Donald Trump stocks have been a one-way bet. They almost always go up, and have hit record highs day after day. The strategy of selling volatility has been so profitable that promoters tout it to investors as a source of “steady, low-risk income.” Nothing could be further from the truth. Yes, sellers of volatility have made steady profits the past year. But the strategy is extremely risky and you could lose all of your profits in a single bad day. Think of this strategy as betting your life’s savings on red at a roulette table. If the wheel comes up red, you double your money. But if you keep playing eventually the wheel will come up black and you’ll lose everything.

That’s what it’s like to sell volatility. It feels good for a while, but eventually a black swan appears like the black number on the roulette wheel, and the sellers get wiped out. I focus on the shocks and unexpected events that others don’t see. Right now looks like one of those highly favorable windows when the purchase of volatility is the right move. You could collect huge winnings as the short sellers scramble to cover their bets before they are wiped out completely. The chart below shows a 20-year history of volatility spikes. You can observe long periods of relatively low volatility such as 2004 to 2007, and 2013 to mid-2015, but these are inevitably followed by volatility super-spikes. During these super-spikes the sellers of volatility are crushed, sometimes to the point of bankruptcy because they can’t cover their bets.

The period from mid-2015 to late 2016 saw some brief volatility spikes associated with the Chinese devaluation (August and December 2015), Brexit (June 23, 2016) and the election of Donald Trump (Nov. 8, 2016). But, none of these spikes reached the super-spike levels of 2008 – 2012. In short, we have been on a volatility holiday. Volatility is historically low and has remained so for an unusually long period of time. The sellers of volatility have been collecting “steady income,” yet this is really just a winning streak at the volatility casino. The wheel of fortune is about to turn and luck is about to run out for the sellers. It will soon be time for the buyers of volatility to collect their winnings, big time.

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Sliding scales. One step before large tech is declared utility?!

• YouTube “Economically Censors” Ron Paul (ZH)

Former US Congressman Ron Paul has joined a growing list of independent political journalists and commentators who’re being economically punished by YouTube despite producing videos that routinely receive hundreds of thousands of views. In a tweet published Saturday, Wikileaks founder Julian Assange tweeted a screenshot of Paul’s “Liberty Report” page showing that his videos had been labeled “not suitable” for all advertisers by YouTube’s content arbiters. Assange claims that Paul was being punished for speaking out about President Donald Trump’s decision to increase the number of US troops in Afghanistan, after Paul published a video on the subject earlier this week. The notion that YouTube would want to economically punish a former US Congressman for sharing his views on US foreign policy – a topic that he is unequivocally qualified to speak about – is absurd.

Furthermore, the “review requested” marking on one of Paul’s videos reveals that they were initially flagged by users before YouTube’s moderators confirmed that the videos were unsuitable for a broad audience. Other political commentators who’ve been censored by YouTube include Paul Joseph Watson and Tim Black – both ostensibly for sharing political views that differ from the mainstream neo-liberal ideology favored by the Silicon Valley elite. Last week, Google – another Alphabet Inc. company – briefly banned Salil Mehta, an adjunct professor at Columbia and Georgetown who teaches probability and data science, from using its service, freezing his accounts without providing an explanation. He was later allowed to return to the service. Conservative journalist Lauren Southern spoke out about YouTube’s drive to stifle politically divergent journalists and commentators during an interview with the Daily Caller.

“I think it would be insane to suggest there’s not an active effort to censor conservative and independent views,” said Southern. “Considering most of Silicon Valley participate in the censorship of alleged ‘hate speech,’ diversity hiring and inclusivity committees. Their entire model is based around a far left outline. There’s no merit hiring, there’s no support of free speech and there certainly is not an equal representation of political views at these companies.” Of course, Google isn’t the only Silicon Valley company that’s enamored with censorship. Facebook has promised to eradicate “fake news,” which, by its definition, includes political content that falls outside of the mainstream. Still, economically punishing a former US Congressman and medical doctor is a new low in Silicon Valley’s campaign to stamp out dissent.

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The most prosperous times of our societies coincide with the highest tax levels for the rich.

• Should The Rich Be Taxed More? (G.)

The past four decades have been extremely kind to those at the top. They have seen their incomes grow faster than the rest of the population and hold a far bigger share of wealth in the form of property and financial investments than the rest of the population. Over the years a bigger slice of national income has gone to capital at the expense of labour, and the rich have been the beneficiaries of that, because they are more likely to own shares and expensive houses. The trend has been particularly strong in the US, where labour’s share of income has fallen from a recent peak of 57% at the end of Bill Clinton’s presidency to 53% by 2015. The Gini coefficient – a measure of inequality – has been steadily rising since 1970 and is now at levels normally seen in developing rather than advanced economies.

Hatgioannides, Karanassou and Sala seek to take account of these profound changes in the distribution of income and wealth. They do so by dividing the average income tax rate of a particular slice of the US population by the%age of national income commanded by that same group and by their share of wealth. They then look at whether by this measure – the fiscal inequality coefficient – the US tax system has become more or less progressive over time. The findings show quite clearly that it has become less progressive. In terms of income, the poorest 99% of the US population paid nine times as much income tax as the richest 1%, both when John F Kennedy was president in the early 1960s and when Ronald Reagan beat Jimmy Carter in the 1980 race for the White House. By 2014, they paid 21 times as much.

Similarly, the bottom 99.9% in the US paid 28 times as much tax as the elite 0.1% in the early 1960s and the early 1980s, but by 2014 they were paying 76 times as much. The same trend applies – although it is not pronounced – when income tax is divided by the share of wealth. The bottom 99% paid 22 times as much income tax as the wealthiest 1% in 1980 but were paying 47 times as much in 2014. The bottom 99.9% paid 58 times as much income tax as the top 0.1% before the onset of Reaganomics; by 2014 they were paying 175 times as much. [..] As the authors note, since 1980, economic policy making has been dominated by the idea that deregulation, less generous welfare and tax cuts will stimulate higher investment, higher productivity, higher growth and higher living standards for all. None of this has occurred and, what’s more, the social mobility in the decades after the second world war has been thrown into reverse. The great American dream – the notion that anybody can strike it rich – is dead.

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They won’t be.

• The West’s Wealth Is Based On Slavery. Reparations Should Be Paid (G.)

Malcolm X explained that “if you stick a knife in my back nine inches and pull it out six inches, that’s not progress. If you pull it all the way out, that’s not progress. The progress comes from healing the wound that the blow made”. Instead of attempting to fix the damage, we are completely unable to progress on issues of equality because countries such as Britain “won’t even admit the knife is there”. It is the height of delusion to think that the impact of slavery ended with emancipation, or that empire was absolved by the charade of independence being bestowed on the former colonies.

[..]It is not just governments that owe a debt; some of the biggest institutions and corporations built their wealth on slavery. Lloyds of London is one of Britain’s most successful companies and its roots lie in insuring the merchant trade in the 17th century. The fact that this was the slave trade has already led to civil action being taken by African Americans in New York. The church, many of the biggest banks, much of the ironworks industry and port cities gorged themselves on the profits from human flesh. It is clear that it would be just to pay reparations, and it is also possible to calculate the amount that Britain and other nations owe. A lot of work has been done in the United States to determine the damages owed to African Americans. The figure owed comes to far more than the “forty acres and a mule” that were promised to some African Americans who fought in the civil war.

The latest calculations from researchers estimates that for unpaid labour, taking into account interest and inflation, African Americans are owed anywhere between $5.9tn and $14.2tn. It would not be prohibitively complicated to work out the debts owed by the western powers, or the companies that enriched themselves off exploitation. The obviousness of the issue is such that a federation of Caribbean countries (Caricom) is now demanding reparations, as is the Movement for Black Lives in America and Pan-Afrikan Reparations Coalition in Europe. In many ways the calls for reparatory justice do not take go far enough. Caricom includes a demand to cancel third world debt, and the Movement for Black Lives for free tuition for African Americans.

Both of these are examples of removing the knife from our backs, rather than healing the wound. Third world debt was an unjust mechanism for maintaining colonial economic control and; allowing free access to a deeply problematic school system will not eradicate the impacts of centuries of oppression. In order to have racial justice we need to hit the reset button and have the west account for the wealth stolen and devastation caused. Nothing short of a massive transfer of wealth from the developed to the underdeveloped world, and to the descendants of slavery and colonialism in the west, can heal the deep wounds inflicted.

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Cows to Qatar, cown to SIberia: the new backpackers?!

• Danone Sends 5,000 Cows to Siberia in Quest for Cheaper Milk (BBG)

President Vladimir Putin’s ban on European Union cheese imports has driven up milk prices in Russia by so much that French yogurt maker Danone is transporting almost 5,000 cows to a farm in Siberia to ensure it has an affordable supply. The Holstein cows are traveling as many as 2,800 miles (4,500 kilometers) in trucks from the Netherlands and Germany, boosting the herd on a farm near the city of Tyumen, according to Charlie Cappetti, head of Danone’s Russian unit. That should protect the company from the increase in raw milk prices, which are up 14% this year, he said. “Milk prices have been going up steadily,” Cappetti said in an interview in Moscow. “That puts products such as yogurt under pressure.” While the French dairy company doesn’t normally invest in agriculture, it made an exception for Russia.

After Putin’s ban on dairy imports took hold in 2014, demand for milk surged as local cheesemakers rushed to replace French camembert and Italian pecorino. That has exacerbated the inflationary effects of the ruble’s weakness. Danone invested in the 60-hectare (150-acre) farm with local producer Damate, Cappetti said. The first cows started to provide milk for Danone in May, and a final shipment of cattle is due to arrive in September. “We hope that Russian milk inflation will slow down next year,” the executive said. The difference between supply and demand is narrowing as new milk is coming to the market, including from the Siberian farm. While easing milk inflation may help the Russian dairy market rebound in volume terms, Danone isn’t expecting a fast economic recovery in the country, according to Cappetti. Sales in Russia have been growing in line with inflation in the first half and should rise in 2018, he said.

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