In recent days, the initial New Year optimism of many investors may have been jolted by fears of an economic slowdown resulting from interest-rate hikes. But no one should be surprised if the current sharp fall in equity prices is followed by a swift return to bullishness, at least in the short term. Despite the recent slide, the mood supporting stocks remains out of sync with the caution expressed by political leaders. Market participants could easily be forgiven for their early-year euphoria. After a solid 2017, key macroeconomic data – on unemployment, inflation, and consumer and business sentiment – as well as GDP forecasts all indicated that strong growth would continue in 2018. The result – in the United States and across most major economies – has been a rare moment of optimism in the context of the last decade.
For starters, the macro data are positively synchronized and inflation remains tame. Moreover, the IMF’s recent upward revision of global growth data came at precisely the point in the cycle when the economy should be showing signs of slowing. Moreover, stock markets’ record highs are no longer relying so much on loose monetary policy for support. Bullishness is underpinned by evidence of a notable uptick in capital investment. In the US, gross domestic private investment rose 5.1% year on year in the fourth quarter of 2017 and is nearly 90% higher than at the trough of the Great Recession, in the third quarter of 2009. This is emblematic of a deeper resurgence in corporate spending – as witnessed in durable goods orders. New orders for US manufactured durable goods beat expectations, climbing 2.9% month on month to December 2017 and 1.7% in November.
Other data tell a similar story. In 2017, the US Federal Reserve’s Industrial Production and Capacity Utilization index recorded its largest calendar year gain since 2010, increasing 3.6%. In addition, US President Donald Trump’s reiteration of his pledge to seek $1.5 trillion in spending on infrastructure and public capital programs will further bolster market sentiment. All of this bullishness will continue to stand in stark contrast to warnings by many world leaders. In just the last few weeks, German Chancellor Angela Merkel cautioned that the current international order is under threat. French President Emmanuel Macron noted that globalization is in the midst of a major crisis, and Canadian Prime Minister Justin Trudeau has stated that the unrest we see around the world is palpable and “isn’t going away.”
“Leveraged loans,” extended to junk-rated and highly leveraged companies, are too risky for banks to keep on their books. Banks sell them to loan mutual funds, or they slice-and-dice them into structured Collateralized Loan Obligations (CLOs) and sell them to institutional investors. This way, the banks get the rich fees but slough off the risk to investors, such as asset managers and pension funds. This has turned into a booming market. Issuance has soared. And given the pandemic chase for yield, the risk premium that investors are demanding to buy the highest rated “tranches” of these CLOs has dropped to the lowest since the Financial Crisis. Mass Mutual’s investment subsidiary, Barings, has packaged leveraged loans into a $517-million CLO that is sold in “tranches” of different risk levels.
[..] These floating-rate CLOs are attractive to asset managers in an environment of rising interest rates. If rates rise further, Libor rises in tandem, and investors would be protected against rising rates by the Libor-plus feature of the yields. Libor has surged in near-parallel with the US three-month Treasury yield and on Monday reached 1.83%. So the yield of Barings CLO was 2.82%. While the Libor-plus structure compensates investors for the risk of rising yields and inflation, it does not compensate investors for credit risk!
[..] One of the measures that track whether “financial conditions” are getting “easier” or tighter is the weekly St. Louis Fed Financial Stress Index. In this index, zero represents “normal.” A negative number indicates that financial conditions are easier than “normal”; a positive number indicates that they’re tighter than “normal.” The index, which is made up of 18 components – including six yield spreads, including one based on the 3-month Libor – had dropped to a historic low of -1.6 on November 3, 2017. Despite the Fed’s rate hikes and the accelerating QE Unwind, it has since ticked up only a smidgen and remains firmly in negative territory, at -1.35.
The Financial Stress Index and the two-year Treasury yield usually move roughly in parallel. But since July 2016, about the time the Fed stopped flip-flopping on rate hikes, the two-year yield began rising and more recently spiking, while the Financial Stress Index initially fell. The chart below shows this disconnect between the St. Louis Fed’s Financial Stress Index (red, left scale) and the two-year Treasury yield (black, right scale). Note the tiny rise of the red line over the past few weeks (circled in blue):
Investors actively abandoned the world’s biggest passive fund during the onset of market mayhem. The SPDR S&P 500 exchange-traded fund (ticker SPY) suffered a record $23.6 billion in outflows last week amid the worst momentum swing in history for the underlying U.S. equity benchmark. Outflows amounted to 8% of the fund’s total assets at the start of the week, a rate of withdrawals not seen since August 2010. A blowup in volatility-linked products sent markets haywire, eliciting waves of risk aversion from jittery investors. Strategists at JPMorgan said the swiftness and severity of the positioning unwind is a sign that further selling from the likes of commodity trading advisors and risk parity funds “should be limited from here.”
“The picture we are getting in the U.S. equity ETF space is one of advanced rather than early state de-risking,” they added. The five-session stampede for the exits erased the previous nine weeks of inflows into the fund, which is issued by State Street. The combination of price declines and withdrawals erased $38.6 billion in SPY’s assets. That’s nearly double the second-worst showing of $19.4 billion in asset shrinkage during the week ending Aug. 21, 2015, when China’s surprise devaluation of the yuan roiled markets. Prior to this recent market tumult, extreme enthusiasm for U.S. equities had propelled the fund’s total assets above $300 billion.
Tomorrow’s VIX options expiration could prove extra volatile for the gauge. The Cboe Volatility Index tends to have bigger swings on days its contracts mature, with intraday moves of 13% on average on the past 12 monthly expirations. That compares with a mean daily fluctuation of 10% in the year through January. Of course, that was before this month, when a record VIX surge on Feb. 5 sent its average intraday move for February to almost 60%. What’s more, the recent market turmoil has led to a surge in the number of VIX contracts, and put open interest almost tripled to a record since the Jan. 17 expiration. Counting puts and calls, there are 15.4 million VIX options outstanding, and 40% of them mature tomorrow. While most stock-index options expire on the third Friday of every month, monthly VIX contracts expire two days earlier, on the Wednesday.
For European banks, it’s a headache that just won’t go away: the €944 billion ($1.17 trillion) of non-performing loans that’s weighing down their balance sheets. Economists say the pile of past-due and delinquent debt makes it harder for banks to lend more money, hurting their earnings. European authorities are prodding lenders to sell or wind down non-performing credit, but they’re split on how to tackle the issue, and some investors are disappointed by the pace of progress.
The problem is particularly acute in the countries that were hit hardest by the sovereign debt crisis. Greece, which has yet to exit its bailout program, tops the list of non-performing loans as a share of total credit, while Italy has the biggest pile of bad debt in absolute terms.
Italian banks have fixed goals for shrinking their bad credit levels by selling portfolios or winding down loans. Intesa Sanpaolo, the country’s biggest bank by market value, got a head start on its rivals two years ago and plans to accelerate the reduction of non-performing loans, Chief Executive Officer Carlo Messina said last month. He says other Italian banks “are doing the right job” and should make further progress this year.
Mario Draghi is facing yet another headache this year as a strong currency threatens to derail his quest to keep prices stable, with many analysts suggesting there’s no easy way out for the president of the ECB. Investors have been flocking to the single currency as the euro zone economy keeps growing and political risks dissipate. However, that could become a problem for the ECB as a stronger currency can mean that European-produced products become pricier and less attractive outside the region. The euro has risen nearly 3% against the U.S. dollar since the start of the year, at a time when the ECB has been assessing how to reduce its monetary stimulus – which aims to increase lending and stoke consumer prices. At the bank’s last press conference in January, Draghi admitted that recent volatility in the exchange rate was a “source of uncertainty.”
The ECB’s primary target has always been inflation and not the exchange rate and Draghi — like many central bankers around the world — has been cautious when speaking of his own currency. However, analysts believe that Draghi wouldn’t be able to talk down the euro, even if he wanted to. “I believe it will be difficult for the ECB to talk the euro down in a very significant manner as it has already pretty much exhausted its preferred expansionary monetary policy instruments which it could use to weaken the currency (rate hikes and QE),” Thu Lan Nguyen at Commerzbank told CNBC via email. “And as the G-20 nations have agreed that they will refrain from manipulating their exchange rates, interventions are not a viable option either. Or even directly talking the euro down for that matter, because other nations would see this as a violation of the agreement as well,” she said.
Greek bond yields continued to rise Tuesday, increasing worries about the cost of borrowing the country will face once it has to cover all of its financing needs through the market. At the same time Finance Minister Euclid Tsakalotos is adamant that Greece will not need a precautionary credit line and is embarking on a series of contacts in an attempt to attract investor interest. Tsakalotos departed on Tuesday for Paris for meetings with representatives of investment companies, hoping to convince them about the prospects of the Greek economy. He will continue his mission in London on Thursday. He is due back to Athens on Friday. The Greek 10-year bond saw its yield climb further on Tuesday, reaching 4.38% from 4.29% on Monday, while the yield on five-year paper advanced from 3.64% to 3.77% in a day. The 7-year debt yield exceeded 4%, having been sold to investors with a 3.5% yield just last Thursday.
Britons will spend almost a third more on their mortgages and other household debts over the next five years, according to new data, sparking fears many may struggle to cope with mounting costs if interest rates rise as predicted. The projection, revealed by a freedom of information request to the Office for Budget Responsibility, found household debt servicing costs were set to climb 29% by 2023, the vast majority of which are likely to be mortgages. The rise may take homeowners by surprise, given that costs fell 9% over the previous five years and also declined as a share of household income by almost a quarter due to historically low interest rates.
The Bank of England has indicated that it plans to raise interest rates from as early as May. On Monday the Resolution Foundation warned it could hit millions of low-income families who have relied on cheap credit. The Bank’s governor, Mark Carney, has said he believes the growing economy, including GDP growth and rising average wages, warrants a rise in interest rates from their low of 0.5%. Labour’s analysis found that an average household would see an increase of £468 in annual debt costs, from £1,983 in 2018 to £2,451 by 2023. The shadow chancellor, John McDonnell, called the figures “eye-watering increases in the potential costs faced by working families at a time when incomes are being squeezed”.
If you had $1 billion to spend on safe real estate assets, where would you look to buy? For many funds, financial institutions, and wealthy individuals, the perception is that the world’s financial centers are the places to be. After all, world-class cities like New York, London, and Hong Kong will never go out of style, and their extremely robust and high-density city centers limit the supply of quality assets to buy. But what happens when too many people pile into a “safe” asset? According to UBS, certain cities have seen prices rise at rates that are potentially not sustainable – and eight of these financial centers are at risk of having real estate bubbles that could eventually deflate.
Every year, UBS publishes the Global Real Estate Bubble Index, and the most recent edition shows several key markets in bubble territory. The bank highlights Toronto as the biggest potential bubble risk, noting that real prices have doubled over 13 years, while real rents and real income have only increased 5% and 10% respectively. However, the largest city in Canada was certainly not the only global financial center with real estate appreciating at rapid rates in the last year. In Munich, Toronto, Amsterdam, Sydney and Hong Kong, prices rose more than 10% in the last year alone. Annual increases at a 10% clip would lead to the doubling of prices every seven years, something the bank says is unsustainable.
In the last year, there were three key markets where prices did not rise: London, Milan, and Singapore. London is particularly notable, since it holds more millionaires than any other city in the world and is rated as the #1 financial center globally.
UK house price growth accelerated to 5.2% in the year to December, new official data shows. That was a rise from 5% in the twelve months to November. The jump exceeds rises in average wages, prompting experts to warn of a further strain on affordability. The average UK house price hit £227,000 in December 2017, up £1,000 from the previous month and £12,000 higher than in December 2016. The house price index compiled by the Office for National Statistics and the Land Registry shows Scotland and the South-west experienced the highest annual house price growth, registering 7.7% and 7.5% respectively.
Average prices in England rose 5% in the year, to £244,000 while Wales saw house prices increase by 5.4% over the last 12 months to stand at £154,000. Growth in Northern Ireland was slightly more subdued, with the average price rising 4.3% to £130,000. Richard Snook, a senior economist at PwC, said the overall UK rise was above his projection made at the start of 2017. [..] “In terms of regional trends, London prices showed a slight recovery from the sharp fall in November so the picture is one of a market that has plateaued since the summer. London prices are just 2.5% above their level a year ago.
The number of first-time buyers hit the highest level for a decade in 2017 while lending for buy-to-let has gone into retreat, according to official figures. A total of 365,000 buyers took ownership of their first home last year, an increase of 7.4% on 2016 and the highest number since 2006, said UK Finance, the trade body for Britain’s banks. Its data showed that the average first-time buyer was 30 and had an income of £41,000. Property experts said the government’s help-to-buy programme plus lower deposit and cheap mortgage deals propelled first-time buyers in 2017. But in a sign that the boom may be waning, the figures for December show the number slipped compared with the same month last year. The slowdown comes despite the stamp duty cut in the November budget, which is expected to save four out of five first-time buyers up to £5,000.
The raft of tax measures on buy-to-let introduced last year has sent the sector swiftly into retreat. There were 5,300 new buy-to-let house purchase mortgages completed in December, 17.2% fewer than in the same month a year earlier. Paul Smee, of UK Finance, said: “2017 saw the number of first-time buyers reach its highest level in a decade, which is welcome news for those getting started on the housing ladder. “But although the market remains competitive there is no room for complacency, with weaker December figures consistent with our market forecast of subdued growth this year. [..] Separate figures from the Office for National Statistics revealed that house price inflation in 2017 was 5.2%, taking the price of a typical UK home to £226,760.
Over the past year the rate of house price inflation has fallen while the number of first-time buyers has risen to its highest level since 2006. These two facts are connected: the reason young people have become renters rather than owner-occupiers is that property became expensive. Property has become so dear that the average first-time buyer is now 30 years old and has a salary of £41,000 a year. Owner-occupation rates have fallen from 70% to 63% over the past decade and it is not difficult to see why. Ultra-low interest rates mean that it has never been cheaper to service a mortgage, but that doesn’t matter all that much when the price of a home relative to incomes is so high.
For those who want to buy their own home, the good news is that house-price inflation will be modest in 2018. Earnings growth is still around 2.5%; the Bank of England is warning that interest rates are likely to go up faster and by more than previously expected; and tax changes that have helped cause a 17% annual drop in buy-to-let purchases in the year to December are going to become more stringent in April. House prices would already be falling were it not for the fact that interest rates and unemployment are low. It was the combination of 15% interest rates and a doubling of the jobless total that caused the property-price collapse of the early 1990s, and a repeat of that looks highly improbable because of a (welcome) lack of distressed sellers.
Boris Johnson will say he fears people are becoming “even more determined” in their efforts to stop Britain’s withdrawal from the European Union (EU), as he sets out in a major speech what allies claim is a liberal vision of Brexit. The Foreign Secretary’s Valentine’s Day address – entitled the Road to Brexit – will be the first in a series of set pieces from Cabinet ministers and preludes Theresa May’s address in Germany this weekend. At a central London location, Mr Johnson will say he fears that some are becoming “even more determined” to stop Brexit and “frustrate the will of the people”.
“I believe that would be a disastrous mistake that would lead to permanent and ineradicable feelings of betrayal,” Mr Johnson will say. “We cannot and will not let it happen.” “But if we are to carry this project through to national success – as we must – then we must reach out to those who still have anxieties. “I want to try today to anatomise at least some of those fears and to show to the best of my ability that they are unfounded, and that the very opposite is usually true: that Brexit is not grounds for fear but hope.”
The U.S. government shut down at midnight on Friday after Democrats and Republicans failed to reach a last-minute deal to fund its operations, divided in a bitter dispute over immigration and border security. In a dramatic late-night session, senators blocked a bill to extend government funding through Feb. 16. The bill needed 60 votes in the 100-member Senate but fell short, with only 50 supporting it. Most Democrats opposed the bill because their efforts to include protections for hundreds of thousands of mostly young immigrants known as Dreamers failed. Huddled negotiations by Senate Majority Leader Mitch McConnell and Senate Democratic leader Chuck Schumer in the last minutes before midnight were unsuccessful, and the U.S. government technically ran out of money at midnight.
The shutdown formally began on Saturday, the first anniversary of President Donald Trump’s inauguration. Trump immediately sought to blame Democrats. “Tonight, they put politics above our national security, military families, vulnerable children, and our country’s ability to serve all Americans,” the White House said in a statement. It also said it would not discuss immigration until the government is up and running again. “We will not negotiate the status of unlawful immigrants while Democrats hold our lawful citizens hostage over their reckless demands. This is the behavior of obstructionist losers, not legislators.” In return, Schumer pointed the finger directly at Trump. “It’s almost as if you were rooting for a shutdown and now we’ll have one and the blame should crash entirely on President Trump’s shoulders,” he said.
Until a funding deal is worked out, scores of federal agencies across the country will be unable to operate, and hundreds of thousands of “non-essential” federal workers will be put on temporary unpaid leave. The Republican-controlled House of Representatives passed a stopgap funding measure on Thursday. But Republicans then needed the support of at least 10 Democrats to pass the bill in the Senate. While five Democrats ended up voting for the measure, five Republicans voted against it. Democratic leaders demanded that the measure include protections from deportation for about 700,000 undocumented immigrants known as Dreamers who arrived in the United States as children.
Despite bipartisan negotiations, Republican leaders refused to include those protections, and neither side was willing to back down. McConnell and Schumer insisted they were still committed to finding an agreement that restores government funding as soon as possible. Trump, who had made strict measures on immigration a cornerstone of his presidential campaign, last week rejected a bipartisan proposal, saying he wanted to include any deal for Dreamers in a bigger legislative package that also boosts funding for a border wall and tighter security at the U.S. border with Mexico.
U.S. President Donald Trump will be entering something of a lion’s den when he visits the elitist enclave of Davos next week, rubbing shoulders with the same “globalists” that he campaigned against in winning the 2016 election. Aides said some of Trump’s advisers had argued against him attending the World Economic Forum in order to steer clear of the event, which brings together political leaders, CEOs and top bankers. But in the end, they said, Trump, the first sitting U.S. president to attend the forum since Bill Clinton in 2000, wanted to go to call attention to growth in the U.S. economy and the soaring stock market. A senior administration official said Trump is expected to take a double-edged message to the forum in Switzerland, where he is to deliver a speech and meet some world leaders.
In his speech, Trump is expected to urge the world to invest in the United States to take advantage of his deregulatory and tax cut policies, stress his “America First” agenda and call for fairer, more reciprocal trade, the official said. During his 2016 election campaign, Trump blamed globalization for ravaging American manufacturing jobs as companies sought to reduce labor costs by relocating to Mexico and elsewhere. “Globalization has made the financial elite who donate to politicians very wealthy. But it has left millions of our workers with nothing but poverty and heartache,” he said on June 28, 2016, in Pennsylvania. Trump retains the same anti-globalist beliefs but has struggled to rewrite trade deals that he sees as benefiting other countries.
The US government bond market has further soured this week, with Treasuries selling off across the spectrum. When bond prices fall, yields rise. For example, the two-year Treasury yield rose to 2.06% on Friday, the highest since September 2008. In the chart, note the determined spike of 79 basis points since September 8, 2017. That was the month when the Fed announced the highly telegraphed details of its QE Unwind. September as month of the QE-Unwind announcement keeps cropping up. All kinds of things began to happen, at first quietly, without drawing much attention. But then the trajectory just kept going.
The three-year yield, which had gone nowhere for the first eight months of 2017, rose to 2.20% on Friday, the highest since October 1, 2008. It has spiked 82 basis points since September 8:
The ten-year yield – the benchmark for financial markets that most influences US mortgage rates – jumped to 2.66% late Friday. This is particularly interesting because the 10-year yield had declined from March 2017 into August despite the Fed’s three rate hikes last year, and rising short-term yields. At 2.66%, the 10-year yield has reached its highest level since April 2014, when the “Taper Tantrum” was winding down. That Taper Tantrum was the bond market’s way of saying “we’re shocked and appalled,” when Chairman Bernanke dropped hints the Fed might eventually begin tapering what the market had called “QE Infinity.” The 10-year yield has now doubled since the historic intraday low on July 7, 2016 of 1.32% (it closed that day at 1.37%, a historic closing low):
Friday capped four weeks of pain in the Treasury market. But it has not impacted yet the corporate bond market, and the spread in yields between Treasuries and corporate bonds, and particularly junk bonds, has further narrowed. And it has not yet impacted the stock market, and there has been no adjustment in the market’s risk pricing yet. But it has impacted the mortgage market. On Friday, the average 30-year fixed-rate mortgage with conforming loan balances ($417,000 or less) for top-tier borrowers, according to Mortgage News Daily, ended at 4.23%, the highest in nine months. But historically, 4.25% is still very low. And likely just the beginning of a long, uneven climb higher. And the impact on mortgage payments can be sizable. When rates rise for example from 3.5% to 4.5%, the payment for a $250,000 mortgage jumps by $144 to $1,267 a month. This can move the payment out of reach for households that have trouble making ends meet.
In case you’re worked up about the looming federal government shut-down, this is exactly how we’re supposed to roll in the long emergency: everything organized at the gigantic scale is going to wobble and fail. It’s nature’s way of saying, “get smaller, get realer, scale down, and get local.” The catch is, we probably won’t listen to nature. Instead, we’ll just behave like bystanders and do nothing until the full force of failure is upon us, just as we’re doing with climate change — the tragedy of the commons at planetary scale. The failure of national party politics is deep and systemic, as you would expect from activities nurtured in a shit-hole called Washington, corruption being the manifestation of sepsis. The lethal vector of this illness is money.
There’s the money flowing into the “campaign funds” (so-called) of congressmen and senators, of course, but there’s also the “money” that is flowing in and out of the leviathan government — a whole lot of it is not really there. It’s a figment of promises to pay back loans on top of a monumental heap of past promises that will never be kept. The threatened government shutdown is just a symptom of the illness: a society doing things out of scale, trying to run its excessive activities by check-kiting and accounting fraud. What could go wrong? Not the stock and bond markets, I’m sure. Though… wait a minute… that hockey-stick surge in equities looks a little bit like the action of a thermometer measuring the rising body temperature of a very sick patient.
From 25,000 to 26,000 on the Dow — in what? seven days? — is kind of like the flu victim going from 98.6 to 105 after onset. And we know what happens to humans up around the 105 Fahrenheit body temperature level: the brain starts to sputter and smoke. Soon, it’s lights out and don’t let your karma smack you on the butt going through the exit.
The National Security Agency destroyed surveillance data it pledged to preserve in connection with pending lawsuits and apparently never took some of the steps it told a federal court it had taken to make sure the information wasn’t destroyed, according to recent court filings. Word of the NSA’s foul-up is emerging just as Congress has extended for six years the legal authority the agency uses for much of its surveillance work conducted through U.S. internet providers and tech firms. President Donald Trump signed that measure into law Friday. Since 2007, the NSA has been under court orders to preserve data about certain of its surveillance efforts that came under legal attack following disclosures that President George W. Bush ordered warrantless wiretapping of international communications after the 2001 terrorist attacks on the U.S.
In addition, the agency has made a series of representations in court over the years about how it is complying with its duties. However, the NSA told U.S. District Court Judge Jeffrey White in a filing on Thursday night and another little-noticed submission last year that the agency did not preserve the content of internet communications intercepted between 2001 and 2007 under the program Bush ordered. To make matters worse, backup tapes that might have mitigated the failure were erased in 2009, 2011 and 2016, the NSA said. “The NSA sincerely regrets its failure to prevent the deletion of this data,” NSA’s deputy director of capabilities, identified publicly as “Elizabeth B.,” wrote in a declaration filed in October. “NSA senior management is fully aware of this failure, and the Agency is committed to taking swift action to respond to the loss of this data.”
In the update Thursday, another NSA official said the data were deleted during a broad, housecleaning effort aimed at making space for incoming information. “The NSA’s review to date reveals that this [Presidential Surveillance Program] Internet content data was not specifically targeted for deletion,” wrote the official, identified as “Dr. Mark O,” “but rather the PSP Internet content data matched criteria that were broadly used to delete data of a certain type … in response to mission requirements to free-up space and improve performance of the [redacted] back-up system. The NSA is still investigating how these deletions came about given the preservation obligations extant at the time. The NSA, however, has no reason to believe at this time that PSP Internet content data was specifically targeted for deletion.”
Russia’s Foreign Minister Sergey Lavrov has accused the United States of working to carve out “an alternative government” on Syrian soil in statements made at a UN press briefing related to the recent Turkish military build-up poised to assault Syrian Kurdish areas of Northern Syria. Lavrov’s words come after Secretary of State Rex Tillerson pledged in a speech on Wednesday that US military forces would remain in Syria indefinitely until various objectives are met, which include Syrian government transition and the curtailing of Iran’s influence. Lavrov said “It’s a fact that US forces are seriously involved in creating alternative government bodies on vast part of the Syrian territory. And this, of course, absolutely contradicts their own obligations, which they committed to on numerous occasions, including at the UN Security Council, on maintaining the sovereignty and the territorial integrity on Syria.”
The Russian FM further accused the US of contradicting its previous claim that US troops – which number at least 2,000 according to recent Pentagon statements – were only in Syria to fight the Islamic State and not wage a proxy war against the Syrian government and its allies. The prior US policy of regime change in Syria, which began under the Obama administration and intensified under a CIA program, was something many analysts perceived that President Trump had abandoned – consistent with earlier campaign promises. In the summer of last year Trump shut down the CIA program – widely reported to be the agency’s largest covert program – even while boosting support for the Pentagon program to arm and train the predominately Kurdish Syrian Democratic Forces (SDF).
“Rex Tillerson told me many times that the only reason for their presence there [in Syria] is defeating Islamic State (IS, formerly ISIS/ISL). Now they have some much more long-standing plans,” Lavrov said further of the inconsistency in US policy. “We will have to take this into account and look for solutions that won’t allow the destruction of Syrian sovereignty.”
Because it is such a riveting clown show with new crazy episodes almost every day, Europeans can be forgiven for ignoring the fact that Brexit is going to hurt them too. But as the date of Britain’s departure comes closer and Theresa May’s government continues its kamikaze policy of demanding the politically unthinkable from the EU, it is time for Europeans to wake and begin preparing for the worst. On Thursday the Dutch government published a report drawn up by the consultancy firm KPMG analysing the consequences of a “no-deal” Brexit in which the UK leaves the EU without an agreement on 29 March 2019.
Here are the practical implications and cold numbers behind the hot-headed rhetoric about no deal with the EU being “better than a bad deal” for Britain: should the UK “crash” out of the EU by late March 2019 the Dutch companies trading with the UK will have to secure a total of no less than 4.2m exporting and 750,000 importing licences. If by this time both states have a functioning customs system in place – a big if for this consistently incompetent UK government – costs for companies are between €80 and €130. That is per licence. The price tag for all this new red tape is €600m for the Dutch side alone. This excludes the costs of new export and import tariffs, VAT and other new “sector-specific” barriers for trading with the UK.
The 35,000 small and medium-sized businesses unused to trading with non-EU countries also face an estimated cost of €20,000-€50,000 to adapt their IT systems. Added to this, warns the report, must be the likely effects of the inevitable economic slowdown, or worse, in Britain. When the country leaves without a deal it must “fall back” on the minimal WTO rules for trade. But financial services and aviation fall outside the WTO regime, meaning that after a British no-deal departure both sectors must stop trading with the EU overnight. Between Amsterdam Schiphol airport and London alone there are currently 60 flights a day – one every 15 minutes.
There is little for the average household to cheer these days as inflation crushes paltry earnings increases. Inflation is running at 3% while wage rises can manage no more than 2.5%. Worse for the average household, the banks are beginning to turn off the lending taps that have allowed them to boost their incomes with cheap debt. Things were better in the year to April 2017, according to the number crunchers at the Office for National Statistics, who have lifted the lid on Britain’s spending habits in their annual family spending report. It shows that average weekly household spending clawed its way back from the depths of the 2009 recession to exceed the pre-crisis level for the first time.
This slice of good news, albeit five or six years later than many economists thought it would happen, disguises how the better off have thrived compared to those on the bottom rung of the income ladder. For instance the richest 10% spent more on wine per week (£9.40) than the poorest 10% spent on water (£7.30). In the same vein, the richest 10% spent £59.40 on “furniture and furnishings, carpets and other floor coverings” to almost match how much the poorest 10% spent on rent (£62.70). Challenging the idea that the poorest waste their money on booze and cigarettes, the survey found that the richest 10% devote twice as much of the weekly shop (£17.50) to “alcoholic drinks, tobacco and narcotics” as the poorest. But it is the new rich, the 65- to 74-year-olds that really catch the eye.
Their spending might not match that of the top 10%, yet it significantly powers ahead of anything the average 20-something can muster on areas like entertainment and recreation. The figures show that people in the 10 years from their 65th birthday go on a spending binge that means devoting nearly a fifth of their total expenditure on recreation and culture, double the 10% spent by the under-30s. This is the final salary pension bonanza that can only be described as a once in a generation spending boost. The same applies to those of all ages on below average incomes. They increased their spending by a startling 7% on the previous year, far more than the 1% increase across the richest half of households. Unfortunately they managed this largely by running down savings and taking on extra debt.
As banks, under instruction from the financial regulator, rein in their lending, debt-fuelled spending should be considered a one-off boon, just like the final salary payout. However, that seems unlikely. Banks remain dependent for profit on lending.
The Carillion whitewash has begun. Carillion’s interim CEO, Keith Cochrane, is spinning the line that had banks not pulled funding, its collapse could have been averted. And the Financial Times has released details of a letter Carillion sent to the Government at the beginning of January, in which it asked for short-term advances to tide it over while it underwent restructuring. Labour MP Pat McFadden has written to the Treasury Secretary asking whether it would have been more cost-effective for the U.K. Government to support Carillion, rather than allowing it to collapse. This looks to me like a campaign to deflect blame from Carillion’s management to its lenders and customers. We are being led to believe that it wasn’t insolvent, it was just illiquid, and depriving it of short-term funds caused a completely unnecessary collapse.
Deliciously, the bank Cochrane principally accuses of precipitating Carillion’s collapse by depriving it of funds is RBS, which was rescued at taxpayer expense in the 2008 financial crisis. Something tells me Cochrane’s fingering of RBS is no accident. For a bailed-out bank to refuse to provide a major Government contractor with short-term funds looks at best ungrateful and at worst insulting. Of course, RBS is itself a past master at playing the “we’re not insolvent, we are just illiquid” game. On the day that RBS failed, in September 2008, RBS’s CEO, Fred Goodwin, insisted that the bank was solvent. “We don’t have a capital problem,” he said. “We have a liquidity problem. All we need is short-term cash”.* But in fact, RBS was deeply insolvent. Rescuing it cost the U.K. Government £45bn, and RBS has lost a further £58bn since. Nearly ten years after the crisis, it is still in majority public ownership.
The similarity to RBS’s collapse is striking. Less than a week after Carillion’s failure, we now know that it is deeply insolvent. A couple of days after it filed for compulsory liquidation, Carillion’s unsecured bonds were trading at only 2.4% of par: This is an extraordinary writedown. It implies that bondholders expect to get back almost none of their investment. And this is senior unsecured debt, not subordinated debt or equity. The holders of anything more junior have already been wiped.
Two hundred cross-party MPs are calling on heads of the major supermarkets to eliminate plastic packaging from their products by 2023. The MPs, who are from seven political parties, have written to Tesco, Sainsbury’s, Morrisons, Asda, Waitrose, Aldi, Lidl, Budgens and Marks & Spencer urging them to scrap plastic packaging. They wrote after the Guardian revealed this week the major supermarkets in the UK create more than 800,000 tonnes of plastic packaging waste – well over half the household plastic waste – each year. Six of the major supermarkets refused to reveal the amount of plastic packaging they put on to the market, saying the information was commercially sensitive. Analysis by Eunomia environmental consultants used figures provided by Aldi and the Co-op – the only chains to release public figures on their plastic tonnage – and the market share of each supermarket to estimate how much plastic packaging the chains produce each year.
This week, Iceland announced it would stop plastic packaging on its own brand products by 2023. Catherine West, Labour MP for Hornsey and Wood Green, who is behind the letter, said: “Vast amounts of plastic are ‘used’ for merely a few seconds before being discarded. “We have a moral duty to tackle this disposable culture. As such, I welcome the recent announcement from Iceland supermarkets … and I’m delighted that MPs from all parties are supporting my call for other retailers to follow suit.” Waitrose announced on Friday it would no longer use black plastic for its meat, fish, fruit and vegetables by the end of this year, and that all Waitrose products would be free of black plastic by the end of 2019. Black plastic cannot be recycled under current UK systems.
Each year it is estimated that more than 300m tonnes of plastic are produced globally. The Guardian revealed recently that plastic production is set to soar over the next 10 years. On Friday Coca-Cola announced a new goal to collect and recycle the equivalent of 100% of the packaging it sells globally by 2030. Coca-Cola said: “Given the size and scope of this challenge, we expect to invest in new packaging innovations and local collection and recycling systems, as well as consumer education and awareness programs.”
This year marks the centenary of Spanish flu, the most deadly pandemic in human history. It is estimated that five hundred million people contracted it – a third of the global population in 1918 – and that between fifty and a hundred million of them died. Asians were thirty times more likely to die than Europeans. The pandemic had some influence on the lives of everyone alive today. Donald Trump’s grandfather Friedrich died from it in New York City. He was 49. His early death meant that his fortune passed to his son Fred, who used it to start a New York property empire. My wife’s great-grandmother died from it in Verona; her grandfather, aged eight, had to leave school and find work to support the family. Emilio died in 2011 aged 101.
When I told a friend, the writer Andrew Greig, that I was writing this piece, he told me that his father, born in 1899, came down with Spanish flu while on leave from the war in France. ‘His convalescence delayed his return to the front, where his battalion was all but wiped out,’ Andrew said. ‘He always insisted Spanish flu saved his life, and without it, I suppose I wouldn’t be alive either.’ Laura Spinney’s book attempts to collate what is known about the pandemic, and takes a stab at examining its legacy: ‘The flu resculpted human populations more radically than anything since the Black Death,’ she writes. ‘It influenced the course of the First World War and, arguably, contributed to the second. It pushed India closer to independence, South Africa closer to apartheid, and Switzerland to the brink of civil war. It ushered in universal healthcare and alternative medicine, our love of fresh air and our passion for sport.’
The majority of deaths came in the three months between September and December 1918. The war probably didn’t spawn it, but certainly helped it spread: the US lost more soldiers to flu than to the war in part because so many of them spent weeks coughing together in barracks and transports on their way to Europe. Britain and Italy suffered between two and three times more deaths from the war than from the flu, while Germany’s war deaths outnumbered flu deaths six to one. Spinney quotes historians who claim that flu struck Germany harder than Britain or France; Erich Ludendorff was convinced it had robbed Germany of victory. The spread of Spanish flu was quickened by the railway and steamer lines that girdled the planet, starkly illuminating global inequalities in security, nutrition and access to medical care.
In India 6% of the population died; in Fiji 5%; in Tonga 10%. In Western Samoa, for reasons that aren’t entirely clear, more than 20% of the population died. Even harder hit were the Alaskan Inuit, with a death rate between 25 and 50%: in some small Alaskan communities everybody died. Koreans and Japanese were infected at the same rate, but the Koreans, subject to chronic malnutrition, were twice as likely to die. In the US, Italian immigrants died at twice the background rate (the Italian neighbourhoods of New York had a density of five hundred per acre, ten to a room), while black populations were the least affected. ‘As far as the “Flu” is concerned the whites have the whole big show to themselves,’ J. Franklin Johnson wrote to the Baltimore Afro-American.
Let’s start with two obvious points about the whole Russia fiasco… Namely, there is no “there, there.” First off, the president has the power to declassify secret documents at will. But in this instance he could also do that without compromising intelligence community (IC) “sources and methods” in the slightest. That’s because after Edward Snowden’s revelations in 2013, the whole world was put on notice — and most especially Washington’s adversaries — that it collects every single electronic digit that passes through the worldwide web and related communications grids. Washington essentially has universal and omniscient SIGINT (signals intelligence). Acknowledging that fact by publishing the Russia-Trump intercepts would provide new knowledge to exactly no one. Nor would it jeopardize the lives of any American spy or agent (HUMINT).
It would just document the unconstitutional interference in the election process that had been committed by the U.S. intelligence agencies and political operatives in the Obama White House. That pales compared to whatever noise comes out of Langley (CIA) and Ft. Meade (NSA). And I do mean noise. Yes, I can hear the boxes on the CNN screen harrumphing that declassifying the “evidence” would amount to obstruction of justice! That is, since Trump’s “crime” is a given (i.e. his occupancy of the Oval Office), anything that gets in the way of his conviction and removal therefrom amounts to “obstruction.” Given that he is up against a Deep State/Democratic/Neoconservative/mainstream media prosecution, the Donald has no chance of survival short of an aggressive offensive of the type I just described. But that’s not happening because the man is clueless about what he is doing in the White House.
And he’s being advised by a cacophonous coterie of amateurs and nincompoops. So he has no action plan except to impulsively reach for his Twitter account. That became more than evident — and more than pathetic, too — when he tweeted out an attack on his own Deputy Attorney General, Rod Rosenstein. At least Nixon fired Elliot Richardson (his Attorney General) and Bill Ruckelshaus (Deputy AG): “I am being investigated for firing the FBI Director by the man who told me to fire the FBI Director! Witch Hunt.” Alone with his Twitter account, clueless advisors and pulsating rage, the Donald is instead laying the groundwork for his own demise. Were this not the White House, this would normally be the point at which they send in the men in white coats with a straight jacket.
[..] Even Senator John Thune, an ostensible Swamp-hating conservative, had nothing but praise for Special Counsel Robert Mueller, that he would fairly and thoroughly get to the bottom of the matter. No he won’t! Mueller is a card-carrying member of the Deep State who was there at the founding of today’s surveillance monster as FBI Director following 9/11. Since the whole $75 billion apparatus that eventually emerged was based on an exaggerated threat of global Islamic terrorism, Russia had to be demonized into order to keep the game going — a transition that Mueller fully subscribed to.
RT: Australia halted its cooperation. How significant is this development? Why did they do it? Ron Paul: I think that is good. Maybe wise enough, I wish we could do the same thing – just come home. It just makes no sense; there’s a mess over there. So many people are involved, the neighborhood ought to take care of it, and we have gone too far away from our home. It has been going on for too long, and it all started when Obama in 2011 said: “Assad has to go.” And now as the conditions deteriorate …it looks like Assad and his allies are winning, and the US don’t want them to take Raqqa. This just goes on and on. I think it is really still the same thing that Obama set up – “Get rid of Assad” and there is a lot of frustration because Assad is still around and now it is getting very dangerous, it is dangerous on both sides.
One thing that I am concerned about – because I’ve seen it happen so often over the years, are false flags. Some accidents happen. Even if it is an honest accident or it is deliberate by one side or the other to blame somebody. And before they stop and think about it, then there is more escalation. When our planes are flying over there and into airspace where we shouldn’t be, and we are setting up boundaries and say “don’t cross these lines or you will be crossing our territory.” We have no right to do this. We should mind our own business; we shouldn’t be over there, when we go over there and decide that we are going to take over, it is an act of aggression, and I am positively opposed to that. And I think most Americans are too if they get all the information they need.
Most Americans’ idea of happiness involves lounging by the water or on a beach somewhere. But it turns out, human happiness can flourish even in freezing climates far from the equator. To wit, the Social Progress Imperative, a US-based nonprofit, released the results of its annual Social Progress Index report, which purports to rank countries based on the overall wellbeing of their citizens. Four Scandinavian countries – Denmark, Finland, Iceland and Norway claimed the top spots, while the US placed 18th out of 128, leaving it in what the SPI defines as the “second-tier” of countries based on citizens’ wellbeing, according to Bloomberg. Luckily, being “second-tier” doesn’t seem that bad, according to a definition found in the report. “Second-tier countries demonstrate “high social progress” on core issues, such as nutrition, water, and sanitation.
However, they lag the first-tier, “very high social progress” nations when it comes to social unity and civic issues. That more or less reflects the U.S. performance. (There are six tiers in the study.)” “We want to measure a country’s health and wellness achieved, not how much effort is expended, nor how much the country spends on healthcare,” the report states. In a nod to the controversy surrounding President Donald Trump’s anti-immigrant rhetoric, as well as his efforts to repeal and replace Obamacare, the report noted that the US received its lowest marks in the categories of “tolerance and inclusion” and “health and wellness.” America’s “tolerance” score has been sliding since 2014, around the time that several high-profile shootings of unarmed black men ignited the “Black Lives Matter” movement, sparking a national conversation about the prevalence of racism in US society.
The United States is growing older and more ethnically diverse, a trend that could put strains on government programs from Medicare to education, the Census Bureau reported Thursday. Every ethnic and racial group grew between 2015 and 2016, but the number of whites increased at the slowest rate — less than one hundredth of 1% or 5,000 people, the Census estimate shows. That’s a fraction of the rates of growth for non-white Hispanics, Asians and people who said they are multi-racial, according to the government’s annual estimates of population. President Donald Trump’s core support in the racially divisive 2016 election came from white voters, and polls showed that it was especially strong among those who said they felt left behind in an increasingly racially diverse country.
In fact, the Census Bureau projects whites will remain in the majority in the U.S. until after 2040. “Even then, (whites) will still represent the nation’s largest plurality of people, and even then they will still inherit the structural advantages and legacies that benefit people on the basis of having white skin,” said Justin Gest, author of “The New Minority,” a book about the 2016 election. The Census Bureau reported that the median age of Americans — the age at which half are older and half are younger — rose nationally from just over 35 years to nearly 38 years in the years between 2000 and 2016, driven by the aging of the “baby boom” generation. The number of residents age 65 and older grew from 35 million to 49.2 million during those 16 years, jumping from 12% of the total population to 15%.
That’s a costly leap for taxpayers as those residents move to Medicare, government health care for seniors and younger people with disabilities, which accounted for $1 out of every $7 in federal spending last year, according to the Kaiser Family Foundation. By 2027, it will cost $1 out of every $6 of federal money spent. Net Medicare spending is expected to nearly double over the next decade, from $592 billion to $1.2 trillion, the KFF reported.
Not surprisingly, the financial press has been all ago about the drama of Travis Kalanick’s forced departure from Uber’s CEO position yesterday, and has focused on getting salacious insider details of his ouster. That means journalists largely ignored what ought to be the real story, which is whether Uber has any future. I anticipate that Hubert Horan will offer a longer-form treatment of this topic. Hubert had already documented, in considerable detail in his ten-part series, how Uber has no conceivable path to profitability. Its business model has been based on a massive internal contradiction: using a ginormous war chest to try to achieve a near-monopoly position in a low-margin, mature business that is fragmented geographically and locally.
Monopolies and oligopolies are sustainable only when certain factors are operative: the ability to attain a superior cost position through scale economies, which include network effects, or barriers to entry, such as regulations, very high skill levels, or high minimum investment requirements. Neither of these apply in the local car ride business. Even if Uber were able to drive literally every competing cab operator in the world out of business due to its ability to continue its predatory pricing, once Uber raised prices to a level where it achieved profits, new entrants (or revived old entrants) would come in. Uber will thus never be able to charge the premium prices (in excess of the level for a traditional taxi operator to be profitable) for the very long period necessary for Uber to merely be able to recoup the billions of dollars it has burned, mainly in subsidizing the cost of rides, let alone to achieve an adequate return on capital.
And that’s before you get to the fact that systematically much higher prices would mean fewer fares. The developments of the last few months mean Uber’s decay path is sure to accelerate. I’ve been following the business press for over 30 years. I can’t think of a single case where even an established, profitable business with an established franchise has had so many top level positions vacant, and for such bad reasons. As reader vidimi quipped, “With no CEO, CFO, COO, and CIO, uber is coming very close to becoming a self-driving company.” And that’s not even a full list. World-class communications expert Rachel Whetstone, who is recognized as a key force in rebuilding the Tories’ brand in the UK, quit in April.
The heads of engineering departed for failing to disclose a previous sexual investigation; the head of product and growth was forced out over a sexual impropriety at a company function. And in a scandal that will have a much longer tail, Uber’s former head of its Waymo driverless car unit, Anthony Levandowski, has had his case involving alleged theft of intellectual property from Google referred to the Department of Justice. Kalanick was deeply involved in Levandowski sudden exodus. It seems implausible that Kalanick didn’t know Levandowski was making off with Google files. If the case does lead to a criminal prosecution, it is hard to see how Kalanick could escape scrutiny as a potential criminal co-conspirator.
Oil prices could be poised to fall below $40 a barrel before too long, according to an analyst at Energy Aspects, as the commodity appeared set to post its largest price slide in the first half of the year for the past two decades. “This is like a falling knife right now, I genuinely haven’t seen sentiment this bad ever,” Amrita Sen, the co-founder and chief oil analyst at Energy Aspects, told CNBC on Wednesday. “We have had clients emailing saying they have been trading this for 20 or 30 years and they have never seen something like this,” she added. Oil prices have tumbled more than 20% his year, marking its worst performance for the first six months of the year since 1997 and putting the commodity in bear market territory.
The ongoing decline in prices appears to have stemmed from investors discounting evidence of robust compliance by OPEC and non-OPEC producers with a deal to curtail a global supply overhang. Prices took a fresh leg lower in the previous session – dipping 2% – as new signs of rising output from Nigeria and Libya, the two OPEC members exempt from a deal to cut production. Output from the 14-member exporter group ticked higher in May due to rising production in Nigeria, Libya and Iraq, raising concerns about OPEC’s effort to shrink global stockpiles of crude oil. OPEC and other producers have committed to keeping 1.8 million barrels a day off the market through March. Libya’s oil production rose more than 50,000 barrels per day to 885,000 bpd. Meanwhile, exports of Nigeria’s benchmark Bonny Light crude oil are set to rise by 62,000 barrels per day in August.
With the anointment of Prince Mohammed bin Salman as heir to the Saudi throne, any doubts over the continuation of policies that have shaken up the Middle East have gone. Western diplomats already referred to the 31-year-old as “Mr. Everything,” because of his control over most aspects of domestic, foreign and defense affairs. His elevation ends a behind-the-scenes struggle for power and answers the question of what would happen to his plans for Saudi Arabia when King Salman, now 81, dies or steps aside. The most ambitious of these, Vision 2030, seeks to recalibrate the economy to end the country’s near-total dependence on oil revenue. But internationally, there are also ramifications. Last month, the prince again raised the stakes in the regional rivalry with Iran, saying that dialog was “impossible” as they fight a proxy war in Yemen.
He also led a multi-nation effort to isolate neighboring Qatar, causing a rift among fellow members of the Gulf Cooperation Council. That also looks set to turn into another long and potentially fruitless test of wills as Iran and Turkey come to Qatar’s aid. “The switch offers him the legitimacy and consensus of becoming the next king and that will validate his vision, his plans and his policies,” said Sami Nader, head of the Beirut-based Levant Institute for Strategic Affairs. “There were a lot of question marks about the future of Saudi Arabia and the transition. Now this debate has ended.” Widely known as MBS, he was made crown prince just after dawn in Riyadh, displacing his older cousin, Mohammed bin Nayef, who was also stripped of his post as interior minister in charge of domestic security forces and counter-terrorism policy.
The move was neither a shock nor a coup, and it means he could be running the kingdom for decades to come. What’s more, his tough approach to the intractable problems of the Middle East would appear to mesh well with U.S. President Donald Trump, who visited Saudi Arabia last month. Trump called the new crown prince Wednesday to offer congratulations on his elevation, the White House said in a statement. Trump and the prince “committed to close cooperation to advance our shared goals of security, stability, and prosperity across the Middle East and beyond,” according to the statement. The problem is what comes next. On Tuesday, the U.S. Department of State questioned Saudi Arabia’s justification at striking out at Qatar by cutting it off from diplomatic and transport links.
The bombing campaign in Yemen aimed at destroying the rebel Houthi forces that Saudi Arabia sees as proxies for Iran, meanwhile, appears to have no end in sight. Two years later, it has become bogged down, bloody and increasingly unpopular. “On the foreign policy side he’s also embroiled Saudi Arabia in Yemen and Qatar without an exit strategy,” said James Dorsey at Singapore’s Nanyang Technological University. These aren’t changes of direction for Saudi Arabia, but “what he has done is to stretch up a notch and put some very sharp edges on it, and at this point those are backfiring.”
Canadian home sales fell the most in five years last month. That didn’t stop an increase in prices, which were up 18% nationwide from a year earlier. When you consider that most houses are leveraged assets, this represents huge gains for homeowners. While leverage can help boost performance on the way up, it becomes very dangerous on the way down. Leverage can turn even the best investments into poor ones when things go wrong, as losses are amplified. Equity can get wiped out pretty quickly on an overleveraged asset. Canadian real estate has been on fire for years. The housing price data there has made the U.S. real estate market during the boom of the mid-2000s look mild. The Federal Reserve Bank of Dallas puts out a global housing price index for more than 20 countries every quarter. Using this data, I looked at the real house price index data for Canada and compared it with the same data in the U.S. going back to 1975. Here’s this relationship from 1975 through the end of 2005:
Although there were some divergences in the early and late 1980s, both housing markets essentially ended up in the same place after 30 years. Now let’s add in the most recent data to see how things have unfolded since:
An enormous divergence occurred in 2006, when U.S. housing prices really began to soften, while Canadian price barely skipped a beat. This makes any differences in the past look like blips. The rise in Canadian real estate prices has been relentless. The U.S. housing market peaked in late 2006. Since then, based on this index, U.S. housing prices are still down almost 13% from their peak through the end of 2016. In that same time frame, Canadian housing prices are up 56%. From the 2006 peak, it took until late 2012 for real estate in the U.S. to bottom. We’ve since witnessed a 19% recovery from what was a 27% decline nationwide, on average. While the U.S. real estate downturn lasted almost six years, Canada’s housing market experienced just a 7% drawdown that lasted less than a year. And house prices in Canada reclaimed those losses in about a year and a half. Canadian housing has also outpaced its neighbors to the south since the 2012 bottom in U.S. real estate, with a 30% gain in that time.
Two miles south of the charred skeleton of Grenfell Tower is a large complex of sleek new apartments that some of those displaced by last week’s inferno will soon be able to call home. Kensington Row’s manicured lawns, clipped trees and burbling fountains are a haven from the rumbling traffic of two busy London thoroughfares, and its spacious, air-conditioned foyers a relief from June’s oppressive heatwave. Four unfinished blocks house the 68 flats purchased by the Corporation of London for families who lost their homes in Grenfell Tower. Workmen had been instructed not to talk to the media, but one said there was now a rush to complete the building work. “It’s a brilliant idea,” he said of the resettlement plan. Among those exercising dogs and small children, the views were more mixed. “It’s so unfair,” said Maria, who was reading the news in the Evening Standard with two neighbours.
She bought her flat two years ago for a sum she was unwilling to disclose. “We paid a lot of money to live here, and we worked hard for it. Now these people are going to come along, and they won’t even be paying the service charge.” Nick, who pays £2,500 a month rent for a one-bedroom flat in the complex, also expressed doubts about the plan. “Who are the real tenants of Grenfell Tower?” he asked. “It seems as though a lot of flats there were sublet. Now the people whose names are on the tenancies will get rehoused here, and then they’ll rent the flats out on the private market. And the people who were actually living unofficially in the tower at the time of the fire won’t get rehoused. “I’m very sad that people have lost their homes, but there are a lot of people here who have bought flats and will now see the values drop. It will degrade things. And it opens up a can of worms in the housing market.”
Bad loans are rapidly becoming the latest hot commodity in China as more domestic and foreign investors rush into the market and bid up prices. Non-performing loan prices have risen more than 30% this year, according to distressed investor Belos Capital Asia. The average selling price of NPLs has climbed to around 50 cents on the dollar in the past two years, from 30 cents, said Victor Jong, a partner in the deals and business recovery services unit of PricewaterhouseCoopers in Shanghai. Such a high level is “very rare” in international markets, Jong said. “There are just too many buyers grabbing a limited supply of NPLs,” said Hanson Wong, CEO of Belos Capital in Hong Kong. “At these prices, it’s pretty hard for these NPLs to be profitable.” Distressed investors are increasing as Chinese authorities encourage market-oriented ways to resolve lenders’ mounting piles of non-performing debt amid slowing economic growth.
A jump in valuations of real estate, which often act as underlying assets for secured loans, has boosted the debt’s recovery prospects. Combined with a surge in money supply, this has lifted bad-loan prices even in some less-developed regions of China, according to domestic distressed debt investor Bald Eagle Asset Management. Foreign investors including Oaktree Capital, Lone Star, Goldman Sachs and PAG have bought China NPLs in the current cycle that began in 2014, according to a March report from PwC. Non-performing loans at the country’s lenders jumped 61% in the past two years to 1.58 trillion yuan ($231 billion) at the end of March. In the previous NPL cleanup in China, between 2001 and 2008, secured debt was typically sold at 20 cents on the dollar, and unsecured creditors got back only 5 cents, said Wang Yingyi, a partner at Bald Eagle in Beijing.
The loans portfolio put up for sale by Eurobank is attracting strong investment interest but low offers as the lender begins the process for the transfer of nonperforming loans. This is a portfolio valued at €2.8 billion which has attracted the interest of about 20 investment funds in the data room, illustrating the strong leverage the NPL market commands, partly due to the banks’ commitment to reducing their bad loans by 40% by the end of 2019. The portfolio that Eurobank is selling includes debt from consumer loans and credit cards that have gone unpaid for years, most for at least a decade – i.e. since before the financial crisis broke.
Eurobank has made all the necessary moves for the collection of part of the €2.8 billion, without getting a great response. Therefore the prices in the market are expected to be particularly low for the portfolio, with estimates speaking of just 5% of the original value. Market professionals note that Eurobank’s effort to recover part of the dues just before the opening of the portfolio’s sale, offering debtors a haircut of up to 95% without any significant results, means that the price will likely drop below 5% too.
As the European Union’s cohesion faces being sorely test by the upcoming Brexit negotiations and other challenges, Greeks appear increasingly skeptical about the benefits and prospects of the EU, according to a new study by London-based international policy institute Chatham House and research company Kantar. 74% of Greeks are worried about the outlook for the EU, according to the survey which was carried out on a sample of 1,000 people in 10 European countries: Britain, Belgium, Germany, Greece, Spain, France, Italy, Austria, Hungary and Poland.
The Greek figure was almost double the research average of 38%. Greeks were also significantly more downbeat than their counterparts, with 60% declaring themselves to be pessimistic compared to a research average of 40%. An even larger proportion of Greeks, 80%, said they believed more members of the bloc would follow Britain’s lead and decide to break away from the Union in the next 10 years. Predictably, following seven years of belt-tightening imposed by foreign creditors, a significant proportion of Greeks (67%) said that austerity was the EU’s biggest failure. 73% of Greeks believe that the decision of Britain to leave the EU will weaken the Union.
The tourism sector is showing genuine signs of growth this year that suggest it will be the main driver of the Greek recovery, as it will help state revenues, the private economy, the country’s current accounts and employment. The government is for the first time speaking of 30 million arrivals in 2017. Bank of Greece data show that in the first four months of the year travel receipts increased by 2.4% or 23 million euros year-on-year, reaching 997 million euros. This increase was thanks to the 3.2% rise in arrivals and not average spending per trip, which posted a 0.8% decline. This means the 4.8% drop in travel receipts during the first quarter was offset in April, when arrivals rose 12% and receipts 11.3% annually. This positive picture is expected to have continued in May.
Retail sector representatives are looking forward to cashing in on the increase in arrivals, to offset the losses resulting from Greek households’ ever shrinking disposable incomes. Based on the bookings picture, turnover in retail commerce could rise by up to 5% this year. Addressing a conference organized by the Panhellenic Exporters Federation, Tourism Minister Elena Kountoura said that the data of the first five months point to an increase in arrivals, revenues, nights stayed and occupancy rates. They also show an increase in bookings for the summer ranging between 15 and 70%, depending on area, which led to her conclusion that Greece will have more then 30 million tourists this year after welcoming 28 million in 2016 and 26 million in 2015. The growth in tourism is also reflected in employment and commerce. The number of unemployed registered last month dropped by 56,820 people from April to 913,518, mainly thanks to the rise in seasonal employment in tourism and commerce.
Toronto’s hot housing market has entered a new phase: jittery. After a double whammy of government intervention and the near-collapse of Home Capital Group Inc., sellers are rushing to list their homes to avoid missing out on the recent price gains. The new dynamic has buyers rethinking purchases and sellers asking why they aren’t attracting the bidding wars their neighbors saw just a few weeks ago in Canada’s largest city. “We are seeing people who paid those crazy prices over the last few months walking away from their deposits,” said Carissa Turnbull, a Royal LePage broker in the Toronto suburb of Oakville, who didn’t get a single visitor to an open house on the weekend. “They don’t want to close anymore.”
Home Capital may be achieving what so many policy measures failed to do: cool down a housing market that soared as much as 33% in March from a year earlier. The run on deposits at the Toronto-based mortgage lender has sparked concerns about contagion, and comes on top of a new Ontario tax on foreign buyers and federal government moves last year that make it harder to get a mortgage. “Definitely a perception change occurred from Home Capital,” said Shubha Dasgupta, owner of Toronto-based mortgage brokerage Capital Lending Centre. “It’s had a certain impact, but how to quantify that impact is yet to be determined.”
Early data from the Toronto Real Estate Board confirms the shift in sentiment. Listings soared 47% in the first two weeks of the month from the same period a year earlier, while unit sales dropped 16%. Full-month data will be released in early June. The average selling price was C$890,284 ($658,000) through May 14, up 17% from a year earlier, yet down 3.3% from the full month of April. The annual price gain is down from 25% in April and 33% in March. Toronto has seen yearly price growth every month since May 2009. The last time the city saw gains of less than 10% was in December 2015.
Brokers say some owners are taking their homes off the market because they were seeking the same high offers that were spreading across the region as recently as six weeks ago. “In less than one week we went from having 40 or 50 people coming to an open house to now, when you are lucky to get five people,” said Case Feenstra, an agent at Royal LePage Real Estate Services Loretta Phinney in Mississauga, Ontario. “Everyone went into hibernation.” Toronto real estate lawyer Mark Weisleder said some clients want out of transactions. “I’ve had situations where buyers are trying to try to find another buyer to take over their deal,” he said. “They are nervous whether they bought right at the top and prices may come down.”
Tyler: “..given that the average house in Canada costs roughly $200,000 and carries a monthly mortgage payment of $1,000, that means that most Canadians couldn’t incur a $100 hike in their monthly mortgage payments “
Almost three quarters of Canadian homeowners would have difficulty paying their mortgage every month if their payments increased by as little as 10%, a new survey from Manulife Bank suggests. The bank polled 2,098 homeowners — between the ages of 20 to 69 with household incomes of $50,000 or higher — online in the first two weeks of February. Because they aren’t randomized samples, polling experts say online polls don’t have a margin of error, but the survey nonetheless highlights just how tight the budgets are for many Canadians. 14% of respondents to Manulife’s survey said they wouldn’t be able to withstand any increase in their monthly payments, while 38% of those polled said they could withstand a payment hike of between 1 and 5% before having difficulty.
An additional 20% said they could stomach a hike of between six and 10% before feeling the pinch. Add it all up, and that means 72% of homeowners polled couldn’t withstand a hike of just 10% from their current record lows. That’s a dangerous place to be with interest rates set to rise at some point. “What these people don’t realize is that we’re at record low interest rates today,” said Rick Lunny, president and CEO of Manulife Bank. If mortgage rates increase by as little as one percentage point, some borrowers could be facing a hike of 10% on their monthly bills. A bigger mortgage rate hike would bring more pain.
In the survey, 22% said they could handle a payment increase of between 11 to 30%, while the remaining 7% didn’t know or were unsure. Overall, nearly one quarter (24%) of Canadian homeowners polled said they haven’t been able to come up with enough money to pay a bill in the past year. And most are not in good shape to weather any sort of financial storm — just over half of those polled had $5,000 or less set aside to deal with a financial emergency, while one fifth of them have nothing saved for a rainy day. “When you put it into that context, they’re not really prepared for what is inevitable. Sooner or later, interest rates are going to rise,” Lunny said.
Asking prices for UK homes hit a new record high over the past month as families in search of bigger properties brushed aside uncertainty caused by Brexit and June’s general election. Prices sought by sellers rose 1.2% in the four weeks to 13 May, pushing the average asking price to a fresh peak of £317,281, according to the property website Rightmove. Families with children under the age of 11 were twice as likely as the average person to be moving home, as they looked for bigger properties in school catchment areas. Asking prices for typical family homes – with three or four bedrooms but excluding detached properties – rose by 5.4% year-on-year over the last month, to £270,953.
Miles Shipside, a Rightmove director and housing market analyst, said such families were more willing to ignore any uncertainty caused by Brexit and the general election. “As well as that shrinking house feeling, parents with young children also have the pressures of travelling times to amenities as well as the weekday school commute. These have to be balanced against under-pressure finances, even more so when the sector with the property type that suits them best is seeing the biggest price jump. “What seems to be happening is that moving pressures are understandably taking priority over electioneering and Brexit worries. For many in this group, it seems that moving is definitely on their manifesto.”
There is a direct link between the wealth of those at the top and the capital’s housing crisis – which affects not just those at the bottom but the majority of Londoners who struggle to buy properties, or pay extortionate rents. The 2008 financial crash created a new politics of space, in which people on low incomes are forced out of their homes by rising rent and the wealthy are encouraged to use property for profit. These trends are not limited to London. The same currents of global capital are also transforming San Francisco, New York and Vancouver, European cities from Berlin to Barcelona and towns and cities in the UK from Bristol and Manchester to Margate and Hastings. This isn’t gentrification, it’s another phenomenon entirely. Global capital is being allowed to reconfigure the country.
The major concern for the government and employers in London is that people who do not earn enough to meet extortionate rents will leave, hollowing out the city and threatening its labour market and culture. “We see this with employers saying they’re having a really hard time retaining professional level jobs, let alone cleaners. London is losing teachers – they’re commuting from Luton and they’re giving up – it’s having a massive knock-on effect,” Dilner said. The vacancy rate for nurses at London’s hospitals is 14-18%, according to a report from the King’s Fund thinktank, and the number of entrants to teacher training has fallen 16% since 2010, according to Ofsted. But it’s not just carers, nurses, teachers, artists and university lecturers who can’t afford to live in London. Fifty Thousand Homes is a business-led campaign group – including the RBS, the CBI and scores of London businesses – formed to push the housing crisis up the political agenda.
Its research shows that on current trends, customer services and sales staff at almost every level are being pushed out of the capital. Three-quarters of business owners believe that housing costs are a significant risk to London’s economic growth and 70% of Londoners aged 25 to 39 report that the cost of their rent or mortgage makes it difficult to work in the city. Vicky Spratt is a 28-year-old journalist who worked as a producer of political programmes at the BBC but left because she felt the issues affecting her generation, such as the housing crisis, were not being covered properly. “A lot of issues were dismissed by the older generation – it didn’t affect them. They all owned their own homes,” she told me. Spratt joined the digital lifestyle magazine The Debrief, aimed at twentysomething women, and began an online petition against lettings agents’ fees that gathered more than 250,000 signatures.
Spratt describes herself as a reluctant campaigner, but her circumstances pushed her into it. She currently pays £1,430 per month, not including bills, for a one-bedroom flat which she can afford because she shares with her boyfriend, but she used to live in a room “which was literally the size of a bed”. “The walls were very thin because it had originally been part of one room, which the landlord split into two. I noticed after about six weeks my mental health deteriorated. If I wasn’t in a relationship I would be looking at going back to that,” she said. Spratt earns enough to get a mortgage but, because rents are so high, not enough to save for the 20–30% deposit required. “The common thread for people my age is that we don’t own our own homes and potentially we never will. The housing crisis is older than me and it shocks me that nobody did anything about this, and I want it on the news agenda,” she said. “This is structural neglect. The buy-to-let boom and the unregulated market have a lot to answer for.”
Police hunting the terror network behind the Manchester Arena bombing have stopped passing information to the US on the investigation as a major transatlantic row erupted over leaks of key evidence in the US, according to a report. Downing Street was not behind any decision by Greater Manchester police to stop sharing information with US intelligence, a Number 10 source said, stressing that it was important police operations were allowed to take independent decisions. “This is an operational matter for police,” a Number 10 spokesman said. The police and the Home Office refused to comment on the BBC report. The Guardian understands there is not a blanket ban on intelligence sharing between the US and the UK.
Relations between the US and UK security services, normally extremely close, have been put under strain by the scale of the leaks from US officials to the American media. Theresa May is expected to confront Donald Trump over the stream of leaks of crucial intelligence when she meets the US president at a Nato summit in Brussels on Thursday. British officials were infuriated on Wednesday when the New York Times published forensic photographs of sophisticated bomb parts that UK authorities fear could complicate the expanding investigation into the lethal blast in which six further arrests have been made in the UK and two more in Libya. It was the latest of a series of leaks to US journalists that appeared to come from inside the US intelligence community, passing on data that had been shared between the two countries as part of a long-standing security cooperation.
Before diving into the best way to play the current bubble dynamics to your advantage, let’s look at the evidence for whether a bubble exists in the first place… My preferred metric is the Shiller Cyclically Adjusted PE Ratio or CAPE. This particular PE ratio was invented by Nobel Prize-winning economist Robert Shiller of Yale University. CAPE has several design features that set it apart from the PE ratios touted on Wall Street. The first is that it uses a rolling ten-year earnings period. This smooths out fluctuations based on temporary psychological, geopolitical, and commodity-linked factors that should not bear on fundamental valuation. The second feature is that it is backward-looking only. This eliminates the rosy scenario forward-looking earnings projections favored by Wall Street.
The third feature is that that relevant data is available back to 1870, which allows for robust historical comparisons. The chart below shows the CAPE from 1870 to 2017. Two conclusions emerge immediately. The CAPE today is at the same level as in 1929 just before the crash that started the Great Depression. The second is that the CAPE is higher today than it was just before the Panic of 2008. Neither data point is definitive proof of a bubble. CAPE was much higher in 2000 when the dot.com bubble burst. Neither data point means that the market will crash tomorrow. But today’s CAPE ratio is 182% of the median ratio of the past 137 years. Given the mean-reverting nature of stock prices, the ratio is sending up storm warnings even if we cannot be sure exactly where and when the hurricane will come ashore.
On Tuesday night, Moody’s downgraded China’s sovereign credit rating for the first time in 28 years. In doing so, the rating agency is acknowledging the dragon in the room: China will have to pay the price for its epic debt binge, whatever policymakers do from here. [..] “The downgrade,” the agency explained, “reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.” The downgrade was slight, and China remains well within investment grade. Still, Moody’s concerns should wake up those investors who have decided, based on the apparent calm in Chinese stock and currency markets, that the country isn’t experiencing financial strain. What’s happening today may not look like the meltdowns suffered by South Korea or Indonesia in the 1990s.
But that might be only because the state retains so much more control in China. If officials hadn’t stepped in last year to curtail escalating outflows of capital, the picture would likely have looked much grimmer. This “crisis with Chinese characteristics” features all of the seeds of a much more serious downturn: still-rising debt, unrecognized bad loans and a government paying lip service to the severity of the problem. Brandon Emmerich of Granite Peak Advisory noted in a recent study that more and more new debt is being used to pay off old debt, and “a subset of zombie issuers borrowed to avoid default.” As he explains, “even as Chinese corporate bond yields have rebounded (in 2017) and issuance stalled, the proportion of bond volume issued to pay off old debt reached an all-time high – not the behavior of healthy firms taking advantage of a low-yield environment.”
Efforts to curtail credit will thus inflict serious pain on corporate China. And given that the economy remains largely dependent on debt for growth, deleveraging will also make it harder for such firms to expand and service their debt. The one-two punch could push more companies toward default, punishing bank balance sheets. What’s more, if Beijing policymakers respond by ramping up credit again, all they’ll do is delay the inevitable. Larger dollops of debt simply allow zombie companies to stay alive longer and add to the debt burden on the economy. Sooner or later, the government is going to have to bail out local governments and state-owned enterprises, and recapitalize the banks. The only question is how expensive repairing the financial sector will be for taxpayers once Chinese leaders realize the game is up. Looking at past banking crises, the tab could prove huge. South Korea’s cleanup after the 1997 crisis cost more than 30% of gross domestic product. Applying that to China suggests the cost would reach some $3.5 trillion.
Iron ore led a slump in industrial commodities after Moody’s Investor Service downgraded China’s credit rating and warned that the country’s debt position will worsen as its economic expansion slows. However, one glance at the divergence between industrial metals’ collapse and the sudden buying panic in Chinese stocks confirms what Asher Edelman noted yesterday about the US markets, China’s so-called “National Team” was clearly intervening… As Bloomberg reports, Iron ore futures on the Dalian Commodity Exchange fell as much as 5.6% to 452 yuan a metric ton, almost by the daily limit, before closing at 455.50 yuan, extending Tuesday’s 3% loss. Nickel led a broad slump among base metals, dropping as much as 2.4% to $9,125 a ton on the London Metal Exchange. Nickel stockpiles rose the most in more than a year.
In context, the overnight reversal in Chinese stocks is even more obvious… Moody’s move, downgrading China’s debt to A1 from Aa3, adds to concerns about the effects of a slowdown in the country’s economic growth, following on from downbeat manufacturing readings and weak commodity imports, Simona Gambarini, an analyst at Capital Economics, said. “We’re not particularly concerned about credit growth getting out of hand, but in regards to industrial metals, we have been negative on the outlook for some time on the basis that Chinese growth will slow.” Will The National Team be back tonight?
China has rejected a move by Moody’s to lower its credit rating, saying the downgrade exaggerates the difficulties facing the economy and underestimates the government’s reform agenda. The country’s finance ministry claimed the credit rating agency used “inappropriate methodology” in its decision to lower long-term local and foreign currency issuer ratings from “Aa3” to “A1”. “Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy,” the finance ministry said in a statement Wednesday, translated by Reuters. It added that the moves are “underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand.”
Moody’s said that the downgrade reflects its expectation that China’s financial strength will “erode somewhat” over the coming years. The one-notch downgrade marks the first time Moody’s has lowered China’s credit rating in almost 30 years. It last downgraded the country in 1989. It comes as the government moves ahead with its ambitious reform agenda, which it hopes will move the country away from its traditional dependence on manufacturing and towards a services-led economy. Moody’s argues, however, that these aims will be hampered somewhat by the country’s “economy-wide debt”, which it says is set to rise as economic growth slows. Though the new rating will likely modestly increase the cost of borrowing for the Chinese government, it remains within the investment grade rating range.
China’s first credit rating downgrade by Moody’s since 1989 couldn’t have come at a worse time for the nation’s companies, which have never been more reliant on the overseas bond market for funding. While Chinese companies’ foreign-currency debt is only a fraction of the $9 trillion local bond market, China Inc. is on pace for record dollar bond sales this year after the authorities’ crackdown on financial leverage drove up borrowing costs at home. Overseas borrowing has also been part of the government’s strategy to encourage capital inflows in a bid to ease the depreciation pressure on the yuan. Airlines and shipping companies, which finance the costs of new aircraft and vessels with debt, are particularly vulnerable to higher borrowing costs, according to Corrine Png, CEO of Crucial Perspective in Singapore.
Khoon Goh, head of Asia research for Australia & New Zealand Bank, sees state-owned enterprises among firms feeling the biggest impact. Companies including State Grid and China Petroleum & Chemical raised $23 billion in bond sales in April, an increase of 141% from a year earlier. With additional $8.9 billion issuance so far in May, the sales this year totaled $69 billion, representing 71% of the record $98 billion in 2016. Moody’s lowered China’s rating to A1 from Aa3 on Wednesday, citing a worsening debt outlook. Moody’s also downgraded the ratings of 26 non-financial corporate and infrastructure government-related issuers by one level. China’s Finance Ministry blasted the move as “absolutely groundless,” saying the ratings company has underestimated the capability of the government to deepen reform and boost demand.
“The economy is dependent on policy stimulus and with that comes higher leverage,” Marie Diron, associate managing director, Moody’s Sovereign Risk Group, said. “Corporate debt is really the big part.” [..] For major Chinese airlines, every percentage-point increase in average borrowing costs can cut net profit by 5% to 9%, said Crucial Perspective’s Png. For shipping companies, cuts to net profit may reach 15% to 30%. Hainan Airlines, controlled by conglomerate HNA Group Co., plans to buy 19 Boeing aircraft, using the proceeds of a convertible bond sale of up to 15 billion yuan ($2.2 billion), according to a statement to the Shanghai Stock Exchange on May 19. HNA itself has been one of China’s most acquisitive companies, with more than $30 billion worth of announced and completed deals since 2016.
Despite an explosive rise in the power and market capitalisation of technology firms over the last year, China’s banking giants have defended their dominance of Forbes magazine’s annual global ranking of the world’s biggest public companies. The list, released on Wednesday, places Industrial & Commercial Bank of China at the top for a fifth consecutive year, followed by compatriot China Construction Bank. Agricultural Bank of China and Bank of China – the other two that make up China’s “Big Four” of finance – slipped down the list but remained in the top 10, qualifying as public companies despite largely being owned by the state. Warren Buffett’s Berkshire Hathaway, which is the largest public company in the US, took third spot, followed by JPMorgan Chase in fifth.
Although Forbes in a separate list earlier this week named Apple the most valuable brand of 2017, the tech giant only managed to secure ninth spot in the overall list of the biggest public companies. Companies that made it into this year’s list faced a slew of pressures stemming from an unsteady geopolitical climate and slowing economies. But Forbes said that in aggregate the 2,000 companies analysed managed to come out stronger than last year, with increased sales, profits, assets and market values. “This list illustrates that in spite of headwinds, the world’s dominant companies remain a steady force in an unpredictable and challenging environment,” said Halah Touryalai of Forbes. She said that despite slowing GDP figures, companies in China and the US make up more than 40% of the 2017 and dominate the top ten.
Notable gainers this year included General Electric, at 14th from 68th place in 2016, Amazon, up to 83rd from 237th, Charter Communications, at 107th from 784th and Alibaba, at 140th from 174th in 2016. The US dominated the ranking with 565 companies, followed by China and Hong Kong with 263 companies, Japan with 229. The UK had 91 companies in the top 2,000. But one of the UK’s highest ranked companies last year, banking giant HSBC, fell to 48th spot from 14th in 2016, with Forbes citing “economic malaise, low interest rate, paying fines, ongoing regulatory expenses and your usual dose of political uncertainty”. Elsewhere Forbes said that low oil prices had continued to put pressure on companies in the energy sector, reflected in PetroChina falling 85 spots to 102nd place in this years’ ranking. Exxon Mobil slipped four spots to 13th while Chevron tumbled to just 359th from 28th.
The European Food Safety Authority dismissed a study linking a Monsanto weedkiller to cancer after counsel from a US Environmental Protection Agency officer allegedly linked to the company. Jess Rowlands, the former head of the EPA’s cancer assessment review committee (CARC), who figures in more than 20 lawsuits and had previously told Monsanto he would try to block a US government inquiry into the issue, according to court documents. The core ingredient of Monsanto’s RoundUp brand is a chemical called glyphosate, for which the European commission last week proposed a new 10-year license. Doubts about its regulatory passage have been stirred by unsealed documents in an ongoing US lawsuit against Monsanto by sufferers of non-hodgkins lymphoma, who claim they contracted the illness from exposure to RoundUp.
“If I can kill this, I should get a medal,” Rowlands allegedly told a Monsanto official, Dan Jenkins, in an email about a US government inquiry into glyphosate in April 2015. In a separate internal email of that time, Jenkins, a regulatory affairs manager, said that Rowlands was about to retire and “could be useful as we move forward with [the] ongoing glyphosate defense”. Documents seen by the Guardian show that Rowlands took part in a teleconference with Efsa as an observer in September 2015. Six weeks later, Efsa adopted an argument Rowlands had used to reject a key 2001 study which found a causal link between exposure to glyphosate and increased tumour incidence in mice. Rowlands’ intervention was revealed in a letter sent by the head of Efsa’s pesticides unit, Jose Tarazona, to Peter Clausing, an industry toxicologist turned green campaigner.
In the missive, Tarazona said that “the observer from the US-EPA [Rowlands] informed participants during the teleconference about potential flaws in the Kumar (2001) study related to viral infections.” Efsa’s subsequent report said that the Kumar study “was reconsidered during the second experts’ teleconference as not acceptable due to viral infections”. Greenpeace said that news of an Efsa-Rowlands connection made a public inquiry vital. “Any meddling by Monsanto in regulatory safety assessments would be wholly unacceptable,” said spokeswoman Franziska Achterberg. “We urgently need a thorough investigation into the Efsa assessment before glyphosate can be considered for re-approval in Europe.”
We can feed an extra 4 billion people a year if we reject the bloated and wasteful factory farming systems that are endangering our planet’s biodiversity and wildlife, said farming campaigner Philip Lymbery on Monday night, launching a global campaign to Stop the Machine. At present, 35% of the world’s cereal harvest and most of its soya meal is fed to industrially reared animals rather than directly to humans. This is a “wasteful and inefficient practice” because the grain-fed animals contribute much less back in the form of milk, eggs and meat than they consume, according to Lymbery, the chief executive of Compassion in World Farming (CIWF). “The food industry seems to have been hijacked by the animal feed industry,” he said.
In recent years the developing world in particular has seen significant agricultural expansion. According to independent organisation Land Matrix, 40m hectares have been acquired globally for agricultural purposes in the last decade and a half, with nearly half of those acquisitions taking place in Africa. The impact of that expansion is still unclear, but meanwhile the world’s wildlife has halved in the past 40 years. “Ten thousand years ago humans and our livestock accounted for about 0.1% of the world’s large vertebrates,” said Tony Juniper, the former head of Friends of the Earth. “Now we make up about 96%. This is a timely and necessary debate, and an issue that is being debated more and more.” An exhibition at the Natural History Museum by the campaigners aims to draw explicit links between industrial farming and its impact on wildife.
The Sumatran elephant, for example, has been disastrously affected by the growing palm oil industry, with more than half of its habitat destroyed to create plantations, and elephant numbers falling rapidly. The old argument that we need factory farming if we are to feed the world doesn’t hold true, says Lymbery, who argues that ending the wasteful practice of feeding grain to animals would feed an extra 4 billion people. Putting cattle onto pasture and keeping poultry and pigs outside where they can forage, and supplementing that with waste food is far more efficient and healthy, he says. According to his calculations, based on figures from the UN’s Food and Agriculture Organisation (FAO), the total crop harvest for 2014 provided enough calories to feed more than 15 billion people (the world’s population is currently 7.5 billion), but waste and the animal feed industry means that much of that is going elsewhere.
For the past seven-plus years, as Greece’s debt crisis plays out in public in painful, blow-by-blow detail, the European body charged with its rescue has conducted its affairs away from prying eyes. Now there are growing calls to change the way the Eurogroup operates. Critics of the gathering of finance ministers from the 19 countries in the euro and officials from the ECB and European Commission accuse it of acting like a private club. They want greater transparency in keeping with the influence it wields over issues of vital importance to many of the eurozone’s 350 million citizens. “The euro crisis changed everything,” said Leo Hoffmann-Axthelm, an advocacy coordinator with the NGO Transparency International. “The Eurogroup should be institutionalized, with proper rules of procedure, document handling and a physical address with actual spokespeople. We can no longer be governed by an informal club.”
Although it can impose tough conditions for bailing out struggling member countries or rescuing banks, it publishes no official minutes, has no headquarters, and the people who function as its secretariat have other day jobs. Its public face is a eurozone finance minister, who works for no salary: The current president is Jeroen Dijsselbloem, a Dutch Socialist with conservative views on fiscal matters. Legally, it is governed by a single sentence in Article 137 of the EU treaty which says “arrangements for meetings between ministers of those Member States whose currency is the euro are laid down by the Protocol on the Euro Group.” Emily O’Reilly, the EU’s ombudsman, is among those calling for reform. While she credits Dijsselbloem for his efforts to peel back the curtain on Eurogroup proceedings, she said: “It is obviously difficult for Europeans to understand that the Eurogroup, whose decisions can have a significant impact on their lives, [isn’t] subject to the usual democratic checks and balances.”
Indeed, when a group of citizens from Cyprus who disagreed with the terms of the 2013 Cypriot bank bailout took their case to the European Court of Justice, the court’s response was that the Eurogroup is not “capable of producing legal effects with respect to third parties” because it is just a discussion forum. Last year, Dijsselbloem used the ECJ ruling to justify the Eurogroup avoiding standard EU transparency rules, though he did commit to individual transparency requests on an informal basis. But some of those who participate in Eurogroup meetings argue that its informality is precisely what makes it useful. The last thing they want is another bureaucratic EU institution, and if the Eurogroup were reformed out of existence, they say, a new version would pop up in its place, without the minimal accountability it currently offers in the form of meeting agendas and press conferences.
“It’s the informal nature of the Eurogroup that makes it possible to have an open exchange that you will not find in more formal bodies,” said Taneli Lahti, a former head of cabinet for European Commission Vice President Valdis Dombrovskis. “This is crucial for policymaking, negotiating, finding agreements and understanding each other.”
Greece will not need any debt relief from euro zone governments if it keeps its primary surplus above 3% of GDP for 20 years, a confidential paper prepared by the euro zone bailout fund, the European Stability Mechanism (ESM), showed. The paper, obtained by Reuters, was prepared for euro zone finance ministers and IMF talks last Monday, which ended without an agreement due to diverging IMF and euro zone assumptions on future Greek growth and surpluses. A group of euro zone finance ministers led by Germany’s Wolfgang Schaeuble insists that the issue of whether Greece needs debt relief can only be decided when the latest bailout expires in mid-2018. The IMF says the need for a bailout is already clear now.
Under scenario A, the paper assumes no debt relief would be needed if Athens kept the primary surplus – the budget balance before debt servicing – at or above 3.5% of GDP until 2032 and above 3% until 2038. The ECB says such long periods of high surplus are not unprecedented: Finland, for example, had a primary surplus of 5.7% over 11 years in 1998-2008 and Denmark 5.3% over 26 years in 1983-2008. A second option under scenario A assumes Greece secures the maximum possible debt relief under a May 2016 agreement. Greece would then have to keep its primary surplus at 3.5% until 2022 but could then lower it to around 2% until mid-2030s and to 1.5% by 2048, giving an average of 2.2% in 2023-2060.
The paper says the maximum possible debt relief under consideration is an extension of average weighted loan maturities by 17.5 years from the current 32.5 years, with the last loans maturing in 2080. The ESM would also limit Greek loan repayments to 0.4% of Greek GDP until 2050 and cap the interest rate charged on the loans at 1% until 2050. Any interest payable in excess of that 1% would be deferred until 2050 and the deferred amount capitalized at the bailout fund’s cost of funding. The ESM would also buy back in 2019 the €13 billion that Greece owes the IMF as those loans are much more expensive than the euro zone’s. All this would keep Greece’s gross financing needs at 13% of GDP until 2060 and bring its debt-to-GDP ratio to 65.4% in 2060, from around 180% now.
US-led air strikes on Syria killed a total of 225 civilians over the past month, a monitor said on Tuesday, the highest 30-day toll since the campaign began in 2014. The Syrian Observatory for Human Rights said the civilian dead between April 23 and May 23 included 44 children and 36 women. The US-led air campaign against the Islamic State jihadist group in Syria began on September 23, 2014. “The past month of operations is the highest civilian toll since the coalition began bombing Syria,” Observatory head Rami Abdel Rahman told AFP. “There has been a very big escalation.” The previous deadliest 30-day period was between February 23 and March 23 this year, when 220 civilians were killed, Abdel Rahman said. The past month’s deaths brought the overall civilian toll from the coalition campaign to 1,481, among them 319 children, the Britain-based monitoring group said. Coalition bombing raids between April 23 and May 23 also killed 122 IS jihadists and eight fighters loyal to the Syrian government, the Observatory said.
More than 30 migrants, mostly toddlers, drowned on Wednesday when about 200 people without life jackets fell from a boat into the sea off the Libyan coast before they could be hauled into waiting rescue boats. The boat was near a rescue vessel when it suddenly listed and many migrants tumbled into the Mediterranean, Italian Coast Guard commander Cosimo Nicastro told Reuters. “At least 20 dead bodies were spotted in the water,” he said. The rescue group MOAS, which also had a ship nearby, said it had already recovered more than 30 bodies. “Most are toddlers,” the group’s co-founder Chris Catrambone said on Twitter. The coast guard called in more ships to help with the rescue, saying about 1,700 people were packed into about 15 vessels in the area.
The transfer from these overloaded boats is risky because desperate migrants in them sometimes surge to the side nearest a rescue vessel and destabilise their flimsy craft, which then list dangerously or capsize. More than 1,300 people have died this year on the world’s most dangerous crossing for migrants fleeing poverty and war across Africa and the Middle East. Last Friday, more than 150 disappeared at sea, the International Organization for Migration (IOM) said on Tuesday, citing migrant testimony collected after they disembarked in Italy. In the past week, more than 7,000 migrants have been plucked from unsafe boats in international waters off the western coast of Libya, where people smugglers operate with impunity.
We are witnessing the demise of the world’s two largest economic power blocks, the US and EU. Given deteriorating economic conditions on both sides of the Atlantic, which have been playing out for many years but were so far largely kept hidden from view by unprecedented issuance of debt, the demise should come as no surprise.
The debt levels are not just unprecedented, they would until recently have been unimaginable. When the conditions for today’s debt orgasm were first created in the second half of the 20th century, people had yet to wrap their minds around the opportunities and possibilities that were coming on offer. Once they did, they ran with it like so many lemmings.
The reason why economies are now faltering invites an interesting discussion. Energy availability certainly plays a role, or rather the energy cost of energy, but we might want to reserve a relatively larger role for the idea, and the subsequent practice, of trying to run entire societies on debt (instead of labor and resources).
It almost looks as if the cost of energy, or of anything at all really, doesn’t play a role anymore, if and when you can borrow basically any sum of money at ultra low rates. Sometimes you wonder why people didn’t think of that before; how rich could former generations have been, or at least felt?
The reason why is that there was no need for it; things were already getting better all the time, albeit for a briefer period of time than most assume, and there was less ‘want’. Not that people wouldn’t have wanted as much as we do today, they just didn’t know yet what it was they should want. The things to want were as unimaginable as the debt that could have bought them.
It’s when things ceased getting better that ideas started being floated to create the illusion that they still were, and until recently very few people were not fooled by this. While this will seem incredible in hindsight, it still is not that hard to explain. Because when things happen over a period of decades, step by step, you walk headfirst into the boiling frog analogy: slowly but surely.
At first, women needed to start working to pay the bills, health care and education costs started rising, taxes began to rise. But everyone was too busy enjoying the nice slowly warming water to notice. A shiny car -or two, three-, a home in the burbs with a white picket fence, the American -and German and British etc.- Dream seemed to continue.
Nobody bothered to think about the price to pay, because it was far enough away: the frog could pay in installments. In the beginning only for housing, later also for cars, credit card debt and then just about anything.
Nobody bothered to look at external costs either. Damage to one’s own living environment through a huge increase in the number of roads and cars and the demise of town- and city cores, of mom and pop stores, of forest land and meadows, basically anything green, it was all perceived as inevitable and somehow ‘natural’ (yes, that is ironic).
Damage to the world beyond one’s own town, for instance through the exploitation of domestic natural resources and the wars fought abroad for access to other nations’ resources, only a very precious few ever cared to ponder these things, certainly after the Vietnam war was no longer broadcast and government control of -or cooperation with- the media grew exponentially.
Looking at today’s world in a sufficiently superficial fashion -the way most people look at it-, one might be forgiven for thinking that debt, made cheap enough, tapers over all other factors, economic and otherwise, including thermodynamics and physics in general. Except it doesn’t, it only looks that way, and for a limited time at that. In the end, thermodynamics always beats ‘financial innovation’. In the end, thermodynamics sets the limits, even those of economics.
That leads us into another discussion. If not for the constraints, whether they emanate from energy and/or finance, would growth have been able to continue at prior levels? Both the energy and the finance/political camps mostly seem to think so.
The energy crowd -peak oilers- appear to assume that if energy would have been more readily available, economic growth could have continued pretty much unabated. Or they at least seem to assume that it’s the limits of energy that are responsible for the limits to economic growth.
The finance crowd mostly seems to think that if we would have followed different economic models, growth would have been for the taking. They tend to blame the Fed, or politics, loose regulation, the banking system.
Are either of them right? If they are, that would mean growth can continue de facto indefinitely if only we were smart enough to either make the right economic and political decisions, or to find or invent new sources of energy.
But what kind of growth do both ‘fields’ envision? Growth to what end, and growth into what? 4 years ago, I wrote What Do We Want To Grow Into? I have still never seen anyone else ask that question, before or since, let alone answer it.
We want growth by default, we want growth for growth’s sake, without caring much where it will lead us. Maybe we think unconsciously that as long as we can secure growth, we can figure out what to do with it later.
But it doesn’t work that way: growth changes the entire playing field on a constant basis, and we can’t keep up with the changes it brings, we’re always behind because we don’t care to answer that question: what do we want to grow into. Growth leads us, we don’t lead it. Next question then: if growth stops, what will lead us?
Because we don’t know where we want growth to lead us, we can’t define it. The growth we chase is therefore per definition blind. Which of necessity means that growth is about quantity, not quality. And that in turn means that the -presupposed- link between growth and progress falls apart: we can’t know if -the next batch of- growth will make us better off, or make our lives easier, more fulfilling. It could do the exact opposite.
And that’s not the only consequence of our blind growth chase. We have become so obsessed with growth that we have turned to creative accounting, in myriad ways, to produce the illusion of growth where there is none. We have trained ourselves and each other to such an extent to desire growth that we’re all, individually and collectively, scared to death of the moment when there might not be any. Blind fear brought on by a blind desire.
As we’ve also seen, we’ve been plunging ourselves into ever higher debt levels to create the illusion of growth. Now, money (debt) is created not by governments, as many people still think, but by -private- banks. Banks therefore need people to borrow. What people borrow most money for is housing. When they sign up for a mortgage, the bank creates a large amount of money out of nothing.
So if the bank gets itself into trouble, for instance because they lose money speculating, or because people can’t pay their mortgages anymore that they never could afford in the first place, the only way out for that bank, other than bailouts, is to sign more people up for mortgages -or car loans-, preferably bigger ones all the time.
What we have invented to keep big banks afloat for a while longer is ultra low interest rates, NIRP, ZIRP etc. They create the illusion of not only growth, but also of wealth. They make people think a home they couldn’t have dreamt of buying not long ago now fits in their ‘budget’. That is how we get them to sign up for ever bigger mortgages. And those in turn keep our banks from falling over.
Record low interest rates have become the only way that private banks can create new money, and stay alive (because at higher rates hardly anybody can afford a mortgage). It’s of course not just the banks that are kept alive, it’s the entire economy. Without the ZIRP rates, the mortgages they lure people into, and the housing bubbles this creates, the amount of money circulating in our economies would shrink so much and so fast the whole shebang would fall to bits.
That’s right: the survival of our economies today depends one on one on the existence of housing bubbles. No bubble means no money creation means no functioning economy.
What we should do in the short term is lower private debt levels (drastically, jubilee style), and temporarily raise public debt to encourage economic activity, aim for more and better jobs. But we’re doing the exact opposite: austerity measures are geared towards lowering public debt, while they cut the consumer spending power that makes up 60-70% of our economies. Meanwhile, housing bubbles raise private debt through the -grossly overpriced- roof.
This is today’s general economic dynamic. It’s exclusively controlled by the price of debt. However, as low interest rates make the price of debt look very low, the real price (there always is one, it’s just like thermodynamics) is paid beyond interest rates, beyond the financial markets even, it’s paid on Main Street, in the real economy. Where the quality of jobs, if not the quantity, has fallen dramatically, and people can only survive by descending ever deeper into ever more debt.
Do we need growth? Is that even a question we can answer if we don’t know what we would need or use it for? Is there perhaps a point, both from an energy and from a financial point of view, where growth simply levels off no matter what we do, in the same way that our physical bodies stop growing at 6 feet or so? And that after that the demand for economic growth must necessarily lead to The Only Thing That Grows Is Debt?
It’s perhaps ironic that the US doesn’t appear to be either first or most at risk this time around. There are plenty other housing markets today with what at least look to be much bigger bubbles, from London to China and from Sydney to Stockholm. Auckland’s bubble already looks to be popping. The potential consequences of such -inevitable- developments are difficult to overestimate. Because, as I said, the various banking systems and indeed entire economies depend on these bubbles.
The aftermath will be chaotic and it’s little use to try and predict it too finely, but it’ll be ‘interesting’ to see what happens to the banks in all these countries where bubbles have been engineered, once prices start dropping. It’s not a healthy thing for an economy to depend on blowing bubbles. It’s also not healthy to depend on private banks for the creation of a society’s money. It’s unhealthy, unnecessary and unethical. We’re about to see why.
If Donald Trump really wants to Make America Great Again, he’s going to have to Make the Dollar Weak Again first. So argued hedge fund manager Mathew Klody of MCN Capital Management at this week’s Grant’s investment conference in New York. He made an intriguing case. If Klody’s right, Trump may just be blowing smoke when he talks about tariffs and border-adjustment taxes. And, most importantly, if Klody is right, we should also buy foreign currencies, especially those issued by emerging markets. Sooner or later, the president will need to drive down the dollar, and for those based in the U.S. that will drive up foreign currencies. Mexican pesos, anyone? This is not far-fetched. Research Affiliates, the smart investment advisers in Newport Beach, Calif., argue that emerging market currencies are among the most attractive asset classes available to investors.
They’re expecting those currencies to produce returns in U.S. dollars of inflation plus about 3.5% a year over the next decade, with far less volatility than stocks. Incidentally, if Klody’s analysis is right, Trump should also, logically, be good for gold. The collapse of American manufacturing towns, and the old industrial middle class, has gone hand in hand with a staggering 40-year rise in the dollar, Klody observed. It is standard economics that as your currency rises, your exports become more expensive and less competitive in foreign markets. Meanwhile, the reverse happens at home: Imports from overseas get cheaper and cheaper compared with domestic production. Klody noted that since the mid-1970s, the U.S. dollar has quadrupled in price — yes, really — when measured against the Federal Reserve’s broad basket of foreign currencies.
It may be mere coincidence that during that same period, imports have surged, and the U.S. has lost its global dominance in many areas of manufacturing. MCN Capital’s Klody notes that during the period that the dollar soared, workers’ share of domestic income has plummeted.From the 1940s through the early 1970s, the working man and woman got a pretty consistent 50% of national domestic income.Since the mid-1970s, it’s collapsed to around 43%. And, yes, that’s happened under most political regimes (the Clinton-Gingrich-dot-com years in the 1990s being an exception).That, of course, is a big reason why Trump won. Klody himself came from a small town in Pennsylvania that used to be a classic American industrial boomtown. And now, according to the town’s mayor, it looks like a deserted bomb site.
Tyler: “The above, simply summarized: the Fed has given Trump just enough rope to hang himself with; and since all that matters now is how effective the President will be in passing his political agenda – which is not looking good- should Trump fails, the one of two possible outcomes that is most likely is the one where the “curve bear flattens or inverts”, prompting the next, long overdue, recession. “
Aleksandar Kocic: “The subtext of the last week’s Fed “package” is a compromise motivated by a desire to extend the comfort zone and to hedge their position against possible fiscal irresponsibility, while, at the same time, not stand in the way to any possible fiscal stimulus (or its absence) by hiking too aggressively…. Depending on the interplay between degree of political resolve and the Fed actions we could see two distinct paths of resolution of the existing tensions in the mid- or long-run. Last week, the Fed delivered what appears as a dovish hike, in all likelihood to be followed with two hikes more in 2017 and three in 2018. Such a choice of the Fed action was a compromise driven by the developments in the labor market and the key events in Europe, on one side, combined with the risk associated with the approval of the fiscal stimulus, on the other.
The subtext of this compromise can be interpreted as being motivated by the Fed’s desire to extend the comfort zone and to hedge their position against possible fiscal irresponsibility, while, at the same time, not stand in the way to any possible fiscal stimulus by hiking too aggressively. Despite all the efforts not to create more uncertainty, this is likely to create at least mild ambiguity regarding the long-run. A Fed which is not in a standby position waiting for the fiscal package to arrive and kick in is going to be supportive for USD and higher real rates. The March FOMC “package” (in terms of rate hike, dots, rhetoric and Q&E) implies effectively a real rate rise and is most likely bearish for breakevens, which could diminish the effect of the border tax on the trade deficit and, as such, reduce the impact on growth potential.
In addition, having higher real rates increases the costs of borrowing and possibly creates political resistance against deficit expansions and structural steepening of the curve. On top of that, given what we saw in the last weeks, this suggests that the political process around the budget plan and the Legislative package already expected by the market is going to be anything but smooth, which is adding further doubts about its success and timing. Depending on the interplay of politics and policy – degree of political resolve and the Fed actions – we could see two distinct paths of resolution of the existing tensions in the mid- or long-run.
On one hand, it appears that the Fed is removing uncertainty around the terminal rate, while on the other, politics is creating a binary outcomes which could have a dramatically different effect on long rates. In that context, we are facing a future with bifurcating back end of the curve. Either political bottlenecks clear and the stimulus gets approved and goes full force leading to higher growth potential with subsequent rise in price levels and structural steepening of the curve, or political tensions effectively sabotage either its arrival or content (or both), and the curve initially bear flattens or even twists with rate shorts capitulation accelerating the rally of the back end.”
The S&P 500 index, closing today at 2,373, hovers near its all-time high. Total market capitalization of the 500 companies in the index exceeds $20 trillion, or 106% of US GDP. In the three-plus years since the end of January 2014, the index has soared 33%. And yet, over these three-plus years, even with financial engineering driven to the utmost state of perfection, including $1.7 trillion in share buybacks and despite “ex-bad-items” accounting schemes that are giving even the SEC goosebumps – despite all these efforts, the crucial and beautifully doctored “adjusted” earnings-per-share, perhaps the single most manipulated metric out there, has gone nowhere. “Adjusted” earnings per share are back where they’d been at the end of January 2014. It’s a sad sign when not even financial engineering can conjure up the appearance of earnings growth.
Companies report earnings in two ways: 1) All companies report as required under GAAP (our slightly inconvenient Generally Accepted Accounting Principles). These earnings are often a loss or way too small and shrinking, instead of growing, and hence not very palatable. 2) So most companies also report pro-forma, ex-bad-items, “adjusted” earnings, based on the companies’ own notions of what matters. Analysts and the media hype that metric. This is just a method of reporting the same results in a more glamorous manner. Then there’s financial engineering. Companies borrowed heavily over the past few years and used those funds to purchase their own shares. This hollowed out equity and left companies with piles of debt.
Over the past three years, companies blew $1.7 trillion on share buybacks. This money was not invested in productive activities that would have expanded the company and the economy, and generated cash flow to service this debt. All it did was reduce the number of shares outstanding. This has the effect of increasing earnings per share (EPS) though the company didn’t actually make more money. Add this system of share buybacks to the system of “adjusting” earnings per share via reporting schemes, and the result should be a miracle of soaring “adjusted” EPS. But no.
For the first time ever, the market cap of America’s “Big Four” banks topped $1 trillion having surged 30% since Donald Trump was elected president. While to some this is cause for celebration, we note that the last time a nation’s “big four” banks topped $1 trillion in market cap did not end well… As Bloomberg notes, the four biggest U.S. banks were worth the most on record versus China’s “Big Four” this month, as JPMorgan, Wells Fargo, Bank of America, and Citigroup were worth over $250 billion more than Industrial & Commercial Bank, China Construction Bank, Bank of China, and Agricultural Bank of China combined. The four Chinese banks, the world’s most profitable, were worth about the same as the U.S. foursome as recently as June. However, as the chart shows, while the American quartet’s combined market value closed above $1 trillion for the first time last month, China achieved that goals in June 2015… and it did not end well.
Australia’s central bank saw growing risks in the nation’s hot housing market when it left rates steady earlier this month, underlining the case against further easing in policy. Minutes of its March meeting showed the Reserve Bank of Australia (RBA) was generally optimistic about the economy as it transitioned away from a decade long boom in mining investment. However, board members felt there had been a “build-up of risks” in the housing market as borrowing for investment fueled brisk price rises in Sydney and Melbourne. Home prices accelerated at an annual pace of 11.7% in February, with Sydney running red-hot at 18.4%, data from property consultant CoreLogic showed. Governor Philip Lowe has repeatedly argued that cutting rates further could encourage a renewed borrowing binge by households who are already heavily indebted, outweighing any economic benefits.
With wages growing at record lows, debt was outpacing incomes and threatening to weigh on consumer spending. Data out recently showed retail sales grew at a tepid pace for a third straight month while the outlook for capital expenditure remained uninspiring. The RBA noted tighter supervision had contributed to “some” strengthening in lending standard by the banks, which has also been raising rates on some mortgage products recently. Analysts suspect even stricter standards are likely to be imposed by regulators in coming weeks. Housing affordability, or the lack of it, has become a hot-button issue for the conservative government of Malcolm Turnbull which has promised measures to ease the problem in its May budget. The RBA’s angst over housing has convinced financial markets there will be no more cuts in interest rates, already at all time lows of 1.5%.
Regulators are preparing to impose a fresh wave of constraints on the banks to slow investor lending growth, crack down on interest-only loans, and force buyers to stump up more equity on purchases as they scramble to manage a rampant property boom. Warning that financial and economic risks have grown in recent months, particularly across east coast property markets, the nation’s top financial regulators and Treasurer Scott Morrison unleashed co-ordinated calls for fresh restraint from banks. “Watch this space,” declared Australian Prudential Regulation Authority chairman Wayne Byres on Monday, speaking just hours after Mr Morrison urged APRA and the Australian Securities and Investments commission to use “the levers that they have”. Leaping house price growth over recent months in Sydney and Melbourne, as well as a tsunami of new apartment stock due to hit the market in coming months are creating a wall of uncertainty over the financial stability of the housing market.
That’s being exacerbated by concerns over heavily indebted households’ ability to withstand a rising global interest rate environment at a time of record-low wages growth. In a sign of growing tensions between members of the Council of Financial Regulators – which includes APRA, ASIC, Treasury and chaired by the Reserve Bank – Mr Byres pointedly refused to describe the property market as being in a “bubble”, saying use of the term was “superficial” and “binary”. “I don’t use the B-word. I refuse to use the B-word,” Mr Byres said. “We are in it – we are not in it. If we are in it we’re all going to be ruined – if we are not in it we’re going to be right. It’s too simplistic.” By contrast, Greg Medcraft, ASIC’s chairman, bluntly repeated his view that the market was in a bubble. “I have been saying for a while that I thought it was a bubble and other people are catching up now. “Clearly the issue is if you raise interest rates that’s a big tool but then you affect the whole economy.”
Toronto’s housing market is likely to stay strong for the rest of the year, with home prices jumping as much as 25%, amid hints that speculators are fueling demand and posing a potential risk to the economy, TD Economics Chief Economist Beata Caranci said. A “strong Toronto home-price forecast is not a vote of confidence in market fundamentals,” Caranci wrote Monday in a note to clients. “It’s getting harder to ignore warning signs that market demand pressures are increasingly reflecting speculative forces.” Residential prices in Canada’s largest metropolitan region are forecast to grow 20 to 25% this year, up from a previous estimate of 10 to 15%, according to the report by TD Economics, part of Toronto-Dominion Bank.
Toronto-area prices have climbed 19% in the past 12 months, the fastest clip since the 1980s, when a frenzied housing market resulted in year-over-year increases of 55%, Caranci said. “Evidence is building that speculative forces are growing deeper roots, which raises the risk that prices will move closer to the top end of that forecast in the absence of policy measures,” Caranci wrote. As for next year, higher mortgage rates and fewer affordable properties will likely cut the growth rate to 3 to 5%, though a lack of clarity on housing speculation makes predictions difficult, Caranci said. A housing market driven by speculators seeking a quick profit boosts the risk of rapidly unwinding price gains at the same time homebuyers are contending with larger debt burdens, she said.
Originally, I thought this would be a bit of a joke. There were billboards in all the Toronto subway cars advertising the Canadian Real Estate Wealth Expo – learn how to become a millionaire. I thought this was so ridiculous, it may be fun. What better way to experience the top of the housing market than watching Tony Robbins and Pitbull along with a bunch of US real estate professionals explain how Toronto real estate is the path to riches. Prices were originally $150 per ticket, but I was able to buy for $50. While it deeply bothers me that I paid $50 to these shameless (amoral) self-promoters, I thought it would be worth it to witness, in person, the top of the housing market. I had thought, there can’t be that many people stupid enough to attend this, but I was very wrong – 15,000 people were there! I was blown away. Bubbles are largely psychological. This crowd was tangible proof of that.
15k people in one spot listening to Americans explain why real estate in Toronto is an exceptional investment. The whole experience was horrifying. The crowd was very well-dressed, middle- to upper-middle class (from appearances), and super excited to hear how much money could be made if you just buy real estate (most of them clearly already owned). The first real segment of the expo was a panel of Canadian developers and real estate agents giving their views on the market. It actually started off a touch bearish, which surprised me. Two of the panelists were saying that prices are exceptionally high and no market goes up forever. With that slight bit of caution thrown out there, it became a real estate FOMO-building talk.
There are, apparently, two very important things to know when dealing with real estate. First, you have to face your fear; this fear is to be ignored and then you should ‘just do it’ and ‘buy now’. The next step is find what you can afford and then buy it. Ignore all ‘non-doers’, don’t overanalyze or focus on the numbers, just fucking buy. To allay fears the speakers are actually quite clever as they shift between a long to short term focus when it suits. For example, now is a great time to buy because short-term the market is on fire. If, however, markets cool then you just hold because it always goes up long-term – and you are a savvy long-term buyer, aren’t you? By showing no scenario where you can lose I can see how this pitch works on the susceptible.
The second important factor in real estate is financing. Not everyone has money, so what can they do? The answers were shocking. Be ‘creative’ was the first response. Pool your money, borrow from friends and family, own just 5% of a house, get the money however you can and just do it – remember, it only goes up. Other financing suggestions were get cozy with a lender and they will ‘bend the rules’ for you! The fact that the biggest condo developer in Canada (Brad Lamb) said lenders will bend (but not break, apparently) rules to get you financing in front of 15k people with most people smiling and nodding was shocking. So there you go – when it comes to Toronto real estate, just do it (using borrowed money any way you can get it).
Britain’s high street banks processed nearly $740m from a vast money-laundering operation run by Russian criminals with links to the Russian government and the KGB, the Guardian can reveal. HSBC, the Royal Bank of Scotland, Lloyds, Barclays and Coutts are among 17 banks based in the UK, or with branches here, that are facing questions over what they knew about the international scheme and why they did not turn away suspicious money transfers. Documents seen by the Guardian show that at least $20bn appears to have been moved out of Russia during a four-year period between 2010 and 2014. The true figure could be $80bn, detectives believe. One senior figure involved in the inquiry said the money from Russia was “obviously either stolen or with criminal origin”.
Investigators are still trying to identify some of the wealthy and politically influential Russians behind the operation, known as “the Global Laundromat”. They estimate a group of about 500 people were involved. These include oligarchs, Moscow bankers, and figures working for or connected to the FSB, the successor spy agency to the KGB. Igor Putin, the cousin of Russia’s president, Vladimir, sat on the board of a Moscow bank which held accounts involved in the fraud. British-registered companies played a prominent role in this extensive money-laundering network. The real owners of most of the firms used in the scheme remain secret, however, because of the anonymity provided by controversial offshore laws.
The Global Laundromat banking records were obtained by the Organized Crime and Corruption Reporting Project (OCCRP) and Novaya Gazeta from sources who wish to remain anonymous. OCCRP shared the data with the Guardian and media partners in 32 countries. The documents include details of about 70,000 banking transactions, including 1,920 that went through UK banks and 373 via US banks.
In the 1950s, finance made up about 5% of the economy. It’s mission then was pretty simple and straightforward: to manage the accumulated wealth of the nation (capital) and then allocate it to those who proposed to generate greater wealth via new productive activities, mostly industrial, ad infinitum. It turned out that ad infinitum doesn’t work in a world of finite resources — but the ride had been so intoxicating that we couldn’t bring ourselves to believe it, and still can’t. With industry expiring, or moving elsewhere (also temporarily), we inflated finance to nearly 40% of the economy. The new financialization was, in effect, setting a matrix of rackets in motion.
What had worked as capital management before was allowed to mutate into various forms of swindling and fraud — such as the bundling of dishonestly acquired mortgages into giant bonds and then selling them to pension funds desperate for “yield,” or the orgy of merger and acquisition in health care that turned hospitals into cash registers, or the revenue streams on derivative “plays” that amounted to bets with no possibility of ever being paid off, or the three-card-monte games of interest rate arbitrage played by central banks and their “primary dealer” concubines. Some of what I’ve listed above may be incomprehensible to the blog reader, and that is because these rackets were crafted to be opaque and recondite.
The rackets continue without regulation or prosecution because there is an unstated appreciation in government, and in the corporate board rooms, that it’s all we’ve got left. What remains of the accustomed standard of living in America is supported by wishing and fakery and all that is now coming to a climax as we steam full speed ahead into Murphy’s law: if something can go wrong, it will. When all of America comes to realize that President Trump doesn’t know what he’s doing, it will make last November’s national nervous breakdown look like a momentary case of the vapors. What can go wrong awaits in markets, banks, currencies, and the immense dark pools of counterparty obligations that amount to black holes where notions of value are sucked out of the universe. There is so much that can go wrong. And then it will. And then maybe that will prompt us back to consider being a nation again.
The record-breaking heat that made 2016 the hottest year ever recorded has continued into 2017, pushing the world into “truly uncharted territory”, according to the World Meteorological Organisation. The WMO’s assessment of the climate in 2016, published on Tuesday, reports unprecedented heat across the globe, exceptionally low ice at both poles and surging sea-level rise. Global warming is largely being driven by emissions from human activities, but a strong El Niño – a natural climate cycle – added to the heat in 2016. The El Niño is now waning, but the extremes continue to be seen, with temperature records tumbling in the US in February and polar heatwaves pushing ice cover to new lows.
“Even without a strong El Niño in 2017, we are seeing other remarkable changes across the planet that are challenging the limits of our understanding of the climate system. We are now in truly uncharted territory,” said David Carlson, director of the WMO’s world climate research programme. “Earth is a planet in upheaval due to human-caused changes in the atmosphere,” said Jeffrey Kargel, a glaciologist at the University of Arizona in the US. “In general, drastically changing conditions do not help civilisation, which thrives on stability.” The WMO report was “startling”, said Prof David Reay, an emissions expert at the University of Edinburgh: “The need for concerted action on climate change has never been so stark nor the stakes so high.”
[..] 2016 saw the hottest global average among thermometer measurements stretching back to 1880. But scientific research indicates the world was last this warm about 115,000 years ago and that the planet has not experienced such high levels of carbon dioxide in the atmosphere for 4m years. 2017 has seen temperature records continue to tumble, in the US where February was exceptionally warm, and in Australia, where prolonged and extreme heat struck many states. The consequences have been particularly stark at the poles. “Arctic ice conditions have been tracking at record low conditions since October, persisting for six consecutive months, something not seen before in the [four-decade] satellite data record,” said Prof Julienne Stroeve, at University College London in the UK. “Over in the southern hemisphere, the sea ice also broke new record lows in the seasonal maximum and minimum extents, leading to the least amount of global sea ice ever recorded.”
Almost three-quarters of older people in the UK are lonely and more than half of those have never spoken to anyone about how they feel, according to a survey carried out for the Jo Cox commision on loneliness. The poll by Gransnet, the over-50s social networking site, also found that about seven in 10 (71%) respondents – average age 63 – said their close friends and family would be surprised or astonished to hear that they felt lonely. Gransnet is one of nine organisations – including Age UK, the Alzheimer’s Society and the Silver Line helpline for older people – working to address the issue of loneliness in older people, which is the current focus of the commission, set up by Cox before her murder last June. They are urging individuals and businesses to look for signs of loneliness and refer people to organisations that can help.
But they also want people to take time to speak to neighbours, family, old friends or those they encounter randomly. The chairs of the cross-party commission, the Labour MP Rachel Reeves and Conservative MP Seema Kennedy, said there was a stigma around loneliness that must be tackled. “We all need to act and encourage older people to freely talk about their loneliness,” they said. “Everyone can play a part in ending loneliness among older people in their communities by simply starting a conversation with those around you. “How we care and act for those around us could mean the difference between an older person just coping, to them loving and enjoying later life.” Almost half (49%) of the 73% who described themselves as lonely in the online poll said they had been so for years, 11% said they had always felt lonely and 56% said they had never spoken about their loneliness to anyone.
A change in legislation last April has given access to the public health system to some 2.5 million Greeks who did not have social insurance but has also put a financial strain on hospitals, whose funding has not increased. Treating uninsured patients cost public hospitals in Athens €57.2 million last year. Across Greece, €23.5 million was spent on providing free lab tests to about 204,000 people. “Our experience shows that the number of uninsured people coming to the hospitals is increasing,” the vice president of the Athens-Piraeus Hospital Doctors’ Association, Ilias Sioras, told Kathimerini. “But the hospitals do not have adequate funds.” State funding is at €1.1 billion this year, the same as in 2016.
New arrivals to the eastern Aegean islands of Lesvos, Chios and Samos have raised the number of migrants landing in Greece from neighboring Turkey since last Thursday to 566, government figures showed on Monday. The figure represents a significant increase compared to arrivals in the rest of March and for the whole of February. In the past four days, 195 migrants landed on Lesvos, 341 on Chios and 30 on Samos. More than 14,000 migrants remain stuck on the islands of the eastern Aegean awaiting the outcome of their applications for asylum or deportation. The majority are living in overcrowded reception facilities where conditions have been described as “unacceptable” and “inhumane” by human rights groups.
Sweden’s welfare state supposedly allows for success while providing a safety net for those unable to keep up with the market. In principle, it is an ideal, utopian-like state. However, Sweden’s touted economic success has come at the expense of its currency, the Krone (SEK), and long-term sustainability. Riksbank, the Swedish Central Bank, like its European contemporaries, has undertaken experimental policy, driving real and nominal interest rates below zero. Since 2014, Swedish deposit rates have been negative. Not only has overall negative real interest rate policy affected housing, but it also drove Swedish consumers deeper into debt. Embarking on the dual mandate policy may have staved off recession, but it created greater problems for the future.
Although current deposit rates are at a record low of -1.25%, the latest GDP print came in at 2.3%, and the growth rate has been tapering since 2015. Sweden’s “hot” GDP growth – hot relative to the region – could be attributed, not to industrial growth, but rather increased government spending, funding social programs. Additionally, with no incentive to save, consumer debt has taken off, along with the housing prices, while disposable income lagged. Swedish household debt is now at a record high. Hence, the Swedish growth story is not organic but rather a borrow-and-spend one.
Swedes, like Norwegians, are victims of the “exchange rate versus housing price shell game.” The SEK received today for the sale of their inflated flats has fallen 30% against the US dollar (average USDSEK in 2014 was 6.86 vs. 8.95 on March 15, 2017). Stockholm housing rose 31% during the same period in SEK terms, negating the recent gains over the same period. The SEK fell 23% against gold in the same period. Hence, the “Swedish Model” is under attack. The egalitarian underpinnings, unwinding with the negative rates, are driving a wedge into Swedish society, creating extremes on both sides of the economic spectrum. The rampant consumerism, encouraged by artificially low rates, continues to widen the wealth gap. Coincidentally, the middle class deteriorated the most between 2014 and 2015: the same time that deposit rates took a dive. Furthermore, the negative savings rates are driving the average person to “gamble” on speculative investments instead of saving and building a future over the long term.
[..] instead of undertaking experimental rate policy, Riksbank and the Swedish government should be engineering a soft-landing or a “controlled crash”, adjusting taxes and policy to ensuring a smooth transition to sustainability for the general population. There is precedent from Iceland that already exists. It is clear that the negative rate experiment is neither sustainable nor helpful to economic growth. It only inflates bubbles while widening the wealth gap in Swedish society. A once prudent and financially conservative people are now getting drunk on debt, wrecking their future. The very premise of Swedish society is under attack.
Former prime minister Paul Keating has labelled as “scandalous” the Turnbull government’s suggestion it might allow young people to raid their superannuation for house deposits. Ahead of the May budget, Mr Keating argues the idea would rob younger Australians of a large block of savings at the end of their working lives. “As an economic idea, this is scandalous. But, of course, for the Liberal Party, this is an ideological proposal,” he writes in Fairfax Media today. Mr Keating, who spearheaded Australia’s superannuation sector in 1992, said if the government were to proceed with this “irresponsible” idea it would put at risk the financial future of generations.
“It would potentially destroy superannuation for those, in the main, under 40 years of age, while at the same time, driving up the cost of the housing they are seeking to purchase,” he said. The federal government earlier this month set up a taskforce to look at new ways to promote millions of dollars of investment in community housing that could benefit one in three Australians. The taskforce will be headed up by Stephen Knight, who has had extensive experience in debt capital markets as CEO of the Treasury Corporation in NSW and as a member of the Australian Office of Financial Management advisory board. The group will report back to the government by the middle of the year. Treasurer Scott Morrison said housing affordability issues were impacting on the 30% of Australians who live in rented homes, and those who relied on affordable and social housing.
“The government intends to pause the surging home prices, and let them walk steadily up later,” said Xia Dan, a Shanghai-based analyst at Bank of Communications Co., adding that if curbs on demand are lifted, prices will rise further. “The government doesn’t want the prices to run all the time and ferment bubbles.” As Bloomberg notes, China’s biggest cities have seen a round of home price surges in the past year. In Beijing, new home prices rose 24% in February from a year earlier, while Shanghai saw a 25% gain. Shenzhen prices increased 14% in the same period. “Beijing’s tightening will have a short-term effect to stabilize the market, but the power of policy has become increasingly weaker,” Zhang Hongwei at Tospur Real Estate Consulting, said Friday, adding more local tightening may follow.
Or maybe not, because one may ask: is the rebound really unexpected. Perhaps not: as the WSJ reported on Sunday, “this year it seemed China was finally going to make headway on an idea familiar to U.S. homeowners: a property tax. For many Chinese families, owning a home is one of few options to build wealth, driving buying frenzies as people rush to purchase before prices soar. Imposing costs on homeowners through a property tax is seen as a way to tame such speculation, while also helping fund local governments. Lu Kehua, China’s vice housing minister, last month said the government needed to “speed up” a property-tax law. Economists and academics have long recommended the move. Yet the annual National People’s Congress came and went this month with no discussion of the topic. An NPC spokeswoman said a property tax wouldn’t be on the legislative agenda for the rest of the year.
In short, China evaluted the risk of a potential housing bubble burst, and deciding that – at least for the time being – it is not worth the threat of losing a third of Chinese GDP in “wealth effect”, got cold feet. Expect the recent dip in home prices to promptly stabilize, with gains in the short-term more likely that not.
The Federal Reserve might be doing the right thing for the U.S. economy by moving to bring interest rates back up to normal. But for foreign companies and governments that have borrowed trillions of U.S. dollars, the adjustment could be painful. Thanks in large part to a prolonged period of extremely low U.S. interest rates, borrowers around the world have gone on a dollar binge over much of the past decade – making them more vulnerable to the Fed’s policy decisions than ever before. As of September, non-bank companies and governments outside the U.S. had some $10.5 trillion in dollar-denominated debt outstanding, according to the Bank for International Settlements. That’s more than triple the level of September 2004, the last time the Fed was about this far into a cycle of rate increases. Here’s a chart:
If the Fed sticks with its plan of raising rates more than a percentage point by the end of next year, the increased interest costs could stunt growth and weigh on borrowers’ finances in places as far flung as the U.K. and China. It could also mean losses for investors holding the debt, particularly given that the duration of dollar-denominated bonds – a measure of their price sensitivity to changes in interest rates – is close to its highest point in at least two decades. An increase of 1 percentage point, for example, would take $500 billion off the value of the bonds included in the Bank of America Merrill Lynch U.S. Dollar Global Corporate and High Yield Index. Here’s a chart showing how that number has changed over the years (thanks to a combination of increased dollar debt and increased duration):
Oil prices fell on Monday, with already-bloated markets pressured by rising U.S. drilling activity and steady supplies from OPEC countries despite touted production cuts. Prices for benchmark Brent crude futures were 35 cents, or 0.68%, below their last settlement at 0646 GMT, at $51.41 per barrel. U.S. West Texas Intermediate (WTI) crude futures were down 46 cents, or 0.94%, at $48.32 a barrel. Traders said that prices came under pressure from rising U.S. drilling and ongoing high supplies by OPEC despite its pledge to cut output by almost 1.8 million barrels per day (bpd) together with some other producers like Russia.
“There is good, strong momentum to the downside,” futures brokerage CMC Markets said in a note on Monday. U.S. drillers added 14 oil rigs in the week to March 17, bringing the total count up to 631, the most since September 2015, energy services firm Baker Hughes Inc said on Friday, extending a recovery that is expected to boost shale production by the most in six-months in April. Sukrit Vijayakar of energy consultancy Trifecta said the rising drilling activity was “reinforcing the expectation of higher U.S. production offsetting (OPEC’s) supply cuts”. U.S. oil output has risen to over 9.1 million bpd from below 8.5 million bpd in June last year.
“..for the likes of Rudd, “Never forget” means “Don’t forget for two weeks” or, if politically expedient, “Don’t forget for three days”.
“The reason they can never answer the question, ‘How could it [the Holocaust] possibly happen?’ is that it’s the wrong question. Given what people are, the question is, ‘Why doesn’t it happen more often?’”
It is time to say that attempts to memorialise the Holocaust have failed and may even be counterproductive. The dead are still dead; anti-Semitism still exists and sometimes thrives. Myths of Jewish power circulate, now with the added insult of “playing the Holocaust card (that you presumably picked up at a Holocaust memorial gift shop)”. A clutch of these memorials, all counselling kindness to the refugee, could not save Aylan Kurdi, a three-year-old Syrian boy, from drowning in the Mediterranean Sea in 2014. In January the Home Secretary, Amber Rudd, posted a picture of herself signing a Holocaust remembrance book on Twitter. “We must never forget,” she wrote. It reminded me of my favourite line from the 1986 Woody Allen film Hannah and Her Sisters: “The reason they can never answer the question, ‘How could it [the Holocaust] possibly happen?’ is that it’s the wrong question. Given what people are, the question is, ‘Why doesn’t it happen more often?’”
Two weeks later, Rudd announced that the “Dubs amendment” – which aimed to offer sanctuary to solitary child refugees and was sponsored by Lord Dubs, who came to the UK from Czechoslovakia on the Kindertransport in March 1939 – would be discontinued after resettling just 350 children. (Even the Cameron government, no friend to the vulnerable, suggested that it could take about 3,000.) I do not expect Rudd to know that, in response to the Évian Conference on Jewish refugees, held in France in 1938, Adolf Hitler offered German Jews to the world but the world did not want them. Britain took 10,000 children, sponsored privately, and left their parents to die. After 1945, Britain agreed to take another 1,000 Jewish children but it could not find 1,000 still alive. It took 732. I now see that, for the likes of Rudd, “Never forget” means “Don’t forget for two weeks” or, if politically expedient, “Don’t forget for three days”.
But if that’s what you think, you never knew anything to forget. Rudd couldn’t see the connection between the British government of 1938 leaving children to die in far-off lands and the British government of 2016 doing the same. Her signing of a Holocaust remembrance book was so meaningless that it was, at best, hand exercise and, at worst, a cynical PR gesture. This act of Holocaust memorialising was a failure. I hope that Rudd is prevented from approaching any Holocaust-related stationery in future. But that won’t happen. The orthodoxy in these circles is: let them all come to bear witness, no matter what they do with it. Some of them might learn something. This policy led to a friend hearing a young Polish boy, touring Auschwitz, describe a fellow visitor as “a rich Jewish bitch in all that jewellery”. The boy had learned nothing, but the man had. He punched him in the face, and that is the only cheerful anecdote in this article.
Maybe Germany and the US should make this very clear: “..the head of the BND foreign intelligence agency, who said the Turkish government had failed to convince it that Muslim cleric Fethullah Gulen was responsible for the coup attempt.”
Doubts expressed by Germany’s spy agency regarding the role of a U.S.-based cleric in last year’s attempted coup in Turkey are proof that Berlin supports the organization behind the attempt, Turkish President Tayyip Erdogan’s spokesman said on Sunday. Ibrahim Kalin made the comment in a live interview with broadcaster CNN Turk. On Saturday, German news magazine Der Spiegel published an interview with the head of the BND foreign intelligence agency, who said the Turkish government had failed to convince it that Muslim cleric Fethullah Gulen was responsible for the coup attempt. “Turkey has tried to convince us of that at every level but so far it has not succeeded,” Bruno Kahl was quoted as saying. Kalin said those comments were proof that Berlin supported the coup. Germany and Turkey have been locked in a deepening diplomatic row after Berlin banned some Turkish ministers from speaking to rallies of expatriate Turks ahead of a referendum next month, citing public safety concerns.
Ankara launched a new wave of anti-German rhetoric on Sunday, with President Recep Tayyip Erdogan calling out the German chancellor in a televised speech. “When we call them Nazis, they (Europe) get uncomfortable. They rally together in solidarity. Especially Merkel,” Erdogan said. “But you are right now employing Nazi measures,” he said, addressing Merkel directly and using the unofficial, personal way of saying “you” in Turkish. Erdogan has previously accused both the Netherlands and Germany of acting like Nazis after the two countries prevented Turkish ministers from holding campaign rallies on their territory. In his Sunday speech, Erdogan accused Merkel personally of using Nazi methods against his “Turkish brother citizens in Germany and brother ministers.”
The row with Europe “showed that a new page had been opened in the ongoing fight against our country,” he added. Berlin was decidedly not amused, saying that the Turkish president had “gone too far.” Foreign Minister Sigmar Gabriel told the Passauer Neue Presse that he warned Ankara against continuing this “shocking” rhetoric. “We are tolerant but we’re not stupid,” Gabriel said. “That’s why I have let my Turkish counterpart know very clearly that a boundary has been crossed here.” Ankara also responded furiously to a Kurdish rally in Frankfurt yesterday, where participants carried flags and symbols of the outlawed Kurdistan Workers’ Party (PKK) and called for a ‘no’ on the upcoming referendum. The Turkish government said the rally showed Berlin’s hypocrisy after halting similar events for the ‘yes’ camp. They also summoned the German ambassador over the incident.
The European Stability Mechanism (ESM) – the euro zone’s bailout fund – should ultimately be turned into a European version of the International Monetary Fund, the head of euro zone finance ministers told a German newspaper. “I think it would make a lot of sense for the euro zone bailout fund ESM to be developed into a European IMF in the medium to long term,” Jeroen Dijsselbloem told Monday’s edition of Frankfurter Allgemeine Zeitung. He said that would also mean that Greece’s current “troika” of lenders – the European Commission, ECB and the IMF – would need to be broken up in the longer term. “The ECB feels increasingly uncomfortable in its troika role, and rightly so I think,” Dijsselbloem said, adding that the European Commission had other “important tasks” that it should concentrate on.He said the ESM should “build up the technical expertise that only the IMF has at the moment”.
German Finance Minister Wolfgang Schaeuble has also proposed turning the ESM into a European monetary fund to improve the management of crises in Europe. Dijsselbloem said the institutions should maintain their roles for Greece’s current bailout and said he still expected the IMF to decide on a new programme, adding that it would be “most welcome” if this happened by the summer. Germany, which holds elections in September, wants the IMF on board before new money is lent to Athens. But it disagrees with the IMF over debt relief and the fiscal targets that Greece should maintain after the bailout programme ends in 2018. Dijsselbloem said he did not expect the current review of Greece’s bailout programme to be concluded quickly, adding that he did not think the institutions will complete it before a Eurogroup meeting in Malta in April.
Under the current government, the PvdA’s rightward shift took on a whole new meaning. The party gained significant ground during the 2012 elections by arguing that a vote for Labour was the only way to avoid a VVD-led austerity government. Immediately after the elections, the party turned around and started negotiating the formation of a coalition with those very opponents. This government launched a massive austerity program, entailing almost fifty billion euros in cutbacks. PvdA ministers prided themselves on taking some of the most difficult posts, including social affairs and employment (PvdA leader Lodewijk Asscher) and finance (Jeroen Dijsselbloem).
A PvdA minister of the interior loyally executed the VVD’s anti-refugee policies. And Dijsselbloem not only enthusiastically applied the European Union’s fiscal stringency to the Netherlands but, as chairman of the Eurogroup, became its main enforcer against the Syriza government. Nothing could more fully demonstrate the PvdA’s neoliberal drift than the fact that Alexander Pechtold, leader of the liberal-democratic party Democrats 66 (D66), repeatedly suggested Dijsselbloem could continue to represent the Netherlands in Brussels “so that he can finish the job.” [..] The same anger and anxieties that created violent shocks to the political system — of which the PvdA’s collapse is only the latest example — also continue to drive large numbers to vote for allegedly safe parties that they wrongly believe will at least not make things worse.
Greece spends more on pensions because it is the only fallback the economy has, they play the role that in other countries is played by unemployment benefits. The Troika knows this very well. It’s hard not to conclude that the lenders are trying to create a civil war in Greece.
Greece is set to miss yet another deadline for unlocking bailout funds this week, edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted state to the edge of economic collapse. Euro-area finance ministers meeting in Brussels on Monday will reiterate that the government of Alexis Tsipras has yet to comply with the terms attached to the emergency loans that have kept the country afloat since 2010. While Tsipras had promised the long delayed review of the latest bailout would be completed by March 20, a European official said last week that reaching an agreement even in April is now considered a long shot. The two sides are still far apart on reforms demanded by creditors in the Greek energy market and the government in Athens is resisting calls for additional pension cuts. And while discussions continue on how to overhaul the labor market, a finance ministry official said in an email to reporters on Friday that the issue can’t be solved in talks with technocrats.
Stalled bailout reviews and acrimony between successive governments and auditors representing creditor institutions are all too familiar themes in the seven-year crisis that has reduced the Greek economy by a quarter. Failure to resolve the latest standoff before the summer could mean that Greece may not be able to meet debt payments due in mid-July. Even as Greek bonds have performed better than most of its euro-area peers this year on expectations that the government will capitulate, uncertainty has weighed on economic activity, raising the risk that an additional bailout may be needed. Unemployment rose in the last quarter of 2016, the economy unexpectedly contracted, and a bleeding of deposits from the nation’s battered lenders resumed.
For a story of waste and suffering, it’s notable that some of the worst decisions in response to the refugee crisis in Greece were born of good intentions. An archipelago of some 50 small refugee camps was scattered over Greece in preference to concentrating asylum seekers in larger ghettos. As an idea it had merits. In practice it was disastrous. Authorities still struggle to say how many camps there are. The Ministry of Migration Policy lists 39 but the UN says there may be more than 50. Many of these sites, which are in various states of closure, were clearly unfit for human habitation in the first place. The choice to build so many of them multiplied infrastructure costs for things like sewage systems built on private property or remote sites that will serve no public purpose in the future. Meanwhile, the Public Power Corporation is building substations at sites that will likely face closure.
The European Commission and its humanitarian operations agency ECHO are expected to cease support for all but 10 of Greece’s mainland camps in the near future. As the main donor, this will be decisive. There is similar confusion over how many asylum seekers remain in Greece from the 1.03 million who entered in 2015-16. Again the ministry and the UN disagree, with the former saying 62,000 and the latter nearer 50,000. European officials say privately that both numbers are overestimates. This shroud of confusion has contributed to a mess that will be remembered as the most expensive humanitarian response in history. Some $803 million flowed into Greece from the beginning of 2015, according to an investigation by Refugees Deeply, an independent reporting platform. The bulk of these funds were meant to be spent on services for the 57,000 refugees and migrants stranded in Greece when the borders shut one year ago. That translates to a rough cost per beneficiary of $14,000.
Nobody believes this has been money well spent. One senior aid official admitted that as many as $70 out of every $100 spent had been wasted. As anyone who followed the response in Haiti or Kosovo would affirm, the aid industry is inherently wasteful but this was excessive. The scale of this became obvious from November onward when refugees were pictured in tents in the snow and it sparked a blame game. None of the actors emerge with much credit. The UN refugee agency played mute witness to failures in refugee protection for fear of offending its second largest donor, the EU. The European Commission was content to make grandiose statements that exaggerated the funding it had committed, while doing nothing to correct the mistakes it witnessed on the ground. It also made promises on asylum service assistance that were not kept. The bigger the mess in Greece, the greater the deterrent and the stronger the message to future asylum seekers not to come this way.
Just before midnight in a sleepy district of Beirut, dozens of Syrian refugees huddle in small groups around bulging suitcases, clutching their pinging cellphones and one-way tickets to Italy. “Torino! Pronto! Cappuccino!” They practise random Italian words in a schoolyard in the Lebanese capital’s eastern Geitawi neighbourhood, waiting for the buses that will take them to the airport, and onwards to their new lives in Italy. Under an initiative introduced last year by the Italian government, nearly 700 Syrian refugees have been granted one-year humanitarian visas to begin their asylum process in Italy. The programme is the first of its kind in Europe: a speedy third way that both avoids the United Nations lengthy resettlement process and provides refugees with a safe alternative to crammed dinghies and perilous sea crossings.
[..] A country of just four million people, Lebanon hosts more than one million Syrian refugees. For members of Mediterranean Hope, the four-person team coordinating Italy’s resettlement efforts from Lebanon, “humanitarian corridors” are the future of resettlement. The group interviews refugees many times before recommending them to the Italian embassy, which issues humanitarian visas for a one-year stay during which they begin the asylum process for permanent resettlement. “It’s safe and legal. Safe for them, legal for us, says Mediterranean Hope officer Sara Manisera. “After people cross the Mediterranean on the journey of death, they are put into centres for months while they wait. But with this programme, there are no massive centres, it costs less, and refugees can keep their dignity,” she tells AFP.
Around 3,000 migrants were rescued off the coast of Libya on Sunday as they tried to cross the Mediterranean to Europe, the Italian coast guard told AFP. “After some calm days, migrants are arriving in large numbers, taking advantage of a window of favorable weather,” said a coast guard official. The rescue was undertaken in 22 separate operations coordinated by the Italian coast guard. One participant was the Aquarius, a humanitarian ship run by the NGO SOS Mediterranean and Doctors Without Borders (MSF), which said it saved 946 people, including 200 unaccompanied minors. An MSF video showed three young children smiling and dancing on the ship to the sound of drumming. The migrants rescued by the Aquarius had been found drifting on nine wooden and rubber boats. According to the Italian government, 16,206 people have been rescued in the sea by Friday — compared to 11,911 by the same time last year.
In a note to clients, Intermarket Strategy Chief Executive and Strategist Ashraf Laidi points out that the S&P 500’s 50-week moving average is falling below its 100-week moving average. This “statistically significant” death cross has only happened twice is the past two decades, Laidi points out. The first took place in 2001 and was followed by a 37% decline in the index, while the second pattern occurred in 2008 and preceded a 48% drop. With investors already growing increasingly nervous about prospects for equities, a death cross of grave proportions could give extra reason for caution.
[..] The latest stop-go credit cycle began in mid-2015 and has since accelerated to an epic blow-off, with the M1 money supply now growing at 22.9pc, by the fastest pace since the post-Lehman blitz. Wei Yao from Societe Generale estimates that total loans rose by $1.15 trillion in the first quarter, equivalent to 46pc of quarterly GDP. “This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the ‘four trillion stimulus’ package in 2009. The consequence of that stimulus was inflation, asset bubbles and excess capacity,” she said. House sales rose 60pc in April, despite curbs to cool the bubble. New starts were up 26pc. Prices jumped 63pc in Shenzhen, 34pc in Shanghai, 20pc in Beijing, and 18pc in Hefei. Panic buying is spreading to the smaller Tier 3 and 4 cities with the greatest glut.
It all has echoes of the stockmarket boom and bust last year. “Investors are convinced that the government will guarantee that housing prices won’t fall,” said Professor Zhu Ning from the Shanghai Advanced Institute of Finance, speaking to the South China Morning Post. It also sounds like Britain. There was a slight cooling in April but less than headlines suggested. The old measure of total social financing (TSF) slipped but this was more than offset by record bond issuance of $180bn. Together they reached a 26-month high. Capital Economics says budgeted funds must be disbursed by the end of this quarter under new finance ministry rules, implying another $310bn of bonds by late June. The fiscal boost will be ‘front-loaded’. The money will pile up in accounts and flood the economy over the late summer. If the usual time-lags hold, the mini-boom will last for a few more months. Then the trouble will start. Needless to say, markets may roll over long before the economy itself.
[..] .. this year the China bears may get their revenge, if they have any money left to play with. The rot in the country’s $7.7 trillion bond markets is metastasizing. Bo Zhuang from Trusted Sources said more than 100 firms cancelled or delayed bond issues in April due to widening credit spreads. Ten companies have defaulted this year, with the shipbuilder Evergreen, Nanjing Yurun Foods, and the solar group Yingli Green Energy all in trouble this month. But what has really spooked markets is the suspension of nine bonds issued by the AA+ rated China Railways Materials, the first of the big central SOE’s to signal default. “This has greatly weakened investors’ long-standing expectation of implicit government support,” he said.
Bo Zhuang said investors have poured money into bonds in the latest frenzy. The stock of corporate bonds has jumped by 78pc to $2.3 trillion over the last year. It is the epicentre of leverage through short-term ‘repo’ transactions, and it is now coming unstuck. “The experience with the stock market shows how difficult it can be to contain a reversal in leveraged bets. In our view, a bond market crisis would be much more destructive,” he said. With luck, the rest of us outside China will have three or four more months to order our own affairs before the storm gathers. Whether it is bumpy landing, a hard landing, or a crash landing, depends on who the “authoritative person” in Beijing turn out to be.
One of the stated reasons for the Shanghai Composite’s 1.3% drop (and it would have been worse had the PPT not launched its infamous last minute buying blitz) was also the most amusing one: the stock market bubble is in danger of popping even more as a result of a housing bubble that is now raging at a pace not seen since the last Chinese housing bubble, and thus threatens to soak up even more cash from China’s chronic gamblers-cum-speculators.
So just how high of a housing number did the NBS report that spooked stocks so much? Well, as Goldman summarizes, housing prices in the primary market increased 1.1% month-over-month after seasonal adjustment in April, higher than the growth rate in March. Out of 70 cities monitored by China’s National Bureau of Statistics (NBS), 63 saw housing prices increase from the previous month. On a year-over-year, population-weighted basis, housing prices in the 70 cities were up 6.9% (vs. 5.5% yoy in March). According to an alterantive set of calculations by MarketNews, aggregate home prices rose 12.4% Y/Y in April after rising 10.4% in March. Since both numbers are ridiculously high, we’ll just leave them at that.
However, it was not the overall market bubble that is troubling, but that focused on the most desired, top – or Tier 1 – cities. Here, April price growth was 2.6% month-over-month after seasonal adjustment, vs. 3.0% in March.
But the real shocker was that on a year-over-year price growth in tier-1 cities continue to rise however, reaching 28.3% vs. 26.0% yoy in March. In fact it is so bad that Goldman, which tried to show the surge in the second chart below, clearly needs a bigger chart. Incidentally, total property sales in tier-1 cities accounted for around 5% of nationwide property sales in volume terms, and around 15% in value terms (2015 data).
And the stunning charts: Home price inflation month over month
And year over year: to show the Tier 1 housing bubble, Goldman will need a bigger chart.
Emerging-market stocks and currencies fell to two-month lows as the dollar got a boost from minutes of the Federal Reserve’s last meeting that showed officials want to raise interest rates in June. The MSCI Emerging Markets Index headed for its biggest two-day drop in two weeks after minutes of the April 26-27 meeting released Wednesday in Washington showed most officials judged it “likely would be appropriate” to hike next month provided incoming data are in line with a second-quarter pickup. China’s yuan, South Korea’s won, Malaysia’s ringgit and Taiwan’s dollar fell to the weakest levels since March, while Indonesia’s rupiah and Thailand’s baht reached February lows.
The release of the minutes and speeches by regional Fed bank presidents warning investors not to dismiss the chance of a June increase have seen the chance of such a move increasing to 32% from 4% at the beginning of the week, Fed Funds futures show. Developing-nation stocks have now wiped out all of their gains this year and there’s a risk of outflows accelerating if the dollar keeps strengthening. “Investors should avoid any additional investments in emerging markets because their currencies and stocks will be under huge pressure from the strong dollar,” said Komsorn Prakobphol at Tisco Financial in Bangkok. Energy stocks will probably be resilient as the oil price is being driven more by supply and demand dynamics, he said.
A gauge of the greenback against 10 peers was steady after jumping 0.8% overnight, the most since November. The Bloomberg Dollar Index has rallied 3.1% in May, on track for its best month since January 2015. Overseas investors have pulled $2.9 billion from Taiwanese stocks this month and close to a combined $1 billion from Indian, Indonesian and Thai bonds, exchange data show. “Asian currency weakness has been exacerbated by portfolio outflows from the region and we see little respite in the weeks and months ahead,” said Mitul Kotecha at Barclays in Singapore. The ringgit, baht, rupiah and, to an extent, the Taiwan dollar are the most vulnerable Asian currencies to a Fed rate increase, while India’s rupee and the Korean won are better placed, he said.
The case for or against a British exit from the EU – #Brexit – is headline news. For the moment the earlier quarrel about a possible Greek exit from the Eurozone – #Grexit – seems to have taken the back seat – with one or two exceptions such as Christian Lindner, leader of Germany’s liberal FDP. Most EU proponents are deeply concerned about these prospects and the repercussions either might have on European unity. Yet, while highly important, neither of them should distract Europe from zooming in on the real issue: the dominant and altogether destructive role of Germany in European affairs today. There can be no doubt that the German “stability-oriented” approach to European unity has failed dismally. It is high time for Europe to contemplate the option of a German exit from the Eurozone – #Gexit – since this might be the least damaging scenario for Europe to emerge from its euro trap and start afresh.
Germany’s membership of the Eurozone and its adamant refusal to play by the rules of currency union is indeed at the heart of the matter. Of course, it was never meant to be this way. And it was not inevitable for Europe to end up in today’s state of never-ending crisis that impoverishes and disunites its peoples. I have always supported the idea of a common European currency as I believed that it could potentially provide a monetary order that is far superior to the status quo ante of deutschmark hegemony: the Bundesbank – in pursuit of its German price stability mandate – pulling the monetary strings across the continent. While I have also always held that the euro – the peculiar regime of Economic and Monetary Union agreed at Maastricht – was deeply flawed, I kept up my hopes that the political authorities would reform that regime along the way to make the euro viable.
In this spirit I proposed my “Euro Treasury” plan that would, among other things, fix the Maastricht regime’s most serious flaw: the divorce between the monetary and fiscal authorities that is leaving all key players vulnerable and short of the powers required to steer a large economy like the Eurozone through anything but fair weather conditions, at best. Watching developments over in Europe from afar my hopes are dwindling by the day that the failed euro experiment will usher in reforms that could save it. Instead, the likelihood of some form of eventual euro breakup seems to be rising constantly. It is undeniable that the euro has turned out to be an instrument of widespread impoverishment rather than shared prosperity.
When Ignazio Visco, governor of the Bank of Italy, spoke in Florence this month, his focus turned to regulation. At a sensitive moment for Italian lenders, whose shares had collapsed over recent months, the governor chose to address what he called “regulatory uncertainty” in the wake of new European-wide rules for failing banks. “We must strike the right balance,” he said. “We should not rule out the possibility of temporary public support in the event of systemic bank crises, when the use of a bail-in is not sufficient”. Taxpayer support for banks, however, was precisely what the new European rules introduced at the start of this year aimed to avoid. To protect taxpayers, investors in banks bonds – mostly untouched during the bailouts of the last crisis – now face losses, or “bail-ins”.
The tension between the Italian central bank and European regulations is related to who owns this debt. In Italy, many retail investors hold exposed bank bonds, and a “bail-in” of small Italian banks in November last year was politically sensitive for this reason. But Mr Visco’s comments also reflect the challenges of implementing continent-wide rules in very different individual countries, with contrasting banking systems. So how else might this regulatory uncertainty, and the role of national governments, complicate a European vision for dealing with bank failure? Under the Bank Recovery and Resolution Directive (BRRD), European banks are now required to have a certain amount of bonds that are exposed to losses. The key issue is who suffers losses first. Whereas senior bank bonds ranked alongside depositors during the crisis, new bonds need to be subordinated to take losses.
But the actual instruments that count towards this measure are determined by national legislation. As a result, different countries have taken different approaches. Italy has raised corporate depositors above bondholders. France is currently legislating for a new class of bank debt, which will sit below depositors and existing senior bonds. In Germany, the law has been changed to subordinate outstanding senior bonds. In the UK, banks sell bonds from their holding companies, which will rank below other senior bank bonds. In the Netherlands, it is unclear how the rules will work. Robert Muller, treasurer at Rabobank, says the bank is strongly leaning towards the French approach, rather than the German. For investors, this represents a challenge. “At this point in time it’s very difficult for investors to see how this pans out,” says Mr Muller. “For US investors it will become very different to follow.”
Euro-area officials are weighing a proposal to purchase loans that member states made to Greece in a move that would ease the nation’s debt burden, a precondition for the IMF’s involvement in a bailout program. Senior finance ministry officials held a conference call on Wednesday night to discuss ways to make Greece’s €321 billion of obligations sustainable, according to two people with knowledge of the talks. One option would be for the European Stability Mechanism, the euro-area’s financial backstop, to purchase loans individual euro nations made to Greece and reduce the interest payments, said the people, who asked not to be named because the discussions are private. About €52.9 billion of bilateral loans were made in 2010 and 2011.
Greece’s creditors are struggling to complete a review of the nation’s third bailout, which would pave the way for the disbursal of much-needed aid. The IMF has made its participation in the program contingent upon debt relief, a prospect euro-area finance ministers began discussing last week during an emergency meeting meant to resolve the impasse in unlocking the funds. Nations including Germany have said that the IMF needs to be involved in any future bailout program. The ESM is also considering purchasing the IMF’s loans as a way to give Greece a financial boost since its debt terms are more lenient than those of the Washington-based fund, according to a sustainability report prepared by the European institutions.
Buying back the IMF loans “amounts to debt relief,” European Commission Vice President Valdis Dombrovskis said in remarks in Brussels on Wednesday at a Politico conference. The officials mulled three debt-relief options during the call: have the ESM purchase bilateral loans made to Greece from individual countries; have the ESM purchase the IMF’s obligations; and extending the maturities of Greece’s debt and reducing the interest rates, one of the people said.
The models have been run and the numbers crunched: Bernie Sanders’s presidential platform, if enacted, would create 26 million jobs and 5.3% growth. An economist has done the calculating, and there’s no use arguing with mathematics. CNN’s headline reads: “Under Sanders, income and jobs would soar, economist says.” When I run that line by Russ Roberts, he replies with a joke: “How do you know macroeconomists have a sense of humor? They use decimal points.” Mr. Roberts is a fellow at the Hoover Institution, a University of Chicago Ph.D., and the gregarious host of EconTalk, a weekly podcast that celebrated its 10th anniversary in March. He is also an evangelist for humility in economics. “The world’s a complicated place,” he says. “We demand things from economics that it can’t provide, and we should be honest about that.”
What’s striking is Mr. Roberts isn’t talking only about politically contrived agitprop. Nobody believes that stuff: One of President Obama’s former economic advisers stirred ire from Sandernistas earlier this year when he said that getting Bernie’s agenda to add up requires assuming “magic flying puppies with winning Lotto tickets tied to their collars.” The deeper question is: How much better—more credible, or reliable, or falsifiable—are the economic forecasts pouring out of respectable think tanks, the White House and Congress? Mr. Roberts’s answer: not all that much. He cites the Congressional Budget Office reports calculating the effect of the stimulus package—for instance, one in late 2009 suggesting it had increased employment by between 600,000 and 1.6 million.
Leaving aside the incredible range of the estimate, how did the CBO come up with those numbers? Did it somehow measure employment in the real world? Nope: The CBO gnomes simply went back to their earlier stimulus prediction and plugged the latest figures into the model. “They had of course forecast the number of jobs that the stimulus would create based on the amount of spending,” Mr. Roberts says. “They just redid the estimate. They just redid the forecast. And you’re thinking, that can’t be what they really did.”
Five major banks and four traders were sued on Wednesday in a private U.S. lawsuit claiming they conspired to rig prices worldwide in a more than $9 trillion market for bonds issued by government-linked organizations and agencies. Bank of America, Credit Agricole, Credit Suisse, Deutsche Bank and Nomura were accused of secretly agreeing to widen the “bid-ask” spreads they quoted customers of supranational, sub-sovereign and agency (SSA) bonds. The lawsuit filed in Manhattan federal court by the Boston Retirement System said the collusion dates to at least 2005, was conducted through chatrooms and instant messaging, and caused investors to overpay for bonds they bought or accept low prices for bonds they sold.
“Only through collusion could a dealer quote a wider spread than market conditions otherwise dictate without losing market share and profits,” the complaint said. “Defendants reaped millions of dollar(s) in profits at the expense of plaintiff and members of the class as result of their misconduct.” The proposed class-action lawsuit seeks triple damages, and follows probes by U.S. and European Union antitrust regulators into possible SSA bond price rigging.
[..] The lawsuit is one of many in the Manhattan federal court seeking to hold banks liable for alleged price-fixing in bond, commodity, currency, derivatives, interest rate and other financial markets. One such lawsuit, concerning competition in the credit default swaps market, led last September to a $1.86 billion settlement with a dozen banks. SSA bonds are sold in various currencies by issuers such as regional development banks, infrastructure borrowers including highway and bridge authorities, and social security funds. Many carry explicit or implicit backing from governments, and thus enjoy high investment-grade ratings.
Deutsche Bank investors expressed their frustration with management at the company’s annual meeting a year ago. Weeks later, co-Chief Executive Officer Anshu Jain was gone. Now it’s Chairman Paul Achleitner and Jain’s replacement, John Cryan, who are set to feel the displeasure of shareholders when they gather in Frankfurt on Thursday. With revenue plunging and the need for capital mounting, some investors worry it may be just a matter of time before they’re asked to stump up and buy new stock. “The mood’s going to be bad, maybe even worse than at last year’s meeting,” said Klaus Nieding, vice president of DSW, a German firm that advises shareholders on company proposals.
Deutsche Bank shares dropped by more than half in the past year – erasing about $22.6 billion in market value – as plans to bolster capital and slash costs failed to revive confidence and profits shriveled across the industry. For Achleitner, a supervisory board dispute in April raised questions about his commitment to rooting out misconduct at Germany’s largest bank. Jain, 53, resigned in June after he and co-CEO Juergen Fitschen received the lowest approval rating in at least a decade in a vote at last year’s annual meeting. Fitschen, 67, will stand down on Thursday, leaving Cryan as sole CEO. Cryan, a British citizen who chaired the audit committee of the supervisory board before becoming co-CEO, has been outspoken about the company’s shortcomings, criticizing excessive pay, spiraling legal costs and outdated technology.
He suspended the dividend to bolster capital and pledged to shed about 9,000 jobs, or almost 10% of the workforce, and shrink the investment bank by scaling back the debt-trading empire built by Jain. While some investors applauded the cost reductions as long overdue, others expressed concern the cutting would eat too deeply into sales, especially during a trading slump. Debt-trading revenue, Deutsche Bank’s largest source of income, fell 29% in the first quarter from a year before, while net income dropped 61%. Cryan told analysts last month that his efforts to overhaul the company and settle outstanding legal matters may lead to a second straight annual loss. “The issue that we have is that we want to get an awful lot done this year,” he said.
Hillary Clinton says that when she and her husband moved out of the White House 15 years ago, they were “dead broke.” Today, they’re worth more than $150 million. In the new documentary “Clinton Cash,” it becomes all too clear how the former first couple went from rags to filthy rich — with the emphasis on filthy. As the movie shows, the Clintons are political Teflon dons compared with another Beltway power couple, former Virginia Gov. Bob McDonnell and his wife, Maureen. The McDonnells were convicted of accepting more than $150,000 in gifts from a businessman while the governor was in office. Meanwhile, the Clintons raked in 700 times that amount – $105 million – under the pretext of speaking fees while Hillary was in public office.
Yet while the McDonnells face time in the Big House, the Clintons are once again aiming for the White House. The documentary is based on a book by former Hoover Institution fellow Peter Schweizer and was just screened during the Cannes Film Festival. It is set to be shown in major US cities, including Philadelphia during the Democratic National Convention there in July. Schweizer’s research has withstood a year of intense scrutiny from critics because it is fact, not fiction. And the facts are compelling. The film whisks you around the globe, retracing how the Clintons personally pocketed six-figure speaking fees and collected billions of dollars for their family foundation. How? By trading on Hillary’s position as secretary of state and possible future president.
She and her ex-president husband sold out to titans, dictators and shady characters in Nigeria, Congo, Kazakhstan and the United Arab Emirates, not to mention at Goldman Sachs and TD Bank. Along the way, the Clintons betrayed the values they profess on the campaign trail: human rights, environmentalism and democracy. That’s why Schweizer is bringing the documentary to the Democratic convention — to show the party faithful how the Clintons used and abused their liberal principles to amass a fortune. The Clintons earned the bulk of their money from speaking fees. It was simple: Bill’s fees skyrocketed when Hillary became secretary of state in 2009, suggesting that countries and companies hiring him counted on getting more than just Bill — they also expected to land what his wife had to offer.
Earth’s heat is stuck on high. Thanks to a combination of global warming and an El Nino, the planet shattered monthly heat records for an unprecedented 12th straight month, as April smashed the old record by half a degree, according to federal scientists. The National Oceanic and Atmospheric Administration’s monthly climate calculation said Earth’s average temperature in April was 58.7 degrees (14.8 degrees Celsius). That’s 2 degrees (1. 1 degrees Celsius) warmer than the 20th century average and well past the old record set in 2010. The Southern Hemisphere led the way, with Africa, South America and Asia all having their warmest Aprils on record, NOAA climate scientist Ahira Sanchez-Lugo said. NASA was among other organizations that said April was the hottest on record. The last month that wasn’t record hot was April 2015.
The last month Earth wasn’t hotter than the 20th-century average was December 1984, and the last time Earth set a monthly cold record was almost a hundred years ago, in December 1916, according to NOAA records. “These kinds of records may not be that interesting, but so many in a row that break the previous records by so much indicates that we’re entering uncharted climatic territory (for modern human society),” Texas A&M University climate scientist Andrew Dessler said in an email. At NOAA’s climate monitoring headquarters in Asheville, North Carolina, “we are feeling like broken records stating the same thing” each month, Sanchez-Lugo said. And more heat meant record low snow for the Northern Hemisphere in April, according to NOAA and the Rutgers Global Snow Lab.
Snow coverage in April was 890,000 square miles below the 30-year average. Sanchez-Lugo and other scientists say ever-increasing man-made global warming is pushing temperatures higher, and the weather oscillation El Nino — a warming of parts of the Pacific Ocean that changes weather worldwide — makes it even hotter. The current El Nino, which is fading, is one of the strongest on records and is about as strong as the 1997-1998 El Nino. But 2016 so far is 0.81 degrees (0.45 degrees Celsius) warmer than 1998 so “you can definitely see that climate change has an impact,” Sanchez-Lugo said. Given that each month this year has been record hot, it is not surprising that the average of the first four months of 2016 were 2.05 degrees (1.14 degrees Celsius) higher than the 20th-century average and beat last year’s record by 0.54 degrees (0.3 degrees Celsius).
India is set to start work on a massive, unprecedented river diversion programme, which will channel water away from the north and west of the country to drought-prone areas in the east and south. The plan could be disastrous for the local ecology, environmental activists warn. The project involves rerouting water from major rivers including the Ganges and Brahmaputra and creating canals to interlink the Ken and Batwa rivers in central India and Damanganga-Pinjal in the west. The minister of water resources, Uma Bharti, said this week that work could start in a few days. A spokesperson from her department told the Guardian that the government is still waiting for clearance from the environment ministry. The project will cost an estimated 20 lakh crore rupees (£207bn) and take 20-30 years to complete.
The government of Narendra Modi, the prime minister, is presenting the project as the solution to India’s endemic water problems. For years, parts of India have suffered from devastating spells of drought. As average temperatures in India rise, and the growing population puts increasing demands on water resources, millions of people are without a reliable water supply. This year, 330 million Indians have been affected by drought. State governments used emergency measures to deliver water by train in the western state of Maharashtra; in other areas, schools and hospitals were forced to close, and hundreds of families were forced to migrate from villages to nearby cities where water is more easily accessible.
According to the National Water Development Agency, which will oversee the rivers project, “the water availability even for drinking purposes becomes critical, particularly in the summer months … On the other hand excess rainfall occurring in some parts of the country create[s] havoc due to floods.” The scheme is a pet project of Modi, who has made several promises to end India’s long-term water problems. In the first few months of his premiership, Modi’s cabinet revived the idea of linking 30 rivers across India. The water resources ministry spokesperson said: “The idea is old, but the Modi government has done all the work on it.” Plans to interlink rivers were drawn up in the 1980s by Indira Gandhi’s government, and were gathering dust as central governments repeatedly failed to win the approval of states. Now, with a supreme court mandate, and government backing, save the rubber stamp of the environment ministry, the project could get under way in a matter of days.
“You may call it ‘nonsense’ if you like, but I’ve heard nonsense, compared with which that would be as sensible as a dictionary,” says the Red Queen in “Through The Looking-Glass.” Central banks have gone down the rabbit hole. Starting with record low interest rates, then purchases of government bonds and mortgage bonds, ultra-accommodative policy progressed in Japan to buying real-estate investment trusts and equity funds. With negative rates, central bankers have now managed what was believed all but impossible: breaching the “zero lower bound.” In the looking-glass world of modern central banking, almost nothing is taboo, with even the abolition of cash discussed seriously by top monetary wonks.
One idea not yet considered: the Bank of Japan should print money to buy oil. It sounds beyond nonsense. But with central bankers believing six impossible things before breakfast, it no longer seems inconceivable, which is informative in itself. Consider the BOJ’s problem. The central bank is creating ¥80 trillion ($700 billion) a year to buy mainly government bonds, one of the biggest programs of money printing in history. It already owns almost a third of the bond market, nearly 2% of equities and about half of exchange-traded funds by value. Nonetheless, Japanese inflation remains quiescent. The yen has been strengthening despite the negative rates introduced last month, making it even harder to push prices up toward the BOJ’s 2% target.
There have been hints that the BOJ will do more next month, although Gov. Haruhiko Kuroda on Tuesday cast doubt on whether printing money alone would achieve the goal. The obvious alternative is to take rates much more negative, possibly in conjunction with more asset purchases and higher government spending. Yet, negative rates have unpleasant side-effects, hurting banks, while bond supply may be limited. Nomura estimates that over the next three years only ¥236 trillion of bonds could be available to buy because banks and insurance companies are reluctant to sell many of their holdings—making it hard to ramp up purchases further. HSBC says that in a worst-case scenario the BOJ would have trouble filling its monthly purchases later on this year.
These estimates may be overly pessimistic. If not, the obvious alternative of buying foreign assets is challenging. Direct currency manipulation is a diplomatic no-no nowadays for such a big country as Japan, so buying U.S. Treasurys—similar to Swiss purchases of European bonds—is not realistic. There are more extreme options, such as direct financing of government spending, or abolishing bank notes so interest rates can go deeply negative. None is politically palatable. Compared with these, creating money to buy oil has several big advantages.
Mario Draghi has two weeks left to decide how to ramp up stimulus in a way that doesn’t upset either his colleagues or investors. When ECB policy makers meet in Frankfurt from March 9-10, they’ll consider whether negative interest rates and 60 billion euros ($67 billion) a month of debt purchases is enough to revive consumer prices. With another rate cut priced in by markets, the biggest question mark hangs over how to customize quantitative easing. The ECB president has said there are no limits to how far policy makers will go within their mandate, yet sub-zero rates carry risks and expanding QE is easier said than done.
He’ll walk a fine line between convincing investors he can overcome the hurdles and avoiding the market disappointment that greeted the last adjustment in December. “It’ll be very challenging” to increase QE, said James Nixon at Oxford Economics, who doesn’t expect such a move just yet. “You’d have to sort of throw the rule book out. It might be quite interesting to see whether Draghi, as he tends to do when he’s confronted by these situations, pulls another rabbit out of the bag.”
[..] To ease the reliance on German debt, the ECB could eliminate the capital key that links buying to economic size. That would allow other countries with more outstanding debt, such as Italy, to buy a greater share. That strategy might make it look like the ECB is supporting nations that pursued riskier fiscal policies. Worse, it could draw accusations of monetary financing, which is banned under European Union law. “They chose the capital key for a reason,” said Peter Schaffrik at Royal Bank of Canada in London. “Do I think it would make sense to change that from a macroeconomic point of view? Absolutely. Do I think that’s the preferred measure and most easily adoptable within the council? I’m not so convinced.”
Allowing central banks to buy other nations’ public debt would also be a hard sell. It’s unlikely a country such as Germany would find it acceptable to buy riskier bonds from elsewhere. “You’ve really got to sort of put that in print, write it down, to realize how completely unworkable politically that would be,” Nixon said. “It’s just a complete non-starter.”
Do investors think central banks can restore calm or is negative rate policy an error? Bear markets thrive on fear and uncertainty. Until a few weeks ago, the list included a hard landing for China, plunging oil prices, problems for European banks and fears that even the US economy was rolling over. Now we worry that central bankers are not just behind the curve, to use that trite phrase, but have lost the plot. What is the current policy framework, let alone its efficacy? The first concern is China’s exchange rate policy; is it simply moving from a fixed dollar peg to a trade weighted basket? Is modest volatility required to justify the renminbi’s membership of the IMF’s SDR, the reserve asset, or a dramatic depreciation to prop up a rapidly slowing economy? The ‘unholy trinity’ remains very clear — that China cannot simultaneously control its currency and its money supply growth and allow free flow of capital.
A second policy error possibly took place when the Bank of Japan unexpectedly adopted negative interest rates, following in the footsteps of several European central banks. Just as with QE, there are several channels through which this new policy tool could affect the real economy. The standard argument is that in a world of low headline inflation the zero bound on nominal yields needs to give way to engineer negative real yields, encourage portfolio rebalancing and discourage savings. There are other rationales, though; the Swiss and Swedish central banks adopted negative rates to dissuade currency inflows which could destabilise their inflation targets. It is vital to recognise what works domestically need not work externally. Each central bank in turn argues that their currency is too high in relation to domestic conditions, and therefore action needs to be taken to make their exchange rate more competitive.
This argument might work in an environment of strong global GDP and trade growth but those days are long past. We are all familiar with the litany of headwinds which have brought global nominal GDP growth to its lowest since 2009. A zero sum game is threatening with no winners from ever more desperate efforts to bring currencies down. Negative rates are an especially large threat to commercial banks because they compress net interest margins and thus remove a key driver of profits. That may matter less in Sweden where banks can benefit from a range of other income sources. Rightly or wrongly, investors have assumed that Japan’s decision is more dangerous. Sure, the BoJ was aware of the risk and crafted a complicated three-tier mechanism, but negative rates were associated with a parallel shift down, rather than a steepening, in the yield curve. Over 70% of the JGB market now has negative yields — about 15% of Japanese bank assets are in bonds and bills. How can this help profits growth?
China has two very good reasons to slow the gusher of cheap money that continues to flood its economy. The first, obviously, is to prevent the kind of financial implosion that’s struck down similarly debt-burdened countries. The second is just as important: to clear out the deadwood in the world’s second-largest economy. For Chinese leaders, the need to prop up faltering GDP growth outweighs fears about a rapid buildup in debt. In January alone, banks made a record $385 billion worth of new loans, more than 70% higher than the year before. Debt now tops 230% of GDP and could reach as high as 300% of GDP if current trends continue. Billionaire investor Bill Gross has joined the chorus of voices calling this trajectory “unsustainable.” Even the Bank for International Settlements, a body not known for hyperbole, has warned that Chinese debt is reaching levels that typically trigger financial crises.
The recent surge in credit is merely an extension of policies put into place after the global financial crisis. To fend off a downturn, China launched a massive 2009 fiscal stimulus package focused on infrastructure and investment spending. Simultaneously, policymakers ordered banks to open the credit spigot. Since January 2009, total loans in China have grown 202%, for an annualized growth rate of 34%. Local governments and businesses alike have been only too happy to partake in the largesse. The problem is that most of this money has gone into the least efficient, most saturated parts of the economy. Nomura estimates that 40% of bank loans to companies go to state-owned enterprises, although they account for barely 10% of China’s output. The money is being used to prop up companies that probably shouldn’t survive: One Chinese securities firm suggests 45% of new debt is being used to pay interest on old debt, like using a new credit card to pay off an old one.
Cheap money is also continuing to expand capacity in sectors that already have too much. There are currently about four-and-a-half years’ worth of residential real estate sales under construction. Coal plants, which are currently running at only 67% of capacity, are investing in an additional $9.4 billion worth of capacity in 2015, with a similar number expected in 2016. The government has pledged to slash capacity in the bloated steel sector by as much as 13% by 2020. But given that the industry is already losing about $25 for every ton of steel produced, those small cuts, even excluding capacity additions, are hardly going to solve the problem. The government isn’t blind to the dangers. Its 2016 economic plan lists “deleveraging” and capacity reduction as two major priorities for the year.
The central bank has imposed limits on certain banks that had been a bit too liberal in their recent lending. But the fact remains that the state-owned giants drawing the bulk of new lending are also the most politically well-connected. Rather than shutting them down and throwing potentially millions of Chinese out of work, the government hopes to keep them afloat while they’re merged and overhauled. There’s little reason to think this plan can succeed. No country with a similarly rapid rise in debt levels has escaped either a financial crisis, or like Japan, a prolonged slowdown. Continuing to lend at this pace will only increase the ranks of zombie companies, alive because of government life support. Slowing lending will inevitably mean lower GDP growth, more corporate bankruptcies and higher unemployment. But it will also reduce the buildup of risks that are otherwise certain to come due.
China still owns the world’s largest currency reserves, but it has been burning through them at such a pace that some think Beijing might soon have to allow a sharp fall in the yuan or back-pedal on liberalization and tighten its capital controls. Foreign exchange reserves in China declined $99.5 billion in January to $3.23 trillion, following a record fall the previous month, and have shrunk by $762 billion since mid-2014, more than the gross domestic product of Switzerland. That still leaves a mighty arsenal, and the People’s Bank of China says it is more than adequate, though it has not said what the minimum might be and did not return a request for comment. PBOC governor Zhou Xiaochuan told Caixin magazine a week ago that much of the outflow had been Chinese companies repaying dollar debt as the greenback rose, which would bottom out, or outbound investment, which was to be welcomed.
Most economists agree China has a way to go before running out of road, but some believe it will have to hit the brakes in months, not years. The pace of decline has accelerated as the PBOC fought to keep the yuan steady in the face of speculative selling offshore and capital flight at home, a task made harder by China’s slowest economic growth in 25 years and the bank’s own decision to guide the currency down in August and again in early January. Though it has huge reserves, an economy the size of China’s needs them to cover imports and foreign debts, and the less liquid assets in reserves can’t readily serve those purposes. Though the composition of China’s reserves is a state secret, officials also say the falling dollar value of other currencies it holds accounts for some of the fall.
Economists and foreign exchange professionals around the world are nevertheless asking how low can they go before Beijing is forced to choose between fresh capital controls or giving up selling dollars to defend the yuan. French bank Societe Generale says IMF guidelines put $2.8 trillion as the minimum prudent level for China, which is not far away if reserves keep falling at the current pace. “If that occurs in the next few months,” says SocGen, “expect to see a tidal wave of speculative selling, forcing the PBOC to throw in the towel and let the market decide the level of the renminbi exchange rate.” A G20 deputy central banker was considerably more sanguine. “Whatever number I would come up with, it would be a lot less than $2.8 trillion,” he said, adding that reserves could fall another trillion by year-end in conjunction with stability in the exchange rate.
While markets are flirting with the idea that a big devaluation of the yuan could take China’s economic slowdown to a new and more dangerous place, economists and some money managers say it’s not at all likely. Over the past eight months, China’s central bank has spent billions of dollars to fend off speculators who think the yuan will fall as China looks to pump up exports. The currency fell to a five-year low of 6.51 against the dollar on Jan. 6 as weak economic data spooked investors. That’s one reason uber-bear fund manager Kyle Bass, founder of Hayman Capital Management, could shake markets with a prediction that China’s currency could lose 40% of its value in the next 18 months, thanks to the heavy debt load of state-backed Chinese enterprises.
Bass’ idea is that China’s banks are facing huge yet-undisclosed credit losses, largely on loans to manufacturers that, like the banks, are controlled by the government, and that the currency will fall as the government prints yuan to recapitalize the banks. Bass’ opinion remains, for now at least, a minority view. Other fund managers and economists argue that devaluation would do little to promote sales of Chinese exports that are already competitive, especially in the U.S., and that a sharp devaluation would backfire if countries like Australia, Malaysia and Indonesia were prodded to devalue their currencies in a bid to make sure they remain competitive with China.
Most of all, they said, a market-jolting move lower for the yuan would be at odds with a record of incrementalism that Beijing’s government has nurtured for years, and it would rock investors who have already pushed the Shanghai Composite Index down 43% to 2,927 since its peak last June. “They want a stable but gradually declining exchange rate if they can engineer it,” said Barry Eichengreen, an economist at the University of California-Berkeley and former senior policy advisor for the International Monetary Fund. “Stability is good for their image in the markets, and a gradual decline is good for their effort to maintain a growth rate of 6%.”
The sluggish global economy has entered “unprecedented territory” as countries grapple with divergent difficulties, leaving little room for a coordinated policy response from the Group of 20 finance chiefs meeting this week, World Bank President Jim Yong Kim said in an interview. “There is a lot of uncertainty; there is a lot of instability and fluctuations in global markets,” he said. “But I don’t think we’re at a point where you are going to see some sort of concerted, focused action in one sector or another.” Global growth continues to lag even as advanced economies embrace “unorthodox” policies, Kim said. “We are now seeing negative interest rates in Japan, negative interest rates in Europe and even in the US, although they are not negative, the notion that that might be possible has been put on the table, so this is completely unprecedented territory.”
The Washington-based development bank lowered its global forecast for 2016 growth to 2.9%, from a 3.3% projection in June, according to a report it released last month. The world economy advanced 2.4% last year, lower than the 2.8% growth forecast. China’s hosting of the G-20 forum this year in Shanghai culminates in a leaders’ summit in September, and officials are pushing a detailed and diverse platform that covers everything from bolstering investment in infrastructure to climate-friendly financing. The weakening outlook for global growth and how policy makers should respond will dominate the agenda when the G-20 central bank governors and finance ministers gather. China faces calls to make its currency and macroeconomic policies clearer at the meeting.
The economic woes afflicting individual countries are so varied that it’s unlikely a consensus on a policy response will be reached, Kim said. The G-20 provides “an environment in which we can put difficult issues on the table and talk them through,” he said. “But it’s difficult to imagine that everyone would take a particular action around fiscal, monetary or other kinds of policies because you have oil producers and oil importers, you have commodity exporters and commodity importers — there’s such a difference in economic models.”
Call it the new normal for European bank earnings. Standard Chartered shares plunged by the most in more than three years on Tuesday after the bank posted a “surprise” 2015 pretax loss of $1.5 billion, somewhat different from the $1.37 billion average profit estimate from 20 analysts. On Monday, HSBC delivered a “surprise” fourth-quarter pretax loss of $858 million, rather than the expected profit of $1.95 billion. On Jan. 28, Deutsche Bank “surprised” bond investors with a fourth-quarter net loss of $2.3 billion, less than two weeks after tapping them for $1.75 billion of funds. As the saying goes, fool me once, shame on you; fool me twice, shame on me. But fool me three times and maybe I should just resign myself to being a fool, at least where European banks are concerned.
The unpalatable truth is that the banking model is broken. The days of generating gobs of cash from “socially useless” financial engineering, as Adair Turner put it in 2009 when he chaired the U.K. Financial Services Authority, are over. Because banks have to hold more capital for a rainy day, they have less money to play with in financial markets. And they’re still shrinking their trading desks, further curbing their ability to make money from markets. Important aspects of Europe’s regulatory backdrop remain foggy at best; the European Union’s Markets in Financial Instruments Directive, new rules covering a multitude of markets from derivatives to bonds, has been delayed by a year to 2018. But it’s clear that the EU is seeking to keep financial institutions from so-called casino banking as much as possible.
Provisions for European bank loans to oil and gas companies are likely to climb – HSBC took a $400 million hit on those loans this week – further crimping profit. And there seems to be no end to the fines being paid for rigging markets, with settlements for faking prices for gold, silver, platinum, palladium and derivative-market benchmarks still looming. As another saying goes, a billion here and a billion there and pretty soon you’re talking about real money. So it’s little wonder that Europe’s banks have lost about 30% of their value in the past year [..] Central bank interest rates at near or below zero deliver cheap money. But longer-term rates also at record lows and in many cases below zero (five-year German government bonds yield -0.33%) mean banks can’t borrow cheaply and profit from lending to their customers at inflated rates.
Cash-strapped energy firms are coming under increasing pressure from U.S. bank lenders and, on average, could see a 15% to 20% cut in their credit lines, the head of JP Morgan’s commercial bank told investors on Tuesday. Until now, banks could be more lenient with their energy clients despite a prolonged slump in the price of oil, but Doug Petno, the head of JP Morgan’s commercial bank, said that is changing. Moves, disclosed in securities filings, by oil and gas companies such as Linn Energy and SandRidge Energy to max out revolving credit lines – designed to cover short-term funding gaps – have prompted banks to take action. Petno said JP Morgan was not waiting for April, when banks traditionally reassess the value of oil reserves underpinning energy loans – a process known as redetermination – to reassess its exposure.
“We are not waiting for the spring redetermination to discuss this with our clients,” he said during a presentation at JP Morgan’s annual investor day in New York. Petno said JP Morgan had been working closely with its energy customers through the current price rout. The biggest U.S. bank by assets plans to increase provisions for expected losses on bad energy loans by more than 60% in the first quarter. Petno said he expected credit lines, on average, would shrink by 15% to 20% across the industry, but there would be wide variations depending on the health of the borrower. “Some borrowing bases may by go up. Some may go down by 50%,” he said. A lurch in the price of oil below $30 a barrel last month has forced companies to offload assets and cut staff to survive.
Dozens of companies have already hit the wall and a third of oil producers and service firms, or 175 companies, are at high risk of slipping into bankruptcy this year, according to a study by Deloitte. “Most of these clients are working with their banks way in advance of redeterminations, so it is compelling M&A, it is compelling asset sales, it is compelling discussions with private equity. But there is a lot of leverage,” said Petno. “The most distressed clients know when they are going to be pinched… and are taking the steps to deal with it,” he added. “There will be a meaningful number of these players who have no options. I think we have only begun to see the range of bankruptcies in oil and gas.”
Boris Johnson’s backing of Brexit has heightened anxiety in the City of London. But Europe’s dominant financial center faces bigger threats to its future than whether or not the Brits listen to their capital’s mayor and quit the EU. A vote to leave in June’s referendum certainly wouldn’t help London’s financiers. Take this from Deutsche Bank analysts led by Barbara Boettcher:”An EU exit would mean uncertainty for the ability to use the U.K. as a hub to provide banking services into Europe. This has implications not just for the EU operations of U.K. financial institutions (which have actually reduced significantly post-crisis), but also for the U.K. and European operations of banks globally. “Some banks might move their headquarters to continental Europe or shift jobs, Deutsche Bank said, something senior executives have warned about in private over the past year.
HSBC chief Stuart Gulliver broke cover on Monday and said his bank could shift about 1,000 U.K. jobs to Paris in the event of an exit.But despite the veiled (and not so veiled) threats, the City of London is already under pressure on jobs and to defend its pre-eminence in Europe – even before a decision on the EU. For starters, many roles that were traditionally strong in London have been in the firing line since the financial crisis. In particular, big banks are shrinking fixed income and commodities trading desks in response to regulations that make these businesses more capital intensive and less profitable. At the top global investment banks, fixed income revenues and staffing levels fell about a third between 2010 and 2015, according to Coalition research. More broadly, weak revenue growth across banking puts more emphasis on costs as the best way to lift profit.
Investment-banking revenue has dipped 15% since 2010 but costs have remained stubbornly high despite layoffs. That suggests more cuts will come.Meanwhile, the soaring cost of employing staff in London makes it harder to keep large swathes of workers there when other locations will do. London has by far the most expensive office space in Europe – annual leasing costs run to $122 per square foot on average, compared to just $56.75 in Paris or $53.25 in Frankfurt. Surging accommodation costs are pushing up the cost of living too. The median house price in London climbed about 13% in December from a year earlier to $615,931. Already, many global investment banks have shifted jobs to smaller U.K. cities such as Bournemouth, Birmingham and Manchester and to offshore sites, and more plans are afoot.
Jonathan Tepper, a UK based economist and founder of research house Variant Perception, is convinced Australia is in the midst of “one of the biggest housing bubbles in history”. The Australian Financial Review reports about how he and local hedge fund manager John Hempton scoped out the apparent epicenter of this bubble, Sydney’s western suburbs, and walked away thinking it was even worse than they’d originally thought. It’s a fascinating story. In a subsequent report to clients, obtained by Fairfax Media, Tepper uses the following charts to support his thesis.
‘Australia is simply in a league of its own when it comes to mortgage lending.’
And a rising share of these mortgages are ‘interest only’ loans
“The Australian housing bubble could not have become as ridiculous as it is without the help of easy financing,” he writes. “Over the past few years, over 40% of all new mortgages originated have been interest-only mortgages. “This is truly Ponzi financing, where home buyers only make money if their houses keep rising in value,” he writes, later describing interest only loans as a “disaster waiting to happen.”
The negative gearing effect…
It is one of the most contentious issues in the national political discourse at the moment. Tepper likens negative gearing – the ability to claim losses on leveraged investment properties as a tax deduction – to startups during the dot com bubble burning through their cash. “Only in a bubble could losing money on housing be viewed as positive,” he writes.
Housing prices are totally out of whack with…everything
Portugal’s Socialist-led lawmakers have approved a 2016 budget that pledges to reverse unpopular austerity measures but is seen as high-risk by critics and investors, with Lisbon under EU pressure to stay on a disciplined path. “This budget proves it is possible to live a better life in Portugal,” socialist Prime Minister Antonio Costa said yesterday. The vote came a few weeks after the European Commission approved Portugal’s draft, but warned that more efforts would be needed by the government to avoid a breach of EU rules on spending. In response, Portugal cut its budget deficit target for 2016 to 2.2% of GDP from a previously announced target of 2.6%. Last year, Portugal’s budget deficit came in at 4.3%, well above the EU’s 3.0% limit.
The conservative opposition lashed out at the new budget yesterday, branding it “unrealistic and populist”. “It is a poisoned gift for the Portuguese,” said former prime minister Pedro Passos Coelho. Portugal received a massive international debt bailout in 2011 that saved it from defaulting, but in return the country had to introduce a string of austerity measures. In four years, over 78,000 public sector jobs were cut – more than 10% of the total – alongside other steps the creditors said were needed to return the public finances to balance and put the economy back on track.
Portugal’s public debt is forecast to hit 130% of GDP. True to the socialists’ campaign promises that brought them to power in November, Costa’s budget restores civil servants’ salaries, eases a surtax tax on employees’ incomes, and breathes new life into the welfare system. However, in a bid to appease Brussels’ demands, the government also announced a hike in taxes on fuel, vehicles and tobacco. Analysts were sceptical however that the plan would actually work. “The budget seeks an impossible balance. It is doomed. It will neither put an end to austerity, nor will it meet the deficit objectives,” said Joao Cesar das Neves, an economics professor.
The Czech Republic may choose to follow Britain out of the EU, the country’s prime minister said, amid growing fears in Brussels of a “contagion”. Bohuslav Sobotka said that a “Czexit” may take place. The Czech Republic only joined the EU in 2004 and has been the beneficiary of billions in development funds, but has some of the most hostile public opinion. A Brussels decision to force the country to take in a quota of migrants caused fury. Three-fifths of Czechs said they were unhappy with EU membership and 62% said they would vote against it in a referendum, according to an October 2015 poll by the STEM agency. “If Britain leaves the EU, we can expect debates about leaving the EU in a few years too,” said Mr Sobotka, who led eastern European states in opposition to David Cameron’s plans to curb benefits.
“The impact may be really huge,” he said, adding that a “Czexit” could trigger an economic and security downturn and a return to the Russian sphere of influence. Such a move “would be an absolute negation of the developments after 1989”, he said, referring to the revolution of Czechoslovakia that threw off Soviet rule. There are fears in Brussels that the multiple crises of Brexit, migration and the euro mean that 2016 will prove to be the high-water mark of the European project, in which it becomes plain that the vision of a fully federalised EU state will never be reached. And leaders fear that Mr Cameron will trigger a string of copy-cat referendums from ambitious leaders who want to extract special concessions from Brussels, pulling the bloc to pieces.
Meanwhile, Aleksander Vucic, the Serbian Prime Minister said that EU membership is no longer the “big dream it was in the past” for Balkan states.. “The EU that all of us are aspiring to, it has lost its magic power,” Mr Vucic told a conference at the European Bank for Reconstruction and Development (EBRD) in London. “Yes we all want to join, but it is no longer the big dream it was in the past.” “When you see that in Britain at least 50% of the people say they want to leave that has an effect on the public,” he said. Seven states are in the queue to join the EU under a new wave of enlargement, that will not take place before 2019: Serbia, Montenegro, Kosovo, Bosnia-Herzegovina, Albania, Turkey and Macedonia. Membership could take years for some, as they are gripped by corruption, cronyism and sky-high unemployment, according to the EU’s own assessment reports.
The recent Nato agreement to create a mission to tackle the migration crisis in the Aegean has been presented as a major new development. But its impact on migrant flows will in reality be limited. Its shape and scope for action is a reflection of Turkey’s priorities in the region rather than European needs. The creation of the Nato mission showcases the EU’s strategic irrelevance and highlights Turkey’s desire to entangle Europeans in its adventurist endeavours in Syria. The Nato mission will conduct monitoring, surveillance and reconnaissance in the Aegean in order to deter and contain the activities of human traffickers. Nato forces will not push back boats, except when rescuing migrants from drowning who will be returned to Turkey. The task of deterring smugglers will be performed by the Greek and Turkish coastguards.
But assistance from Nato will not make much of a difference if the key actor in the crisis, Turkey, does not act decisively. The stemming of migration flows still hinges on Turkish will to patrol its coasts. In previous months, Turkey had been under pressure to patrol its coasts more effectively. But it refrained from acting because the cost of accepting back or keeping in Turkish territory large numbers of migrants was considered much higher than whatever rewards the EU had promised. Caving in to external pressure would also be infuriating for domestic public opinion. A Nato mission allows Turkey to give in to some EU demands while circumventing these problems. As the mission covers Turkish as well as Greek territory, Turkey can deflect part of the European pressure for control of migrant flows back on its neighbour.
Turkey has also ensured that its actions will be scrutinised by an organisation in which it has a strong say. The migration issue forms only one aspect of a complex geopolitical game that Turkey is involved in now in Syria. Turkey’s relationship with Russia has deteriorated rapidly. Moscow’s clients in Syria have made significant inroads against Turkey’s allies, threatening it with both a collapse of its support and the arrival of new waves of refugees to its borders. Turkey’s position is further complicated by the assertiveness of Syria’s Kurds, whom Turkey’s Western allies consider a valuable ally against Islamic State. Turkey is now pushing for stronger support from Nato for its activities in Syria. A first step was taken in the same meeting that authorised the migrant mission in the Aegean. There,
Nato also decided to step up its participation in the fight against Islamic State, initially by deploying AWACS planes in the region. Involving Nato in the management of the migration crisis is part of a broader strategy by Turkey to align Europeans with its goals in the region. Any signs of Turkey becoming more cooperative on migration in the following weeks must be seen through the prism of its interests in Syria and its expectation that Europe will support it there in return.
More than 110,000 migrants and refugees have arrived in Greece and Italy already this year, a sharp increase on 2015, the International Organization for Migration (IOM) said on Tuesday. They include around at least 102,500 landing on Greek islands including Samos, Kos and Lesbos, and 7,500 in Italy, the IOM said. “Over 410 migrants and refugees have also lost their lives during the same period, with the eastern Mediterranean route between Turkey and Greece continuing to be the deadliest, accounting for 321 deaths,” the IOM said. Last year, the figure of 100,000 refugees and migrants was not reached until the end of June, according to IOM figures. Spokesman Itayi Viriri noted that the figure of 100,000 had already been exceeded this year despite rough sea conditions in recent days on the route from Libya to Italy. Migrants arriving in Italy are often in “very bad condition, having been subjected to violence by smugglers in Libya”, the IOM said, adding that women were subjected to human trafficking.
More than 700 migrants were rescued from six leaky boats in the sea between Tunisia and Sicily on Tuesday and four were found dead, the Italian navy said. More than 400 migrants have died in the Mediterranean this year, as people continue to try to cross into Europe despite bad winter weather in the second year of Europe’s biggest migration crisis since World War II. More than 110,000 people, many fleeing poverty and war in Africa and the Middle East, have arrived in Greece and Italy this year, a sharp increase on 2015, according to the International Organization for Migration (IOM). The navy said one of its ships went to help three boats, recovering 403 survivors and the four bodies. Another ship rescued 219 people from two vessels and a third coordinated the rescue of 105 migrants from their sinking boat.
The navy did not say what nationality the migrants were nor did it give any other information about their identities. Bad weather cut the number of people arriving last month in Greece, the main gateway to Europe for migrants, but the number was still nearly 40 times higher than in the previous January, European Union border agency Frontex says. Most of those were from Syria, Iraq and Afghanistan, while most of those who entered Europe via Italy were Nigerian, according to Frontex. Italy called on Monday for shared funding, including through issuing EU bonds, for a common policy to manage external borders and cope with the migration crisis.
More than 12,000 refugees and migrants found themselves trapped in Greece on Tuesday as Athens took diplomatic action to counter the border restrictions to its north that are causing the buildup. The Greek government issued a demarche to Austria over its decision to limit the number of asylum seekers it will accept, as well as the number of migrants that can pass through its territory in transit. Vienna is also hosting a conference on Wednesday to discuss the refugee crisis. A number of Western Balkan countries will attend but Greece had not been invited, prompting Athens to accuse the Central European country of making a “unilateral” move. “The exclusion of our country at this meeting is seen as a non-friendly act since it gives the impression that some, in our absence, are expediting decisions which directly concern us,” said Foreign Minister Nikos Kotzias.
Prime Minister Alexis Tsipras also called his Dutch counterpart Mark Rutte to discuss Athens’s grievances as the Netherlands currently holds the six-month rotating EU presidency. Athens feels that there was an agreement at last week’s leaders’ summit in Brussels that none of the Union’s members should take any unilateral actions concerning refugees until the planned meeting with Turkey takes place on March 6. The limitations put in place by Austria have had a knock-on effect along the rest of the so-called Balkan Route for migrants, particularly on Greece’s border with the Former Yugoslav Republic of Macedonia (FYROM), where only a few dozen people were allowed to cross on Tuesday.
FYROM border guards refused to allow Afghans to cross, leading to the Greek government hiring 21 coaches to transport the migrants back to Athens, where some were taken to the former Olympic Games site at Elliniko and others to the transit center at Schisto. Last night there was a total of around 2,500 people at the two sites. The rise in the number of arrivals also means there is a greater number of refugees and migrants on the Greek islands. Almost 1,400 people were rescued by the coast guard on Lesvos, some 1,200 people were at the hot spot on Chios and more than 1,300 had arrived on passengers ferries at Piraeus.
The European Commission and the Dutch EU presidency warned on Tuesday (23 February) of a humanitarian crisis in the Western Balkans and “especially in Greece,” adding that preparation for “contingency plans” was under way. The warning comes after border controls along the Western Balkan migration route were tightened in recent days in Austria and Macedonia. It is the realisation of a worst-case scenario becoming reality for EU authorities, in which Greece would be in effect cut off from the Schengen area and left to cope with hundreds of thousands of stranded refugees, while still being itself in the middle of an economic and social crisis. On Monday, Macedonia decided to deny entry to Afghan migrants and restricted access to Syrians and Iraqis.
The move followed last week’s decision by Austria to cap to 80 the number of daily asylum applications and to 3,200 the number of entries, also under the condition that the people go to another country to apply for asylum. The situation illustrates the growing rift between the actions of some EU and Balkan states and the common policies the European Commission and Germany have tried to put in place since the start of the migrant crisis last summer. The result is growing and potentially dramatic pressure on Greece, where 2,000 to 4,000 migrants arrive on the islands each day. On Tuesday alone, 1,130 refugees arrived at Athens Piraeus port, where they will have to be taken care of. “We are concerned about the developments along the Balkan route and the humanitarian crisis that might unfold in certain countries especially in Greece,” EU migration commissioner Dimitri Avramopoulos and Dutch minister for migration Klaas Dijkhoff said in a joint statement.
They called on “all countries and actors along the route to prepare the necessary contingency planning to be able to address humanitarian needs, including reception capacities”. “In parallel,” they said, “the commission is coordinating a contingency planning effort, to offer support in case of a humanitarian crisis both outside and within the EU, as well as to further coordinate border management.” Commission experts are already in Greece to assess the needs and what could be done in cooperation with the UN. Faced with the new developments, the commission seems to be more helpless than ever. “There is a clear risk of a fragmentation of the [Balkan] route,” an EU official said, with countries deviating from previously agreed plans. “We are concerned by the fact that member states are acting outside of the agreed framework,” commission spokeswoman Natasha Bertaud told journalists on Tuesday.
[..] This is the scenario that is now unfolding with the Austrian-Balkan initiative, one that the commission, together with Germany and some other EU countries, had wished to avoid. “We cannot let Greece become an open air detention camp,” a senior EU diplomat said, adding that “preserving the integrity of Schengen” was crucial for the EU. Financial and geopolitical concerns also come under consideration as Greece is engaged in an €85 billion bailout programme. “We do not want 500,000 migrants to destabilise the Greek government and Greece itself,” a source from another influential country said. “We would not see our money back and the whole EU would dismantle.”
A sharp, one-off devaluation of the yuan is among options China’s central bank might consider to stem capital outflows and shift market psychology to appreciation from depreciation, according to Barclays. The risk of such a move, which Barclays says would need to be in the region of 25% to alter perceptions, is rising as China’s foreign-exchange reserves plunge, analysts Ajay Rajadhyaksha and Jian Chang wrote in a report. Based on the current pace of decline in those holdings, there’s a six- to 12-month window before they drop to uncomfortable levels and measures such as capital controls or monetary tightening may also have to be looked at to curb the exodus of money, they said. All those options carry elements of danger.
Another rapid yuan depreciation could spook investors just as concern about the state of the global economy is growing and other central banks would likely follow, countering the beneficial impact on Chinese exports, the analysts said. Strict capital controls won’t work in an export-driven economy, while a move to policy tightening could slow growth and cause credit defaults, they said. “A devaluation of this magnitude seems impossible to ‘sell’ to the rest of the world,” according to the analysts at Barclays, the world’s third-biggest currency trader. “The People’s Bank of China will probably have to take more aggressive measures to stem outflows,” said head of macro research Rajadhyaksha in New York and Hong Kong-based chief China economist Chang.
[..] Chinese policy makers are trying to counter record outflows and prop up the yuan, while opening up the capital account and keeping borrowing costs low to revive growth in the world’s second-biggest economy. The balancing act challenges Nobel-winning economist Robert Mundell’s “impossible trinity” principle, which stipulates a country can’t maintain independent monetary policy, a fixed exchange rate and free capital borders all at the same time.
Standard Chartered dropped the most in more than three years after reporting a surprise full-year loss, as revenue missed estimates and loan impairments almost doubled to the highest in the bank’s history. The stock dropped as much as 12% as the London-based bank said its pretax loss was $1.5 billion in 2015, down from profit of $4.2 billion a year earlier. Excluding some one-time items, pretax profit was $834 million. CEO Bill Winters is attempting to unwind the damage caused by predecessor Peter Sands’ revenue-led expansion across emerging markets, which left the bank riddled with bad loans when the commodity market crashed and growth stalled from China to India.
Since June, Winters has raised $5.1 billion from investors, scrapped the dividend and announced plans to cut 15,000 jobs to help save $2.9 billion by 2018, while seeking to restructure or exit $100 billion of risky assets. “While our 2015 financial results were poor, they are set against a backdrop of continuing geo-political and economic headwinds and volatility across many of our markets,” Winters said in the statement. “We expect the financial performance of the group to remain subdued during 2016.”
[..] Implicit in the whole misbegotten wealth effects doctrine is the spurious presumption that the Wall Street gambling apparatus can be rented for a spell by the central bank. So doing, our monetary central planners believe themselves to be unleashing a virtuous circle of increased spending, income and output, and then more rounds of the same. At length, according to these pettifoggers, production, income and profits catch-up with the levitated prices of financial assets. Accordingly, there are no bubbles; and, instead, societal wealth continues to rise happily ever after. Not exactly. Central bank stimulated financial asset bubbles crash. Every time.
The Fed and other practitioners of wealth effects policy do not rent the gambling apparatus of the financial markets. They become hostage to it, and eventually become loathe to curtail it for fear of an open-ended hissy fit in the casino. Bernanke found that out in the spring of 2013, and Yellen three times now – in October 2014, August 2015 and January-February 2016. But unlike the last two bubble cycles, where our monetary central planners did manage to ratchet the money market rate back up to the 6% and 5% range, by 2000 and 2007, respectively, this time an even more obtuse posse of Keynesian true believers rode the zero bound right to the end of capitalism’s natural recovery cycle.
Accordingly, the casinos are populated with financial time bombs like never before. Worse still, the central bankers are now so utterly lost and confused that they are all thronging toward the one thing that will ignite these time bombs in a fiery denouement. That is, negative interest rates. This travesty reflects sheer irrational desperation among central bankers and their fellow travelers, and will soon illicit a fire storm of political revolt, currency hoarding and revulsion among even the gamblers inside the casino. Besides that, they are crushing bank net interest margins, thereby imperiling the solvency of the very banking system that the central banks claim to have rescued and fixed.
We will treat with some of the time bombs set to explode in the sections below, but first it needs to be emphasized that the third bubble collapse of this century is imminent. That’s because both the global and domestic economy is cooling rapidly, meaning that recession is just around the corner. Based on the common sense proposition that the nation’s 16 million employers send payroll tax withholding monies to the IRS based on actual labor hours utilized – and without any regard for phantom jobs embedded in such BLS fantasies as birth/death adjustments and seasonal adjustments – my colleague Lee Adler reports that inflation-adjusted collections have dropped by 7-8% from prior year in the most recent four-week rolling average.
As far as the OECD is concerned, monetary policy is being forced to take too much of the strain. Its chief economist Catherine Mann made the point that lasting recovery required three things: stimulative monetary policy; activist fiscal policy; and structural reform. The OECD wants the second of these ingredients to be added to the recipe in the form of increased spending on public infrastructure, something it says would more than pay for itself at a time when governments can borrow so cheaply.
The Paris-based thinktank says collective action by the world’s leading economies is needed because a go-it-alone approach will result in the effects of stronger demand being blunted by higher imports. It will make the case for higher investment spending at this week’s meeting of the G20 in Shanghai, almost certainly to little effect. Central banks will argue that they still have plenty of ammunition left, even though as the years tick by it becomes more and more apparent that relying solely on monetary policy is the equivalent of pushing on a piece of string. Central banks now have one last chance to live up to their exalted reputations. A prolonged period of low but positive interest rates carries the risk that it will create the conditions for asset price bubbles. That risk is amplified by quantitative easing.
All the dangers associated with low but positive borrowing costs apply to negative interest rates – but with some added complications. One is that it affects the profitability of banks, by squeezing lending spreads, at a time when many of them have yet to make a full recovery from the last crisis. Another is that central banks will overcook things and that the deeper into negative territory interest rates go now the higher they will have to go later. Perhaps though the biggest danger is to the reputation of central banks. Throughout the crisis, the assumption has been that the Federal Reserve, the Bank of England, the ECB, the Bank of Japan and all the other central banks are in control of a tricky situation. Central bankers give the impression that they can model the impact of interest rates and QE on growth and inflation; that is part of their mystique.
Now, it may be that it is simply taking time for central banks to get to grips with a protracted and complex crisis. Everything may work out well in the end, with inflation returning to target and interest rates back to more normal levels. The absence of supportive fiscal policy could be making an already tough job that much tougher. But the longer this goes on the more the suspicion grows that central bankers aren’t quite so clever as they think they are, and that what is dressed up as a carefully calibrated policy response is really just blundering around in the dark. Central banks have been conducting a gigantic experiment over the past seven years and Tyrie will want to know from Carney whether he actually knows what he is doing. It is a perfectly fair question.
China, Japan and other overseas central banks are leaving more of their dollars with the U.S. Federal Reserve as they have liquidated their U.S. Treasuries holdings to raise cash in an effort to stabilize their currencies, government data show. Foreign central banks’ reduced ownership of U.S. government debt, especially older issues, have bloated the bond inventories of U.S. primary dealers and kept U.S. money market rates elevated in recent months, analysts said. Primary dealers, or the top 22 Wall Street firms that do business directly with the Fed, held $113.5 billion worth of Treasuries in the week ended Feb. 10, the most since October 2013. As Wall Street holds more Treasuries, foreign central banks have piled more money into the Fed’s reverse purchase program where they earn interest income.
“They have been selling their Treasuries holdings and using more the Fed’s reverse repo program,” Alex Roever, head of U.S. interest rate strategy at J.P. Morgan Securities in New York, said on Monday. On Monday, the New York Federal Reserve’s executive vice president Simon Potter said the Fed’s repo program for foreign central banks has increased because “the constraints imposed on customers’ ability to vary the size of their investments have been removed, the supply of balance sheet offered by the private sector to foreign central banks appears to have declined, and some central banks desire to maintain robust dollar liquidity buffers.” On Feb. 17, overseas central banks held $246.65 billion in reverse repos, up from $129.78 billion a year earlier, Fed data released last week showed.
During Deutsche Bank’s share price meltdown a couple of weeks ago, Wolfgang Schäuble, the German finance minister, said he had “no concerns” about the health of Germany’s largest bank. But what could he actually do if he really were worried? Last year Mark Carney, governor of the Bank of England, proclaimed that the era of too-big-to-fail banks was over, meaning that politicians (via their taxpayers) will no longer be able to rescue banks. If Mr Carney is right about that, it would indeed be some achievement. It was in 1984 that Stewart McKinney, a US congressman, popularised the phrase “too big to fail” when he described the near collapse of Continental Illinois Bank, which at the time was the seventh-largest bank in the US. The issue came back to haunt policymakers in 2008 with the plethora of bank rescues.
But can taxpayers around the world really breathe a sigh of relief that next time it will not be down to them to pay for the bailout of their banks? Nobody knows. Indeed, just last week Neel Kashkari, one of the architects of the $700bn taxpayer bailout of US banks in 2008 and the head of the Minneapolis Federal Reserve, said that he thought “too big to fail” remained alive and well. We all know what the new rule book says; that when one of the world’s largest banks becomes close to going bust, then it is up to all of its debt and equity holders to pay for the rescue. That bit is clear. But financial history is littered with examples of rule books being ignored in the teeth of a crisis.
That is what happened in 2008, when governments trampled over rules that placed limits on deposit guarantees and refused to call on senior bondholders to suffer the losses that they were contractually expected to bear. Faced with contagion risk and fears of systemic failures, governments break rules. To some extent we can ask the markets to judge Mr Carney’s claim that “too big to fail” has really ended against Mr Kashkari’s scepticism. An April 2014 IMF report estimated that the too-big-to-fail subsidy — the lower funding costs enjoyed by the world’s largest banks — totalled up to $630bn per annum. If true, then removing that subsidy would destroy the profits of these big banks.
Yet the fact that share prices for most banks, whilst weak, have not totally collapsed suggests that markets, at least, either do not believe that the subsidy was ever that big, or that the age of “too big to fail” is still not over. There have always been two ways to address this too-big-to-fail challenge. One approach — the one which hitherto has been favoured by most regulators — is to place the cost of bailouts on the private sector and therefore to remove the cost of failure from taxpayers. Yet as Mr Kashkari makes clear, there remains considerable doubt over whether such a course of action will really work in practice. And until a major bank nears collapse, such doubts will inevitably remain.
Insane. That’s how Jonathan Tepper, chief executive officer at research firm Variant Perception, described Australia’s housing sector in a word, painting the picture of a market that’s strikingly similar to that of the U.S. prior to the financial crisis. A local 60 Minutes segment that aired on Sunday titled “Home Groans” chronicled some of the eye-popping events in the nation’s real estate market, with amateurs owning (and under water on) multiple homes with no tenants, interest-only loans increasing in prominence, price-to-income ratios at elevated levels, and home auctions attended by the community and captured for the small screen.
Much of the clip centers on the coal town of Moranbah, which the narrator deems to be a canary in the coal mine for the nation’s housing market as a whole, and the financial and emotional plight of those who got caught up in the boom. According to an owner, the value of one property in the Queensland town has declined by roughly 80%. Perhaps the juiciest tidbit, however, is a claim that John Hempton, a hedge fund manager at Bronte Capital and long-time Australian property bear, and Tepper—who’s called housing busts in the U.S., Spain, and Ireland—put on Twitter:
Tepper later added that this offer came from a “major brand lender.” While most discussions of frothy housing markets focus on the low cost of credit (and central banks’ role in that), the ability to access credit is arguably more important. A borrower may be willing to take on a dangerous amount of leverage to be part of a seemingly can’t-miss opportunity, but in the end, the bank still has the final say on whether to provide the funds. Australia hasn’t had a recession since the early 1990s, but it’s tough to see the nation avoiding one in the event that Tepper’s prophesied 30% to 50% crash in home values comes to pass. Of course, investors have also been warning of an Australian housing bubble for almost as long.
We are searching for an insight. Each time we think we see it… like the shadow of a ghost in an old photo… it gets away from us. It concerns the real nature of our money system… and what’s wrong with it. Here… we bring new readers more fully into the picture… and try to spot the flaw that has doomed our economy. Let’s begin with a question. After the invention of the internal combustion engine, people in Europe… and then the Americas… got richer, almost every year. Earnings rose. Wealth increased. Then in the 1970s, after two centuries, American men ceased making progress. Despite more PhDs than ever… more scientists… more engineers… more capital… more knowledge… more Nobel Prizes… more college graduates… more machines… more factories… more patents… and the invention of the Internet… after adjusting for inflation, the typical American man earned no more in 2015 than he had 40 years before.
Why? What went wrong? No one knows. But we have a hypothesis. Not one person in 1,000 realizes it, but America’s money changed on August 15, 1971. After that, not even foreign governments could exchange their dollars for gold at a fixed rate. The dollar still looked the same. It still acted the same. It still could be used to buy booze and cigarettes. But it was flawed money. And it changed the whole world economy in a fundamental way… a way that is just now coming into focus. The Old Testament tells us that God chased Adam and Eve from the Garden of Eden with this curse: “By the sweat of your brow, you will earn your food until you return to the ground.” From then on, you worked… you earned money… you could buy bread. Or lend it out. Or invest it.
Dollars – or any form of real money – were compensation… for work, for risk taking, for accumulating knowledge and capital. Money is information. It tells us how much reward we’ve earned… how much things cost… how much profit, how much loss, how much something is worth… how much we’ve saved, how much we’ve spent, how much we need, and how much we’ve got. Ultimately, only a market-chosen money can be sound. The market chose gold as the most marketable commodity. There were no meetings or committees deciding on this, it happened spontaneously – governments simply usurped it. Money doesn’t have to be “hard” or “soft” or expensive or cheap. But it has to be honest. Otherwise, the whole system runs into a ditch. But the new money was a phony. It put the cart ahead of the horse.
This was money that no one ever had to break a sweat to get. It was based on credit – the anticipation of work, not work that had already been done. Money no longer represented wealth. It now represented anti-wealth: debt. So, the economy stopped producing real wealth. The Fed could create money that no one ever earned and no one ever saved. It was no longer the real thing, but a counterfeit. In this way, effort and reward were cut off from one another. The working man still had to labor. But it was the banker, gambler, speculator, lender, financier, investor, politician, or inside operator who made the money. And the nature of the economy changed. Instead of rewarding the productive Main Street economy, it rewarded insiders… and the financial sector.
World trade is as bad as it has been at any point since the global financial crisis in 2008. The Baltic Dry Index, a measure of how much it costs to transport raw materials, in November dropped below 500 for the first time, and it has kept falling. The index was as high as 1,222 in August, and it has fallen 84% from a recent peak of 2,330 in late 2013. The index measures how much it costs to ship dry commodities, meaning raw materials like grain and steel, around the world. It is frequently used as a so-called canary in the coal mine for the state of the global economy and how well international trade is performing. If the price is low, it suggests trade is slowing.
Analysts at Deutsche Bank led by Amit Mehrotra have been watching the fall closely. The drop has been so bad that ships are being scrapped faster than they are being built. Here are the main points in a recent note:
• Total dry bulk capacity declined by almost 1M tons (net) last week as the pace of deliveries slowed and scrapping remained elevated.
• Around 16 ships were sold for scrap last week totaling 1.6M tons. This more than offset 9 new deliveries, translating to a net reduction of 7 vessels.
• Last week’s scrapping would represent an annualized pace of 11% of installed capacity, which is almost double the all-time high of 6.3% set in 1986.
• Year-to-date scrapping is up 80% versus same time last year.
It’s bad news, as it means that ship owners expect demand for cargo transport to remain weak long into the future. And they’re generally very good at predicting trends in global trade. This graph from Capital Economics shows just how closely the Baltic Dry index tracks world trade volumes.
OPEC and U.S. shale may need a relationship counselor. After first ignoring it, later worrying about it and ultimately launching a price war against it, OPEC has now concluded it doesn’t know how to coexist with the U.S. shale oil industry. “Shale oil in the United States, I don’t know how we are going to live together,” Abdalla Salem El-Badri, OPEC secretary-general, told a packed room of industry executives from Texas and North Dakota at the annual IHS CERAWeek meeting in Houston. OPEC, which controls about 40% of global oil production, has never had to deal with an oil supply source that can respond as rapidly to price changes as U.S. shale, El-Badri said. That complicates the cartel’s ability to prop up prices by reducing output.
“Any increase in price, shale will come immediately and cover any reduction,” he said. The International Energy Agency earlier on Monday gave OPEC reason to worry about shale oil, saying that total U.S. crude output, most of it from shale basins, will increase by 1.3 million barrels a day from 2015 to 2021 despite low prices. While U.S. production from shale is projected to retreat by 600,000 barrels a day this year and a further 200,000 in 2017, it will grow again from 2018 onward, the IEA said. “Anybody who believes that we have seen the last of rising” U.S. shale oil production “should think again,” the IEA said in its medium-term report.
Standard & Poor’s cut its corporate credit ratings on BP, Total SA and Statoil ASA , citing the Europe-based oil and gas companies’ persistent weak debt coverage measures over 2015-2017. The ratings agency on Monday cut the long- and short-term corporate credit ratings on BP Plc to ‘A minus/A-2’ from ‘A/A-1’ with a stable outlook. S&P lowered the long- and short-term corporate credit ratings on Total S.A. to ‘A plus/A-1’ from ‘AA-/A-1 plus’ and assigned a negative outlook. The ratings agency also cut the long- and short-term corporate credit ratings on Statoil ASA to ‘A plus/A-1’ from ‘AA minus/A-1 plus’ and assigned a stable outlook. Standard and Poor’s had lowered its ratings on some U.S. exploration & production companies after price assumption revisions earlier this month.
The sea stretched toward the horizon last New Year’s Eve as the Theo T, a red-and-white tug at her side, slipped quietly beneath the Corpus Christi Harbor Bridge in Texas. Few Americans knew she was sailing into history. Inside the Panamax oil tanker was a cargo that some on Capitol Hill had dubbed “Liquid American Freedom” – the first U.S. crude bound for overseas markets after Congress lifted the 40-year export ban. It was a landmark moment for the beleaguered energy industry and one heavy with both symbolism and economic implications. The Theo T was ushering in a new era as it left the U.S. Gulf coast bound for France.
The implications – both financial and political – for energy behemoths such as Saudi Arabia and Russia are staggering, according to Mark Mills, a senior fellow at the Manhattan Institute think tank and a former venture capitalist. “It’s a game changer,” he said. For the Saudis and their OPEC cohorts, who collectively control 40% of the globe’s oil supply, the specter of U.S. crude landing at European and Asian refineries further weakens their grip on world petroleum prices at a time they are already suffering from lower prices and stiffened competition. With Russia also seeing its influence over European energy buyers lessened, the two crude superpowers last week tentatively agreed to freeze oil output at near-record levels, the first such coordination in a decade and a half.
The political effects need not wait until U.S. shipments become more plentiful, Mills said. “In geopolitics, psychology matters as much as actual transactions,” he said. Meanwhile, the U.S. is also poised to make its first shipments of liquefied natural gas, or LNG, from shale onto world markets within weeks, about two months later than scheduled. Cheniere Energy Iexpects to have about 9 million metric tons a year of LNG available for its own portfolio from nine liquefaction trains being developed at two complexes in Texas. That’s enough to power Norway and Denmark combined for a year.
[..] Beyond corporations, the Dec. 18 lifting of the export ban by Congress and President Barack Obama created geopolitical winners and losers, too. The U.S., awash in shale oil, has gained while powerful exporters like Russia and Saudi Arabia, for whom oil represents not just profits but also power, find themselves on the downswing. The U.S. remains a net importer, but its demand for foreign oil has fallen by 32% since its peak in 2005. Meanwhile, plummeting oil and gas prices, driven in part by the U.S. shale revolution, have already eroded OPEC and Russia’s abilities to use natural resources as foreign policy cudgels. They are also squeezing petroleum-rich economies from Venezuela to Nigeria that rely heavily on crude receipts to fund everything from military budgets to fuel subsidies.
Oil prices are unlikely to significantly rebound for at least a few years, the International Energy Agency projected on Monday, as a top official with the Organization of the Petroleum Exporting Countries said he wouldn’t rule out taking additional steps to stabilize the market. The new IEA projections and the statements by OPEC’s secretary-general, which came as oil ministers, executives and analysts gathered for the annual IHS CERAWeek conference in Houston made one point abundantly clear: No one is immediately coming to the rescue for struggling oil producers. Oil rallied Monday following the IEA’s projection that shale production is poised to fall this year by about 600,000 barrels a day, and by 200,000 barrels a day in 2017.
But Fatih Birol, the executive director of the IEA, which tracks the global oil trade on behalf of industrialized nations, and OPEC’s Abdalla el-Badri, who represents the cartel of major exporters, both agreed that market signals continue to point to depressed prices. “Everybody is suffering,” said Mr. el-Badri, noting that the rapid fall in crude had caught many member nations by surprise. “This is historical,” said Mr. Birol. “In the last 30 years, we have never seen oil investment decline two-consecutive years.” A preliminary agreement between Saudi Arabia and Russia to freeze output at January levels was a “first step” toward creating market stability, he said. Iran, whose oil exports have only recently been freed from Western sanctions, has yet to agree. “If this is successful, maybe we can take other steps in the future,” Mr. Birol said, declining to specify what those could be. He also asserted OPEC’s continued relevance on the world scale. “We are not dead. We are alive and alive and alive. You will see us for many years.”
Investment in the UK’s embattled oil and gas industry is expected to fall by almost 90pc this year, raising urgent industry calls for the Government to reform its North Sea tax regime to safeguard the industry’s future. Oil firms have been forced to dramatically slash costs in order to survive a 70pc cut in oil prices since mid-2014, but the severe drop in investment threatens thousands of North Sea jobs, said Oil and Gas UK (OGUK). The trade group says that firms have forced down the cost of oil production from $29.30 a barrel in 2014 to just under $21 a barrel in 2015. But despite improving efficiency and cutting operating costs almost half of the UK’s oilfields will struggle to make a profit if oil prices remain at $30-a-barrel levels for the rest of the year.
The financial risk means many have axed or delayed investment decisions, and OGUK said that investment in new projects could fall as low as £1bn this year, compared with a typical average of £8bn a year. OGUK boss Deidre Mitchell said: “This drop in activity is being felt right across the supply chain, which contracted by a quarter in the last year and is expected to fall further in the coming year as current projects near completion. “With demand for goods and services falling, ongoing job losses are the personal cost to individuals and families across the UK.” North Sea job losses could reach a total of 23,000, and Aberdeen is expected to take the brunt of the economic hit. Securing the future of the region has already climbed the political agenda this year with both the Scottish and Westminster governments pledging hundreds of millions of pounds in support.
In for a penny, in for a pound. With falling oil prices eroding Canada’s revenue base, newly elected Prime Minister Justin Trudeau is fully embracing deficits, with his finance minister hinting Monday the country will run a deficit of about C$30 billion ($22 billion) in the fiscal year that starts April 1. It’s one of the biggest fiscal swings in the country’s history that, in just four months since the Oct. 19 election, has cut loose all the fiscal anchors Trudeau pledged to abide by even as he runs deficits. The government’s bet is that appetite for more infrastructure spending and a post-election political honeymoon will trump criticism over borrowing and unmet campaign promises. “It looks like the Liberals want to front load as much bad news as possible in the hope when the election occurs in four years things will be better,” said Nik Nanos, an Ottawa-based pollster.
Trudeau swept to power in part by promising to put an end to an era of fiscal consolidation the Liberals claimed was undermining Canada’s growth, which has been lackluster since the recession in 2009. Still, he has tried to temper worries by laying out three main fiscal promises: annual deficits of no more than C$10 billion, balancing the budget in four years and reducing the debt-to-GDP ratio every year. On Monday, Finance Minister Bill Morneau indicated none of those three promises will be met. A fiscal update – released a month before the government’s first budget is due – showed Canada’s deficit in the year that begins April 1 is on pace to be C$18.4 billion, even before the bulk of the government’s C$11 billion in spending promises and any other stimulus measures are accounted for. The same document shows the nation’s debt-to-GDP ratio will be rising in the coming fiscal year, not falling. Morneau also reiterated that balancing the budget in the near term would be “difficult.”
Thousands of refugees and migrants gathered at Greece’s border with the Former Yugoslav Republic of Macedonia (FYROM) on Monday, heightening concern that they will become trapped over the coming days. Some 4,000 people were estimated to have congregated at the Idomeni border crossing after FYROM refused to allow any Afghans at all or Iraqis and Syrians who did not have passports to cross from Greece. Athens said it had launched diplomatic efforts to convince Skopje to allow the Afghans, who make up around a third of arrivals, through. But the FYROM government said its decision was triggered by actions to its north. Austria, which is not accepting more than 80 refugees a day has called a summit with Albania, Bosnia, Bulgaria, Croatia, Montenegro, FYROM, Serbia, Slovenia and Kosovo tomorrow to attempt to coordinate their reaction to the refugee crisis.
Slovakia’s Prime Minister Robert Fico expressed doubts about whether the EU’s plans to reach a deal with Turkey next month on limiting the flow of migrants and refugees would be effective. “If that does not work, and I am very pessimistic, and all of us in Europe will insist on proper protection of external borders, there will be nothing left but protecting the border on the line of Greece-Macedonia and Greece-Bulgaria,” he said. FYROM’s action on its border was already having a knock-on effect in other parts of Greece yesterday. Thousands of migrants arriving at Piraeus from the Aegean islands, where almost 8,000 people arrived between Friday and Sunday, were held back at the port to avoid further overcrowding at Idomeni. Some were taken to the new transit center at Schisto.
“Our biggest fear is that the 4,000 migrants who are in Athens head up here and the place will become overcrowded,” Antonis Rigas, a coordinator of the medical relief charity Doctors Without Borders, told Reuters. Despite the rise in arrivals over the weekend, bad weather cut the number of refugees and migrants arriving in Greece by 40% last month compared to December, the European Union’s border agency Frontex said. But the number was still nearly 40 times higher than a year before. Frontex said most of the 68,000 people that reached Greece last month were Syrians, Iraqis and Afghans.
Greece has been making frantic appeals to Macedonia to open its frontier after a snap decision to tighten border controls by the Balkan state left thousands of people stranded. By midday on Monday up to 10,000 men, women and children had been trapped in Greece, with most marooned in the north. Another 4,000, newly arrived from islands off Turkey’s Aegean coast, were stuck in Athens’s port of Piraeus. The backlog came after Macedonia refused entry to Afghan refugees, claiming it was reacting to a similar move by Serbia. Amid rising tension and fears of the collapse of the passport-free Schengen zone,Greece lambasted the policies being pursued by countries to its north.
Speaking on state-run ERT television, the Greek migration minister, Yiannis Mouzalas, said: “Once again the European Union voted for something, it reached an agreement, but a number of countries lacking the culture of the European Union, including Austria, unfortunately violated this deal barely 10 hours after it had been reached.” Neighbouring countries along the Balkan corridor had in turn become enmeshed in “an outburst of scaremongering”. “The Visegrád countries have not only not accepted even one refugee; they have not sent even a blanket for a refugee,” he added, referring to the Czech Republic, Poland, Hungary and Slovakia. “Or a policeman to reinforce [EU border agency] Frontex.” Skopje said on Monday it had tightened restrictions after Austria imposed a cap on transit and asylum applications, triggering a domino effect down the migrant trail.
As officials scrambled to find accommodation for the newcomers, Athens’s leftist-led government was engaged in desperate diplomatic efforts to ease the border controls. Greece has become Europe’s main entry point for the vast numbers fleeing war and destitution in the Middle East, Africa and Asia. Last year, more than 800,000 people – the majority from Syria – passed through the country en route to Germany and other more prosperous EU member states. With the pace of arrivals showing no sign of abating – a record 11,000 people were registered on Aegean islands in the space of three days last week – Athens has been in a race against the clock to improve hosting facilities including ‘hot spot’ screening centres and camps.
Mounting questions over Turkey’s desire to stem the flow, and Greece’s ability to handle it, have fuelled fears that if nations take unilateral action to seal frontiers, hundreds of thousands will end up trapped in Europe’s most chaotic state. Battling its worst economic crisis in modern times, Athens is ill-equipped to deal with the emergency.
Greek police started removing migrants from the Greek-Macedonian border on Tuesday after additional passage restrictions imposed by Macedonian authorities left hundreds of them stranded, sources said. The migrants had squatted on rail lines in the Idomeni area on Monday after attempting to push through the border to Macedonia, angry at delays and additional restrictions in crossing. Greek police and empty buses had entered the area before dawn, a Reuters witness said. In one area seen from the Macedonian side of the border, about 600 people had been surrounded by Greek police, the witness said. There were an estimated 1,200 people at Idomeni, in their vast majority Afghans or individuals without proper travel documents.
A crush developed there on Monday after Macedonian authorities demanded additional travel documentation, including passports, for people crossing into the territory. Some countries used by migrants as a corridor into wealthier northern Europe are imposing restrictions on passage, prompting those further down the chain to impose similar restrictions for fear of a bottleneck in their own country. But there are concerns at what may happen in Greece, where a influx continues unabated to its islands daily from Turkey. On Tuesday morning, a further 1,250 migrants arrived in Athens by ferry from three Greek islands. Some of them had bus tickets to Idomeni, but it was unclear if they would be permitted to travel north from Athens.
Thessaloniki Mayor Yiannis Boutaris is absolutely right: “Refugees don’t eat people.” We are not sure if the reverse is true, as current events do not allow for any kind of certainty in the matter. For many leaders and citizens in a number of countries, refugees have already proved expendable, ready for sacrifice. A mass whose feelings don’t count, whose hopes for a better life bring laughter to those already enjoying it. This mass only acquires any significance when incorporated into the strategies of geopolitical players. In order for these strategies to succeed, it is no longer necessary to sacrifice parts of the cronies’ powers, in other words the unknown soldiers, as is usually the case when it comes to typical confrontations between countries. Being foreign and often of a different religion, the refugees are a great substitute and are inexpensive.
They constitute hundreds of thousands of pawns being moved on the map by chess-playing marshals constantly launching threats and blackmailing each other. We see this happening in bilateral and multilateral summit meetings in Brussels, London, Geneva, Vienna and Ankara, where talks focus on reaching a truce in the Syrian conflict, the allocation of refugees in European states and Turkey’s obligations, not to mention the precise rewards for fulfilling these obligations. A crucial element is that one of the biggest taboos of the post-Nazi era, threatening references to a Third World War, are forfeited during these meetings. Greece is not among the big players. It never has been. It is nowhere near Turkey in terms of size, population figures or diplomatic cynicism, which during Recep Tayyip Erdogan’s dominance has increasingly acquired delusions of grandeur.
When it comes to the refugee-migrant issue, Greece is just a pipeline, in between two taps over which it has no control. In the east, the entry tap can be opened and closed as the Turkish government pleases, depending on what suits its interests at the time: from showing a bit of good behavior through a partial containment of flows to playing the tough guy, by turning a blind eye to the smuggling rings. At the same time, Greece has very little influence over the exit tap at the Former Yugoslav Republic of Macedonia border. The neighboring country appears to be treating the current situation as a major opportunity to promote its broader interests, hence offering its services to the so-called Visegrad Four and Western Balkan countries.
No matter what else is going on, Greece must continue to honor its agreements, making the absence of morals and justice in the international political arena even more painfully clear.