Dec 162017
 


Tamara de Lempicka The refugees 1937

 

Note: I feel kind of sorry this has become such a long essay. But I still left out so much. You know by now I care a lot about Greece, and it’s high time for another look, and another update, and another chance for people to understand what is happening to the country, and why. To understand that hardly any of it is because the Greeks had so much debt and all of that narrative.

The truth is, Greece was set up to be a patsy for the failure of Europe’s financial system, and is now being groomed simultaneously as a tourist attraction to benefit foreign investors who buy Greek assets for pennies on the dollar, and as an internment camp for refugees and migrants that Europe’s ‘leaders’ view as a threat to their political careers more than anything else.

I would almost say: here we go again, but in reality we never stopped going. It’s just that Greece’s 15 minutes of fame may be long gone, but its ordeal is far from over. If you read through this, you will understand why that is. The EU is deliberately, and without any economic justification, destroying one of its own member states, destroying its entire economy.

 

 

A short article in Greek paper Kathimerini last week detailed the latest new cuts in pensions the Troika has imposed on Greece, and it’s now getting beyond absurd. For an economy to function, you need people spending money. That is what keeps jobs alive, jobs which pay people the money they need to spend on their basic necessities. If you don’t do at least that, there’ll be ever fewer jobs, and/or ever less money to spend. It’s a vicious cycle.

We may assume the Troika is well aware of this, and that would mean they are intentionally killing off the Greek economy. Something I’ve said a thousand times before. Still, both the Greek Tsipras government and exterior voices continue to claim the economy is recovering. Even if that is mathematically impossible. There undoubtedly are sectors of the economy being boosted, but they are only the ones the Troika members are interested in.

The economy’s foundation, the ‘normal’ people, who work jobs if they’re lucky, are not recovering or being boosted. Quite the contrary. Half of young people are unemployed and receive no money at all. Most of those who do have jobs receive less than €500 for a full month of work. Mind you, this is while the cost of living is as high as it is in Germany or Holland, where people would protest vehemently if even their unemployment benefits were cut that low. Unemployment benefits hardly exist at all in Greece.

This situation, as also mentioned often before, means that entire families must live off the pension a grandmother or grandfather gets. As of next year, such a pension will be cut to net €480. Of which most will go to rent. And the cuts are not finished. There are plenty neighborhoods in Athens where there are more boarded-up shops then there are open ones. It is fiscal waterboarding, it is strangulation of an entire society, and there is no valid economic reason for it, nor is there a justification.

If Greece had access to international debt markets, if would perhaps pay a higher interest rate, but investors would buy its bonds. The Troika denies Greece that access. Likewise, if the ECB had not excluded the country from its QE bond-buying programs, the country would be nowhere near its present disastrous predicament. The ECB’s decision not to buy Greek bonds can only be a political one, it’s not economic. There is something else going on.

Here’s that latest pension news:

 

Greek Pension Cuts To Hit 70% Since The Start Of The Bailouts

The next batch of pension cuts, voted through in the last couple of years and set to come into force within the next two years, will take total losses for pensioners since the start of the bailout period in 2010 up to 70%. A recent European Commission report on the course of Greece’s bailout program revealed that the reforms passed since 2015 will slash up to 7% of the country’s GDP up to 2030. The United Pensioners network has made its own calculations and estimates that the impending cuts will exacerbate pensioners’ already difficult position, with 1.5 million of them threatened with poverty. The network argues that when the cuts expected in 2018 and 2019 are added to those implemented since 2010, the reduction in pensions will reach 70%.

Network chief Nikos Hatzopoulos notes that “owing to the additional measures up until 2019, the flexibility in employment and the reduction of state funding from 18 billion to 12 billion euros, by 2021, one in every two pensioners will get a net pension of 550 euros [per month]. If one also takes into account the reduction of the tax-free threshold, the net amount will come to 480 euros.” Pensioners who retired before 2016 stand to lose up to 18% of their main and auxiliary pensions, while the new pensions to be issued based on the law introduced in May 2016 by then minister Giorgos Katrougalos will be up to 30% lower.

More than 140,000 retirees on low pensions will see their EKAS supplement decrease in 2018, as another 238 million euros per year is to be slashed from the budget for benefits for low income pensioners. The number of recipients will drop from 210,000 to 70,000 in just one year. There will also be a reduction in new auxiliary pensions (with applications dating from January 2015), a 6% cut to the retirement lump sum, and a freeze on existing pensions for another four years, as retirees will not get the nominal raise they would normally receive based on the growth rate and inflation.

 

As half of the pensioners see their pensions cut to €480 a month, they’re not the worst off in the country. There are about a million unemployed who get nothing at all, and 580,000 who do have ‘jobs’ but ‘earn’ just €407 a month. And that’s if they’re lucky enough to get a contract. Many don’t, and work for even less. Yeah, that’s how you keep unemployment numbers down; Americans should know all about it.

 

Unemployment Decreases, Yet 580,000 Workers Earn Just €407 Per Month

Greece’s jobless rate fell to 20.2% in July-to-September from 21.1% in the second quarter, data from the country’s statistics service ELSTAT have showed. About 75.6% of Greece’s 970,000 jobless are long-term unemployed, meaning they have been out of work for at least 12 months, the figures showed on Thursday. Greece’s highest unemployment rate was recorded in the first quarter of 2014, when joblessness hit 27.8%.

Athens has already published monthly unemployment figures through June, which differ from quarterly data because they are based on different samples and are seasonally adjusted. Quarterly figures are not seasonally adjusted. At the same time, part-time employment has been constantly increasing. According to latest data, 580,000 workers earn just 407 euros per month. An amount that is for sure not enough to help people come through the month. And this data refers to declared work contracts. In undeclared work market people earn even 200 or 300 euros.

 

While all these Greeks don’t make enough to feed themselves and their families, the Troika-induced tax rises keep on coming like a runaway train with broken brakes. Every single day, more people are added to the list of those who simply can’t afford to pay their taxes, under the guise of going after ‘strategic defaulters’. There is no way out if this other than large scale debt forgiveness, debt restructuring, debt write-offs. Consumer spending is what keeps economies alive, but in Greece that is what’s shrinking day after day.

 

Greeks Crushed By Tax Burden

Tax authorities have confiscated the salaries, pensions and assets of more that 180,000 taxpayers since the start of the year, but expired debts to the state have continued to rise, reaching almost €100 billion, as the taxpaying capacity of the Greeks is all but exhausted. In the month of October, authorities made almost 1,000 confiscations a day from people with debts to the state of more than €500. In the first 10 months of the year, the state confiscated some €4 billion, and the plans of the Independent Authority for Public Revenue provide for forced measures to be imposed on 1.7 million state debtors next year.

IAPR statistics show that in October alone, the unpaid tax obligations of households and enterprises came to €1.2 billion. Unpaid taxes from January to October amounted to €10.44 billion, which brings the total including unpaid debts from previous years to almost €100 billion, or about 55% of the country’s GDP. The inability of citizens and businesses to meet their obligations is also confirmed by the course of public revenues, which this year have declined by more than €2.5 billion. The same situation is expected to continue into next year, as the new tax burdens and increased social security contributions look set to send debts to the state soaring. Notably, since 2014, there has been a consolidated trend of a €1 billion increase each month in expired debts to the state.

There are now 4.17 million taxpayers who owe the state money. This means that one in every two taxpayers is in arrears to the state, with 1,724,708 taxpayers facing the risk of forced collection measures. Of the €99.8 billion of total debt, just €10-15 billion is still considered to be collectible, as the lion’s share concerns debts from previous years, in many cases of bankrupt enterprises and deceased individuals.

 

Lately, a narrative is being force-fed into, and by, western media about Greece becoming some sort of paradise for investors. But why would anyone want to invest into an economy that clearly is no longer functioning, not even viable? Well, in such an economy, all kinds of things can be bought on the cheap. And because Greece is very beautiful, and has beautiful weather, why not buy it all and turn it into a tourist colony owned by foreigners and the odd rich Greek?

One tiny thing: they would prefer a different, even more business-friendly government. As if Tsipras hasn’t crawled up the Troika’s where-the-sun-never-shines parts enough. That’s the context into which to place for instance Kyle Bass’s comments:

 

Kyle Bass: Investors to Pour Billions into Greece after Political Change

Hedge fund manager Kyle Bass believes that Greece will come out of the crisis and investors will pour billions into its economy once the government changes, according to a CNBC report. The founder and chief investment officer of Hayman Capital Management; which manages an estimated $815 million in assets, is closely following the course of the Greek economy and political situation, and has invested in Greek bank stocks.

Bass says that foreign investors are waiting on the sidelines for a political shift to take place in 2018. “My best guess is a snap election for prime minister will be called between April and September of next year and Prime Minister Alexis Tsipras will lose power. When that happens, there will be a massive move into the Greek stock market. Big money will flow in as investors feel more confident with a more moderate administration,” Bass said.

“It’s going to take Kyriakos Mitsotakis; president of New Democracy, the Greek conservative party, to be voted in as prime minister to reform the culture and rekindle investor confidence,” the investor said. “I have no doubt 15 billion euros in bank deposits will come back to Greek banks if he’s elected. The stock and bond markets will also jump following the election.” Bass says that global investors are waiting for the political change in order to invest in real estate, energy and tourism.

So far, the hedge fund manager noted, Greece has proceeded with privatizations of its main port; regional airports; its railway system; the largest insurance company, and there are more important ones to be completed within the next two years. “There is so much potential in Greece,” Bass said, noting that investors are waiting for the right moment to enter, the CNBC report concludes.

Kyle Bass and all his ilk are lining up for the goodies for pennies on the dollar. If only the desolate pensioners and unemployed young are desperate enough to believe that, and vote for, a right-wing government is good, simultaneously, for both their interests and that of international vultures and hedge funds.

 

Funds Take Positions Ahead Of Government Change In Greece

Brevan Howard Asset Management, one of Europe’s biggest hedge funds, revealed to Bloomberg on Tuesday that it has set up two investment funds whose exclusive targets are assets in Greece such as real estate, enterprises and securities, and is aiming to collect 500 million euros from private investors. Co-founder of Brevan Howard and head of one of the two funds Trifon Natsis said that some 250 million euros has already been collected. The company was co-founded by four others, including Alan Howard, in 2002. “After eight years of crisis and recession that’s hit Greece, we’re at a point where the tail risks have disappeared and the country is stabilizing at a low base,” he said.

“We anticipate a material uplift in the Greek economy and asset prices.” “The likely political transition over the next 12 to 18 months will add momentum and reinforce that process,” Natsis said. Brevan Howard seems to be in agreement with Hayman Capital, whose head Kyle Bass said a few weeks ago that the brewing change in government in Greece within the next 18 months will benefit the market: “You’re starting to see green shoots, you’re starting to see the banks do the right things finally in Greece, and you’re about to have new leadership,” he stated recently.

My personal assessment after spending much of my time over the past 2.5 years in Athens is that they will be disappointed. Not only does a country, to make it attractive for foreigners, need a functioning economy, which Greece no longer has even at a “low base”, but the anger that has been building up here, which was held in check by Syriza and its ultimately empty promises, is bound to explode when some right winger manages to seize power.

Athens is the most peaceful city you can imagine, the only violence is between ‘anarchists’ and police, and it mostly takes place at set dates and places. Violence among people is virtually non-existent, despite all the deception, the betrayal, the poverty and the youthful testosterone energy that has nowhere to go. But that’s not going to last, I’m afraid.

 

And that will also be because many Greeks understand the contents of the following, devastating, interview by Michael Nevradakis for Mint Press News with Nicholas Logothetis, former member of the board of the Greek Statistical Authority (ELSTAT). Greece has been set up. And many people here know it. They have put their hopes in the democratic process, in voting into power a different government from the same old clique they have seen for many decades.

The likely winner of the next elections is New Democracy, led by Kyriakos Mitsotakis, the man the hedge-funders want in. Mitsotakis, a banker, is very much part of the old Greek elite, his father was a prime minister. If he gets elected things are not very likely to remain peaceful. Says my gut.

 

Update: while I was writing this article, the following came out. Eurogroup head Dijsselbloem admitting the first Greek referendum had nothing to do with helping Greece, the reason always provided for why it happened. Instead, it was always, as we’ve said so many times, meant to save German and French banks. And now that he’s leaving the job, Dijsselbloem, who obviously feels untouchable, just lays it out there. After having played a large role in destroying the country, the society, the economy. It’s almost hard to believe. But only almost. Because the Troika doesn’t answer to anyone. Then again, Greece has an independent judicial system.

 

The Aim Of The First Memorandum Was To Rescue Investors Outside Greece, Dijsselbloem Admits

The main aim of the first Greek memorandum, especially, was to rescue investors outside Greece, outgoing Eurogroup chief Jeroen Dijsselbloem admitted in the Europarliament on Thursday. “There were mistakes in the first programmes, we improvised. The way we dealt with the banks was expensive and ineffective. It is true that our aim was to rescue investors outside Greece and for this reason I support the rules for bail-ins, so that investors aren’t rescued with tax-payers’ money,” said Dijsselbloem in reply to independent Greek MEP Notis Marias.

Dijsselbloem noted that it had been a huge crisis because the fiscal sector had faced the risk of a total collapse that would have left many countries with a high debt. However, he pointed out that banks had only needed €4.5 billion in the third programme because the private sector had a huge participation. Referring to the non-performing loans, he said that a private solution that did not once again place the burden on tax-payers was near. He also pointed to measures being taken in Greece for the protection of the socially weaker groups, to make sure that they were not the victims of the auctions.

Referring to the early payment of the IMF loans with the remaining money of the programme, the Eurogroup chief said that this made sense financially, given that the IMF’s loans were more expensive than those of the Europeans. However, from a political point of view, the Eurogroup prefers that the IMF remain fully involved in the Greek programme, with its own responsibilities, he added. In any case, he noted that the final decisions on debt relief will be made later, when the programme is concluded and the sustainability of the Greek debt has been examined.

 

As an introduction, a piece of that interview with former Greek Statistical Authority bioard member Nicholas Logothetis (see the rest below). Greece being set up is not just some fantasy idea.

In my opinion, joining these medieval memorandums, which have brought about this economic crisis that Greece is still experiencing, was beyond any doubt pre-planned and predetermined. This arises not only from Strauss-Kahn’s own admission that the IMF had been preparing every detail of this with Papandreou, it also arises for other reasons that subsequently became known – that Greece was chosen by the designers of the European Union to become the guinea pig for the implementation of harsh austerity and other forms of economic punishment, set up for all as an example to be avoided, in the context of a new EU economic policy for handling the member countries with fiscal problems.

Indeed, the policy of the memorandums gave the opportunity not only to the IMF to put a foot in Europe – until then its activities always were, with devastating consequences, limited to developing countries in Africa and Latin America – but also gave the opportunity to the French and German banks to get rid of their so-called toxic bonds, that were loaded onto the Greek people by turning a private debt into a state debt.

In order to achieve all of this, of course, they had to plant the appropriate person in ELSTAT at a time when certain statistical adjustments were required, in order to support their treacherous plan. Where did this lead eventually? To the bankruptcy of the Greek state.

This is some story. It’s being denied in what just about amounts to a full blast PR campaign by many of those involved on the Troika side. Their narrative is: how dare the Greeks attack, and drag into court, their own unblemished ex-IMF statistician (who’s not even a statistician)? Whereas the actual question should be: how dare the Troika et al attack the Greek judicial system?

They’re getting away with it so far, but there are still court cases pending. And as Nicholas Logothetis says, he is confident that the Greek court system is the only party that has the power and the independence to set this straight.

I wanted to take bits and pieces out of this, shorten it etc., but it’s just too good. Sorry, Michael, sorry MintPress! It reads like a crime novel. And you can never again say you didn’t know. We can only hope that the Greek court system will hold Europe to task.

But while they can probably call on Papandreou to stand trial, what about Strauss-Kahn or Lagarde? Or Schäuble and Dijsselbloem? What if they can even prove Greece was set up, who’s going to pay the damage done to the Greek population, society, and the Greek economy, over a decade?

It’ll take many decades for the country to recover from what has been perpetrated upon it. And this could only happen because western media have been too lazy and compliant to question what has been going on. 90%+ of what you’ve been reading about Greece has been fake news. Note: I always put everything I quote in italics, but this is an exception to that rule:

Here we go:

 

The Trials of Andreas Georgiou and the Fraud That Drove Greece into Austerity

The mainstream narrative regarding the cause of the severe economic crisis Greece has experienced is that the Greek people and Greek state were irresponsible with their finances, lived “beyond their means” at the expense of EU taxpayers, and provided overly generous social benefits and pensions to an underproductive, uncompetitive, and lazy populace.

These characterizations have then been used to justify the successive memorandum agreements, or “bailouts,” and the austerity measures that have been imposed in Greece since 2010, as the country’s “just deserts” — the “bitter medicine” that must be prescribed to correct Greece’s previous ills.

A different view exists, however — one that is based on allegations that Greece was driven into the memorandum and austerity regime not by economic incompetence and cultural deficiencies, but by a fraud that was perpetrated against the Greek people and the country of Greece.

In this interview, which aired in November on Dialogos Radio, Nicholas Logothetis, a former member of the board of the Greek Statistical Authority (ELSTAT), describes allegations that have been made against Andreas Georgiou, ELSTAT’s former president, and against EU statistical authority Eurostat, regarding how Greece’s deficit and debt figures were illegitimately inflated in 2010, providing the rationale to drag Greece under a regime of austerity and extreme economic oversight.

Logothetis details how debt swaps and other questionable financial dealings were added to Greece’s debt and deficit, as well as the consequences of these actions, the criminal and civil convictions against Georgiou, and the court cases that are still pending.

 

MPN: Let’s begin with a discussion about Andreas Georgiou, the embattled former president of ELSTAT, who oversaw the augmentation of the Greek deficit and debt. Describe for us Georgiou’s background prior to taking on the role of president of ELSTAT. Was Georgiou even a statistician?

NL: No, he wasn’t. The operation of the Hellenic Statistical Authority (ELSTAT), as a continuation of the initial National Statistical Authority, as we called it, officially began in late June of 2010. This was the time that the members of ELSTAT’s management board were selected and approved by the conference of parliamentary presidents, with the required supermajority of four-fifths.

Georgiou has been working at the International Monetary Fund since the late 1980s. For a few years before he came to Greece, he was deputy head of a division of the IMF’s statistics department, the financial institutions division. However, the Greek Ministry of Finance announced the appointment of ELSTAT’s board of directors through a press release to all Greek newspapers. In that press release, it presented Georgiou as deputy head of the entire IMF statistics department, a very big department in the IMF and a very important one, hiding his actual organizational position in the IMF, a position of an economic nature rather than a statistical nature, in a subordinate division of the statistics department.

Obviously, the objective of the Greek Minister of Finance was to present Georgiou as an experienced statistician with a significant management position at the IMF, who supposedly left America and came here to “save” Greece by putting in order all of its statistics. In fact, this gentleman was not only unable to run an important institution such as ELSTAT, with over 1,000 employees, but he wasn’t even a statistician, with no academic publications and no knowledge of statistics.

Moreover, for at least six months after assuming the ELSTAT presidency, Georgiou still held his organizational position at the IMF, something that was explicitly forbidden by ELSTAT’s founding law.

 

MPN: What were the actions undertaken by Georgiou as president of ELSTAT? In other words, how were the Greek deficit and debt figures manipulated and in what other ways were Greece’s official economic figures altered?

NL: First of all, Georgiou’s first moves were to remove from the other members of the board any ability and initiative to propose discussion topics or to be involved in the calculation of the deficit or the debt. They were forbidden even to communicate with the remaining staff of ELSTAT! This behavior of Georgiou was not only due to his inability to act as a manager but also due to the fact that he understood from the very beginning, even from the second meeting of the board in September 2010, our refusal to adopt the deficit and debt calculation procedures he wanted to follow. He knew that eventually, the majority of the board members would not approve his deficit figures to be officially published before the end of October 2010.

 


Andreas Georgiou, stands outside the headquarters of the Statistics agency, in Athens, Greece. (AP/Petros Giannakouris)

 

Shortly after the last meeting of the board in early October 2010, the final silencing of the whole board followed and we were never convened again, thus leaving the way free for Georgiou, always under the auspices of senior Eurostat executives, on the one hand, to change the founding law—as he always wanted, to turn ELSTAT into one-person authority—and on the other hand, to inflate the 2009 figures. Exactly how he did this became clear later, but we had suspected soon enough what he was going to do.

My first disagreement with him was when I realized he would add to the deficit figures and to the national debt of Greece the Simitis swaps — that is, the swaps that former Greek prime minister Costas Simitis had made use of in 2001 in order for Greece to get accepted to the Eurozone. Allow me to briefly explain what these swaps are, as they indicate clearly an activity typical of the statistical mishandlings that had always been used and are still taking place in our country, every time the government’s leaders want to achieve something with communication or financial benefits for themselves or for third parties. Swaps are a type of a bond, a banking derivative or simply a stock exchange bet, a currency exchange bet. Many countries do it, even now they are doing it, converting their existing debt into currencies of other countries, say in Swiss francs or Japanese yen, betting that the value of that currency will rise and at the maturity of this debt, the owner will gain from the difference in the value of currencies.

In a way, what happened in 2001 is that much of Greece’s debt was converted into yen, but at the value that the yen had in 1995, which was higher than that of 2001! Remember, the swaps were made in 2001, but the price of the yen in 1995 was the one used for this swap. We can put a big question mark here because I don’t know how legitimate this was, to consider as valid the exchange value of the yen of six years ago. But anyway, this was what happened.

From this action, Greece was theoretically gaining an amount of 2.8 billion euros, which theoretically reduced our debt by this amount, and also reduced the annual deficit below 3%, thus meeting the requirement of the Maastricht Treaty for Greece’s entry into the Eurozone. But let us not forget, however, that this was a bet. It’s not unlike, say, a bond that matures and is redeemable after 30 years: at the time of the swap, there was no applicable European regulation allowing the “bond” to be cashed in prior to maturity, and therefore the swaps were of indeterminate value.

However, Walter Radermacher — at the time the general director of Eurostat, the EU’s statistical authority — decided only for Greece and only for that time and while the value of the yen had collapsed, that this swap value had to be included in our total debt, thus raising our national debt by 21 billion euros because of the losses of the yen. So we found ourselves with an additional fiscal debt of 21 billion euros.

Radermacher’s additional act was to instruct Georgiou to divide this amount by four and to include what came out of it in the deficits for the years 2009, 2008, 2007, and 2006. So eventually, for 2009 and all the three previous years, we found ourselves with an additional deficit of about 5.5 billion euros. But I’m pointing out again that swaps should not be used in any way before their maturity, in order to manipulate negatively or positively the fiscal debt, let alone the yearly deficit.

Another illegal augmentation of our deficit made by Georgiou included the addition of 3.6 billion euros in hospital costs that were not even approved by the Court of Auditors. The Court of Auditors is one of the three institutions of Greek justice, along with the Supreme Court and the Council of State. With regards to this cost, as it turned out later, no one committed to it and no one was paying for it. And finally, the major swelling of the budget deficit was accomplished by the overnight inclusion of the deficits of 17 public utilities, violating many Eurostat criteria and rules. That alone added 18.2 billion euros, equivalent to 20 billion dollars, to the fiscal debt of Greece.

As a result of all the above, Greece ended up with a huge deficit for the year 2009 — 36 billion euros, or equivalently, 15.4% of GDP. This legitimated the first memorandum, paved the way for the second and worst memorandum, and justified the imposition of these cumbersome austerity measures, such as the pension cuts, social insurance and healthcare, and the tax increases — huge tax increases — measures that we are still suffering today.

 

MPN: Dominique Strauss-Kahn himself, the former president of the International Monetary Fund, has gone on the record as saying that he met with George Papandreou to discuss an IMF “bailout” of Greece in April 2009. This was several months before Papandreou was elected as prime minister and at a time when Papandreou was saying, while campaigning, that plenty of money existed to fund the social programs he was promising to Greek voters. Do you believe that the economic “crisis” in Greece was pre-ordained or pre-planned?


Greek Prime Minister George Papandreou, right, shakes hand with the head of the International Monetary Fund, Dominique Strauss-Kahn, during a joint news conference in Athens, Dec. 7, 2010. (AP/Thanassis Stavrakis)

NL: Yes, I do. In my opinion, joining these medieval memorandums, which have brought about this economic crisis that Greece is still experiencing, was beyond any doubt pre-planned and predetermined. This arises not only from Strauss-Kahn’s own admission that the IMF had been preparing every detail of this with Papandreou, it also arises for other reasons that subsequently became known — that Greece was chosen by the designers of the European Union to become the guinea pig for the implementation of harsh austerity and other forms of economic punishment, set up for all as an example to be avoided, in the context of a new EU economic policy for handling the member countries with fiscal problems.

Indeed, the policy of the memorandums gave the opportunity not only to the IMF to put a foot in Europe — until then its activities always were, with devastating consequences, limited to developing countries in Africa and Latin America — but also gave the opportunity to the French and German banks to get rid of their so-called toxic bonds, that were loaded onto the Greek people by turning a private debt into a state debt.

In order to achieve all of this, of course, they had to plant the appropriate person in ELSTAT at a time when certain statistical adjustments were required, in order to support their treacherous plan. Where did this lead eventually? To the bankruptcy of the Greek state.

 

MPN: Andreas Georgiou is no longer in Greece, despite the fact that various legal cases and judicial decisions are outstanding against him. Where does Georgiou find himself today and what is he presently involved with?

NL: He’s away, because he knows what he’s faced with, with trials and legal cases. Georgiou is currently in his comfortable villa in Maryland. He left Greece in the summer of 2015, one month before the end of his five-year term as ELSTAT chairman. Coincidentally, this was shortly after the call from the House of Parliament to testify before the examination committee that had been formed at that time to investigate the reasons for our accession to the first memorandum. He never came to the examination room, pretending to be in the hospital with “pneumonia.” Who on earth has ever heard of a pneumonia case in the middle of the Greek summer?

Anyway, immediately after his “discharge” from the hospital, he left for America. I repeat, one month before the end of his term and without requesting a renewal of the chairmanship position for another five years. He could have done that, but he didn’t, apparently having realized that he could not have avoided the imminent court hearing on the prosecutions for breach of duty and for the felony of inflating the deficit figures — which in the legal language is expressed as “felony of false certification at the expense of the state” together with the “aggravating order for public abusers,” a very impressive legal phrase. This is a legal category that leads to life imprisonment.

I presume that he’s engaged at this time in preparing his defense, through statements via his lawyers in Greece, while he remains absent, missing from every trial that has taken place regarding him.

 

MPN: A few months ago Georgiou was found guilty by the Greek justice system. What were the charges for which Georgiou was convicted and sentenced?

NL: There are two convictions Georgiou had this year. In March, in a criminal court, he was convicted for libel and for written defamation, and he was given one-year imprisonment with a three-year suspension. He appealed through his lawyers, but the Penal Court of Appeals condemned Georgiou again, giving him the same sentence.

Georgiou’s crime was that, in an official ELSTAT news release, he accused former ELSTAT board member Dr. Nicholas Stroblos of being a statistical swindler, obviously trying to divert guilt from himself for statistical fraud. I’m pointing out here that Dr. Stroblos is the former director of the national accounts department of ELSTAT, whom Georgiou illegally replaced with one of his now co-defendants. Consequently, Stroblos sued him in both criminal and civil courts and, apart from the one-year imprisonment imposed by the criminal court, the civil court fined Georgiou 10,000 euros for damages resulting from libel.

Georgiou’s most recent conviction is concerned with one of the three accusations included in the prosecution for breach of duty. The first accusation was related to the fact that he was in parallel for several months, from July to November 2010, as head of the statistical authority in Greece but also as an employee of the IMF, a duplication of employment explicitly prohibited by ELSTAT’s founding law 3832 of 2010. That law required him to work exclusively and with full employment in the ELSTAT board. Georgiou deluded the Greek parliament about his ongoing post with the IMF — and note that the IMF is one of the lenders of Greece — while at the same time he had accepted the post as president of ELSTAT’s board. He would not have been selected as ELSTAT president, not even as a simple member of the board, had the parliament known about his double post.

The second accusation concerned the fact that Georgiou did not convene the ELSTAT board for a whole year, violating the law that required meetings at least once a month.

The third accusation, and the most important of all three, concerned the fact that the decision to endorse the revised figures for 2009’s deficit was taken only by Georgiou, without the agreement of the other members of the board — which had been selected, I remind you, and approved exactly for this purpose by the conference of the parliamentary presidents with a majority of four-fifths. For this accusation, he was convicted in the context of breach of duty, and this had to do with the publication of deficit figures without our approval, as required by law. Georgiou appealed this conviction to the Supreme Court, and we are waiting to see what the Supreme Court will decide.

Georgiou was acquitted on the charge that he did not timely convene the ELSTAT board, although this is intimately interconnected with the non-convening of the board for the approval of the data, for which he was convicted. So we ended up with a paradoxical situation here. He was also acquitted of the charge that while he was a member of the IMF — that is to say, a servant of the lender — he was also chairman of ELSTAT — that is, a servant of the borrower — something that is inconceivable worldwide and yet happened in today’s occupied and economically enslaved Greece.

Naturally, the people who were present in the courtroom were annoyed and protested these acquittals, but when they heard the announcement of his conviction on the third charge they were relieved, of course, and for this charge he was sentenced to two years’ imprisonment with a three year suspension — without being granted, of course, any mitigation.

I, together with fellow whistleblower and former ELSTAT board member Zoe Georganta, filed an objection against the court judgment for the two accusations for which he was acquitted, and we expect a Supreme Court decision as to whether or not Georgiou will go to a new trial for these new accusations. At the moment, the two acquittals cannot be considered irrevocable. But it is true that the most important accusation, for which Georgiou desperately wanted to be acquitted, was the one for which he got convicted.

Indeed, the fact that Georgiou published the inflated elements of the deficit without approval by the ELSTAT board not only proves his guilt of the second accusation, of not convening the board as he should have, but it also implies a deception, because he knew that his swollen deficit figures would never be accepted by a majority of the board members. He further recognized that such a disagreement would sooner or later become public and reveal the irregularities he used with the help of Eurostat itself. Such a revelation would result in the failure of the plan to legitimize the first memorandum and thence to impose onerous austerity measures on Greece. That was not acceptable by the initiators of this plan, who I believe had to use Georgiou and instructed him to silence the rest of the ELSTAT board.

 

MPN: Following the guilty verdicts against Georgiou this past spring, a barrage of positive coverage and PR in favor of Georgiou appeared in the Greek and international media — including Bloomberg, the Washington Post and Politico. We also heard numerous statements of support from major political figures in Greece, the European Union, and elsewhere. These statements criticized the supposed lack of independence of the Greek justice system in the verdicts against Georgiou. How would you describe or characterize Georgiou’s network of support within and outside of Greece, and these arguments made in his favor?

NL: Yes, indeed, various statements have been heard and continue to be heard in support of Georgiou, trying to sanctify him, to elevate him as a serious personality and as an honest scientist. All this in order to justify everything he did illegally as ELSTAT president. All that has been said rests on myths that have been circulated by the domestic and foreign supporters of Georgiou, who are desperate that the case not be brought to the court of justice — the major case of the inflation of the deficit figures.

But this also proves their own guilt in the matter. If they really believe that Georgiou is innocent and that we are the slanderers and the liars, why don’t they let Greek justice do its job and prove his presumed innocence in a court hearing? I would even expect Georgiou himself to be the first to grab this opportunity to be redeemed. This furious effort of all his supporters to prevent the case from being brought to trial reveals their panic as well as their guilt, because they know very well that in the forthcoming court hearing all the evidence will be revealed proving that Greece has suffered the greatest national betrayal since the time of the Thermopylae treason, 2500 years ago, when Efialtes betrayed the Greek army which was fighting the Persian invasion.

The participation of all those major political figures in Greece and the European Union in the betrayal perpetrated by Georgiou will also be revealed. Indeed, the core of this support network includes first and foremost Eurostat, whose senior staff advised Georgiou on how to inflate the 2009 deficit and also how to change ELSTAT’s founding laws in order to neutralize the rest of the board.

Imagine therefore what impact Georgiou’s conviction would have on Eurostat’s image! Eurostat’s political chief is the European Commission, Brussels — that is, one-third of the troika — with all that implies, of course, for many high-ranking political figures in the European Union and beyond. So one can clearly understand why high-level managers from Eurostat and major political figures from the EU itself are continuing to build a wall of protection and support for Georgiou — in the hope that the government and the Supreme Court of Greece will believe all these myths they are promoting.


Greece’s Statistics agency employees walk past the logo of the agency in Piraeus, near Athens. (AP/Petros Giannakouris)

The first myth is that in recent years Georgiou was acquitted many times but the persecution against him continues. That’s what they say. The supporters of Georgiou claim again and again that Georgiou was acquitted, but it’s not true. The acquittal may occur only after the irrevocable final judgment in a court trial, or after an exonerating court order is accepted by the Supreme Court. As appeals against all rulings in Georgiou’s case have been filed with the Supreme Court, he has not been acquitted irrevocably for any charges brought against him.

On the contrary, he has had an irrevocable conviction for defamation, as I said before, and a conviction for one of the three accusations for breach of duty — regarding which the Supreme Court decision is awaited, whether or not it will become irrevocable. But the other two accusations for breach of duty for which he has been acquitted, as I have already said, for these we have filed a complaint and they cannot, therefore, be considered irrevocable or a final acquittal. So it’s in keeping with due process that the prosecutions against him still continue.

The second myth goes as follows: Georgiou took over the presidency of ELSTAT after the first memorandum. He cannot, therefore, be regarded responsible for the memorandum and the economic crisis that followed. Well indeed, when Georgiou took action in ELSTAT, we were already under the first memorandum. If you remember, our entry into the first memorandum was announced by George Papandreou in his speech made on the Greek island of Kasterllorizo in April 2010, and the reason for this was allegedly the high level of the 2009 deficit, which was put by Papandreou at 13.6% of GDP. That’s equivalent to about 30 billion euros.

However, it was not the actual deficit, but the prediction by Papandreou of what it would be after all relevant calculations took place. Papandreou did not have the right to take such an important decision, one that would affect Greek society so much, based only on a prediction that had not even been approved by the Court of Auditors. We would be the ones, as ELSTAT’s management board, to supervise the calculations of the actual deficit, to approve it and publish it in October 2010, six months later.

Actually, if we had been given the opportunity to do that and found these deficit figures to be less than 10%, we would have been able to denounce the first memorandum and cancel it! And of course, the rest of the memorandums that followed. But obviously, this would not be something that the designers of the first memorandum wished to happen, and so the appropriate person must be found who, with specific statistical adjustments, could make the deficit of 2009 “confirm” the “validity” of Papandreou’s deficit “forecast” in April 2010, and fully justify our entry into the first memorandum. This is what they wanted.

Furthermore, in order to avoid any controversies with the rest of the board that could endanger their plan, it was decided to neutralize not only the dissidents on the board but the whole of ELSTAT’s board. As a result of all these unlawful actions, the first memorandum was legitimized — and the door opened for the second and worst memorandum and obviously the rest of the memorandums that have followed, and for the austerity measures that have been imposed since then. Therefore, it’s perhaps wrong to say that the first memorandums was due to Georgiou. It’s more appropriate to say that all memorandums and their related medieval austerity measures that we still have on our backs are actually due to Georgiou!

The third myth: since Eurostat has approved Georgiou’s practices and figures, they must be right, they must be correct. But would it have been possible for Eurostat not to approve these statistics, provided by Georgiou, and the methods of administration that he was using? It was Eurostat’s director himself, Walter Radermacher, who gave orders to Georgiou as to what data to add to the deficit. Correspondence has been revealed, from Radermacher to Georgiou, that shows how to add this amount of debt that was incurred by the Simitis swaps, how to add it into four years’ deficits until 2009 — prior to the expiry date, as we previously explained, and although no European regulation existed at the time that would allow this.

Also, it was the permanent representative of Eurostat at ELSTAT, Hallgrimur Snorrason, who — with the assistance of Eurostat’s legal adviser, Per Samuelson — advised Georgiou on how to change ELSTAT’s founding law in order to transform ELSTAT into one-man authority. It’s hardly surprising therefore that Eurostat approved the practices and the deficit figures of Georgiou. Of course, that does not mean that they were correct.

The final myth that I want to mention is that his proponents are saying Georgiou applied all proper European regulations. On the contrary, most European regulations and Eurostat’s own criteria for the deficit and debt calculations were violated by Georgiou and his advisers from Eurostat, in order to justify the unjustifiable integration of deficits of many public utilities into the 2009 deficit — a decision that would require a thorough study of several months for each public utility. You can’t just decide to include the deficit of a utility in the public debt; you need a thorough study, for several months, six months. So what kind of European regulations did Georgiou actually apply, I wonder? No one knows.

 

MPN: What is plainly evident is that there is a very extensive and very powerful network of support for the likes of Andreas Georgiou, a network that includes powerful media voices, major politicians and political figures, major centers of power and influence and decision-making. How can such a powerful and seemingly unified network of political and media forces even be countered by the Greek people?

NL: Indeed, Georgiou’s support network, composed of high-ranking political figures — domestic and foreign — is powerful. But no matter how much influence this network can have on political affairs in Greece, I think that it is not in a position to influence the Greek justice system, which I consider impartial. The fact that the case has reached up to the level of the Supreme Court, which so far has justified many of our objections and appeals against Georgiou, gives us hope that ultimately the systemic power network that exists supporting Georgiou can be successfully dealt with.

At the end of the day, our justice system, perhaps the only irreproachable institution in our country, seems to have borne the burden of this matter. I believe that the truth will soon be revealed, no matter how many powerful political and media forces try to force an acquittal of Georgiou.

 

MPN: What are the judicial cases still outstanding regarding the ELSTAT case and Andreas Georgiou? What are the charges which Georgiou is still facing? And what is your expectation regarding the outcome of these cases?

NL: Most importantly, the cases of the false inflation of data and of the breach of duty by Georgiou, involve crimes of public document forgery and violation of ELSTAT’s founding law. As I have already said, Georgiou was convicted of one of the more important accusations related to the breach of duty — that of the publication of the 2009 deficit figures without the approval of the ELSTAT board. He has been acquitted on the other two charges — the duplication of his appointment in the IMF and ELSTAT and the non-convening of the board — but we have appealed these two verdicts, and we hope that the Supreme Court will decide to repeat the trial for these two related charges.

If this affair is remanded back to the trial courts, we certainly expect Georgiou to be convicted, because the evidence we have against him is rock solid and undeniable. This is what Georgiou’s supporters know. That’s why they push as hard as they can to prevent the case from reaching the high court of justice.

 

MPN: In what way do you believe the verdicts that will be reached by the Greek justice system concerning the ELSTAT and Georgiou cases impact the future of Greece, particularly with regard to the austerity policies and memorandums that are being imposed and the non-serviceable public debt of Greece?

NL: I agree with you that Greek debt is non-serviceable. Even if we get away from the memorandums, we don’t get away from the related loan agreements, and we will continue to be under supervision by the EU until we pay 75% of our debt, something impossible for the next 60 years!

If, however, as we hope, there is an irrevocable conviction of Georgiou for the act of inflating the deficit figures, this will prove that all these medieval memorandums were imposed on the basis of false figures — which gives Greece the right to claim compensation from the European Union for the damage we suffered in the last seven years of the financial crisis.

Article 340 of the Treaty on the Functioning of the European Union gives us the right to claim this compensation, and we have even estimated the financial loss since Georgiou set foot in Greece, a cost that may well exceed 210 billion euros. A compensation of this magnitude would certainly overturn the disgraceful economic situation we are experiencing today. However, I emphasize again that a necessary condition is an irrevocable conviction of Georgiou regarding the felony of inflating the deficit figures.

And what about these instigators who used Georgiou to carry out their treacherous plans? Even Grigoris Peponis — the impeccable investigator who proposed the criminal prosecution of Georgiou in the first place — has suggested that the possible existence of certain instigators within the Greek and European political systems, who directed Georgiou on what to do, has to be taken into consideration. These are the ones who do not want the case to reach an open court hearing — the ones who are so desperate for the acquittal of Georgiou as early as possible, in order to cover their own involvement in the above crime, because they’re well aware that we have evidence of their unlawful intervention in inflating the deficit and also in transforming ELSTAT from an independent authority into one-man authority.

If the Supreme Court sends Georgiou to trial in the high court of justice, all his supporters know that this will mean a likely conviction for him. The support network will then collapse, and they will find themselves accused for their betrayal of their homeland and crimes against its citizens. Our country will then pass from an underprivileged position of a beggar, to the strong position of a challenger, on the basis of specific articles of the Treaty on the Functioning of the European Union itself.


Protesters hold a banner during a rally in Athens, Thursday, Dec. 8, 2016. (AP/Yorgos Karahalis)

As far as we are concerned, we do not really care about the strict or non-strict punishment of Georgiou, who is now a pensioner of the IMF. What interests us is to prove his guilt and thereby to remove the injustice that has been committed against Greece through the false inflation of the public debt and deficit of 2009, and also prove the criminal involvement of the European Commission and Eurostat. This will only be done when the case is referred to an open court hearing, in which Eurostat and Georgiou will have to be present, in order to testify under oath whether or not they have falsely inflated the statistical figures of Greece, and the reasons for doing so.

I do not know when and if this will happen, and how many battles we have to give from now on in order to achieve this. Some tell us that there’s no point in continuing to fight, as it seems that with such a front of support for Georgiou by strong decision-making centers, the battle has already been won against us. We reply by saying that if we stop fighting, there will simply be no other battle — something we don’t want, because let’s not forget what Bertolt Brecht said once: “He who fights, can lose. He who doesn’t fight, has already lost.”

 

MPN: Looking at the situation in Greece today and the economic claims that are being made by the Greek government — that the country has returned to economic growth, that Greece has turned a corner — do you believe that the Greek statistical figures today are credible, or are they perhaps still being manipulated?

NL: Unfortunately, the statistical figures have already been exploited by any government in power so far in Greece. We have seen this happen with the alchemies of swaps in order to get into the Eurozone. By the way, I wish that we had never gotten into the Eurozone in the first place! Our economy was not in a position to handle such a strong and competitive currency. We saw another exploitation of the statistical figures, of the deficit, this time. They became the reason for an economic crisis of the past seven years.

I cannot say what is happening these days with the statistical figures, as I am not in ELSTAT. But we will find out sooner or later what is happening. The truth always comes out for any case of mishandling of statistical figures. We’ve seen this happen. But unfortunately, as long as there is no reliable team to correctly manage the handling of the statistical data in the Greek Statistical Authority, I’m afraid we should again expect irregularities and alchemies of the data.

 

 

Jun 042016
 


Walker Evans Street Scene, Vicksburg, Mississippi 1936

The Funniest BLS Jobs Report Ever (Quinn)
US Payrolls Huge Miss: Worst Since September 2010 (ZH)
This Financial Bubble Is 8 Times Bigger Than The 2008 Subprime Crisis (SM)
Lew Says China’s Overcapacity Skewing Markets (BBG)
UBS Tells Clients To Stick With Cash-Bleeding Hedge Funds (BBG)
Schroedinger’s Assets (Coppola)
Homes Should Be Lived In, Not Traded (G.)
EC Wants “Immunity” For EU Technocrats At Greek Privatization Fund (KTG)
Greek Banks Mulling Special NPL Vehicles (Kath.)
A Russian Warning (Dmitry Orlov et al)
20,000 Migrants Wait For Boats To Take Them To UK (DM)
At Least 117 Bodies Of Migrants Found After Boat Capsized Off Libya (AP)
Hundreds Rescued, At Least 9 Die In Shipwreck Off Crete (Kath.)

Is the narrative falling apart?

The Funniest BLS Jobs Report Ever (Quinn)

Only a captured government drone could put out a report showing only 38,000 new jobs created, with the working age population rising by 205,000, and have the balls to report the unemployment rate plunged from 5.0% to 4.7%, the lowest since August 2007. If you ever needed proof these worthless bureaucrats are nothing more than propaganda peddlers for the establishment, this report is it. The two previous months were revised significantly downward in the fine print of the press release. It is absolutely mind boggling that these government pond scum hacks can get away with reporting that 484,000 people who WERE unemployed last month are no longer unemployed this month.

Life is so fucking good in this country, they all just decided to kick back and leave the labor force. Maybe they all won the Powerball lottery. How many people do you know who can afford to just leave the workforce and live off their vast savings? In addition, 180,000 more Americans left the workforce, bringing the total to a record 94.7 million Americans not in the labor force. The corporate MSM will roll out the usual “experts” to blather about the retirement of Baby Boomers as the false narrative to deflect blame from Obama and his minions. The absolute absurdity of the data heaped upon the ignorant masses is clearly evident in the data over the last three months.

Here is government idiocracy at its finest:
• Number of working age Americans added since March – 406,000
• Number of employed Americans since March – NEGATIVE 290,000
• Number of Americans who have supposedly voluntarily left the workforce – 1,226,000
• Unemployment rate – FELL from 5.0% to 4.7%

Talk about perpetrating the BIG LIE. Goebbels and Bernays are smiling up from the fires of hell as their acolytes of propaganda have kicked it into hyper-drive. We only need the other 7.4 million “officially” unemployed Americans to leave the work force and we’ll have 0% unemployment. At the current pace we should be there by election time. I wonder if Cramer, Liesman, or any of the other CNBC mouthpieces for the establishment will point out that not one single full-time job has been added in 2016. There were 6,000 less full-time jobs in May than in January, while there are 572,000 more low paying, no benefits, part-time Obama service jobs. Sounds like a recovery to me.

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“..a massive surge in people not in the labor force..” We’re approaching negative employment.

US Payrolls Huge Miss: Worst Since September 2010 (ZH)

If anyone was “worried” about the Verizon strike taking away 35,000 jobs from the pro forma whisper number of 200,000 with consensus expecting 160,000 jobs, or worried about a rate hike by the Fed any time soon, you can sweep all worries away: moments ago the BLS reported that in May a paltry 38,000 jobs were added, a plunge from last month’s downward revised 123K (was 160K). The number was the lowest since September 2010! The household survey was just as bad, with only 26,000 jobs added in May, bringing the total to 151,030K. This happened as the number of unemployed tumbled from 7,920K to 7,436K driven by a massive surge in people not in the labor force which soared to a record 94,7 million, a monthly increase of over 600,000 workers.

As expected Verizon subtracted 35,000 workers however this was more than offset by a 36,000 drop in goods producing workers. Worse, there was no offsetting increase in temp workers (something we caution recently), and no growth in trade and transportation services. What is striking is that while the deteriorationg in mining employment continued (-10,000), and since reaching a peak in September 2014, mining has lost 207,000 jobs, for the first time the BLS acknowledged that the tech bubble has also burst, reporting that employment in information declined by 34,000 in May. The change in total nonfarm payroll employment for March was revised from +208,000 to +186,000, and the change for April was revised from +160,000 to +123,000.

With these revisions, employment gains in March and April combined were 59,000 less than previously reported. Over the past 3 months, job gains have averaged 116,000 per month. There is no way to spin this number as anything but atrocious.

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And growing..

This Financial Bubble Is 8 Times Bigger Than The 2008 Subprime Crisis (SM)

On July 1, 2005, the Chairman of then President George W. Bush’s Council of Economic Advisors told a reporter from CNBC that “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” His name was Ben Bernanke. And within a year he would become Chairman of the Federal Reserve. Of course, we now know that he was dead wrong. The housing market crashed and dragged the US economy with it. And Bernanke spent his entire tenure as Fed chairman dealing with the consequences. One of the chief culprits of this debacle was the collapse of the sub-prime bubble.

Banks had spent years making sweetheart home loans to just about anyone who wanted to borrow, including high risk ‘sub-prime’ borrowers who were often insolvent and had little prospect of honoring the terms of the loan. When the bubble got into full swing, lending practices were so out of control that banks routinely offered no-money-down mortgages to subprime borrowers. The deals got even sweeter, with banks making 102% and even 105% loans. In other words, they would loan the entire purchase price of a home plus closing costs, and then kick in a little bit extra for the borrower to put in his/her pocket. So basically these subprime home buyers were getting paid to borrow money.

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They know this already, Jack.

Lew Says China’s Overcapacity Skewing Markets (BBG)

The U.S. will push China to reduce excess capacity in its economy at upcoming talks in Beijing, with Treasury Secretary Jacob J. Lew calling it an “area of central concern” Friday in Seoul. The issue bears watching when “excess capacity is distorting markets and important global commodities,” Lew said in remarks to reporters ahead of the U.S.-China Strategic and Economic Dialogue, scheduled for June 6-7 in Beijing. China Vice Premier Wang Yang, State Councilor Yang Jiechi and U.S. Secretary of State John Kerry will attend the meeting along with Lew. A senior Treasury official told reporters China has made a commitment to take serious action to reduce excess capacity in areas like steel and aluminum.

It’s a tough transition, especially as millions of workers would have to find new jobs. However, if the actions aren’t taken, excess capacity will continue to erode China’s economic growth prospects, said the official, who asked not to be identified. Chinese authorities are cutting excess capacity in industries including coal and steel while striving to keep growth above their 6.5% minimum target for this year. The economy has endured four years of factory-gate deflation, though forecasters expect that to turn around. Producer prices will improve in each of the next four quarters and turn positive in 2018, according to economists surveyed by Bloomberg in April.

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At what fee for UBS?

UBS Tells Clients To Stick With Cash-Bleeding Hedge Funds (BBG)

UBS is advising its wealthiest clients to stick with hedge funds even after the $2.9 trillion industry had its worst start to a year since 2008. While the days of “double-digit and triple-digit returns” for hedge funds are over, they still generate enough to satisfy yield-hungry clients who face negative interest rates, said Mark Haefele, global CIO of UBS Wealth Management. “Their performance in the first half hasn’t been impressive but they provide diversification,” he said in an interview with Bloomberg. “They still provide a better risk-reward or different risk-reward than other parts like sovereign bonds.”

UBS in April boosted its recommended allocation to hedge funds to 20% from 18%, saying the strategy will provide stability from volatile markets. The move comes as a net $15 billion was pulled from the global hedge-fund industry in the the first quarter and as some of world’s largest institutions including MetLife said they will scale back their holdings. Hedge funds may lose about a quarter of their assets in the next year as performance slumps Blackstone’s billionaire president, Tony James, predicted last week. The HFRI Fund Weighted Composite Index declined 0.6% in the first quarter, its worst start to a year since 2008.

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The number of non-dead assets is much higher than we let on.

Schroedinger’s Assets (Coppola)

In a new paper, Michael Woodford has reimagined the famous “Schroedinger’s Cat” thought experiment. I suspect this is unintentional. But that’s what happens when, in an understandable quest for simplicity, you create binary decisions in a complex probability-based structure. Schroedinger imagined a cat locked in a box in which there is a phial of poison. The probability of the cat being dead when the box is opened is less than 100% (since some cats are tough). So if p is the probability of the cat being dead, 1-p is the probability of it being alive. The problem is that until the box is opened, we do not know if the cat is alive or dead. In Schroedinger’s universe of probabilities, the cat is both “alive” and “dead” until the box is opened, when one of the possible outcomes is crystallised. Now for “cat”, read assets. In Woodford’s model, when there is no crisis, the probability of asset collapse is zero. But if there is a crisis, the probability of an asset collapse is greater than zero but less than 100%:

“The sequence of events, and the set of alternative states that may be reached, within each period is indicated in Figure 1. In subperiod 1, a financial market is open in which bankers issue short-term safe liabilities and acquire risky durables, and households decide on the cash balances to hold for use by the shopper. In subperiod 2, information is revealed about the possibility that the durable goods purchased by the banks will prove to be valueless. With probability p, the no crisis state is reached, in which it is known with certainty that the no collapse in the value of the assets will occur, but with probability 1-p, a crisis state is reached, in which it is understood to be possible (though not yet certain) that the assets will prove to be worthless. Finally, in subperiod 3, the value of the risky durables is learned.”

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Close to my heart, but very incomplete in its argumentation.

Homes Should Be Lived In, Not Traded (G.)

The problem is twofold: the move to viewing houses as assets, a predictable investment that lets you turn a profit and offers more return on the pound than a pension, means there’s an incentive for wealthy buyers to invest in bricks and mortar without bothering with tenants. But also, as long as our economy gets sucked into a south-east vortex, more people will head to the capital for work, as the rest of the country struggles. George Osborne’s northern powerhouse claims to address this imbalance, twinned with the excruciatingly named “Midlands engine”. But with the announcement that 250 jobs in the very department responsible for rolling out the northern powerhouse are moving from Sheffield to London, that commitment looks as weak as the efforts to give it a catchy moniker.

As long as jobs fail to materialise in post-industrial towns, empty terraces will multiply. Conservative politicians have long opined that people seeking work should “get on their bike”, without stopping to observe that many do: hence the brain drain from the north and Wales, and the exponential demand for housing in the south-east England. Houses should be lived in, most people would agree: so the government’s move to criminalise squatting is key to understanding the problem of empty houses. Contrary to scare stories, people don’t pop out for a pint of milk and find that squatters have moved in to their home. Squatters often took up residence in vacant buildings, and used the houses for their intended purpose: living in.

Prosecuting squatters reasserts people’s right to treat homes as assets, not shelter. When it comes to empty houses, it’s the inequality stupid. The inequality that means some can buy multiple houses, while others cannot rent one. That sees London swallowing up wealth, jobs and land value hikes, while parts of the country grow desolate. There shouldn’t be empty homes while some people sleep on the streets, but the fact that so many lie empty should worry us: many houses aren’t homes, they’re investment vehicles, and long term, they scupper all our chances of financial and social security.

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Selling off a country in peace.

EC Wants “Immunity” For EU Technocrats At Greek Privatization Fund (KTG)

The European Commission directly intervened in the work of the Greek Justice and demanded that EU technocrats working at the Greek Privatization Fund enjoy “immunity.” The EC intervenes two days after corruption prosecutors in Athens raised charges against 3 Greeks and 3 EU-nationals of the HRADF for selling public assets thus causing losses of several millions of euro to the state. On Friday, EC spokesman Margaritis Schinas told reporters in Brussels that EU experts working in Greece under the Greek program, should enjoy some kind of ‘guarantee’. “For us, satisfactory operating margins should be guaranteed for all European experts assisting Greece to improve its economy and find its way back to growth,” Schinas said.

At the same time, he stressed that “there is full respect to judicial procedures” currently under way against 6 members of the old Privatization Fund.but the invervention was clear. Schinas did not elaborate on the Eurogroup request referring to immunity for EU technocrats who will work for the new Greek Privatization Fund. The EC intervention came right after the corruption prosecutors raised charges against 6 members of the TAIPED for the sale of 28 public assets. Three of those members are Greeks, the other three from Italy, Spain and Slovakia appointed by the Eurogroup. The six have been investigated for the period 2013-2014 and have been called to testify before corruption investigator Costas Sargiotis.

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Yeah, let’s create some more creativity.

Greek Banks Mulling Special NPL Vehicles (Kath.)

Greece’s core banks are considering the creation of special purpose companies which will receive large portfolios of nonperforming loans and then be sold so that they stop burdening the lenders’ financial figures, as NPLs now exceed €100 billion in total. The ECB is asking bank managers to proceed with tackling this huge matter at a speedier pace and to make brave decisions for the drastic slashing of bad loans from their finances. In this context, one of the plans being examined concerns the special vehicles to be created with NPL portfolios and sold off not to third parties but to the existing stakeholders of the banks.

This creation of what would resemble a “bad bank” for each lender would serve to immediately lighten the credit sector’s financial reports, while the transfer of those vehicles to the existing stakeholders could offer them future benefits from the active management of those bad loans. Nowadays the biggest obstacle to the sale of NPLs to third parties is the great distance between buyers and sellers. The buyers of bad loans want to acquire such portfolios at exceptionally low prices, due to the country risk, the devaluation of assets owing to the protracted recession in Greece, the inefficient legal system etc. On the other hand, the sellers – i.e. the banks – are refusing to sell at such low prices as they appear certain that among the current NPL stock that reaches up to 55 percent of all loans there is a huge volume of debts that could revert to normality with the right management.

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They are not kidding.

A Russian Warning (Dmitry Orlov et al)

We, the undersigned, are Russians living and working in the USA. We have been watching with increasing anxiety as the current US and NATO policies have set us on an extremely dangerous collision course with the Russian Federation, as well as with China. Many respected, patriotic Americans, such as Paul Craig Roberts, Stephen Cohen, Philip Giraldi, Ray McGovern and many others have been issuing warnings of a looming a Third World War. But their voices have been all but lost among the din of a mass media that is full of deceptive and inaccurate stories that characterize the Russian economy as being in shambles and the Russian military as weak—all based on no evidence. But we—knowing both Russian history and the current state of Russian society and the Russian military, cannot swallow these lies. We now feel that it is our duty, as Russians living in the US, to warn the American people that they are being lied to, and to tell them the truth.

And the truth is simply this: If there is going to be a war with Russia, then the United States will most certainly be destroyed, and most of us will end up dead. Let us take a step back and put what is happening in a historical context. Russia has suffered a great deal at the hands of foreign invaders, losing 22 million people in World War II. Most of the dead were civilians, because the country was invaded, and the Russians have vowed to never let such a disaster happen again. Each time Russia had been invaded, she emerged victorious. In 1812 Nepoleon invaded Russia; in 1814 Russian cavalry rode into Paris. On June 22, 1941, Hitler’s Luftwaffe bombed Kiev; On May 8, 1945, Soviet troops rolled into Berlin.

But times have changed since then. If Hitler were to attack Russia today, he would be dead 20 to 30 minutes later, his bunker reduced to glowing rubble by a strike from a Kalibr supersonic cruise missile launched from a small Russian navy ship somewhere in the Baltic Sea. The operational abilities of the new Russian military have been most persuasively demonstrated during the recent action against ISIS, Al Nusra and other foreign-funded terrorist groups operating in Syria. A long time ago Russia had to respond to provocations by fighting land battles on her own territory, then launching a counter-invasion; but this is no longer necessary. Russia’s new weapons make retaliation instant, undetectable, unstoppable and perfectly lethal.

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Be afraid! There’s only 60 million of you!

20,000 Migrants Wait For Boats To Take Them To UK (DM)

A file lying in the drawer of the manager’s office at a small French seaside hotel provides intriguing clues about the gangsters who smuggle migrants across the Channel to Britain. It contains the passport details of four shadowy men who booked in for a night to pull off an audacious crime by trafficking 30 Pakistanis and Albanians by sea into the UK. Gangs of people smugglers now operate along all 450 miles of the north French coast — from Calais on the Belgian border to Cherbourg and beyond — as 20,000 migrants wait to get to England for a new life. During the past week they have used small fishing vessels, private yachts and speedboats to slip migrants onto England’s South Coast beaches under cover of darkness.

Early last Sunday, 18 migrants were rescued in Dymchurch, a coastal village in Kent, after their rubber dinghy began to sink offshore. The same morning, eight migrants were rescued by a lifeboat in Portsmouth harbour as they floated adrift in a fishing boat. The determination of migrants and the greed of traffickers has not been diminished by the French government’s demolition in March of the ‘Jungle’ migrant camp in Calais, an unhygienic shanty town of 4,000. The migrants simply moved on — initially 30 or so miles away to Dunkirk, where thousands live in a camp near the port, paying traffickers to cross the Channel, and then spreading further along the coast.

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How many boats and bodies sink that we never hear about?

At Least 117 Bodies Of Migrants Found After Boat Capsized Off Libya (AP)

More than 110 bodies were found along a Libyan beach after a smuggling boat of mostly African migrants sank, while a separate search-and-rescue operation across the Mediterranean saved 340 people Friday and recovered nine bodies. The developments were the latest deadly disasters for refugees and migrants seeking a better life in Europe, and they followed the drownings of more than 1,000 people since May 25 while attempting the long and perilous journey from North Africa to southern Europe. As traffickers take advantage of improving weather, officials say it is impossible to know how many unseaworthy boats are being launched — and how many never reach their destination. Naval operations in the southern Mediterranean, co-ordinated by Italy, have been stretched just responding to the disasters they do hear about.

At least 117 bodies — 75 women, six children and 36 men — washed up on a beach or were pulled from the water near the western Libyan city of Zwara Thursday and Friday, Mohammed al-Mosrati, a spokesman for Libya’s Red Crescent, told The Associated Press. All but a few were from African countries. The death toll was expected to rise. The children were aged between 7 and 10, said Bahaa al-Kwash, a top media official in the Red Crescent. “It is very painful, and the numbers are very high,” he said, adding that the dead were not wearing life jackets — something the organization had noticed about bodies recovered in recent weeks. “This is a cross-border network of smugglers and traffickers, and there is a need for an international effort to combat this phenomenon,” he said.

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Crete is a somewhat novel destination.

Hundreds Rescued, At Least 9 Die In Shipwreck Off Crete (Kath.)

Hundreds of migrants were rescued on Friday after a smuggling boat sank in international waters south of Crete, while the Hellenic Coast Guard recovered the bodies of at least nine drowned migrants. The 25-meter vessel capsized in the early hours of Friday morning under circumstances that remained unclear, leaving hundreds of migrants in the sea, some 70 nautical miles south of Crete. According to the International Organization for Migration, around 700 migrants had been aboard the vessel. Five ships – cargo and commercial vessels – had been near the scene and offered assistance, rescuing scores of migrants. The Hellenic Coast Guard sent two vessels while the navy dispatched two Super Puma helicopters to scour the area.

By late Friday, 340 migrants had been rescued and the bodies of nine migrants pulled out of the sea by rescue workers. Another vessel capsized off the coast of Libya on Friday, leading to a larger death toll, with more than 100 bodies found in the sea. Meanwhile authorities on the islands of the eastern Aegean expressed concern as tensions are rising at detention centers and frequently escalating into brawls. The influx of migrants to the islands, which had all but stopped in recent weeks, following a deal between the European Union and Ankara to return migrants to Turkey, appears to have picked up again, unnerving authorities. A group of 120 migrants arrived on Chios Friday and another 25 on Lesvos.

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Jan 042016
 
 January 4, 2016  Posted by at 9:10 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


AP Refugee carries child in freezing waves off Lesbos 2016

China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)
China Factories Struggle As Weak Exports Drag Industry In Asia (Reuters)
China’s Tech Sector Likely Faces Tougher Sledding in 2016 (WSJ)
Obama Dollar Rally Is Forecast to Join Clinton, Reagan Upturns (BBG)
Global Stock Markets Overvalued And Unprepared For Return Of Risk (Telegraph)
Reserve Bank of Australia Index of Commodity Prices (RBA)
As Hedge Funds Go, So Goes The World (John Rubino)
Japan Central Bank Turns Activist Investor To Revive Economy (Reuters)
UK Set For Worst Wage Growth Since 1920s, 3rd Worst Since 1860s (Guardian)
UK High Street Retailers Feel The Pinch As Shoppers Stay At Home (Guardian)
Big Oil Faces Longest Period Of Investment Cuts In Decades (Reuters)
New EU Authority Budgets For 10 Bank Failures In Four Years (FT)
Fed’s Fischer Supports Higher Rates If Markets Overheat (BBG)
Cash Burning Up For Shipowners As Finance Runs Dry (FT)
The 20% World: The Odds Of The Unthinkable Are Going Up (BBG)
Greece Warns Creditors On ‘Unreasonable Demands’ Over Pensions (FT)
Sweden To Impose ID Checks On Travellers From Denmark (Guardian)
Refugees Hold Terrified, Frozen Children Above The Waves Off Lesbos (DM)

Great start to the year.

China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)

China halted trading in stocks, futures and options after a selloff triggered circuit breakers designed to limit swings in one of the world’s most volatile equity markets. Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7%, according to data compiled by Bloomberg. An earlier 15-minute halt at the 5% level failed to stop the retreat, with shares extending losses as soon as the market re-opened. The selloff, the worst-ever start to a year for Chinese shares, came on the first day the circuit breakers took effect. The $7.1 trillion stock market is starting the year on a down note after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders.

Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990. “Stay short, or go home,” said Mikey Hsia at Sunrise Brokers. “That’s all you can do.” The halts took effect as anticipated, without any technical issues, Hsia said. About 595 billion yuan ($89.9 billion) of shares changed hands on mainland exchanges before the suspension, versus a full-day average of about 1 trillion yuan over the past year, according to data compiled by Bloomberg.

Under the circuit breaker rules finalized last month, a move of 5% in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7% closes the market for the rest of the day. The CSI 300, comprised of large-capitalization companies listed in Shanghai and Shenzhen, fell as much as 7.02% before trading was suspended. Chinese shares listed in Hong Kong, where there is no circuit breaker, extended losses after the halt on mainland exchanges. The Hang Seng China Enterprises Index retreated 4.1% at 2:12 p.m. local time. “Investors are using Hong Kong to hedge their positions,” said Castor Pang at Core-Pacific Yamaichi. “The circuit breaker may increase selling pressure further.”

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China needs a big clean-up.

China Factories Struggle As Weak Exports Drag Industry In Asia (Reuters)

China’s factory activity shrank for a 10th straight month in December as surveys across Asia showed industry struggling with slack demand even as the policy cupboard is looking increasingly bare of fresh stimulus. Uncertainty over the economic outlook was exacerbated by a flare up in tensions between Saudi Arabia and Iran, that has sent investors scurrying from stocks to safe havens such as the Japanese yen. Japan’s Nikkei fell over 2% and Shanghai lost more than 3%. The Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) slipped to 48.2 in December, below market forecasts of 49.0 and down from November’s 48.6. That was the lowest reading since September and well below the 50-point level which demarcates contraction from expansion.

It followed a fractional increase in the official PMI to 49.7. There was a faint stirring of hope as PMIs in South Korea and Taiwan both edged above the 50 mark, though more thanks to a pick up in domestic demand than any revival in exports. Weighed down by weak demand at home and abroad, factory overcapacity and cooling investment, China is expected to post its weakest economic growth in 25 years in 2015, with the rate of expansion slipping to around 7% from 7.3% in 2014. “Absent vibrant external demand, we think it’s a consensus view that China’s GDP growth is poised to slow further to ‘about’ 6.5% in 2016,” ING said in a research note. The drag from industry comes as China makes gradual progress in its transformation to a more service-driven economy.

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Not so smart money: “More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014..”

China’s Tech Sector Likely Faces Tougher Sledding in 2016 (WSJ)

Investors who poured billions into China’s homegrown technology companies scored big during 2015. But increasingly it looks like the easy money has been made and this year could prove tougher as China’s tech companies face high expectations from investors. Many Chinese privately held startups rewarded investors, as valuations more than doubled during 2015 and a wave of management buyout offers buoyed investors in U.S.-listed Chinese tech companies. More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014 according to data from CB Insights and Dealogic. Investors marked up their holdings in Chinese privately held startups during the year even as they put lower price tags on some of their Silicon Valley investments.

Most investors aren’t required to publicly disclose their valuations of startup holdings, which are often valued based on their most recent round of fundraising. But mutual fund Fidelity Blue Chip Growth Fund, which has marked down some of its Silicon Valley startup investments, instead increased the value ascribed to its January investment in the $15 billion Chinese shopping app Meituan.com by more than 20% through the end of November. Investors have seen their bet on Chinese ride-hailing company Didi Kuaidi Joint Co. nearly triple from a $6 billion valuation in February to $16 billion in September.

The higher valuations and cash-burning of many startups are giving some investors pause. In recent months, some have become more cautious about putting fresh cash into big startups, as China’s rocky domestic stock market put local initial public offerings on hold. “The huge swings in the public markets have spilled over into the later-stage venture investment market,” says Richard Ji, founder of All-Stars Investment, an investor in Chinese startups like $46 billion smartphone maker Xiaomi Corp. and ride-sharing company Didi Kuaidi Joint Co. “Valuations overall have softened and companies are offering better terms to investors.”

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Smashing US exports, emerging and commodities currencies in the process.

Obama Dollar Rally Is Forecast to Join Clinton, Reagan Upturns (BBG)

The dollar has an opportunity to make history. After three straight years of gains, strategists are forecasting the U.S. currency will be a world beater again in 2016, strengthening against seven of 10 developed-world peers by the end of the year, according to the median estimate in a Bloomberg survey. That outlook is backed by the Federal Reserve’s stated intent to continue raising interest rates while peers in the rest of the world keep them flat or lower. The rally that started during President Barack Obama’s second term is poised to join a category defined by only the biggest, most durable periods of dollar strength since the currency’s peg to gold ended in 1971.

Of the two other rallies that share that distinction, during the terms of Presidents Ronald Reagan and Bill Clinton, neither stopped at four years. “This is the third big dollar rally we’ve had,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. “The Obama dollar rally, I think, is being fueled by the divergence in monetary policy.” The U.S. currency will end 2016 higher against its major counterparts except the Canadian dollar, British pound and the Norwegian krone, posting its biggest gains against the New Zealand and Australian dollars and the Swiss franc, according to forecasts compiled by Bloomberg.

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“UK shares have steadily risen for more than 70 months..”

Global Stock Markets Overvalued And Unprepared For Return Of Risk (Telegraph)

Investors face a rude awakening in 2016 as the return of risk brings an end to the era of unparalleled financial excess. Central bankers actions to save creditors by reducing borrowing costs to near zero created a Dorian Gray style economy that pursued returns without consequences. We are about to unveil the reality of those decisions after six years in a world devoid of financial responsibility.

[..] The realisation of losses is something that many in the cosseted world of investment will never have experienced. The collapse in high-yield bond prices is already causing paralysis. Third Avenue Management, a $800m high-yield mutual fund, was forced to halt redemptions in order to run down the fund in an orderly fashion as investors clamoured for the exit. The holders of certain bonds in Portuguese bank Novo Banco reacted with fury when they were informed they faced losses last week under a recapitalisation plan. The fact that an investor in the debt of a Portuguese bank is surprised that losses are even a possibility is laughable, if it wasn’t also deeply troubling. The return of risk will turn many of the investment decisions made during the past six years on their head.

Out will go unprofitable companies that relied on constant support from shareholders for stellar growth. In will come companies with solid profit track records that can generate enough cash to fund themselves. The lofty valuations in the technology sector are looking particularly exposed. When the world economy stumbled in 2008 it was only concerted action that pulled it back from the brink. The situation now is very different with the US pursuing monetary tightening, and China devaluing its currency to arrest the decline. Emerging markets have been crippled by a currency collapse and the drop in commodity prices has undermined the budgets of Canada, Norway, Australia, Venezuala and Saudi Arabia. The flow of funds out of developed Western equity markets is becoming alarming.

We enter 2016 as the bull run in the FTSE 100 is looking particularly long in the tooth. UK shares have steadily risen for more than 70 months. The goldilocks scenario of cheap debt and low wages is coming to and end and placing corporate profits under pressure. The Institute of Directors has already warned UK profits may be past their peak. This leaves investors in the FTSE 100 exposed with shares trading on 16 times forecast earnings, a premium to the long run average of 15. Even more worrying when you consider earnings have to increase by 14pc in 2016 to achieve that rating, if earnings remain flat in the year ahead the market is trading on more than 20 times earnings.

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Scary graph of the day.

Reserve Bank of Australia Index of Commodity Prices (RBA)

Preliminary estimates for December indicate that the index declined by 4.9% (on a monthly average basis) in SDR terms, after declining by 3.1% in November (revised). The decline was led by the prices of iron ore and oil. The base metals subindex declined slightly in the month while the rural subindex was little changed. In Australian dollar terms, the index declined by 6.0% in December. Over the past year, the index has fallen by 23.3% in SDR terms, led by declines in the prices of bulk commodities. The index has fallen by 17.1% in Australian dollar terms over the past year. Consistent with previous releases, preliminary estimates for iron ore, coking coal and thermal coal export prices are being used for the most recent months, based on market information. Using spot prices for these commodities, the index declined by 5.3% in December in SDR terms, to be 25.6% lower over the past year.

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John provides a slew of examples I have no space for here.

As Hedge Funds Go, So Goes The World (John Rubino)

How do you make money in a world where history is meaningless? The answer, for a growing number of big fund managers, is that you don’t. Hedge funds, generally the most aggressive species of money manager, do a lot of “black box” trading in which bets are placed on previously-identified patterns and relationships on the assumption that those patterns will repeat in the future. But with governments randomly buying stocks and bonds and bailing out/subsidizing everything in sight, old relationships are distorted and strategies that worked in the past begin to fail, as do the money managers who rely on them.

[..] Why should regular people care about the travails of the leveraged speculating community? Because these guys are generally considered to be the finance world’s best and brightest, and if they can’t figure out what’s going on, no one can. And if no one can, then risky assets are no longer worth the attendant stress. In response, a system that had previously embraced leverage and “alternative” asset classes will go risk-off in a heartbeat, and all those richly-priced growth stocks and trophy buildings and corporate bonds will find air pockets under their prices. And since pretty much everything else now depends on high asset prices, things will get ugly in the real world.

A case can be made that such a contagion is already underway but is being hidden from Americans by the recent strength of the dollar. According to Deutsche Bank, when measured in dollars the rest off the world is now deeply in recession and falling fast. In other words, Main Street is vulnerable to leveraged trading algorithms and Brazilian bonds because it’s not just exotica that is overleveraged. Virtually all governments have to refinance trillions of short-term debt each year. Corporations have borrowed record amounts of money in this expansion (and wasted much of it on share buy-backs). Pension funds (the last remaining leg of the middle-class stool for millions of Americans) are grossly underfunded and will have to slash benefits if their portfolios decline from here.

Risk-off, in short, is no longer just a temporary swing of the pendulum, guaranteed to reverse in a year or two. As amazing as this sounds, we’ve borrowed so much money that as hedge funds go, so goes the world.

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Desperation writ large.

Japan Central Bank Turns Activist Investor To Revive Economy (Reuters)

Japan’s central bank, which dominates the domestic bond market, has begun to call the shots in the equity market as well – to the point where asset managers are looking to design investment funds with the Bank of Japan in mind. The bank has blazed a trail in global central banking by becoming something of an activist investor in pursuit of economic revival, using its influence as a mainly indirect owner of shares to support firms that spend more cash at home. The bank, which owns about $54 billion in exchange-traded funds (ETFs), is ramping up its purchases but has yet to give any detailed investment criteria, beyond a preference for firms with growing capital expenditure and investment in its staff.

“We’re willing and considering to add such a product,” said Kohei Sasaki at Mitsubishi UFJ Kokusai Asset Management. “We’ve already contacted index vendors on this matter.” Bank of Japan Governor Haruhiko Kuroda and Prime Minister Shinzo Abe have been calling on companies to raise capital expenditure and wages to spur the economy, after repeated monetary and fiscal stimulus over the past three years failed to lift it out of a funk of weak consumption and deflation. So far, their pleas have failed to prod companies into action, despite many of them making record profits on the back of the central bank’s zero interest rates and a weak yen.

Losing patience, Kuroda said last month the bank would buy 300 billion yen ($2.5 billion) a year of ETFs, in addition to 3 trillion yen it already assigns each year to ETFs. It said the extra purchases would target funds whose underlying firms were “proactively making investment in physical and human capital”. Though he did not go into detail, the comment was an invitation for asset managers and index compilers to come up with some “Abenomics” ETFs which would be full of listed firms doing their bit to revive consumption and the broader economy. “We’ve already started trying to develop some kind of solution to the demand,” said Seiichiro Uchi, managing director for index compiler MSCI in Tokyo.

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This is a policy thing, not some freak accident.

UK Set For Worst Wage Growth Since 1920s, 3rd Worst Since 1860s (Guardian)

The 10 years between 2010 and 2020 are set to be the worst decade for pay growth in almost a century, and the third worst since the 1860s, according to new research. Research from the House of Commons Library shows that real-terms wage growth is forecast by the Office for Budget Responsibility to average at just 6.2% in this decade, compared with 12.7% between 2000 and 2010. The figures show that real-terms wage growth was lower only in the decades between 1920 and 1930 and between 1900 and 1910. Wage growth averaged at 1.5% in the 1920s and at 1.8% in the 1900s. Owen Smith, shadow work and pensions secretary, who commissioned the research, said that a “Tory decade of low pay” would see “workers’ pay packets squeezed to breaking point”.

“Even with this year’s increase in the minimum wage, the Tories will have overseen the slowest pay growth in a century and the third slowest since the 1860s,” he said. George Osborne has justified cuts to in-work benefits by arguing that the government is transitioning the UK from being “a low-wage, high-welfare economy to a high-wage, low-welfare economy”, a claim that Smith said was contradicted by wage-growth figures. In the autumn statement, the chancellor abandoned plans to cut £4bn from working tax credits, under pressure from the opposition and many backbench Tory MPs. However, Labour has pointed out there will be cuts to in-work benefit payments for new claimants put on the new universal credit system – championed by the work and pensions secretary, Iain Duncan Smith – which rolls at least six different benefits into one.

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Reasons given: weather and terrorism. Couldn’t be lack of spending money, could it?

UK High Street Retailers Feel The Pinch As Shoppers Stay At Home (Guardian)

Record-breaking discounts on offer in the post-Christmas sales have so far failed to attract a rush of bargain hunters to the high street, raising fears that Marks and Spencer, John Lewis and Next will be forced to report disappointing trading figures for the festive period. The number of high street shoppers from Monday 28 December to Friday 1 January was down 3% compared with the same period in 2014, according to research firm Springboard. A year ago, retailers had been celebrating a jump of 6.2%. Retail experts had predicted a stampede to the shops on Boxing day after retailers offered discounts topping last year’s average of more than 50%. They are desperate to clear cold-weather clothing that has remained on the shelves during record mild weather.

While Boxing Day had offered some hope of a pick-up in trade, the following week – which included a bank holiday – was poor. Shopper behaviour differed markedly in different parts of the country, with footfall down by almost 7% in Wales and by 5.8% in the West Midlands, but up in Scotland and the east of England by 11.3% and 4.5% respectively. In London and the south-east, the affluent engine of consumer spending, numbers were also in decline, dropping 4.5% and 3.3% respectively. But Springboard figures showed that some of this trade appeared to have migrated to shopping centres, where numbers were up 3.3% in Greater London and ahead by 8.8% in the south-east. As well as unexpectedly mild weather leaving little demand for winter clothing stock, shoppers are also thought to have been put off venturing out by heavy rainstorms and concerns about potential terrorist attacks.

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Will M&A’s be 2016 story?

Big Oil Faces Longest Period Of Investment Cuts In Decades (Reuters)

With crude prices at 11-year lows, the world’s biggest oil and gas producers are facing their longest period of investment cuts in decades, but are expected to borrow more to preserve the dividends demanded by investors. At around $37 a barrel, crude prices are well below the $60 firms such as Total, Statoil and BP need to balance their books, a level that has already been sharply reduced over the past 18 months. International oil companies are once again being forced to cut spending, sell assets, shed jobs and delay projects as the oil slump shows no sign of recovery. U.S. producers Chevron and ConocoPhillips have published plans to slash their 2016 budgets by a quarter. Shell has also announced a further $5 billion in spending cuts if its planned takeover of BG Group goes ahead.

Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22% fall to $595 billion in 2015, according to the Oslo-based consultancy Rystad Energy. “This will be the first time since the 1986 oil price downturn that we see two consecutive years of a decline in investments,” Bjoernar Tonhaugen, vice president of oil and gas markets at Rystad Energy, told Reuters. The activities that survive will be those that offer the best returns. But with the sector’s debt to equity ratio at a relatively low level of around 20% or below, industry sources say companies will take on even more borrowing to cover the shortfall in revenue in order to protect the level of dividend payouts.

Shell has not cut its dividend since 1945, a tradition its present management is not keen to break. The rest of the sector is also averse to reducing payouts to shareholders, which include the world’s biggest investment and pension funds, for fear investors might take flight. Exxon Mobil and Chevron benefit from the lowest debt ratios among the oil majors while Statoil and Repsol have the highest debt burden, according to Jefferies analyst Jason Gammel.

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Amounts look utterly useless.

New EU Authority Budgets For 10 Bank Failures In Four Years (FT)

The new EU authority that took over the job of winding up failing banks on January 1 has budgeted enough money to wind up 10 banks over the next four years, a tender sent to financial services firms shows. The tender, seen by the Financial Times, says the Single Resolution Board (SRB) is seeking €40m in “accounting advice, economic and financial valuation services and legal advice” to be used in the resolution of struggling eurozone banks from 2016-2020. Industry sources said such advice would cost between €4m and €5m per large case, so the SRB will be able to resolve eight to 10 banks. A spokeswoman for the SRB confirmed the tender’s details, but said the budget should not be interpreted as firm prediction of the number of banks the authority expects to resolve over the coming years.

“The SRB has made a reasonable estimation of the amount,” she said. “This estimation can be negotiated and adjusted.” In the aftermath of the 2008 financial crisis, which saw a series of chaotic and inconsistent collapses, eurozone leaders hammered out a complex protocol for handling bank failures. The goal is to be able to wind up even one of the region’s biggest banks over a single weekend under the guiding arm of the Brussels-based SRB and national resolution authorities. The authority is chaired by Elke König, a former president of the German regulator BaFin.

Many industry insiders and policy watchers are sceptical about whether an orderly wind-down in such a tight timeframe is really possible, especially in cases as complicated as the implosion of the Greek and Cypriot banking systems. As such, the first case the SRB handles will be closely watched. The SRB wants to have the best advice money can buy. The tender, which has not yet been awarded, is only open to large international firms; those offering accountancy or valuation advice must have annual sales of at least €5m the last three years, those offering legal advice must have at least €10m.

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Yeah. What are the odds? Which markets? China’s?

Fed’s Fischer Supports Higher Rates If Markets Overheat (BBG)

Federal Reserve Vice Chairman Stanley Fischer said it might be necessary for the central bank to increase interest rates if financial markets were overheating, though the first line of defense should be using regulatory tools to prevent bubbles from developing. “If asset prices across the economy – that is, taking all financial markets into account – are thought to be excessively high, raising the interest rate may be the appropriate step,” Fischer said in a speech at the annual American Economic Association meeting in San Francisco on Sunday. He suggested that might be particularly true in the U.S., where many of the so-called macro-prudential regulatory tools to tackle financial market excesses are either lacking or untested. Such tools would include, for example, adjusting lending rules to try to rein in borrowing.

Fischer did make clear that he thought “macro-prudential tools, rather than adjustments in short-term interest rates, should be the first line of defense” in tackling asset bubbles, while spelling out that “the real issue of whether adjustments in interest rates should be used to deal with problems of potential financial instability is macroeconomic.” Fischer didn’t address the current state of financial markets, although other policy makers, including Fed Chair Janet Yellen, have indicated that they do not see them, on the whole, as being overheated. Fischer was among three Fed policy makers who made public remarks at the AEA meeting on Sunday. San Francisco Fed President John Williams discussed estimates of long-run neutral rates, while Cleveland’s Loretta Mester delivered her outlook for the U.S. economy and explained why the Fed would not react to short-term swings in economic data.

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Baltic Drier.

Cash Burning Up For Shipowners As Finance Runs Dry (FT)

During stumbles in the market for shipping dry bulk commodities since the financial crisis, DryShips — the listed vehicle of George Economou, one of the industry’s best-known figures — has proved adept at dodging trouble. Diversification into owning oil-drilling rigs — through Ocean Rig, in which DryShips now holds only a minority stake — proved robustly profitable when oil prices were high. The company also diversified into oil tankers. However, slumps in earnings for dry bulk carriers and in oil prices have left the company scrabbling to stay afloat. On December 7, it announced an $820m loss for the third quarter after it was forced to take a $797m write-off for the value of its entire remaining fleet of dry bulk vessels, many of which it has been selling off. In October, the company announced that it was borrowing $60m from an entity controlled by Mr Economou.

The challenges facing DryShips are among the most acute of those facing nearly all dry bulk shipping companies after a slump in earnings drove most owners’ revenues well below their operating costs. Owners are haemorrhaging cash. Owners of Capesize ships — the largest kind — currently bring in around $3,000 a day less than the $8,000 they cost to operate. The losses for the many owners who have to service debts secured against vessels are far higher. Basil Karatzas, a New York-based corporate finance adviser, points out that in an industry that has already been making steady losses for 18 months, such substantial losses quickly mount up. “If you have 10 ships and you’re losing $3,000 to $4,000 per day per ship, that’s, let’s say, $40,000 per day, times 30 in a month, times 12 in a year,” he says. “You are losing some very serious money.” The question is how long dry bulk owners — and the private equity firms which have invested heavily in the companies — can survive the miserable market conditions.

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Odd take, but amusing.

The 20% World: The Odds Of The Unthinkable Are Going Up (BBG)

If you want to pick a number for 2016, how about 20%? Look around the politics of the Western world, and you’ll see that a lot of once-unthinkable ideas and fringe candidates suddenly have a genuine chance of succeeding. The odds are usually somewhere around one in five – not probable, but possible. This “20% world” is going to set the tone in democracies on both sides of the Atlantic – not least because, as anybody who bets on horse racing will tell you, eventually one of these longshots is going to canter home. Start with President Donald Trump. Gamblers, who have been much better at predicting political results than pollsters, currently put the odds of the hard-to-pin-down-but-generally-right-wing billionaire reaching the White House at around 6-1, or 17%.

Interestingly, those are roughly the same odds as the ones offered on Jeremy Corbyn, the most left-wing leader of the Labour Party for a generation, becoming the next British prime minister. In France, gamblers put the likelihood of Marine Le Pen winning France’s presidency in 2017 at closer to 25%, partly because the right-wing populist stands an extremely good chance of reaching the runoff. Geert Wilders, another right-wing populist previously described as “fringe,” perhaps stands a similar chance of becoming the next Dutch prime minister. Other once-unthinkable possibilities could rapidly become realities. America’s version of Corbyn, Bernie Sanders, whom Trump recently described as a “wacko,” is currently trading around 5%, no worse than Jeb Bush.

Plus, Sanders has assembled the sort of Corbynite coalition of students, pensioners and public-sector workers that tends to outperform in primaries. If Hillary Clinton stumbles into another scandal, the Democrats could yet find themselves with a socialist contending for the national ticket. And it’s not just “wacko” candidates; some unthinkable events are also distinctly possible. This year, perhaps as early as June, Britain may vote to leave the European Union. Bookmakers still expect the country to go for the status quo, though most pundits are less certain about this than they were about the Scottish referendum in 2014, which turned out to be an uncomfortably close race for the British establishment.

Investors are used to the political world serving up surprises. These surprises, however, have usually involved one mainstream party doing much better or worse than expected – and things continuing as normal. Not this time. With Trump in charge, America would have a wall along the Rio Grande and could well be stuck in a trade war with China. Le Pen wants to take France out of the euro and renegotiate France’s membership in the EU. It’s hard to tell what would do more damage to the City of London: a Brexit that could lead to thousands of banking jobs moving to the continent; or a Corbyn premiership, which could include a maximum wage and the renationalization of Britain’s banks, railways and energy companies.

Moreover, in the 20% world, some nasty possibilities make others more likely. If Britain leaves the European Union, Scotland (which, unlike England, would probably have voted to stay in) might in turn try to leave Britain. If Le Pen manages to pull France out of the euro, the union’s chances of dissolution increase. And you can only guess what a President Trump would do to U.S. relations with Latin America and the Muslim world.

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How much longer for Tsipras?

Greece Warns Creditors On ‘Unreasonable Demands’ Over Pensions (FT)

Greek Prime Minister Alexis Tsipras has said his government “will not succumb to unreasonable demands” as it prepares to send the country’s creditors proposals on crucial reforms to the pension system this week. “The creditors have to know that we are going to respect the agreement,” Mr Tsipras said in an interview with Real News newspaper on Sunday, referring to reforms demanded in exchange for Greece’s €86bn bailout agreement last year. However, he pledged that Greece “won’t succumb to unreasonable and unfair demands” for more pension cuts. Mr Tsipras said that Greece will reform its pension system through measures targeting additional proceeds of about €600m in 2016, adding that “we have no commitment to find the money exclusively from pension cuts”.

On the contrary, “the agreement provides the option of equivalent measures”, he said, admitting however, that the pension system is “on the brink of collapse” and needs to be overhauled. Greece’s proposals are due to be sent to the creditors via email on Monday. The aim is to reach an agreement when the representatives of the creditors return to Athens later in January. The proposals include increases in employer insurance contributions by 1% and employee contributions by 0.5%. Taxes on banking transactions may also be introduced to secure the targeted €600m and avoid any further cuts. But creditors have indicated that further pension cuts are inevitable.

They have already expressed their scepticism about increasing the contributions paid by employers and workers, stressing the potential wider economic impact on struggling businesses. Mr Tsipras’s comments were echoed by the finance minister Euclid Tsakalotos, who warned of forthcoming difficulties in negotiations with creditors. “There will be victories and defeats,” he said in an interview with Kathimerini newspaper. The government is rushing to finalise and submit the new pension bill to parliament for voting by January 15 so that the first review of the bailout package can be completed and discussion on debt relief can begin. Mr Tsipras’ governing majority is expected to be sorely tested by any pension reform legislation. The government’s majority has slid from 155 seats to 153, only two seats from the required minimum.

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How much longer for the EU?

Sweden To Impose ID Checks On Travellers From Denmark (Guardian)

Sweden is set to drastically reduce the flow of refugees into the country by imposing strict identity checks on all travellers from Denmark, as Scandinavian countries compete with each other to shed their reputations as havens for asylum seekers. For the first time since the 50s, from midnight on Sunday travellers by train, bus or boat will need to present a valid photo ID, such as a passport, to enter Sweden from its southern neighbour, with penalties for travel operators who fail to impose checks. Passengers who fail to present a satisfactory document will be turned back.

“The government now considers that the current situation, with a large number of people entering the country in a relatively short time, poses a serious threat to public order and national security,” the government said in a statement accompanying legislation enabling the border controls to take place. The move marks a turning point for the Swedish ruling coalition of Social Democrats and Greens, which earlier presented itself as a beacon to people fleeing conflict and terror in Asia and the Middle East. “My Europe takes in people fleeing from war, my Europe does not build walls,” Swedish prime minister Stefan Löfven told crowds in Stockholm on 6 September. But three months and about 80,000 asylum seekers later, the migration minister told parliament: “The system cannot cope.”

[..] Critics of Sweden’s refugee crackdown fear it will cause a “domino effect” as countries compete to outdo each other in their hostility to asylum seekers. “Traditionally, Sweden has been connected to humanitarian values, and we are very worried that the signals Sweden is sending out are that we are not that kind of country any more,” said Anna Carlstedt, president of the Red Cross in Sweden, whose staff and volunteers have often been the first line of support for new arrivals in the country. Other Scandinavian countries have recently announced their intention to stem the flow of refugees. In his new year address, Denmark’s liberal PM Lars Løkke Rasmussen said the country was prepared to impose similar controls on its border with Germany, if the Swedish passport checks left large numbers of asylum seekers stranded in Denmark.

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The shame deepens still.

Refugees Hold Terrified, Frozen Children Above The Waves Off Lesbos (DM)

Parents were forced to hold their children above freezing January waves as they struggled to reach shore on the Greek island of Lesbos on Sunday. The group of migrants and refugees were helped to disembark by volunteers, although several were forced to wade to the beach after falling overboard. Photographs show one father struggling to reach shore as he tried to hold his tiny, terrified daughter above the waves. Another image shows a group gathered around a woman in tears, while in another photograph, a little girl cries as she sits wrapped in a giant, silver thermal blanket after the harrowing crossing from Turkey. Once on shore, the group were handed thermal blankets stamped with the logo of the UNHCR as they sat on the beach near the town of Mytilene.

It comes the day after charity workers created a giant peace sign out of thousands of life-jackets on the hills of the Greek island, in honour of those who have died while making the perilous crossing in the hope of reaching Europe. The onset of winter and rougher sea conditions do not appear to have deterred the asylum-seekers, with boats still arriving on the Greek islands daily. Elsewhere, Turkish coastguards rescued a group of 57 migrants and refugees, including children, after they were left stranded on a rocky islet in the Aegean Sea. The group was trying to reach Greece by making the perilous journey across the sea, but they hit trouble after leaving the Turkish resort of Dikili, in Izmir province.

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Dec 192015
 
 December 19, 2015  Posted by at 9:46 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle December 19 2015


John Vachon Auto of migrant fruit worker at gas station, Sturgeon Bay, Wisconsin Jul 1940

Rate Rally Fizzles as Dow Loses 621 Points in 2 Days (WSJ)
Explaining Today’s “Massive Stop Loss” Quad-Witching Market Waterfall (ZH)
Hedge Funds Cut Fees To Stem Client Exodus (FT)
History of Junk Bond Meltdowns Points to Trouble (BBG)
IEA Sees ‘Peak Coal’ As Demand For Fossil Fuel Crumbles In China (AEP)
Congress Slips Controversial CISA Law In With Sure-To-Pass Budget Bill (Wired)
US-Mexico Border: Arizona’s Open Door (FT)
Bundesbank’s Weidmann: Greek Debt Relief Is Not Urgent (Kath.)
Iceland Bank Collapse Nears End as Creditors Reach Last Accord (BBG)
Ukraine Debt Default and EU Sanctions Extension Anger Russia (IT)
Merkel Defends Russian Gas Pipeline Plan (WSJ)
The Unraveling Of The European Union Has Begun (MarketWatch)
‘Cameron’s Battle Against EU Is Like Grappling With A Jellyfish’ (RT)
‘Cancer of Europe’ – Russian Duma Speaker Calls For NATO Dissolution (RT)
135 Jobs In 2.5 Years: The Plight Of Spain’s New Working Poor (Guardian)
One Of Every 122 Humans Today Has Been Forced To Flee Their Home (WaPo)

The Dow doesn’t often lose over 2% in a day. “..on pace for its first negative year since 2008.”

Rate Rally Fizzles as Dow Loses 621 Points in 2 Days (WSJ)

In the two days after the Federal Reserve gave investors exactly what they expected, the Dow Jones Industrial Average posted its steepest loss since a late-August plunge. The back-to-back selloff erased 621 points from the blue chips—sending the Dow to its lowest level in two months and wiping out a three-session winning streak logged around the Fed’s liftoff for interest rates. The fizzled rally underscores the difficult backdrop across markets as investors prepare to close out what is shaping up to be worst year for U.S. stocks since the financial crisis. Investors are going into the holidays with grim news from the energy and mining sectors, uncertainty about the stability of markets for low-rated debt and worries about slowing economies overseas.

Meanwhile, public companies have struggled to post higher profits, and investors remain wary of buying stocks that look expensive compared with historical averages. “When you buy a share of stock you’re paying for a piece of future cash flows,” said David Lebovitz, global market strategist, at J.P. Morgan Asset Management, which has about $1.7 trillion under management. “If those cash flows aren’t materializing, it doesn’t make sense.” Investors had taken heart from stronger jobs data and the Fed’s signal that the U.S. economy is strong enough to begin returning rates to a more normal level. But optimism took a back seat at the end of the week. The Dow fell 367.29, or 2.1%, to 17128.55 on Friday, leaving it with a loss of 0.8% for the week. The index is down 3.9% so far in 2015, on pace for its first negative year since 2008.

The S&P 500 fell 1.8% to 2005.55. It ended the week down 2.6% for 2015, on track for first yearly decline since 2011 and its biggest fall since 2008. Both indexes had rallied broadly over the past six years, in part fueled by record-low interest rates. Weaker stocks and crude oil prices Friday added to demand for safe havens, sending investors into Treasurys. The yield on the benchmark 10-year Treasury note fell to 2.197% late Friday from 2.236% Thursday, as investors bid up the price. Yields on the note now aren’t much above where they started the year. “Shorting Treasury bonds which are a safe haven beneficiary when the economic and geopolitical risks are rising is foolhardy,’’ said Jonathan Lewis at Samson Capital Advisors.

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They kept the S&P500 neatly just above 2000, for a reason.

Explaining Today’s “Massive Stop Loss” Quad-Witching Market Waterfall (ZH)

One week ago, and again last night, we previewed today’s main event: an immensely important quad-witching expiration, the year’s last, one which as JPM’s head quant calculated will be the “largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050.” What is most important, is that the “pin risk”, or price toward which underlying prices may gravitate if HFTs are unleashed to trigger option stop hunts, is well below current S&P levels: as JPM notes, “clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market.”

What does this mean? Considering that the bulk of the puts have been layered by the program traders themselves, including CTA trend-followers and various momentum strategist (which work in up markets as well as down), and since the vol surface of today’s market is well-known to everyone in advance, there is a very high probability the implied “stop loss” level will be triggered. Not helping matters will be the dramatic lack of market depth (thank you HFTs and regulators) and overall lack of liquidity, which means even small orders can snowball into dramatic market moves. “While equity volumes look robust, market depth has declined by more than 60% over the last 2 years. With market depth so low, the market does not have capacity to absorb large shocks. This was best illustrated during the August 24th crash.”

[..] the problem is that since over the past 7 years, the entire market has become one giant stop hunt, the very algos which “provide liquidity” will do everything they can to inflict the biggest pain possible to option holders – recall that for every put (or call) buyer, there is also a seller. As such, illiquid markets plus algo liquidity providers makes for an explosive cocktail at a time when the Fed is already worried whether the Fed may have engaged in “policy error.” So what does this mean in simple English? As Reuters again points out, levels to watch are the large imbalances in favor of puts in Dec SPX put contracts at 2050, 2000, 1950, 1900 strikes It further writes that “as SPX moves below these levels market makers who are short these puts would be forced to sell spot futures to hedge, which could exacerbate a market selloff.” In other words, selling which begets even more selling, which begets even more selling.

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They might as well close then.

Hedge Funds Cut Fees To Stem Client Exodus (FT)

Many hedge funds are cutting fees and negotiating with investors to trim some of their hefty costs and avert withdrawals after another mediocre year for returns. The industry has been shifting for several years away from its traditional model of charging 2% of assets and keeping 20% of profit. Some funds are already wooing customers with fees closer to 1% and 15%, people in the industry say. Now pressures are mounting on a wider range of fund managers, as a crowded sector copes with a middling year. The HFRI Fund Weighted Composite index is up 0.3% on the year and returned just under 3% in 2014, according to Hedge Fund Research. Management fees declined this year in every strategy except event driven, falling to a mean of 1.61% from 1.69%, according to JPMorgan’s Capital Introduction Group.

For performance fees, some strategies were impacted more than others, with the biggest declines in global macro, multi-strategy, commodity trading advisers and relative value. When Sir Chris Hohn founded The Children’s Investment Fund about a decade ago, he was an outlier. His $10bn fund charges management fees as low as 1%, depending on how long investors lock up their money. He recently referred to himself as “the antithesis of the classic hedge fund,” because he waived performance fees until the fund crossed a set return hurdle for the year. But others are following his lead in an effort to attract and retain clients amid tough competition.

There are now more than 10,000 hedge funds compared with 610 in 1990, HFR data show, and there are increasing benefits for the larger operators, including lower prime broker costs and better access to company management for research. The client base has also moved away from wealthy individuals, who were happy to take on significant risk in exchange for high returns. Now funds depend on institutional investors such as insurers and pension schemes, who cannot afford to miss minimum return targets and are themselves under pressure from boards that oversee investments. “Most [fund] managers prefer to haggle like rug-salesmen at a bazaar; institutional investors would rather shop at Ikea,” says Simon Ruddick, founder of consultant Albourne.

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Nothing new, but nothing learned either.

History of Junk Bond Meltdowns Points to Trouble (BBG)

The rout in junk bonds is intensifying and there’s blood in the water. After claiming some high-profile casualties – notably Third Avenue Management – the turmoil is raising fears of a larger meltdown in the markets, perhaps even a recession. In other words, is high-yield debt the canary in the credit mine? Academic work on the subject suggests that the difference in the rates for high-risk debt and rock-solid government securities – the so-called risk premium, or high-yield spread – often is a significant harbinger. A paper published in the Oxford Review of Economic Policy in 1999 concluded that the high-yield spread “outperforms other leading financial indicators,” such as the term spread and the federal funds rate. An International Monetary Fund staff paper published in 2003 offered a similar assessment, but added that “abnormally high levels of the high-yield spread have significant short-term predictive power.”

The trouble with these findings is that the pool of data is focused on very recent financial history, which makes it harder to draw broad conclusions. This limitation reflects the conventional wisdom that junk bonds are a recent invention cooked up by the likes of Michael Milken and company, and as a consequence, there are no comparable data sets before the late 1980s. But several economists at Rutgers – Peter Basile, John Landon-Lane and Hugh Rockoff – recently disputed that conclusion in an intriguing working paper that resurrected neglected data on high-yield securities from 1910 to 1955. These forerunners of today’s junk bonds initially merited Aaa or Baa ratings, but lost their appeal once they were downgraded to Ba or worse. Such speculative-grade bonds constituted, on average, approximately a quarter of the total book value of outstanding bonds before the end of World War II.

The authors of the study argue that although other kinds of spreads also have predictive power, “junk bonds may be a more sensitive indicator, perhaps a more sensitive leading indicator, of economic conditions than higher-grade bonds.” While their research opens all sorts of avenues for academic exploration – Was there a decline in lending standards in the late 1920s? Was there a liquidity trap in the late 1930s? – the most intriguing question it raises is about the predictive power of the spread between high-yield and high-quality debt. In theory, this power to predict turning points in the business cycle could manifest in two ways. The first would be a narrowing of the spread, which would mean that investors recognized the worst was over, a trough was imminent and a rebound was in offing. The second would be a spike in the spread, which means that investors anticipated that the economy had peaked and that a contraction was in the offing.

The authors found that a narrowing of the high-yield spread predicted a mere three of 10 troughs. But spikes were another matter: Exceptional bumps in the high-yield spread accurately predicted eight of 10 peaks (and the subsequent declines, most notably the downturn that began in August 1929 and turned into the Great Depression, as well as the recession that began in 1937 after the Fed prematurely hiked rates). It may be too early to read too much into these findings. But when combined with the research on the predictive capacity of the high-yield spread from the 1980s onward, this recent work suggests that the spread is a leading indicator worth watching.

And given the recent spike, something far worse than a junk bond meltdown may be brewing. How bad? In the three months before August 1929, the high-yield spread spiked by 47 basis points, and in the three months before May 1937, it shot up 85 basis points. In the past six weeks of 2015, it has spiked by about 120 basis points. That doesn’t mean we’re headed for disaster: There’s still an apples-and-oranges quality to comparisons of the two eras, despite the best efforts to create a commensurate set of data. But if the spread continues to widen, another downturn – or worse – could be ahead.

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Ambrose is blind: “Crucially, the switch is happening because the country is moving up the technology ladder and switching to a new growth model. ” No, coal use is tumbling because the Chinese economy is.

IEA Sees ‘Peak Coal’ As Demand For Fossil Fuel Crumbles In China (AEP)

China’s coal consumption has been falling for two years and may never recover as the moment of “peak coal” draws closer, the International Energy Agency (IEA) has said. The energy watchdog has slashed its 2020 forecast for global coal demand by 500m tonnes, warning that the industry risks unstoppable decline as renewable technologies and tougher climate laws shatter previous assumptions. In poignant symbolism, the peak coal report came as miners worked their final shift at Britain’s last surviving deep coal mine at Kellingley in North Yorkshire, closing the chapter on the British industrial revolution. Mines around the world are at increasing risk as prices slump to 12-year lows of $38 a tonne, and the super-cycle gives way to a pervasive glut. The IEA said the $40bn Galilee Basin project in Australia may never become operational.

There is simply not enough demand, even for cheap, open-cast coal. “The golden age of coal seems to be over,” said the IEA’s medium-term market report. “Given the dramatic fall in the cost of solar and wind generation and the stronger climate policies that are anticipated, the question is whether coal prices will ever recover.” “The coal industry is facing huge pressures, and the main reason is China,” said Fatih Birol, the agency’s director. The IEA reported that China’s coal demand fell by 2.9pc in 2014 and the slide has accelerated this year as the steel and cement bubble bursts. The country produced more cement between 2011 and 2013 than the US in the entire 20th century, according to one study. This will never happen again. Crucially, the switch is happening because the country is moving up the technology ladder and switching to a new growth model.

The link between electricity use and economic growth has completely broken down. The “energy intensity” of GDP fell by 4pc in 2014. Mr Birol said China’s coal consumption is likely to flatten out until 2020 before declining, but the definitive tipping point could happen much faster if president Xi Jinping carries out his economic reform drive with real vigour. Coal demand will drop by 9.8pc under the agency’s “peak coal scenario”. The shift is dramatic. China’s coal demand has tripled since 2000 to 3.920m tonnes – half of global consumption – and the big mining companies had assumed that it would continue. The market is now badly out of kilter. Rising demand from India under its electrification drive will not be enough to soak up excess supply or replace the lost demand from China.

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“They’ve got this bill that’s kicked around for years and had been too controversial to pass, so they’ve seen an opportunity to push it through without debate. And they’re taking that opportunity.”

Congress Slips Controversial CISA Law In With Sure-To-Pass Budget Bill (Wired)

Update 12/18/2015 12pm: The House and Senate have now passed the omnibus bill, including the new version of CISA.

Privacy advocates were aghast in October when the Senate passed the Cybersecurity Information Sharing Act by a vote of 74 to 21, leaving intact portions of the law they say make it more amenable to surveillance than actual security. Now, as CISA gets closer to the President’s desk, those privacy critics argue that Congress has quietly stripped out even more of its remaining privacy protections. In a late-night session of Congress, House Speaker Paul Ryan announced a new version of the “omnibus” bill, a massive piece of legislation that deals with much of the federal government’s funding. It now includes a version of CISA as well. Lumping CISA in with the omnibus bill further reduces any chance for debate over its surveillance-friendly provisions, or a White House veto.

And the latest version actually chips away even further at the remaining personal information protections that privacy advocates had fought for in the version of the bill that passed the Senate. “They took a bad bill, and they made it worse,” says Robyn Greene, policy counsel for the Open Technology Institute. CISA had alarmed the privacy community by giving companies the ability to share cybersecurity information with federal agencies, including the NSA, “notwithstanding any other provision of law.” That means CISA’s information-sharing channel, ostensibly created for responding quickly to hacks and breaches, could also provide a loophole in privacy laws that enabled intelligence and law enforcement surveillance without a warrant. The latest version of the bill appended to the omnibus legislation seems to exacerbate that problem.

It creates the ability for the president to set up “portals” for agencies like the FBI and the Office of the Director of National Intelligence, so that companies hand information directly to law enforcement and intelligence agencies instead of to the Department of Homeland Security. And it also changes when information shared for cybersecurity reasons can be used for law enforcement investigations. The earlier bill had only allowed that backchannel use of the data for law enforcement in cases of “imminent threats,” while the new bill requires just a “specific threat,” potentially allowing the search of the data for any specific terms regardless of timeliness. [..] Even in its earlier version, CISA had drawn the opposition of tech firms including Apple, Twitter, and Reddit, as well as the Business Software Alliance and the Computer and Communications Industry Association.

In April, a coalition of 55 civil liberties groups and security experts signed onto an open letter opposing it. In July, the Department of Homeland Security itself warned that the bill could overwhelm the agency with data of “dubious value” at the same time as it “sweep[s] away privacy protections.” That Senate CISA bill was already likely on its way to become law. The White House expressed its support for the bill in August, despite its threat to veto similar legislation in the past. But the inclusion of CISA in the omnibus package may make it even more likely to be signed into law in its current form. Any “nay” vote in the house—or President Obama’s veto—would also threaten the entire budget of the federal government. “They’re kind of pulling a Patriot Act,” says OTI’s Greene. “They’ve got this bill that’s kicked around for years and had been too controversial to pass, so they’ve seen an opportunity to push it through without debate. And they’re taking that opportunity.”

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Reality vs hubris.

US-Mexico Border: Arizona’s Open Door (FT)

Many people in the US today look towards the country’s border with Mexico and tremble. So great are the fears about illegal immigration and the possible infiltration of terrorists that Donald Trump has vaulted to the top of the Republican presidential field by vowing to build a wall between the two countries and make the Mexicans pay for it. So it may come as a surprise to learn about the economic ideas now emerging from Arizona, a solid red state — having voted Republican in 15 of the past 16 presidential elections – that sits cheek by jowl with the Mexican state of Sonora. Arizonan movers and shakers have started to think that bringing in more Mexicans is a good way to stimulate growth.

To make people from south of the border feel more welcome, county planning organisations, municipal officials and business leaders are lining up behind a proposal to transform their entire state into a “free-travel zone” for millions of better-off Mexicans with the money and wherewithal to qualify for a travel document that is widely used in the south-west, but little known elsewhere – a border-crossing card, or BCC. “Fear gets you nowhere. Chances get you somewhere,” says Dennis Smith, executive director of the Maricopa Association of Governments, planning body for the county that includes Phoenix, Arizona’s capital and biggest city. “What do we have to lose? Nothing.” BCC holders are currently allowed to go 75 miles into Arizona, which takes them as far as Tucson, the state’s second-largest city.

But Arizona officials are seeking a change in federal rules that would allow these people to roam across the state, hoping that if the visitors travel further, they will stay longer and spend more money at malls, restaurants and tourist attractions. The desired Mexicans are a far cry from the “murderers” and “rapists” of Mr Trump’s stump speeches. They can afford the $160 fee and offer the proof of employment and family ties back home that are required for a BCC, which is good for 10 years and enables Mexicans to remain in the US for up to 30 days at a time. To stay longer or travel further, they need more documentation. However, Arizona’s charm offensive illustrates the complexity of border politics as the 2016 presidential election approaches. In the US imagination, Mexico looms as both a menace and a market. People want to keep some kinds of Mexicans out — and encourage others to come in.

The impulses are often contradictory. For now, the emphasis in Arizona is shifting toward accommodation. Local planners speak excitedly of integrating the economies of Arizona and Sonora into an “Ari-Son” mega-region, in which cross-border trade will increase and more Mexicans will attend pop concerts or sports events in Phoenix, take family car trips to the Grand Canyon and ski in the state’s northern mountains. “This is vitally important to the state’s economic health,” says Glenn Hamer, chief executive of the Arizona Chamber of Commerce and a former executive director of Arizona’s Republican party. “On the business side, it is a great asset for the state to be close to a market that is growing and becoming more prosperous every single day.”

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Yes, it is.

Bundesbank’s Weidmann: Greek Debt Relief Is Not Urgent (Kath.)

Greece faces relatively low debt servicing needs in the coming years and further debt relief is not a matter of urgency, Greek financial daily Naftemporiki quoted ECB Governing Council member Jens Weidmann as saying on Thursday. “In 2014 interest payments as a percentage of GDP were lower in Greece than in Spain, Portugal and Italy,” Weidmann, head of Germany’s central bank, told the paper. “Taking into account the low refinancing needs for the next years, further debt relief does not seem to be an issue of particularly urgent interest.” Athens has been struggling to legislate reforms agreed with its eurozone partners in exchange for an €86 billion bailout, the third financial aid package to keep it afloat since its debt crisis exploded in 2010.

The government, however, wants some form of debt relief to allow for future growth. Weidmann said the most important task at hand was the full implementation of the agreed economic adjustment program of reforms. “This will not simply increase the ability to grow but also dissolve prevailing uncertainty which acts as a brake for investments,” he told the paper. Weidmann added it was up to the Greek government to decide when to lift capital controls it imposed in late June to stem a flight of deposits.

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And this is what can happen when you don’t have the EU to bully you.

Iceland Bank Collapse Nears End as Creditors Reach Last Accord (BBG)

A seven-year standoff between Iceland and the international creditors of its failed banks is nearing an end after a court approved the last remaining settlement. The agreement signed by the caretakers of LBI hf paves the way for creditor payments from the bank’s 455.6 billion kronur ($3.5 billion) estate. It follows similar deals involving Glitnir Bank hf and Kaupthing Bank hf. The three banks hold combined assets of $17.6 billion, according to their latest financial statements. The banks failed within weeks of each other in 2008 under the weight of $85 billion in debt. Iceland then resorted to capital controls to prevent a total collapse of its $15 billion economy. International creditors, among them the Davidson Kempner Capital Management, Quantum Partners and Taconic Capital Advisors hedge funds, have been unable to access the lenders’ assets.

Glitnir’s administrators said they planned to make the first payments to creditors on Friday. Theodor S. Sigurbergsson, a member of Kaupthing’s winding up committee, said in an interview this week that he expects “to start payments to creditors early next year.”
In June, the government offered creditors in Glitnir, Kaupthing and LBI the option of either paying a 39% exit tax on all their assets or making what it calls a stability contribution of as much as 500 billion kronur by the end of the year. To be eligible for the offer, creditors needed to complete settlements by Dec. 31. Parliament later extended that deadline to March 15. The island’s handling of the financial crisis has won praise from Nobel laureates and the IMF. The krona has strengthened about 8% this year and Iceland’s economy is now growing at a faster pace than the euro-zone average. With Glitnir having been granted an exemption from capital controls on Thursday, Iceland is expected to make a full return to the international financial community during the course of 2016.

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It’s a miracle Russia stays so quiet.

Ukraine Debt Default and EU Sanctions Extension Anger Russia (IT)

Ukraine and Russia are on a collision course over major trade and finance disputes, as the European Union prepares to extend sanctions against Moscow for annexing Crimea and fomenting a bloody conflict in eastern Ukraine. Kiev has refused to meet Sunday’s due date on a $3 billion loan that Moscow gave to authorities led by former Ukrainian president Viktor Yanukovich in December 2013, when they were rocked by huge street protests. Moscow has vowed to take Kiev to court over the disputed bond, which comes due just as Russia gets ready to scrap its free-trade zone with Ukraine in response to the planned January 1st launch of a landmark EU-Ukraine trade pact. “The government of Ukraine is imposing a moratorium on payment of the so-called Russian bond,” Ukrainian prime minister Arseniy Yatsenyuk said on Friday.

“I remind you that Ukraine has agreed to restructure its debt obligations with responsible creditors, who accepted the terms of the Ukrainian side. Russia has refused, despite our many efforts to sign a restructuring deal, to accept our offers.” Russian officials have threatened to launch legal action by the end of the year to reclaim the cash from Ukraine. “By announcing a moratorium on returning this sovereign debt, the Ukrainian side has, you could say, in fact admitted default,” said Kremlin press secretary Dmitry Peskov. Russia long argued that the unpaid debt should block future IMF funding for cash-strapped Ukraine, and Moscow was furious with the lender this week for changing its rules to allow aid to keep flowing to countries that are in arrears. The IMF agreed with Moscow, however, that the bond should be treated as sovereign debt, and told Kiev that it must negotiate with Russia “in good faith” to ensure continued access to a $17.5 billion aid package.

Ukraine relies on the IMF, United States and EU to prop up its ailing economy, and depends on the West to maintain diplomatic pressure on Russia. Diplomats say EU states have agreed to extend sanctions on Russia for another six months from Monday, due to its continuing failure to fulfil a deal aimed at ending an 18-month conflict in eastern Ukraine that has killed more than 9,000 people. “It was an expected decision, we heard nothing new, and it will have no effect on the economy of the Russian Federation, ” said Alexei Ulyukaev, Russia’s minister for economic development. Russia’s economy has been damaged by sanctions and above all by the plunge in the price of oil. The Kremlin has ordered the suspension of a free-trade agreement between Russia and Ukraine from January 1st, when a far-reaching trade deal is due to start between Ukraine and the EU.

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Gas is more important than Ukraine.

Merkel Defends Russian Gas Pipeline Plan (WSJ)

German Chancellor Angela Merkel found herself under pressure on Friday from other Europe Union leaders over her government’s support for a natural-gas pipeline from Russia that others fear could further undermine the economic and political stability of Ukraine. The planned expansion of PAO Gazprom’s Nord Stream pipeline, which ships Russian gas via the Baltic Sea to northern Germany, would add an extra 55 billion cubic meters of gas in capacity—about as much as the company currently transports through Ukraine. Officials in Brussels and Washington as well as Kiev have accused Moscow of using the project, dubbed Nord Stream 2, to deprive Ukraine of much of its remaining political leverage as well as much-needed revenues from transit fees. Ukrainian President Petro Poroshenko on Wednesday called Nord Stream 2 his country’s “greatest concern as of today.”

But Ms. Merkel defended the planned pipeline. “I made clear, along with others, that this is a commercial project; there are private investors,” Ms. Merkel said following talks with the other 27 EU leaders. During the discussion on Nord Stream, the chancellor’s position was attacked by Italian Prime Minister Matteo Renzi and Bulgaria’s Boyko Borisov, while she received some backing from Dutch Premier Mark Rutte. Gazprom holds a 50% stake in the Nord Stream 2 consortium. The other 50% are held in equal parts by Shell, Germany’s E.On and BASF, Austria’s OMV and France’s Engie. Despite the involvement of these private investors, several European Union and U.S. officials have questioned the commercial reasoning behind Nord Stream 2, arguing that existing transit routes from Russia, including the first Nord Stream pipeline and the Ukrainian lines aren’t used at full capacity.

In a recent interview, the U.S. special envoy for international energy affairs, Amos Hochstein, called Nord Stream 2 “an entirely politically motivated project” and warned European authorities against “rushing into” the project. Since relations with Moscow cooled over the conflict in eastern Ukraine, the EU has been working to reduce its dependence on Russian gas. Building Nord Stream 2, however, would concentrate 80% of the bloc’s gas imports from Russia onto a single route, according to the EU’s climate and energy commissioner, Miguel Arias Cañete. “In my perspective, Nord Stream does not help diversification nor would it reduce energy dependence,” said European Council President Donald Tusk, who presided over Friday’s discussions among the 28 EU leaders. He said, however, the EU must avoid politicizing this issue and check whether the pipeline would comply with EU rules, which block companies from controlling both a pipeline and its supply.

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“..the mantra of 28 states having the same ultimate objective … is officially dead.”

The Unraveling Of The European Union Has Begun (MarketWatch)

Whatever spin comes out of the Brussels summit this week, the European Union finds itself in the midst of an existential crisis after the bloc’s most challenging year since the launch of economic and monetary union in 1999. National leaders will continue to do what they do best — muddle through in a fog of obfuscation as they fail again to address the fundamental problems that have led to a string of financial, political and foreign policy crises from the Ukraine incursion through the Greek bailout to a flood of refugees. Even as British Prime Minister David Cameron tries to renegotiate his country’s terms of membership to avoid an exit from the EU, recent elections in Poland, France and Portugal reflect a shift in public opinion to question whether European integration on the current model is such a good idea after all.

Spain faces an election Sunday in which the conservative Popular Party, which has toed the Brussels line on austerity, is sure to lose its majority as voters are poised to create a new political landscape with four major parties and big questions about the future of the country. And Cameron himself is wrestling with a growing momentum in Britain favoring an exit from a Brussels regime that seems increasingly onerous or irrelevant. It is, of course, Cameron’s Conservative Party that historically has championed EU membership, and the EU itself is generally touted as a boon for business and the economy. So it is perhaps telling that recent commentary from a London-based think tank that generally mirrors the relatively conservative views of its central-banking and asset-management constituency is taking an increasingly critical view of Europe.

“There is a sense that the Union is drifting towards some form of calamity — the end of free movement of people, or the exit of Greece from the euro, or the departure of Britain from the Union itself,” John Nugée, a former Bank of England official who is a director of the Official Monetary and Financial Institutions Forum in London, wrote this week after meeting with officials in Asia, who have a pessimistic view of Europe’s situation. “The view from Asia is that the Union is struggling because it falls between two extremes of strength and weakness: It has neither a strong democratic regime nor a strong autocratic one,” Nugée writes in an OMFIF commentary. The EU is instead a “weak democracy” in this view. “The authorities have sufficient strength to try to rule without popular consent,” Nugée observes.

“But they are too weak to ignore the negative populist response such action inevitably incites and which, in turn, exacerbates their initial weakness.” The bottom line, according to this analyst, is that Europe’s leaders are simply overwhelmed. “The complexity of each individual issue seems to make the combined difficulties beyond the capacity of the political system to solve,” Nugée writes. In another OMFIF commentary this week, Antonio Armellini, a former Italian diplomat who represented his country in a number of foreign capitals and international organizations, argued that the British request for special terms “obliges everyone to recognize that the mantra of 28 states having the same ultimate objective … is officially dead.”

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“They [EU] have already made these decisions. They are not known for being democratic – [Jean-Claude] Juncker and [Donald] Tusk. There is no democracy in the EU. They pay lip service to democracy, they have decided, what is going to happen. ”

‘Cameron’s Battle Against EU Is Like Grappling With A Jellyfish’ (RT)

It’s unlikely that ‘lame duck PM’ David Cameron, would get any concessions over the UK’s EU membership, but he is still banging his head against that brick wall, says investigative journalist Tony Gosling. EU leaders have gathered in Brussels for a summit to partly determine Britain’s future within the union. Prime Minister David Cameron on Thursday pushed for changes to the terms of the country’s EU membership saying that “there is a pathway to a deal in February.” He also emphasized the importance of UK’s demand to constrain access to in-work benefits for EU migrants in Britain. RT: Would the EU be better to lose Britain altogether than sacrifice the main principles. Who’s going to win in this regard?

Tony Gosling: … You can almost pick a tramp from the streets of London – there are plenty more since Cameron came to power – and they probably would make a better job of this than David Cameron, because he first promised this referendum back in 2009, and still we’re waiting. Also we’ve got the situation back in May, when we had a general election that [François] Hollande and [Angela] Merkel made absolutely clear to Cameron – there would be no concessions, but he is still banging his head against that brick wall. No, I don’t think he is going to get these concessions. The battle is almost like he is grappling with a jellyfish, with the EU. They [EU] have already made these decisions. They are not known for being democratic – [Jean-Claude] Juncker and [Donald] Tusk. There is no democracy in the EU. They pay lip service to democracy, they have decided, what is going to happen.

Cameron’s real problem here is that he is looking for this four-year ban on benefits going to migrants coming into Britain. The problem being that four years is just not enough. Those benefits are keep going up to about 40 percent of everybody that comes into Britain’s pay packets. We’ve got a massive problem here with the working poor on benefits. He’s effectively saying that if migrants come to Britain, that they are going to be below the poverty line immediately… And of course, we can’t have that. Anybody in Britain that needs benefits is going to have to get them. We’ve already seen signs of this with things like tent cities springing up across the country…

RT: Are EU leaders growing tired of negotiating with the UK? TG: It almost seems we are the basket case of Europe, doesn’t it? And partly that is because we’ve stayed out of the euro and they wanted us in the euro. But we are in a similar position to many of the countries economically. We’ve got a massive property bubble. We’ve just heard here in Britain – it is so difficult to just to find somewhere to live. The house prices in Britain are now up to 300,000 pounds – that is $450,000 average to buy a house here in Britain. And that is what a classic bubble – massively over inflated house prices; no real market anymore.

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Just like Ron Paul does. And me.

‘Cancer of Europe’ – Russian Duma Speaker Calls For NATO Dissolution (RT)

State Duma Speaker Sergey Naryshkin has said that Russia is very concerned by continuing NATO expansion, adding that global security would benefit significantly from the dissolution of the military bloc. “My attitude to this organization is special – I see it as a cancerous tumor on the whole European continent. It would only be for the better if this organization is dissolved,” Naryshkin said during a meeting with Serbian lawmakers on Thursday. This dissolution could be conducted in several stages, the Duma speaker suggested. “First of all, the USA should be excluded from the bloc and after this it would be possible to painlessly disband the whole organization,” he said. “This would be a good step towards greater security and stability on the whole European continent.”

Naryshkin also told Serbian lawmakers that Russia was aware of the fact that large numbers of Montenegrin citizens, possibly even the majority of the country’s population, were resisting their nation’s potential entry into NATO. He noted that in late November the Russian State Duma called for the Montenegrin parliament to abandon plans to enter the military bloc, and expressed hope that Serbian politicians would offer some help in persuading Montenegro – which historically has been always close to Serbia – not to make this dangerous step. In early December NATO foreign ministers agreed to invite Montenegro to join the military alliance. In September, Montenegro’s parliament voted for a resolution to support the country’s accession to the military organization. The opposition called for a national referendum on the issue, but failed to push their initiative through the national legislature.

Moscow has promised that a response would follow if Montenegro joined NATO, but added that the details of any such steps are still under consideration. The head of the Russian Upper House Committee for Defense and Security, Viktor Ozerov, said that the step would force Russia to cut a number of joint projects with Montenegro, including military programs. In mid-December Russian Foreign Ministry spokesperson Maria Zakharova said the row over possible NATO membership had revealed deep divisions in Montenegrin society. “We think that the Montenegrin people should have their say in a referendum on this issue. This would be a manifestation of democracy that we call for,” Zakharova said.

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Election tomorrow.

135 Jobs In 2.5 Years: The Plight Of Spain’s New Working Poor (Guardian)

He has taken on stints as a stable hand, been a door-to-door salesman and set up stages for local concerts: rarely does David Pena turn down a job. “In the past two a half years, I’ve probably had about 135 contracts,” said Pena. Most of them last between one and three days. “It’s a bit tiresome not to ever have anything stable.” Tiresome is perhaps an understatement. The 33-year-old’s disjointed CV stands out as an extreme example of a growing section of Spanish society made up of those ousted from the workforce during the economic crisis and now struggling to land anything but precarious short-term contracts. On Sunday Spaniards will cast their ballots in one of the tightest races in the country’s recent history.

The result promises to offer a glimpse of the national mindset as Spain emerges from a prolonged economic downturn that sent unemployment soaring, triggered painful austerity measures and saw thousands of families evicted. The wide brush of corruption has sent Spaniards’ trust in politicians and institutions plunging in recent years, and given rise to a crop of national newcomers promising a better future. For many, however, the key issue in this campaign is jobs. Unemployment in Spain stands at 21.6% – the highest in the EU after Greece. Mariano Rajoy, the country’s current prime minister, has based his re-election campaign on the economy and its fragile recovery, pointing to more than 1m jobs created in the past two years and one of the fastest growth rates in the eurozone.

Polls suggest that his conservative People’s party (PP) will remain the largest party after Sunday’s election, even it looks likely to lose its majority. Rajoy’s critics point to the dire situation still facing many Spaniards, who, like Pena, have been forced to string together a salary from a series of low-paying contracts that offer scant benefits. Temporary workers now make up more than a quarter of the workforce in Spain. Far from just seasonal work, temporary contracts have become more common among hospital workers, teachers and other public servants. Statistics suggest that short-term work is the definitive feature of the new jobs being created, making up about 90% of the contracts signed this year so far in Spain, with about one in four lasting seven days or less.

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But arms sales are booming.

One Of Every 122 Humans Today Has Been Forced To Flee Their Home (WaPo)

The number of people who have been forced to flee their homes has reached a staggering level, with 2015 on track to break previous records, according to a United Nations report released Friday. People who have been forcibly displaced — including those who fled domestically as well as international refugees and asylum-seekers — has likely “far surpassed 60 million” for the first time, reads the U.N. High Commissioner for Refugees report. Last year, 59.5 million had been displaced. “In a global context, that means that one person in every 122 has been forced to flee their home,” the agency said in a statement. Forced displacement “is now profoundly affecting our times,” High Commissioner for Refugees António Guterres said in a statement.

“It touches the lives of millions of our fellow human beings – both those forced to flee and those who provide them with shelter and protection. Never has there been a greater need for tolerance, compassion and solidarity with people who have lost everything.” War in Syria has become the “single biggest generator worldwide of both new refugees and continuing mass internal and external displacement,” the agency said. More than 4 million Syrians are now refugees – compared t0 less than 20,000 in 2010. Following Syria, most refugees come from Afghanistan, Somalia and South Sudan. The report, which covers the first six months of 2015, found that by June, the world had 20.2 million refugees – nearly 1 million more than a year before.

An average of 4,600 people flee their homes daily, and nearly 1 million refugees and migrants have crossed the Mediterranean to get to Europe so far this year. Turkey, Pakistan and Lebanon host the most refugees. Such a massive flow of people from country to country has also put a strain on host nations, and left unmanaged, this “can increase resentment and abet politicization of refugees,” the report notes.

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Oct 042015
 
 October 4, 2015  Posted by at 9:52 am Finance Tagged with: , , , , , , , ,  1 Response »


Russell Lee Photo booth at fiesta, Taos, New Mexico Jul 1940

Markets Are Back At Panic Levels, Says Credit Suisse (MarketWatch)
Post-QE “S&P Should Be Trading At Half Of Its Value”: Deutsche Bank (ZH)
Oil Slump Plays Havoc With The Junk-Bond Market (MarketWatch)
Oil Bulls Lose Faith in Recovery as Russia Adds to Global Glut (Bloomberg)
Economists Can’t Find the Silver Lining in US Jobs Report (Bloomberg)
US Hedge Funds Brace For Worst Year Since Financial Crisis (Reuters)
US System Designed To Prevent Financial Crisis ‘Likely To Fail’ (MarketWatch)
Fed’s Fischer Says Financial Stability Toolkit May Need To Grow (Reuters)
IMF’s Mass Debt Relief Call For Greece Set To Be Rejected By Europe (Telegraph)
New Greek Debt Framework Not So Flattering For Italy, Spain, Portugal (WSJ)
‘Bubbles Are All Over The Place’: Ron Paul (RT)
History Isn’t A Guide When Market Is Playing By A New Set Of Rules (Ind.)
The Failure Of Central Banking: The French Revolution Case Study (Lebowitz)
UK Car Emissions Test Body Receives 70% Of Cash From Motor Industry (Observer)
The Record US Military Budget. Spiralling Growth of America’s War Economy (Davies)
153,000 Refugees Arrived In Greece In September Alone (UNHCR)
280,000 Refugees Arrived In Germany In September (AFP)

They can’t let go: “..panic equals buying opportunities..”

Markets Are Back At Panic Levels, Says Credit Suisse (MarketWatch)

If it feels like you’re reliving the market jitters of the Great Recession and eurozone crisis, it’s probably because you are. During this week, global risk appetite dropped to “panic” levels for the first time since January 2012, according to Credit Suisse’s Global Risk Appetite Index. That was back when investors feared a breakup of the euro bloc, grappled with unsustainably high sovereign borrowing costs and freaking out about the spillover from Greece. Before that, the index reached panic state around the onset of the 2008 financial crisis, after the Sept. 11, 2001 attacks on the U.S., during the dotcom bubble and after Black Monday in 1987. Get the picture?

This time, Credit Suisse’s Global Risk Appetite Index slipped into panic territory just as global equity markets were wrapping up their worst quarter in four years. That came as investors feared a sharp slowdown in China’s economy and a collapse in commodity prices. “Global growth is not a strong supportive factor for risky assets right now,” said the analyst team led by the bank’s chief economist, James Sweeney. “Weak Chinese growth has had very negative effects on general emerging market performance and commodity prices. And a strong dollar has caused many exporters around the world to see declining trade revenues, even if actual activity has not fallen off a cliff,” they added. Indeed, the U.S. economy may not even have grown 1% in the third quarter, according to the Atlanta Fed’s GDPNow tracker.

But here’s for the good news: panic equals buying opportunities. The Credit Suisse analysts said panic usually is an overreaction to short-term events, providing a chance to buy risky assets at a cheaper price. There’s a caveat for the current panic state, however. Because of the murky global growth outlook, investors should only use this as a short-term opportunity, rather than going in for the long haul, the analysts said. “If panic persists, it could alter the global growth outlook for the worse. Ongoing panic and weak global growth would likely influence Fed behavior. But history suggests rebounds often occur when they are least expected,” they said. “That’s why we see the current panic as a tactical opportunity, even if it does not point to a lasting boom in risky assets.”

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Define ‘value’.

Post-QE “S&P Should Be Trading At Half Of Its Value”: Deutsche Bank (ZH)

[..] “Since 2013, stocks rallied while disinflationary pressures were reinforced by a strong USD, low commodity prices and a decline in global demand. If pre-2013 coordination between the two is taken as a reference, then based on current stock prices breakevens should trade about 1.5% wider. This means the Fed should be hiking because inflation is above target. Alternatively, given the current level of inflation, S&P should be trading at half of its value.”

Wait, the S&P should be trading at 900… or even less? Yes, according to the following Deutsche Bank chart:

Only one question remains: which breaks first – do inflation expectations surge higher, soaring by some 150 bps to justify equity valuations, or do equities crash?

“Is reconciliation likely – and, if so, in which direction? Are we returning to the pre-crisis world, or we are in a completely new regime?”

The answer will come from none other than the Fed and by now, even Janet Yellen knows that one word out of place, one signal to the market that the QE-inflation trade will converge with stocks crashing instead of inflation rising (which, unless the Fed launched QE4, NIRP of even helicopter money now appears inevitable), and some $10 trillion in market cap could evaporate overnight. Is it any wonder that Yellen is exhibiting “health issues” during her speeches: the realization that the fate of the biggest stock market bubble lies on your shoulders would make anyone “dehydrated.” In retrospect, Ben Bernanke knew exactly what he was doing when he got out of Dodge just as the endgame was set to begin.

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The last few sources of funding dry up.

Oil Slump Plays Havoc With The Junk-Bond Market (MarketWatch)

Low oil prices continued to wreak havoc in the U.S. high-yield bond market in September, and the outlook remains grim, reports from two major rating firms showed Friday. Moody’s said its Liquidity Stress Index, a measure of stress in the high-yield bond market, deteriorated in the month, weighed down once again by a wave of downgrades in the energy sector. The index rose to 5.8% in September from 5.1% in August, placing it at its highest level since October of 2010. The index measures the number of companies that carry Moody’s lowest liquidity rating of SGL-4. The index rises when more issuers are placed in that category, and it falls when liquidity improves.

The U.S. high-yield market is dominated by energy companies, many of them highly leveraged shale producers that had ramped up production while oil prices were soaring. Many are now struggling as the low oil price hammers profits just as debt service costs rise. Crude has lost roughly 59% of its value in the past year, falling from a high close to $107 a barrel in 2014 to about $44 on Friday. Reflecting the pressure on risky borrowers, the energy Liquidity Stress subindex shot up to 16.9% in September from 12.7% in August, its highest level since it reached 19.2% in July of 2009. “The LSI’s rise warns that more companies are becoming dependent on increasingly fickle capital markets to alleviate liquidity pressures, and this is putting upward pressure on defaults,” Moody’s said in a report.

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Pumping at full capacity is the only lifeline left.

Oil Bulls Lose Faith in Recovery as Russia Adds to Global Glut (Bloomberg)

Hedge funds trimmed bullish oil bets for the first time in six weeks, losing faith in a swift recovery as Russia boosted output to the highest since the Soviet Union collapsed. Speculators reduced their net-long position in West Texas Intermediate crude by 9.1% in the week ended Sept. 29, according to data from the Commodity Futures Trading Commission. Longs dropped from a 12-week high while shorts increased. U.S. crude output is down 514,000 barrels a day from a four-decade high reached in June, Energy Information Administration data show. The number of rigs targeting oil in the U.S. dropped to a five year low, Baker Hughes said Oct. 2. WTI traded in the tightest range since June last month as China’s slowing economy and the highest Russian output in two decades signaled the global glut will linger.

“The U.S. producers are the only ones doing their part to reduce the global glut,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. “Other countries, such as Russia, are pumping at full tilt. The cutbacks by shale producers here aren’t going to have much impact, especially given the slowing global economy.” WTI decreased 1.3% in the report week to $45.23 a barrel on the New York Mercantile Exchange. It settled at $45.54 Friday. U.S. crude stockpiles, already about 100 million barrels above the five-year average, may swell further. Stockpiles have climbed during October in eight of the last 10 years as refiners slow operations to perform seasonal maintenance.

Russian oil output rose to a post-Soviet record last month as producers took advantage of the weak ruble to push ahead with drilling. The nation’s production of crude and condensate climbed to 10.74 million barrels a day, 1% more than a year earlier and topping a record set in June, according to data from the Energy Ministry’s CDU-TEK unit.

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Give ’em a few days…

Economists Can’t Find the Silver Lining in US Jobs Report (Bloomberg)

When the U.S. jobs report is released each month, there’s typically enough nuance to offer something for everyone — the good and the bad. Today proved to be a feast for the bears. “When you look through all the details of the data, there just isn’t anything good to hang your hat on,” said Thomas Simons at Jefferies in New York. “It’s been years since we’ve seen such an unambiguously bad report. Silver linings were tough to come by in the September jobs data. Payrolls came in at a much-weaker-than-forecast 142,000, while August and July figures were revised down. Wage growth was nonexistent for the month, with average hourly earnings actually falling by a penny on average.

The softness in manufacturing endured, with factory payrolls falling by 9,000 when they were expected to show no change. With dollar appreciation and sluggish overseas growth providing headwinds, it was the biggest back-to-back decline since 2010. Even service industries, which make up the lion’s share of the economy and are more shielded from global weakness, seem to have shifted into a lower gear. Payroll growth there has slowed for four straight months, the longest such streak since 2001. “While it’s always important not to overreact to one single data release, we’ll make an exception in this case,” Paul Ashworth at Capital Economics in Toronto, wrote in a note to clients. “Aside from manufacturing, the slowdown in employment gains is most notable in business services and education and health, which are not the sectors most prone to cyclical swings.”

Even a small positive in today’s report — a sharp decline in the ranks of the underemployed — must be taken with a grain of salt, economists said. The ranks of people working part-time for economic reasons fell by the most since January 2014, which is generally a good sign. However, the number of full-time employees dropped as well. Meanwhile the labor force participation rate decreased to the lowest level since October 1977. At best, the data are murky. “It’s weak through and through,” Simons said. Because such thoroughly disappointing reports are so rare, “we probably won’t see it again next time around.”

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Numbered days?!

US Hedge Funds Brace For Worst Year Since Financial Crisis (Reuters)

U.S. hedge funds are bracing for their worst year since the 2008 financial crisis after a dramatic sell-off in healthcare and biotechnology stocks triggered double-digit losses for some prominent players last month. September’s sucker punch in the biotech sector, on top of a grim August when global markets tumbled due to fears about slowing growth in China, have pushed many hedge fund managers deep into the red. “These are some of the worst numbers we have seen since the crisis,” said Sam Abbas, whose Symmetric IO tracks hedge fund managers’ returns. The average hedge fund lost 19% in 2008 when the credit crunch hit. Since then, hedge funds have had only one down year, when they lost 5.25% in 2011, data from Hedge Fund Research show.

While the biotech sector held up relatively well during the initial market sell-off in August, it cratered in September. “It was the last remaining bastion of alpha and a sector where many hedge funds were hiding. Now it has succumbed,” said Peter Rup at Artemis Wealth Advisors, which invests in hedge funds. Rup said he was expecting some big negative surprises as more hedge funds send September returns to clients. Some of America’s most prominent hedge funds have seen their returns crumble. David Einhorn’s Greenlight Capital, now off 17%, is on track to post its first losses since 2008. And William Ackman’s Pershing Square Capital Management, which has a big bet on Valeant, told investors on Thursday that its Pershing Square Holdings portfolio is now off 12.6% for the year, a big reversal of fortune after 2014’s 40% gain. “Hedge funds are reeling from a relentless rout that has all but killed a year’s worth of alpha in a matter of two weeks,” Stanley Altshuller at research firm Novus wrote in a report.

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So.. more bailouts.

US System Designed To Prevent Financial Crisis ‘Likely To Fail’ (MarketWatch)

The current U.S.regulatory structure designed to prevent another financial crisis is “Balkanized,” a “mess” and likely to fail when needed, experts said. “The current U.S. institutional set-up is likely to fail in a crisis, and will be doing less to prevent a crisis than it should be,” said Adam Posen, president of the Peterson Institute for International Economics, at a two-day conference on financial stability sponsored by the Boston Federal Reserve. Posen said that U.S. regulators, including the Fed, don’t have the tools or the mandates from Congress that they need. Posen was especially critical of the umbrella group of regulators, the Financial Stability Oversight Council, that was set up by Dodd Frank to identify and deal with financial stability risks.

He said FSOC is chaired by the Secretary of Treasury, who is the most political member of the group. “To me, the FSOC is a mess,” Posen said. Mervyn King, the former head of the Bank of England, agreed that the U.S. institutional structure was a problem. He said U.S. regulators had a knack of working well together in a crisis, whatever the institutional structure. “It is before the crisis that the U.S. set-up is to be questioned,” King said. Well before the financial crisis, the U.S. and the Bank of England had a war game to discuss a possible cross-border bank failure, King said. The U.K. regulators had three key participants, while the U.S. had a “mass choir,” he said. Former Fed vice chairman Donald Kohn agreed: “broader and deeper structural deficiencies exist in the U.S. regulatory system for macroprudential regulation.”

Kohn said there is a widespread perception in Washington that the Fed is responsible for financial stability, but said in reality the Fed must work in a “Balkanized” regulatory system. He agreed that FSOC “cannot remedy the underlying flaws of financial regulation in the U.S.” During the conference, regulators and experts echoed concerns with the regulatory structure. Fed Vice Chairman Stanley Fischer said the Fed needed new tools targeted at the real estate sector to prevent another bubble. Boston Fed President Eric Rosengren suggested that Congress needed to give the U.S. central bank a third mandate to foster financial stability.

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Central banks’ toolkits should be abolished, not expanded. They create only mayhem.

Fed’s Fischer Says Financial Stability Toolkit May Need To Grow (Reuters)

The U.S.’s set of tools to limit asset bubbles is neither large nor “battle tested,” Federal Reserve vice chair Stanley Fischer said on Friday in a call for regulators to step up research on how to improve financial stability. Fischer said that compared to other countries the complexity of the U.S. financial system and the diverse number of regulators may make it difficult to develop or deploy so-called “macroprudential” tools – policies that could be used to selectively cool overheated financial markets. As head of the Bank of Israel, Fischer put such tools to work, for example, by hiking loan to value ratios on home mortgages to slow a run-up in real estate values. He has said the U.S. should examine that and other policies before new financial risks emerge, though he acknowledged they may be tough to implement.

“I remain concerned that the U.S. macroprudential toolkit is not large and not yet battle tested,” Fischer said, and it may be difficult to expand because so many agencies have control over different parts of the financial system. In addition, he said, targeting policies at one sector, such as home mortgages, could simply push that sort of lending to less regulated companies. There is concern that the Dodd-Frank regulations put in place after the crisis are already doing that, helping expand the influence of “shadow” banks not covered by the same rules as commercial lenders. Some of those regulations have a macroprudential character, such as the stress testing of banks and the possible imposition of “countercyclical” capital buffers that could require the largest banks to hold more in reserve if markets overheat.

Ultimately Fischer said it may be left to monetary policy to bear responsibility for financial stability. “The limited macroprudential toolkit…leads me to conclude that there may be times when adjustments to monetary policy should be discussed as a means to curb risks to financial stability,” Fischer said. Even though the interest rate is a blunt tool, requiring a potential tradeoff of higher unemployment if it was hiked to control an asset bubble, “we need to consider the potential role of monetary policy in fostering financial stability,” he said. That could include using narrower policy tools, like bank reserve requirements, and not just the interest rate alone, he said.

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And then Greece can jump back into crisis mode. No relief till 2017/18.

IMF’s Mass Debt Relief Call For Greece Set To Be Rejected By Europe (Telegraph)

The IMF is still poised to pull out of Greece’s third international rescue in five years over the sensitive issue of debt relief. The fund is pushing for a restructuring of at least €100bn of Greece’s €320bn debt pile, according to a report in Germany’s Rheinische Post. Such bold measures to extend maturities and reduce interest payments are set to be rejected by its European partners, who are unwilling to impose massive lossess on their taxpayers. The head of Greece’s largest creditor – Klaus Regling of the European Stability Mechanism – told the Financial Times that such radical restructuring was “unnecessary”. Debt relief is also not due to be discussed when eurozone finance ministers gather to meet for talks on Monday, said EU officials.

This intransigence could now see the IMF withdraw its involvement when its programme ends in March 2016. In debt sustainability analysis carried out by body, it has suggested Greece may need a full moratorium on payments for 30 years to finally end its reliance on international rescues. The reports came after a former IMF watchdog urged the world’s “lender of last resort” to be more critical of its involvement in many bail-out countries for the sake of the institution’s credibility. “Few reports probe more fundamental questions – either about alternative policy strategies or the broader rationale for IMF engagement,” said a report from David Goldsbrough, a former deputy director of IMF’s Independent Evaluation Office (IEO). The IMF has come under fire for failing in its duty of care towards Greece by pushing self-defeating austerity measures on the battered economy.

The Washington-based fund has previously admitted it should have eased up on the spending cuts and tax hikes, pushed for an earlier debt restructuring and paid more “attention” to the political costs of its punishing policies during its five-year involvement in Greece. Accounts from 2010 show the IMF was railroaded into a Greek rescue programme on the insistence of European authorities, vetoing the objections of its own board members from the developing world. The IMF is prevented from lending to bankrupt nations by its own rules. But it deployed an “exceptional circumstances” justification to provide part of a €110bn loan package to Athens five years ago. Greece has since become the first ever developed nation to default on the IMF in its 70-year history.

Despite privately urging haircuts for private sector creditors in 2010, the IMF was ignored for fear of triggering a “Lehman” moment in Europe, by then European Central Bank chief Jean-Claude Trichet. Greece later underwent the biggest debt restructuring in history in 2012. The findings of the fund’s research division have largely discredited the notion that harsh austerity will bring debtor nations back to health. However, this stance has been at odds with its negotiators during Greece’s new bail-out talks where officials have continued to demand deep pension reforms and spending cuts for Greece. Diplomatic cables between Greece’s ambassador to Washington have since revealed the White House pressed the fund to make vocal calls for mass debt relief to keep Greece in the eurozone during fraught negotiations in the summer.

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All it takes is a straw.

New Greek Debt Framework Not So Flattering For Italy, Spain, Portugal (WSJ)

When eurozone governments decided to throw Greece another financial lifeline this summer, they also embraced a new way of assessing whether the country will ever be able to repay its debts. But that framework isn’t so flattering for three other highly indebted euro countries. Italy, Portugal and Spain all have gross financing needs—the money a country has to raise to cover its deficit and roll over maturing debt—above 15% of gross domestic product in the coming years. That’s the maximum level the IMF said is manageable for Greece in its preliminary debt-sustainability analysis released this summer. By contrast, Cyprus and Ireland, two other euro countries that were bailed out in recent years, remain below the 15% threshold.

The question of when a country’s debt can be considered sustainable has been central to bailout discussions between the eurozone and the IMF for years. And the answer has been changing regularly—especially in the case of Greece. In the spring of 2012, the International Monetary Fund signed off on a second multibillion bailout, only after a steep writedown on its government bonds promised to bring Greek debt below 120% of gross domestic product by 2020. That, the IMF said at the time, was necessary to make the country’s debt “sustainable in the medium term.” It didn’t take long for that prediction to become outdated. By November 2012 it became clear that the 120% by 2020 was now out of reach. To keep the IMF on board, eurozone governments promised to ensure Greece’s debt would be “substantially lower than 110%” of gross domestic product by 2022.

Fast forward to 2015 and months of back and forth between Greece’s left-wing anti-austerity government and the rest of the eurozone. By the end of June, the IMF was once again ringing the alarm bells over Greek debt. The bigger deficits, lower growth and fewer privatizations expected under the Syriza-led government “render the debt dynamics unsustainable,” the fund warned. In its analysis released in on July 2, three days before Greeks overwhelmingly voted “no” in a referendum on a new bailout deal, the IMF said that Greece’s debt was going to remain at 149.9% in 2020. Even if debt sustainability was going to be judged by gross financing needs rather than the debt-to-GDP ratio, it was still unlikely that Athens would ever be able to regain its financial independence without substantial debt relief, the IMF warned. It was in this report that the IMF first official mentioned 15% as the adequate threshold for determining Greece’s debt sustainability.

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“..everything is a mistake and everything is going to be volatile…”

‘Bubbles Are All Over The Place’: Ron Paul (RT)

The US economy is set to grow 0.9% in the third quarter after a bigger-than-expected widening of the trade gap for goods in August, according to the Atlanta Federal Reserve’s GDPNow. This appeared to be a much slower rate from the regional Fed bank’s prior estimate of 1.8% last week, the Atlanta Fed noted. “It’s just the beginning of a downturn, nothing’s really happened yet,” Paul said. “Everything is misdirected because of the price of money. There are bubbles every place. You have a stock market bubble, you have still bubblemaking in housing when you see houses selling for $500 million, and you have a bubble in student loans.”

“The bubbles are all over the place. This is the problem. I don’t see an easy way out. I think the markets are going to go down a lot more when you realize how serious this is. Actually we are doing better than the rest of the world but we’re in for trouble too because the world has never had a situation like this where a whole world endorsed a paper currency and had pyramiding of debt around the world by the reserve currency which is the dollar. “It’s the biggest bubble ever, so it’s going to big the biggest crash ever, but it remains to be seen exactly when that’s going to hit. The source of the trouble is the Federal Reserve System, which simply cannot work in a real market economy, Dr Paul said.

“In a true free market economy you have to have people work, use what they need to live on and then save money, and that dictates interest rates and tells businessmen what they should do. Well, that isn’t the way it works any more. The so-called capital comes from the Fed and they create it out of thin air. So everything is a mistake and everything is going to be volatile. You can do this for a while when the country is very very wealthy, and a currency is very very strong.” “But eventually people mistrust the government. They don’t pay interest, they have a huge amount of principal to pay, and corporations are deeply in debt, they borrow a lot of money practically for free and they buy up their stocks. It’s a mess. It’s artificial. It has nothing to do with freedom, has nothing to do with free markets, and the sooner we realize this, the sooner we’ll get rid of central economic planning and especially look into the serious problems we get from the Federal Reserve System.”

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Only a few now the new rules.

History Isn’t A Guide When Market Is Playing By A New Set Of Rules (Ind.)

[..] an unstable global economy is nothing new. David Buik, a City of London veteran and a commentator for the stockbroker Panmure Gordon, has a theory – and it’s one echoed by many who have seen trading evolve over the years. “I think we forget that 40% of trades are programme trades,” Buik explains. “The number of what I call ‘numeric geeks’ that now work in the markets would never have considered being in the markets 50 years ago. “You’ve got a totally different person. He’s incredibly bright and he works out programmes that decide when it’s time to buy and sell. When you’ve got that kind of influence [on the market] you get that level of volatility.” Automated trading has changed the way the stock market works beyond all recognition.

Instead of holding a stock for years, months or days, as was the norm in years gone by, shares can now be owned for a matter of milliseconds. For example, a programme could be created to buy a stock when it reaches £10 and sell it at £10.0001. It might not sound like a big gain, but do it many thousands of times and it can make a tidy profit. High-frequency trading of this nature is also to blame for the “flash crashes” that have happened in recent years. So-called “stop-losses” can be put on trades, meaning that when a share price falls below a level determined by the investor, it is automatically sold, limiting their loss. For investors, it can mean the difference between a small loss and a catastrophic one – as plenty of those Glencore backers would attest to.

But inevitably, automatic stop-loss sales drag share prices down and trigger more selling, causing a dangerous domino effect as investors are automatically bailed out. The stock market is being played or manipulated by financial whiz kids – all completely legally, of course – but it is not what the market was intended for – investing in a company for the benefit of the backer and the recipient. The result is that the market has become increasingly detached from the real world and not a fair reflection of what most see as an improving outlook for the global economy. America, the world’s largest economy, is on the up and an interest rate rise is still expected this year. Yet the US stock market does not reflect that, with its benchmark Dow Jones average falling 8% in the third quarter.

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Great history.

The Failure Of Central Banking: The French Revolution Case Study (Lebowitz)

During the 1700’s France accumulated significant debts under the reigns of King Louis XV and King Louis XVI. The combination of wars, significant financial support of America in the Revolutionary War, and lavish government spending were key drivers of the deficit. Through the latter part of the century, numerous financial reforms were enacted to stem the problem, but none were successful. On a few occasions, politicians supporting fiscal austerity resigned or were fired because belt tightening was not popular and the King certainly didn’t want a revolution on his hands. For example, in 1776 newly anointed Finance Minister Jacques Necker believed France was much better off by taking large loans from other countries instead of increasing taxes as his recently fired predecessor argued.

Necker was ultimately replaced 7 years later when it was discovered France had heavy debt loads, unsustainable deficits, and no means to pay it back. By the late 1780’s, the gravity of France’s fiscal deficit was becoming severe. Widespread concerns helped the General Assembly introduce spending cuts and tax increases. They were somewhat effective but the deficit was very slow to decrease. The problem, however, was the citizens were tired of the economic stagnation that resulted from belt tightening. The medicine of austerity was working but the leaders didn’t have the patience to rule over a stagnant economy for much longer. The following quote from White sums up the situation well:

“Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self?denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; and France was not then one of these few”.

By 1789, commoners, politicians and royalty alike continuously voiced their impatience with the weak economy. This led to the notion that printing money could revive the economy. The idea gained popularity and was widely discussed in public meetings, informal clubs and even the National Assembly. In early 1790, detailed discussions within the Assembly on money printing became more frequent. Within a few short months, chatter and rumor of printing money snowballed into a plan. The quickly evolving proposal was to confiscate church land, which represented more than a quarter of France’s acreage to “back” newly printed Assignats (the word assignat is derived from the Latin word assignatum – something appointed or assigned).

This was a stark departure from the silver and gold backed Livre, the currency of France at the time. Assembly debate was lively, with strong opinions on both sides of the issue. Those against it understood that printing fiat money failed miserably many times in the past. In fact, the John Law/Mississippi bubble crisis of 1720 was caused by an over issue of paper money. That crisis caused, in White’s words, “the most frightful catastrophe France had then experienced”. History was on the side of those opposed to the new plan.

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Cosy.

UK Car Emissions Test Body Receives 70% Of Cash From Motor Industry (Observer)

The body examining the practices of the car industry following the Volkswagen emissions scandal has been accused of a major conflict of interest after it emerged that nearly three quarters of its funding comes from the companies it is investigating. According to its latest annual report, the Vehicle Certification Agency receives 69.91% of its income from car manufacturers, who pay it to certify that their vehicles are meeting emissions and safety standards. The transport secretary, Patrick McLoughlin, said last month that the VCA, which also receives government funding, would be responsible for re-running tests on a variety of makes of diesel cars and investigating their real-world emissions.

The announcement followed the revelation from the US EPA last month that Volkswagen had installed illegal software to cheat emission tests, allowing its diesel cars to produce up to 40 times more pollution than is permitted. However, the apparent conflict of interest raised by VCA’s funding has prompted lawyers to demand a truly independent investigation into the industry, and will raise fresh concerns over the government’s handling of the issue of air pollution. Last week the Observer revealed how the government has been seeking to block EU legislation that would force member states to carry out surprise checks on car emissions. It has also been accused of ignoring a supreme court ruling that the government needed to urgently draw up significant plans to tackle the air pollution problem, which has been in breach of EU limits for years and is linked to thousands of premature deaths each year.

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Last days of the empire.

The Record US Military Budget. Spiralling Growth of America’s War Economy (Davies)

To listen to the Republican candidates’ debate last week, one would think that President Obama had slashed the U.S. military budget and left our country defenseless. Nothing could be farther off the mark. There are real weaknesses in Obama’s foreign policy, but a lack of funding for weapons and war is not one of them. President Obama has in fact been responsible for the largest U.S. military budget since the Second World War, as is well documented in the U.S. Department of Defense’s annual “Green Book.”

The table below compares average annual Pentagon budgets under every president since Truman, using “constant dollar” figures from the FY2016 Green Book. I’ll use these same inflation-adjusted figures throughout this article, to make sure I’m always comparing “apples to apples”. These figures do not include additional military-related spending by the VA, CIA, Homeland Security, Energy, Justice or State Departments, nor interest payments on past military spending, which combine to raise the true cost of U.S. militarism to about $1.3 trillion per year, or one thirteenth of the U.S. economy.

The U.S. military receives more generous funding than the rest of the 10 largest militaries in the world combined (China, Saudi Arabia, Russia, U.K., France, Japan, India, Germany & South Korea). And yet, despite the chaos and violence of the past 15 years, the Republican candidates seem oblivious to the dangers of one country wielding such massive and disproportionate military power. On the Democratic side, even Senator Bernie Sanders has not said how much he would cut military spending. But Sanders regularly votes against the authorization bills for these record military budgets, condemning this wholesale diversion of resources from real human needs and insisting that war should be a “last resort”.

Sanders’ votes to attack Yugoslavia in 1999 and Afghanistan in 2001, while the UN Charter prohibits such unilateral uses of force, do raise troubling questions about exactly what he means by a “last resort.” As his aide Jeremy Brecher asked Sanders in his resignation letter over his Yugoslavia vote, “Is there a moral limit to the military violence that you are willing to participate in or support? Where does that limit lie? And when that limit has been reached, what action will you take?” Many Americans are eager to hear Sanders flesh out a coherent commitment to peace and disarmament to match his commitment to economic justice. When President Obama took office, Congressman Barney Frank immediately called for a 25% cut in military spending.

Instead, the new president obtained an $80 billion supplemental to the FY2009 budget to fund his escalation of the war in Afghanistan, and his first full military budget (FY2010) was $761 billion, within $3.4 billion of the $764.3 billion post-WWII record set by President Bush in FY2008. The Sustainable Defense Task Force, commissioned by Congressman Frank and bipartisan Members of Congress in 2010, called for $960 billion in cuts from the projected military budget over the next 10 years. Jill Stein of the Green Party and Rocky Anderson of the Justice Partycalled for a 50% cut in U.S. military spending in their 2012 presidential campaigns. That seems radical at first glance, but a 50% cut in the FY2012 budget would only have been a 13% cut from what President Clinton spent in FY1998.

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They will not stop coming.

153,000 Refugees Arrived In Greece In September Alone (UNHCR)

The UN refugee agency said on Friday that refugee and migrant arrivals in Greece are expected to hit the 400,000 mark soon, despite adverse weather conditions. Greece remains by far the largest single entry point for new sea arrivals in the Mediterranean, followed by Italy with 131,000 arrivals so far in 2015. With the new figures from Greece, the total number of refugees and migrants crossing the Mediterranean this year is nearly 530,000. In September, 168,000 people crossed the Mediterranean, the highest monthly figure ever recorded and almost five times the number in September 2014.

UNHCR spokesman Adrian Edwards told journalists in Geneva that the continuing high rate of arrivals underlines the need for a fast implementation of Europe’s relocation programme, jointly with the establishment of robust facilities to receive, assist, register and screen all people arriving by sea. “These are steps needed for stabilizing the crisis,” he said. As of this morning, a total of 396,500 people have entered Greece by sea since the beginning of the year, more than 153,000 of them in September alone. The nine-month 2015 total compares to 43,500 such arrivals in Greece in all of 2014. Ninety-seven% are from the world’s top 10 refugee-producing countries, led by Syria (70%), Afghanistan (18%) and Iraq (4%).

“There was a noticeable drop in sea arrivals this week, along with the change in the weather,” Edwards said, adding that on Sept. 25, for example, there were some 6,600 arrivals. The next day, it dropped to around 2,200. “From an average of around 5,000 arrivals per day recently, it has fallen to some 3,300 over the past six days with just 1,500 yesterday. Nevertheless, any improvement in the weather is likely to bring another surge in sea arrivals.”

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Refugees in Berlin face 50-day waits just to register. The system is broken.

280,000 Refugees Arrived In Germany In September (AFP)

A record 270,000 to 280,000 refugees arrived in Germany in September, more than the total for 2014, said the interior minister of the southern state of Bavaria Wednesday. “According to current figures… we have to assume that in September 2015 between 270,000 and 280,000 refugees came to Germany,” said Joachim Herrmann. Europe’s biggest economy recorded around 200,000 migrant arrivals for the whole of 2014. The sudden surge this year has left local authorities scrambling to register as well as provide lodgings, food and basic care for the new arrivals. Herrmann highlighted the pressure on the state government of Bavaria – the key gateway for migrants arriving through the western Balkans and Hungary.

“My fellow interior ministers confirm, without exception, that pretty soon we’ll hit our limits in terms of accommodation,” he said. “It’s crucial to immediately reduce the migrant pressure on Germany’s borders,” he said. As Germany expects up to one million refugees this year, Chancellor Angela Merkel’s generosity towards migrants has sparked discord within her coalition. Merkel’s allies, the conservative CSU party governing Bavaria, have been particularly vocal in criticising the policy and warning that resources are overstretched. Berlin is now stepping up action to deter economic migrants from trying to obtain asylum in the country, in a bid to free up resources to deal with applicants from war-torn countries like Syria.

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Nov 252014
 
 November 25, 2014  Posted by at 10:47 am Finance Tagged with: , , , , , , , , ,  3 Responses »


Taylor Deluxe Kauneel auto trailer, Bay City, Michigan May 1936

“We Are Starting To Break Down”: Why So Many Americans Feel Traumatized (Salon)
Buy the All Time High (James Howard Kunstler)
The Dismal Economy: 148 Million Government Beneficiaries (Lance Roberts)
The Mystery Of America’s “Schrodinger” Middle Class (Zero Hedge)
Overvalued, Overbought, Overbullish, Extremely Vulnerable Markets (Hussman)
Canada Moving Toward American-Style Inequality (CTV)
Oil Seen Dropping Another $30 by ICAP on Commodity, Dollar Cycle (Bloomberg)
Market Manipulation Of Oil Prices Backfires On Those That Start It: Putin (RT)
Global Growth To Get $200 Billion Kick From Oil Price Crash (Telegraph)
How The Fed Has Boxed US Into An Easy-Money Corner (Satyajit Das)
The Week That Shook the Fed (Gretchen Morgenson)
Eurozone Yields Hit Record Lows: Is ECB Trumping Reality? (CNBC)
Bundesbank’s Weidmann Warns Of ‘Legal Limits’ On Further Moves By ECB (Reuters)
German Bond Yields To Trump Japan As ECB Battles Deflation (AEP)
Greece Bailout Talks Resume Amid Concerns Over Exit (Reuters)
Britain’s EU Retreat Means German Hegemony Warns Prodi (AEP)
BOJ Minutes Show Bazooka Is All About The Message (CNBC)
Kuroda Tells Japan Inc. to Stop Hoarding Cash as Costs to Rise (Bloomberg)
Hedge Funds Lose Money for Everyone, Not Just the Rich (Bloomberg)
Dudley Defense Leaves Senators Unimpressed as Fed Scrutiny Rises (Bloomberg)
Even Brazil’s President Is Involved In The Petrobras Scandal (CNBC)
Summit of Failure: How the EU Lost Russia over Ukraine (Spiegel)
In Wake Of China Rejections, GMO Seed Makers Limit US Launches (Reuters)

An absolute must read by Lynn Stuart Parramore.

“We Are Starting To Break Down”: Why So Many Americans Feel Traumatized (Salon)

Recently Don Hazen, the executive editor of AlterNet, asked me to think about trauma in the context of America’s political system. As I sifted through my thoughts on this topic, I began to sense an enormous weight in my body and a paralysis in my brain. What could I say? What could I possibly offer to my fellow citizens? Or to myself? After six years writing about the financial crisis and its gruesome aftermath, I feel weariness and fear. When I close my eyes, I see a great ogre with gold coins spilling from his pockets and pollution spewing from his maw lurching toward me with increasing speed. I don’t know how to stop him. Do you feel this way, too?

All along the watchtower, America’s alarms are sounding loudly. Voter turnout this last go-round was the worst in 72 years, as if we needed another sign that faith in democracy is waning. Is it really any wonder? When your choices range from the corrupt to the demented, how can you not feel that citizenship is a sham? Research by Martin Gilens and Benjamin I. Page clearly shows that our lawmakers create policy based on the desires of monied elites while “mass-based interest groups and average citizens have little or no independent influence.” Our voices are not heard.

When our government does pay attention to us, the focus seems to be more on intimidation and control than addressing our needs. We are surveilled through our phones and laptops. As the New York Times recently reported, a surge in undercover operations from a bewildering array of agencies has unleashed an army of unsupervised rogues poised to spy upon and victimize ordinary people rather than challenge the real predators who pillage at will. Aggressive and militarized police seem more likely to harm us than to protect us, even to mow us down if necessary. Our policies amplify the harm. The mentally ill are locked away in solitary confinement, and even left there to die. Pregnant women in need of medical treatment are arrested and criminalized. Young people simply trying to get an education are crippled with debt. The elderly are left to wander the country in RVs in search of temporary jobs. If you’ve seen yourself as part of the middle class, you may have noticed cries of agony ripping through your ranks in ways that once seemed to belong to worlds far away.

[..] A 2012 study of hospital patients in Atlanta’s inner-city communities showed that rates of post-traumatic stress are now on par with those of veterans returning from war zones. At least 1 out of 3 surveyed said they had experienced stress responses like flashbacks, persistent fear, a sense of alienation, and aggressive behavior. All across the country, in Detroit, New Orleans, and in what historian Louis Ferleger describes as economic “dead zones” — places where people have simply given up and sunk into “involuntary idleness” — the pain is written on slumped bodies and faces that have become masks of despair. We are starting to break down.

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Brilliant piece by buddy Jim: “All of these evil systems have to go and must be replaced by more straightforward and honest endeavors aimed at growing food, doing trade, healing people, traveling, building places worth living in, and learning useful things.”

Buy the All Time High (James Howard Kunstler)

Wall Street is only one of several financial roach motels in what has become a giant slum of a global economy. Notional “money” scuttles in for safety and nourishment, but may never get out alive. Tom Friedman of The New York Times really put one over on the soft-headed American public when he declared in a string of books that the global economy was a permanent installation in the human condition. What we’re seeing “out there” these days is the basic operating system of that economy trying to shake itself to pieces. The reason it has to try so hard is that the various players in the global economy game have constructed an armature of falsehood to hold it in place — for instance the pipeline of central bank “liquidity” creation that pretends to be capital propping up markets.

It would be most accurate to call it fake wealth. It is not liquid at all but rather gaseous, and that is why it tends to blow “bubbles” in the places to which it flows. When the bubbles pop, the gas will tend to escape quickly and dramatically, and the ground will be littered with the pathetic broken balloons of so many hopes and dreams. All of this mighty, tragic effort to prop up a matrix of lies might have gone into a set of activities aimed at preserving the project of remaining civilized. But that would have required the dismantling of rackets such as agri-business, big-box commerce, the medical-hostage game, the Happy Motoring channel-stuffing scam, the suburban sprawl “industry,” and the higher ed loan swindle.

All of these evil systems have to go and must be replaced by more straightforward and honest endeavors aimed at growing food, doing trade, healing people, traveling, building places worth living in, and learning useful things. All of those endeavors have to become smaller, less complex, more local, and reality-based — rather than based, as now, on overgrown and sinister intermediaries creaming off layers of value, leaving nothing behind but a thin entropic gruel of waste. All of this inescapable reform is being held up by the intransigence of a banking system that can’t admit that it has entered the stage of criticality. It sustains itself on its sheer faith in perpetual levitation. It is reasonable to believe that upsetting that faith might lead to war.

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The numbers are getting insane.

The Dismal Economy: 148 Million Government Beneficiaries (Lance Roberts)

.. the Federal Reserve has stopped their latest rounds of bond buying and are now starting to discuss the immediacy of increasing interest rates. This, of course, is based on the “hopes” that the economy has started to grow organically as headline unemployment rates have fallen to just 5.9%. If such activity were real then both inflation and wage pressures should be rising – they are not. According to the Congressional Budget Office study that was just released, approximately 60% of all U.S. households get more in transfer payments from the government than they pay in taxes.

Roughly 70% of all government spending now goes toward dependence-creating programs. From 2009 through 2013, the U.S. government spent an astounding 3.7 trillion dollars on welfare programs. In fact, today, the percentage of the U.S. population that gets money from the federal government grew by an astounding 62% between 1988 and 2011. Recent analysis of U.S. government numbers conducted by Terrence P. Jeffrey, shows that there are 86 million full-time private sector workers in the United States paying taxes to support the government, and nearly 148 million Americans that are receiving benefits from the government each month.

Yet Janet Yellen, and most other mainstream economists suggests that employment is booming in the U.S. Okay, if we assume that this is indeed the case then why, according to the Survey of Income and Program Participation conducted by the U.S. Census, are well over 100 million Americans are enrolled in at least one welfare program run by the federal government. Importantly, that figure does not even include Social Security or Medicare. (Here are the numbers for Social Security, Medicaid and Medicare: More than 64 million are receiving Social Security benefits, more than 54 million Americans are enrolled in Medicare and more than 70 million Americans are enrolled in Medicaid.) Furthermore, how do you explain the chart below? With roughly 45% of the working age population sitting outside the labor force, it should not be surprising that the ratio of social welfare as a percentage of real, inflation-adjusted, disposable personal income is at the highest level EVER on record.

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This is how you can pretend to have a recovery.

The Mystery Of America’s “Schrodinger” Middle Class (Zero Hedge)

On one hand, the US middle class has rarely if ever had it worse. At least, if one actually dares to venture into this thing called the real world, and/or believes the NYT’s report: “Falling Wages at Factories Squeeze the Middle Class.” Some excerpts:

For nearly 20 years, Darrell Eberhardt worked in an Ohio factory putting together wheelchairs, earning $18.50 an hour, enough to gain a toehold in the middle class and feel respected at work. He is still working with his hands, assembling seats for Chevrolet Cruze cars at the Camaco auto parts factory in Lorain, Ohio, but now he makes $10.50 an hour and is barely hanging on. “I’d like to earn more,” said Mr. Eberhardt, who is 49 and went back to school a few years ago to earn an associate’s degree. “But the chances of finding something like I used to have are slim to none.” Even as the White House and leaders on Capitol Hill and in Fortune 500 boardrooms all agree that expanding the country’s manufacturing base is a key to prosperity, evidence is growing that the pay of many blue-collar jobs is shrinking to the point where they can no longer support a middle-class life.

In short: America’s manufacturing sector is being obliterated: “A new study by the National Employment Law Project, to be released on Friday, reveals that many factory jobs nowadays pay far less than what workers in almost identical positions earned in the past.

Perhaps even more significant, while the typical production job in the manufacturing sector paid more than the private sector average in the 1980s, 1990s and early 2000s, that relationship flipped in 2007, and line work in factories now pays less than the typical private sector job. That gap has been widening — in 2013, production jobs paid an average of $19.29 an hour, compared with $20.13 for all private sector positions. Pressured by temporary hiring practices and a sharp decrease in salaries in the auto parts sector, real wages for manufacturing workers fell by 4.4% from 2003 to 2013, NELP researchers found, nearly three times the decline for workers as a whole.

How is this possible: aren’t post-bankruptcy GM, and Ford, now widely touted as a symbol of the New Normal American manufacturing renaissance? Well yes. But there is a problem: recall what we wrote in December 2010: ‘Charting America’s Transformation To A Part-Time Worker Society:”

.. one of the most important reasons for lower pay is the increased use of temporary workers. Some manufacturers have turned to staffing agencies for hiring rather than employing workers directly on their own payroll. For the first half of 2014, these agencies supplied one out of seven workers employed by auto parts manufacturers. The increased use of these lower-paid workers, particularly on the assembly line, not only eats into the number of industry jobs available, but also has a ripple effect on full-time, regular workers. Even veteran full-time auto parts workers who have managed to work their way up the assembly-line chain of command have eked out only modest gains.

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“QE only misallocates capital toward more speculation and low-quality debt .. ”

Overvalued, Overbought, Overbullish, Extremely Vulnerable Markets (Hussman)

.. iwhen concerns about default are rising, default-free, low-interest rate money is not considered to be an inferior asset, and as a result, its increased availability does not provoke risk-seeking behavior. If we observe narrowing credit spreads and stronger uniformity in market internals, we will be able to infer a shift toward risk-seeking (and in turn, a greater likelihood that monetary easing will provoke further speculation). That won’t make stocks any cheaper, and downside risk will still need to be managed, but our immediate concerns would be less dire. At present, current market conditions and the lessons of history encourage us to be aware that very untidy market outcomes could unfold in very short order. [..] QE only misallocates capital toward more speculation and low-quality debt (primarily junk and leveraged loan issuance), without much impact on real growth. [..]

The upshot is this. Quantitative easing only “works” to the extent that default-free, low interest liquidity is viewed as an inferior holding. When investor psychology shifts toward increasing risk aversion – which we can reasonably measure through the uniformity or dispersion of market internals, the variation of credit spreads between risky and safe debt, and investor sponsorship as reflected in price-volume behavior – default-free, low-interest liquidity is no longer considered inferior. It’s actually desirable, so creating more of the stuff is not supportive to stock prices. We observed exactly that during the 2000-2002 and 2007-2009 plunges, which took the S&P 500 down by half in each episode, even as the Fed was easing persistently and aggressively. A shift toward increasing internal dispersion and widening credit spreads leaves risky, overvalued, overbought, overbullish markets extremely vulnerable to air-pockets, free-falls, and crashes.

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It hurts to see Canada become so much like the US in so many ways.

Canada Moving Toward American-Style Inequality (CTV)

A prominent U.S. political economist says Canada is moving toward American-style inequality, and believes austerity economics and tax cuts for corporations are making the problem worse. Robert Reich, the secretary of labor during Bill Clinton’s presidency, now writes extensively on income equality and was in Canada this week speaking at an event for the Broadbent Institute. “The United States economy and the Canadian economy are going on parallel courses,” Reich said in an interview on CTV Question Period. With Japan moving into an official recession and much of Europe still mired in a slowdown, there’s still an idea that countries need to cut government spending during the recovery.

That kind of thinking, Reich says, has the effect of worsening the ratio of debt to the total economy. “Austerity economics does not work,” Reich said. “If you slow down the economy because government is cutting down so much that there’s not enough demand to keep the economy going, then you end up with a worse ratio of debt to GDP.” The U.S. and Canadian economies are growing too slowly, he says. And many wealthy people or corporations, he said, are putting their money in places where they can get the highest return – but that kind of investment isn’t what creates jobs. “Without customers, businesses are not going to create jobs,” he said.

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“The long-term cycle points to the dollar moving higher and the euro declining into 2016, while commodities move lower through 2016 and 2017.”

Oil Seen Dropping Another $30 by ICAP on Commodity, Dollar Cycle (Bloomberg)

New York-traded crude oil will probably drop another $30 in the next two years as long-term cycles in commodities and currencies converge, no matter what happens at this week’s OPEC meeting and Iran nuclear talks, according to brokerage United-ICAP. West Texas Intermediate crude, the U.S. benchmark, has collapsed five times since the contract’s introduction in 1983, said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey. The plunges in 1986, 1991, 1998, 2001 and 2008 coincided with an OPEC price war, recessions and financial crises, and were also tied to cycles in commodities or the dollar, said Zimmerman, who was calling for a drop in oil prices as early as April. “This time we have both.”

“Crude is heading lower, with the high $40s or low $50s being touched by 2017,” Zimmerman said. The long-term cycle points to the dollar moving higher and the euro declining into 2016, while commodities move lower through 2016 and 2017, he said. The average drop during the previous five major declines was about 62%, according to Zimmerman. Oil prices have dropped 32% from the year’s high in June amid slower economic growth and surging production in the U.S. and OPEC members. The Bloomberg dollar index is up 10% since the low in May and the euro is down 12%. The Bloomberg Commodity Index dropped 17% to a five-year low this month.

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“What is the profitability of this production like? It’s from $65 to $83 per barrel. Now when the price of a barrel of oil has fallen below $80, shale gas production becomes unprofitable.” said Putin.”

Market Manipulation Of Oil Prices Backfires On Those That Start It: Putin (RT)

The modern world is interdependent and there is no guarantee that sanctions, a sharp fall in oil prices, or the depreciation of the ruble won’t backfire on those who provoked them, says Russian President Vladimir Putin. “If undercharging for energy products occurs deliberately, it also hits those who introduce these limitations. Problems arise, they will continue to grow, worsening the situation, and not only for Russia but also for our partners, including oil and gas producing countries,” said Putin in an interview to TASS. The Russian leader suggested that the fall in oil prices is due to the sharp increase in the production of shale oil and gas by the United States, but questioned its commercial viability. “What is the profitability of this production like? It’s from $65 to $83 per barrel. Now when the price of a barrel of oil has fallen below $80, shale gas production becomes unprofitable.” said Putin.

The President said he sees objective reasons for the decline in oil prices. “The supply has increased from Libya, surprising as it may seem it produces more, Iraq as well, despite all the problems … ISIS sell oil illegally at $30 per barrel on the black market, Saudi Arabia increased its production and consumption decreased due to a period of stagnation or, say, a decrease compared with the forecasts of global economic growth,” he said. Talking about the Russian economy and the weakening ruble, Putin said the situation with oil prices doesn’t hit the budget as hard as expected. “…we are confident in solving social issues. Including the ones of the defense industry. Russia has its own base for import substitution,” he said. “Thank God, we’ve received a lot from previous generations, and that we’ve done much to modernize the industry over the past decade and a half. Does it damage us? Partly, but not fatally,” Putin concluded.

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SocGen is way off target here, any benefits will vanish along the way. The biggest problem all around today is deflation. Lower oil prices will exacerbate the problem, not solve it. People are simply not going to drive twice as much.

Global Growth To Get $200 Billion Kick From Oil Price Crash (Telegraph)

Global economies are set for a lift of more than $200bn (£127.4bn) within the next year, thanks to a “once in a generation downturn” in oil prices. Brent – an oil classification that serves as a global benchmark – has already plummeted by as much as 30pc from a peak of $115 a barrel in June. The decline of oil, and the effect that has on lower energy costs, will serve to boost growth and keep inflation contained, according to French bank Societe Generale. The lender’s economists have calculated that a $20 a barrel fall in oil prices could increase global output by an extra 0.26 percentage points after the first year of the shock, with producers in North America and Asia reaping much of the benefit.

This decline in oil has been “a major correction” said Michael Haigh, head of commodities research at the French bank. The downturn differs from previous falls because of its root cause – an oversupply of oil that “is not temporary in nature”, Mr Haigh argued. “We believe that we’re in the middle of a very fundamental change in the oil markets – the type of change that only happens every decade or two”, he added. Oil’s recent fall to around $80 a barrel has been driven “by both weak demand and increased supply”, said Michala Marcussen, Societe Generale’s global head of economics. A marked increase in Libyan oil production alongside a structural rise in US volumes, as a result of the shale boom in North America, have contributed to higher supply. With energy accounting for approximately 9pc of global inflation, a reduction in oil prices should also result in more subdued price growth.

If Brent Crude fell as low as $70 a barrel, this would reduce Societe Generale’s forecast for UK inflation by 0.3 percentage points for the whole of next year. But gains from weaker prices are unlikely to act as a panacea for nations suffering from lower growth. “Policy makers hoping that low oil prices will salvage growth should think twice,” Ms Marcussen cautioned. “In particular euro area leaders would do well to act resolutely on the European Central Bank’s calls for structural reforms at an accelerated pace.”

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” .. a 3% increase in government bond rates would result in a change in the value of outstanding government bonds ranging from a loss of around 8% of GDP for the U.S. to around 35% for Japan.”

How The Fed Has Boxed US Into An Easy-Money Corner (Satyajit Das)

Despite the Federal Reserve ending its purchases of Treasury bonds, U.S. monetary policy remains accommodative — and will be for a long time to come. The downside is too great. Withdrawing fiscal stimulus would slow economic activity. Reduction in government services and higher taxes hits disposable incomes, especially when wage growth is stagnant. In turn, this leads to a sharp contraction in consumption. Slower growth, exacerbated by high fiscal multipliers, makes it difficult to correct budget deficits and control government debt levels. Accordingly, the Fed’s ability to reverse an expansionary fiscal policy is restricted, at best, corroborating economist Milton Friedman’s sarcastic observation: “There is nothing so permanent as a temporary government program.”

The Fed is basically stuck. Its ZIRP and QE policies are difficult to change. Normalization of interest rates, reducing purchases of government bonds, and the reduction of central bank holdings of securities, all risk risks higher rates and reduced available funding for economic expansion. Low rates, meanwhile, allow overextended companies and nations to maintain or increase borrowings. Central banks also cannot sell government bonds and other securities held on their balance sheet. The size of these holdings means that disposal would lead to higher rates, resulting in large losses to the central bank as well as commercial banks and investors. The reduction in liquidity would tighten the supply of credit, destabilizing a fragile financial system.

In 2013, the Federal Reserve’s tentative “taper,” in effect a slight reduction in bond purchases, triggered market volatility. Resulting higher mortgage rates slowed the rate of refinancing of existing mortgages and the recovery of the housing market. A 1% rise in rates would increase the debt-servicing costs of the U.S. government by around $170 billion. A rise of 1% in G-7 interest rates would increase the interest expense of the G-7 countries by around $1.4 trillion. Higher interest rates would also affect indebted consumers and corporations. In the U.S., for example, a 1% increase in interest rates, according to a McKinsey Global Institute Study, would increase household debt payments collectively to $876 billion from $822 billion, a rise of 7%. According to the Bank of International Settlements, a 3% increase in government bond rates would result in a change in the value of outstanding government bonds ranging from a loss of around 8% of GDP for the U.S. to around 35% for Japan.

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“But it was a good week for anyone interested in understanding how this secretive institution works. Or doesn’t.”

The Week That Shook the Fed (Gretchen Morgenson)

The Federal Reserve Board prefers to operate in a shroud of secrecy, and its officials really don’t like having to answer to anybody. So it was fascinating to learn last week that the Fed is embarking on a soul-searching campaign. Its inspector general will take up the astonishing questions of whether the Fed’s big-bank examiners have what they need to do their jobs and whether they receive the support of their superiors when they challenge bank practices. Or, as the Fed put it, whether “channels exist for decision-makers to be aware of divergent views” among the Fed’s bank examination teams. Asking such questions is an about-face for the Fed, whose officials have long maintained that it is the most sophisticated and enlightened of financial regulators. And given that the Fed received extensive new regulatory powers under the Dodd-Frank financial reform law, it is troubling indeed that it may not be certain that its bank examiners have what they need to do their jobs.

The Fed announcement looks an awful lot like damage control. It came late Thursday afternoon, directly after one Senate hearing that was critical of Fed practices and before another on Friday. It also came after a bill proposed by Senator Jack Reed, a Rhode Island Democrat, that would change the way the head of the most powerful of the 12 district banks — the Federal Reserve Bank of New York — is appointed. Currently, the president of the New York Fed is selected by its so-called public board members — those not affiliated with financial institutions. Senator Reed’s proposal would give the president of the United States, with Senate approval, responsibility for naming the president of the New York Fed. Clearly, last week was not a good one for the Fed. But it was a good week for anyone interested in understanding how this secretive institution works. Or doesn’t.

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The periphery is loaded with zombies.

Eurozone Yields Hit Record Lows: Is ECB Trumping Reality? (CNBC)

It’s hard to believe it’s just a few years since countries like Ireland and Spain had to go cap-in-hand to international lenders – at least if you look at their bond yields. Ireland’s 10-year bond yield, usually reflective of a country’s economic performance, hit a record low of 1.477% Monday, while Spanish 10-year bond yields fell below 2% for the first time ever. Ireland is expected to have one of the strongest economic rebounds in the euro zone, with 3.7% growth in GDP this year, according to Deutsche Bank forecasts. Yet it is also facing plenty of headwinds. There are increasing concerns that the current administration may not last for its maximum five-year term, as disputes over water charges and the recording of phone calls to police stations have destabilized the coalition.

Taoiseach Enda Kenny’s Fine Gael party would get just 22% of the vote now, down from 36% in the 2011 elections, according to a Red C/Sunday Business Post opinion poll published at the weekend. Polls suggest a large swing towards Sinn Fein, formerly better known as the political wing of the Irish Republican Army but now a growing voice of dissent from the main parties in Dublin. Independent candidates, often campaigning in direct opposition to a single government policy, have also been boosted by the waning popularity of the two traditionally dominant parties, Fine Gael and Fianna Fail. The troika of the International Monetary Fund, European Commission and ECB, who bailed-out Ireland and its banks during the credit crisis, warned on Friday that its current budget “makes less progress than desirable” towards reducing its budget deficit – and that its recovery is at risk if there is a further slowdown in the euro zone.

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“This would be a radical change in the structure of the global financial system.”

German Bond Yields To Trump Japan As ECB Battles Deflation (AEP)

German bond yields are to fall below Japanese levels and plumb depths never seen before in history as Europe becomes the epicentre of global deflationary forces, according to new forecast from the Royal Bank of Scotland. “We are seeing `Japanification’ setting in across Europe,” said Andrew Roberts, the bank’s credit strategist. “We expect 10-year Bund yields to cross the 10-year Japanese government bond and we are amply positioned for such an outcome.” Mr Roberts said it is a “weighty win-win” situation for investors. If the European Central Bank launches full-blown quantitative easing, it will almost certainly have to buy large amounts of German Bunds, and these are becoming scarce. “Net supply in Germany is zero since they are in budget surplus this year and next, and they have written a balanced-budget amendment into their constitution. There are simply fewer and fewer Bunds to buy, and everybody wants them,” he said.

It is assumed that if the ECB buys sovereign bonds, it will have to buy them evenly in accordance with its capital “key”. This implies that 28pc would have to be German debt. Yet if the ECB fails to deliver on hints that it will expand its balance sheet by €1 trillion, the damage would be so enormous that Europe would be sucked into a depressionary vortex, according to the bank. Bund yields would fall for different reasons, as debt markets began to reflect a Japanese-style deflation trap. The bank’s credit team is betting that the ECB will act more quickly and on a greater scale than widely assumed, launching purchases of corporate bonds as soon as early December and full sovereign QE in February once the European Court has ruled on a previous debt rescue plan (OMT). “We think Germany will be dragged to the table, kicking and screaming all the time,” said Mr Roberts.

Japanese yields are just 0.45pc, which is steeply negative in real terms now that ‘Abenomics’ is driving up Japan’s inflation rate. This is a deliberate strategy to whittle away a public debt that has reached 245pc of GDP. German yields are 0.78pc. RBS expects the two bonds to cross as Japanese yields rise while German yields fall. This would be a radical change in the structure of the global financial system.

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Some German court at some point will strike Draghi down.

Bundesbank’s Weidmann Warns Of ‘Legal Limits’ On Further Moves By ECB (Reuters)

The European Central Bank could encounter “legal limits” if it pursued additional steps to combat low inflation, the president of Germany’s Bundesbank said on Monday, calling for a focus on growth rather than any government bond buying. “Instead of focusing on the purchasing program, we should focus on how you find growth,” Jens Weidmann told an audience in Madrid, when asked about the possibility of the ECB buying government bonds, a step known as quantitative easing. He warned that it would be difficult to pursue such steps to tackle low inflation. “Of course there are other measures which are more difficult, because they are untested, because they are less clear … and of course they hit the legal limits of what you can do,” said Weidmann, who sits on the ECB’s Governing Council. “This is why discussions are so intense,” he added.

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There is nothing good left for Greece in the eurozone. It’s as simple as that.

Greece Bailout Talks Resume Amid Concerns Over Exit (Reuters)

Greece’s government will resume stalled talks with EU/IMF lenders in Paris on Tuesday, as Athens pushes to conclude a crucial review by inspectors so it can make an early exit to an unpopular bailout programme. Athens had set a 8 December deadline to complete the review. But talks floundered over a projected budget gap for next year and EU/IMF inspectors did not return as expected to Athens this month, leading to concerns that a delayed review would derail Greece’s plan to quit its bailout by the end of the year. The two sides will meet in Paris “to advance the review and examine the framework for the day after”, the bailout ends, the Greek Finance Ministry said in a statement. A ministry official declined to say if the talks would continue beyond Tuesday, but said the bailout would not be extended past the end of the year.

Greece’s government has staked its own survival on abandoning the €240bn (£190bn) bailout programme, which has entailed unpopular austerity measures, ahead of schedule. Prime minister Antonis Samaras needs to push through his candidate in a presidential vote in February to avoid being forced to call early elections; he is is hoping that leaving the bailout will help win him enough support to survive the vote. But the final bailout review, like most reviews before it, has struggled amid rows over reforms and austerity cuts. Athens and its foreign lenders have been at loggerheads over the projected deficit for next year, with the lenders arguing Greece will miss the target of 0.2% of gross domestic product because of a new payback plan for austerity-hit Greeks who owe money to the state. The Greek government, however, has so far resisted changes demanded by the inspectors, going so far as to submit its 2015 budget to parliament last week without the approval of lenders.

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You guys

Brexit or Grexit, if one leaves more will follow.

Britain’s EU Retreat Means German Hegemony Warns Prodi (AEP)

Britain is already a lame duck within the EU’s internal governing structure and is losing influence “by the day” in Brussels, even before David Cameron holds a referendum on withdrawal. This self-isolation has upset the European balance of power in profound ways, leading ineluctably to German hegemony and a unipolar system centred on Berlin. It is made worse by the near catatonic condition of France under Francois Hollande. Smaller states no longer form clusters of alliances around a three-legged diplomatic edifice made up of Germany, France, and Britain. They are instead scrambling to adapt to a new European order where only one state now counts. So too is the EU’s permanent civil service and the institutional machinery in Brussels and Luxembourg. Such is the verdict of Roman Prodi, the former Italian premier and ex-president of the European Commission.

I pass on his thoughts because the Brexit debate in the UK invariably dwells on what the consequences might or might not be for Britain, while taking it for granted that Europe itself would somehow sail on sedately as if nothing had changed. But everything would change, and we can already discern it. “France is ever more disoriented and Britain is losing power by the day in Brussels after its decision to hold a referendum on EU membership,” he said. “All the countries that previously maintained an equilibrium between Germany, France, and Britain (from Poland, to the Baltic States, passing through Sweden and Portugal) are regrouping under the German umbrella,” he told the Italian newspaper Il Messaggero. “Germany is exercising an almost solitary power. The new presidents of the Commission and the Council are men who rotate around Germany’s orbit, and above all there is a very strong (German) presence among the directors, heads of cabinet and their deputies. The bureaucracy is adapting to the new correlation of forces,” he said. [..]

The EU is either a treaty club of democracies and equals, or it is nothing.

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As Abe said at some point last year: all it takes for Abenomics to succeed is for people to believe in it. Well, they don’t. So now what, Shinzo?

BOJ Minutes Show Bazooka Is All About The Message (CNBC)

Latest minutes from the Bank of Japan (BOJ) released Tuesday reveal that the central bank’s surprise move in October to expand its already-massive stimulus program was about sending the message that it will do whatever it takes to “conquer deflation.” “The BOJ intended to send a strong message, beyond the financial markets, to jolt the wider economy,” said Shun Maruyama, Chief Japan Equity Strategist at BNP Paribas. “Consumer and business leaders remain unmoved by monetary policy.” Consumer inflation looks set to stall at around 1%, half of the BOJ’s stated target, he added, noting capital investments are picking up but not by enough to boost economic growth.

The BOJ’s commitment to pull the country out of two decades of deflation remains “unshakable”, according to the minutes from its policy meeting on October 31, when the central bank expanded its asset purchase program by 30 trillion yen to 80 trillion yen. “If no policy action was taken at this meeting, this could be understood as a breach of the commitment (to achieve its inflation target of 2%), thereby possibly impairing the Bank’s credibility significantly,” said one board member. The members that supported further monetary easing argued that the BOJ needed to “convey the bank’s unwavering resolve to conquer deflation.” In a tight ballot, five members backed the latest measures, and four voted against.

The BOJ kept its goal to boost the inflation rate to 2% by next year, but falling oil prices could put the target in question. When stripped of the effect of April’s consumption tax hike, Japan’s core inflation rate rose 1% in September from the year-ago period, its lowest pace in nearly a year. “The year-on-year rate of increase in the CPI (all items less fresh food) was likely to be at around 1% for some time, mainly due to the effects of the decline in crude oil prices,” board members said.

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The hoarding meme in economics is a red flag. Bernanke’s Asian ‘savings glut’ all over again.

Kuroda Tells Japan Inc. to Stop Hoarding Cash as Costs to Rise (Bloomberg)

Bank of Japan chief Haruhiko Kuroda urged business leaders to use profits more productively, saying hoarding cash will become costly as the central bank stamps out deflation. Companies could boost investment in facilities and jobs, taking advantage of a weaker yen, Kuroda said today in a speech in Nagoya. At the same time, the BOJ will continue to spur price gains, adjusting its unprecedented easing policy as needed to achieve its inflation goal, he said. Japanese companies are headed toward their highest profits ever as a weaker yen resulting from the BOJ’s stimulus boosts Toyota and other exporters. Japan Inc. holds near-record cash while capital spending in the second quarter was more than 50% lower than a peak in the first three months of 2007. “Kuroda is making it clear it’s companies’ turn to act,” said Mari Iwashita, an economist at SMBC Friend Securities.

“Capital spending, wages and price settings are all vital for the BOJ but are out of its hands. Kuroda must convince companies the economy will get better and deflation will end.” Kuroda last week secured a wider board majority for easing that the BOJ boosted on Oct. 31, and warned the central bank’s key gauge of inflation could fall below 1% after the world’s third-largest economy slid into recession. Falling prices over two decades of stagnation made holding cash a viable option for companies looking for safety and real returns on capital. The BOJ has been making steady progress in shaking a “deflationary mindset,” Kuroda said. Kuroda called on business leaders to take “action” that looks toward an economy that has overcome deflation. “As a corporate strategy, using their profits in a more productive manner is imperative,” Kuroda said. “I have great interest in developments in wages and price settings through spring of next year.”

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“Guess what the hedge fund firms are doing now? Hunting for new, less skeptical customers.”

Hedge Funds Lose Money for Everyone, Not Just the Rich (Bloomberg)

When Douglas Kobak was an adviser at a large brokerage firm, he suggested his wealthiest clients buy a hedge fund promising to be “a very conservative alternative to bonds.” Then the credit crisis hit in 2008, the fund imploded and investors got 45 cents on the dollar — as long as they promised not to sue. Since then, mediocrity is more common than blow-ups. Hedge funds have lagged behind stocks while still charging fees of up to 2% of assets and 20% of gains. For the rich and their advisers, “the sex appeal of hedge funds has worn off,” says Kobak, now head of Main Line Group Wealth Management. Guess what the hedge fund firms are doing now? Hunting for new, less skeptical customers.

While only those with at least $1 million are allowed to invest in hedge funds, anyone can buy a mutual fund with a hedge fund strategy. Unfortunately, these “alternative” funds come with the same disadvantages hedge funds have: high fees, inconsistent performance and strategies that take a PhD to decipher. By starting alternative funds, mutual fund companies get a chance to bring in revenue they’re losing to cheap index funds and exchange-traded funds. In a deal announced Nov. 18, Blackstone Alternative Asset Management is coming up with hedge-fund-like products for mutual fund company Columbia Management. They’ll join 11 other U.S. mutual funds and ETFs classified by Bloomberg as “alternative,” which together hold $68 billion in assets. One in five of those assets is held by the largest fund, the MainStay Marketfield Fund. Started in 2007, it’s one of the oldest alternative funds, and one of the most disappointing.

After a good start from 2007 to 2009, the fund mostly matched the stock market in 2010 and 2011, and then lagged behind it in 2012 and 2013. This year, it has dropped almost 11%, a mirror image of the S&P 500’s 11.6% gain. Unreliable and disappointing performance is getting to be as common among alternative funds as among hedge funds. The Bloomberg Global Aggregate Hedge Fund index is up 2% year-to-date. The average return of an alternative fund open to all investors is 1.1%, behind the inflation rate. High-quality corporate bonds have returned 70% more than the median alternative fund over the last three years. The stock market has brought in eight times as much as alternatives. And these blah results don’t come cheap. The MainStay Marketfield Fund has been losing money while charging an expense ratio of 2.6% per year. That’s pricier than 99% of all funds, though it’s not as extreme among alternative funds. They charge an average of 1.74% per year, 20 times as much as the cheapest index funds.

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“Goldman Sachs, the Wall Street bank where Dudley was chief U.S. economist for a decade.”

Dudley Defense Leaves Senators Unimpressed as Fed Scrutiny Rises (Bloomberg)

Federal Reserve Bank of New York President William C. Dudley’s defense of his record on financial supervision is unlikely to appease lawmakers seeking to tighten their oversight of the central bank. In a tense exchange with Senator Elizabeth Warren at a Nov. 21 hearing, Dudley rejected her assertion that there had been a “long list” of regulatory failures at the New York Fed. Warren, a Massachusetts Democrat, suggested that if Dudley doesn’t fix a “cultural problem” at the bank, “we need to get someone who will.” While the Senate doesn’t have the authority to appoint or remove Fed presidents, the exchange was a sign of growing frustration among Republicans and Democrats alike. Republicans, who have been critical of the Fed’s loose monetary policy, will take control of the Senate in January, adding to pressure on the Fed from Democrats who see the central bank as too close to the Wall Street banks it supervises.

“The Fed is as vulnerable as any time since the 1980s,” when then-Chairman Paul Volcker drew the ire of politicians for driving up interest rates to levels that threw the country into a recession, said Karen Shaw Petrou, managing partner of Federal Financial Analytics. The next Congress will be “really challenging for the Fed.” Last week’s hearing before a subcommittee of the Senate Banking Committee was prompted by allegations made by a former New York Fed bank examiner, Carmen Segarra, who said her colleagues were too deferential to Goldman Sachs, the Wall Street bank where Dudley was chief U.S. economist for a decade.

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She headed the board of directors as the money laundering and organized crime (those are the charges) were going on. And of course now says she had no idea. Which makes one wonder what she has no idea of now she leads the government. Ignorance doesn’t come high on a president’s list of job qualifications.

Even Brazil’s President Is Involved In The Petrobras Scandal (CNBC)

Energy giant Petrobras is engulfed in a corruption scandal that could prove to be Brazil’s biggest, threatening to engulf the country’s most senior politicians—including its president. Even the company is not downplaying the events. In a news release last week to explain why it had delayed its upcoming financial report, Petrobas said it was “undergoing a unique moment in its history, in light of the accusations and investigations of the “Lava Jato Operation” (Portuguese for “Operation car wash”) being conducted by the Brazilian Federal Police, which has led to charges of money laundering and organized crime.” CNBC takes a look at the facts behind the scandal and the implications for other oil companies and Brazil itself. [..]

Petrobras executives are alleged to have paid politicians for contracts, using money skimmed from company profits. The head of the country’s budget watchdog, Joao Augusto Nardes, has said the kickbacks may total as much as 4 billion Brazilian reais ($1.6 billion), according to the WSJ. The company has neither confirmed nor denied the allegations. It has hired independent auditors to investigate further, in addition to the official investigation by the Brazilian Federal Police. The country’s most senior politicians are implicated, including recently re-elected President Dilma Rousseff, who previously headed the Petrobras board of directors.

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Der Spiegel provides a lengthy history of how failure decided the future of Ukraine, and the German magazine doesn’t spare Merkel.

Summit of Failure: How the EU Lost Russia over Ukraine (Spiegel)

One year ago, negotations over a Ukraine association agreement with the European Union collapsed. The result has been a standoff with Russia and war in the Donbass. It was an historical failure, and one that German Chancellor Angela Merkel contributed to.

Only six meters separated German Chancellor Angela Merkel and Ukrainian President Viktor Yanukovych as they sat across from each other in the festively adorned knight’s hall of the former Palace of the Grand Dukes of Lithuania. In truth, though, they were worlds apart. Yanukovych had just spoken. In meandering sentences, he tried to explain why the European Union’s Eastern Partnership Summit in Vilnius was more useful than it might have appeared at that moment, why it made sense to continue negotiating and how he would remain engaged in efforts towards a common future, just as he had previously been. “We need several billion euros in aid very quickly,” Yanukovych said. Then the chancellor wanted to have her say. Merkel peered into the circle of the 28 leaders of EU member states who had gathered in Vilnius that evening. What followed was a sentence dripping with disapproval and cool sarcasm aimed directly at the Ukrainian president.

“I feel like I’m at a wedding where the groom has suddenly issued new, last minute stipulations.” The EU and Ukraine had spent years negotiating an association agreement. They had signed letters of intent, obtained agreement from cabinets and parliaments, completed countless diplomatic visits and exchanged objections. But in the end, on the evening of Nov. 28, 2014 in the old palace in Vilnius, it became clear that it had all been a wasted effort. It was an historical earthquake. Everyone came to realize that efforts to deepen Ukraine’s ties with the EU had failed. But no one at the time was fully aware of the consequences the failure would have: that it would lead to one of the world’s biggest crises since the end of the Cold War; that it would result in the redrawing of European borders; and that it would bring the Continent to the brink of war. It was the moment Europe lost Russia.

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Even Reuters cheerleading can’t prevent this.

In Wake Of China Rejections, GMO Seed Makers Limit US Launches (Reuters)

China’s barriers to imports of some U.S. genetically modified crops are disrupting seed companies’ plans for new product launches and keeping at least one variety out of the U.S. market altogether. Two of the world’s biggest seed makers, Syngenta and Dow AgroSciences, are responding with tightly controlled U.S. launches of new GMO seeds, telling farmers where they can plant new corn and soybean varieties and how can the use them. Bayer CropScience told Reuters it has decided to keep a new soybean variety on hold until it receives Chinese import approval. Beijing is taking longer than in the past to approve new GMO crops, and Chinese ports in November 2013 began rejecting U.S. imports saying they were tainted with a GMO Syngenta corn variety, called Agrisure Viptera, approved in the United States, but not in China.

The developments constrain launches of new GMO seeds by raising concerns that harvests of unapproved varieties could be accidentally shipped to the world’s fastest-growing corn market and denied entry there. It also casts doubt over the future of companies’ heavy investments in research of crop technology. The stakes are high. Grain traders Cargill and Archer Daniels Midland, along with dozens of farmers, sued Syngenta for damages after Beijing rejected Viptera shipments, saying the seed maker misrepresented how long it would take to win Chinese approval. In the weeks since Cargill first sued on Sept. 12, Syngenta’s stock has touched a three-year low. ADM in its lawsuit last week alleged the company did not follow through on plans for a controlled launch of Viptera corn. Syngenta says the complaints are unfounded.

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Oct 202014
 
 October 20, 2014  Posted by at 11:17 am Finance Tagged with: , , , , , , , , , ,  3 Responses »


John Vachon Houses in Atlanta, Georgia May 1938

Leveraged Money Spurs Selloff; ‘Liquidity Isn’t What It Used to Be’ (Bloomberg)
Fed’s Rosengren Sticks to 3% Growth Forecast, Sees End for QE (Bloomberg)
China GDP Report May Reignite Global Growth Panic (CNBC)
The ECB Changes Its Mind On Which Bonds To Monetize, Then Changes It Again (ZH)
Hedge Funds Cut Bullish Bets on Crude as Prices Tumble (Bloomberg)
Is The US Pushing Oil Prices Down To Hurt Russia? (CNBC)
Russia Credit Rating Nears Junk as Reserves Erode Amid Sanctions (Bloomberg)
Russia to Reject Conditions to End Sanctions After Ukraine Talks (Bloomberg)
Two Female Japan Ministers Resign in One Day in Blow to Abe (Bloomberg)
Abe Hints At Delaying Japan Sales Tax Hike (FT)
Deeper Oil Slump Seen as ‘Disaster’ Risk for Australian LNG (Bloomberg)
The $2 Trillion Megacity Dividend China’s Leaders Oppose (Bloomberg)
The Eurozone’s Problems Are Based in Politics (WSJ)
The Unending Economic Crisis Makes Us Feel Powerless And Paranoid (Guardian)
German Intelligence Claims Pro-Russian Separatists Downed MH17 (Spiegel)
China Wastes 35 Million Metric Tons of Grain a Year, Enough to Feed 200 Million (BW)
Ebola Patients Had Possible Contact With 300 in US (Bloomberg)
Ebola Front-Line Doctors at Breaking Point (Bloomberg)

” … you sell what you can, not what you want”

Leveraged Money Spurs Selloff; ‘Liquidity Isn’t What It Used to Be’ (Bloomberg)

When markets are buckling and volatility is signaling a crisis, you sell what you can, not what you want. That’s what happened last week on Wall Street, where slowing economic growth in Europe, Ebola anxiety and escalating conflicts in the Middle East and Ukraine tore through the calm with a force not seen in three years. Loath to find out what their record holdings of corporate bonds and leveraged loans were worth as liquidity thinned and markets slid, professional traders turned to stocks and Treasuries to defuse risk. The result was a frenzy. U.S. government debt volume surged to an all-time high of $946 billion at ICAP Plc, the world’s largest interdealer broker, more than 40% above the previous record. About 11.9 billion shares changed hands on U.S. equity exchanges on Oct. 15, the most since the European debt crisis of 2011.

“Whenever people can’t sell their illiquid assets, they turn to the U.S. stock market because everyone is involved in it and that’s what they can sell,” said Matt Maley, an equity strategist at Miller Tabak. “That’s why the market selloff was so sharp. You sell what you can, and the deepest, most liquid asset in the world is U.S. stocks.” Equity owners were blindsided by swings that erased the Dow Jones Industrial Average’s 2014 gain and wiped out $672 billion of global market value. The 30-stock gauge swung in a 458-point range on Oct. 15, the widest since 2011. Its 263-point rally on Oct. 17 trimmed the weekly decline to 1%, the fourth consecutive drop. Measures of turbulence soared this month. The Chicago Board Options Exchange Volatility Index (VIX) has gained 35% in October and touched its highest level since June 2012. A gauge compiled by Bank of America tracking swings in equities, Treasuries, currencies and commodities reached a 13-month high just three months after hitting its lowest level ever.

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Yet another Fed head speaks out. Starting to be a long series.

Fed’s Rosengren Sticks to 3% Growth Forecast, Sees End for QE (Bloomberg)

Federal Reserve Bank of Boston President Eric Rosengren said the Fed shouldn’t overreact to turmoil in financial markets as it approaches its next policy making meeting at the end of the month. “Volatility by itself isn’t a bad thing, it’s just reflecting there’s a lot of uncertainty in the market,” Rosengren said in an Oct. 17 interview in Boston. “Just because we’re seeing volatility in the last two weeks isn’t enough to have me fundamentally change my forecasts.” Rosengren said he believes the Federal Open Market Committee should halt bond purchases as planned when it meets Oct. 28-29, ending its campaign of so-called quantitative easing. He added the program could be extended if there is additional erosion in the outlook for economic growth. “If we get a lot of information in the next week and a half that indicates there’s a much more severe problem, I wouldn’t rule it out,” he said.

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What are the odds on that? Beijing will say whatever it wants to say.

China GDP May Reignite Global Growth Panic (CNBC)

China may ignite fresh panic over the state of the global economy when it reports its third quarter GDP on Tuesday, which could confirm a marked slowdown in the world’s main growth engine. The economy is forecast to have grown 7.2% in the July-September period, according to a Reuters poll, the slowest pace since the first quarter of 2009 and down from 7.5% in the previous three months. “The sagging housing market has affected the economy more broadly, weighing on investment and on commodity production,” Alaistair Chan, economist at Moody’s Analytics, wrote in a report. “A bright spot was the acceleration in exports, but this was not sufficient to keep the economy from growing below potential,” he said.

Recent economic indicators, including weaker-than-expected inflation, have painted a grim picture of the world’s second-largest economy. China’s annual consumer inflation slowed to 1.6% in September, a level not seen since January 2010, suggesting rising risks of deflation. The weakening inflationary pressure is a reflection that the economy is growing below its potential growth rate, with too much spare capacity and too little demand, economists explain.

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Just plain fun.

The ECB Changes Its Mind On Which Bonds To Monetize, Then Changes It Again (ZH)

To get a sense of just how chaotic, unprepared, confused and in a word, clueless the ECB is about just its “private QE”, aka purchases of ABS, which should begin in the “next few days” (but certainly don’t hold your breath) – let alone the monetization of public sovereign debt – here is Exhibit A. Because if you were confused about what is about to happen, don’t worry: it appears the ECB hardly has any idea either, because it was just on October 7 when 40 ABS bonds were dropped from the ECB’s “eligible for purchasing” list. And then, just a week later, the ECB changed its mind about changing it mind, and reinstated 19 of the ineligible bonds right back! Citi’s Himanshu Shrimali explains the stunning flip flop that only the ECB could have pulled off without losing all its credibility (perhaps because it no longer really has any):

As straight forward as the details of the ECB’s ABS purchase programme (ABSPP) released on 2 Oct 2014 seemed, many market participants were taken by surprise on 7 October when about 40 bonds became ineligible under the central bank’s collateral framework and 19 of them were again reinstated on 15 October. We understand that the bonds were initially removed from the list of eligible securities because of inadequate servicer continuity provisions – a requirement which came into force on 1 October 2013 but had a 1-year transitional period until 1 October 2014.

We believe the reinstatements occurred because the ECB had earlier misinterpreted the adequacy of servicer continuity provisions in these bonds. Some of these expelled bonds, which include Spanish and Portuguese RMBS, have lost 2–3 points in cash prices, according to our trading desk. A similar tiering is evident in the broader ABS market with ineligible bonds demanding 40–50bp spread pickup over eligible bonds.

Don’t worry though, and just repeat: “the bonds fell and rose not because of ECB frontrunning, or lack thereof, but because of fundamentals.” Keep repeating until it becomes the truth.

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Is short covering holding up the oil price temporarily?

Hedge Funds Cut Bullish Bets on Crude as Prices Tumble (Bloomberg)

Plunging oil prices spurred hedge funds to cut bullish wagers by the most in six weeks, losing confidence in the willingness of producers to constrict supply. Money managers cut net-long positions in West Texas Intermediate by 8.1% in the week ended Oct. 14. Short positions jumped to the highest level in 22 months, U.S. Commodity Futures Trading Commission data show. WTI tumbled 8.8% this month as U.S. production expanded to a 29-year high. That added to signs of a global supply glut just as the International Energy Agency cut its forecast for demand growth. Crude is now trading in a bear market, underpinned by speculation that OPEC members are favoring market share over prices.

“The price action this week is a reflection of the positioning,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone Oct. 17. The speculative betting makes further declines more likely, he said. WTI fell $7.01, or 7.9%, to $81.84 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Futures rose 41 cents to $83.16 at 12:18 p.m. in Singapore in electronic trading on the New York Mercantile Exchange today. Global crude consumption will rise by about 650,000 barrels a day this year, the Paris-based IEA said in its monthly market report on Oct. 14. That was 250,000 fewer than last month’s estimate and the slowest growth since 2009. The adviser to energy-consuming countries cut its 2015 demand growth forecast by 100,000 barrels a day to 1.1 million.

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It seems silly to suggest there are any coincidences left in today’s financial markets.

Is The US Pushing Oil Prices Down To Hurt Russia? (CNBC)

The recent drop in oil prices could be due to more than just lower demand, according to some analysts, who have suggested that the U.S. could be deliberately manipulating the market to hurt Russia at a time of geopolitical stress. Patrick Legland, the global head of research at Societe Generale, conceded that he had no in depth knowledge of the situation but claimed that it was an “interesting coincidence” that the two events were happening at the same time. “Is it lower demand or is it the U.S. clearly maneuvering?,” he told CNBC Monday. “I’m not so sure that it is lower demand, it might be some sort of tactical move….I don’t know, but as someone from markets I’m always surprised by these kind of coincidences.” Brent crude futures edged higher on Monday morning to trade at $86.48 per barrel. The commodity has been trading near its lowest since 2010 and has seen a 25% dip since June with concerns of an oversupply and a lack of demand in key global markets.

The U.S. has stepped up its efforts towards self-sufficiency with its shale gas industry booming over the last decade, and has become a competitor for major oil-exporting countries such as Saudi Arabia and Russia. Meanwhile, economists have warned of mediocre global growth in the years ahead and there are also fears of deflation in places like the euro zone. Looking at his own research, Legland claimed that there was indeed a slowdown in the global economy but maintained that it wasn’t to the extent at which oil prices have currently fallen. The U.S. would obviously deny any acquisitions of manipulation and there is no evidence to suggest that this is the case. “It’s very hard to prove,” Timothy Ash, head of emerging markets research at Standard Bank told CNBC via email. “I have heard such suggestions before. It is clearly useful for the West, as it adds pressure on Russia,” he added.

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Russia doesn’t sound worried. It will simply establish, with China, an independent ratings agency.

Russia Credit Rating Nears Junk as Reserves Erode Amid Sanctions (Bloomberg)

Russia’s credit rating was cut to the second-lowest investment grade by Moody’s Investors Service, which cited sluggish growth prospects and an erosion of the country’s reserves amid sanctions over Ukraine. Moody’s downgraded the sovereign one level to Baa2 from Baa1 and kept a negative outlook on the rating on Oct. 17. It is in line with Fitch Ratings’s credit grade and one step above Standard & Poor’s, which lowered Russia to BBB- in April. Russia has spent $13 billion from its foreign reserves this month to slow the ruble’s weakening as tumbling oil prices add to the woes of an economy that’s teetering toward recession amid the sanctions by the U.S. and European Union. President Vladimir Putin and European negotiators are struggling to hold together a six-week truce in eastern Ukraine, inching forward in talks to prevent the fighting from escalating.

“It’s negative news, but it’s not really critical because it’s still an investment grade,” Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow, said by phone yesterday. “It was expected and therefore the negative reaction will probably be limited.” The downgrade is driven by “Russia’s increasingly subdued medium-term growth prospect,” Kristin Lindow, an analyst at Moody’s Investors Service Inc., said in a phone interview on Oct. 17. “The gradual and ongoing erosion of the country’s international reserve buffer” contributed to a weakening of Russia’s creditworthiness, she said.

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These are the most useless talks imaginable. Ukraine, US, EU demand it all: surrender by rebels, getting back Crimea, low gas prices. They go into the talks on purpose with demands they know Russia can’t and won’t meet.

Russia to Reject Conditions to End Sanctions After Ukraine Talks (Bloomberg)

Russia’s foreign minister said his country will refuse to accept conditions to end sanctions after talks in Italy failed to produce a breakthrough to bolster a truce in the eastern Ukrainian conflict. Russia has been told to comply with various criteria before the U.S. and its allies revoke the limitations, Sergei Lavrov said in the transcript of an NTV interview posted on the ministry’s website yesterday. Explosions in the Ukrainian city of Donetsk were heard throughout the day after shelling had killed four people and wounded nine others earlier, the local authorities said on its website.

The U.S. and European Union imposed restrictions on Russian officials and companies after the March annexation of Crimea and July downing of a Malaysian passenger plane over eastern Ukraine. Russia’s partners, including overseas politicians and businessmen, understand that a policy designed to punish the country is doomed to failure, Lavrov said. “We respond very simply: we shall not agree to any criteria or conditions,” he said. “Russia is doing more than anyone else to resolve the crisis in Ukraine.”

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Japanese female politicians are all corrupt?

Two Female Japan Ministers Resign in a Day in Blow to Abe (Bloomberg)

After nearly two years without a single resignation from Japanese Prime Minister Shinzo Abe’s cabinet, two female ministers – appointed only last month – stepped down on the same day. Yuko Obuchi, 40, trade and industry minister, resigned over allegations of improper use of political funds, and Justice Minister Midori Matsushima, 58, quit over claims she breached election laws. The resignations are a double blow to Abe who has made promoting women a pillar of his economic policy. Abe’s government has enjoyed unusually stable voter approval since he took office in December 2012, helped by economic policies that have boosted the stock market and an absence of scandals. Faced with a shrinking workforce, he has sought to attract more women to paid employment, emphasized a goal of having women in 30% of leadership positions by 2020, and appointed women to high profile government positions.

“This is the first real bump in the road for Abe, who has been doing well, keeping support rates high even though his policies are not that popular,” said Steven Reed, professor of political science at Chuo University in Tokyo. With the resignation of the two ministers “one of his ways of distracting people from his less popular policies is no longer a distraction.” Abe, speaking after accepting the resignations, apologized and said he would quickly choose their successors. Internal Affairs Minister Sanae Takaichi was appointed interim trade minister, and Eriko Yamatani, the minister for abductee issues, was made justice minister on a temporary basis, according to documents from Abe’s office.

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Funny: “Mr Abe said: ‘By increasing the consumption tax rate if the economy derails and if it decelerates, there will be no increase in tax revenues so it would render the whole exercise meaningless.’ “. That’s exactly what happened after the first hike too.

Abe Hints At Delaying Japan Sales Tax Hike (FT)

Shinzo Abe has hinted that he may delay increasing Japan’s consumption tax, saying the move would be”meaningless” if it inflicted too much damage on the country’s economy. In an interview with the Financial Times, Japan’s prime minister,said the planned tax increase from 8% to 10% was intended to help secure pension and health benefits for “the next generation”. But he added: “On the other hand, since we have an opportunity to end deflation, we should not lose this opportunity.” The Japanese economy shrunk 7.1% between April and June compared with a year ago after Mr Abe’s government raised consumption tax from 5% to 8%. A second rise has strong backing from the Bank of Japan, the finance ministry, big business and the International Monetary Fund,which all want action to reduce the country’s mountainous debt. A postponement would require a change in the law.

But Mr Abe said: “By increasing the consumption tax rate if the economy derails and if it decelerates, there will be no increase in tax revenues so it would render the whole exercise meaningless.” His caution shows how much now rides on the strength of there bound in growth in the third quarter. He is expected to decide on the tax in early December when the final data come in, but early indicators have been disappointing. Concerns that Mr Abe’s plan to revive the Japanese economy is running out of steam added to gloom over global growth prospects that stirred financial markets around the world last week. On previous foreign trips, the Japanese prime minister has acted as a confident salesman for his reform program. Heonce urged traders at the New York Stock Exchange to “Buy my Abenomics.” But the exuberance has gone from Abenomics. Instead the effort to turn around the Japanese economy is looking like a long, hard, perilous slog.

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And all other LNG producers.

Deeper Oil Slump Seen as ‘Disaster’ Risk for Australian LNG (Bloomberg)

An extended slump in oil prices threatens an expansion of the liquefied natural gas industry and risks cutting returns for project developers in Australia, poised to become the world’s biggest supplier of LNG. The nation’s exports of natural gas converted to liquid are linked to the oil price, which has declined from a June peak. Brent crude, the global benchmark, reached an almost four-year low of $82.60 a barrel last week. Australia’s natural gas industry is already facing high costs as companies from BG Group to Chevron build seven export ventures to meet Asian demand. Developers across the nation are studying further investment of as much as A$180 billion ($160 billion).

Weaker oil prices may put proposed LNG projects “to sleep for a number of years,” Fereidun Fesharaki, chairman of Facts Global Energy, an industry consultant, said in a phone interview. “For the projects that are already under construction, it hits their pocketbooks seriously.” Prices below $80 a barrel may be a “disaster” for some projects, said Fesharaki, who forecasts Brent may decline to $60 a barrel before the end of the year, then rebound to about $80 by the end of 2015. In a 2012 presentation, he cited lower oil prices as a bigger concern for Australia’s LNG industry than supply competition from the U.S. Origin Energ’s long-term view of the economics of its project with ConocoPhillips is unchanged, the Sydney-based company said last week in an e-mail. In a November presentation, Origin said it needed a $55 a barrel price over the life of the project to recover its costs.

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Make China’s maga cities bigger?! To what 50 million, 100 million people? Just to boost GDP? Think they’ll be happy?

The $2 Trillion Megacity Dividend China’s Leaders Oppose (Bloomberg)

China needs a new prescription for growth: Cram even more people into the pollution-ridden megacities of Beijing, Shanghai, Guangzhou and Shenzhen. While this may sound like a recipe for disaster, failing to expand and improve these urban areas could be even worse. That’s because the biggest cities drive innovation and specialization, with easier-to-reach consumers and more cost-efficient public transport systems, according to Yukon Huang, a former World Bank chief in China. He estimates China’s leaders’ seven-month-old urbanization blueprint, which aims to funnel rural migrants to smaller cities, will slice as much as a percentage point off gross domestic product growth annually through the end of 2020.

“China’s big cities are actually too small,” said Huang, a senior associate at the Carnegie Endowment for International Peace’s Asia program in Washington. “If China wants to grow at 7% for the rest of this decade, it’s got to find another 1 to 1.5% percentage points of productivity from somewhere.” A strategy that supports the biggest cities’ expansion would add $2 trillion to China’s output in 10 years – more than India’s 2013 GDP – according to Shanghai-based Andy Xie, a former Morgan Stanley chief Asia-Pacific economist. With a population more than four times that of the U.S. living on roughly the same land mass, China should have big, densely populated urban areas, Xie said. To make that a reality, the megacities need to build up, not out, he added, citing Tokyo and its population of about 37 million as a workable example.

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Everything is.

The Eurozone’s Problems Are Based in Politics (WSJ)

Some say the euro crisis is back; others argue that it never really went away. A gloomy forecast from the IMF suggesting a 40% chance of a slide back into recession and a flurry of weak data pointing to a faltering recovery, particularly in Germany, have spooked markets. Once again, the eurozone is the focus of global attention amid fears that low growth will tip the Continent into outright deflation. European equities fell last week to their lowest level for 10 months, German bunds rallied and peripheral-country bond yields rose. Most eye-catching: Greek government 10-year yields briefly soared above 9% and ended the week just below 8%. A bit of perspective is necessary. First, the origins of this slowdown lie not in the eurozone but in emerging markets. This emerging-market downturn, which caught the IMF by surprise but has in fact been under way for most of the year, was the inevitable result of the U.S. Federal Reserve’s decision to start turning off the monetary taps.

As the extraordinary liquidity flows that fueled developing-country booms and commodity-price bubbles have unwound, developed countries with major export sectors such as Germany have been hit too. Geopolitical tensions have also played a part. The market is worried about future sources of global demand, but falling commodity prices are akin to a tax cut for developed economies that should underpin domestic demand. Second, the eurozone, on most measures, is in better shape than in 2012.Former crisis countries Spain, Portugal and Ireland are growing again and have exited their bailout programs; even Greece is likely to have grown in the third quarter of this year, after 24 quarters of recession. Budget deficits have been slashed. Eurozone banks are much better capitalized. The launch of the eurozone’s banking union should reverse some of the fragmentation in the banking system. The eurozone also now has rescue funds and a central bank willing to backstop the financial system.

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Much to say about the mental effects of a 7 year crisis that’s continuously denied.

The Unending Economic Crisis Makes Us Feel Powerless And Paranoid (Guardian)

Six years into the economic crisis we can still get days – as with last week’s market correction – where the froth blows off the recovery and reveals only something flat and stale beneath. The fundamental economic problems have not been solved: they’ve just been palliated. In today’s economy we never quite seem to turn the corner towards rising growth, falling poverty, stabilised public finances. Not so much winter without Christmas, but winter without ever getting to the shortest day. And that is doing something to our psychology. It is destroying our confidence in “agency” – the human ability to avoid danger, mitigate risk, regain control over fluid situations. [..] And it is logical to feel powerless if you witness the best educated and briefed people of your generation flounder – as politicians and diplomats have – in the face of a collapse of global order. But for economists – veterans of Lehman Brothers, Enron and the dotcom boom and bust before them – there is a feeling of deja vu.

We know what it’s like to get all your preconceptions blown out of the water, and see talented people flounder. In economics, big, uncontrollable forces are the norm; but by understanding them – by charting the rules of the game we’re supposed to play – we gain the ability to act. So, as one Lehman trader anecdotally told his new recruit before the crash: “Stay here, keep your head down, do nothing extraordinary and in 20 years you will have a Lamborghini, just like me.” Agency in a normal capitalist system is about knowing the rules. But in a disrupted system, power flies to the extremes. The majority of people feel powerless because the rules no longer apply: you can keep your head down, do nothing extraordinary, and still leave the building with only a cardboard box. Meanwhile, for a tiny minority, disrupted systems seem to endow them with kryptonite powers.

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More claims. Let’s see that proof. Why keep on keeping everything a secret? What are the intentions behind that?

German Intelligence Claims Pro-Russian Separatists Downed MH17 (Spiegel)

Germany’s foreign intelligence agency says its review of the crash of a Malaysian Airlines Boeing 777 in Ukrainian has concluded it was brought down by a missile fired by pro-Russian separatists near Donetsk. After completing a detailed analysis, Germany’s foreign intelligence service, the Bundesnachrichtendienst (BND), has concluded that pro-Russian rebels were responsible for the crash of Malaysian Airlines Flight MH17 on July 19 in eastern Ukraine while on route from Amsterdam to Kuala Lumpur. In an Oct. 8 presentation given to members of the parliamentary control committee, the Bundestag body responsible for monitoring the work of German intelligence, BND President Gerhard Schindler provided ample evidence to back up his case, including satellite images and diverse photo evidence. The BND has intelligence indicating that pro-Russian separatists captured a BUK air defense missile system at a Ukrainian military base and fired a missile on July 17 that exploded in direct proximity to the Malaysian aircraft.

Evidence obtained shortly after the accident suggested the aircraft had been shot down by pro-Russian militants. Both the governments of Russia and Ukraine had mutually accused each other of responsibility for the crash. After a Dutch investigative commission reviewed the flight recorder, it avoided placing any blame for the crash. Some 189 residents of the Netherlands perished in the downing of Flight MH17. BND’s Schindler says his agency has come up with unambiguous findings. One is that Ukrainian photos have been manipulated and that there are details indicating this. He also told the panel that Russian claims the missile had been fired by Ukrainian soldiers and that a Ukrainian fighter jet had been flying close to the passenger jet were false. “It was pro-Russian separatists,” Schindler said of the crash, which involved the deaths of four German citizens.

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As the number of Chinese facing chronic hunger is 158 million.

China Wastes 35 Million Metric Tons of Grain a Year, Enough to Feed 200 Million (BW)

Chinese officials like to point out that their country has less than 10% of the world’s arable land but has to feed a fifth of the world’s population. So you would think that China obsessively ensures there is no wastage in its agriculture sector. You would be wrong. Every year China wastes at least 35 million metric tons of grain through subpar storage, during transportation by truck, rail, and boat, and through excessive processing, said a Chinese official earlier this week. “The losses can feed 200 million people for a year, which is shameful,” said Chen Yuzhong, an official with the State Administration of Grain, reported China Daily today. In particular, 27.5 million tons is lost through improper storage and transportation, while another 7.5 million tons is destroyed during processing, he said. Excessive processing that leads to waste happens as companies polish rice two or three times, according to Wang Lirong, a quality engineer in the State Administration of Grain.

“Nowadays, consumers have a higher demand for the appearance of rice in color and shape, but whiter rice doesn’t mean more nutrition,” Wang said. Of China’s 210 million farming families, only 3% stockpile the grain in the most effective fashion, according to statistics from China’s agriculture ministry. China’s major grain-producing provinces of Hebei, Henan, Shandong, Jilin, Liaoning, and Heilongjiang lack granaries for about 35 million tons of grain. Despite its massive waste, China is doing a good job of feeding its population, mainly by upping overall production through technological improvements, and by giving its farmers more incentives to produce, said Premier Li Keqiang earlier this week. [..] The proportion of people in China experiencing undernourishment has dropped from 22.9% in 1990 to 1992, to 11.4% in 2011 to 2013. Over the same period, the number of those facing chronic hunger has fallen from 272.1 million to 158 million, according to the FAO.

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Looking at US reactons to ebola, you’d think you’re in a kindergarten.

Ebola Patients Had Possible Contact With 300 in US (Bloomberg)

More than 300 people have had possible or verified contact with Ebola patients in the U.S., according to data released by health authorities yesterday. The new numbers were issued as the top public official co-ordinating the response to the deadly virus in Dallas said 48 of the original contacts with deceased Ebola patient Thomas Eric Duncan were cleared of risk for the disease over the weekend or were expected to be cleared today. Duncan’s girlfriend Louise Troh and three people in her Texas household are scheduled to come out of a 21-day quarantine today, barring any last-minute appearance of symptoms. “Big day today,” Judge Clay Jenkins, the highest elected official in Dallas County, said yesterday evening. “It marks a day on the curve where we begin to see a decline.” Numbers from the CDC, covering Texas, and from the Ohio Department of Health showed there are still many under monitoring for possible Ebola symptoms. The potential Ohio exposures to Ebola stem from a trip from Dallas to Ohio by Amber Joy Vinson, a nurse who contracted the disease from Duncan.

Ohio issued travel-restriction recommendations for residents who had contact with Vinson to limit the risk of spreading the disease. Counties that include Cleveland and Akron have begun notifying affected residents of the restrictions, said Scott Milburn, a spokesman for Ohio Governor John Kasich. Texas Health Presbyterian Hospital came under Congressional criticism in hearings last week for its handling of Ebola patients. In a full-page ad in the Dallas Morning News yesterday, the Dallas hospital apologized for failing to diagnose Duncan’s symptoms when he first showed up at the emergency room. In its defense, the hospital has said it followed CDC safety procedures. The protocols used to treat Ebola patients in Dallas were inappropriate, Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases, said in talk shows yesterday. The guidelines were based on field experience in Africa unsuited for more-invasive treatments used in U.S. hospitals.

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Far too much is being demanded from these. Talk about heroes. And see what you get when you are one.

Ebola Front-Line Doctors at Breaking Point (Bloomberg)

At 3:30 a.m. in the world’s biggest Ebola treatment center, Daniel Lucey found the outbreak reduced to its essentials: patients lying on mattresses on the floor and vomiting in the dark, visible only by the wavering flashlight beam of a single volunteer doctor. “I don’t see a light at the end of the tunnel,” said Lucey, a physician and professor from Georgetown University who is halfway through a five-week tour in Liberia with Medecins Sans Frontieres, the medical charity known in English as Doctors Without Borders. “The epidemic is still getting worse,” he said by phone between shifts. That’s an increasingly urgent challenge for MSF and the global health community. As fear spreads in the U.S. over transmission of the virus to two nurses in a modern Dallas hospital, the main fight against the outbreak is still being waged by volunteers like Lucey half a world away.

MSF has been the first – and often only – line of defense against Ebola in West Africa. The group raised the alarm on March 31, months ahead of the World Health Organization. Now, after treating almost a third of the roughly 9,000 confirmed Ebola cases in Africa – and faced with a WHO warning of perhaps 10,000 new infections a week by December – MSF is reaching its limits. “They are at the breaking point,” said Vinh-Kim Nguyen, a professor at the School of Public Health at the University of Montreal who has volunteered for a West African tour with MSF in a few weeks. MSF has already seen 21 workers infected and 12 people die, and “there’s a sense that there’s a major wave of infections that’s about to wash everything away,” Nguyen said.

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Oct 162014
 
 October 16, 2014  Posted by at 11:14 am Finance Tagged with: , , , , , , , , , , ,  6 Responses »


Arthur Rothstein First settler on Douglas County farmsteads, Nebraska May 1936

World Economy So Damaged It May Need Permanent QE (AEP)
Liquidity Nightmare Blamed For Crazy Market Moves (CNBC)
This Is Just The Beginning Of The Bear Market: Gartman (CNBC)
World Economy Gives Investors Growth Scare as They Look to US (Bloomberg)
Tumbling Oil Prices: Recession In Russia, Revolt In Venezuela? (Guardian)
Citigroup Sees $1.1 Trillion Stimulus From Oil Plunge (Bloomberg)
Oil Drop Makes US Drillers Own Worst Enemy (Bloomberg)
Yellen Voices Confidence in U.S. Economic Expansion (Bloomberg)
U.S. Stocks Drop as Weakening Economic Data Fuel Selloff (Bloomberg)
Draghi Letdown Sends European Equities Down 11% (Bloomberg)
ECB Stress Test Dead On Arrival As Deflation Hits (Telegraph)
German States Join Ranks Pressing Merkel to Spur Spending (Bloomberg)
Why Putin and Merkel Don’t Put Growth First (Bloomberg)
Biggest Pain Trade Gives 37% Loss to Bond Bears Getting It Wrong (Bloomberg)
Hedge Funds Face Their Worst Year Since 2011 (FT)
US Warns Europe On Deflation, ECB Policies (Reuters)
U.S. Says China Shows Some ‘Willingness’ to Let Yuan Rise (Bloomberg)
How Both Dating And Finance Have Been Screwed By The Internet (Slate)
US Health Official Allowed New Ebola Patient On Plane With Fever (Reuters)

But we can’t have permnent QE. Ambrose claims China and the Fed will yet see the light and start pumping again, but what have they left?

World Economy So Damaged It May Need Permanent QE (AEP)

Combined tightening by the United States and China has done its worst. Global liquidity is evaporating. What looked liked a gentle tap on the brakes by the two monetary superpowers has proved too much for a fragile world economy, still locked in “secular stagnation”. The latest investor survey by Bank of America shows that fund managers no longer believe the European Central Bank will step into the breach with quantitative easing of its own, at least on a worthwhile scale. Markets are suddenly prey to the disturbing thought that the five-and-a-half year expansion since the Lehman crisis may already be over, before Europe has regained its prior level of output. That is the chief reason why the price of Brent crude has crashed by 25pc since June. It is why yields on 10-year US Treasuries have fallen to 1.96pc, and why German Bunds are pricing in perma-slump at historic lows of 0.81pc this week. We will find out soon whether or not this a replay of 1937 when the authorities drained stimulus too early, and set off the second leg of the Great Depression.

If this growth scare presages the end of the cycle, the consequences will be hideous for France, Italy, Spain, Holland, Portugal, Greece, Bulgaria, and others already in deflation, or close to it. The higher their debt ratios, the worse the damage. Forward-looking credit swaps already suggest that the US Federal Reserve will not be able to raise interest rates next year, or the year after, or ever, one might say. It is starting to look as if the withdrawal of $85bn of bond purchases each month is already tantamount to a normal cycle of rate rises, enough in itself to trigger a downturn. Put another way, it is possible that the world economy is so damaged that it needs permanent QE just to keep the show on the road. Traders are taking bets on capitulation by the Fed as it tries to find new excuses to delay rate rises, this time by talking down the dollar. “Talk of ‘QE4’ and renewed bond buying is doing the rounds,” said Kit Juckes from Societe Generale.

Gentle declines in the price of oil are typically benign, a shot in the arm for companies and consumers alike. The rule of thumb is that each $10 drop in the price adds 0.3pc to GDP growth over the next year. Crashes are another story. They signal global stress, doubly dangerous today because the whole industrial world is one shock away from a deflation trap, a psychological threshold where we batten down the hatches and wait for cheaper prices. That is the Ninth Circle of Hell in economics. Lasciate ogni speranza. The world is also more stretched. Morgan Stanley calculates that gross global leverage has risen from $105 trillion to $150 trillion since 2007. Debt has risen to 275pc of GDP in the rich world, and to 175pc in emerging markets. Both are up 20 percentage points since 2007, and both are historic records.

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Without excess stimulus, nothing moves anymore.

Liquidity Nightmare Blamed For Crazy Market Moves (CNBC)

Investors are blaming an unprecedented lack of liquidity for Wednesday’s gut-wrenching stock market open, which saw the S&P 500 fall as much as 2.2% from Tuesday’s close, sent the VIX screaming to 28 and led to outsized moves in major stocks like Disney. According to Eric Hunsader of Nanex, there were 179 “mini flash crashes” during the first 15 minutes of trading, which is the most since the Knight Capital Group fiasco in August 2012. Additionally, Hunsader reports that there were 68 trades in the S&P e-mini that moved that key futures contract 3 or more ticks. And Treasury futures, too, moved sharply as a result of low liquidity. The definition that Nanex uses for a mini flash crash is that a stock sees 10 or more down ticks, for a price change exceeding 0.8%, within 1.5 seconds. “There was no liquidity at all, so it doesn’t take a whole lot of size to really move the price,” Hunsader told CNBC. But “some people come in, and they’re used to buying or selling X-amount, and they’re not paying attention. And X-amount now causes significant movements in price.”

When this lack of liquidity collided with a great number of traders willing to get out at any price, markets got ugly. “This was a pukage. People were putting in market order to sell on the open—’Just get me out’—without thinking,” said Brian Stutland of Equity Armor Investments. The issue, Hunsader said, is that high-frequency trading creates the appearance of liquidity. He gives the example of a trader who wants to buy 10,000 shares of a stock. That order might get routed to two exchanges, but instead of the order getting completed with 5,000 shares traded on each exchange, the first trade of 5,000 shares will cause the other 5,000 share offered on the other exchange to dry up. When these are market-order trades to buy or sell at the available price, the effect of this is a ricochet effect that leads to an outsized move. This explains why not all of Wednesday morning’s moves were to the downside.

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Heed Dennis.

This Is Just The Beginning Of The Bear Market: Gartman (CNBC)

The selloff in global markets is set to continue as a bear market takes hold “for a long period of time,” according to widely followed investor Dennis Gartman, who warned investors not to go long on stocks. “This is the start of a bear market,” Gartman, the founder of the closely watched Gartman Letter, told CNBC Europe’s “Squawk Box” on Thursday. “You stay in cash and you stay in short term bonds and you don’t move out, this is a very difficult period of time and I’m afraid – and I don’t like to think about it – but this might be the very beginnings of a bear market that could last some period of time,” he warned. Gartman’s comments come amid global market turmoil, particularly in the U.S. this week on the back of weaker economic data and fears of an economic slowdown in previous growth engines China, the U.S. and Germany. [..]

Gartman warned that there was going to be “more than a mere 7% to 10% correction” in markets which had enjoyed a bull run since the U.S. Federal Reserve announced an unprecedented bond-buying program designed to stimulate growth in the world’s largest economy. “I don’t like to be that way- you have to remember that in the business of trading…in the business of trading bears don’t eat. Only bulls in the market enjoy the upside, only bulls actually get paid over time. I don’t like to be bearish but this is a time to be at least neutral and perhaps at worst bearish.” Earlier this week, Gartman told CNBC he has “north of 80% in cash and short-term bond funds.” He said Wednesday’s flight to Treasurys was “real panic buying in the bond market probably by those that have been short, because so many people have been bearish of the bond market.”

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The US will sink right along with the rest.

World Economy Gives Investors Growth Scare as They Look to US (Bloomberg)

The global economy faces its biggest test of confidence since the European sovereign debt crisis as investors fear it’s running out of engines. Japan and the euro area are throwing up fresh signs of weakness by the day and emerging markets such as China are dragging instead of driving growth. The sense of tumult is being exacerbated by war in the Middle East, the standoff in Ukraine, street protests in Hong Kong and the spread of Ebola to Dallas. The worry is that five years since the world limped out of recession, central banks have virtually exhausted their stimulus arsenals if activity keeps fading. That leaves the hopes of financial markets riding on the U.S. to resume its historical role as a locomotive robust enough to pull up demand elsewhere. “The global economy and the markets have a history of traumatic economic events,” said Paul Mortimer-Lee, chief economist for North America at BNP Paribas SA in New York.

“Psychologically and physically they have not recovered fully and are anxious about a relapse.” The doubts were evident across financial markets yesterday as a bear market in oil deepened, the Standard & Poor’s 500 Index came close to surrendering its gains for the year and bonds from Germany to the U.S. rallied. The Chicago Board Options Exchange Volatility Index (VIX), a measure of investor nerves known as the VIX, is at its highest since June 2012. U.S. stocks pared losses after Bloomberg News reported that Fed Chair Janet Yellen voiced confidence in the durability of the American expansion at a closed-door meeting in Washington last weekend. The S&P 500 closed 0.8% lower after dropping as much as 3%.

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If it’s up to the Saudi-US combo, bring it on!

Tumbling Oil Prices: Recession In Russia, Revolt In Venezuela? (Guardian)

The sudden slump in oil prices, which have fallen 15% in the past three months, has sent tremors through the capitals of the world’s great oil powers, many of whom could face testing budget crunches if the tendency persists. Higher output coupled with weaker demand from China and Europe has driven the price of crude down to $85 – its lowest for four years. The US also now produces 65% more oil than it did five years ago following the boom in shale production. The rise has contributed to the global glut of crude and allowed the US to import 3.1 million fewer barrels of oil a day compared with its peak in 2005. Prices are now well below the level on which many oil exporters have based their budgets.

If prices remain weak – and many forecasters suggest they will – then from Moscow to Caracas and from Lagos to Tehran governments will start to feel the impact on macroeconomic policy. Brent has averaged $103 since 2010 – trading mostly between $100 and $120 – so a continued period of $80 oil, or less, would have an impact across the world, and from multiple angles. The lower price isn’t bad news for everyone. For example, India would not suffer much – commodities account for 52% of India’s imports but only 9% of its exports (paywall), and unlike Brazil, Russia or South Africa, India would reap immediate advantages from a fall in commodity prices.

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Sure. Things do look spectacularly different when you live in just one dimension.

Citigroup Sees $1.1 Trillion Stimulus From Oil Plunge (Bloomberg)

The lowest oil price in four years will provide stimulus of as much as $1.1 trillion to global economies by lowering the cost of fuels and other commodities, according to Citigroup Inc. Brent, the world’s most active crude contract, closed at $83.78 a barrel in London yesterday. That’s more than 20% below its average for the past three years, amounting to savings of about $1.8 billion a day based on current output, Citigroup estimates. Savings will climb to $1.1 trillion annually as the slide cuts costs of other commodities, leaving consumers and companies with extra cash to spend and bolstering growth, according to Ed Morse, the bank’s head of global commodities research in New York.

Crude prices are plunging amid signs that OPEC, supplier of 40% of the world’s oil, won’t act to eliminate a surplus as global growth slows. Combined supplies from the U.S. and Canada rose last year to the highest since at least 1965 as producers tapped stores locked in shale-rock formations and oil sands. The global economy will rebound next year, with growth quickening to 2.98%, the fastest since 2010, according to analyst forecasts compiled by Bloomberg. “A reduction in oil prices also results in a reduction in prices across commodities, starting with natural gas, but also including copper, steel, and agriculture,” Morse said yesterday in an e-mailed response to questions. “All commodities are energy intensive to one degree or another.”

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Let’s have the margin calls come in, see what’s left behind.

Oil Drop Makes US Drillers Own Worst Enemy (Bloomberg)

U.S. oil producers that saw profits soar on the North American shale boom are feeling the downside of success: falling prices and shrinking cash are threatening to slow development. At the same time, as crude prices approach four-year lows, natural gas companies are experiencing a reversal of fortune after having been shunned by many investors when a supply glut drove the fuel to a decade-low. Gas producers are now viewed as a safer haven than oil companies. Whiting Petroleum hit an all-time high in August after striking a deal to become the biggest oil producer in North Dakota, the state with the second-largest output. It has since lost more than $4 billion in value as its shares plunged 38%. Meanwhile, Southwestern Energy, an independent producer whose output is 99% gas, has fallen just 13%. “Natural gas is becalmed through this,” Donald Coxe, who manages about $200 million at Coxe Advisorsin Chicago, said in an interview. “It is Walden Pond compared to a hurricane in Florida.”

Whiting is one of 26 companies on the S&P Oil & Gas Exploration and Production Select Industry Index that have declined more than 30% in the past month. Shale producers had shifted their focus to more profitable oil as gas prices fell. Now a growing glut of crude has deflated the price of the U.S. benchmark by 18% in the past three months, as gas futures dropped 7.2%. “We’re running into a wall,” said Scott Hanold, an Austin, Texas-based analyst for RBC Capital Markets. “We’re producing more light, sweet crude than we need.” West Texas Intermediate touched $80.01 a barrel, the lowest since June 2012, on the New York Mercantile Exchange today. Brent prices, an international benchmark, fell to the lowest price since November 2010. Exploration and production companies “just drill and produce and all at once say, ‘My God, we’ve oversupplied the market,’” T. Boone Pickens said in an Oct. 9 interview. If crude prices stay below $80 a barrel for three months, they “are going to sober up.”

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Well, well. Talking her book.

Yellen Voices Confidence in U.S. Economic Expansion (Bloomberg)

Federal Reserve Chair Janet Yellen voiced confidence in the durability of the U.S. economic expansion in the face of slowing global growth and turbulent financial markets at a closed-door meeting in Washington last weekend, according to two people familiar with her comments. The people, who asked not to be named because the meeting was private, said Yellen told the Group of 30 that the economy looked to be on track to achieve growth of around 3%. She also saw inflation eventually rising back to the Fed’s 2% target as unemployment falls further, according to the people. The G-30 describes itself as a “nonprofit, international body composed of very senior representatives of the private and public sectors and academia.” Former European Central Bank President Jean-Claude Trichet is chairman, and former Fed Chairman Paul Volcker is chairman emeritus. G-30 Executive Director Stuart Mackintosh was unavailable for immediate comment.

Stocks pared losses after Yellen’s comments were reported, and Treasury yields rose. The S&P 500 was down 0.8% to 1,862.49 at the 4 p.m. close of trading in New York after falling as much as 3%. The yield on the two-year Treasury note was down 5 basis points, or 0.05 %age point, to 0.32% after dropping as much as 13 basis points. “She expressed some confidence” in the outlook, said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. Yellen’s reported remarks were roughly in line with the forecasts presented by Fed policy makers at their last meeting in September. They saw the economy growing by 2.6 to 3% next year and inflation rising to 1.7 to 2% in 2016, according to their central tendency forecasts, which excludes the three highest and three lowest projections.

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” … a cathartic, cataclysmic crescendo of capitulation”.

U.S. Stocks Drop as Weakening Economic Data Fuel Selloff (Bloomberg)

An afternoon rebound helped the Standard & Poor’s 500 Index pare its biggest intraday plunge since 2011 amid speculation the selloff was overdone. The S&P 500 lost 0.8% to 1,862.49 at 4 p.m. in New York, trimming an earlier plunge of as much as 3%. The index pared its gain for the year to less than 0.8% and has tumbled 7.4% since a record on Sept. 18. The Dow Jones Industrial Average fell 173.45 points, or 1.1%, to 16,141.74 after dropping as much as 460 points. The Russell 2000 Index of smaller companies jumped 1%. “Investor sentiment has clearly been pummeled of late as some signs of surrender are forming,” Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist in New York, wrote in a note today. “While no one ever rings a bell at the bottom and there is not generally a cathartic, cataclysmic crescendo of capitulation, fear is emerging which intimates that a floor may be within reach.”

The Chicago Board Options Exchange Volatility Index, the benchmark gauge of options prices known as the VIX, jumped 15% to 26.25, the highest level since 2012, amid demand for protection against losses in equities. Almost 12 billion shares changed hands in the U.S., the most since October 2011. Stocks pared losses after the S&P 500 fell to its low of the day of 1,820.66 shortly before 1:30 p.m. in New York. About an hour later, Bloomberg News reported that Federal Reserve Chair Janet Yellen voiced confidence in the durability of the U.S. economic expansion in the face of slowing global growth and turbulent financial markets at a closed-door meeting in Washington last weekend. Retail sales in the U.S. dropped more than forecast in September, decreasing 0.3% after a 0.6% gain in August that was the biggest in four months, Commerce Department figures showed. Another report today showed manufacturing in the Federal Reserve Bank of New York’s region slowed more than projected in October. The bank’s so-called Empire State index dropped to 6.2 this month from an almost five-year high of 27.5 in September. Readings greater than zero signal growth.

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It’s the bubble as much as it is Draghi. All he could do would be temporary and grossly expensive.

Draghi Letdown Sends European Equities Down 11% (Bloomberg)

Just last month, Europe’s stocks were trading near their highest levels in six years, with optimism spreading that central-bank stimulus would ignite the economy. Much has changed. The Stoxx Europe 600 Index plunged the most in almost three years yesterday, closing down 11% from its June high to meet the definition of a correction. At one point, Greece’s ASE Index was down 10% from the previous day’s close, finishing with a loss of 6.3%. Italy’s FTSE MIB Index fell 4.4% and Portugal’s PSI 20 Index hit a two-year low. Europe is leading a rout that has wiped almost $5 trillion from the value of equities worldwide. While data on everything from industrial production in Germany to manufacturing in the U.K. has contributed to the gloom, sentiment began souring on Oct. 2, when European Central Bank President Mario Draghi stopped short of spelling out how many assets the ECB might buy to head off deflation.

“The shock to markets has been so big in the past days, I have doubt that equities will recover from this very quickly,” Francois Savary, chief investment officer of management firm Reyl & Cie., said in a phone interview from Geneva. “Draghi’s latest communication to the market was a nightmare.” Equities in the Stoxx 600 have lost more than 6% since Draghi spoke this month as investors came to grips with prospects that policy makers might lack tools to keep Europe out of its second recession in a year. It was Draghi’s promise to leave no option off the table in saving the euro that ended the region’s last crisis. “It’s the realization that there’s a real limit to his ‘whatever it takes’ promise,” said Savary. “Any signs that U.S. growth won’t do as well as expected throws markets into a panic because it’s still carrying the global economic recovery on its shoulders.”

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It’s all just politics.

ECB Stress Test Dead On Arrival As Deflation Hits (Telegraph)

It’s the banking fix which is meant to set Europe on the path to economic recovery. Regrettably, it’s all too likely to be just another damp squib. Too little, too late, and too backward looking, it may already have become largely irrelevant for a continent that seems fast to be slipping into deflation. For much of the past year, the European Union’s 130 largest banks, together accounting for 85pc of European banking assets, have been conducting an exhaustive process of “stress testing” their balance sheets against a series of supposedly worst-case economic calamities. One bank, I’m told, has devoted 20pc of its staff to the tests, leaving everything else to go to hell in a handcart. The purpose of the exercise is to identify which banks do not have sufficient capital to meet the imagined shocks, and then require them to recapitalise accordingly, thus restoring confidence in a banking system that nobody trusts as things stands.

The results are due to be published on 26 October, triggering further capital raising which according to some City estimates could amount to €50bn or more. This is in addition to the €70bn already raised so far this year in anticipation. Once complete, then credit growth can begin anew, and economic recovery will follow seamlessly in its wake. That at least is the hope; as ever with Europe, it seems to be built largely on sand. There have been two previous attempts to stress test Europe’s banks. The first was so deficient that it famously found the Irish banking system to be perfectly solvent. Since then, a sum roughly equivalent to half a year’s national GDP has been spent on Irish bailouts. The second one wasn’t much better, so there is a lot riding on the third attempt, particularly as it marks the ECB’s official appointment as overarching supervisor for the eurozone banking system.

The birth of a “single supervisory mechanism” for Europe is, by the way, in itself proving a mind numbingly complicated process, involving multiple layers of duplication, instruction and general regulatory grief. If there is still a banking sector left at all by the time the bureaucrats have had their fill, it will be a minor miracle. There will be 69 individual “supervisors” looking after Deutsche Bank alone, with the lead regulator a French national to avoid any suspicion of national favouritism. Likewise, the lead supervisor for BNP Paribas will be Spanish. It would be amusing to think the Greek banking system will be assigned a German, but that might be thought an insensitivity too far.

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At least they still have the cash.

German States Join Ranks Pressing Merkel to Spur Spending (Bloomberg)

Germany’s state governments stepped up calls for infrastructure spending, adding another source of pressure on Chancellor Angela Merkel to boost investment as economic growth falters. Much like Merkel’s national government, the states are caught between a deteriorating growth outlook and the balanced-budget drive that Germany started in response to the euro area’s debt crisis. It’s making the 16 regions set aside political differences to challenge the status quo, from rich Bavaria to rural Mecklenburg-Western Pomerania in the east, home to Merkel’s electoral district. A day after the German government lowered its growth outlook, proposals to spend more on projects such as highways in Europe’s biggest economy are on the table at a retreat of state premiers starting today that Merkel plans to attend.

“To unleash growth impulses, additional investment is needed in infrastructure and other future-oriented sectors,” according to a summary of the states’ negotiating position in fiscal talks with the federal government that was prepared for the meeting in Potsdam. The states want a “lasting” funding boost, saying a lack of spending is holding back economic development nationwide. The struggle in Germany parallels the international conflict pitting Merkel and Finance Minister Wolfgang Schaeuble against the International Monetary Fund and countries such as France and Italy that advocate spending to stimulate growth. Germany cut its forecast as investor confidence fell to the lowest level in two years, the latest in a series of data fueling speculation the country may be facing recession.

Merkel didn’t flinch, telling lawmakers yesterday that Germany won’t raise public spending and reaffirming her goal of balancing the budget next year, according to a party official who asked not to be named because the session was private. While Merkel said last week her government is looking at measures that don’t threaten her budget goal, such as spurring investment in digital technology and renewable energy, she and Schaeuble say fiscal leeway is tight. “We are agreed in the German federal government that we must stay the course even in difficult times,” Schaeuble said after a meeting of European Union finance ministers yesterday.

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Bloomberg uber-douche Bernidsky gets something halfway right.

Why Putin and Merkel Don’t Put Growth First (Bloomberg)

The notion requires something of an-apples-and-oranges leap, but President Vladimir Putin of Russia and Chancellor Angela Merkel of Germany may have more in common than their experience in the former East Germany and the ability to speak each other’s language. Both defy their critics by continuing to pursue policies that are bad for economic growth. From their perspective, however, it may make sense to resist placing growth above other considerations. Conventional wisdom holds that if gross domestic product is growing, a government must be doing something right, or at least nothing too wrong. If GDP drops 0.2%, as it did in Germany in the second quarter of this year, and especially if it goes down for two consecutive quarters – the formal definition of a recession – the government is supposed to do something about it.

Merkel is under pressure to borrow and spend more to address the slowdown. For Putin, who is faced with a potential recession, the course would be comply with Western demands on Ukraine and earn the lifting of economic sanctions. The GDP, however, is a deeply flawed reflection of a nation’s welfare. Simon Kuznets, who laid the groundwork for the modern methods of GDP calculation, asked in a report to the U.S. Congress in 1934, “If the GDP is up, why is America down?” He continued: “Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.” Both Merkel and Putin are trying to mind those distinctions.

In Germany, the low growth and threat of recession don’t necessarily mean living standards will deteriorate. Economics Minister Sigmar Gabriel forecast that the number of working Germans would increase by 325,000 this year, and by half as many more in 2015. At the same time, he said, the number of unemployed would stay at 2.9 million, or about 4.9%. Net wages per employee will increase by 2.6% this year and by 2.7% next year. With such numbers in hand, German officials must be asking themselves what would be achieved if they gave in to the growing demands from both home and abroad to resort to deficit spending.

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Panic is as panic does.

Biggest Pain Trade Gives 37% Loss to Bond Bears Getting It Wrong (Bloomberg)

What a dismal time for bond traders who were optimistic about growth. Investors who poured more than $1 billion this year into a $3.8 billion leveraged exchange-traded fund that bets against long-dated U.S. Treasuries are suffering a 10.7% loss this month alone, Bloomberg data show. The fund is down 36.5% this year, a small window into the magnitude of pain in a market where many traders have been wagering debt prices would fall. Treasuries have defied predictions across Wall Street for higher yields all year, and yesterday’s move is sending bond bears into a tailspin. Yields on 10-year Treasuries fell the most since March 2009, trading below 2% for the first time since June 2013 as a decline in retail sales prompted traders to reduce wagers the Federal Reserve will start raising interest rates next year. The move is in part driven by traders covering their short bets, according to Jack Flaherty, an investment manager at GAM USA in New York. “There’s been weakness, weakness, weakness and today it’s just ‘Get me out’,” Flaherty said yesterday.

Primary dealers had the biggest short position on benchmark government notes at the beginning of the month since June 2013. They had a net $20.7 billion wager against notes maturing in the seven-to-eleven year range in the week ended Oct. 1, Fed data show. It seems, though, that almost everything in the world is going against these bears right now. The global economy is slowing down, the Ebola epidemic in Western Africa is spreading, and conflicts in Iraq and Syria are escalating. All of that is translating into a surge in demand for the safety of Treasuries. “We keep thinking we’re getting capitulation trades, but clearly there’s a lot more skeletons in the closet than we thought,” Ira Jersey, an interest-rate strategist at Credit Suisse in New York, wrote in an e-mail. “We’re also seeing more flight to quality buyers out of global asset classes that are considered ‘riskier.’” Adding to the bout of general anxiety overwhelming the market was the data yesterday showing that U.S. retail sales dropped more than forecast in September on a broad pullback in spending.

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Not a lot of money there lately. They should all disband and find something useful to do with their lives. These are not stupid people, but they do make stupid choices like chasing money 24/7. Go be useful to society, I’d say.

Hedge Funds Face Their Worst Year Since 2011 (FT)

Hedge funds are on course for their worst year since 2011, as several of their biggest and most popular trades turned sour and some managers were forced to cut their losses. Wednesday’s new and sudden fall in US Treasury yields wrongfooted numerous funds that had positioned themselves for rising interest rates and an improving macroeconomy. Hedge fund bets on tax-driven mergers and on US housing finance giants Fannie Mae and Freddie Mac have also unraveled this month. October is shaping up to be a worse month for some hedge funds even than September, when the industry lost 0.75%. Big name managers including so-called “Tiger cubs” Rob Citrone, Philippe Laffont and Chase Coleman, who used to work under veteran hedge fund manager Julian Robertson at Tiger Management, have all fallen into the red as technology stocks have been hard hit.

Claren Road, the hedge fund controlled by Carlyle Group, has suffered an 11% fall in its credit opportunities fund since the start of October. Some funds have pulled back their positions as financial market volatility has jumped in recent weeks, and more appeared to capitulate on Wednesday amid a flash crash in US Treasury yields. The unexpected drop in the price of oil has created cascading losses through popular hedge fund trades, said Mino Capossela, head of liquid alternative investments for Credit Suisse Asset Management. The price of Brent crude has fallen by almost a quarter since mid-June. As well as using oil as a bet on improving economic growth, funds have also bought energy stocks and bonds. Oil companies have been among the biggest recent issuers of high-yield bonds, meaning that credit funds have also been affected.

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And I warn the US.

US Warns Europe On Deflation, ECB Policies (Reuters)

The United States on Wednesday renewed a warning that Europe risks falling into a downward spiral of falling wages and prices, saying recent actions by the European Central Bank may not be enough to ward off deflation. In a semiannual report to Congress, the U.S. Treasury Department said Berlin could do more to help Europe, namely by boosting the German economy. “Europe faces the risk of a prolonged period of substantially below-target inflation or outright deflation,” the Treasury said.

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Moot.

U.S. Says China Shows Some ‘Willingness’ to Let Yuan Rise (Bloomberg)

The U.S. said China has shown “some renewed willingness” to let the yuan strengthen while reiterating the currency “remains significantly undervalued.” In a twice-yearly report to Congress on foreign exchange, the Treasury Department said changes to China’s currency policy remain incomplete and the world’s second-largest economy should allow the market to play a greater role in setting the yuan’s value. The report covering the first half of this year concluded that no country was designated a currency manipulator. The Treasury reiterated its call for more balanced global growth as the U.S. economy gathers strength, the euro area and Japan struggle, and emerging markets such as China face slowdowns. Countries including Germany, where domestic demand has been “persistently weak,” need to do more to support domestic growth and help the world economy, the report said.

“The report tries to strike a fine balance between encouraging economies that have weak growth and current-account surpluses to boost domestic demand, but to do so using fiscal policy and other responses,” said Eswar Prasad, a professor of trade policy at Cornell University in Ithaca, New York, and a senior fellow at the Washington-based Brookings Institution. China should build on “the apparent recent reduction in foreign-exchange intervention and durably curb its activities in the foreign-exchange market,” the department said in yesterday’s report. The Treasury also pushed for changes in South Korea, saying the won “should be allowed to appreciate further.” Treasury Secretary Jacob J. Lew, in a meeting with South Korea’s finance minister last month, emphasized the importance of avoiding currency intervention.

The Treasury said Japanese authorities need to “carefully calibrate the pace of overall fiscal consolidation” to help escape deflation, according to the report. “Monetary policy cannot offset excessive fiscal consolidation nor can it substitute for necessary structural reforms that raise trend growth and domestic demand.” To boost growth, Japan could raise household income through greater labor-force participation and higher earnings to “durably increase” consumers’ buying appetite, the Treasury said. The yen has depreciated 23% from October 2012 to August 2014 on a real trade-weighted basis, according to the report.

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Nice approach.

How Both Dating And Finance Have Been Screwed By The Internet (Slate)

Your parents dated the way Warren Buffett picks a stock: a close review of the prospectus over dinner, careful analysis of long-term growth potential, detailed real asset evaluation. Sure, the old economy dating market in which they participated had the occasional speculative frenzy: Woodstock, V-E day, whatever went on at Studio 54. My parents met during spring break. In Florida. But love and its compounding interests were usually pursued with appropriate due diligence. Then came the Internet. The “innovation” that has driven the financial industry over the last two decades has also transformed the dating market, with similar effects on romance as on the economy. The traditional focus on long-term security—marriage and retirement—has been replaced by a relentless pursuit of instant gratification and immediate returns. These days, the Wolf is as much on Tinder as on Wall Street.

Just look at what online dating has done to the meet market. The speed and frequency of transactions has gone up. Volatility has spiked as relationship investment strategy has changed from building long-term value to quarterly—or nightly—profits. New investors have entered the market with greater ease, although all too often only to be taken advantage of by more sophisticated players. New avenues for fraud have opened up: Manti Te’o meet Bernie Madoff on Ashley Madison. Even inequality has risen. Some investors are rolling in it; others have just lost their shirts. How did the bedroom end up looking so much like the boardroom? In successive waves, innovation pioneered in the financial markets has been adopted to dating. Online dating’s initial trading platforms—Match created in 1995, JDate in 1997, etc.—were the relationship equivalent to the online trading sites that first allowed investors to directly manage their own portfolios. Think “Talk to Chuck,” except if he can message you first (hopefully not about the size of his portfolio).

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Unbelievable. What else is there to say? She cared for a patient who died, and who already infected one other nurse. She should have been in isolation.

US Health Official Allowed New Ebola Patient On Plane With Fever (Reuters)

A second Texas nurse who has contracted Ebola told a U.S. health official she had a slight fever and was allowed to board a plane from Ohio to Texas, a federal source said on Wednesday, intensifying concerns about the U.S. response to the deadly virus. The nurse, Amber Vinson, 29, flew from Cleveland to Dallas on Monday, the day before she was diagnosed with Ebola, the U.S. Centers for Disease Control and Prevention (CDC) said. Vinson told the CDC her temperature was 99.5 Fahrenheit (37.5 Celsius). Since that was below the CDC’s temperature threshold of 100.4F (38C) “she was not told not to fly,” the source said. The news was first reported by CNN.

Chances that other passengers were infected were very low because Vinson did not vomit on the flight and was not bleeding, but she should not have been aboard, CDC Director Dr. Thomas Frieden told reporters. Congress will hold a hearing on Thursday on the U.S. response to Ebola, with Frieden and other officials scheduled to testify. Vinson was isolated immediately after reporting a fever on Tuesday, Texas Department of State Health Services officials said. She had treated Liberian patient Thomas Eric Duncan, who died of Ebola on Oct. 8 and was the first patient diagnosed with the virus in the United States. Vinson was transferred to Emory University Hospital in Atlanta by air ambulance and will be treated in a special isolation unit. Three other people have been treated there and two have been discharged, the hospital said in a statement.

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