Sep 152017
 September 15, 2017  Posted by at 9:16 am Finance Tagged with: , , , , , , , , , ,  13 Responses »

Juan Gris Portrait of the artist’s mother 1912


Fed To Take Historic Leap Into The Unknown (MW)
Janet Yellen’s Right-Hand Man Is Hanging Up His Boots (BI)
97 Million American Workers Are Living Paycheck To Paycheck (ZH)
“Markets Are Wrong” (Hugh Hendry)
Japanese Told To Find Shelter After North Korea ‘Fires New Missile’ (Y.)
JPMorgan Is In A Bubble And Not Bitcoin – Max Keiser (RT)
Why Europe Will Miss The Disruptive Brits (Gardner)
Brexit’s Irish Question (Fintan O’Toole)
IMF Is Set On Asset Quality Review For Greek Banks (K.)
Greece Sells Its Railway Company To Italian State Operator (AP)
Greek Oil Spill Forces Closure Of Athens Beaches (G.)
100% Wishful Thinking: the Green-Energy Cornucopia (Cox)
China Takes The Lead In Building Quantum Data Security Networks (Axios)



No. The Fed took that leap in 2008. Bernanke himself talked about uncharted territory. Which is where they’ve been ever since. They literally don’t know what they’re doing.

Fed To Take Historic Leap Into The Unknown (MW)

The Federal Reserve is set to take a leap into the unknown next week by beginning to sell some of the roughly $3.7 trillion of bonds and mortgage securities it amassed during the financial crisis. The Fed will meet on Tuesday and Wednesday and is widely expected at the end of the meeting to announce it plans to allow the run-off of its massive balance sheet beginning sometime in October. Fed Chairwoman Janet Yellen will hold a press conference afterwards to explain the decision. “It will be an historic day” for the Fed, said Lewis Alexander, chief U.S. economist at Nomura Securities, one the central bank has long thought about but was unsure when it would come. And still the final destination is unknown. “We are heading for a place that is very different from where we are now. It will take years to get there and figure out where we are,” Alexander said.

Trying to keep financial markets calm, the Fed is not celebrating this turning point. Officials have openly admitting they have designed the first steps to be so small it will be like watching paint dry. But economists have no doubt that bond yields will eventually move higher. “The Fed is just hoping desperately it has been transparent enough so that the adjustment will be orderly,” said Jim Glassman, head economist for the commercial bank at J.P. Morgan Chase. The central bank is trying to avoid a repeat “taper tantrum,” the swift run up of nearly 1 percentage point on the yield of the 10-year Treasury in 2013 after then-Chairman Ben Bernanke discussed the tapering of bond purchases for the first time. Fed officials have known they would have to reverse course eventually. Hawks and doves agree the policy is not sustainable over the medium term because it potentially adds too much stimulus to a healthy economy.

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I don’t get how or why people can praise a man whose entire career has been one long litany of either wrong or intentionally bad decisions and policies. He was the teacher to all those central bankers who made all those decisions that the entire world will still be paying for many years from now. Fisher is the one outstanding symbol of everything that’s wrong in the shady area where finance touches politics.

Janet Yellen’s Right-Hand Man Is Hanging Up His Boots (BI)

Federal Reserve Vice Chair Stanley Fischer announced last week he was resigning for personal reasons before the end of his term, opening yet another seat in the central bank’s powerful board for President Donald Trump to fill. The departure of Fischer, 73, represents a big loss of institutional knowledge and gravitas for the Fed at a time when many American institutions are sorely lacking in technocratic expertise. Fischer is considered the leader of a generation of prominent academic and professional economics, in part because he taught many of them at MIT. “He is often referred to as the dean of central bankers, having taught most central bankers including former Fed Chairman Ben Bernanke and ECB president Mario Draghi,” Shawn Baldwin, the chairman of AIA Group, wrote in a LinkedIn post. “Fischer’s departure creates a vacuum not easily filled, adding to the uncertainty in monetary policy.”

Larry Summers, the Harvard economist and former Treasury secretary, dubbed Fischer’s resignation “the end of an era.” Fischer, who was born in Zambia and later studied in London, started his career as an academic but became a policymaker at the World Bank and later the International Monetary Fund, where he rose to the role of first deputy managing director. Fischer then spent three years at Citigroup as a vice chairman before moving to Israel in 2005 to become the head of its central bank. Fischer returned to the US as Fed vice chairman in 2014. His term was not set to end until June 2018. “The Fed and the international monetary system will be weaker for his departure from official responsibility,” Summers wrote in a blog post. “Stan’s has been a singular career,” he said. “As an MIT professor he coauthored, with his close friend Rudi Dornbusch, the macro textbook that defined the basics of the field for a generation.

With Olivier Blanchard,” the former IMF chief economist, “he wrote the treatise that defined the state of the art for graduate students. His lectures were models of lucid exposition and balanced judgment. My view of monetary economics was shaped by my experience auditing his class in the Fall of 1978.” Not everyone is complimentary about the arc of Fischer’s career. To some, he represents the kind of establishment economics that led to financial instability and income inequality in many parts of the world. During his time at the IMF, Fischer became the face of austerity measures gone wrong. Many of his and the IMF’s recommendations for drastic spending cuts during the Asian financial crisis of the late 1990s have since been widely discredited as having made matters worse.

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And that’s just the workers. Not their dependents. Or the unemployed.

97 Million American Workers Are Living Paycheck To Paycheck (ZH)

As we’ve noted time and time again, the number of Americans scraping by with almost no money in their savings account (if they even have a savings account) is staggeringly high – and growing. As the Motley Fool pointed out in a recent post, the St. Louis Federal Reserve, the personal saving rate in June 2017 was a measly 3.8%, or $3.80 for every $100 they earn. With the median household income in the US at just north of $50,000, that would amount to about $4,000 a year. And that’s when they’re saving money. Another study from GoBankingRates found that 69% of Americans surveyed had less than $1,000 in savings. And about one-third had no money in reserve.

Considering that the US economy is 70% based on consumption, Americans are probably over-consuming rather than saving. The Federal Reserve recently released data showing that aggregate credit card debt had hit an all-time high of $1.027 trillion, eclipsing the previous high that was set before the Great Recession. Add in another trillion of auto-loan debt and $1.4 trillion in student-loan debt, and the aggregate debt pile is not only larger than ever before – it’s growing at its fastest rate in decades. And in what’s perhaps the most troubling statistic highlighted by Motley Fool, a recent survey by CareerBuilder and The Harris Poll found that 78% of full-time US workers – nearly 100 million Americans – are now living paycheck to paycheck, up from 75% in 2016.

The survey suggested that only 19% of workers save more than $501 monthly, while at the other end of the spectrum, 56% were saving less than $100 a month, including 26% who saved nothing monthly. Fewer than one-third of respondents admitted to following a budget. Meanwhile, about half of respondents said they wouldn’t give up their internet, phone or car to save money. Maybe once the Federal Reserve has succeeded in “normalizing” interest rates, spendthrift Americans will have more of an incentive to save, while also making it more expensive to pay down debt – a powerful disincentive. Now, if only the central bank could find a way to revive stagnant wages…

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Hendry has fallen prey to the central bankers. And shut his hedge fund.

“Markets Are Wrong” (Hugh Hendry)

What if I was to tell you I wasn’t bearish on anything? Is that something you would be interested in? It wasn’t supposed to be like this and it is especially frustrating as nothing much has gone wrong with the economy over the summer. If anything we feel more convinced that our thesis of a healing global economy is understated: for the first time in an age all parts of the world are enjoying synchronised economic momentum and I can’t see it ending for some time. It’s just that our substantial risk book became strongly correlated over the short term to the maelstrom of President Trump and the daily news bombs emanating from the Korean Peninsula; that and the increasing regulatory burden which makes it almost impossible to manage small pools of capital today. Like I said, it wasn’t supposed to be like this…

But let me bow out by sharing my team’s views. For the implications of a sustained bout of economic growth are good for you. It’s good because it should continue to underwrite a continuation in the positive performance of global equities. I would stay long. It’s also good because I can’t see interest rates rising abruptly to interrupt the upward path of equities. And commodities have already acknowledged the upturn in the fortunes of the global economy and are likely to trend higher still. That’s a lot of good news. But it is bad news for me because funds like mine are required to demonstrate negative correlation with risk assets (when they go up like this I go down…), avoid large drawdowns and post consistent high risk adjusted returns. Oh, and I forgot, macro fund clients don’t like us investing in the stock market for the understandable fear that we concentrate their already considerable risk undertaking.

That proved to be an almighty puzzle for a fund like mine that has been proclaiming the stock market as a “safe-ish” bet ever since 2013. Let me explain the “markets are wrong and we boom now” argument. To begin with, and for the sake of clarity, I think we have to carefully go back and deconstruct the volatile engagement between capital markets and central banks for the last ten years for an understanding of where we stand today. The first die was cast by the central bankers in early 2009: having stared into the abyss of a deflationary spiral in 2008 the Fed and the BoE announced a radical new policy of bond purchases named Quantitative Easing. The bond market hated the idea as it was expected to cause a severe inflation problem.

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Just yesterday I was telling a friend they would soon fire the next.

Japanese Told To Find Shelter After North Korea ‘Fires New Missile’ (Y.)

North Korea has fired a ballistic missile directly over Japan. US Secretary of State Rex Tillerson branded the launch ‘reckless’ and called on China and Russia to take ‘direct action’ against Kim Jong-un, while Seoul responded to the test by launching the missiles of its own. The test sparked panic in Japan, where residents were immediately told to take shelter as the missile passed directly overhead – the second time Pyongyang has done so in the past few weeks. It flew over Hokkaido in northern Japan and fell into the Pacific Ocean, sparking a nationwide alert. South Korea said the missile probably reached an altitude of 770km and travelled 3,700km and called an urgent National Security Council meeting.

The North’s launch comes a day after it threatened to sink Japan and reduce the United States to “ashes and darkness” for supporting a U.N. Security Council resolution imposing new sanctions against it for its nuclear test on September 3. The severe sanctions include limits on imports of crude oil and a ban on exports of textiles – which is the country’s second biggest export, worth more than $700m a year. The North previously launched a ballistic missile from Sunan on August 29, which flew over Japan’s Hokkaido island and landed in the Pacific waters

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Max is very crypto. But bitcoin et al had big overnight losses.

JPMorgan Is In A Bubble And Not Bitcoin – Max Keiser (RT)

“JP Morgan, along with the entire finance sector, has been subsidized by the Federal Reserve’s corrupt practice of ‘financial repression’ that moves hundreds of billions from savers and pensioners, and workers, into JP Morgan and Jamie Dimon’s pocket. Jamie’s compensation is tied directly to manipulating JP Morgan’s stock and option prices, thanks to the Fed’s conflicted, corrupt, cozy malfeasance,” [..] “The US dollar, bond markets, and many property markets are in bubbles. Bitcoin and gold are the only financial assets not in bubbles.

To say bitcoin is fraudulent would be like saying gold is fraudulent. Some might say this, but no rational person would agree,” he said. “As the bubbles in fiat money, bonds and stocks pop, capital will flow into bitcoin, gold, and silver. At some point, when his customers start leaving JPMorgan and move to more bitcoin-focused options, Jamie will be forced to capitulate, or get replaced,”[..] “Bitcoin makes banks, essentially price gouging intermediaries and socially unacceptable leeches, obsolete. Bankers rightfully fear for their jobs as bitcoin replaces them,”

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Nigel Gardner is a former European Commission spokesman.

Why Europe Will Miss The Disruptive Brits (Gardner)

The UK’s constant digging-in of heels has allowed other governments to steer clear of negotiating clashes, safe in the knowledge that Britain and its Eurosceptic media would do the blocking of unpopular measures for them. Take the seemingly trivial example from 2013, of rules about how olive oil could be served in restaurants. “There was a daft proposal that it couldn’t be served in bowls or glass jugs at the table, but only in sealed sachets,” recalls a senior Dutch official. “We didn’t have to do anything – the Brits and their tabloids did the heavy lifting for us, and the proposal was withdrawn … Every time the European Commission proposes something, we know we can rely on the British to kick and shout so it’s blocked. With Brexit, that’s no longer going to be possible.”

Even that opt-out over the 48-hour week for which the UK fought its lonely battle is now – 20 years later – quietly being used by 15 other member states. So which country may end up replacing Britain as Europe’s new troublemaker-in-chief? Poland and Hungary are the obvious candidates because, across a whole range of areas, from civil liberties to media freedoms, the two countries find themselves at odds with the EU. As one senior EU official put it: “They are simply not in line with fundamental EU policies. As new member states they should be enthusiastic, but it’s the opposite.” Beata Szydlo, for example, tells us a lot about what the EU will look like after 2019 when Britain is supposed to exit. The Polish prime minister’s intemperate language at a recent European summit was previously the kind of thing the EU’s top brass expected only from the British.

She would not accept “blackmail from a leader with an approval rating of 4%” she raged against France’s then president François Hollande. Poland is now facing EU legal action over judicial reforms which Brussels says would undermine Polish democracy. Ironically, we may need to look to a more unlikely quarter to find Europe’s true new bad boy. Because post-Brexit, the Germans will end up being much more unpopular. “Without Britain,” one EU official told me, “they will have to assume the role they are historically reluctant to play.”

Indeed, the eurozone crisis provided a foretaste of how this could play out. With Britain outside the single currency, all the anger was directed against Germany and its chancellor, Angela Merkel, when things went wrong. Pictures of Merkel with a Hitler moustache were everywhere in the Greek press. And the old joke about Merkel arriving at Athens airport – the one where the border guard asks “Occupation?” and Merkel replies, “No, just visiting” – took on new life. Expect much more of this.

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He might as well have called it Brexit’s British Question.

Brexit’s Irish Question (Fintan O’Toole)

Brexit is, in a sense, a misnomer. There are five distinct parts of the UK: Scotland, Wales, Northern Ireland, the global metropolis that is Greater London, and what the veteran campaigner for democratic reform Anthony Barnett, in his excellent new book The Lure of Greatness, calls England-without-London. In three of these parts—Scotland, Northern Ireland, and London—Brexit was soundly rejected in last year’s referendum. Wales voted narrowly in favor of Brexit. But in England-without-London Brexit was triumphant, winning by almost 11%. It was moreover a classic nationalist revolt in that the support for Brexit in non-metropolitan England cut across the supposedly rigid divides of North and South, rich and poor. Every single region of England-without-London voted to leave the EU, from the Cotswolds to Cumbria, from the green and pleasant hills to the scarred old mining valleys.

This was a genuine nationalist uprising, a nation transcending social class and geographical divisions to rally behind the cry of “Take back control.” But the nation in question is not Britain, it is England. The problem with this English nationalism is not that it exists. It has a very long history (one has only to read Shakespeare) and indeed England can be seen as one of the first movers in the formation of the modern nation-state. The English have as much right to a collective political identity as the Irish or the Scots (and indeed as the Germans or the French) have. But for centuries, English nationalism has been buried in two larger constructs: the United Kingdom and the British Empire. These interments were entirely voluntary. The gradual construction of the UK, with the inclusion first of Scotland and then of Ireland, gave England stability and control in its own part of the world and allowed it to dominate much of the rest of the world through the empire.

Britishness didn’t threaten Englishness; it amplified it. Now, the empire is gone and the UK is slipping out of England’s control. Britain’s pretensions to be a global military power petered out in the sands of Iraq and Afghanistan: the British army was effectively defeated in both Basra and Helmand and had to be rescued by its American allies. The claim on Northern Ireland has been ceded, and Scotland, though not yet ready for independence, increasingly looks and sounds like another country. In retrospect, it is not surprising that the reaction to these developments has created a reversion to an English, rather than a British, allegiance. In the 2011 census, 32.4 million people (57.7% of the population of England and Wales) chose “English” as their sole identity, while just 10.7 million people (19.1%) associated themselves with a British identity only.

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The torture never stops.

IMF Is Set On Asset Quality Review For Greek Banks (K.)

Greece looks set for another difficult series of negotiations with its international creditors in the third review of its third bailout program, as IMF spokesman Gerry Rice made it clear on Thursday that the issue of the asset quality review of Greek banks (AQR) “will form part of the review.” He also said the Fund may demand new measures for next year, stressing that the programs evolve and conditions change. Citing the IMF report dated July 20 – when the Fund approved its participation in the Greek program “in principle” – Rice left no doubt as to whether the AQR would be discussed, branding it an important matter. This will likely cause friction with the European Central Bank, which has scheduled its own stress tests for the banks in 2018.

Sources in Frankfurt have noted that only if the Greek government asks for an AQR will the ECB authorize it. However, Athens, as a senior Finance Ministry official has said, has no such intention. Greek banks are obviously against any such project that would upset their operations, and had hoped that the IMF would eventually decide against raising the issue. In July the IMF had estimated that local lenders would need at least 10 billion euros in additional capital, raising the prospects of another recapitalization. Rice said on Thursday that the Fund is cooperating with the ECB and other European institutions on all issues, but added that “the stability of the credit system is of great significance for the program.”

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For €45 million? An entire railway national company? How much is the kitchen sink?

Greece Sells Its Railway Company To Italian State Operator (AP)

Greece has agreed to sell its railways company to Italy’s own state-owned operator for 45 million euros ($54 million) as part of its privatization drive. The country’s Asset Development Fund said Thursday that the sale of Trainose to Ferrovie Dello Stato Italiane completed a four-year process. Greece has pledged to carry out an ambitious privatization program as part of its international bailout, under which it has received billions of euros in emergency loans in return for overhauling its economy. Many of the privatizations have been met with resistance from unions. No trains were running on Thursday as the railway workers’ union called a 24-hour strike to protest the company’s sale.

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An awful mess in more ways than one.

Greek Oil Spill Forces Closure Of Athens Beaches (G.)

An emergency operation is under way to clean up an oil spill from a sunken tanker that has blackened popular beaches and bays in Athens’ Argo-Saronic gulf. What had been thought a containable spill is being described by officials as an ecological disaster after thick tar and oil pollution drifted toward residential coastal areas. By Thursday, four days after the 45-year-old Agia Zoni II sank off Salamína island, mayors in suburbs south of the capital were forced to close beaches, citing public health risks. “This is a major environmental disaster,” said the mayor of Salamína, Isidora Nannou-Papathanassiou. “Clearly the danger [of pollution] was not properly gauged, the currents have moved the spill.” The vessel sank while at anchor in the early hours of Sunday. It was carrying 2,500 tonnes of fuel oil and marine gas when it went down in mild weather.

It has emerged that only two of its 11-strong crew – the captain and chief engineer – were on board when it began to take on water. Both men have since been charged with negligence but freed on bail. The company operating the small, Greek-flagged vessel insisted it was seaworthy. Merchant marine officials said initial emphasis had been placed on sealing the vessel’s cargo holds to stop further leakage. The merchant marine minister, Panagiotis Kouroumblis, who has brought in help from abroad including an anti-pollution truck to collect the oil, ruled out further seepage on Tuesday, saying the ship’s hull had been secured. Late on Wednesday, however, the ministry’s general secretary, Dionysis Kalamatianos, raised the possibility that oil was still leaking from the vessel, telling Skai TV that efforts to seal it were “almost complete”.

The contradictory statements sparked accusations that authorities had not only underestimated the scale of the spill, but also lost valuable time in tackling it. The slick extends for miles, and some officials said the cleanup could last four months – much longer than the 20 days Kouroumblis estimated. In the Athens suburb of Glyfada, where floating dams have been set up and chemicals used to dissolve the spillage, the mayor, Giorgos Papanikolaou, said 28 tonnes of fuel had been removed from one beach alone. Images of of dead and oil-coated turtles and birds underscored the economic and environmental impact, and experts estimated it could take years before the affected area fully recovered.

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The only good alternative energy is the one you don’t use.

100% Wishful Thinking: the Green-Energy Cornucopia (Cox)

At the People’s Climate March back last spring, all along that vast river of people, the atmosphere was electric. But electricity was also the focus of too many of the signs and banners. Yes, here and there were solid “System Change, Not Climate Change” – themed signs and banners. But the bulk of slogans on display asserted or implied that ending the climate emergency and avoiding climatic catastrophes like those that would occur a few months later—hurricanes Harvey and Irma and the mega-wildfires in the U.S. West—will be a simple matter of getting Donald Trump out of office and converting to 100-percent renewable energy.

The sunshiny placards and cheery banners promising an energy cornucopia were inspired by academic studies published in the past few years purporting to show how America and the world could meet 100% of future energy demand with solar, wind, and other “green” generation. The biggest attention-getters have been a pair of reports published in 2015 by a team led by Mark Jacobson of Stanford University, but there have been many others. A growing body of research has debunked overblown claims of a green-energy bonanza. Nevertheless, Al Gore, Bill McKibben (who recently expressed hope that Harvey’s attack on the petroleum industry in Texas will send a “wakeup call” for a 100-percent renewable energy surge), and other luminaries in the mainstream climate movement have been invigorated by reports like Jacobson’s and have embraced the 100-percent dream.

And that vision is merging with a broader, even more spurious claim that has become especially popular in the Trump era: the private sector, we are told, has now taken the lead on climate, and market forces will inevitably achieve the 100-percent renewable dream and solve the climate crisis on their own. [..] America does need to convert to fully renewable energy as quickly as possible. The “100-percent renewable for 100% of demand” goal is the problem. Scenarios that make that promise, along with the studies that dissect them, lead me to conclude that, at least in affluent countries, it would be better instead to transform society so that it operates on far less end-use energy while assuring sufficiency for all. That would bring a 100%-renewable energy system within closer reach and avoid the outrageous technological feats and gambles required by high-energy dogma. It would also have the advantage of being possible.

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Quantum is per definition unbreakable. The CIA is not going to like it.

China Takes The Lead In Building Quantum Data Security Networks (Axios)

For decades, physicists have looked to use the behavior of particles of light to securely send information. The basic science underlying quantum cryptography has been determined over the past 40 years, but a slew of papers published this summer by physicist Jian-Wei Pan establishes China as the early leader in deploying the technology on a global scale. Why it matters: Networks using quantum keys theoretically allow for very private communications and safe transactions — because if attacked, the key would be altered and the parties would know it wasn’t secure. That would be valuable for financial transactions or voting that involves transmitting information between two points. But beyond a handful of field tests, there hasn’t been a commitment to develop the technology at this scale until now.

How it works: Two people who want to communicate would share a number key encoded in a string of single photons (particles of light) that can be used to encrypt and decrypt a message. It’s secure because if someone tries to intercept the message, the photons would be physically altered and the key would no longer work, but the data would be secure. The vision: Optical fibers carry photons short distances on the ground (anything more than about 200 kilometers and the fiber absorbs the photon signal). So researchers want to pair them with satellites that can relay the signal and then drop it back down to a receiver on Earth. That goes on and on, ultimately carrying the information around the globe to the intended receiver. What they did: China built a 2,000-km fiber optic network between Beijing and Shanghai and launched a satellite last year — both dedicated to basic research on quantum satellite communications. So far, they’ve used it to:

• Send photons from the satellite to telescopes 1,200 km apart on the ground that acted as receivers. • Transmit quantum-encoded information from the ground to the satellite. • Distribute an actual quantum key string of photons from the satellite to the ground. • Shared the key between two ground receivers — during the day. (That’s key because light from the sun, moon and cities on Earth can drown out the photon signal. The current satellite only operates at night.) “They all together prove that a number of different concepts relevant for the quantum internet really do work in a space setting,” says Anton Zeilinger, a quantum physicist at the University of Vienna who was Pan’s advisor.

The bottom line: China’s achievements are more technological than scientific, but they represent a true advance in the development and deployment of these technologies, says Ray Newell of Los Alamos National Laboratory. He points out that many of the fundamental science and technologies for quantum key distribution were invented in the United States. (Satellite-based quantum key distribution was invented at Los Alamos, which holds the original patent for the technology.) Other countries possess the knowledge to build these systems, but China is the first to make a major investment. “In China, the decision to build it was done at the beginning, and then they went through with a lot of manpower and money,” says Norbert Lutkenhaus from the University of Waterloo.

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Nov 232014
 November 23, 2014  Posted by at 8:42 pm Finance Tagged with: , , , , , , ,  5 Responses »

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

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

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

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

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

China Ready To Cut Rates Again On Fears Of Deflation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The End of China’s Economic Miracle?

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

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

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

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

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

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

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

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

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

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

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

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

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