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Private creditors have replaced the public sector as lead borrower to developing countries, which has contributed to a new borrowing and lending boom. Private financial institutions are responsible for prompting a potential “new wave” of debt crises among developing nations, according to a new report carried out by European Think Tank Eurodad. Public debt in developing countries is increasingly being borrowed from private lenders, which the authors argue has meant that an increasing portion of credit is not effectively monitored or regulated. “Private borrowers, in particular private corporations, have used this regulation gap to throw a big borrowing party, a debt party, and thus have contributed disproportionately to the external debt burden that developing countries carry now,” the report warned.

As part of its findings, the authors of the report concluded that, “while relative debt burdens decreased between 2000 and 2010, these trends have reversed in 2011. Since then debt is on an upward path, also when measured in relative terms.” Developing countries total external debt burden reached US$5.4 trillion in 2014 and over half of this amount is now owed by private debtors, according to data from the report titled,“The Evolving Nature of Developing Country Debt and Solutions for Change.” The study attributed the recent increase in private creditors to the heavy public borrowing that took place during the 1980’s and 1990’s, which prompted sharper restrictions on public lending institutions such as the International Monetary Fund.

Remember affordable housing?

• US Homeownership Dips to Lowest Rate Since 1960 (RCM)

The US homeownership rate, as recently reported by the Census Bureau, dropped to 62.9% in the second quarter of 2016, a rate about equal to the rate of 61.9% reported over a half century ago for 1960. This stagnation compares unfavorably to 1900 to 1960 when the non-farm homeownership rate increased from 36.5% to 61%.-a period encompassing rampant urbanization, immigration, and population growth. For example, the non-farm population quadrupled from about 42 million to 166 million, yet the non-farm homeownership rate increased by 67%. Except for the interruption caused by the Great Depression, the rate of increase was moderate to strong throughout the period.

How can this be? Isn’t there an alphabet soup of federal agencies-FHA, HUD, FNMA, FHLMC, GNMA, RHS, FHLBs-all with the goal of increasing homeownership by making it more “affordable”? Don’t these agencies fund or insure countless trillions of dollars in home loan lending–most with very liberal loan terms? Could it be the federal government massive liberalization of mortgage terms creates demand pressure leading to higher prices? Could it be federal, state, and local governments’ implement land use policies that constrain supply and drive prices up even further? Could it be government housing policies have made homeownership less, not more affordable or accessible?

The answer is an unequivocal yes. Since the mid-1950, liberalized federal lending policies have fueled a massive and dangerous increase in leverage-one that continues to this day. For example, in 1954 FHA loans had an average loan term of 22 years vs. 29.5 years today, an average loan-to-value of 80% vs. 97.5%, average housing debt-to-income ratio of 15% vs. 28%. Only the average borrowing cost in 1954 of 4.5% is the same as it is today. The result is today’s FHA borrower can purchase a home selling for twice as much as one with the underwriting standards in place in 1954-but without a dollar’s increase in income!

It’s all a big rip-off. Get the government out of housing once and for all.

• The Next Huge American Housing Bailout Could Be Coming (TAM)

The failures of government intervention in the economy have made headlines yet again. Recent stress tests by the Federal Housing Finance Agency found something sinister brewing under the surface at notorious mortgage giants Fannie Mae and Freddie Mac. The results show that these puppet companies could need up to a $126 billion bailout if the economy continues to deteriorate. That’s right — the two companies that were taken over by the government and that sucked $187 billion from the treasury could be entitled to more taxpayer money. The toxic home loans bought during the last crisis coupled with a lack of liquidity have suddenly become serious risk factors.

The so-called “recovery” that has been trumpeted for years by countless politicians and economists is falling apart in plain view. The media will do just about anything to assure the public that this is all isolated and overblown, but the canary in the coal mine has just dropped dead. The tests ran a scenario eerily similar to warnings we’ve heard about what the economic future might hold: “The global market shock involves large and immediate changes in asset prices, interest rates, and spreads caused by general market dislocation and uncertainty in the global economy.” In the throes of the 2008 crisis, the government took many unprecedented actions, but one of the most notable was seizing control of the two largest mortgage loan holders in the country.

Since then, Fannie Mae and Freddie Mac have been converted from subsidized private organizations into some of the biggest government-sponsored enterprises ever created. These institutions have been used to prop up the entire real estate market by purchasing trillions of dollars in home loans from other banks to keep prices elevated. Without Fannie and Freddie, the supply of houses on the market would have far exceeded the number of buyers. This glut in supply and low demand would have forced sellers to lower prices until a deal was made. Instead, these wards of the state were able to buy up properties at artificially high prices using government-issued blank checks, allowing for the manipulation of home values back up to desired levels.

Debt at work.

• China’s Stimulus Efforts Show ‘Malinvestment Is Still Hard at Work’ (BBG)

It was supposed to be different this time. Ahead of looming fiscal stimulus from China, analysts were quick to emphasize that this would be a leaner, smarter government spending program. There would be a new method of financing to try to keep the debt burdens for local governments from becoming too onerous. And, above all, it would be targeted to avoid exacerbating the excess capacity that’s abundant in many industries. While the scale of the expenditures certainly pales in comparison to those that followed the Great Recession, the story remains the same. A Morgan Stanley team, led by Chief China Economist Robin Xing, noted that fixed-asset investment growth among state-owned enterprises (or SOEs) has accelerated across the board in 2016, with the exception of mining.

This same trend also holds for investment in services sectors, Xing observed. These data suggest that stimulus efforts have not been as targeted as proponents hoped, belie the narrative of rotation of growth from credit-driven infrastructure projects to activity linked to domestic demand, and raise the specter of further malinvestment in the world’s second largest economy. “We know a) in real terms rebalancing isn’t advancing as much as the government protests citing nominal data and b) the restimulation this last year of investment via credit and fiscal policies will certainly have slowed it down further,” writes George Magnus, senior economic adviser at UBS. “Capital accumulation isn’t all or always wrong but if it’s largely debt financed and SOE provided, I’d say that malinvestment is still hard at work.”

Lest we forget: There is no market. There is only distortion.

• The UK Is the New Engine of Bond-Market Distortion (WSJ)

Britain has taken over from Japan as the world’s wildest bond market, raising new questions about the distortions being caused by central banks. The soaring price (and so plunging yield) of the 30-year gilt means it has now returned the same 31% over the past 12 months as the Japanese 30-year note, even as some of the excess in long-dated Japanese bonds falls away. The race into gilts partly anticipated and was accelerated by the Bank of England’s resumption of bond purchases this week, part of a package of monetary easing designed to offset damage to the economy from June’s Brexit vote. Lower gilt yields are in turn contributing to demand for global bonds, helping keep U.S. Treasury yields depressed even as other market moves suggest a revival of hopes for growth and inflation.

This again raises a long-running problem for investors. Should they regard low yields as a sign of how grim a future is in store for the world economy? Or are central banks distorting the signal so much through bond purchases that yields no longer carry much information about the economy? The rally in gilts has been extraordinary, with the yield on the U.K.’s longest-dated bond, the 2068 maturity, almost halving from 2% on the day of the referendum to 1.06% on Thursday. The price of the bond is up 53% this year, the sort of gains usually produced by risky stocks, not rock-solid government paper.

Consolation: it happens everywhere.

• A Really Vicious Circle Is Threatening UK Pension Pots (BBG)

As the Bank of England seeks to ease Brexit angst by injecting money into the U.K. economy, pension managers and insurers are finding themselves caught up in a vicious circle. Britain’s new quantitative-easing program, combined with monetary easing around the world, is crushing yields, leaving these long-term investors ever more desperate to hold on to their 20-, 30- and 50-year bonds to meet return targets and liabilities. That forces protagonists like the BOE, which is buying 60 billion pounds ($78 billion) of government debt over six months, to bid higher prices – driving yields down even further.

This may explain the crunch this week, when the central bank failed to find enough investors to sell it longer-maturity gilts, the part of the debt market dominated by pensions and insurers. While the revival of QE is intended to reduce the risk of a Brexit-fueled slump, the shortfall raises the question of whether debt purchases with newly created money are becoming part of the problem as well as the solution. “We recognize the Bank’s concern and the need to protect the economy,” said Helen Forrest Hall, defined-benefit policy lead at the Pensions and Lifetime Savings Association in London. “But the challenge we have is that the QE programs do have an impact on pension funds’ liabilities.”

Yeah, can’t risk bank profits, can we?

• IMF to ECB: Forget Negative Rates, Or You’ll Do More Harm Than Good (MW)

Economists at the IMF are urging the ECB to stop yanking interest rates further into negative territory, warning it will take a toll on the region’s already struggling banks and reduce lending to businesses and households. In a blog post on the IMF website, economists Andy Jobst and Huidan Lin say any additional cuts that would push rates further below zero will encounter diminishing returns and threaten, at this point, to do more harm than good. “Further policy rate cuts could bring into focus the potential trade-off between effective monetary transmission and bank profitability. Lower bank profitability and equity prices could pressure banks with slender capital buffers to reduce lending, especially those with high levels of troubled loans,” the analysts said on the blog.

“The prospect of prolonged low policy rates has clouded the earnings outlook for most banks, suggesting that the benefits from a negative interest rate policy might diminish over time,” they said. The warning comes as expectations are rising the central bank will announce fresh stimulus at its September meeting to offset the negative impact on the eurozone from the U.K.’s Brexit vote on June 23. At its July meeting, ECB boss Mario Draghi stopped short of pledging more measures, saying the policy makers will reassess in September when it will have fresh economic forecasts that factor in the impact of the U.K.’s referendum on ending its EU membership.

New normal: Profit falls 90%, shares up 5.3%.

• Global Shipping Giant Moller-Maersk Reports 90% Fall In Net Profit (CNBC/R.)

Moller-Maersk kept its downbeat 2016 profit forecast on Friday as the Danish shipping and oil giant reported net profit way under expectations as it struggles to cope with a shipping recession and tough oil markets. The Danish shipping and oil group said net profit fell to $101 million in April-June, lagging a forecast of $196 million. It was also around 90% lower than the $1.069 billion reported for the same period last year. The company maintained its outlook for an underlying profit for the full year significantly below last years $3.1 billion. Shares of the group were up 5.3% Friday morning.

Trond Westlie, chief financial officer of Maersk Group, told CNBC on Friday that the shipping industry faced turbulent times as a result of the “very difficult” oil market and decline in freight rates. “When we look at the overall market and when we look at supply and demand and the growth in the world, we still think it’s going to be low-growth and volatile.” “For us, like always, we have a view on a couple of weeks or a four weeks’ indication on where the market is going but after that it’s very opaque for us as well.”

Debt Rattle July 11 2016

Jul 112016

July 11, 2016 Posted by Raúl Ilargi Meijer at 8:24 am Finance Tagged with: Abenomics, bailout, Brexit, helicopter, housing, media, Merkel, NIRP, oil, Orwell 7 Responses »

G.G. Bain Auto polo, somewhere in New York 1912

• Will Merkel Hand Over The Keys To The Helicopter? (Napier)

• Black Hole of Negative Rates Is Dragging Down Yields Everywhere (WSJ)

• 70% Of German Bonds Are No Longer Eligible For ECB Purchases (ZH)

• Wall Street Monkeyshines – Look Ma, No Hands! (David Stockman)

• China Pension Readies $300 Billion Warchest for Stock Market (BBG)

• Massive Stockpile Means Oil Rebound Is Over: Barclays (CNBC)

• Japan PM Abe To ‘Accelerate Abenomics’ After Huge Election Win (BBG)

• Deutsche Bank Chief Economist Calls For €150 Billion Bailout Of EU Banks (ZH)

• Bank Born Out of Black Death Struggles to Survive (BBG)

• Australia First-Home Buyers Hit Lowest Level In A Decade (Domain)

• The Great New Zealand Housing Down-Trou (Hickey)

• The Media Against Jeremy Corbyn (Jacobin)

• How the Corporate Food Industry Destroys Democracy (Hartmann)

• 10 Years (Or Less): Orwell’s Vision Coming True (SHTF)

Either Draghi gets to fly the chopper, or the EU falls to bits. Wait, it’ll do that anyway. So why give him the keys?

• Will Merkel Hand Over The Keys To The Helicopter? (Napier)

Now only one question matters for global investors – Wo ist der Hubschrauber? (Where is the helicopter?). The decline of European commercial bank share-prices before Brexit made it clear that a monetary reflation of Europe was failing. The collapse in these same share-prices post-Brexit means that even the politicians now realise that the ECB acting alone cannot stabilize the European economy. Indeed, given the evident political strains in the European Union, saving the economy from recession is now key to saving the European political union project itself. So, will Mrs Merkel abolish fiscal austerity across Europe and permit each of the states of the European political union expand their debt mountains at the same time that the ECB is buying that debt?

Are the keys to der Hubschrauber to be handed over? To save the European political union Germany must now confront its greatest fear and enfranchise the political union’s central bank to conduct outright monetary financing of all its constituent governments. Investors need to remain very cautious indeed as it is in no way clear that Mrs Merkel will hand over the keys to der Hubschruaber. Should she do so, however, major changes in investment allocation are necessary as helicopter money will be raining from the skies in Japan, the Eurozone, the UK and even in the USA if President Clinton also wins the House and the Senate.

This form of reflation will likely work and in due course work too much. Few things are binary in investment, but this huge decision to be taken in Berlin is the biggest binary event for investors this analyst has yet come across. The repercussions will reverberate throughout this century. This analyst would like to present you with a firm forecast as to the possibility of ‘helicopter money’ coming to the European political union. However, it is too close to call. Even if that assertion is correct, this is truly dire news for financial markets.

What? “..the global yield grab is raising questions about whether rates can prove reliable economic indicators.” That’s an actual question?

• Black Hole of Negative Rates Is Dragging Down Yields Everywhere (WSJ)

The free fall in yields on developed-world government debt is dragging down rates on global bonds broadly, from sovereign debt in Taiwan and Lithuania to corporate bonds in the U.S., as investors fan out further in search of income. The ever-widening rush for yield could create problems if interest rates snap back, which would cause losses on investors’ low-yielding portfolios, or if credit quality falls. And the global yield grab is raising questions about whether rates can prove reliable economic indicators. Yields in the U.S., Europe and Japan have been plummeting as investors pile into government debt in the face of tepid growth, low inflation and high uncertainty, and as central banks cut rates into negative territory in many countries.

Even Friday, despite a strong U.S. jobs report that helped send the S&P 500 to nearly a record, yields on the 10-year Treasury note ultimately declined to a record close of 1.366% as investors took advantage of a brief rise in yields on the report’s headlines to buy more bonds. Yields move in the opposite direction of price. As yields keep falling in these haven markets, investors are looking for income elsewhere, creating a black hole that is sucking down rates in ever longer maturities, emerging markets and riskier corporate debt. “What we are seeing is a mechanical yield grab taking place in global bonds,” said Jack Kelly at Standard Life Investments. “The pace of that yield grab accelerates as more bond markets move into negative yields and investors search for a smaller pool of substitutes.”

Self-fulfilling perversity.

• 70% Of German Bonds Are No Longer Eligible For ECB Purchases (ZH)

Back in April of 2015, we warned that the biggest risk facing the ECB is running out of eligible securities which the central bank can monetize. Draghi’s recent launch of the CSPP, in which the ECB has been buying not only investment grade but also junk bonds, is an indirect confirmation of that. A direct one comes courtesy of a Bloomberg calculation according to which following a seventh straight week of gains in German bunds, the yields on securities of all maturities has plunged to unprecedented lows, which has left about $801 billion of debt out of the statutory reach of the ECB. As noted earlier, there is now $13 trillion of global negative-yielding debt. That compares with $11 trillion before the Brexit vote.

The surge in sovereign debt since Britain’s vote to exit the European Union last month has pushed yields on about 70% of the securities in the $1.1-trillion Bloomberg Germany Sovereign Bond Index below the ECB’s -0.4% deposit rate, making them ineligible for the institution’s quantitative-easing program. For the euro area as a whole, the total rises to almost $2 trillion. As Bloomberg adds, following a rush for safety and a scramble for capital appreciation ahead of more ECB debt purchases, the yield on German 10-year bunds to a record-low, and those on securities due in up to 15 years below zero, even though – paradoxically – the rush to buy these bonds has made them no longer eligible for direct ECB purchases as they now have a yield lower than the ECB’s deposit rate threshold.

Or rather, they are ineligible for the time being. As a result, the rally has boosted the same concerns we warned about for the first time in the summer of 2014, namely that the ECB’s Public Sector Purchase Programme could run into scarcity problems well before its completion date of March 2017, prompting speculation policy makers may tweak their plan.

“..the economic gods created market-based price discovery for a reason. It was to insure that in the great arena of financial market supply and demand, the forces of fear and greed would contend on a level playing field..”

• Wall Street Monkeyshines – Look Ma, No Hands! (David Stockman)

The boys and girls on Wall Street are now riding their bikes with no hands and eyes wide shut. That’s the only way to explain Friday’s lunatic buying spree in response to another jobs report that proves exactly nothing about an allegedly resurgent economy. When the S&P 500 first hit 2130 back in May 2015, reported LTM earnings were $99.25 per share, and that was already down 6.4% from the cyclical high of $106 per share in September 2014. Thus, stocks were being valued at a nosebleed 21.5X in the face of falling earnings. During the four quarters since then, reported LTM earnings have slumped by a further 12.3% to $87 per share. So that brings the “cap rate” to 24.5X earnings that have shrunk by 18% over the last six quarters. Wee!

You have to use the parenthetical because the casino is not capitalizing anything rational. It’s just drifting higher in daredevil fashion until something big and nasty stops it. That something would be global deflation and US recession. Both are racing down the pike at accelerating speed. Needless to say, when these lethal economic forces finally hit home, the puppy pile-up on Wall Street is going to be one bloody mess. But that’s the price you pay when you have destroyed honest price discovery entirely, and have transformed the money and capital markets into robo-machine driven venues of rank speculation. Janet Yellen and the other 100 clowns who run the world’s central banks, of course, have no clue as to the financial doomsday machine they have enabled. Indeed, they apparently think efficient pricing and allocation of capital doesn’t matter.

After all, their entire modus operandi is to peg the price of money, bonds and the yield curve sharply below market-clearing levels – so that households and business will borrow and spend more than otherwise. Likewise, they aim to goose stock prices to ever higher levels. That’s so the top 10% and the top 1%, who own the preponderant share of equities, will feel the wealth(effects) and then spend-up and invest-up a storm. But the economic gods created market-based price discovery for a reason. It was to insure that in the great arena of financial market supply and demand, the forces of fear and greed would contend on a level playing field. Short-sellers and contrarians heading south were to intercept the lemmings of greed heading north before they reached the edge of the cliff. Now there is nothing but cliff.

The idea is that simply because pensions buy stocks, these will go up in ‘value’. Yeah, that should work.. For a week.

• China Pension Readies $300 Billion Warchest for Stock Market (BBG)

China’s pension funds are about to become stock investors. The country’s local retirement savings managers, which have about 2 trillion yuan ($300 billion) for investment, are handing over some of their cash to the National Council for Social Security Fund, which will oversee their investments in securities including equities. The organization will start deploying the cash in the second half, according to China International Capital and CIMB Securities. Chinese policy makers announced the change last year in a bid to boost yields for a pension system that has long suffered low returns by limiting its investments to deposits and government bonds.

For the nation’s equity markets – which are dominated by retail investors and among the world’s worst performers this year – the state fund’s presence is even more valuable than its cash, said Hao Hong, chief China strategist at Bocom International Holdings. The NCSSF has “such a good reputation in being a value investor that if they take the lead, the signaling effect is actually quite strong,” said Hong, who had predicted the start and peak of China’s equity boom last year. “It’s almost like Warren Buffett saying he is buying a stock.” The NCSSF, which oversees 1.5 trillion yuan in reserves for China’s social security system, has returned an average 8.8% a year since 2000, the Securities Daily reported earlier this year, citing official data. The larger pension system, on the other hand, has been locally managed and made just 2.3% annually through 2014, the newspaper said.

Is someone overestimating demand perhaps?

• Massive Stockpile Means Oil Rebound Is Over: Barclays (CNBC)

A massive global stockpile of oil could mean trouble ahead for the global crude market, according to Barclays. Crude oil prices dropped to a two month low on Thursday, after the Energy Information Administration reported a smaller-than-expected decrease in oil stockpiles. That may be a canary in the coalmine, a top energy market watcher explained. “For the last 6 quarters there’s been this discrepancy between global supply and global demand,” Michael Cohen, head of energy commodities research at Barclays, said last week on CNBC’s “Futures Now.” Cohen said Barclays is bearish on oil for the next six to eight months, because the current stockpile could increase in an economic downturn, likely to drive prices lower.

In the summer months, increased travel often increases the demand for gasoline, and drags up crude oil by default. Yet once that season ends, inventory levels may continue to rise. Looking at a chart of the expected crude oil supply compared with the current amount, Cohen said the disconnect is staggering. The chart accounts for oil supply from the 38 countries in the Organization for Economic Cooperation and Development (OECD), which includes the U.S., U.K., France, Germany and Canada, among others. During the recent financial crisis, crude production overhang was 138 million barrels. Now, the overhang is twice that, at 383 million barrels among the OECD, Cohen said.

Given what a disaster Abenomics is, one wonders: how inept can Japan’s opposition be? Abe wins a two-thirds majority?! Can also change the constitution so Japan can go back to war.

• Japan PM Abe To ‘Accelerate Abenomics’ After Huge Election Win (BBG)

Japanese Prime Minister Shinzo Abe’s conservative coalition scored a convincing upper house election win, putting it on course for a two-thirds majority that would allow Abe to press ahead with plans to revise the country’s pacifist constitution. The Liberal Democratic Party secured 56 of the 121 seats in contention, public broadcaster NHK said, while junior coalition partner Komeito had 14. Alongside others who support Abe’s view on constitutional revision, plus uncontested seats, the prime minister is set for a super majority, it said. The results raise questions over whether Abe will switch his focus to altering the postwar U.S.-imposed constitution, a potentially time-consuming process that could expend his political capital and distract the government from its economic program.

Abe vowed during the campaign to focus on policies aimed at expanding the size of the economy to 600 trillion yen ($6 trillion) from 500 trillion yen. “If Prime Minister Abe’s coalition scores a hot, two-thirds majority on Sunday, it might be tempted to pass constitutional changes, draining political capital away from urgently needed economic reforms,” Frederic Neumann at HSBC in Hong Kong, wrote in an e-mailed note before the election. Tokyo shares headed for their biggest gain in almost three months after the upper house election result and as jobs data eased concerns over the U.S. economy. The Topix index added 2.8% to 1,243.93 at 9:43 a.m. in Tokyo.

“Abe said he’ll continue to put together his economic policy package, so that optimism is going to continue to support Japanese shares,” said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Center. Abe’s coalition, which previously held 136 of the 242 seats in the chamber, fended off a challenge from opposition parties that had sought to unify the anti-government vote by avoiding running candidates against one another in many districts. “I think this means I am being told to accelerate Abenomics, so I want to respond to the expectations of the people,” Abe told TBS television after early results were announced.

But EU demands bail-ins these days?

• Deutsche Bank Chief Economist Calls For €150 Billion Bailout Of EU Banks (ZH)

The cards have been tipped, and it appears Italy’s Prime Minister may have been right. In the aftermath of Brexit, much of the investing public’s attention has turned to Italian banks which are in desperate need of a bailout as a result of €360 billion in bad loans growing worse by the day (and not a bail-in, as European regulations mandate, as that would lead to an immediate bank run) to avoid a freeze and/or collapse of Italy’s banking sector. This has pushed stock prices – and default risk – on Italian banks to record levels. So far Italy’s bailout requests have mostly fallen on deaf ears, as Germany’s political leaders have resisted Renzi’s recurring pleas for a taxpayer funded rescue.

However, as we have alleged, and as the Italian Prime Minister admitted last week, the core risk for Europe is not just the Italian banking sector but the biggest bank of all in Europe: Deutsche Bank. Recall last Thursday, when Matteo Renzi said other European banks had much bigger problems than their Italian counterparts. “If this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to one hundred,” Renzi said. He was, of course, referring to the tens of trillions of derivatives on Deutsche Bank’s books. Today, we got the most definitive confirmation yet that the noose is tightening not only around Italy, but Germany itself [..], when none other than David Folkerts-Landau, the chief economist of Deutsche Bank, has called for a multi-billion dollar bailout for European banks.

Speaking to Germany’s Welt am Sonntag, the economist said European institutions should get fresh capital for a recapitalization following a similar bailout in the US. What he didn’t say is that the US bailout took place nearly a decade ago, in the meantime Europe’s financial sector was supposed to be fixed courtesy of “prudent” fiscal and monetary policy. It wasn’t. As Landau says the US helped its banks with $475 billion dollars, and such a program is now needed in Europe, especially for Italian banks. In other words, just because the US did it, now it’s Europe’s turn to ask for more of the same.

“In Europe, the bailout does not need to be so large. A €150 billion program should be enough to help European banks recapitalize,” said David Folkerts-Landau. He adds that the decline in bank stocks is only the symptom of a much larger problem, namely a fatal combination of low growth, high debt and a “dangerous” deflation. “Europe is seriously ill and needs to address very quickly the existing problems, or face an accident,” said the chief economist.

Good read. “It’s the inevitable consequence of medieval governance falling prey to the fangs of Wall Street..”

• Bank Born Out of Black Death Struggles to Survive (BBG)

Siena, the medieval city renowned for its Palio horse races, is home to the world’s oldest bank. Within its aging walls lies a distinctly 21st-century tale of devastation wrought by local politicians and global financiers. Banca Monte dei Paschi di Siena, Italy’s third-largest lender, is struggling to survive as it seeks to repay a second bailout or face nationalization. Its downfall proved a boon to global investment banks. They offered merger and investment advice to executives beholden to politicians that helped wipe out 93 percent of Monte Paschi’s value. Then they sold it complex derivatives that hid, even worsened the losses. Efforts to rescue the 541-year-old lender have cost Italian taxpayers €4.1 billion.

The investment banks, including Merrill Lynch, JPMorgan and Deutsche Bank, earned more than $200 million in fees from 2008 through 2011, filings and deal memos show. “These international banks come to exploit, and Italy is vulnerable,” said former Senator Elio Lannutti, who heads Adusbef, a consumer group for Italian bank customers. “On one side, there’s the local incompetence, and on the other side the bad faith of the international investment banks.” Franco Debenedetti, a former CEO of Olivetti, was even blunter. “It’s the inevitable consequence of medieval governance falling prey to the fangs of Wall Street,” said Debenedetti, now chairman of Italy’s Bruno Leoni Institute, a pro-free-market research group in Turin.

[..] ..the heritage of a bank with 2,300 branches and 28,500 employees that traces its origins to combating excessive loan rates. Siena officials founded Monte Paschi in 1472, after the Black Death wiped out more than half the city’s population. They modeled it on the pawnshops Franciscan monks had set up to counter usury. As it grew, the lender helped fuel the Renaissance in Tuscany that pulled Europe from the Middle Ages.

Well, they did it. Congrats! Young people can’t afford to live in their own communities any more. Is there a govenment responsibility here somewhere?

• Australia First-Home Buyers Hit Lowest Level In A Decade (Domain)

First-home buyers are now at their lowest levels in more than a decade, data released on Monday shows. As a proportion of all home buyers, first-home buyers dropped to 13.9% in May, according to housing finance data released by the Australian Bureau of Statistics. Down from 14.4% in April, this latest result is the lowest since 2004. At that time, the proportion fell to a record low 12.8% as grants for first-home buyers came to an end. For first-home buyers to make a significant return prices would have to fall, BIS Shrapnel senior manager of residential Angie Zigomanis said. “A drop in prices of some sort is needed, but we’ll also need a reduction in expectations in terms of what [first-home buyers] are looking for,” Mr Zigomanis said.

“At some point they have to come back, in theory … but for now the market is tough.” And a slowdown might be on the cards. While month-to-month figures can be volatile, overall lending figures are slowing from the frenzied levels of 2015, HSBC chief economist Paul Bloxham said. “We’re seeing a pullback in [housing finance] that has been going on since late last year, which is consistent with the idea that the housing market is set to cool,” he said. “[It’s a result of] tighter prudential settings and is also a sign that the exuberance has come out of the market … there was concern that strong activity from investors was overheating the market.”

Same in Kiwiland: “The leader of the Government is more worried about the short-term fates of leveraged-up speculators and developers than the long-term fate of Generation Rent.”

• The Great New Zealand Housing Down-Trou (Hickey)

Former Reserve Bank Chairman Arthur Grimes essentially undressed our politicians in front of us this week when he challenged them to embrace a 40% fall in Auckland house prices. He exposed them as emperors without clothes. “What I do is whenever I find a politician who says they want affordable housing, I ask them a very simple question: ‘How much do you want house prices to fall by overall?’ “And not one of them has been able to answer that very simple question,” Grimes said this week. He was talking about the extraordinary response to his suggestion 150,000 houses be built in six years to push Auckland prices down. Prime Minister John Key’s response was immediate – and betrayed where he stands on the issue of using a supply shock to make housing affordable.

It was “crazy”, would leave people in the market with huge losses and put pressure on developers. So there we have it. The leader of the Government is more worried about the short-term fates of leveraged-up speculators and developers than the long-term fate of Generation Rent. Despite years of saying the only way to improve housing affordability is to increase supply, his position is any increase in supply that hurts the investors who have bought in the past couple of years is out of the question. The Prime Minister who boasts his Government is aspirational had this to say about going for a really big response to the challenge: “Where you’d get 150,000 homes from overnight, I don’t know.”

Key said he hoped house-price inflation could be slowed by the Government’s measures, with the implication affordability would somehow creep up on everyone with wage increases. The Treasury forecasts wages will rise by an average of 2.2% over the next six years. It also forecasts house prices will rise by an average of 5.7% over the same period. The Government’s own forecasts show this magical affordability catch-up is not going to happen – and is expected to get much worse. Auckland houses cost nearly 10 times household income. That’s double what it was in the early 2000s and almost double the rest of the country. The accepted model for affordability around the world is closer to three times income.

British media are anti-journalism.

• The Media Against Jeremy Corbyn (Jacobin)

The British media has never had much time for Jeremy Corbyn. Within a week of his election as Labour Party leader in September, it was engaging in a campaign the Media Reform Coalition characterized as an attempt to “systematically undermine” his position. In an avalanche of negative coverage 60% of all articles which appeared in the mainstream press about Corbyn were negative with only 13% positive. The newsroom, ostensibly the objective arm of the media, had an even worse record: 62% negative with only 9% positive. This sustained attack had itself followed a month of wildly misleading headlines about Corbyn and his policies in these same outlets. Concerns about sexual assaults on public transport were construed as campaigning for women-only trains.

Advocacy for Keynesian fiscal and monetary policies was presented as a plan to “turn Britain into Zimbabwe.” An appeal to reconsider the foreign policy approach of the last decade was presented as an association with Putin’s Russia. In the months which followed the attacks continued. Particularly egregious examples, such as the criticism of Corbyn for refusing to “bow deeply enough” while paying his respects on Remembrance Day, stick in the memory. But it is the insidious rather than the ridiculous which best characterizes the British media’s approach to Corbyn. One example of this occurred in January when it was revealed that the BBC’s political editor Laura Kuenssberg had coordinated the resignation of a member of Corbyn’s shadow cabinet so that it would occur live on television. Planned for minutes before Corbyn was due to engage in Prime Minister’s Questions, it was a transparent attempt to inflict the maximum damage possible to his leadership.

“..political bribes aren’t free speech and corporations aren’t persons.”

• How the Corporate Food Industry Destroys Democracy (Hartmann)

On July 1, Vermont implemented a law requiring disclosure labels on all food products that contain genetically engineered ingredients, also known as genetically modified organisms or GMOs. Wenonah Hauter, executive director of Food and Water Watch, hailed the law as “the first law enacted in the US that would provide clear labels identifying food made with genetically engineered ingredients. Indeed, stores across the country are already stocking food with clear on-package labels thanks to the Vermont law, because it’s much easier for a company to provide GMO labels on all of the products in its supply chain than just the ones going to one state.”

What that means is that the Vermont labeling law is changing the landscape of our grocery stores, and making it easier than ever to know which products contain GMOs. And less than a week later after that law went into effect, it is under attack. Monsanto and its bought-and-paid-for toadies in Congress are pushing legislation to override Vermont’s law. Democrats who oppose this effort call the Stabenow/Roberts legislation the “Deny Americans the Right to Know” Act, or DARK Act. This isn’t the first time that a DARK Act has been brought forward in the Senate, and one version of the bill was already shot down earlier this year. The most recent version of the bill was brought forward by Michigan Democratic Sen. Debbie Stabenow and Kansas Republican Sen. Pat Roberts, both recipients of substantial contributions from Big Agriculture.

Stabenow has received more than $600,000 in campaign contributions since 2011 from the Crop Production and Basic Processing Industry, and Pat Roberts has received more than $600,000 from the Agricultural Services and Products industry. When Senator Stabenow unveiled the industry-friendly legislation, she boasted that, “For the first time ever, consumers will have a national, mandatory label for food products that contain genetically modified ingredients.” Which sounds great, and it would be great, if it were true. But the fact is, the DARK Act would set up a system of voluntary labeling that would overturn Vermont’s labeling law and replace it with a law that’s riddled with so many loopholes and exemptions that it would only apply to very few products, and there’s no enforcement mechanism and no penalties or consequences of any kind for defying the bill.

[..] If our democracy actually worked, this bill never would have seen the light of day, because people overwhelmingly want to know what’s in their food and support GMO labeling. But our democracy doesn’t work, because our lawmakers are bought and paid for by special interests like Monsanto. If we want our lawmakers to pass popular laws that actually work, we need to get money out of politics, we need to overturn Citizens United and we need to amend the Constitution to make it clear that political bribes aren’t free speech and corporations aren’t persons.

” It’s not the independence of Britain from Europe, but the independence of Europe from the USA.”

• 10 Years (Or Less): Orwell’s Vision Coming True (SHTF)

In the wake of all of the Brexit vote, a chilling blurb made headlines and it went largely unnoticed and uncommented upon. The line was couched within comments made by Boris Titov, an economic policy maker for Russia’s Kremlin. Actually all of the following merits attention, but one line stands out. The source for this excerpt is a Facebook post by Titov. Here it is: “…it seems it has happened — UK out!!! In my opinion, the most important long-term consequence of all this is that the exit will take Europe away from the anglo-saxons, meaning from the USA. It’s not the independence of Britain from Europe, but the independence of Europe from the USA. And it’s not long until a united Eurasia — about 10 years.”

This is a very revealing post to show how unfavorably the past 50 years of post-World War II American imperialism has been viewed. The tipping point, as mentioned in a previous article was the outright 180º that George H.W. Bush pulled on Mikhail Gorbachev: the promise of NATO membership upon reunification of the two Germany’s and the dissolution of the Soviet Union, and then not fulfilling that promise.

The American corporate interests inserted themselves, as the communist government shattered, leaving in its wake oligarchs, the Russian mafia, and a “Wild West” environment within Russia proper and the ex-SSR’s, the former Soviet satellite nations. A tremendous amount of chaos occurred for a decade that was both enabled and further fostered by the United States. The perception in Russia even before the Soviet Union came into being was that Russians were in an economic war with Great Britain, and the United States was looked upon as an “extension” of Britain: a country with language, law, and cultural parallels,especially in terms of expansion.

As of the past several years, the United States has been encroaching upon Russian territory and economic interests. That encroachment has intensified into a U.S.-created “Cold War Resurrection” stance with the bolstering of NATO forces in the Baltic states. The U.S. is virtually thumbing its nose at Russia with the distribution of the “anti-ballistic missile systems” emplaced in places such as Moldova. As Putin pointed out, it takes not even a sneeze and a couple of hours to convert those platforms into use for Tomahawks with nuclear capability. The Russians did not exercise “en passant” with such an opener, and are placing missiles of their own to face the U.S. assets.

Debt Rattle June 22 2016

Jun 222016

June 22, 2016 Posted by Raúl Ilargi Meijer at 8:16 am Finance Tagged with: 1930s, balance sheet, Brexit, bubble, central bankers, housing, refugees, savings 1 Response »

Harris&Ewing Painless Dentist, Washington, DC 1918

• Nervy Global Investors Revisit 1930s Playbook (R.)

• Fed Warns of Commercial Real Estate Bubble (BBG)

• Federal Reserve Says US Stocks Have Gotten Expensive (MW)

• Amsterdam Housing Market Is Overheating (BBG)

• ECB Balance Sheet Hits Record High -With Stocks At 18-Month Lows- (ZH)

• Some 66 Million Americans Have ‘Zero’ Emergency Savings (MW)

• Increase In Refugees Reaching Aegean Islands Fuels Concern (Kath.)

Not a bad article, but it is really simple. 1) Centralization stops when growth does, 2) The only thing that’s really been growing for years is debt, and 3) You can’t borrow or buy growth.

• Nervy Global Investors Revisit 1930s Playbook (R.)

Global investors are once again dusting off studies of the 1930s as fears of protectionism, nationalism and a retreat of globalization, sharpened by this week’s Brexit referendum, escalate anew. With markets on tenterhooks over Thursday’s “too close to call” vote on Britain’s future in the EU, the damage an exit vote would deal business activity and world commerce is amplified by the precarious state of the global economy and its inability to absorb any left-field political shocks. As such, the Brexit vote will not be an open-and-shut case regardless of the outcome. Broader worries about global trade, frail growth and dwindling investment returns have festered since the banking shock of 2007/08 and have mounted this year.

Stalling trade growth has already led the world economy to the brink of recession for the second time in a decade, with growth now hovering just above the 2.0-2.5% level most economists say is needed to keep per capita world output stable. Three-month averages for growth of world trade volumes through March this year have turned negative compared with the prior three months, according to the Dutch government statistics body widely cited as the arbiter of global trade data. And it’s not a seasonal blip. Last year saw the biggest drop in imports and exports since 2009 and their average annual growth of 3% over the intervening seven years was itself half that of the 25 years before, according to Swiss asset manager Pictet. 2016 is set to be the fifth sub-par year in row.

A study published by the Centre For Economic Policy Research shows this paltry pace of trade growth is also below the 4.2% average for the past 200 years. Foreign direct investment growth of 2% of world output is also at its lowest since the 1990s, while the hangover from the credit crunch has seen annual growth rates in cross-border bank lending grind to a halt from some 10% in the decade to 2008.

First you blow a bubble, then you warn against it. Without using the term ‘bubble’, of course.

• Fed Warns of Commercial Real Estate Bubble (BBG)

The Federal Reserve warned that prices in the commercial real-estate market may have run up too far too fast. Valuations in commercial real estate “appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income,” the Fed said in its semiannual Monetary Policy Report to Congress. The Fed noted that prices exceed their pre-crisis peaks by some measures. The Fed included a special section on financial stability risks in the report, which accompanies Chair Janet Yellen’s testimony. The report said that even given “moderate’’ financial vulnerabilities, risks of external shocks, such as the U.K.’s possible exit from the European Union, pose stability risks. The report also highlighted issues related to credit exposures to the energy sector, money-market mutual funds and stock valuations.

The central bank said price-to-earnings ratios on a forward-looking basis for stocks have increased to a level “well above” their median for the past 30 years. “Although equity valuations do not appear to be rich relative to Treasury yields, equity prices are vulnerable to rises in term premiums to more normal levels, especially if a reversion was not motivated by positive news about economic growth,” the Fed said. The Fed said “some structural vulnerabilities are expected to persist” in money-market mutual funds even after Securities and Exchange Commission reforms go fully into effect in October. “Leverage for the non-financial corporate sector has stayed elevated and indicators of corporate credit quality, though still solid overall, continued to show signs of deterioration for lower-rated firms, especially in the energy sector,” the Fed said in its report. Strong U.S. bank capital positions contributed to the resilience of the financial system, the Fed said.

Real estate bubble, stocks bubble: the Fed ia aware of all.

• Federal Reserve Says US Stocks Have Gotten Expensive (MW)

Even the Federal Reserve is weighing in on valuations in the U.S. stock market. In its monetary policy report submitted to the Congress ahead of Federal Reserve Chairwoman Janet Yellen’s testimony, the central bank acknowledges that stock values have grown somewhat richer since the beginning of 2016. Here’s how they put it: “Forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades. Although equity valuations do not appear to be rich relative to Treasury yields, equity prices are vulnerable to rises in term premiums to more normal levels, especially if a reversion was not motivated by positive news about economic growth.”

The S&P 500 closed higher Tuesday, up 0.3% at 2,088 and it appears investors are shrugging off both the testimony and the report on valuations. Of course, not everyone views the Fed as an authority on stock values and some analysts and traders disagree with the notion that equities have gotten pricey. “No one looks to the Fed as a chief market strategist and markets have their own dynamics on valuing stocks,” said Quincy Krosby at Prudential Financial. In Crosby’s opinion “stocks are fully valued at these levels.” She says “what investors want to hear is whether companies’ earnings will start improving. Whether the Fed decides that stocks are undervalued or overvalued does not have an impact on prices.”

Wall Street tends to turn to the U.S. central bank for clues about the pace of interest-rate increases, the health of the labor market and to get a gauge on inflation. It’s rare that it offers specifics on sectors or assets but it isn’t totally unprecedented. Back in 2014, Yellen said valuations for technology stocks were stretched in her congressional testimony, resulting in a selloff in social-media names, which were booming at the time. Going back to mid-1990s, former Fed Chairman Alan Greenspan sounded the alarm on tech stocks too. But his famous “irrational exuberance” comments didn’t pop the tech bubble when he delivered them in 1996. It would take another four years before the air rushed out.

The perversity of low rates.

• Amsterdam Housing Market Is Overheating (BBG)

It’s getting hot in the Amsterdam property market. The Netherlands, the nation of tulipmania almost 400 years ago, saw prices in its capital city surge almost 21% in the first quarter. While the blame partly falls on a simple supply-and-demand imbalance, the signs are pointing to a potential squeeze. In London, by comparison, government data show prices rose about 14% from a year earlier, according to Savills Plc. In a market where almost half of properties are owned by non-profit corporations, mainly for social housing, there’s just not enough coming on to the market to satisfy buyers. After falling about 14% in five years, prices have rebounded recently and are now above pre-crisis levels.

“The Amsterdam housing market shows signs of overheating,” said Frans Schilder, who studies housing policy in the economics department at the University of Amsterdam. “The prices are absurd but I don’t expect them to fall in the near future.” Any houses coming up for sale in the Amsterdam region are scooped up immediately. The supply shortage is a hangover from the financial crisis, which restrained new building and led to more families choosing to remain in the city, as it was harder to sell properties at a profit. In the first quarter of 2016, all houses that came on the market were sold, nearly half for more than the asking price. The asking price for an average house rose 5% from a month ago in May while it was up 26% from a year earlier, the Dutch bureau of statistics said Tuesday.

Imbalance sheet.

• ECB Balance Sheet Hits Record High -With Stocks At 18-Month Lows- (ZH)

Draghi, we have a problem.

The European Central Bank's balance sheet has reached a new record high this week – surpassing the chaotic expansion peak in 2012 – as Mario Draghi prepares to unleash TLTRO-II, which will definitely increase this time (just like LTRO and NIRP didn't!)

"Fool me once" in 2011/12 but not in 2015/16.

Given the utter failure to create any 'real' economic gains via the expansion of the ECB balance sheet, the plunge in stock prices (and thus crushing the trickle-down wealth-creation mandate) leaves Draghi in the same boat as Yellen – utterly impotent.

Which is ironic because this is what Draghi just said…

*DRAGHI SAYS ECB ACTION PUT RECOVERY ON MORE SOLID FOOTING

*DRAGHI SAYS GROWTH, INFLATION WOULD BE LOWER WITHOUT ECB ACTION

Though we'll never know, can you imagine just how bad things are in reality?

Excuse me? “Accumulating emergency savings requires establishing the habit.”

• Some 66 Million Americans Have ‘Zero’ Emergency Savings (MW)

Around 28% of U.S. adults have saved “zero dollars” for an emergency, according to a survey released Tuesday of 1,000 U.S. adults by personal savings website Bankrate.com carried out by Princeton Survey Research Associates International, a polling firm. When extrapolated for the entire 234.6 million U.S. adult population, that’s equivalent to 66 million people. That’s down from 29% last year, but up from 24% in five years ago. Another 28% of adults have saved enough money to last six months, up from 22% from last year and a six-year high; 18% had some emergency savings, but not enough for six months. Generation Xers are in the worst position of all generations: 33% of 36- to 51-year-olds haven’t saved anything for an emergency.

Millions of Americans are struggling with student loans, medical bills and other debts, experts say, and although Central bankers hiked their short-term interest rate target last December to a range of 0.25% to 0.50% from near-zero, that’s still a small return for savings left in bank accounts. Many investors are behaving like another imminent rate hike is highly unlikely, MarketWatch columnist Jeff Reeves wrote this month. “Expenses grow faster than many Americans can save during the home-buying, family-raising years,” says Greg McBride, chief financial analyst at Bankrate.com. “Accumulating emergency savings requires establishing the habit.”

Slowly going very wrong – again.

• Increase In Refugees Reaching Aegean Islands Fuels Concern (Kath.)

The influx of would-be migrants into Greece from neighboring Turkey is decisively on the increase following several months during which the flow had been staunched thanks to a European Union deal with Ankara to crack down on people smuggling. Over the long weekend, 270 migrants arrived on Greek islands in the eastern Aegean while arrivals in the first 20 days of June came to 981. The renewed influx is putting increased pressure on reception facilities on the islands, which according to local authorities are already full. Meanwhile, Greek committees are continuing to process hundreds of asylum applications. Greek authorities have rejected dozens of these applications, of which 70 were upheld by appeal committees that ruled Turkey is an “unsafe country” to send migrants back to.

In an apparent bid to curb the number of rulings upholding appeals, the government passed a legislative amendment last week which removes the representative of the Hellenic League for Human Rights from the appeal committees, which feature two judges and a representative of the United Nations refugee agency. The HLHR rapped the government for changing the composition of the committees instead of applying pressure to ensure that Turkey becomes a safe country to make migrant returns viable. In a related development the UN revealed on Tuesday that the number of people displaced from their homes due to conflict and persecution last year exceeded 60 million for the first time since the organization was founded in 1945.

Debt Rattle June 17 2016

Jun 172016

June 17, 2016 Posted by Raúl Ilargi Meijer at 8:58 am Finance Tagged with: austerity, Brexit, bubble, casino, CO2, default, Greece, housing, Jo Cox, malls 3 Responses »

Unknown Dutch Gap, Virginia. Bomb-proof quarters of Major Strong 1864

• Stocks, Sterling Surge After British MP’s Death (ZH)

• ’I’d Risk Life And Limb For My Babies’: Jo Cox (G.)

• There’s A New Kind Of Housing Crisis in America (MW)

• US Housing Bubble 2.0: Shadow Demand vs Shelter-Buyer Fundamentals (Hanson)

• America’s Dying Shopping Malls Have Billions in Debt Coming Due (BBG)

• Sell The Stocks, Sell The Bonds, Get Out Of The Casino: Stockman (Fox)

• Default Cycle: ‘It’s Only A Matter Of Time Before Many Of Them Blow Up’ (ZH)

• China’s Debt Is 250% of GDP And ‘Could Be Fatal’, Says Government Expert (G.)

• The Fed Has Brought Back ‘Taxation Without Representation’ (Black)

• Forget Brexit, It’s Italy’s Turn (Stelter)

• Austerity Kills! Greeks’ Health Deteriorating, Life Expectancy Shrinks (KTG)

• Antarctic CO2 Hits 400ppm For First Time In 4 Million Years (G.)

The world drowns in cynicism.

• Stocks, Sterling Surge After British MP’s Death (ZH)

The devastating news that British MP Jo Cox has died following the shooting incident earlier today by a mentally unstable man…

“U.K. Labour Party lawmaker Jo Cox died after being attacked as she met constituents in her electoral district in West Yorkshire in the north of England. Campaigning ahead of next week’s referendum on Britain’s membership of the European Union was suspended for the rest of Thursday by both sides after the attack, which happened just before 1 p.m. Jo was attacked by a man who inflicted serious and, sadly, ultimately fatal injuries,” West Yorkshire Police Temporary Chief Constable Dee Collins said in a televised press conference in Wakefield.

…has sparked a bullish buying binge in stocks as Sterling rallies on the market’s “hope” that the Brexit vote will be delayed. This evening’s major speech at Mansion House by Bank of England Governor Carney has been cancelled due to her death…

Bank of England says Governor Mark Carney will no longer deliver planned speech in London. BOE cites “dreadful attack today on Jo Cox MP” Governor will attend event and deliver a “short speech reflecting on today’s events”

No further comment. Perhaps complete silence would be the most appropriate answer, but all we’ll hear all day and then some is comments and opinions. Spin doctors and conspiracies work overtime.

• ’I’d Risk Life And Limb For My Babies’: Jo Cox (G.)

Labour MP Jo Cox, who died on Thursday after being attacked in her constituency of Batley and Spen in West Yorkshire by an armed man, makes a speech in parliament about the need for the UK to help child migrants stranded unaccompanied in Europe. The speech was part of a debate on the issue which took place in April 2016.

Unaffordability. Known to pop many a bubble.

• There’s A New Kind Of Housing Crisis in America (MW)

America has a housing crisis, and most Americans want policy action to address it. That’s the conclusion of an annual survey released Thursday by the MacArthur Foundation. The “crisis” is no longer defined by the layers of distress left behind after the subprime bubble burst, but about access to stable, affordable housing. A vast majority of respondents – 81% – said housing affordability is a problem, and one-third said they or someone they know has been evicted, foreclosed on, or lost their housing in the past five years. Over half the respondents, 53%, said they’d had to make sacrifices over the past three years to be able to pay their mortgage or rent. Yet most respondents believe the housing problem is solvable, and want policymakers to address it.

Nearly two-thirds of survey respondents from both parties say housing hasn’t received enough attention in the 2016 campaign. Most people supported a range of proposed policies to support affordable housing, both rentals and purchase. But people increasingly believe that owning a home is a “an excellent long-term investment.” Some 60% agreed with that statement, up from 56% a year ago and 50% in 2014. Access to stable, affordable housing – whether to rent or buy – is “about more than shelter,” the MacArthur Foundation noted in a release. “It is at the core of strong, vibrant, and healthy families and communities.”

“If 2006 was a known bubble with housing prices at “X”, affordability never better, easy availability of credit, unemployment in the 4%’s, total workforce at record highs, and growing wages, then what do you call today with house prices at X+ 5% to 20%, worse affordability and credit, higher unemployment, weakening total workforce, and shrinking wages? Whatever you call it, it’s a greater thing than “X”.

• US Housing Bubble 2.0: Shadow Demand vs Shelter-Buyer Fundamentals (Hanson)

[..] if everybody always had to purchase owner-occupied properties using the same down payment amount and a market rate, fixed-rate mortgage then house prices would always reflect the employment, income, and macro-economic conditions of the surrounding area. But, when ‘Shadow Demand’ cohorts enter the market using cheap and easy credit and liquidity prices can detach from local-area economics, especially if the Shadow Demand continues to gain market share. Heck, in the greater Phoenix region, over 50% of all households can’t afford the going rate on a two-bedroom apartment, yet house prices are some of the strongest in the nation. Obviously, this isn’t due to strong end-user, shelter-buyer fundamentals.

As Shadow Demand continues to gain share over end-user buyers, they settle for lower respective returns on their housing investments and prices continue to rise. Then, when appraisers use properties purchased by Shadow buyers — for unconventional purposes with cheap and easy credit and liquidity — as comparable sales, all property values rise. Sure, there are end-user, shelter-buyers who will be able to chase the market all the way up. But, the larger the bubble blows the more the end-user, shelter-buyer demand will get crowded out and/or turn into increased supply as they liquidate. We are seeing this happen all over the nation.

In Bubble 1.0, Shadow Demand continued to gain market share until it blew up. And we know that beginning in 2011 the four pillars of unorthodox, Shadow Demand — beginning with the distressed market — controlled housing demand and still does. The implosion of the mortgage securitization market in 2007 didn’t crash housing. Rather, when the Shadow Demand – reliant on cheap and easy credit and liquidity largely driven by securitization — left the market, housing “reset to end-user, shelter-buyer fundamentals”. In other words, the pendulum swung back to the fundamental, end-user, shelter-buyer with 20% down and a market-rate 30-year fixed mortgage, which was 30% lower. Again, this isn’t a housing crash per se, rather a demand-shift and a reset, or reattachment, to real fundamentals.

Bottom line: History will repeat because the drivers are identical. Bubble 2.0 will end with house prices once again “resetting to end-user fundamentals”, or to what the end-user shelter buyer can afford with a typical down payment and 30-year fixed rate mortgage. And it doesn’t have to be an MBS market blowing up to cause house prices to reattach to end-user fundamentals. It could be anything that swings this pendulum from being driven by Shadow Demand, which is where we are today.

Erosion.

• America’s Dying Shopping Malls Have Billions in Debt Coming Due (BBG)

Suburban Detroit’s Lakeside Mall, with mid-range stores such as Sears, Bath & Body Works and Kay Jewelers, is one of the hundreds of retail centers across the U.S. being buffeted by the rise of e-commerce. After a $144 million loan on the property came due this month, owner General Growth Properties Inc. didn’t make the payment. The default by the second-biggest U.S. mall owner may be a harbinger of trouble nationwide as a wave of debt from the last decade’s borrowing binge comes due for shopping centers. About $47.5 billion of loans backed by retail properties are set to mature over the next 18 months, data from BofAML show. That’s coinciding with a tighter market for commercial-mortgage backed securities, where many such properties are financed.

For some mall owners, negotiating loan extensions or refinancing may be difficult. Lenders are tightening their purse strings as unease surrounding the future of shopping centers grows, with bleak earnings forecasts from retailers including Macy’s and Nordstrom, and bankruptcy filings by chains such as Aeropostale and Sports Authority. Older malls in small cities and towns are being hit hardest, squeezed by competition from both the Internet and newer, glitzier malls that draw wealthy shoppers. “For many years, people thought the retail business in the U.S. was a bit overbuilt,” said Tad Philipp at Moody’s. “The advent of online shopping is kind of accelerating the separation of winners and losers.” Landlords that can’t refinance debt may either walk away from the property or negotiate for an extension of the due date. It can be hard to save a failing mall, leading to high losses for lenders on soured loans, Philipp said.

“.. (low) interest rates are the mothers milk of speculation..”

• Sell The Stocks, Sell The Bonds, Get Out Of The Casino: Stockman (Fox)

“..central banks in their infinite wisdom have made the cost of money so cheap that it has created an environment that forces a complete misallocation of capital in the market ..”

• Default Cycle: ‘It’s Only A Matter Of Time Before Many Of Them Blow Up’ (ZH)

It’s been a tough year for traders and bankers alike, as layoffs have gripped firms due to difficult trading environments and an overall sluggish economy. However, there is one area that is starting to actually pick up. As the number of bankruptcies begin to increase, firms are expanding their turnaround teams in order to handle all of the work headed their way – bankers with experience in turnarounds and restructuring are now in high demand. “Firms are hungry for experienced restructuring professionals, who are increasingly in short supply. You need to reach deep into your Rolodex to find people you know who are capable, and you need to move fast.” said Richard Shinder, hired by Piper Jaffray in March to help build out its restructuring team.

Both the number of bankruptcies and the amount of liabilities associated with them have picked up significantly, as Bloomberg points out. With the amount of companies in distress, firms such as Lazard, Guggenheim, Perella Weinberg and Alix are all hiring in anticipation of even more bankruptcies. “Cycles come and go, but when a wave hits, you want to make sure you are in the right seat with the right group of people. We are putting the band back together.” said Ronen Bojmel, who is helping to build the restructuring team at Guggenheim. Moody’s is forecasting high default rates in sectors that are largely expected given commodity prices, such as Metals & Mining and Oil & Gas, however trouble looks to be spilling over into other sectors such as Construction, Media, Durable Consumer Goods, and even Retail.

As we have discussed for quite some time, central banks in their infinite wisdom have made the cost of money so cheap that it has created an environment that forces a complete misallocation of capital in the market as the search for yield continues down every rabbit hole it can find. This will (and already is) inevitably catch up to the economy in the form of defaults and bankruptcies. “The wave is already here. Many risky debt deals have been done as people chased yield, and it’s a matter of time before many of them blow up.” said Tim Coleman, head of PJT Partners.

Local governments = shadow banks. Would like to see someone dig into who owns them.

• China’s Debt Is 250% of GDP And ‘Could Be Fatal’, Says Government Expert (G.)

China’s total debt was more than double its GDP in 2015, a government economist has said, warning that debt linkages between the state and industry could be “fatal” for the world’s second largest economy. The country’s debt has ballooned to almost 250% of GDP thanks to Beijing’s repeated use of cheap credit to stimulate slowing growth, unleashing a massive, debt-fuelled spending binge. While the stimulus may help the country post better growth numbers in the near term, analysts say the rebound might be short-lived. China’s borrowings hit 168.48 trillion yuan ($25.6 trillion) at the end of last year, equivalent to 249% of economic output, Li Yang, a senior researcher with the leading government think-tank the China Academy of Social Sciences (CASS), has told reporters.

But the huge number, which includes government, corporate and household borrowings, was lower than some non-government estimates. The consulting firm McKinsey Group said earlier this year that the country’s total debt had quadrupled since 2007 and was likely as high as $28 trillion by mid-2014. The debt-to-GDP ratio is not the highest in the world. The US has a ratio of 331%, for example, much of which is accounted for by federal debt. But part of the concern about China’s massive debt binge is that the most worrying risks lie in the non-financial corporate sector, where the debt-to-GDP ratio was estimated at 156%. This sector includes the liabilities of local government financing vehicles, Li said.

Interesting observation.

• The Fed Has Brought Back ‘Taxation Without Representation’ (Black)

In February 1768, a revolutionary article entitled “No taxation without representation” was published London Magazine. The article was a re-print of an impassioned speech made by Lord Camden arguing in parliament against Britain’s oppressive tax policies in the American colonies. Britain had been milking the colonists like medieval serfs. And the idea of ‘no taxation without representation’ was revolutionary, of course, because it became a rallying cry for the American Revolution. The idea was simple: colonists had no elected officials representing their interests in the British government, therefore they were being taxed without their consent. To the colonists, this was tantamount to robbery.

Thomas Jefferson even included “imposing taxes without our consent” on the long list of grievances claimed against Great Britain in the Declaration of Independence. It was enough of a reason to go to war. These days we’re taught in our government-controlled schools that taxation without representation is a thing of the past, because, of course, we can vote for (or against) the politicians who create tax policy.

But this is a complete charade. Here’s an example: Just yesterday, the Federal Reserve announced that it would keep interest rates at 0.25%. Now, this is all part of a ridiculous monetary system in which unelected Fed officials raise and lower rates to induce people to adjust their spending habits. If they want us little people to spend more money, they cut rates. If they want us to spend less, they raise rates. It’s incredibly offensive when you think about it– the entire financial system is underpinned by a belief that a committee of bureaucrats knows better than us about what we should be doing with our own money.

It’s too late to even try bridging the gaps.

• Forget Brexit, It’s Italy’s Turn (Stelter)

If the Germans really want to avoid a Brexit or the exit of other countries from the Eurozone, they will have to change their policies. Unfortunately, German politicians and economists prefer to criticize the other countries instead of doing their homework. They oppose spending more money at home, they oppose a debt restructuring, they oppose debt monetization by the ECB, they oppose exits from the eurozone. In doing so, they increase the pressure in the system as Europe remains locked in recession. Irrespective of how the British vote next week, the problems of Europe keep on growing. It is only a question of when, not if, a euroskeptic party gets into power in one of the largest EU economies, promising to solve all problems by exiting the Euro and the EU.

I continue to see Italy as the prime candidate for such a move. The country suffers under a recession which has by now lasted longer than the recession of the 1930s. It still has not managed to get back to 2008 GDP levels. Unemployment is high, government debt is out of control. Closing the competitive gap to Germany by lowering wages by 30% is a ridiculous idea and an impossible task. The alternative is to leave the eurozone. Italy could then devalue the new lira and regain competitiveness overnight. An Italian uscita (exit) – or “Uscitaly” in the latest clever term of art – is the true risk for the eurozone. And it would be too late when Der Spiegel comes up with a new cover: “Mon dio, Italia. Si prega di non uscire!”

This is the EU Britain must vote for or against. This is what it does. It turns member states into third world nations. Greece had a great health care system. But nobody can afford it anymore.

• Austerity Kills! Greeks’ Health Deteriorating, Life Expectancy Shrinks (KTG)

The economic crisis and the strict austerity bound to the loan agreement kill. They kill Greeks. The Bank of Greece may not write it in such a melodramatic way on its Monetary Policy Report 2015-2016. However, the conclusions in the chapter about “Reforms in health, economic crisis and impact on the health of population” are shocking and confirm what we have been hearing and reading around from relatives and friends in the last years: that the physical and mental health of Greeks has been deteriorating – partly due to economic insecurity, high unemployment, job insecurity, income decrease and constant exposure to stress. Partly also due to economic problems that have patients cut their treatment, partly due to the incredible cuts and shortages in the public health system. The Report notes that “while it takes longer to record the exact effect, trends show a deterioration of the health of Greeks in the years of loan agreements and austerity cuts.”

The BoG states:
• Suicides increased. “The risk of suicidal behavior increases when there are so-called primary risk factors (psychiatric-medical conditions), while the secondary factors (economic situation) and tertiary factors (age, gender) affects the risk of suicide, but only if primary risk factors pre-exist.
• Infant mortality increased by nearly 50%, mainly due to increase of deaths of infants younger than one year, and the decline of births by 22,1%. Infant mortality increase: 2.65% in 2008 and 3.75% in 2014
• Increase of parts of population with mental illness, especially with depression. Increase: 3.,3% in 2008 to 6.8% in 2009, to 8.2% in 2011 and to 12.3% in 2013. In 2014, a 4.7% of the population above 15 years old declared it suffered form depression – that was 2.6% in 2009.
• Chronic diseases increased by approximately 24%.

The BoG notes that “the large cuts in public expenditure have not been accompanied by changes and improvement of the health system in order to limit the consequences for the weakest citizens and vulnerable groups of the society.” [..] Citing OECD data of 2013, the BoG underlines that 79% of the population in Greece was not covered with insurance and therefore without medical and medicine due to long-term unemployment, while self-employed could not afford to pay their social contributions.

[..] One of the neighborhood pharmacists has been telling me on and off about the dramatic number of patients who cannot afford the self-participation in prescription medicine. Many of his clients cut their treatment into half – like 1 tablet for cholesterol not daily but every other day basis – and that some have given up the whole treatment. “For some people the choice is: either have treatment or food.” And this has been going on since 2012, when then Greek Health Minister adopted the German model of “self-participation in prescription medicine, laboratory tests” and cut some primary health services but forgot to adopt also that aspect of the German model that provides that patients would not spend more than 2% of their income for medical services and medication.

4 million years ago is well before anything closely resembling man appeared. That makes this so dangerous for us. It creates an environment that we did not evolve in. As more and more of what was there when we did evolve will also disappear.

• Antarctic CO2 Hits 400ppm For First Time In 4 Million Years (G.)

We’re officially living in a new world. Carbon dioxide has been steadily rising since the start of the Industrial Revolution, setting a new high year after year. There’s a notable new entry to the record books. The last station on Earth without a 400 parts per million (ppm) reading has reached it. A little 400 ppm history. Three years ago, the world’s gold standard carbon dioxide observatory passed the symbolic threshold of 400 ppm. Other observing stations have steadily reached that threshold as carbon dioxide spreads across the planet’s atmosphere at various points since then. Collectively, the world passed the threshold for a month last year.

In the remote reaches of Antarctica, the South Pole Observatory carbon dioxide observing station cleared 400 ppm on May 23, according to an announcement from the National Oceanic and Atmospheric Administration on Wednesday. That’s the first time it’s passed that level in 4 million years (no, that’s not a typo). There’s a lag in how carbon dioxide moves around the atmosphere. Most carbon pollution originates in the northern hemisphere because that’s where most of the world’s population lives. That’s in part why carbon dioxide in the atmosphere hit the 400 ppm milestone earlier in the northern reaches of the world.

But the most remote continent on earth has caught up with its more populated counterparts. “The increase of carbon dioxide is everywhere, even as far away as you can get from civilization,” Pieter Tans, a carbon-monitoring scientist at the Environmental Science Research Laboratory, said. “If you emit carbon dioxide in New York, some fraction of it will be in the South Pole next year.”

Debt Rattle June 2 2016

Jun 022016

June 2, 2016 Posted by Raúl Ilargi Meijer at 8:21 am Finance Tagged with: Brexit, China, genocide, hard landing, homeless, housing, Troika, Trump, Turkey 3 Responses »

Gottscho-Schleisner New York City views. Looking down South Street 1933

• China’s Hard Landing Began Last Year, And It’s Going To Get Worse (SCMP)

• China’s Latest Export: Broken Deals (WSJ)

• US Construction Spending Collapses – Worst April Since 2009 (ZH)

• Banks’ Embrace of Jumbo Mortgages Means Fewer Loans for Blacks, Hispanics (WSJ)

• Brexit, Spexit, Grexit and Frexit Could All Collide In June 23 Weekend (MW)

• Donald Trump To Visit UK On Day Of EU Referendum Result

• Leave Camp Must Accept That Norway Model Is The Only Safe Way To Exit EU (AEP)

• Greece Under Troika Rule (Wren-Lewis)

• Greek Home Prices Down 45%, Seen Dropping Another 20-25% By 2018 (Kath.)

• OECD Warns Of “Disorderly Housing Market Correction” In Canada (ZH)

• Number Of Homeless People In Vancouver Reaches 10-Year High (G&M)

• EU Gives Budget Leeway To France ‘Because It Is France’ – Juncker (R.)

• The ECB’s Illusory Independence (Varoufakis)

• German Vote on Armenian Genocide Riles Tempers, and Turkey (NY Times)

“Perhaps not since the Pharaohs built the pyramids with slave labour has investment made up such a large share of a country’s economy and household consumption made up so little..”

• China’s Hard Landing Began Last Year, And It’s Going To Get Worse (SCMP)

Economist and financial author Richard Duncan believes China’s economy entered into a hard landing in 2015, with the slowdown set to deepen into a slump that will prove to be “severe and protracted”. At its core, a growth model that relied too heavily on investment and exports has left the economy deeply imbalanced, with few drivers that can now take up the slack. Duncan has published a series of videos explaining why, in his opinion, China’s economic development model of export-led and investment-driven growth is now in crisis. The South China Morning Post brings you the second video in that series.

“Perhaps not since the Pharaohs built the pyramids with slave labour has investment made up such a large share of a country’s economy and household consumption made up so little,” Duncan said. “This enormous gap between investment and consumption means China’s economy is now wildly unbalanced.” Underscoring the scale of China’s reliance on investment as an engine of growth, consider how much it has ramped up spending in this area in just a few short years, compared to that of the US, the world’s largest economy. In 2014, investment in the US was US$177 billion higher than 2007, a growth rate of 6%. In 2014, the level of investment in China was US$3.2 trillion more than it was in 2007, representing growth of 236%.

Too much capital is fleeing.

• China’s Latest Export: Broken Deals (WSJ)

China’s global deal-making boom is coming undone. The mystery-shrouded Anbang Insurance is leading the way. It moved a step closer to hitting the trifecta of broken deals this week, just days after a major Chinese construction-equipment maker bailed on its bid to buy U.S. crane maker Terex. Announced overseas deals by Chinese companies topped 2015’s record before this year was half over, which would make China the world’s biggest buyer of foreign companies for the first time ever, according to Dealogic. Chinese companies have also failed to close on more deals than ever before, according to Dealogic.

It’s not a coincidence that the boom in Chinese overseas deal making occurred while businesses and individuals were pouring cash overseas, either to avoid an expected depreciation of the yuan or just to get assets out of the reach of Beijing. And the recent failures have happened while Beijing acts to stem the flow of these funds. That is just part of the weirdness that surrounds many of these deals, and their demise. Another is the opaque nature of the companies involved and the government owners or regulators that determine what is and isn’t allowed. Last are the reasons behind the deals, which have foreign regulators on edge. The latest deal on the ropes is Anbang’s planned $1.57 billion acquisition of U.S. insurer Fidelity & Guaranty Life, one of the biggest sellers of fixed indexed annuities.

Regulators in the U.S. have demanded but haven’t gotten detailed financial information from Anbang. Fidelity says it expects Anbang will try again to get the deal approved. It isn’t surprising that the company hasn’t provided the requested information. Efforts to figure out Anbang’s corporate structure or where its cash came from have so far failed to yield much clarity. This is the third proposed Anbang deal to run into trouble. First was its effort to buy Starwood Hotels & Resorts Worldwide Inc. After bidding up the price and threatening a rival deal, Anbang pulled out suddenly with little explanation.

Weather.

• US Construction Spending Collapses – Worst April Since 2009 (ZH)

Following a hope-strewn bounce in February and March, US Construction Spending plunged 1.8% in April (massively worse than the expected 0.6% rise). This is the biggest monthly drop since January 2011 as while religious construction surged 9.6%, Commercial, Healthcare, and Education construction all plunged with Communications and highway building collapsing 7.7% and 6.5% respectively. We are sure weather will be blamed but the 1.5% drop in residential construction is rather notable for an April – it is the weakest April since 2009.

Lend only to the rich.

• Banks’ Embrace of Jumbo Mortgages Means Fewer Loans for Blacks, Hispanics (WSJ)

Last decade’s financial crisis left many losers in banking. One winner is the jumbo. The biggest U.S. banks are tilting toward these high-dollar mortgages as they overhaul loan operations. And jumbo loans, which were less important during the subprime-loan boom, are helping banks take on less risk, as mandated by regulators in the postcrisis era. These loans, however, could put banks at odds with another federal regulatory mandate—one that says lenders should serve a racially diverse set of customers. As they approve relatively more jumbos, major banks are granting fewer mortgages to African-Americans and Hispanics than just before the crisis, a Wall Street Journal analysis found.

For banks, “it’s one of those damned if you do, damned if you don’t situations,” said Stu Feldstein, president at SMR Research Corp., a mortgage-research firm in Hackettstown, N.J. The Journal analyzed data on every mortgage approval reported to the federal government for home purchases in 2007 and 2014, the most recent available, including borrower race or ethnicity. In that period, each of the 10 biggest U.S. retail banks increased the share of its mortgage approvals that are jumbos. Jumbos, loans above $417,000 in most markets, are attractive because they typically feature high credit scores, big down payments and low default rates. And they aren’t linked to the government programs that cost banks tens of billions of dollars in fines related to the subprime-loan debacle.

Note: it’ll take the entire weekend.

• Brexit, Spexit, Grexit and Frexit Could All Collide In June 23 Weekend (MW)

The hedge funds will have prepped their positions. The investment banks will have ordered in pizza and extra coffee ready for a long night of dealing. Exit polls will have been commissioned, and currency traders will be ready to buy or sell sterling as soon as they start getting a clear idea of whether Britain has voted to stay in or get out of the EU on June 23. But hold on. In fact, it is not just the risk of Brexit that the markets need to be worrying about. In truth, the real drama is going to come over a long and difficult weekend, leading up to potentially wild day in European assets on Monday, June 27. Why? Over that weekend, Spanish voters will go back to the polls in another attempt to settle on a government, which may well see the far-left Podemos group make big gains.

Greece will be struggling to find the money to pay back its latest debts. And if the strikes in France escalate, the country may be close to running out of its strategic fuel reserves – and approaching a total meltdown. Brexit, Spexit, Grexit, and Frexit could all collide. The result? A car crash for the European markets. Brexit remains the most pressing worry for investors, and rightly so. With three weeks until the vote, the polls remain very close. The latest sample for the Daily Telegraph showed a five-point lead for “Remain,” and most have showed the two camps within five to 10 points of each other. But who knows what is going on? The UK hasn’t had a referendum like this for a generation. No one knows what questions to ask, what demographics to target and which side will be better at getting its people to the polling booths on the day.

Either side could win comfortably. Here is the interesting point, however. It may take until the weekend to work out what has happened. The TV networks have decided against an extensive exit poll, on the grounds that they don’t know how to make it accurate. The hedge funds are reported to be spending a lot of money on private exit polls, and the currency markets will tell us what those results look like.

Brilliant: “I think I would be a great uniter. I think that I would have great diplomatic skills; I would be able to get along with people very well,” Trump said. “I had great success [in my life]. I get along with people. People say, ‘Oh gee, it might be tough from that standpoint’, but actually I think the world would unite if I were the leader of the United States.”

• Donald Trump To Visit UK On Day Of EU Referendum Result

Donald Trump, the presumptive Republican nominee in the US presidential election, has confirmed he is to visit the UK later this month to attend the official reopening of his hotel and golf resort in Scotland. The billionaire property developer will be at the Turnberry hotel at the golf course in Ayrshire on 24 June for its official relaunch following a £200m redevelopment. Trump’s announcement throws up the question of whether David Cameron will meet him, as the visit comes the day after the UK’s referendum on EU membership on 23 June – a vote some polls suggest the prime minister faces losing. The Turnberry hotel, which Trump bought in 2014 for £35m, opened to guests on Wednesday. It features a £3,500-a-night presidential suite and, from August, the Donald J Trump ballroom – “the most luxurious meeting facility anywhere in Europe”, according to his publicists.

“Very exciting that one of the great resorts of the world, Turnberry, will be opening today after a massive £200m investment. I own it and I am very proud of it,” Trump said in a statement. He will not be officially confirmed as Republican nominee until the party’s convention in July. And his campaign did not say whether he planned any political activity while in the UK – or whether his trip was a coincidence. Trump has often weighed in on the referendum, and believes the UK should leave the EU. He told Fox News in May: “I know Great Britain very well. I know the country very well. I have a lot of investments there. I would say that they’re better off without it. But I want them to make their own decision.” He recently told Hollywood Reporter, “Oh yeah, I think they should leave”, after being initially unfamiliar with the term “Brexit”.

Ambrose on Brexit. I’m sure many Britons feel this has nothing to do with them, it’s just a bunch of middle-aged right wingers squaring off.

• Leave Camp Must Accept That Norway Model Is The Only Safe Way To Exit EU (AEP)

There have been two excellent reports on the EEA option, one by the Adam Smith Institute and another entitled ‘Flexcit’ by Richard North from the EU Referendum blog. The Adam Smith Institute starts from the premise that the EU is “sclerotic, anti-democratic, immune to reform, and a political relic of a post-war order that no longer exists.” It says the EEA option lets the public judge “what ‘out’ looks like” and keeps disruption to a minimum. “The economic risks of leaving would thus be neutralised – it would be solely a disengagement from political integration. All the business scare stories about being cut off from the single market would fade away,” it said. The report argues that everybody could live with an EEA compromise, whether the Civil Service, or the US, or the EU itself.

Britain would then be a sovereign actor, taking its own seat on the global bodies that increasingly regulate everything from car standards, to food safety, and banking rules. “As Britain is already a contracting party to the EEA Agreement there would be no serious legal obstacle,” it says. David Cameron disparages the Norwegian model as a non-starter. “While they pay, they don’t have a say,” he says. Actually they do. As our forensic report on Norway by Szu Ping Chan makes clear, they have a de facto veto over EU laws under Article 102 of the EEA agreement. Their net payments were £106 a head in 2014, a trivial sum.

They are exempt from the EU agricultural, fisheries, foreign, defence, and justice policies, yet they still have “passporting” rights for financial services. Their citizens can live in their Perigord moulins or on the Costa Del Sol just as contentedly as we can. They do not have to implement all EU law as often claimed. Norway’s latest report shows it has adopted just 1,349 of the 7,720 EU regulations in force, and 1,369 out of 1,965 EU directives. The elegance of the EEA option is that Britain would retain access to the EU customs union while being able to forge free trade deals with any other country over time.

Not the biggest fan of Wren-Lewis, but this is good.

• Greece Under Troika Rule (Wren-Lewis)

“The repayment of foreign loans and the return to stable currencies were recognized as the touchstones of rationality in politics; and no private suffering, no infringement of sovereignty was considered too great a sacrifice for the recovery of monetary integrity. The privations of the unemployed made jobless by deflation; the destitution of public servants dismissed without a pittance; even the relinquishment of national rights and the loss of constitutional liberties were judged a fair price to pay for the fulfilment of the requirements of sound budgets and sound currencies, these a priori of economic liberalism.” – Karl Polanyi (1944), “The Great Transformation” (p142)

This quote (HT Jeremy Smith) could almost be written today about Greece. I had once thought that the lessons of the interwar period and Great Depression had been well learnt, but 2010 austerity showed that was wrong. I therefore used in a 2014 post an earlier example of where one country allowed another to suffer for what was thought to be sound economics and their own ultimate good (‘a sharp but effectual remedy’): the British treatment of Ireland during the famine. The British held back relief because of a combination of laissez-faire beliefs and prejudice against Irish catholics. Replace famine relief with debt relief and Irish operating an inefficient agricultural system with lazy Greeks and an economy in need of structural reform, and the two stories have strong similarities, although of course the scale of the suffering is different.

To understand why the Greek crisis goes on you need to understand its history. That the Greek government borrowed too much is generally agreed. What is often ignored is that the scale of the excess borrowing meant default was pretty inevitable. But Eurozone leaders, worried about their banking system (which held a lot of Greek debt), first postponed default and then made it partial. The real ‘bailing out’ was for the European banks and others who had lent to the Greek government. The money the Eurozone lent to Greece largely went to pay off Greece’s creditors. There was absolutely nothing that obliged Eurozone leaders to lend their voters money to bail out these creditors. Pretty well all the analysis I saw at the time suggested it would be money that Greece would be unable to pay back.

If European leaders felt their banking systems needed support, they could have done this directly. But instead they convinced themselves that Greece could pay them back. It was a mistake they will do anything to avoid admitting. To try and ensure they got their money back, they along with the IMF effectively took over the running of the Greek economy. The result has been a complete disaster. The amount of austerity imposed caused great hardship, and crashed the economy. Whereas the Irish and Spanish economies are beginning to recover and regain market access, Greece is miles away from that, and the Troika’s structural reforms are partly to blame.

When will the Chinese start buying?

• Greek Home Prices Down 45%, Seen Dropping Another 20-25% By 2018 (Kath.)

Property market professionals are expecting house prices in Greece to drop further by up to 25% in the next few years, reporting a sudden rise in supply of properties owing to the upcoming repossessions, while demand will continue to fall due to the recessionary measures of the new bailout agreement. Since end-2008, house prices in the country’s two main cities, Athens and Thessaloniki, have fallen by an average of 45%, according to data from the Bank of Greece. The decline for the country as a whole comes to 41%. Therefore if the above estimate proves right, by the time the bailout period is supposed to be completed (in May 2018), the loss in residential properties’ market value will amount to 65-70%, or even more in some cases.

Giorgos Litsas, the head of chartered surveyors GLP Values, tells Kathimerini that “just under a year ago, when the agreement between the government and its creditors became known in the context of the capital controls, we estimated that the new bailout deal would entail a further 18% drop in home prices. Now, after the measures passed and under the threat of repossessions, we have had to revise the estimated drop in prices over the next couple of years to 20% or even 25%, particularly when taking into account the shift in supply of houses in a saturated market with no demand.”

You don’t say: “We’re a little concerned about housing prices in the greater Vancouver area and Toronto..”

• OECD Warns Of “Disorderly Housing Market Correction” In Canada (ZH)

With regulators and local authorities unable or unwilling to crack down on the unprecedented housing bubble in select Canadian cities, increasingly used by Chinese oligarchs to park hot cash offshore, the local banks are starting to take action into their own hands. Case in point, Bank of Nova Scotia has decided to ease off on mortgage lending in Vancouver and Toronto due to soaring prices, Chief Executive Officer Brian Porter said. “We’re a little concerned about housing prices in the greater Vancouver area and Toronto,” Porter, 58, said Tuesday in an interview on Bloomberg TV Canada. “We just took our foot off the gas the last couple quarters in terms of mortgage growth for the reasons I cited, in terms of Vancouver and Toronto.”

Nationwide home sales in April jumped 10.3% from a year earlier, the most activity for that month and the second-highest level ever, according to the Canadian Real Estate Association. In Vancouver, prices rallied 25% in the month to an average of C$844,800 ($643,000) and sales climbed 15%. Toronto prices jumped 13% to C$614,700 and sales rose 7%, the association said. Then again, while Porter did tacitly admit that soaring housing prices are a threat, he also added that “generally, Canadians have a strong ability to self regulate and they’ve demonstrated that before.”

That may be in doubt, because none other than the OECD itself rang a alarm bells over the frothy nature of the Toronto and Vancouver housing markets and high levels of consumer debt. “Very low borrowing rates have encouraged household credit growth and underpinned rapidly rising housing prices, particularly in Vancouver and Toronto, which together are a third of the Canadian housing market,” the Organization for Economic Co-operation and Development warned again today in its latest outlook quoted by the Globe and Mail.

Just drive up home prices high enough. And then there’s people saying: ‘we have to build our way out of this’. Oh, lord.

• Number Of Homeless People In Vancouver Reaches 10-Year High (G&M)

The number of homeless people in Vancouver is the highest in a decade, underscoring an affordability crunch that has worsened even as the local government has spent millions on new housing. Vancouver recorded 1,847 people without permanent housing during its annual homeless count in March – a 6-per-cent increase from a year earlier – in a city whose mayor came to office promising to end homelessness by the end of 2015. In releasing the tally on Tuesday, the city highlighted steps it had taken in recent years to build new homes and protect affordable housing, including changing its bylaws to make it more difficult for the owners of single-room occupancy hotels to evict low-income tenants.

But critics say those measures aren’t enough, especially when skyrocketing real estate prices make it tempting for building owners to evict tenants so they can sell or redevelop their properties. “We are not surprised by the numbers. What we are seeing in the Downtown Eastside – and it is happening across [Metro Vancouver] – is the loss of low-income housing,” Maria Wallstam, a spokeswoman for Carnegie Community Action Project, said Tuesday after the city released its report. “The existing low-income housing stock is being demolished, the rents are going up, or it’s being developed,” she added. “There are simply no options for people to live.” The homeless count, conducted over two nights in March, found 1,847 people who were homeless, compared with 1,746 in 2015.

The total comprises less than 1% of Vancouver’s population – 603,500 in the 2011 census – but is slightly higher than the level in several other Canadian cities, including Toronto and Saskatoon, the report said. The count showed that 61% had been homeless for less than a year and 78% were facing at least one physical or mental-health concern, or both. “What jumps out at me is the complexity of the issues behind these numbers,” said Jonathan Oldman, executive director of the Bloom Group, a non-profit organization that provides housing and support services in the Downtown Eastside.

All pigs are equal.

• EU Gives Budget Leeway To France ‘Because It Is France’ – Juncker (R.)

The European Commission has given France leeway on fiscal rules “because it is France,” the president of the EU executive Jean-Claude Juncker said on Tuesday, in a remark that may not go down well in Germany and other more thrifty euro zone states. The EU is debating how to best apply its fiscal rules, which require a budget deficit under 3% of GDP and public debt to fall, at a time when some argue that more public spending would help boost economic growth. The Commission, which is in charge of monitoring national budgets and recommending corrective measures, is sometimes accused by Germany and other northern euro zone governments of being to lenient in applying EU budget rules.

The EU executive arm gave France in 2015 two more years to bring its deficit below 3% of GDP, even though Paris appeared to miss agreed targets. Asked why the Commission, on several occasions, had turned a blind eye to French infractions, Juncker admitted candidly in an interview with the French Senate television Public Senate that it did so “because it is France”. “I know France well, its reflexes, its internal reactions, its multiple facets,” Juncker said, adding that fiscal rules should not be applied “blindly”. He then reiterated that France should respect its current commitment to bring its deficit below 3% next year.

It’s politics all the way down.

• The ECB’s Illusory Independence (Varoufakis)

A commitment to the independence of central banks is a vital part of the creed that “serious” policymakers are expected to uphold (privatization, labor-market “flexibility,” and so on). But what are central banks meant to be independent of? The answer seems obvious: governments. In this sense, the ECB is the quintessentially independent central bank: No single government stands behind it, and it is expressly prohibited from standing behind any of the national governments whose central bank it is. And yet the ECB is the least independent central bank in the developed world. The key difficulty is the ECB’s “no bailout” clause – the ban on aiding an insolvent member-state government. Because commercial banks are an essential source of funding for member governments, the ECB is forced to refuse liquidity to banks domiciled in insolvent members. Thus, the ECB is founded on rules that prevent it from serving as lender of last resort.

The Achilles heel of this arrangement is the lack of insolvency procedures for euro members. When, for example, Greece became insolvent in 2010, the German and French governments denied its government the right to default on debt held by German and French banks. Greece’s first “bailout” was used to make French and German banks whole. But doing so deepened Greece’s insolvency. It was at this point that the ECB’s lack of independence was fully exposed. Since 2010, the Greek government has been relying on a sequence of loans that it can never repay to maintain a façade of solvency. A truly independent ECB, adhering to its own rules, should have refused to accept as collateral all debt liabilities guaranteed by the Greek state – government bonds, treasury bills, and the more than €50 billion ($56 billion) of IOUs that Greece’s banks have issued to remain afloat.

Storm, teacup: 11 of the EU’s 28 members have recognized the Armenian killings as genocide and, despite initial protests, Turkey has maintained good relations with several of those countries.

• German Vote on Armenian Genocide Riles Tempers, and Turkey (NY Times)

If modern Germany has a mantra, it is that people should learn from their history. Yet Berlin’s latest attempt at reconciliation with the past focuses on the mass killing of Armenians by Ottoman Turks a century ago. And that gesture toward atonement has riled tempers on all sides of the already strained European relations with Turkey. The argument is set to peak on Thursday in a debate in the German Parliament, which is expected to overwhelmingly approve a resolution that officially declares the century-old Armenian massacres to be genocide — and condemns the then-German Empire, allied with Ankara, for failing to act on information it had at the time about the killings.

President Recep Tayyip Erdogan of Turkey said late Tuesday that he had warned Chancellor Angela Merkel of Germany in a telephone call that there could be consequences if the resolution passes. For Turkey, there is scarcely a more sensitive topic than what German and international historians say was the murder of more than a million Armenians and other Christian minorities from 1915 to 1916. The Turkish government has long rejected the term genocide, saying that thousands of people, many of them Turks, died in the civil war that destroyed the Ottoman Empire. For Germany, the resolution comes at a delicate time for Ms. Merkel.

She is relying on Turkey to stem the flow of migrants from the Middle East to Europe, a policy that has earned her criticism for allying with the increasingly authoritarian Mr. Erdogan. “If Germany is to be deceived by this, then bilateral, diplomatic, economic, trade, political and military ties — we are both NATO countries — will be damaged,” Mr. Erdogan told Turkish reporters before leaving on an official trip to Africa. To date, 11 of the European Union’s 28 members have recognized the Armenian killings as genocide and, despite initial protests, Turkey has maintained good relations with several of those countries.

Debt Rattle March 26 2016

Mar 262016

March 26, 2016 Posted by Raúl Ilargi Meijer at 9:29 am Finance Tagged with: bubble, GDP, housing, Japan, MMT, rates, refugees, river, trade, yuan 1 Response »

Jack Delano Freight operations on the Indiana Harbor Belt railroad 1943

• US Q4 GDP Rose 1.4% As Corporate Profits Plunged (ZH)

• World Trade Collapses in Dollars, Languishes in Volume (WS)

• Bank of Japan’s Latest PR Move: ‘Negative Rates in Five Minutes’ (WSJ)

• Foreigners Dumped More Japanese Stocks This Week Than Ever Before (ZH)

• Yuan’s Fall Drags Down Chinese Companies (WSJ)

• Shanghai Rolls Out Tightening Measures To Cool Home Market (Reuters)

• Affordable Housing Crisis Has Engulfed All Cities In Southern England (G.)

• Radical Economic Ideas Grab Attention Amid Low-inflation Torpor (SMH)

• Modern Monetary Theory Has Ardent Proponents (SMH)

• Brazil Economic Woes Deepen Amid Political Crisis (WSJ)

• The River: America’s 40-Year Hurt (BBC)

• Hope Turns To Despair As Lesbos Camp Becomes Open-Air Prison (Ind.)

“The resilient consumer”. Sure.

• US Q4 GDP Rose 1.4% As Corporate Profits Plunged (ZH)

While the final revision to Q4 2015 GDP was so irrelevant it was released on a holiday when every US-based market is closed, even the futures, it is nonetheless notable that according to the BEA in the final quarter of 2015 US GDP grew 1.4%, up from the 1.0% previously reported, and higher than the 1.0% consensus estimate matching the highest Q4 GDP forecast. The final Q4 GDP print was still well below the 2.0% annualized GDP growth reported in Q3.

The figure marks a slowdown from the 2.2% average pace in the first three quarters of 2015. For all of last year, the U.S. economy grew 2.4% matching the advance in 2014. The reason for the change was largely due to upwardly Personal Consumer Spending, which rose from a contribution of 1.38% to the annualized bottom line to 1.66%. In CAGR terms, personal consumption rose 2.4%, following the 3.0% increase in Q3, higher than the 2.0% previously estimated.

Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased at a 1.7% rate, compared with a previously estimated 1.4% pace. The rest of the GDP components were largely unchanged, with Fixed Investment adding 0.06% to the bottom line, up from 0.02% in the previous estimate, Private Inventories contracting fractionally more than previously estimated (-0.22% vs -0.14%), net trade subtracting 0.1% less from growth (-0.14% vs -0.25%), and finally government spending largely unchanged and hugging the unchanged line at 0.02%.

But while the “resilient consumer” once again carried the US economy in the fourth quarter, largely due to an estimated jump in spending on Transportation and Recreational services, which added an annualized $13 billion to the US economy vs the prior estimate, more disturbing was the drop in profits which we already knew courtesy of company reports and is known confirmed by the BEA whose GDP report also showed that corporate profits dropped in 2015 by the most in seven years. As Bloomberg writes, the earnings slump illustrates the limits of an economy struggling to gather steam at the start of this year. Some companies, encumbered by low commodities prices and sluggish foreign markets, are cutting back on investment while a firm labor market and low inflation encourage households to keep shopping.

Pre-tax earnings declined 7.8%, the most since the first quarter of 2011, after a 1.6% decrease in the previous three months. The estimate of nonfinancial corporate profits was reduced by a $20.8 billion settlement, considered a transfer to the government, between BP and the U.S. after the 2010 oil spill in the Gulf of Mexico. Profits in the U.S. dropped 3.1% in 2015, the most since 2008. Corporate earnings are being weighed down by weak productivity, rising labor costs and the plunge in energy prices. Economists at JPMorgan had expected a 9.5% drop in pre-tax earnings in the fourth quarter. “The pace of growth slowed as we ended 2015, though consumer spending is still the primary underpinning of this economic expansion,” Sam Bullard at Wells Fargo in Charlotte, North Carolina, said before the report. “Any pickup we might see is still likely going to be capped given the overall global picture.”

Globalization is ending.

• World Trade Collapses in Dollars, Languishes in Volume (WS)

The Merchandise World Trade Monitor by the CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, tracks global imports and exports in two measures: by volume and by unit price in US dollars. And the just released data for January was a doozie beneath the lackluster surface. The World Trade Monitor for January, as measured in seasonally adjusted volume, declined 0.4% from December and was up a measly 1.1% from January a year ago. While the sub-index for import volumes rose 3% from a year ago, export volumes fell 0.7%. This sort of “growth,” languishing between slightly negative and slightly positive has been the rule last year. The report added this about trade momentum:

“Regional outcomes were mixed. Both import and export momentum became more negative in the United States. Both became more positive in the Euro Area. Import momentum in emerging Asia rose further, whereas export momentum in emerging Asia has been negative for four consecutive months.” This is also what the world’s largest container carrier, Maersk Lines, and others forecast for 2016: a growth rate of about zero to 1% in terms of volume. So not exactly an endorsement of a booming global economy. But here’s the doozie: In terms of prices per unit expressed in US dollars, world trade dropped 3.8% in January from December and is down 12.1% from January a year ago, continuing a rout that started in June 2014. Not that the index was all that strong at the time, after having cascaded lower from its peak in May 2011.

If June 2014 sounds familiar as a recent high point, it’s because a lot of indices started heading south after that, including the price of oil, revenues of S&P 500 companies, total business revenues in the US…. That’s when the Fed was in the middle of tapering QE out of existence and folks realized that it would be gone soon. That’s when the dollar began to strengthen against other key currencies. Shortly after that, inventories of all kinds in the US began to bloat. Starting from that propitious month, the unit price index of world trade has plunged 23%. It’s now lower than it had been at the trough of the Financial Crisis. It hit the lowest level since March 2006:

This chart puts in perspective what Nils Andersen, the CEO of Danish conglomerate AP Møller-Maersk, which owns Maersk Lines, had said last month in an interview following the company’s dreary earnings report and guidance: “It is worse than in 2008.” But why the difference between the stagnation scenario in world trade in terms of volume and the total collapse of the index that measures world trade in unit prices in US dollars? The volume measure is a reflection of a languishing global economy. It says that global trade may be sick, but it’s not collapsing. It’s worse than it was in 2011. This sort of thing was never part of the rosy scenario. But now it’s here.

‘Explaining’ what they don’t understand themselves.

• Bank of Japan’s Latest PR Move: ‘Negative Rates in Five Minutes’ (WSJ)

The Bank of Japan launched a charm offensive Friday to win over spooked members of the public who have reacted negatively to negative interest rates. The central bank issued a booklet offering a crash course in the basic implications of negative rates, a move that demonstrates the strength of unease created by the introduction of a policy in a nation largely unfamiliar with the concept behind it. Written in a question-and-answer format and in a somewhat casual Japanese, the three-page booklet aims to explain negative rates “in five minutes” by covering 18 issues that have grabbed public attention. Negative rates have become a political hot potato ahead of July’s national elections, with opposition lawmakers accusing the central bank of creating anxiety among consumers. Some ruling party politicians, perhaps feeling uncomfortable about the prospect of explaining the policy to their constituents, are also feeling the jitters.

Prime Minister Shinzo Abe acknowledged Thursday that negative rates have made households nervous and it will likely take some time before people understand them. The Bank of Japan decided to start charging interest on some deposits held by commercial banks at the central bank in January. The policy is part of broader efforts to defeat deflation and create a stronger economy, but the central bank was ill-prepared for the public backlash the policy generated. One of the most common concerns over the policy is whether individuals with regular bank accounts will be charged interest on their deposits at the commercial banks. Opposition lawmakers have frequently quizzed BOJ Gov. Haruhiko Kuroda on this issue in parliament.

“Although the measure is called negative rates, it only involves imposing negative rates on a part of the money deposited at the BOJ by banks,” the booklet says. “Individuals’ deposits are different.” While addressing concerns over the new policy, the central bank also tries to convey the message that Japan must get rid of deflation, a negative cycle of price falls, adding that it has taken the right steps to do just that. “If prices don’t rise because of deflation, this means companies’ revenues don’t increase, and that’s why salaries don’t rise,” the booklet says. Since company earnings have improved a lot during the past three years of monetary easing, firms have started increasing basic pay, it says, adding that salaries will keep rising each year if deflation is overcome.

“..weakness means weak Japanese economy means sell Japanese assets.. and we will soon see capital controls in the world’s largest debtor nation…”

• Foreigners Dumped More Japanese Stocks This Week Than Ever Before (ZH)

USDJPY just had its best week in 2 months, funding bullish momentum and carry trades around the world in the midst of dismal economic data everywhere and tumbling earnings expectations. This "bullish" Yen strength, however, amid China's biggest weekly devaluation in almost 3 months, was ironically driven by drastic investment outflows – record sales of Japanese stocks by foreigners (sell JPY), and record purchases of foreign bonds by Japanese investors (sell JPY). Sooner, rather than later, it is obvious that the investment outflows will dominate the carry trades (see Thursday and Friday) and Kuroda and Abe will have a major problem.

Yen was dumped all week…

Which provided just enough juice for carry trades to lift Japanese stocks (despite the weakness in data and China's biggest weekly Yuan devaluation in almost 3 months)

But notice that the last two days have seen Japanese stocks decouple from USDJPY, perhaps the first glimpse of the investment outflows overwhelming any casino-based carry trades flows.

And this is why… Foreigners sold a record amount of Japanese stocks last week… (implicitly meansing Yen was sold)

And Japanese investors fled the insanity of record low yields in JGBs, buying a record amount of foreign bonds last week (implicitly selling Yen again)…

So the Yen weakness – which was so bullishly supportive of global equity markets via carry – was in fact a signal of massive investor anxiety fleeing the sinking ship. Peter Pan-ic indeed.

Abe and Kuroda will soon face a major problem as a weaker Yen will signal the exact opposite trade that has been so active since 2012 – weakness means weak Japanese economy means sell Japanese assets.. and we will soon see capital controls in the world's largest debtor nation.

And remember – the devaluation of The Yen has done nothing – NOTHING – to improve exports for Japan…

It’s all about the dollar.

• Yuan’s Fall Drags Down Chinese Companies (WSJ)

A weaker Chinese currency has roiled global markets and heightened worries about the state of the world’s second-largest economy. Now, some Chinese companies are reporting they’ve taken a hit from a depreciating yuan. The yuan fell 5% against the U.S. dollar in 2015, plunging after China’s central bank surprisingly devalued the currency in mid-August. A weaker currency helps the country’s exporters but hurts Chinese companies that pay for raw material in U.S. dollars or need to pay off loans in U.S. dollars. Among those negatively affected are firms that source from outside China, such as milk or food companies, as well as real estate companies that hold a lot of dollar-denominated debt, says Herald van der Linde at HSBC.

This was the case with Hengan International, one of the leading makers of tissue paper in China. The company said in a statement it saw $55.3 million in foreign-exchange losses in 2015 because it pays for raw material in U.S. dollars, holds U.S.-denominated debt and has Hong Kong-based yuan-denominated assets, which dropped in value. This contributed to a decline in tissue sales, it said. Weaker currencies also hurt China’s heavily-indebted real-estate developers. Shanghai-based property developer Shui On Land reported its 2015 profit dropped to 1.77 billion yuan ($272 million) from 2.49 billion yuan ($382 million) a year earlier in large part due to the depreciation of the company’s USD- and HKD-denominated debt. Then there are companies that suffer losses from selling to countries whose currencies have weakened.

Sourcing and logistics giant Li&Fung said 2015 revenue dropped 2.4% on year. The main reason? Foreign-exchange losses from weak European and Asian currencies, it said, since 38% of the company’s business is in non-U.S. markets but it accounts in U.S. dollars. In order to tackle the problem, some companies are looking to shed yuan — or at least get it out of the country. Hengan, the tissue company, has remitted the equivalent of several billion Hong Kong dollars from mainland China to Hong Kong in 2015, and another HK$2 billion in the first quarter of this year, said CFO Vincent Loo in Hong Kong. It is also negotiating with sources to pay them in less time — from 30 to 60 days rather than 90 — just in case the yuan continues to fall.

Beijing’s ‘vision’ is now limited to short term only.

• Shanghai Rolls Out Tightening Measures To Cool Home Market (Reuters)

Municipal authorities in Shanghai tightened mortgage down payment requirements for second home purchases on Friday, in a move to cool an overheating property market and reduce fears of a bubble. Senior Chinese leaders raised concerns about the country’s overheated housing market during an annual parliament meeting this month, and Shanghai is the biggest city to take action in the wake of the National People’s Congress, which ended a week ago. Under the new rules, home buyers will need to put down 50-70% of the price of a second home, compared to 40% previously, to qualify for a mortgage. “The new measure will have a big impact on market sentiment on both the primary and secondary market; new launches being sold out within one, two hours will not happen again,” said Joe Zhou, head of East China research at real estate services firm Jones Lang LaSalle.

With the new rules, Shanghai also made it harder for non-residents to buy homes in the city, according to a statement issued by the local government. Potential buyers who do not hold local residence permits, or hukou, must have paid social insurance or taxes in Shanghai for at least five years before they can purchase property. Previously the requirement was two years. Shanghai will also increase the supply of small- and medium-sized homes and crack down on property financing by informal financial institutions. Shanghai home prices gained 20.6% in February from a year ago, posting the second biggest gain in the country after the southern city of Shenzhen, where prices soared 56.9%, despite slowing economic growth.

A world full of housing bubbles. Haven’t we understood how dangerous that is?

• Affordable Housing Crisis Has Engulfed All Cities In Southern England (G.)

There is no longer a city in the south of England where house prices are less than seven and a half times average local incomes, according to analysis by Lloyds Bank that reveals how the home affordability crisis now stretches far beyond London. “The housing affordability gap has widened to its worst level in eight years,” said the Lloyds analysis, noting that the last time prices were so high was at the very top of the boom in 2008, just before the financial crisis struck. The Lloyds analysis is unique in that it compares local house prices with local earnings rather than national averages. On this measure, the worst house prices are not in London but in other parts of the south-east. Oxford is again identified as the least affordable city in the UK, with average prices at 10.68 times local earnings.

Winchester is a close second at 10.54, with London third at 10.06. Cambridge, Brighton and Bath all have prices that are now nearly 10 times local earnings, while cities such as Bristol and Southampton have prices close to eight times earnings. Wage growth has fallen far behind the rise in house prices, said Lloyds, with affordability worsening for the third successive year. The average home in a city in the UK now costs 6.6 times average local earnings, up from 6.2 last year. In the 1950s and 1960s, buyers could typically find homes with mortgages of three to four times their income. But the Lloyds figures show that there is now just one city in the UK that fits that profile: Derry in Northern Ireland. House prices in the city currently fetch 3.81 times local incomes.

While most of the “most affordable” cities in the Lloyds rankings are in the north, Scotland and Northern Ireland, buyers will still be stretched to afford a home from the local salaries on offer. Hull is widely regarded as a low house price area, yet local residents face having to pay 5.11 times average local incomes to buy a home. Meanwhile, York has joined the ranks of cities in the south in the unaffordability tables, with prices at 7.5 times incomes.

When crazy ‘conventional’ ideas fail…

• Radical Economic Ideas Grab Attention Amid Low-inflation Torpor (SMH)

Our economic guardians at Federal Treasury and the Reserve Bank sound increasingly uneasy about some policy choices being made offshore. Since the global financial crisis, quantitative easing has pumped trillions of dollars into major economies with limited success. More recently central banks in Europe and Japan have opted for negative interest rates in a bid to kick-start growth. On Tuesday the Treasury Secretary, John Fraser, pointed out that we’ve now been in an “experimental stage” with monetary policy for more than seven years. “A range of different interventions have been tried with, at least to date, mixed results,” he said. “Sadly, we will have to await the passage of years before we can pass final judgment.” What is clear, warned Fraser, is that these unusual policies “have had a pervasive and frankly quite worrying impact on the pricing of financial risk.”

Earlier this month the Reserve’s deputy governor, Philip Lowe, said it was “very rare” for central banks to worry that inflation is too low. “Yet today, we hear this concern quite often, and the ‘unconventional’ has almost become conventional,” he said. Lowe warned the abnormal monetary policies being adopted in some countries were “a complication for us” because they put upward pressure on exchange rate. But in a world where traditional economic remedies are proving ineffective a swag of other unorthodox policy suggestions are getting a hearing. One controversial option being canvassed by experts is for central banks to deliver “helicopter drops” of cash directly to citizens’ bank accounts in the hope they will spend it and revive growth. Even more radical is a proposal for governments to mandate an across-the-board pay rise for workers.

Olivier Blanchard, a former chief economist at the IMF, and Adam Posen, president of the Peterson Institute for International Economics, recently recommended the Japanese government try this approach to boost growth. The Bank of England’s chief economist, Andy Haldane, raised eyebrows last September when he argued abandoning cash altogether would make it easier for central banks to manage downturns. He warned that in future it might be necessary for central banks to opt for negative interest rates when depositors are charged for putting their money in the bank in a bid to encourage spending. One problem with that strategy, however, is that people are likely to convert deposits into cash. Eliminating cash and replacing it with a government-backed digital currency would remove that option. “This would preserve the social convention of a state-issued unit of account and medium of exchange… But it would allow negative interest rates to be levied on currency easily and speedily,” Haldane said.

A second part from the article above.

• Modern Monetary Theory Has Ardent Proponents (SMH)

As central banks struggle to revive growth, attention has shifted to fiscal policy the way governments use taxation and spending to influence the economy. Even the hard-heads at the IM have advised governments, including Australia’s, to spend more especially on infrastructure. The fund’s most recent assessment of our economy said “raising public investment (financed by borrowing, thus reducing the pace of deficit reduction) would support aggregate demand, take pressure off monetary policy, and insure against downside growth risks.” Amid these debates about fiscal policy, a radical school of thought called Modern Monetary Theory, or MMT, has gained more prominence. Proponents of this theory have been on the periphery of mainstream economics for more than two decades but their profile has been raised by this year’s US presidential race.

Academic economist Stephanie Kelton , a leading advocate of MMT, is an adviser to presidential hopeful, Senator Bernie Sanders. Kelton calls herself a deficit “owl” rather than a deficit hawk or dove. The hawks, of course, have a straightforward view of government finances: deficits are bad. The doves say deficits are necessary when economic times are tough but they should be balanced by surpluses over time. But deficit owls like Kelton have a far more radical take: deficits don’t matter. The starting point for Modern Monetary Theory is that a currency issuing government can keep printing and spending money but never go broke, so long as it doesn’t borrow in a foreign currency. The Australian Commonwealth, for example, will never run out of Australian dollars because it is a monopoly issuer of that currency.

It can always create the money it needs and, therefore, will always be able to service debts. The MMTers claim that in the modern era of floating exchange rates and deregulated financial markets, governments can, and should, run deficits whenever they are needed. There is a strong moral case for this: in a modern economy, there’s no good reason to have unemployed labour or capital. For the MMTers mass unemployment is a great evil and its daily, human cost dwarfs other economic challenges. They acknowledge there are limits to government spending. Resources in the real economy can be constrained and taxes are an essential tool to ensure demand for the currency and to cool the economy if it overheats. But there’s plenty of scope for governments to print and spend money without causing inflation or triggering a financial crisis. MMTers say sophisticated modern economies like the US and Australia are in no danger of the hyper-inflation which plagued Zimbabwe last decade or Germany’s Weimar Republic in the 1930s.

Barely functioning, politically nor economically.

• Brazil Economic Woes Deepen Amid Political Crisis (WSJ)

Brazil’s economic crisis is as bad as its political one. Latin America’s biggest economy appears headed for one of its worst recessions ever. It stalled in 2014, shrank 3.8% last year and now faces a similar contraction this year. Unemployment rose to 9.5% on Thursday as wages fell 2.4%, both trends forecast to worsen. One in five young Brazilians is out of work, and Goldman Sachs says Brazil may be facing a depression. The deteriorating outlook forms a dire backdrop for Brazil’s political straits. President Dilma Rousseff, deeply unpopular, faces impeachment proceedings in Congress amid a widening corruption scandal surrounding the state oil company, Petróbras. That situation is consuming so much energy from policy makers and Congress that the economic downturn isn’t getting the attention it needs, observers say.

“The gravity of the situation is this: We have the kind of problems where if nothing is done, things will definitely get worse,” said Marcos Lisboa, a former finance ministry official who is now president of the Insper business school in São Paulo. “Pretty soon we could be talking about the solvency of the federal government.” Brazil fended off the results of the 2008 global downturn with stimulus spending, and is trying to again inject money into the economy to spur demand. In January, the Rousseff administration unveiled some $20 billion of subsidized loans from state-owned banks such as the BNDES to boost agriculture and builders of big infrastructure projects.

But this time, the country has less leeway to fund stimulus measures. Brazil’s tax take is diminishing, and the Planning Ministry said Tuesday the government needs to cut around $5.9 billion of spending to meet its budget target. On Thursday, Finance Minister Nelson Barbosa asked Congress to loosen the target to allow a bigger deficit in 2016. Some investors say stimulus policies such as cheap credits from state banks haven’t done much long-term good, because they produced big deficits and the money was often poorly invested in money-losing dams and refineries.

“..very few people understood that an epochal change had taken place in the American economy. GDP would grow. Income wouldn’t.”

• The River: America’s 40-Year Hurt (BBC)

Bruce Springsteen is coming to London with the River tour. At £170 for the cheapest pair, I can’t afford to see the Boss any more, even if my body could handle standing on Wembley Stadium’s pitch for three-and-a-half-hours in an early June drizzle. It’s interesting that Springsteen is re-exploring The River album again. Whenever the anger that simmers in America erupts and reminds the rest of the world that the country is troubled, he seems to be the cultural figure whose work offers an explanation. In late 1986, midway through Ronald Reagan’s second term of office, with the twin scourges of Aids and crack racing through American cities and New Deal ideas of economic and social fairness consumed by the Bonfire of the Vanities taking place on Wall Street, Britain’s Guardian newspaper ran an editorial that said, “for good or ill, [America] is becoming a much more foreign land”.

I had just celebrated my first anniversary as an ex-pat in London and wrote an essay trying to explain what America was like away from the places Guardian readers knew. I described the massive population dislocations that followed the long recession that had begun in the mid-70s. I referenced Springsteen. The piece ran under the headline “Torn in the USA”. Now America is going through even worse ructions. But there is nothing fundamentally new. What we are seeing is the continuation of a disintegration that began forty years ago around the time Springsteen was writing the title song of the album. The River, which came out in 1980, was very much about guys trying to kick back at father time and stave off the inevitable arrival of life’s responsibilities – wife, kids, job, mortgage – and the equally probable onset of life’s disappointments in wife, kids, job, mortgage, and in oneself.

The title track is a long, mournful story about that process and the narrator’s desire to reconnect to the person he was when younger and full of hope. “I come from down in the valley / Where mister, when you’re young / They bring you up to do/like your daddy done…” The key point is being brought up to be like your father. Work the same job, carry yourself in the same way, do the right thing. In the song this tie that binds is seen as restricting the choices you can make in life. Your daddy worked in a steel mill, you will work in a steel mill, or on the line at River Rouge, or down a mine. Today, what wouldn’t many of us give for the economic and social stability that gave resonance to Springsteen’s lyrics? A union job, 30 years of work, a pension. Sounds sweet. The narrator of the song goes on to tell us, “I got a job working construction at the Johnstown company / but lately there ain’t been much work on account of the economy.”

Springsteen based the song on the struggle of his brother-in-law to stay employed during the bleak days after the Oil Shock of 1973: a half-decade of inflation and economic stagnation. At the time this stagflation was seen as a cyclical event, the economy would rebound soon. It would be boom time for all. The economy did rebound, but then went into recession in 1982, and rebounded and went into recession at regular intervals, until the near-death experience of 2007/2008. But very few people understood that an epochal change had taken place in the American economy. GDP would grow. Income wouldn’t. Median salaried workers’ wages stagnated. Those working low-wage jobs saw their incomes decline. As for job security, a perfect storm of automation, declining union power, and free-trade agreements put an end to that.

All the time I’m thinking someone must stand up and say ‘till here and no further’. But instead, Europe tumbles to new lows on a daily basis.

• Hope Turns To Despair As Lesbos Camp Becomes Open-Air Prison (Ind.)

Even before it became a holding pen, Moria was a pretty poor registration centre, unable to provide basic facilities and painfully slow to process the thousands of refugees and migrants who arrive on the shores of Lesbos every week. But since midnight on Sunday, when the new EU-Turkey migrant deal came into force, refugees have been picked up by the coastguard and transported directly to Moria by the Greek authorities. The camp has become an open-air prison, a compound of temporary buildings on a hill overlooking the coast of this island, not far from Turkey’s Mediterranean coast. It is to here that all arrivals must wait for the news their long struggle to reach Europe will almost certainly get them no further than the Greek islands.

They will be returned to Turkey, which the EU has now declared a safe country, in its bid to stem the biggest refugee crisis since the Second World War. The lightning fast implementation of the deal, signed last Friday, has stretched to the limit the capacity of the Greek government, which has no means to process the asylum claims that everyone who arrives has the right to make. Those who came looking for peace and a better life have instead found themselves locked up, and handed detention papers. In response, aid agencies have dropped out of their involvement at the centre one by one, refusing to be associated with the detention of migrants – among whom are more than 100 unaccompanied children. Oxfam this week said the development was “an offence” to Europe’s values.

“They have told us nothing,” says Naima Abdullah, 28, speaking through the chain link fence, her four-year-old daughter Mirna by her side. She paid $2,000 for herself, Mirna, and her one-month-old baby to cross the sea from Turkey after fleeing air strikes in rural Damascus three months ago. She arrived on Sunday, in the first boats after the deal came into force. But four days later, she still hadn’t been given an opportunity to register a claim for asylum. And as the numbers grow, observers worry the only possible outcome will be the mass expulsions Europe has promised to avoid. Nadine Abuasil, 25, said she came to Lesbos because life in Turkey since she fled Deraa in Syria a month ago was not worth living. Her family were blackmailed for money by local gangs, and there was no work in a country that is expensive to live in. “We cannot go back to Turkey,” she says simply.

She and her 23-year-old brother arrived on Sunday after a five hour boat journey during which two men died. They had apparently suffocated. She points to the ground of the detention centre. “We would rather die here than in Turkey.” Her brother, Mohammed, was no less emphatic when asked what he’d do if he was forced to return. “I don’t speak English,” he says. “But: kill myself, kill myself.” The deal has been decried by human rights groups and legal experts who question if Turkey can be considered a safe third country for the forcible return of migrants, and if Greece, which has floundered under the pressure of more than one million refugees arrivals in the past year, is capable of processing asylum claims – even with promised outside help.

“Greece has effectively been asked to build an asylum system in two weeks,” says Camino Mortera, a research fellow for the Centre for European Reform and a specialist in EU law. “The EU claims there won’t be returns en masse but if you are not able to process people in a regulated fashion, how else are they going to deal with this?”

Debt Rattle March 25 2016

Mar 252016

March 25, 2016 Posted by Raúl Ilargi Meijer at 9:28 am Finance Tagged with: bubbles, crackdown, debt, extinction, housing, junk, NPL, refugees, sterling, yuan, zombies 2 Responses »

DPC Shoppers on Sixth Avenue, New York City 1903

• Bubbles Spread Like a Zombie Virus (BBG)

• Junk Territory: US Corporate Debt Ratings Near 15-Year Low (CNN)

• Earnings Growth Based On Debt And Buybacks? Totally Unsustainable (SA)

• Everyone Is Worried That A Third China Bubble Is About To Pop (BI)

• Coming to the Oil Patch: Bad Loans to Outnumber the Good (WSJ)

• Traders Are Betting Heavily That The Pound Will Drop To 1980s Lows (BBG)

• Yuan Weakens For 6th Straight Day – Longest Losing Streak In 2 Years (ZH)

• Sweden Cuts Maximum Mortgage Term To 105 Years -The Average Is 140 (Tel.)

• Shenzhen is Home To The Planet’s Fastest Rising House Prices (Guardian)

• Hedge Funds Control Greek NPLs Anyway (Kath.)

• Who Will Speak For The American White Working Class? (Guardian)

• China ‘Detains 20 Over Xi Resignation Letter’ (BBC)

• Facing Life Sentence, Turkish Journalist Vows To Expose State Crimes (Reuters)

• Mass Extinctions and Climate Change (C.)

• Has James Hansen Foretold The ‘Loss Of All Coastal Cities’? (G.)

• Greece Pledges To Provide Shelters For 50,000 Refugees Within 20 Days (Kath.)

Bubbles are so prevalent people tend not to see them anymore.

• Bubbles Spread Like a Zombie Virus (BBG)

The leading academic theory of asset bubbles is that they don’t really exist. When asset prices skyrocket, say mainstream theorists, it might mean that some piece of news makes rational investors realize that fundamental values like corporate earnings are going to be a lot higher than anyone had expected. Or perhaps some condition in the economy might make investors suddenly become much more tolerant of risk. But according to mainstream theory, bubbles are not driven by speculative mania, greed, stupidity, herd behavior or any other sort of psychological or irrational phenomenon. Inflating asset values are the normal, healthy functioning of an efficient market. Naturally, this view has convinced many people in finance that mainstream theorists are quite out of their minds. The problem is, mainstream theory has proven devilishly hard to disprove.

We can’t really observe how investors in the financial markets form their beliefs. So we can’t tell if their views are right or wrong, or whether they’re investing based on expectations or because of changing risk tolerance. Basically, because we can usually only look at the overall market, we can’t get into the nuts and bolts of how people decide what prices to pay. But what about the housing market? Housing is different from stocks and bonds in at least two big ways. First, because house purchases are not anonymous, we can observe who buys what. Second, housing markets are local, so we can see what is happening around them, and thus have some sort of idea what information they are receiving. These unique features allow us to know much more about the decision-making process of each buyer than we know about investors in the anonymous national financial markets.

In a new paper, economists Patrick Bayer, Kyle Mangum and James Roberts make great use of these features to study the mid-2000s U.S. housing boom. Their landmark results ought to have a major effect on the debate over asset bubbles. Bayer et al. find that as the market overheated, the frenzy spread like a virus from block to block. They look at the greater Los Angeles area – a hotbed of bubble activity – from 1989 through 2012. Since they want to focus on people buying houses as investments (rather than to live in), the authors looked only at people who bought multiple properties, and they tried to exclude primary residences from the sample. They found, unsurprisingly, that the peak years of 2004-2006 saw a huge spike in the number of new investors entering the market. Here is the graph from their paper:

It’s like when you start with a basket with a few bad apples: in the end, everything turns to junk.

• Junk Territory: US Corporate Debt Ratings Near 15-Year Low (CNN)

Red flags are rising on Corporate America’s debt. The average rating on U.S. corporate debt has hit nearly a 15-year low, according to a new report by Standard & Poor’s. “We believe corporate default rates could increase over the next few years,” according to S&P credit analysts Jacob Crooks and David Tesher. The average rating on companies that issue debt has fallen to ‘BB,’ or junk status. That is even below the average S&P rating for U.S. corporate debt during and in the aftermath of the financial crisis in 2008 and 2009. There are already concerns about energy companies defaulting on loans due to low oil prices. But new tech firms like Solera and media companies like iHeart too have had their credit rating downgraded this year, according to S&P. Since 2012, there’s been a surge in low-rated companies seeking cash.

In the past four years, S&P has assigned a single-B rating to 75% of companies accessing the debt markets for the first time. That rating is just one notch up from triple-C, a rating given to companies with a high probability of default. Companies with a single-B rating include PF Chang’s, Toys R US and Men’s Wearhouse (MW). That doesn’t mean they’re going to default: They’re just dangerously close to the territory where companies tend to default. The “rapid rise” in companies with low credit ratings accessing the bond markets can be traced to the easy availability of cash in recent years. How did this happen?

Here are a few key dominoes.
1. The Fed created a super low interest rate environment when it put rates next to zero in 2008.
2. Investors looking for more yield move away from safe assets like U.S. Treasury bonds and into higher-risk assets like bonds issued by lower-rated companies.
3. That makes it easier for low-rated companies to get cash at low rates from the capital markets.
Now, however, the tables are turning. The Fed is slowly starting to increase rates and investors’ appetite – and the cash available – for low-rated companies is on the decline. Add to that the gloomy outlook for the global economy and low commodity prices, and some companies may struggle to pay back what they borrowed.

History rhymes.

• Earnings Growth Based On Debt And Buybacks? Totally Unsustainable (SA)

My grandfather was never rich. He did have some money in the 1920s, but he lost most of it at the tail end of the decade. Some of it disappeared in the stock market crash in October of 1929. The rest of his deposits fell victim to the collapse of New York’s Bank of the United States in December of 1931. I wish I could say that my grandfather recovered from the wrath of the stock market disaster and subsequent bank failures. For the most part, however, living above the poverty line was about the best that he could do financially, as he buckled down to raise two children in Queens. There was one financial feature of my grandfather’s life that provided him with greater self-worth. Specifically, he refused to take on significant debt because he remained skeptical of credit. And with good reason.

The siren’s song of “you-can-pay-me-Tuesday-for-a-hamburger-today” only created an illusion of wealth in the Roaring Twenties; in fact, unchecked access to favorable borrowing terms as well as speculative excess in the use of debt contributed mightily to the country’s eventual descent into the Great Depression. G-Pops wanted no part of the next debt-fueled crisis. Here’s something few people know about the past: Consumer debt more than doubled during the ten year-period of the Roaring 1920s (1/1/1920-12/31/1929). And while you may often hear the debt apologist explain how the only thing that matters about debt is the ability to service it, the reckless dismissal ignores the reality of virtually all financial catastrophes.

During the Asian Currency Crisis and the bailout of Long-Term Capital Management (1997-1998), fast-growing emerging economies (e.g., South Korea, Malaysia, Thailand, etc.) experienced extraordinary capital inflows. Most of the inflows? Speculative borrowed dollars. When those economies showed signs of strain, “hot money” quickly shifted to outflows, depreciating local currencies and leaving over-leveraged hedge funds on the wrong side of currency trades. The Fed-orchestrated bailout of Long-Term Capital coupled with rate cutting activity prevented the 19% S&P 500 declines and 35% NASDAQ depreciation from charting a full-fledged stock bear. Did we see similar debt-fueled excess leading into the 2000-2002 S&P 500 bear (50%-plus)? Absolutely. How long could margin debt extremes prosper in the so-called New-Economy?

How many dot-com day-traders would find themselves destitute toward the end of the tech bubble? Bring it forward to 2007-2009 when housing prices began to plummet in earnest. How many “no-doc” loans and “negative am” mortgages came with a promise of real estate riches? Instead, subprime credit abuse brought down the households that lied to get their loans, destroyed the financial institutions that had these “toxic assets” on their books, and overwhelmed the government’s ability to manage the inevitable reversal of fortune in stocks and the overall economy. Just like 1929-1932. Just like 1997-1998. Just like 2000-2002.

Housing, stocks and now credit.

• Everyone Is Worried That A Third China Bubble Is About To Pop (BI)

First, China’s property bubble popped. Then, China’s stock market bubble burst over the summer, and investors lost a ton of money before the government took control of the system. Now the concern floating around the world of markets is that the third in China’s “triple bubble” is about to burst. That bubble is credit, especially corporate bonds, which have absolutely exploded over the past year as refugees from the other bubble bursts searched for yield. This one is going to be for a very straightforward reason, too — supply. Simply put, there are about to be too many bonds in China, and that could ultimately harm the weakest part of the Chinese economy, the debt-loaded zombie companies that helped form the property bubble and are now unable to turn a healthy profit.

Here’s how all of this happened. When the Chinese stock market went careening downward last summer, a ton of the money that was invested in the market ran into the credit market, specifically corporate bonds. “In our view, China is in the midst of a triple bubble, with the third-biggest credit bubble of all time, the largest investment bubble (proxied by the investment share of GDP) and the second-biggest real-estate bubble,” Credit Suisse analyst Andrew Garthwaite wrote in a note back in July. This was great for China’s debt-laden corporates. They could keep running on easy credit because demand was so high. Corporate-bond issuance increased 21% from 2014 to 2015, and by the end of last year their total stock made up 21.6% of GDP, as opposed 18.4% the year before, according to Societe Generale.

Chinese Treasury-bond supply is set to increase too, from 936 billion yuan in 2015 to 1.4 trillion yuan in 2016. At the same time, the government has been getting a move on an important project it has been working on for some time — turning local-government debt from the country’s infrastructure boom into a real municipal-bond market. We’re talking a lot of money here. In March alone the government allowed 1 trillion yuan ($160 billion) of local-government debt to be converted into local-government bonds (LGB). In 2016 analysts expect the government to issue another 6 trillion yuan in LGBs. That’s a lot of bonds.

Denial continues.

• Coming to the Oil Patch: Bad Loans to Outnumber the Good (WSJ)

Bad loans are likely to outnumber good ones soon in the U.S. oil patch, an indication of the pressure on energy companies and their lenders from the crash in prices. The number of energy loans labeled as “classified,” or in danger of default, is on course to extend above 50% this year at several major banks, including Wells Fargo and Comerica, according to bankers and others in the industry. In response, several major banks are reducing their exposure to the energy sector by attempting to sell off souring loans, declining to renew them or clamping down on the ability of oil and gas companies to tap credit lines for cash, according to more than a dozen bankers, lawyers and others familiar with the plans.

The pullback is curtailing the flow of money to companies struggling to survive a prolonged stretch of low prices, likely quickening the path to bankruptcy for some firms. 51 North American oil-and-gas producers have already filed for bankruptcy since the start of 2015, cases totaling $17.4 billion in cumulative debt, according to law firm Haynes and Boone. That trails the number from September 2008 to December 2009 during the global financial crisis, when there were 62 filings, but is expected to grow: About 175 companies are at high risk of not being able to meet loan covenants, according to Deloitte. “This has the makings of a gigantic funding crisis” for energy companies, said William Snyder, head of Deloitte’s U.S. restructuring unit. If oil prices, which closed at $39.79 a barrel Wednesday, remain at around $40 a barrel this year, “that’s fairly catastrophic.”

Against the USD is a safe bet if the term is long enough.

• Traders Are Betting Heavily That The Pound Will Drop To 1980s Lows (BBG)

As Britain ponders its future in the EU, investors are betting an amount almost the size of Iceland’s economy on the pound falling to levels last seen in the 1980s. At least 11 billion pounds ($16 billion) has been wagered this year on options that would profit if sterling fell to or below $1.3502, a 4.5% drop from current levels, after the June 23 referendum. More than half of the positions were placed since the date of the vote was set on Feb. 20. The figures give an indication of what’s at stake as investors weigh the possibility of the U.K. quitting the world’s largest single market, which accounts for about half its imports and exports. Even with opinion polls showing no clear lead for either side, the prospect of a “Brexit” has seen the pound fall more than any other major currency versus the dollar this year.

“There is a risk premium in sterling, both in terms of the spot rate and in terms of the volatility market, but this is one of those events where you have no way of calibrating how big it should be,” said Paul Meggyesi at JPMorgan Chase in London. “Few investors believe that sterling has fallen to levels where the risk-reward favors buying.” While tumbling to $1.3502 would barely exceed the pound’s decline so far this year, it would take the U.K. currency to the lowest level since 1985. Traders assign 54% odds to sterling reaching that level by the day of the referendum, according to Bloomberg’s options calculator. Meggyesi sees the pound falling to $1.38 by mid-year, from $1.4145 as of 4:45 p.m. London time on Thursday. Even forecasts of a drop to these levels may be optimistic if the U.K. actually ends up leaving the EU.

In the shadows, China keeps devaluing.

• Yuan Weakens For 6th Straight Day – Longest Losing Streak In 2 Years (ZH)

PBOC fixed the Yuan at its weakest in 3 weeks, pushing the devaluation streak to its longest since early January. However, Offshore Yuan has now dropped over 1.1% against the USD, extending losses for the 6th straight day to 3-week lows. This is the longest streak of weakness in the offshore Yuan since April 2014.

It appears EUR and JPY took enough pain so the basket is reverting to the USD again…

What’s the opposite of passive-aggressive as a clear message is being sent to The Fed – tighten and we unleash the Yuan-weakness-driven turmoil…

Now that’s a housing bubble.

• Sweden Cuts Maximum Mortgage Term To 105 Years -The Average Is 140 (Tel.)

Think there’s a housing affordability crisis in Britain, with low mortgage rates likely to drive house prices even higher? Take a look at Sweden where lending policies have been more generous, and where house price inflation has been (at least recently) more extreme. A number of banks and analysts have warned that Sweden’s housing market is overheating, with HSBC in January saying: “The pace of acceleration in the housing market points to a bubble.” House prices across the country were up 18pc last year. This compares to Britain’s house price rises in 2015 of between 5pc and 10pc, depending on which index is used. Now Sweden is dealing with its overheated housing market by reining in mortgage availability.

Regulators introduced restrictions which will mean mortgage terms – the time homebuyers have to clear the debt – will be drastically reduced to just… 105 years. The move comes because historically there has been no time limit on mortgage duration. So as prices rose and affordability became tougher, Swedish banks’ response was to extend terms, as had been the case in other high-cost property markets including Japan in the Eighties. The average term is reported to be 140 years. This meant many people who inherited property but who could not afford to take on the mortgage debt had to sell up. Swedish banks were quoted in the local press as opposing the move.

“It isn’t good for the finances of households as it will make mortgages more expensive and the terms not as good. And it isn’t good for financial stability,” the head of Swedish Bankers’ Association was reported to say. In Britain, there has been a move by some lenders to increase mortgage terms but only for younger borrowers. Even then, the maximum term tends to be 35 years, although some lenders – including Halifax and Nationwide – go up to 40, brokers say. The Mortgage Market Review introduced by British regulators in 2013 made it difficult for lenders to arrange loans which went into borrowers’ likely retirement.

And here’s another one. How desperate must Xi be to let this happen?!

• Shenzhen is Home To The Planet’s Fastest Rising House Prices (Guardian)

House prices in Shenzhen, the city which is a hub for technology hardware and known as China’s Silicon Valley, soared by almost 50% last year – the fastest growth in residential property prices worldwide. A new survey puts two Chinese cities – Shenzhen and Shanghai – in the top five fastest-growing property markets despite the Chinese stock market tumbling in 2015. The research, by the estate agents Knight Frank (pdf), also shows the impact of last year’s debt crisis in Greece. House prices in the two biggest Greek cities – Thessaloniki and Athens – were both ranked among the worst six in the survey of 165 cities, falling 5.9% and 4.8% respectively. There were also significant drops in some Italian cities, including Rome, Trieste and Genoa. Nicosia and Larnaca in Cyprus were also among the worst performers.

The Global Residential Cities Index showed that house prices in cities worldwide went up 4.4%. Behind Shenzhen, Auckland was the second fastest growing market with rises of 25.4%, followed by Istanbul (25%) and Sydney (19.9%). Shenzhen has become a hub for the production of hardware used in electronics and has a permanent population of 10 million, rising to 15 million in the summer – autumn electronics season. Their average age is 30. The city bordering Hong Kong did not exist 30 years ago, sporting just a few fishing villages. In 1979, it was declared China’s first special economic zone and surrounded by an 85-mile long, barbed wire fence. Investment and migrant workers flooded the area and factories and housing were built from scratch. By the mid-90s, the population had climbed to 3 million.

In 2004, the first metro station opened and a decade later the network had grown to 131 stations. Two Turkish cities featured in the top 10 – Istanbul and Izmir – while Budapest recorded the biggest rise among European Union cities, with prices up 16.3%. Budapest is also the strongest performing capital city in the index, with demand fuelled by an investment immigration bond for Chinese nationals. Cities traditionally associated with high prices failed to feature prominently. London was ranked at 16 (11.4% growth) with New York at 89th (3.3%). The fast rising prices of Sydney, the fourth fastest rising market, has resulted in high rents and the same sort of concerns about the effects on the young population in the city as in London. In the US, Portland in Oregon and San Francisco were the highest risers, both with increases over the year of 10%. The fastest growing North American city was Vancouver, with prices up nearly 12% on an annual basis.

Greece is ruled by the global finance squid.

• Hedge Funds Control Greek NPLs Anyway (Kath.)

Despite all the government talk about the nonperforming loans secured by borrowers’ homes being protected from falling into the hands of hedge funds, the latest recapitalization process has resulted in the entire credit sector now being controlled by foreign investors – hedge funds no less. Those foreign firms, the majority of which control high-risk portfolios, hold stakes of more than 50% in all of Greece’s systemic lenders, and in some cases far above that. Therefore, by extension, they control a loan portfolio which exceeds 200 billion euros and includes performing loans amounting to some 100 billion and bad loans that also add up to around 100 billion, and there is currently a negotiations battle under way for them not to be sold on to others.

It makes no difference to borrowers who owns their loans; it is the general legal framework and the legal moves they can make in case they are unable to fulfill their obligations that matter. The banks’ planning does not provide for the sale of bad loans, and there are strong indications that the existing stock of NPLs includes many strategic defaulters who have taken advantage of the crisis to avoid fulfilling their obligations. The Bank of Greece estimates that they account for 20% of all bad loans.

“..an economic version of the Hunger Games.”

• Who Will Speak For The American White Working Class? (Guardian)

The National Review, a conservative magazine for the Republican elite, recently unleashed an attack on the “white working class”, who they see as the core of Trump’s support. The first essay, Father Führer, was written by the National Review’s Kevin Williamson, who used his past reporting from places such as Appalachia and the Rust Belt to dissect what he calls “downscale communities”. He describes them as filled with welfare dependency, drug and alcohol addiction, and family anarchy – and then proclaims: “Nothing happened to them. There wasn’t some awful disaster, There wasn’t a war or a famine or a plague or a foreign occupation. … The truth about these dysfunctional, downscale communities is that they deserve to die. Economically, they are negative assets. Morally, they are indefensible. The white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles.”

A few days later, another columnist, David French, added: “Simply put, [white working class] Americans are killing themselves and destroying their families at an alarming rate. No one is making them do it. The economy isn’t putting a bottle in their hand. Immigrants aren’t making them cheat on their wives or snort OxyContin.” Both suggested the answer to their problems is they need to move. “They need real opportunity, which means that they need real change, which means that they need U-Haul.” Downscale communities are everywhere in America, not just limited to Appalachia and the Rust Belt – it’s where I have spent much of the past five years documenting poverty and addiction. To say that “nothing happened to them” is stunningly wrong. Over the past 35 years the working class has been devalued, the result of an economic version of the Hunger Games.

It has pitted everyone against each other, regardless of where they started. Some contestants, such as business owners, were equipped with the fanciest weapons. The working class only had their hands. They lost and have been left to deal on their own. The consequences can be seen in nearly every town and rural county and aren’t confined to the industrial north or the hills of Kentucky either. My home town in Florida, a small town built around two orange juice factories, lost its first factory in 1985 and its last in 2005. [..] Over the past 35 years, except for the very wealthy, incomes have stagnated, with more people looking for fewer jobs. Jobs for those who work with their hands, manufacturing employment, has been the hardest hit, falling from 18m in the late 1980s to 12m now.

The economic devaluation has been made more painful by the fraying of the social safety net, and more visceral by the vast increase at the top. It is one thing to be spinning your wheels stuck in the mud, but it is even more demeaning to watch as others zoom by on well-paved roads, none offering help. It is not just about economic issues and jobs. Culturally, we are witnessing a tale of two Americas that are growing more distinct by the day.

Crackdowns deflate economic confidence.

• China ‘Detains 20 Over Xi Resignation Letter’ (BBC)

A total of 20 people have been detained in China following the publication of a letter calling on President Xi Jinping to resign, the BBC has learned. The letter was posted earlier this month on a state-backed website Wujie News. Although quickly deleted by the authorities, a cached version can still be found online. In most countries the contents of the letter would be run-of-the-mill political polemic. “Dear Comrade Xi Jinping, we are loyal Communist Party members,” it begins, and then cuts to the chase. “We write this letter asking you to resign from all party and state leadership positions.” But in China, of course, and in particular on a website with official links, this kind of thing is unheard of and there have already been signs of a stern response by the authorities. The detention of a prominent columnist, Jia Jia, was widely reported to be in connection with the letter.

Friends say he simply called the editor of Wujie to enquire about it after seeing it on line. But now the BBC has spoken to a staff member at Wujie who has asked to remain anonymous and who has told us that in addition to Jia Jia another 16 people have been “taken away”. The source said they included six colleagues who work directly for the website, including a senior manager and a senior editor, and another 10 people who work for a related technology company. And a well-know Chinese dissident living in the US said three members of his family, living in China’s Guangdong Province, had also been detained in connection with the letter. Wen Yunchao said he believed his parents and his brother had been detained because authorities were trying to pressure him to reveal information. But he told the BBC that he knew nothing about the letter.

The letter focuses its anger on what it says is President Xi’s “gathering of all power” in his own hands, and it accuses him of major economic and diplomatic miscalculations, as well as “stunning the country” by placing further restrictions on freedom of speech. The latter is a reference to Mr Xi’s high profile visit last month to state-run TV and newspaper offices, where he told journalists that their primary duty was to obey the Communist Party. The letter first appeared on an overseas-based Chinese language website, well outside the realm of Communist Party censors, but the big question is how it then made its way onto Wujie. The idea that any Chinese editor of sane mind would knowingly publish such a document seems so unlikely that there has been speculation amongst some Chinese journalists, in private, that Wujie was either hacked, or had perhaps been using some kind of automatic trawling and publishing software.

The backdrop of the refugee deal. Yes, we have no decency.

• Facing Life Sentence, Turkish Journalist Vows To Expose State Crimes (Reuters)

One of two prominent Turkish journalists facing life in prison on charges of espionage vowed to make the trial, which begins on Friday, a prosecution of official wrongdoing. Can Dundar, editor-in-chief of Cumhuriyet, told Reuters he would use his trial, which has drawn international condemnation, to refocus attention on the story that landed him in the dock. Dundar, 54, and Erdem Gul, 49, Cumhuriyet’s Ankara bureau chief, stand accused of trying to topple the government over the publication last May of video purporting to show Turkey’s state intelligence agency helping to truck weapons to Syria in 2014. “We are not defendants, we are witnesses,” Dundar said in an interview at his office, promising to show the footage in court despite a ban and at the risk that judges may order the hearings to be held behind closed doors.

“We will lay out all of the illegalities and make this a political prosecution … The state was caught in a criminal act, and it is doing all that it can to cover it up.” Dundar and Gul spent 92 days in jail, almost half of it in solitary confinement, before the constitutional court ruled last month that pre-trial detention was unfounded because the charges stemmed from their journalism. Both were subsequently released pending trial, although President Tayyip Erdogan said he did not respect the ruling. Erdogan has acknowledged that the trucks, which were stopped by gendarmerie and police officers en route to the Syrian border, belonged to the MIT intelligence agency and said they were carrying aid to Turkmens in Syria. Turkmen fighters are battling both President Bashar al-Assad’s forces and Islamic State.

Erdogan has said prosecutors had no authority to order the trucks be searched and that they acted as part of a plot to discredit the government, allegations the prosecutors denied. Erdogan has cast the newspaper’s coverage as part of an attempt to undermine Turkey’s global standing and has vowed Dundar would “pay a heavy price.” The trial comes as Turkey deflects criticism from the European Union and rights groups that it is bridling a once vibrant press. “We were arrested for two reasons: to punish us and to frighten others. And we see the intimidation has been effective. Fear dominates,” Dundar said.

800,000 years and counting.

• Mass Extinctions and Climate Change (C.)

We now know that greenhouse gases are rising faster than at any time since the demise of dinosaurs, and possibly even earlier. According to research published in Nature Geoscience this week, carbon dioxide (CO2 ) is being added to the atmosphere at least ten times faster than during a major warming event about 50 million years ago. We have emitted almost 600 billion tonnes of carbon since the beginning of the Industrial Revolution, and atmospheric COC concentrations are now increasing at a rate of 3 parts per million (ppm) per year. With increasing CO2 levels, temperatures and ocean acidification also rise, and it is an open question how ecosystems are going to cope under such rapid change. Coral reefs, our canary in the coal mine, suggest that the present rate of climate change is too fast for many species to adapt: the next widespread extinction event might have already started.

In the past, rapid increases in greenhouse gases have been associated with mass extinctions. It is therefore important to understand how unusual the current rate of atmospheric CO2 increase is with respect to past climate variability. There is no doubt that atmospheric COC concentrations and global temperatures have changed in the past. Ice sheets, for example, are reliable book-keepers of ancient climate and can give us an insight into climate conditions long before the thermometer was invented. By drilling holes into ice sheets we can retrieve ice cores and analyse the accumulation of ancient snow, layer upon layer. These ice cores not only record atmospheric temperatures through time, they also contain frozen bubbles that provide us with small samples of ancient air. Our longest ice core extends more than 800,000 years into the past.

During this time, the Earth oscillated between cold ice ages and warm interglacials . To move from an ice age to an interglacial, you need to increase COC by roughly 100 ppm. This increase repeatedly melted several kilometre-thick ice sheets that covered the locations of modern cities like Toronto, Boston, Chicago or Montreal. With increasing COC levels at the end of the last ice age, temperatures increased too. Some ecosystems could not keep up with the rate of change, resulting in several megafaunal extinctions, although human impacts were almost certainly part of the story. Nevertheless, the rate of change in COC over the past million years was tame when compared to today. The highest recorded rate of change before the Industrial Revolution is less than 0.15 ppm per year, just one-twentieth of what we are experiencing today.

“All hell will break loose in the North Atlantic and neighbouring lands..”

• Has James Hansen Foretold The ‘Loss Of All Coastal Cities’? (G.)

James Hansen’s name looms large over any history that will likely be written about climate change. Whether you look at the hard science, the perils of political interference or modern day activism, Dr Hansen is there as a central character. In a 1988 US Senate hearing, Hansen famously declared that the “greenhouse effect has been detected and is changing our climate now”. Towards the end of his time as the director of NASA’s Goddard Institute for Space Studies, Hansen described how government officials had on other occasions changed his testimony, filtered scientific findings and controlled what scientists could and couldn’t say to the media – all to underplay the impact of fossil fuel emissions on the climate. In recent years, the so-called “grandfather of climate science” has added to his CV the roles of author and twice-arrested climate activist and anti-coal campaigner. He still holds a position at Columbia University.

So when Hansen’s latest piece of blockbuster climate research was finalized and released earlier this week, there was understandable global interest, not least because it mapped a potential path to the “loss of all coastal cities” from rising sea levels and the onset of “super storms” previously unseen in the modern era. So what is Hansen claiming? Well, the first thing to understand is that Hansen’s paper, written with 18 other co-authors, many of them highly-reputable names in climate science in their own right, is far from conventional. Most scientific papers only take up four or five pages in a journal. Hansen’s paper – in the journal Atmospheric Chemistry and Physics – grabs 52 pages (although it’s hard to quibble over space when you’re laying out a possible path to widespread global disruption and the complete reshaping of coastlines).

Nor was the paper published in a conventional way. If you’re getting a faint sense of déjà vu about Hansen’s findings, then that could be down to how a draft version of the study was published and widely covered in July last year. The journal runs an unconventional interactive system of peer review where comments and criticisms from other scientists are published for everyone to see, as are the responses from Hansen and his colleagues. This is arguably a more transparent way of conducting the scientific process of peer review – something usually carried out privately and anonymously. None of this should really detract from Hansen and his co-author’s central claims. Firstly, Hansen says they may have uncovered a mechanism in the Earth’s climate system not previously understood that could point to a much more rapid rise in sea levels. When the Earth’s ice sheets melt, they place a freshwater lens over neighboring oceans.

This lens, argues Hansen, causes the ocean to retain extra heat, which then goes to melting the underside of large ice sheets that fringe the ocean, causing them to add more freshwater to the lens (this is what’s known as a “positive feedback” and is not to be confused with the sort of positive feedback you may have got at school for that cracking fifth grade science assignment). Secondly, according to the paper, all this added water could first slow and then shut down two key ocean currents – and Hansen points to two unusually cold blobs of ocean water off Greenland and off Antarctica as evidence that this process may already be starting. If these ocean conveyors were to be impacted, this could create much greater temperature differences between the tropics and the north Atlantic, driving “super storms stronger than any in modern times”, he argues. “All hell will break loose in the North Atlantic and neighbouring lands,” he says in a video summary.

Europe is waiting for unrest in Greece to break out. Then it can send in it own police and military forces. or so it thinks.

• Greece Pledges To Provide Shelters For 50,000 Refugees Within 20 Days (Kath.)

The government said Thursday it will fast-track procedures to create new centers to accommodate 30,000 people within the next 20 days as it finds itself in a race against time to meet an obligation to provide shelter to more than 50,000 asylum seekers stranded in the country, and to prevent an imminent humanitarian disaster. The current capacity of shelters is 38,000. The decision came after a meeting of the government’s council of ministers, chaired by Prime Minister Alexis Tsipras, amid a growing sense of urgency surrounding camps around the country and the increasing realization that the existing infrastructure simply cannot cope with the huge refugee numbers. It also follows the worsening toll on migrants’ health after the withdrawal on Wednesday of aid agencies from camps in Greece to protest the recent EU-Turkey deal – which was activated last Sunday – to stem refugee inflows to Europe, which, they say, contravenes international law.

At the same time, the spokesman of the coordinating committee for refugees, Giorgos Kyritsis, said legislation facilitating the implementation of the EU deal will be tabled in Parliament on Wednesday. The government also said it will further empower the Immigration Policy Ministry to deal with increased obligations implicit in the deal, while temporary staff will also be enlisted. Kyritsis also announced the creation of a monitoring mechanism under the general secretary of the Defense Ministry, Yiannis Tafyllis. The government’s immediate priority, Kyritsis said, will be to provide relief to the sprawling and overcrowded border camp of Idomeni in northern Greece. He added that transport means will be made available over the next few days to transfer refugees to other centers affording more humane conditions.

The mayor of the nearby town of Paionia, Christos Goudenoudis, is calling for the camp’s immediate evacuation as the local community, he said, is feeling increasingly insecure as crime in the area has proliferated. Meanwhile the latest figures suggest a marked decrease in refugee flows into the country over the last few days, while none arrived Thursday – for the first time since the deal between the European Union and Turkey was struck. Authorities, however, have attributed this mostly to bad weather. On Tuesday, inflows were limited to 260 – a significant decrease from the several thousand a couple of weeks ago.

Debt Rattle March 22 2016

Mar 222016

March 22, 2016 Posted by Raúl Ilargi Meijer at 8:59 am Finance Tagged with: China, dinosaurs, disorder, ECB, emissions, Erdogan, GAAP, housing, inflation, oil, refugees 6 Responses »

NPC Ford Motor Co., McReynolds & Sons garage, L Street, Washington DC 1926

• US Existing Home Sales Tumble 7.1% In Warning For Housing Market (Reuters)

• Companies Haven’t Fudged Their Numbers This Much Since 2009 (Yahoo)

• Beware of Draghi Dropping Hints (FT)

• Central Banks Creep Toward Uncomfortable Role as Central Planners (WSJ)

• The ECB and The Mississippi Company Bubble (Macleod)

• Germany Must Leave Eurozone To Save It: Mervyn King (CNBC)

• Government Debt Could Bring China’s Credit Party To A Halt (MW)

• China’s Debt Burden Is Only Going To Get Bigger (BV)

• Home Is Where the Inflation Is (BBG)

• Get Ready For An Australian Recession By 2017 (Steve Keen)

• Regulator Warns Canadian Banks on Oil and Gas Reserves (WSJ)

• Petrobras Posts Record $10 Billion Loss (Reuters)

• Erdogan To Include Journalists, Politicians in ‘Terrorist’ Definition (Ind.)

• The Uses of Disorder (Jim Kunstler)

• Carbon Emission Release Rate ‘Unprecedented’ In Past 66 Million Years (G.)

• The EU’s Deal With Turkey Is a No-Win Situation (Fortune)

• Greece Appeals For EU Logistics Aid For Migrant Deal To Work (Reuters)

• EU Rights Chief Demands More Protection For Refugees (AP)

• Greece Sets Up Detention Camps As Refugee Deal Hits Delays (AP)

The US will keep doing what it can to prop up this bubble.

• US Existing Home Sales Tumble 7.1% In Warning For Housing Market (Reuters)

U.S. home resales fell sharply in February in a potentially troubling sign for America’s economy which has otherwise looked resilient to the global economic slowdown. The National Association of Realtors said on Monday existing home sales dropped 7.1% to an annual rate of 5.08 million units, the lowest level since November. Sales have been volatile and prone to big swings up and down in recent months following the introduction in October of new mortgage regulations, which are intended to help homebuyers understand their loan options and shop around for loans best suited to their financial circumstances. February’s decline weighed on investor sentiment, with the S&P 500 stock index falling after the data was released. Sales fell across the country, including a 17.1% plunge in the U.S. Northeast.

Economists had forecast home resales decreasing 2.8% to a pace of 5.32 million units last month. Sales were up 2.2% from a year ago. The median price for a previously owned home increased 4.4% from a year ago to $210,800. The housing report runs counter to data showing strong job growth and a stabilization of factory output, which had taken a hit from weaker demand overseas and a strong U.S. dollar. Housing continues to be supported by a tightening labor market, which is starting to push up wage growth, boosting household formation. But a relative dearth of properties available for sale remains a challenge. “Finding the right property at an affordable price is burdening many potential buyers,” said NAR economist Lawrence Yun.

Beware when accountants become society’s most creative people.

• Companies Haven’t Fudged Their Numbers This Much Since 2009 (Yahoo)

Almost all of the companies in the S&P 500 have announced their quarterly earnings, and now Wall Street’s number crunchers are finalizing their conclusions as to what actually happened during the last three months of 2015. Unfortunately, it’s become an increasingly challenging task to understand the true financial performance of the big publicly traded companies because of the widening of something called the “GAAP gap.” Don’t worry: this topic isn’t as scary a concept as it sounds. In a nutshell, there’s a standard known as generally accepted accounting principles, or GAAP, which encourages some uniformity in how companies will report financial results. Unfortunately, the strict standards of GAAP often force companies to report big one-time, non-recurring items that will distort quarterly earnings, in turn making them a poor reflection of underlying operations.

And so, many companies will make adjustments for these items and separately report adjusted or non-GAAP financial results. All of that’s well and good. But there’s an unsettling trend we’ve been witnessing: the gap between GAAP and non-GAAP numbers is widening. Specifically, this “GAAP gap” is widening in such a way that more and more costs and expenses are being removed to make underlying profits look higher. “The gap between GAAP (reported) and pro forma (adjusted) EPS continued to widen in 4Q, with the GAAP/Pro forma ratio of 0.74 still at its most extreme levels since 2009,” Bank of America Merrill Lynch’s Savita Subramanian said on Monday. “Trailing four-quarter (2015) GAAP EPS came in at $87 vs. $118 for pro forma EPS.”

It’s jarring to hear that any metric has returned to levels last seen during the financial crisis. Unfortunately, it’s hard to conclude what the implications are here because the issues are tied to just a few industries that are facing their own unique issues. “As was the case last quarter, the chief contributor to “GAAP gap” has been Energy asset impairments/write-downs, followed by M&A costs within Health Care,” Subramanian continued. “The Energy sector alone contributed to nearly half of the “GAAP gap” this quarter.” While this is certainly a top worth keeping an eye on, it would probably be a mistake to jump to any sweeping conclusions about the market and the economy. “We found that while a widening GAAP gap is not a leading indicator of a market downturn, companies with increasing deviations tend to systematically underperform the market,” Subramanian said.

One day we’ll understand just how crazy this is.

• Beware of Draghi Dropping Hints (FT)

It is a risky game, taking central bankers at their word. Investors should be wary of what central bankers appear to be saying or signalling. Like some politicians, economists and even journalists, they often change their mind. Mario Draghi, the president of the ECB, is a case in point. Don’t be fooled by Mr Draghi when he signals that interest rates have been cut as low as they can go, as he did at the ECB’s March policy meeting. After reducing the deposit rate to minus 0.4%, he could not have been clearer when he said: “We don’t anticipate that it will be necessary to reduce rates further.” Although he kept the option of further cuts open, he outlined his unease about negative rates and their impact on the region’s commercial banks. Consequently, some investors and commentators think interest rates have hit their floor in the euro zone.

But Mr Draghi has made similar assertions after cutting rates before. In June 2014, he reduced rates to minus 0.1% and said: “For all practical purposes we have reached the lower bound.” In September 2014, he dropped rates to minus 0.2% and said: “We are at the lower bound where technical adjustments are not going to be possible any longer.” There is an obvious pattern. Mr Draghi signals the floor has been reached, only to change his mind later. The likely reason for his “no lower” signals is that he does not want to scare markets. Bank stocks, bonds and credit default swaps, which are a kind of insurance against default, have all been rocked by worries about negative rates and their impact on the banking business. There are also concerns for banks in euro zone countries such as Austria, Portugal and Spain, where mortgage rates could go negative in the event of the ECB cutting further, as these mortgages are linked to euro zone money market rates.

In other words, banks in Austria, Portugal and Spain may end up paying customers for lending to them, which would be bad news for their balance sheets. The Bank for International Settlements warned in a report this month that there was great uncertainty over the potential for deeper cuts into negative territory. However, “Life Below Zero”, a research paper by HSBC, the bank, suggests that the ECB could cut rates much further. It says that the Swiss National Bank currently operates the most negative rate of all the world’s leading central banks (minus 0.75%). If the costs incurred by Swiss banks were applied to the euro zone banking system, then the ECB’s deposit rate would be much more negative, at minus 1.8%. The ECB could also tier rates. At the moment, the ECB charges about 90% of its bank reserves at negative rates.

“It’s capitalism with Chinese characteristics.”

• Central Banks Creep Toward Uncomfortable Role as Central Planners (WSJ)

Are central banks heading back to an era of rationing money? The question may sound daft when policy makers are pumping gushers of cash into several of the world’s major economies. But as the central banks become more desperate to boost inflation and growth, they are starting to break one of the modern tenets of the profession by funneling that cash directly to what they regard as “good” uses. The past two weeks brought interventions by the Bank of Japan and ECB, which would have been unthinkable just a few years ago. The Bank of Japan’s conditions for companies to qualify for exchange-traded funds it would like to buy sound like they come from a well-meaning government minister, not a monetary authority concerned about overall growth and inflation.

Companies could qualify by offering an “improving working environment, providing child-care support, or expanding employee-training programs.” The central bank wants financiers to create a new breed of ETFs it would like to buy. The ETFs would hold only shares of companies that are increasing capital spending, expanding spending on research and development or boosting what the Bank of Japan calls “human capital.” The latter means pay raises for staff, taking on more people or improving human resources. All these are eminently reasonable things to demand of companies, especially Japanese firms. All would probably be good for the economy, too. However, they have nothing to do with monetary policy. The basic aim of central banks is to adjust the overall economy while leaving the market and government to decide the best use of capital, decisions that are inherently political.

The problem, as Neal Soss, vice chairman of research at Credit Suisse, puts it, is “these are very, very challenging times for the economic orthodoxy,” and if governments won’t step up with an expansionary fiscal policy, central banks have little choice but to fill the gap. To be fair, Bank of Japan Gov. Haruhiko Kuroda is hardly drawing up a Soviet-style five-year plan. Only ¥300 billion ($2.7 billion) a year will be spent “with the aim of supporting firms that are proactively investing in physical and human capital.” The worry is that the Bank of Japan has only just begun. “It’s a massive politicization of credit: Here are the legitimate things for lending, and here are the illegitimate things,” said Russell Napier, an independent strategist and author of “Anatomy of the Bear,” a study of 70,000 Wall Street Journal articles during major bear markets. “It’s capitalism with Chinese characteristics.”

It’s awfully similar indeed. So why do we allow it to happen?

• The ECB and The Mississippi Company Bubble (Macleod)

Last week, the ECB extended its monetary madness, pushing deposit rates further into negative figures. It is extending quantitative easing from sovereign debt into non-financial investment grade bonds, while increasing the pace of acquisition to €80bn per month. The ECB also promised to pay the banks to take credit from it in “targeted longer-term refinancing operations”. Any Frenchman with a knowledge of his country’s history should hear alarm bells ringing. The ECB is running the Eurozone’s money and assets in a similar fashion to that of John Law’s Banque Generale Privée (renamed Banque Royale in 1719), which ran those of France in 1716-20. The scheme at its heart was simple: use the money-issuing monopoly granted to the bank by the state to drive up the value of the Mississippi Company’s shares using paper money created for the purpose.

The Duc d’Orleans, regent of France for the young Louis XV, agreed to the scheme because it would provide the Bourbons with much-needed funds. This is pretty much what the ECB is doing today, except on a far larger Eurozone-wide basis. The need for government funds is of primary importance today, as it was then. In Law’s day, France did not have a central bank, such as the Bank of England, managing the issue of government debt, let alone a functioning government bond market. The profligate spending of Louis XIV had left the state three billion livres in debt, which was the equivalent of 1,840 tonnes of gold. This was about 85% of the world’s estimated gold stock at that time, at the livre’s conversion rate into Louis d’Or. John Law would almost double that by June 1720, with unbacked livre notes issued by his bank.

Today, the assets being overvalued for the governments’ benefit are government bonds themselves, but the principal is the same. There is no need to use a separate, Mississippi-style vehicle, because there is a fully functioning government bond market. Banque Generale created the bank credit for France’s upper and middle classes to buy Mississippi Company shares, driving up the price and making yet higher prices a certainty. Law had set up a money-making machine for those with a modicum of wealth, but the ten% down-payment required to subscribe for Mississippi shares made speculation available to the servant classes as well. The result was virtually everyone in Paris was caught up in the speculative fever, and Mississippi shares increased from the 15 livres deposit to 18,000 livres fully paid at the peak in June 1720. The term “millionaire” dated from that time.

Simplistic. if Germany goes, so must Holland. And Austria. And then Belgium. France.

• Germany Must Leave Eurozone To Save It: Mervyn King (CNBC)

Germany has grown too powerful and should leave the euro zone in order to save the union, former Bank of England Governor Mervyn King said Monday. “That would be the best way forward, and I would hope that many of my American friends would stop pushing the Europeans to throw money at the problem and say we must make the euro successful,” he told CNBC’s “Squawk Box.” The tragedy of the euro zone, said King, is that Germany entered the project in a bid to bind itself into Europe so that no European country would ever again fear the country’s power. But now Germany is more powerful economically and politically than it was when the euro was adopted, he said. Germany also sacrificed the Deutsche mark in the process, “the one really successful symbol of post-war German reconstruction,” he said.

While the United States, the U.K., and some European countries need to export and invest more while consuming less, Germany and China need to spend more and export less, King said. “Unless we’re prepared to tackle that problem head-on, which will involve some restructuring of the economy, then we shall just continue down this path of ever-lower rates and no growth,” he said. Last week, European Central Bank President Mario Draghi warned European leaders that monetary policy alone would not be enough to jump-start the economy and that governments needed to do their job by pushing through structural reforms. “I made clear that even though monetary policy has been really the only policy driving the recovery in the last few years, it cannot address some basic structural weaknesses of the euro zone economy,” Draghi told reporters.

It’s just a matter of what comes first: run out of credit or run out of growth. Since ever more credit is needed to produce one ‘unit’ of growth, diminishing returns rule the day.

• Government Debt Could Bring China’s Credit Party To A Halt (MW)

China’s economy may have run out of growth before it ran out of credit, but no one told its companies. One of the biggest China puzzles today is the seemingly never-ending ability of its corporates to access new supplies of credit, without running into trouble or someone saying no. Some analysts warn that we are looking in the wrong place for distress; it could be building in the government bond market. This year, China’s easy money policy has been most graphically on display through an unprecedented overseas buying spree by its companies. The latest Chinese company throwing its checkbook around is insurer Anbang with a $13.1 billion cash offer for Starwood Hotels and Resorts. Earlier ChemChina broke China’s record for outbound merger and acquisition activity with an offer to buy Syngenta in cash for $44.1 billion.

In fact, in the first three months of this year, China outbound M&A activity has rocketed to $102.7 billion, almost equal to the record total of $107.5 billion for the whole of 2015, according to data from Dealogic. Heavily geared balance sheets appear no hindrance to connected mainland companies being able to access funding. On Monday, Shanghai shares rallied after more, cheaper money was promised to China’s brokers for margin financing. Yet it was possible to detect a hint of caution from the central bank governor at the weekend after the chorus of upbeat commentaries on the economy from China’s leaders in recent weeks. Zhou Xiaochuan said that “lending as a share of [gross domestic product], especially corporate lending as a share of GDP, is too high” and also that a high leverage ratio is more prone to macroeconomic risk.

Corporate gearing in China is now widely estimated at some 160% of GDP. It is these kinds of concerns that have led Moody’s to downgrade the outlook on China’s sovereign rating at the beginning of March. Other analysts are also turning their attention to central government debt — which has long been viewed as manageable — as these funding needs could emerge as a new fault line of distress. Societe Generale said in a new report the government bond market faces an unprecedented supply glut due to combined local and central government bond issuance. As the market has yet to factor in this exponential growth in government paper, it could lead to disruption, which could potentially spill over into the corporate bond market, they warn.

The upswing in issuance is due to an expanded local government debt swap program (where bad loans from special funding vehicles were swapped for debt) and central and local government fiscal deficits. In total, SG calculates this year could see a total net issuance of 7.58 trillion yuan, up by 2.66 trillion yuan from 2015. And this paper will keep coming. The latest audit report put the amount of local government debt eligible for being swapped into bonds at a massive 15.4 trillion yuan.

Until it no longer can.

• China’s Debt Burden Is Only Going To Get Bigger (BV)

China’s debt burden is only going to get bigger. Total borrowing has grown rapidly to reach about 250% of GDP last year, raising concerns about runaway credit. But pressure to meet unrealistic economic growth targets will delay any sustained effort to bring debt back down. The government’s latest five-year plan highlights the dilemma. Prime Minister Li Keqiang pledged that the world’s second-largest economy will expand by at least 6.5% a year, in real terms, until 2020. Meanwhile, planners expect total “social financing” – a broad measure of private sector credit – to grow by 13% in 2016 alone. So even if inflation reaches the optimistic target of 3%, debt will outstrip nominal GDP.

Extend those trends, and borrowing will hit about 290% of annual output by 2020. Central bank Governor Zhou Xiaochuan has expressed concerns about rising corporate debt levels but there’s little sign that China is reining in credit. Banks extended new loans worth 3.5 trillion yuan ($540 billion) in the first two months of 2016, a third more than in the same period of last year. Meanwhile, Chinese companies are using domestic debt to help finance an overseas M&A binge which totals nearly $100 billion this year, according to ThomsonOne. Though a healthier stock market would allow corporations to deleverage by issuing more equity, the collapse of last year’s bubble has made investors understandably skittish.

The government could perhaps take on a greater burden: official borrowing was about 44% of GDP last year, according to Breakingviews calculations based on data from the Bank for International Settlements. That’s well below the level in developed countries. However, this excludes borrowing by state-owned entities and local governments. Moody’s puts these contingent liabilities at between 50 and 70% of GDP. That leaves consumers, whose borrowings are just 39% of GDP. So households have plenty of scope to load up on mortgages and credit cards. A consumer credit boom might help deliver growth targets while also shifting the economy towards greater consumption. Whoever does the borrowing, however, debt levels will keep rising. As in the rest of the world, deleveraging will have to wait.

More or less correct.

• Home Is Where the Inflation Is (BBG)

The U.S. Federal Reserve has had a tough time getting inflation back up to desired levels. There’s one area, though, where it may be having a bigger effect than some of its major foreign counterparts: house prices. Comparing house prices across borders can be a fraught enterprise, given the idiosyncratic nature of housing markets and statistics. That said, after the U.S. housing bust tanked the global economy, the Bank for International Settlements started collecting and publishing data for a large number of countries. Though still imperfect, the data allow for some rough comparisons. The latest numbers, updated Friday, show the U.S. on a run: Over the year through September 2015, house prices exceeded consumer-price inflation by 5.9% – more than in the euro area, Japan or the U.K.

That put them up almost 15% in inflation-adjusted terms since the economy hit bottom in mid-2016, just short of the U.K. Although many factors can affect house prices, much of the difference is probably attributable to central-bank policy – pushing up house prices, after all, is one of the goals of monetary stimulus. The Fed and the Bank of England moved quickly and decisively to push down short-term and long-term interest rates in 2009 and beyond, while the ECB was relatively slow to respond to economic malaise and the Bank of Japan had already used much of its ammunition (though Japan’s demographics play a role, too).

The question, then, is whether higher house prices will do any good. In the short term, they increase inequality, because the benefit accrues to relatively wealthy property owners and raises the bar for poorer folks who want to own. The expectation is that this wealth effect will translate into greater spending and investment that will benefit everyone. There are some signs that may be happening – the U.S. economy is certainly doing better than the euro area’s. Still, real median household income – though rising – only slightly exceeds its pre-recession level. Price gains are undoubtedly a relief for millions of U.S. homeowners who came out of the crisis owing more on their mortgages than their houses were worth. Now the rest of the economy just has to catch up.

I’m sure Steve will come back to the BIS source data, this time for other countries.

• Get Ready For An Australian Recession By 2017 (Steve Keen)

For the last 25 years, Australian politicians of both Liberal and Labor hue have been able to brag that, under their stewardship, Australia has avoided a recession. Those bragging rights are about to come to an end. During the life of the next Parliament -and probably by 2017- Australia will fall into a prolonged recession. Whichever party is in opposition at the time will blame the incumbent, but in reality this recession has been set up by the sidestep both parties have used to avoid downturns for the past quarter century: whenever a crisis has loomed, they’ve avoided recession by encouraging the private sector to borrow and spend.

The end product of that is starkly evident in a new database on private and government debt published by the Bank of International Settlements. Australia’s most famous recession sidestep was during the GFC, when it was one of only two countries in the OECD to avoid experiencing two consecutive quarters of negative GDP growth (the other country was South Korea). Since then, the private sectors of the advanced countries have collectively de-levered, reducing their debt levels from about 170 to 160% of GDP. Australia, in stark contrast, has levered up. Our private debt to GDP ratio is now more than 20% higher than when the GFC began, and more than 50% higher than in the USA (see Figure 1).

This credit sidestep has worked because the extra debt-financed expenditure lifted aggregate demand and income well above what it would have been in the absence of a debt binge (see Figure 2).

Unfortunately for Australia’s next Prime Minister, there are two catches to this trick. The obvious catch is that getting that much extra demand out of credit necessarily increases debt much faster than it increases income — hence the runaway ratio of debt to GDP shown in Figure 1 —and this can’t go on forever. The less obvious one is that when debt is at stratospheric levels that apply in Australia today, total demand falls even if the debt ratio merely stabilises. The logic is pretty simple: your spending in a year is the total of what you earn plus what you borrow, and the same maths applies to the economy as a whole. If nominal GDP grows this year at the 2.8% rate it has averaged for the last five years, then GDP in 2016 will be roughly $1,634 billion. If private debt continues to grow at its average rate of 6.9% per year, it will reach $3,414 billion —an increase of $220 billion over the year.

Total private sector demand (which is spent on both goods and services and asset purchases) will be $1,855 billion. What about 2017, if private debt grows at the same rate as GDP itself, so that the debt ratio stabilises? Then GDP will be $1,680bn, and private debt will rise from $3,414bn to $3,509bn — an increase of just $96bn over the year (compared to $220bn the year before). The sum of the two will be $1,775bn — 4.3% less than the year before. This is the inevitable debt crunch coming Australia’s way, but conventional economists are oblivious to this danger because they’ve brainwashed themselves to ignore private debt as just a “pure redistribution”, to quote Ben Bernanke. This deluded textbook thinking is why Bernanke didn’t see the GFC coming.

But American banks’ exposure is much higher.

• Regulator Warns Canadian Banks on Oil and Gas Reserves (WSJ)

Canada’s banking regulator is urging the country’s major banks to review their accounting practices to ensure they have sufficient reserves as the commodity-price collapse takes a toll on the economy. The Office of the Superintendent of Financial Institutions wants lenders to scrutinize their collective allowances, reserve funds that act as cushions to absorb potential future loan losses, the regulator’s chief said in an interview. “We want them to take a good look at their accounting practices,” said Superintendent of Financial Institutions Jeremy Rudin. “They should support loss-absorbing capacity and the ability to manage through difficult times in general,” he added.

The regulator is giving the country’s six biggest banks this guidance on their accounting as they face mounting criticism from some analysts that they haven’t amassed enough reserves to cover soured loans to the energy sector. That criticism was a recurring theme during calls following their fiscal first-quarter results, in which many banks warned of rising provisions for credit losses but assured investors their rainy-day cushions were adequate. Canadian bank shares have tumbled over the past year as the price of oil has collapsed, but the S&P/TSX Composite Bank Index is now up about 16.77% from its low in February, reflecting a rebound in oil. Still, oil prices remain an overhang for banks, underscoring the size of the energy industry in the Canadian economy and concerns that lenders will eventually be stung by higher loan losses.

Energy loans totaled 49.7 billion Canadian dollars ($38.2 billion) for the country’s six biggest banks during the November-to-January quarter, according to a report by TD Securities. Bank of Nova Scotia, Canada’s third-largest bank by assets, has the biggest direct oil and gas exposure at 3.6% of total loans. Some analysts are skeptical about the lenders’ reserving practices in part because U.S. banks, including J.P. Morgan and Wells Fargo, have set aside millions more for their reserves as they brace for bigger energy-related losses.

Brazil is a game of dominoes.

• Petrobras Posts Record $10 Billion Loss (Reuters)

Brazil’s state-controlled oil company Petrobras posted its biggest-ever quarterly loss on Monday after booking a large writedown for oil fields and other assets as oil prices slumped and refinery projects faltered. Petróleo Brasileiro as the company at the epicenter of Brazil’s massive corruption scandal is commonly known, had a consolidated net loss of 36.9 billion reais ($10.2 billion) in the fourth quarter, according to a securities filing. The bigger-than-expected shortfall was 48% larger than the 26.6 billion-real loss a year earlier, the previous record. It also turned the company’s full-year 2015 result, which was positive through September, into a full-year loss. For a second year in a row, CEO Almir Bendine said, Petrobras will not pay dividends to either its government or non-government investors and it plans to make no bonus payments to employees.

The result caught analysts and investors by surprise. The largest fourth-quarter loss expected in a Reuters survey of analysts was 9.7 billion reais. Petrobras common shares fell 5.5% in after-hours electronic trading in New York, after the results were released. The red ink at Petrobras was driven by a 46% decline in the price of benchmark Brent crude oil, a drop that has driven up losses and caused writedowns throughout the global oil industry. Of the 46.4 billion reais written off in the quarter, 83% was for oil fields. A year earlier, writedowns were also the cause of Petrobras losses, although they were largely related to the giant price-fixing, bribery and political kickback scandal that has roiled the company and help fuel calls for the impeachment of Brazilian President Dilma Rousseff.

Who needs enemies with friends like…

• Erdogan To Include Journalists, Politicians in ‘Terrorist’ Definition (Ind.)

Turkey’s President Tayyip Erdogan has claimed the definition of a terrorist should be changed to include their “supporters” – such as MPs, civil activists and journalists. It comes after three academics were arrested on charges of terrorist propaganda after publicly reading out a declaration that reiterated a call to end security operations in the south-east of Turkey, a predominantly Kurdish area. Mr Erdogan has said the academics will pay a price for their “treachery”. A British national was also detained on Tuesday despite having ordered the arrests, after he was found with pamphlets printed by the Kurdish linked People’s Democratic Party (HDP). “It is not only the person who pulls the trigger, but those who made that possible who should also be defined as terrorists, regardless of their title,” President Erdogan said on Monday, adding that this could be a journalist, an MP or a civil activist.

His comments came the day after a suicide bomb attack in the country’s capital of Ankara killed at least 34 people and wounded 125 others when a car bomb was detonated near a main square in the Kizilay neighbourhood. Violent action between the government and the PKK – which is being blamed by authorities for the Ankara bombing – has reached its worst level for 20 years since fighting restarted last July. Hundreds of civilians, militants and security forces have been killed since the summer. President Erdogan has already threatened the future of Turkey’s highest court after it ruled that holding two journalists in pre-trial detention was a violation of their rights to freedom of expression. The journalists, Cumhuriyet newspaper editor Can Dundar and Ankara bureau chief Erdem Gul, were arrested on charges of revealing state secrets and attempting to overthrow the government. They reportedly face calls for multiple life sentences from prosecutors and will stand trial later in March.

“It would be an awesome and wondrous event if the nation landed on November 8 with both parties in complete disarray..”

• The Uses of Disorder (Jim Kunstler)

Many thoughtful and patriotic citizens entering the Kubler-Ross free-fire zone of desperate bargaining with reality are at work attempting to chart an orderly course around the Godzilla-like figure of Trump looming outside the desecrated once-shining city of American democracy. I doubt there is such an orderly way through this political bad weather. When storms hit, things break up. It can be argued endlessly whether times produce the man or vice versa, but except in the most schematic and wishful sense, is there any question that Donald Trump is unfit for the office he’s seeking? Personally, I am tortured by the question: why him? Why this vulgarian who can’t string together two sequentially coherent thoughts? Are there in this land of 320 million-plus people no other men or women with comfortable fortunes and better minds bold enough to take on the matrix of mafias running our affairs into the ground? Apparently not.

Then there is the question — only nascently theoretical at this point — of where such an orderly course of decision and action might lead this country. For Trump, it seems to be a restoration of the 1950s, when armies of “breadwinner” factory workers churned out cornucopias of Maytag washers and Zenith black-and-white televisions, and the less numerous Wogs of the outside world busied themselves with basket-weaving, and Atoms For Peace would make electric power “too cheap to meter,” and popular entertainment came in the chaste form of Dinah Shore urging the upward-aspiring masses to “see the USA in your Chevrolet!” That was, of course, the time of Trump’s childhood (and my own), and if there is anything more certain than night following day, it is that America is not going back to that sunny moment.

Trump and I are way past done growing up as human organisms and America is done growing as a techno-industrial political economy. People decline and die and are replaced by new people, and political economies wither and morph into sets of new activities and relations. The forces of history want to take us to this new disposition of things, and just about everything on the American scene these days is a manifestation of resistance to that journey. The destination is a much re-scaled and down-scaled edition of daily life in a de-globalized economy, with far fewer luxuries and a greater demand for earnestness, purposeful work, generosity-of-spirit, and plain dealing. These are not qualities exhibited by Trump, who represents only the poorly-articulated and grandiose wish to “make America great again.”

The institutional collapse of the Republican Party is in full swing now thanks to Trump. By the way, it could easily be matched by an equally brutal collapse of the Democratic Party if the head of the FBI makes any criminal referrals in the matter of the Clinton Foundation’s entanglements in official State Department business via an email slime trail. It would be an awesome and wondrous event if the nation landed on November 8 with both parties in complete disarray and more than a couple of rump factions posting candidates with dubious legitimate credentials to stand for election. In over two hundred years we have not seen a national election postponed, or canceled.

Not since the dinosaurs died off. [..] “at the start of the PETM, no more than 1bn tonnes of carbon was being released into the atmosphere each year. In stark contrast, 10bn tonnes of carbon are released into the atmosphere every year by fossil fuel-burning and other human activity.”

• Carbon Emission Release Rate ‘Unprecedented’ In Past 66 Million Years (G.)

Humanity is pumping climate-warming carbon dioxide into the atmosphere 10 times faster than at any point in the past 66m years, according to new research. The revelation shows the world has entered “uncharted territory” and that the consequences for life on land and in the oceans may be more severe than at any time since the extinction of the dinosaurs. Scientists have already warned that unchecked global warming will inflict “severe, widespread, and irreversible impacts” on people and the natural world. But the new research shows how unprecedented the current rate of carbon emissions is, meaning geological records are unable to help predict the impacts of current climate change. Scientists have recently expressed alarm at the heat records shattered in the first months of 2016.

“Our carbon release rate is unprecedented over such a long time period in Earth’s history, [that] it means that we have effectively entered a ‘no-analogue’ state,” said Prof Richard Zeebe, at the University of Hawaii, who led the new work. “The present and future rate of climate change and ocean acidification is too fast for many species to adapt, which is likely to result in widespread future extinctions.” Many researchers think the human impacts on the planet has already pushed it into a new geological era, dubbed the Anthropocene. Wildlife is already being lost at rates similar to past mass extinctions, driven in part by the destruction of habitats. “The new results indicate that the current rate of carbon emissions is unprecedented … the most extreme global warming event of the past 66m years, by at least an order of magnitude,” said Peter Stassen, a geologist at the University of Leuven in Belgium, and who was not involved in the work.

The new research, published in the journal Nature Geoscience, examined an event 56m years ago believed to be the biggest release of carbon into the atmosphere since the dinosaur extinction 66m years ago. The so-called Palaeocene–Eocene Thermal Maximum (PETM) saw temperatures rise by 5C over a few thousand years. But until now, it had been impossible to determine how rapidly the carbon had been released at the start of the event because dating using radiometry and geological strata lacks sufficient resolution. Zeebe and colleagues developed a new method to determine the rate of temperature and carbon changes, using the stable isotopes of oxygen and carbon. It revealed that at the start of the PETM, no more than 1bn tonnes of carbon was being released into the atmosphere each year. In stark contrast, 10bn tonnes of carbon are released into the atmosphere every year by fossil fuel-burning and other human activity.

“Franck Düvell is an associate professor and senior researcher at The University of Oxford’s Centre on Migration, Policy and Society.”

• The EU’s Deal With Turkey Is a No-Win Situation (Fortune)

As of this year, 2.7 to 3.5 million Syrians, Iraqis, Afghans, and others have escaped to Turkey from the various evils and conflicts in the region, while 1 million moved on to the European Union. Policy failed to prevent this, and the EU is now entrenched in a moral panic over what is equivalent to a mere 0.2% of the population. Its recent deal with Turkey to send back irregular migrants in exchange for visa-free travel and billions in aid is not only a human rights violation, but could turn out to be a total PR stunt. The primary root of the refugee crisis stems back to the conflicts in Syria, Iraq, and Afghanistan. But a secondary root lies in the lack of access to protection in the countries outside of the EU. Notably in Turkey, non-Syrians have to wait eight years for asylum interviews, Syrians only get temporary protection, and access to regular employment and social services is restricted for both groups.

They endure severe poverty and years in limbo. Meanwhile, the continuation of the flow is partly driven by women and children following their husbands who made the journey last year. Until the summer of 2015, the EU failed to agree on preventive policies, and Turkey bemoaned that it was left alone with the refugee crisis while failing to stop the outflow. Meanwhile, the EU kept relatively quiet, embracing an almost laissez faire attitude. But then numbers exploded and borders were practically overrun, eventually collapsing under the sheer weight of the number of people. In some incidences, refugees protested, occasionally hurling stones, replicating the actions during the Arab Spring and once more demonstrating for human dignity. Their suffering added a Ghandi-esc dimension to their claims. Human agency supported by a myriad of facilitators proved stronger than state policy.

The EU-Turkey “deal” refers to stopping and returning “irregular migrants” and “migrants not in need of international protection” in exchange for refugees to be resettled from Turkey. But 85% of all arrivals are from countries with many refugees, so the numbers affected would be comparably small. But then it also lists Syrians, hence refugees, to be returned. So far, Turkey has already struggled to stop the outflow within the limits of the law, and now turns to violent and illegal measures. The deal is thus inconsistent—and in case refugees are returned—highly legally questionable. The deal is also practically questionable. Which border gates will be used? Are there ferries, planes, and busses available to ship tens of thousands of people back to Turkey? Where will the returned be kept? How will their human dignity be secured?

How will the people who are resettled in exchange from Turkey to Europe be selected? Does Turkey have the political will and capacity to prevent human rights violations like destitution, or to change its legislation and extent refugee status to non-Europeans? In order to make the deal work, Turkey would (a) need to grant a refugee status that complies with EU and international law, and (b) rapidly develop and, more importantly, implement an integration strategy that could justify containing and simultaneously convincing refugees to stay in Turkey. And in the EU, many political parties and several governments need to drop their objections to visa liberalization for Turkey. And Member states that have so far refused to resettle refugees would need to change their position. All of this seems rather unrealistic.

Insane that this was not done BEFORE the deal was signed.

• Greece Appeals For EU Logistics Aid For Migrant Deal To Work (Reuters)

Greece appealed to EU partners on Monday for logistical help to implement a deal with Turkey meant to stem an influx of migrants into Europe, as people – many unaware of the tough new rules – continued to come ashore on Greek islands. Economically battered Greece, for months at the epicenter of Europe’s biggest migrant crisis since World War Two, is struggling to mount the massive logistics operation needed to process asylum applications from the many hundreds of migrants still arriving daily along its shoreline. Turkish officials arrived on the Greek island of Lesvos on Monday to help realize the deal, which requires new arrivals from March 20 to be held until their asylum applications are processed and for those deemed ineligible to be sent back to Turkey from April 4 onwards.

“We must move very swiftly and in a coordinated manner over the next few days to get the best possible result,” Greek Prime Minister Alexis Tsipras said after meeting EU Migration Commissioner Dimitris Avramopoulos in Athens. “Assistance in human resources must come quickly.” Under the EU-Turkey roadmap agreed last Friday, a coordination structure must be created by March 25 and some 4,000 personnel – more than half from other European Union member states – deployed to the islands by next week. Avramopoulos said France, Germany and the Netherlands had already pledged logistics and personnel. “We are at a crucial turning point … The management of the refugee crisis for Europe as a whole hinges on the progress and success of this agreement,” he said.

However, on Monday, the day after the formal start of an agreement intended to close off the main route through which a million refugees and migrants arrived in Europe last year, authorities said 1,662 people had arrived on Greek islands by 7 a.m. (0500 GMT), twice the official count of the day before.

Too late.

• EU Rights Chief Demands More Protection For Refugees (AP)

The Council of Europe commissioner for human rights is calling for additional measures to protect the rights of migrants now that a deal has been reached by the EU and Turkey. Nils Muiznieks said the deal’s legal and procedural safeguards should apply to all people – not just Syrians – reaching Greece or any EU country. Such safeguards should likewise extend to anyone who is returned to Turkey. He also called on Greece and Turkey to limit the use of detention of migrants to “exceptional” cases and take steps to ensure there are no collective returns. Muiznieks described the deal, which officially came into effect on Sunday, as “just a patch to plug one of the holes in the highly dysfunctional approach of European states to migration.”

People come to you for help and you lock them up?!

• Greece Sets Up Detention Camps As Refugee Deal Hits Delays (AP)

Greece detained hundreds of refugees and migrants on its islands Monday, as officials in Athens and the European Union conceded a much-heralded agreement to send thousands of asylum-seekers back to Turkey is facing delays. Migrants who arrived after the deal took effect Sunday were being led to previously open refugee camps on the islands of Lesbos and Chios and held in detention, authorities on the islands said. EU countries are trying to avoid a repeat of the mass migration in 2015, when more than a million people entered the bloc. Most were fleeing civil war in Syria and other conflicts, traveling first to Turkey and then to the nearby Greek islands in dinghies and small boats. Efforts to limit migration have run into multiple legal and practical obstacles.

Under the deal, Greek authorities will detain and return newly arrived refugees to Turkey. The EU will settle more refugees directly from Turkey and speed up financial aid to Ankara. The two sides, however, are still working out how migrants will be sent back. “We are conscious of the difficulties,” EU Commission spokesman Margaritis Schinas said in Brussels. “And we are working 24-7 to make sure that everything that needs to be in place for this agreement to be implemented soon is happening.” Commission officials said support staff needed to implement the deal -including hundreds of translators and migration officers- would not start arriving until next week. Returns, they said, cannot start until Greece changes its law to recognize Turkey as a “safe country” for asylum applications.

The human rights group Amnesty International sharply criticized the plan. “Turkey does not offer adequate protection to anyone,” Iverna McGowan, the head of Amnesty’s EU office, told The Associated Press, accusing Turkey of routinely forcing Syrians back across the border.

Debt Rattle March 11 2016

Mar 112016

March 11, 2016 Posted by Raúl Ilargi Meijer at 10:57 am Finance Tagged with: amnesia, austerity, China, deflation, Draghi, housing, Japan, refugees Comments Off

Dorothea Lange American River camp, Sacramento, CA. Destitute family. 1936

• ECB’s Draghi Plays His Last Card To Stave Off Deflation (AEP)

• Draghi Can Cut Borrowing Costs, But He Can’t Make Companies Borrow (BBG)

• Japan, An Economics Lab Where Theories Go to Die (BBG)

• China May Rein in Wage Increases to Boost Economy (WSJ)

• Germany Confirmed To Be Back In Deflation (FT)

• Australians Have Amnesia On Housing And Banks (BS)

• Americans’ Home Wealth Recovers $7 Trillion as Prices Firm (BBG)

• An Economy Under Austerity Is Like A Filthy Restaurant Kitchen (Leveller)

• How a BREXIT Could Save Europe From Itself (Heath)

• Netherlands: Turkey-EU Refugee Swap Deal ‘Temporary’ (AFP)

• EU To Ease Greece Refugee Buildup Amid Doubts Over Turkey Deal (Reuters)

• 500,000 Refugees Reached Greece In Q4 2015 (Reuters)

“..“We don’t anticipate it will be necessary to reduce rates further,” he said. The throw-away comment was instantly taken to mean that -0.4pc is the absolute floor that will be permitted by Germany.”

• ECB’s Draghi Plays His Last Card To Stave Off Deflation (AEP)

The ECB has pulled out all the stops to avert a dangerous deflation-trap, launching a blast of triple stimulus despite angry criticism from Germany that it is entirely unnecessary and will do more harm than good. The markets reacted wildly to the package of measures, surging at first and then plummeting on creeping fears that the bank has exhausted its policy options and may be defenceless against a fresh shock. Mario Draghi no longer seems able to conjure confidence with his former panache. His magic has, for now, deserted him. The ECB cut the deposit rate by 10 basis points to a historic low of -0.4pc and stepped up the pace of QE from €60bn to €80bn a month. It buttressed the effect with unlimited 4-year loans to banks at near-zero cost, hoping this will limit the damaging side-effects of negative rates for banks.

“We have shown we are not short on ammunition,” insisted Mr Draghi, who was badly burned in December after seeming to over-promise and then falling short. “Mario Draghi has returned to the fray firing a blunderbuss,” said Simon Ward from Henderson Global Investors. Mr Draghi pledged to flood the financial system with fresh liquidity for as long as it takes to keep the fragile economic recovery alive and prevent a deflationary psychology taking hold, yet there was a sting in the tail. “We don’t anticipate it will be necessary to reduce rates further,” he said. The throw-away comment was instantly taken to mean that -0.4pc is the absolute floor that will be permitted by Germany. Marc Ostwald, from Monument Securities, said the ECB has bet everything on one last throw of the dice. “It’s a kitchen sink job, but at the same time Draghi is saying there is a limit to what they can do, that this is it, and there will nothing more,” he said.

The euro surged by more than two cents to $1.12 against the dollar, making it even harder for the ECB to stave off deflation. “It is not what they were hoping for,” said Simon Derrick from BNY Mellon. “What’s clear is that people are very uncomfortable with negative rates, and markets have become hypersensitive to any shift in monetary expectations,” he said. Hans Redeker, currency chief at Morgan Stanley, said foreign exchange traders had latched onto a subtle shift in ECB policy. It is moving away from efforts to force down the yield curve on sovereign debt, switching instead to a drive for lower corporate credit spreads. This is likely to draw money into eurozone assets. Negative interest rates are widely seen as a tool to force down the exchange rate, a form of “currency war” that will no longer be tolerated by the US after the G20 meeting in Shanghai. The ECB’s shift to other tools is a sign that it is backing away from this game. “We’re not in that war at all,” said Mr Draghi. [..]

Professor Richard Werner from Southampton University, the man who invented the term QE, said the ECB’s policies are likely to destroy half of Germany’s 1,500 savings and cooperative banks over the next five years. They cannot pass on the negative rates to savers so their own margins are suffering. “They are under enormous pressure from regulatory burdens already, and now they are reaching a tipping point,” he said. These banks make up 70pc of German deposits and provide 90pc of loans to small and medium firms, the Mittelstand companies that form the backbone of German industry. Prof Werner said these lenders are being punished in favour of banks that make their money from asset bubbles and speculation. “We have learned nothing from the financial crisis. The sooner there is a revolt in Germany, the better,” he said.

How can you fight deflation when you don’t know what it is?

• Draghi Can Cut Borrowing Costs, But He Can’t Make Companies Borrow (BBG)

Mario Draghi’s plans to buy corporate bonds will cut financing costs for European companies, if history is any guide. Getting the firms to actually borrow and spend money will be harder. Corporations already have hefty incentives to sell debt, with average yields on investment-grade bonds in the region below 2 percent for a second year. But they have little appetite to raise money to invest in new factories and equipment, because the economic outlook is so weak. “If you don’t need the funds then why should you raise them?” said Ivo Kok, the treasurer of Alliander NV, an investment-grade Dutch gas and electricity distribution company. “It is more of a risk to have an awful lot of cash around that you’re not putting to work.”

The ECB said on Thursday that it will start buying investment-grade corporate bonds sometime toward the end of the second quarter, as part of a broader bond purchase program. To help stave off deflation and stimulate growth, it plans to buy €80 billion of debt a month, also including eurozone government bonds, asset-backed securities, and covered notes. The central bank is also taking steps to provide cheap funding to banks through a program known as “targeted longer-term refinancing operations.” That financing, which essentially pays banks to borrow, is meant to encourage more lending. The ECB’s efforts are already looking like they may cut companies’ borrowing costs. A measure of investment-grade corporate credit risk, the Markit iTraxx Europe Index, dropped to its lowest point in two months.

Banks are seen benefiting too – notes issued by Italian lenders Intesa Sanpaolo and UniCredit, the biggest users of the TLTRO facility, were among the gainers. But even before the ECB’s moves, companies had access to cheap credit, said Gary Herbert at Brandywine Global Investment Management. “Is there a need to lever up a balance sheet to grow a business when underlying customers aren’t demanding more of what you make?” Herbert said.

“Japan has a number of unusual traits that make it a very good proving ground for macro models, including a shrinking population, inefficient labor markets, an economy out of sync with the rest of the world and a government willing to engage in dramatic economic experiments.”

• Japan, An Economics Lab Where Theories Go to Die (BBG)

The main thing you have to understand about macroeconomic theory – both of the type used by academics and the type employed by private-sector forecasters – is that it doesn’t really work. Events are constantly taking macro people by surprise, counterexamples to pet theories are a dime a dozen, and the rare theory that can be tested against available data is usually rejected outright. In macroeconomics, your choice of model is usually between “awful” and “very slightly less awful.”

Most macroeconomic theories can be easily tested: all we have to do is take a look at Japan. Japan has a number of unusual traits that make it a very good proving ground for macro models, including a shrinking population, inefficient labor markets, an economy out of sync with the rest of the world and a government willing to engage in dramatic economic experiments. Once we start examining theories used to explain the U.S. economy, and apply them to Japan, we find that these theories usually fail.

For example, take the theory of loanable funds, which is taught in most undergraduate introductory econ classes. According to this model, when the government borrows a lot of money, it pushes up interest rates. That makes a certain logical sense, since interest rates are the price of borrowing, and an increase in demand for credit should push up the price. But even as Japanese government deficits and borrowing have exploded since 1990, interest rates have done nothing but fall as the chart below shows:

Doesn’t sound like a good sign.

• China May Rein in Wage Increases to Boost Economy (WSJ)

China’s Communist leaders are trying to rein in wage increases, favoring business interests at the expense of increasingly discontented workers as growth sags. China’s labor ministry recently urged “steady and cautious control” over minimum wages and proposed a formula change that would slow increases, according to people briefed on the plan. The southern province of Guangdong, a manufacturing hub, last month announced a two-year freeze on minimum wages. During annual legislative meetings in Beijing this past week, Finance Minister Lou Jiwei criticized China’s labor laws as being overly protective of workers, saying they fuel wage inflation and discourage employers from creating more jobs. Despite a rise in labor strife, Premier Li Keqiang made no direct mention of labor relations in his annual speech, a departure from previous years.

Over much of the past decade, Chinese wages grew faster than the economy, lifting workers’ living standards but also diminishing China’s competitive edge. The increases helped ensure workers shared in economic prosperity. Now, as growth slows, leaders are signaling wages and labor rights—already poorly enforced—might need to take a back seat. “China, as a developing country, has adopted labor laws of a European welfare state,” said Yang Keng, chairman of real-estate firm Sichuan BRC Group and a political adviser to the government. “The motives are good but businesses have been hurt.” China is trying to avoid painful job losses by keeping growth at a robust 6.5% over the next five years. Leaders already plan to lay off 1.8 million steel and coal workers and aren’t eager to drive up unrest with deeper cuts.

Instead, they are trying to free up funds for businesses to invest, including by tackling workers’ wages and welfare benefits. “The government is moving in a broadly pro-capital direction,” said Eli Friedman, an assistant professor at Cornell University who studies labor relations in China. “This would be a disaster for Chinese workers, and would certainly undermine efforts at economic rebalancing.”

Schäuble rules.

• Germany Confirmed To Be Back In Deflation (FT)

Germany’s inflation rate for February came in unchanged from its preliminary reading, confirming Germany has fallen back into deflation. Consumer prices were confirmed to have fallen 0.2% year-on-year in February on an EU-harmonised basis, down from a 0.4% rise in January. Economists had forecast the figure to remain the same. On a month-on-month basis, consumer prices rose by 0.4%. The news will give a further headache to the ECB, which yesterday announced a package of additional monetary easing measures partly designed to ward off deflationary pressures from the single currency zone.

Scary numbers.

• Australians Have Amnesia On Housing And Banks (BS)

Australian investors are far too over-exposed to housing and should not be doubling down on that risky exposure by owning shares in the banks as well, according to Lazard Asset Management. Lazard portfolio manager Philipp Hofflin says his greatest concern is the risk posed by the housing market, which he argues is fundamentally overvalued as an asset class. “We are concerned about it because we think the price is fundamentally wrong,” Hofflin told a conference of investment advisers in Melbourne. “It is the biggest issue that faces Australia and the largest asset class by far. There are clearly signs of speculative activity,” he said, citing high levels of interest-only loans and the majority of first homebuyers choosing investment properties rather than owner-occupied.

The media has been awash with reports in recent weeks about the risks of the housing bubble bursting, but Hofflin says it is impossible to predict the timing of such an event because you could only identify the catalysts in retrospect. But if capital-city housing were a fully equity-funded stock (with no debt), it would be trading at a price to earnings ratio of 65, compared with a long-term stock average of 16 to 17. Units are trading about 49 times earnings. The net yield on an Australian home of 2.2% is well below the comparable yield on a US home of 6.2%; on a unit it is 2.9% compared with 5.7% in the US. He pointed to parallels with Australia’s two previous debt-fuelled housing booms in the 1880s and 1920s, both of which were followed by extended economic depressions.

“We’ve been here before. We got here because we suffer from collective intergenerational amnesia,” Hofflin argues. Australians’ over-exposure to housing is evident in the middle 60% of income households, where housing accounts for 90% of their net worth. At the top of the US housing bubble in 2006, that figure was 36% of the household balance sheet and it fell to 28% in the recession. “Often in Australia, the only other thing they own is bank shares, who lend on that property, and hybrids, and term deposits with those same banks. It is one very large, concentrated risk,” Hofflin says. Of investors who directly own shares, over 60% are held in the banks while 80% are in financials.

Just as scary.

• Americans’ Home Wealth Recovers $7 Trillion as Prices Firm (BBG)

In March 2014, Steven and Bernadette Doherty paid $183,000 for a two-bedroom home in Charlotte, North Carolina, $6,000 more than its appraised value. Today, similar houses in the neighborhood are being priced at $300,000 or more. “We bought at the right time,” said Bernadette, a retired Wells Fargo information technology worker. “In retrospect, we were lucky as prices have gone up so much more.” Home-price appreciation is a welcome development for households whose nest eggs were shattered by the residential real-estate bust that began a decade ago. The 2006-2009 housing slump reduced wealth by $7 trillion. Since then, the value of homeowners’ equity in real estate has more than doubled from a low in the first quarter of 2009, a Federal Reserve report today showed. What’s more, housing wealth is poised to reach a new record as early as the second quarter, say economists at the St. Louis Fed and Pantheon Macroeconomics.

Improving property values are allowing homeowners to shake off recent stock-market volatility and keep spending. From the end of 2013 through last year’s fourth quarter, home equity climbed 22% compared with a 11% gain in the Standard & Poor’s 500 Index. The stock index has declined 3% this year. “The increase in housing wealth is a kind of stealth offset to falling stock prices,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, who predicts record home equity values next quarter. “Home ownership is much wider than stock ownership. The consumption effect from a given rise in holdings has been bigger for homes.” Some cities, including Charlotte, are already seeing prices at all-time highs. Home values in Dallas, Denver, and San Francisco and Portland, Oregon, all hit records in December, while they’re down less than 1% in Boston from an August peak, according to S&P/Case-Shiller indexes. About 38% of 87 U.S. metropolitan areas were in record territory last year, data tracker RealtyTrac figures show.

A year old, but an excellent explanation of austerity.

• An Economy Under Austerity Is Like A Filthy Restaurant Kitchen (Leveller)

The austerity fetishists trying to do to Europe and America what the IMF and World Bank did to its third world victims in the eighties, on behalf of their masters in Wall Street, often compare an economy to a household. This household, they tell us, has lived beyond its means, by maxing out its credit card and getting into debt. What do you do when you get into debt? You pay it off! Stop shopping at Whole Foods and go to Walmart instead. Take the shiny gadgets you don’t need to a pawn shop for a bit of extra cash. Work harder. Even ignoring the fact that the increased indebtedness of households these days is part of a structural problem rather than a moral one, the basis for the ‘economy is like an indebted household’ analogy has no relation whatsoever to economics. They would have you believe that austerity is a practical measure, where if you sell off your wasteful trinkets you will become solvent once again – all premised on the iron moral principle that Debts Must Be Paid.

This is a load of bollocks. We want to propose instead that austerity is like a restaurant kitchen, not because we think the analogy is perfect, but because every time a Keynesian economist tries to knock down the household analogy they drone on with “households can’t print money”. Which is hardly a catchy argument to throw at the right wing pub bore. It is possible to have a little more imagination than that. Here is the Leveller’s austerity kitchen analogy, for your pub argument utility belt. Use it carefully. The restaurant has got itself into debt. We don’t really care how, suffice to say the decisions that led to it were made by the owners and not the staff. The owners like to say “we” are in debt to include the staff, which is interesting, given that when the restaurant was making a tidy profit the previous year there was no “we” when it came to giving themselves a fat pay rise. But now, for whatever stupid structural reason you’d care to pick, they are in debt.

Even if there isn’t some troll sat there insisting that the ovens and hobs don’t create value through being there – let’s call her Libby Terrian – consider austerity as being like the restaurant saying, “well there is no immediate value being created by the dishwasher, and we already have a porter and a sink, so let’s sell the dishwasher”. As in the machine, not the porter. So they flog the dishwasher and get some liquidity, and use it to pay off some of their interest-ridden debt. Sadly the value of the dishwasher is not equal to the value of the debt, not even close, and so the debt starts to mount once more; all they’ve done is bought a little time. At the same time, the poor kitchen porter is having to work much harder to keep everything clean – naturally they can’t afford to give him a pay rise to reflect this increase in workload – but he just can’t keep up, because the value of his labour has been reduced by taking the dishwasher out of the microeconomy.

Meanwhile Libby Terrian thinks it would be way better if the chefs just cooked the food at home and brought it in because then the restaurant wouldn’t have to spend money on oven maintenance every few months, but thankfully nobody listens to Libby, because she is mental. Further problems mount from this, of course. The porter’s increased workload with less ability to do it properly leads to an unfortunate situation several nights a week whereby he can’t produce clean plates quickly enough for the chefs, who end up having to wash plates by themselves. Not only does this affect the quality of their dishes, it also affects general hygiene in the restaurant. The restaurant begins to get a reputation for being dirty.

Mostly what I said not long ago.

• How a BREXIT Could Save Europe From Itself (Heath)

It is those who love Europe, its diversity, its history and its humanity who should be the most enthusiastic about Brexit. A paradox? Not at all. The European Union, as currently constituted, has run out of road. It is doomed to fail, sooner or later, with catastrophic consequences for our part of the world, and the only way forward is for one major country to break ranks and show that there can be a better alternative consistent with Europe’s core enlightenment values. It would be far better if we, rather than a more socialist or nationalistic country, were the first to break the mould: Britain would have the opportunity to show that free trade, an open, self-governing society and a liberal approach could ensure the peace and prosperity at the heart of the European dream. Others would soon join us. If we vote to stay, we will lose the moral authority to speak out, and other, less benign, inward-looking, illiberal approaches may triumph instead.

The eurozone is broken, and another, far greater economic crisis inevitable. The next trigger could be a fiscal meltdown in Italy, or another banking collapse, or a political implosion in Spain or France, or another global recession. Nobody can be sure what the proximate cause will be – but there will be one, and the fallout will be turmoil of a far greater magnitude than anything we saw in Greece. At the same time, the tensions fuelled by the migration crisis will grow relentlessly, especially if hundreds of thousands or even millions of people are settled across the continent over the next few years. Many in the Remain camp agree that the eurozone requires drastic surgery, but their solution is naive. They believe that even more integration – a pan-eurozone welfare state, greater transfers between countries, central powers over fiscal policy – would help cancel out the currency’s inherent defects.

I doubt that this would actually work in purely economic terms, but even if it did, it is delusional to believe that such a model can be politically sustainable. Democracy, the term, is derived from the ancient Greek: it denotes a system whereby the people (dêmos) are in power or in which they rule (krátos). One cannot, by definition, have a genuine democracy in the absence of a people; and there is no such thing as a European demos. The French are a people; the Swiss are a people, even though they speak multiple languages; the Americans are a people, even though Democrats and Republicans hate each other. But while Europeans have much in common, they are not a people. Danes don’t know or care about Portuguese politics; the Spanish have no knowledge or interest in Lithuanian issues.

One could hold pan-European elections, of course, with voters picking multi-national slates of candidates; but, then, one could also ask every person on the planet to vote for a world president. Such initiatives would ape democratic procedures, but would be a sham. They would be Orwellian takedowns of genuine democracy, not extensions of it. There would be no relationship or understanding between ruler and citizen, zero genuine popular control, nil real accountability; coalitions of big countries would impose their will on smaller nations, and elites would run riot. We would be back to imperial politics, albeit in a modernised form.

Did they tell the Turks this?

• Netherlands: Turkey-EU Refugee Swap Deal ‘Temporary’ (AFP)

A proposed EU-Turkey deal to swap Syrian refugees one-for-one will be only “temporary” and a longer-term resettlement arrangement will be necessary, the Netherlands warned Thursday. European Union interior ministers meeting in Brussels were debating a proposal made by Ankara at a leaders’ summit on Monday for a wide-ranging deal to curb the migration crisis. Under the deal the EU would resettle one Syrian refugee directly from camps in Turkey, in exchange for every Syrian that Turkey takes from the overstretched Greek islands, a scheme both sides have hailed as “game-changing”.

But Dutch migration minister Klaas Dijkhoff, whose country holds the six-month rotating presidency of the 28-nation EU, said that it was “not a permanent mechanism.” “I think the one-on-one readmission and resettlement, it’s temporary,” Dijkhoff told reporters as he arrived for the meeting. “I think when you have the one-on-one scheme, we will see over time that it won’t pay off to cross the sea in an illegal and very dangerous fashion. So that flow will stop,” he said. “And then we will have to talk with Turkey about a more permanent resettlement scheme in a sense of burden sharing.”

“It will be very difficult to arrive at something legally sound and implementable before the summit..”

• EU To Ease Greece Refugee Buildup Amid Doubts Over Turkey Deal (Reuters)

The European Union aims to rehouse thousands of asylum-seekers from Greece in the coming months, officials said on Thursday as EU ministers wrestled with concerns about the legality of a new plan to force migrants back to Turkey. Dimitris Avramopoulos, the member of the executive European Commission who handles migration, told reporters at a meeting of national interior ministers that at least 6,000 people a month should be relocated to other member states under a scheme which has moved only about 900 hundred people so far. Avramopoulos noted a recent acceleration in relocations under the system which has divided EU governments as some refuse to take in refugees, most of whom are from Syria and Iraq, though he acknowledged the target was ambitious.

Some 35,000 people have been stranded in Greece since Austria and states on the route to Germany began closing borders, barring access to migrants hoping to follow more than a million who reached northern Europe last year. EU officials said that blockage appeared to have made more asylum seekers ask for relocation rather than try to make their own way northward. Chancellor Angela Merkel, under electoral pressure at home after opening Germany’s doors to a million Syrians, has pressed EU partners to share the load. But few are keen and critics say many of those rehoused elsewhere will head for Germany anyway. On Monday, Merkel pushed EU leaders to pencil a surprise deal she brokered with Ankara to halt the flow to Greece by returning to Turkey anyone arriving on the Greeks islands.

But legal details are still being worked out for an EU summit next week and many governments are still sceptical of the scheme. The top United Nations human rights official said it could mean illegal “collective and arbitrary expulsions”. EU ministers also voiced unease at the price of Ankara’s cooperation, notably an accelerated process to ease visa rules for Turks by June and revive negotiations on Turkey’s distant EU membership hopes. “I ask myself if the EU is throwing its values overboard,” said Austrian Interior Minister Johanna Mikl-Leitner, whose government has led a push to seal off Greece from the north as an alternative to relying on Turkey to stop migrants leaving.

She noted the seizure of an opposition newspaper in Turkey three days before it presented EU leaders with the draft deal, under which Europeans will take one Syrian direct from Turkey for every compatriot who is detained and sent back from Greece. Human rights concerns also pose problems for EU lawyers trying to tie up the package by the March 17-18 summit, notably because to despatch people at speed back to Turkey relies on an assessment that Turkey is a “safe” country for them to be in. An EU definition of such a state includes a reference to the Geneva Convention on refugees, to which Turkey does not fully comply, leaving legal experts in Brussels hunting a solution. “It will be very difficult to arrive at something legally sound and implementable before the summit,” an EU official said.

That EU ‘ease’ above talks about resettling 6,000 per month.

• 500,000 Refugees Reached Greece In Q4 2015 (Reuters)

Nearly half a million irregular migrants arrived in Greece in the last three months of 2015, most of whom then moved north through the Balkans, data from EU border agency Frontex showed on Thursday. Frontex, which collates data on the number of irregular border crossings, recorded 484,000 such incidents on the Eastern Mediterranean route from Turkey to Greece between October and December and 466,000 on the Western Balkan route, notably people re-entering the European Union at the Croatian border from non-EU Serbia.

That took the total number of illegal EU border crossings, not using regular crossing points, to 978,300 in the quarter, a record since Frontex began collating such data in 2007. Of those arriving in Greece, mostly on islands off the Turkish coast, 46% said they were Syrian and 28% Afghan, Frontex said. It recorded a drop in arrivals in Italy from Libya but noted a sharp increase in arrivals in Spain from Morocco, albeit at a low level. There were 2,800 illegal crossings in the fourth quarter on the Western Mediterranean route, it said, a record for that season and double that in the same period of 2014.

Debt Rattle January 18 2016

Jan 182016

January 18, 2016 Posted by Raúl Ilargi Meijer at 9:24 am Finance Tagged with: 1%, China, crash, housing, Iran, oil, pollution, refugees, Saudi, slump, stocks, VW 2 Responses »

DPC Chicago & Alton Railroad, Joliet, Illinois 1901

• Asian Shares Drop To 2011 Levels As Oil Slump Intensifies (Reuters)

• Oil Slides To Lowest Since 2003 As Iran Sanctions Are Lifted (Reuters)

• Hedge Funds Are Betting The Commodities Collapse Isn’t Over Yet (BBG)

• Gulf Stock Crash Wipes $38.5 Billion Off Markets As Iran Enters Oil War (Tel.)

• Richest 1% Now Wealthier Than The Rest Of Humanity Combined (BBG)

• Stock Market Crash Could Burst UK Property Bubble (Express)

• It’s Not Time For Britain To Be ‘Intensely Relaxed’ Over Household Debt (Ind.)

• China’s Securities Czar Casts Wide Blame for Market Turmoil (WSJ)

• China To Clean-up ‘Zombie’ Companies By 2020 (Reuters)

• The Problem With Getting Money Out Of China (China Law Blog)

• Gloom Gathers Over The Challenges That Germany Faces (FT)

• “Everything Has Come to a Standstill”: Politics Hits Business in Spain (WS)

• Canadian Officials Under Pressure to Stimulate Economy (WSJ)

• Shock Figures To Reveal Deadly Toll Of Global Air Pollution (Observer)

• False Emissions Reporting Undermines China’s Pollution Fight (Reuters)

• Weak EU Tests For Diesel Emissions Are ‘Illegal’ (Guardian)

• 66 Institutional Investors To Sue Volkswagen In Germany (FT)

• Obama Declares Emergency In Flint, But Not Disaster (DFP)

• When Peace Breaks Out With Iran… (Ron Paul)

• Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation (ZH)

• The Economics Of The Refugee Crisis Lay Bare Our Moral Bankruptcy (Guardian)

China contagion spreads.

• Asian Shares Drop To 2011 Levels As Oil Slump Intensifies (Reuters)

Asian shares slid to their lowest levels since 2011 on Monday after weak U.S. economic data and a massive fall in oil prices stoked further worries about a global economic downturn. Spreadbetters expected a subdued open for European shares, forecasting London’s FTSE to open modestly higher while seeing Germany’s DAX and France’s CAC to start flat-to-slightly-weaker. Crude prices faced fresh pressure after international sanctions against Iran were lifted over the weekend, allowing Tehran to return to an already over-supplied oil market. Brent oil futures fell below $28 per barrel touching their lowest level since 2003. “Iran is now free to sell as much oil as it wants to whomever it likes at whatever price it can get,” said Richard Nephew at Columbia University’s Center on Global Energy Policy.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell to its lowest since October 2011 and was last down 0.5%. Japan’s Nikkei tumbled as much as 2.8% to a one-year low. It has lost 20% from its peak hit in June, meeting a common definition of a bear market. The volatile Shanghai Composite index initially pierced through intraday lows last seen in August before paring the losses and was last up 1%. It was still down 17% this month. On Wall Street, S&P 500 hit a 15-month low on Friday, ahead of Monday’s market holiday. “The fact that U.S. and European shares fell below their August lows, failing to sustain their rebound, is significant,” said Chotaro Morita at SMBC Nikko Securities.

They knew Iran was coming, so that’s not the main driver.

• Oil Slides To Lowest Since 2003 As Iran Sanctions Are Lifted (Reuters)

Oil prices hit their lowest since 2003 in early trading on Monday, as the market braced for a jump in Iranian exports after the lifting of sanctions against the country at the weekend. On Saturday, the U.N. nuclear watchdog said Tehran had met its commitments to curtail its nuclear program, and the United States immediately revoked sanctions that had slashed the OPEC member’s oil exports by around 2 million barrels per day (bpd) since their pre-sanctions 2011 peak to little more than 1 million bpd. “Iran is now free to sell as much oil as it wants to whomever it likes at whatever price it can get,” said Richard Nephew, program director for Economic Statecraft, Sanctions and Energy Markets at Columbia University’s Center on Global Energy Policy.

Iran is ready to increase its crude exports by 500,000 bpd, its deputy oil minister said on Sunday. International Brent crude fell to $27.67 a barrel early on Monday, its lowest since 2003, before recovering to $28.25, still down more than 2% from their settlement on Friday. U.S. crude was down 58 cents at $28.84 a barrel after hitting a 2003 low of $28.36 earlier in the session. “The lifting of sanctions on Iran should see further downward pressure on oil and commodities more broadly in the short term,” ANZ said on Monday. “Iran’s likely strategy in offering discounts to entice customers could see further downward pressure on prices in the near term,” it added. Iran’s potential new exports come at a time when global markets are already reeling from a chronic oversupply as producers pump a million barrels or more of crude every day in excess of demand, pulling down crude prices by over 75% since mid-2014 and by over a quarter since the start of 2016.

And although analysts expect Iran to take some time before being able to fully revive its export infrastructure, suffering from years of underinvestment during the sanctions, it does have at least a dozen Very Large Crude Carrier super-tankers filled and in place to sell into the market. The oil price rout is also hurting stock markets, with Asian shares set to slide to near their 2011 troughs on Monday, stoking further worries about a global economic downturn. “Growth keeps slowing … Lower commodity prices, including oil, partly reflect weakening demand itself. In addition, the downturn in mining capex and the declining income of commodity producers is weighing on exports from Asia,” said Frederic Neumann at HSBC, Hong Kong.

Must be a crowded trade.

• Hedge Funds Are Betting The Commodities Collapse Isn’t Over Yet (BBG)

The commodity meltdown that pushed oil to a 12-year low and copper to the cheapest since 2009 isn’t over yet. At least, that’s how hedge funds see it. Money managers increased their combined net-bearish position across 18 raw materials to the biggest ever, doubling the negative bets in just two weeks. A measure of returns on commodities last week slid to the lowest in at least 25 years. Metals, crops and energy futures all slumped amid supply gluts and an anemic outlook for the global economy. Market turmoil in China, the biggest commodity buyer, is adding to worries over consumption. A stronger dollar is also eroding the appeal of raw materials as alternative investments. While Goldman Sachs predicts that the prolonged slump will start to spur more supply cuts, the bank doesn’t expect prices to rebound until later this year.

“There’s fear in the marketplace,” said Lara Magnusen at Altegris Investments. People are “very concerned about slower economic growth and what’s going on with China and the contagion effect,” she said. With a strong U.S. dollar and the Federal Reserve considering more interest-rate increases, “there’s not a lot of places where you can put your money right now,” she said. “Short commodities is a pretty good place.” The net-short position across 18 U.S.-traded commodities expanded to 202,534 futures and options as of Jan. 12, according to U.S. Commodity Futures Trading Commission figures published three days later. That’s the largest since the government data begins in 2006 and compares with 164,203 contracts a week earlier.

Add that to the low oil price losses.

• Gulf Stock Crash Wipes $38.5 Billion Off Markets As Iran Enters Oil War (Tel.)

Stock markets across the Middle East saw more than £27bn ($38.5 billion) wiped off their value as the lifting of economic sanctions against Iran threatened to unleash a fresh wave of oil onto global markets that are already drowning in excess supply. All seven stock markets in Gulf states tumbled as panic gripped traders. Dubai’s DFM General Index closed down 4.65pc to 2,684.9, while Saudi Arabia’s Tadawul All Share Index, the largest Arab market, collapsed by 7pc intraday, before recovering marginally to end down 5.44pc at 5,520.41, its lowest level in almost five years. The Qatar stock exchange, fell 7.2pc to close at 8,527.75, and the Abu Dhabi Securities Exchange shed 4.24pc to finish at 3,787.4. The Kuwait market returned to levels not seen since May 2004 as it slid 3.2pc lower, while smaller markets in Oman and Bahrain dropped 3.2pc and 0.4pc respectively.

The Iranian stock index gained 1pc, making it one of the best performing markets in the world with gains of 6pc since the start of the year. The dramatic moves came following the historic report from the UN nuclear watchdog, which showed that Iran has met its obligations under the nuclear deal, clearing the way for the lifting of sanctions. The Vienna-based International Atomic Energy Agency issued the landmark document late on Saturday evening, sparking mayhem as markets opened on Sunday, the first day of trading in the Middle East. The stock markets in Dubai and Saudi Arabia have been plunged into a painful bear market, losing 42pc and 38pc respectively, ever since Saudi Arabia decided to ramp up oil production in November 2014.

Oil prices fell below $30 for the third time last week as traders prepared for the prospect of Iranian oil flooding global markets. The Islamic Republic has vowed to return its oil production to pre-sanction levels, with estimates suggesting Tehran will add a further 500,000 barrels a day (b/pd) to the world’s bloated stockpiles within weeks. Fears that the Islamic Republic could quickly ramp up production sent Brent crude falling by 3.3pc to $29.43 on Friday – matching lows last seen in 2004. West Texas Intermediate also slipped back to $29.60, a decline of 4.5pc.

“..the wealth of the poorest 50% dropped by 41% between 2010 and 2015..”

• Richest 1% Now Wealthier Than The Rest Of Humanity Combined (BBG)

The richest 1% is now wealthier than the rest of humanity combined, according to Oxfam, which called on governments to intensify efforts to reduce such inequality. In a report published on the eve of the World Economic Forum’s annual meeting in Davos, Switzerland, the anti-poverty charity cited data from Credit Suisse in declaring the most affluent controlled most of the world’s wealth in 2015. That’s a year earlier than it had anticipated. Oxfam also calculated that 62 individuals had the same wealth as 3.5 billion people, the bottom half of the global population, compared with 388 individuals five years earlier. The wealth of the most affluent rose 44% since 2010 to $1.76 trillion, while the wealth of the bottom half fell 41% or just over $1 trillion.

The charity used the statistics to argue that growing inequality poses a threat to economic expansion and social cohesion. Those risks have already been noted in countries from the U.S. to Spain, where voters are increasingly backing populist political candidates, while it’s sown tensions on the streets of Latin America and the Middle East. “It is simply unacceptable that the poorest half of the world’s population owns no more than a few dozen super-rich people who could fit onto one bus,” said Winnie Byanima, executive director of Oxfam International. “World leaders’ concern about the escalating inequality crisis has so far not translated into concrete action.” Oxfam said governments should take steps to reduce the polarization, estimating tax havens help the rich to hide $7.6 trillion. Politicians should agree on a global approach to ending the practice of using offshore accounts, it said.

Or the other way around?

• Stock Market Crash Could Burst UK Property Bubble (Express)

Property seems to be immune from the fear now gripping the global economy, but that may not always be the case. If the share price meltdown continues and the global economy slows, eventually the UK’s house of cards may collapse as well. Chinese stock markets have plunged since the start of the year, with the FTSE 100 falling 6.5% so far. There seems no end in sight to the share sell-off, but still property powers on. The latest figures from Halifax show that property prices in the final quarter of 2015 were almost 10% higher than one year earlier. The growth seems unstoppable, with new figures from estate agency Your Move showing the average property in England and Wales has leapt £18,000 in the last year to £292,077, a growth rate of an incredible £1,500 a month.

Many Britons suspect the property market is overvalued, with the average UK home now costing more than 10 times earnings. Given that most lenders will not grant mortgages worth more than three or four times your income, this looks unsustainable. Yet few property experts are willing to say openly that the market is in peril. Most remain deaf to warnings of contagion from the share price rout, even though it has scared the life out of some investment experts. Last week, Andrew Roberts, research chief at Royal Bank of Scotland, warned investors to “sell everything except high-quality bonds” because the stock market and oil price crash has only just begun. He is worried about the growing public and company debt burden, and British households have plenty to worry about on that score.

All-time low interest rates have fuelled a borrowing spree that has seen Britons rack up a mind-boggling debt of £40billion. The latest figures show family that household debt rose by 42% in the last six months alone, according to research from Aviva. The average family now owes £13,520 on credit cards, personal loans and overdrafts, up from £9,520 last summer. Throw in a 20% increase in average mortgage debt to £62,739 over five years and households are more vulnerable than ever. Worse, family incomes are falling and many have lost the savings habit as their finances are stretched.

The entire issue is hugely distorted by insanely elevated home prices. Take those out, and you see how bad things truly are.

• It’s Not Time For Britain To Be ‘Intensely Relaxed’ Over Household Debt (Ind.)

There seem to be three main arguments against the idea we should be concerned about household leverage. The first is that the official statistics belie the claim that the aggregate debt burden of UK households is rising and the recovery has been fuelled by borrowing. Second, we’re told UK household debt is mainly mortgage debt and reflects high domestic house prices. For each of these liabilities there is an asset, so we must look at the overall balance sheets of households, which are healthy. Plus, with interest rates still on the floor, aggregate debt-servicing costs are comfortable. Finally, we’re assured that as long as the supply of new homes remains severely restricted, high debt presents no serious financial threat because house prices are pretty unlikely to collapse.

To illustrate this final point, it is pointed out that the banks failed in 2008 because of their dodgy overseas lending, not because of their dodgy UK mortgage books. There are problems with all three arguments. Let’s take them in turn. Measured as a share of household incomes, it is true that household debt has not actually been growing. Since 2008, when the debt to income ratio peaked at 170%, households have been deleveraging. Yet at 140% of gross income, debt levels are still very high, both by historic and international standards. In the G7 only Canada has a higher household leverage ratio today. There is potential fragility here if another economic shock were to hit, as the Bank of England itself admits. To point to the UK’s deleveraging in recent years as a reason for relief is akin to a mountaineer getting halfway down Everest in a vicious storm and saying “job done”.

Debt has not been rising as a share of income but the aggregate household savings ratio, excluding pension rights, has fallen from a peak of 6% in 2010 to less than zero today. That change in household behaviour has certainly helped the economy recover. So not a recovery fuelled by debt, but a recovery fuelled by a lower savings ratio. Incidentally, there was no such savings collapse envisaged by the Office for Budget Responsibility (OBR) in 2010, reflecting how unbalanced the recovery has been relative to hopes six years ago. Moreover, the OBR today predicts that the debt to income ratio is going to race back close to pre-crisis levels over the coming five years. Why? Because the Treasury’s official forecaster expects house prices to rise faster than incomes and for people to keep buying houses. The OBR is very far from being omniscient. But that is surely one of the more plausible assumptions from Robert Chote and his team, given the dismal evolution of the housing market in recent years and decades.

Lemme guess: anyone but Xi?!

• China’s Securities Czar Casts Wide Blame for Market Turmoil (WSJ)

What’s wrong with China’s stock market? Just about everything, according to a statement from Xiao Gang, the country’s chief securities regulator, delivered at a national meeting of Chinese securities officials and posted on his agency’s website Saturday. In the statement, Mr. Xiao defended his handling of successive market meltdowns, blaming the “abnormal volatility” on “an immature market, inexperienced investors, imperfect trading system, flawed market mechanisms and inappropriate supervision systems.” The turmoil in China’s stock market—which on Friday entered “bear” territory of 20% below its recent peak—has cast a harsh light on the performance of Mr. Xiao, 57, a former central banker and chairman of the Bank of China before he was appointed chairman of the China Securities Regulatory Commission in 2013.

During the summer, when Chinese stocks tumbled more than 40%, Mr. Xiao oversaw a slew of measures to prop up the market that many investors criticized as heavy-handed and interventionist. Those ranged from banning certain kinds of short selling and share sales to approving the purchase of hundreds of billions of yuan in equities by government-affiliated funds. Two weeks ago, Mr. Xiao was forced to abandon a circuit-breaker mechanism he’d championed as a way to halt big trading swings, when it instead ended up fanning panic selling. In his Saturday statement, Mr. Xiao defended his efforts, saying they were a successful attempt to stave off a bigger crisis.

“The response to the abnormal volatility in the stock market was essentially crisis management,” Mr. Xiao said. Various departments “addressed market dysfunctions and prevented a potential systemic risk through joint efforts.” Mr. Xiao did admit there had been “supervision and management loopholes” and he promised to crack down on illegal activities, increase market transparency and better educate investors, although he didn’t outline specific proposals. He briefly touched on the detention of some top-ranking officials in the securities industry in relation to a police investigation on alleged violation of rules, but without naming his own agency. Mr. Xiao chastised listed companies for “exaggerated storytelling” to hype up stock prices, and urged market participants to cultivate a stronger sense of social responsibility and to “huddle together for warmth”—or cooperate in the greater interest—when times are bad.

They want to take five years to do what should have been done already. Dangerous.

• China To Clean-up ‘Zombie’ Companies By 2020 (Reuters)

China’s top state-owned asset administrator has vowed to clean-up the country’s so-called “zombie” industrial companies by 2020, the official Xinhua News Agency has reported. Zhang Yi, Chairman of the State-owned Assets Supervision and Administration Commission (SASAC), told a central and local enterprise work conference convened at the weekend that the agency will “basically” resolve the problem of unproductive “zombie” firms over the next three years. Dealing with “zombie companies” is very difficult, Zhang said, according to the report, but “officials need to… use today’s ‘small tremors’ to prevent a future earthquake.” The central government last September rolled out the most ambitious reform program in two decades to resolve the problems at its hugely inefficient public sector companies, encouraging the greater use of “mixed ownership” while promoting more mergers to create globally-competitive conglomerates.

Zhang Xiwu, deputy head of SASAC, told a news briefing at the time that China would work to reorganize state firms to centralize state-owned capital in key industries, while restricting investment in industries not in line with national policies. Zhang said that China would use stock exchanges, property exchanges and other capital markets to sell the assets of low performing state owned enterprises. Profits at China’s state firms dipped 9.5% in the first 11 months of 2015 from a year earlier, led by profits at SASAC-controlled firms, which fell 10.4%, the Ministry of Finance said in December. On Friday, SASAC told state media that the steep decline in profits for the sector had been curtailed, and that 99 of the 106 SASAC-controlled enterprise groups achieved profitability in 2015.

Interesting angle via ZH.

• The Problem With Getting Money Out Of China (China Law Blog)

Regular readers of our blog probably know that our basic mantra about getting money out of China is that if you have consistently follow all of China’s laws, it ought to be no problem. Not true lately. In the last week or so, our China lawyers have probably received more “money problem” calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not. So what has been going on lately? Well if there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars. We are hearing the following:

1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much no questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this.

5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

What are you seeing out there? No really, what are you seeing out there?

You just wait till the German economy starts stumbling.

• Gloom Gathers Over The Challenges That Germany Faces (FT)

This is going to be a difficult year for Germany, one in which the policies of the past may turn out to be unsustainable. The most unsustainable of all was Angela Merkel’s invitation to open the doors to Syrian refugees without limitation. The German chancellor must either have misjudged the effect or acted recklessly — or both. A few months and 1m refugees later, the discontent is growing inside the Christian Democratic Union, her party, and in the country at large. Gerhard Schröder, her Social Democratic predecessor, last week came out against the policy with exactly the same arguments as the right-wingers in Ms Merkel’s own party: Germany cannot absorb such a large number. More than 1m refugees arrived in the country in 2015. It could be twice as many this year and the same again next — more if you include family members who will eventually follow.

It is tempting to think of refugees and migrants as a new source of labour. But in this case this just is not true, at least not for now. The majority of those who arrive in Germany lack the skills needed in the local labour market. They will enter the low wage sector of the economy, and drive down wages, producing another deflationary shock. This is the last thing Germany and the eurozone need right now. I expect that this policy will change at some point this year. What I do not see, however, is a successful political coup against Ms Merkel from inside her own party. What protects her is the grand coalition with the Christian Social Union and the SPD. There is no majority to the right of her, or to the left for that matter.

The second challenge is the economic downturn in emerging markets. There are few large countries as dependent on the global economy as Germany, and few where there is so little awareness of that fact, at least in public debate. Germany has a current account surplus of 8% of gross domestic product. A global downturn tends to affect German industrial companies with a delay of one or two years because many operate in sectors like plant and machinery where multiyear contracts are customary. But eventually, the German and the global business cycles begin to synchronise once more. This will be the year when that starts to happen.

The third challenge for Germany in 2016 is the fallout from the Volkswagen emissions scandal. This could be the single biggest shock of all because Germany has been over-reliant on the car industry for far too long. Last week, suspicion fell on Renault, when the offices of the French carmaker were raided by the authorities. This is not the crisis of a single company, therefore, but of a whole industry. Nor is it just a German problem; it is a pan-European one. It appears that VW behaved more recklessly than the others, and it will pay a heavy price for its behaviour. Whether legal action in the US and in Germany will weaken VW or force it into outright bankruptcy is almost irrelevant, given the bigger picture.

Political capital rules the EU.

• “Everything Has Come to a Standstill”: Politics Hits Business in Spain (WS)

On Friday, Spain’s benchmark stock index, the Ibex 35, plumbed depths it had not seen since the worst days of 2013, the year that the country’s economy began its “miraculous” recovery. Of the 35 companies listed on the index, 15 (or 40%) are – to quote El Economista – “against the ropes,” having lost over a third of their stock value in the last 9 months. Only one of the 35 companies — the technology firm Indra — is still green for 2016. This doesn’t make Spain much different from other countries right now, what with financial markets sinking in synchronized fashion all over the world. What does make Spain different is that it has no elected government to try to navigate the country though these testing times, or at least take the blame for the pain.

Inevitable comparisons have been drawn with Belgium, which between 2011 and 2012 endured 541 days of government-free living. However, Spain is not Belgium: its democratic system of governance is younger, less firmly rooted, and more fragile, and its civil service is more politically compromised. To make matters worse, Spain’s richest region, Catalonia, which accounts for 20% of the country’s economy, bucked expectations last week by cobbling together a last-minute coalition government that seems intent on declaring independence within the next 15 months. Meanwhile, business confidence, the cornerstone of any economic recovery, is beginning to crumble. Spain’s leading index of business confidence, ICEA, just registered a drop of 1.3%, breaking a straight eleven-quarter run of positive results.

For the first time in almost three years more business leaders are pessimistic than optimistic about the economy’s outlook. This should come as little surprise in a country where unemployment is still firmly on the wrong side of the 20% mark, over a quarter of the new jobs created last year had a contract lasting less than one week, and public debt is higher than it’s ever been. And now that there’s no elected government in office, businesses that depend on public sector contracts, including the country’s heavily indebted construction and infrastructure giants, face weeks or perhaps even months of inertia. “Everything has come to a standstill,” a contact in a Madrid-based research consultancy told me. “No decisions are being made, no funds are being released. It’s a vacuum.”

For the moment, the political backdrop has had limited impact on the price of Spanish government debt. The 10-year yield is at 1.75%, below the 10-year US Treasury yield, though it’s up a smidgen since the general elections on December 20. In its latest update, S&P left Spain’s rating unchanged, predicting 2.7% growth for 2016, despite the prevailing mood of political and economic uncertainty. In a similar vein, Deutsche Bank has forecast growth of 2.5%, regardless of what happens within or beyond Spanish borders. In other words, every effort will be made to safeguard the economic order in Spain, including putting a ridiculously positive spin on a desperate situation. To paraphrase Europe’s chief financial alchemist, Mario Draghi: do not underestimate the amount of political capital that has been invested in the European project, in particular in the Eurozone’s fourth largest economy.

“General sentiment is downright toxic in Canada..”

• Canadian Officials Under Pressure to Stimulate Economy (WSJ)

Canadian policy makers are heading into a tough week as pressure mounts on them to revive an economy that has been among the hardest hit by the commodity rout. Prime Minister Justin Trudeau and his cabinet colleagues will convene in a seaside resort town on Canada’s east coast Monday amid more evidence growth may have stalled again after sputtering to life in last year’s third quarter. A recent string of dismal economic news—and a free-falling Canadian dollar—has led to calls for Mr. Trudeau’s government to move sooner rather than later on major infrastructure investments to stimulate growth.

On Wednesday, Bank of Canada Gov. Stephen Poloz will deliver his latest interest-rate decision, and economists are split not only on whether he will opt to cut rates, but whether such a move would do much to help the economy at this time. Analysts say the onus has shifted to Mr. Trudeau’s government to help mitigate the negative fallout from the oil-price rout. Last week the Canadian dollar hit near-13-year lows as prices for oil, a major Canadian export, continued to weaken. As of Friday, the currency has fallen 4.8% against the U.S. dollar since the start of the year and was down 17.8% year-to-year. The drop came as Canada’s stock market lost ground—it is now off 22.2% from its 2015 peak—and the central bank said Canadian companies’ investment and hiring intentions had recently weakened.

“General sentiment is downright toxic in Canada,” said Jimmy Jean, economist at Desjardins Capital Markets. Talk around Mr. Trudeau’s cabinet table likely will revolve around the appropriate response to an economic tailspin fueled by a fresh downturn in the price of crude. While the prime minister last week voiced optimism about Canada’s prospects despite disappointing growth, government officials have privately said they are very worried about the economy. Meanwhile, economists have told the government it should boost the amount of infrastructure spending planned for this year to help offset weak conditions.

But we’ll keep driving along. Soon, in our new clean cars powered by coal plants.

• Shock Figures To Reveal Deadly Toll Of Global Air Pollution (Observer)

The World Health Organisation has issued a stark new warning about deadly levels of pollution in many of the world’s biggest cities, claiming poor air quality is killing millions and threatening to overwhelm health services across the globe. Before the release next month of figures that will show air pollution has worsened since 2014 in hundreds of already blighted urban areas, the WHO says there is now a global “public health emergency” that will have untold financial implications for governments. The latest data, taken from 2,000 cities, will show further deterioration in many places as populations have grown, leaving large areas under clouds of smog created by a mix of transport fumes, construction dust, toxic gases from power generation and wood burning in homes. The toxic haze blanketing cities could be clearly seen last week from the international space station.

Last week it was also revealed that several streets in London had exceeded their annual limits for nitrogen dioxide emissions just a few days into 2016. “We have a public health emergency in many countries from pollution. It’s dramatic, one of the biggest problems we are facing globally, with horrible future costs to society,” said Maria Neira, head of public health at the WHO, which is a specialist agency of the United Nations. “Air pollution leads to chronic diseases which require hospital space. Before, we knew that pollution was responsible for diseases like pneumonia and asthma. Now we know that it leads to bloodstream, heart and cardiovascular diseases, too – even dementia. We are storing up problems. These are chronic diseases that require hospital beds. The cost will be enormous,” said Neira.

[..] According to the UN, there are now 3.3 million premature deaths every year from air pollution, about three-quarters of which are from strokes and heart attacks. With nearly 1.4 million deaths a year, China has the most air pollution fatalities, followed by India with 645,000 and Pakistan with 110,000. In Britain, where latest figures suggest that around 29,000 people a year die prematurely from particulate pollution and thousands more from long-term exposure to nitrogen dioxide gas, emitted largely by diesel engines, the government is being taken to court over its intention to delay addressing pollution for at least 10 years.

Follow the money, that’s all there’s to it. All the rest is window dressing and lip service, for Beijing as much as for Volkswagen.

• False Emissions Reporting Undermines China’s Pollution Fight (Reuters)

Widespread misreporting of harmful gas emissions by Chinese electricity firms is threatening the country’s attempts to rein in pollution, with government policies aimed at generating cleaner power struggling to halt the practice. Coal-fired power accounts for three-quarters of China’s total generation capacity and is a major source of the toxic smog that shrouded much of the country’s north last month, prompting “red alerts” in dozens of cities, including the capital Beijing. But the government has found it hard to impose a tougher anti-pollution regime on the power sector, with China’s energy administration describing it as a “weak link” in efforts to tackle smog caused by gases such as sulfur dioxide. No official data on the extent of the problem has been released since a government audit in 2013 found hundreds of power firms had falsified emissions data, although authorities have continued to name and shame individual operators.

“There is no guarantee of avoiding under-reporting (of emissions) at local plants located far away from supervisory bodies. Coal data is very fuzzy,” said a manager with a state-owned power company, who did not want to be named because he is not authorized to speak to the media. The manager said firms could easily exaggerate coal efficiency by manipulating their numbers. For example, power companies that also provided heating for local communities could overstate the amount of coal used for heat generation, which is not subject to direct monitoring, and understate the amount used for power. “Data falsification is a long-standing problem: China will not get its environmental house in order if it does not deal with this first,” said Alex Wang, an expert in Chinese environmental law at UCLA.

Money trumps laws.

• Weak EU Tests For Diesel Emissions Are ‘Illegal’ (Guardian)

Planned new ‘real driving emissions’ (RDE) test limits that would let cars substantially breach nitrogen oxide (NOx) standards are illegal under EU law, according to new legal analysis seen by the Guardian. The proposed ‘Euro 6’ tests would allow diesel cars to emit more than double the bloc’s ‘80 mg per km’ standard for NOx emissions from 2019, and more than 50% above it indefinitely from 2021. The UK supported these exemptions. But they contradict the regulation’s core objective of progressively scaling down emissions and improving air quality, according to an opinion by the European Parliament’s legal services, which the Guardian has seen. In principle, the exemptions and loopholes “run counter [to] the aims and content of the basic regulation as expressed by the Euro 6 limit values,” says the informal paper prepared for MEPs on the parliament’s environment committee.

“The commission has taken a political decision to favour the commercial interests of car manufacturers over the protection of the health of European citizens,” adds a second analysis by the environmental law firm ClientEarth, also seen by the Guardian. “The decision is therefore illegal and should be vetoed by the European Parliament,” the ClientEarth advice says. Catherine Bearder, a Liberal Democrat MEP on the environment committee, told the Guardian that as well as being morally unjustifiable, the agreement to water down the emissions limits was now “legally indefensible”. “This was a political decision, not a technical one, and so it should have been subject to proper democratic accountability,” she told the Guardian. “MEPs must veto this shameful stitch-up and demand a stronger proposal, based on the evidence and not on pressure from the car industry.”

Might as well close it down.

• 66 Institutional Investors To Sue Volkswagen In Germany (FT)

Sixty-six institutional investors are to take legal action against Volkswagen in its German home market after the carmaker cheated emissions tests in the US. The first claim will be made within the next seven days. The legal action will heap further pressure on Volkswagen, which earlier this month said its annual sales fell last year for the first time in more than a decade. Klaus Nieding, a lawyer at Nieding and Barth, the German law firm, said a capital market model claim, which is similar to a collective lawsuit in the US, will be filed “within the next week” in Germany on behalf of a US institutional investor that has suffered a “big loss”. The other 65 institutional investors are expected to join that claim.

Investors have been nursing heavy losses after the US’s Environmental Protection Agency revealed last September that the world’s second-largest carmaker had cheated US emissions tests by fitting vehicles with “defeat devices” designed to bypass environmental standards. Billions of euros have been wiped off the value of Volkswagen as a result. Nieding and Barth is working with MüllerSeidelVos, a fellow German firm, and Robbins Geller Rudman and Dowd, a US law firm, to represent investors that have contacted DSW, a German shareholder protection association. Mr Nieding said the law firms collectively represent “many foreign institutional investors, primarily from the US, with claims of several hundred million euros”. He added: “We are representing, as far as we know, the largest number of claims and of shareholders [in Germany].”

Bentham Europe, a litigation finance group backed by Elliott Management, the US hedge fund, and Australian-listed IMF Bentham, is also expected to file a damages claim in Germany. Volkswagen is facing additional legal action outside its home market. Class actions against the carmaker, which allow one person to sue on behalf of a group of individuals or companies, have already been filed in the US and Australia. Last week, the Arkansas State Highway Employees Retirement System, a $1.4bn pension fund, was named the lead plaintiff in a class action against VW in the US. “We will be prosecuting the claims on behalf of the class vigorously,” said Jeroen van Kwawegen, a lawyer at Bernstein Litowitz Berger and Grossmann. The law firm is acting on behalf of investors who put money in Volkswagen’s American depositary receipts, a type of stock that represents shares in a foreign corporation.

Snyder should be taken to court over his decisions that led to the mayhem. Instead, Wshington sends HIM the money to solve the issue.

• Obama Declares Emergency In Flint, But Not Disaster (DFP)

President Barack Obama on Saturday declared a federal emergency in Flint, freeing up to $5 million in federal aid to immediately assist with the public health crisis, but he denied Gov. Rick Snyder’s request for a disaster declaration. A disaster declaration would have made larger amounts of federal funding available more quickly to help Flint residents whose drinking water is contaminated with lead. But under federal law, only natural disasters such as hurricanes and floods are eligible for disaster declarations, federal and state officials said. The lead contamination of Flint’s drinking water is a manmade catastrophe. The president’s actions authorize the FEMA to coordinate responses and cover 75% of the costs for much-needed water, filters, filter cartridges and other items for residents, capped initially at $5 million.

The president also offered assistance in finding other available federal assistance, a news release Saturday from the White House said. Snyder, who on Thursday night asked Obama for federal financial aid in the crisis through declarations of both a federal emergency and a federal disaster, said in a news release Saturday he appreciates Obama granting the emergency request “and supporting Flint during this critical situation.” “I have pledged to use all state resources possible to help heal Flint, and these additional resources will greatly assist in efforts under way to ensure every resident has access to clean water resources,” he said. U.S. Rep. Dan Kildee, D-Flint, welcomed the emergency declaration and issued a statement: “I welcome the president’s quick action in support of the people of Flint after months of inaction by the governor,” Kildee said.

“The residents and children of Flint deserve every resource available to make sure that they have safe water and are able to recover from this terrible manmade disaster created by the state.” On Friday, Kildee led a bipartisan effort in support of the request for federal assistance. Kildee had long called for Snyder to request federal aid. Typically, federal aid for an emergency is capped at $5 million, though the president can commit more if he goes through Congress. Snyder’s application said as much as $55 million is needed in the near term to repair damaged lead service lines and as much as $41 million to pay for several months of water distribution and providing residents with testing, water filters and cartridges.

In what’s become a huge government scandal, garnering headlines across the country and around the world, Flint’s drinking water became contaminated with lead after the city temporarily switched its supply source in 2014 from Lake Huron water treated by the Detroit Water and Sewerage Department to more corrosive and polluted Flint River water, treated at the Flint water treatment plant. The switch was made as a cost-cutting move while the city was under the control of a state-appointed emergency manager.

Dr. Paul has been consistently on the case for years.

• When Peace Breaks Out With Iran… (Ron Paul)

This has been the most dramatic week in US/Iranian relations since 1979. Last weekend ten US Navy personnel were caught in Iranian waters, as the Pentagon kept changing its story on how they got there. It could have been a disaster for President Obama’s big gamble on diplomacy over conflict with Iran. But after several rounds of telephone diplomacy between Secretary of State John Kerry and his Iranian counterpart Javad Zarif, the Iranian leadership – which we are told by the neocons is too irrational to even talk to – did a most rational thing: weighing the costs and benefits they decided it made more sense not to belabor the question of what an armed US Naval vessel was doing just miles from an Iranian military base. Instead of escalating, the Iranian government fed the sailors and sent them back to their base in Bahrain.

Then on Saturday, the Iranians released four Iranian-Americans from prison, including Washington Post reporter Jason Rezaian. On the US side, seven Iranians held in US prisons, including six who were dual citizens, were granted clemency. The seven were in prison for seeking to trade with Iran in violation of the decades-old US economic sanctions. This mutual release came just hours before the United Nations certified that Iran had met its obligations under the nuclear treaty signed last summer and that, accordingly, US and international sanctions would be lifted against the country. How did the “irrational” Iranians celebrate being allowed back into the international community?

They immediately announced a massive purchase of more than 100 passenger planes from the European Airbus company, and that they would also purchase spare parts from Seattle-based Boeing. Additionally, US oil executives have been in Tehran negotiating trade deals to be finalized as soon as it is legal to do so. The jobs created by this peaceful trade will be beneficial to all parties concerned. The only jobs that should be lost are the Washington advocates of re-introducing sanctions on Iran. Events this week have dealt a harsh blow to Washington’s neocons, who for decades have been warning against any engagement with Iran. These true isolationists were determined that only regime change and a puppet government in Tehran could produce peaceful relations between the US and Iran.

Instead, engagement has worked to the benefit of the US and Iran. Proven wrong, however, we should not expect the neocons to apologize or even pause to reflect on their failed ideology. Instead, they will continue to call for new sanctions on any pretext. They even found a way to complain about the release of the US sailors – they should have never been confronted in the first place even if they were in Iranian waters. And they even found a way to complain about the return of the four Iranian-Americans to their families and loved ones – the US should have never negotiated with the Iranians to coordinate the release of prisoners, they grumbled. It was a show of weakness to negotiate! Tell that to the families on both sides who can now enjoy the company of their loved ones once again!

What they flee.

• Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation (ZH)

While US intervention in its various forms has likely been ongoing for decades, March 2011 is often cited as the start of foreign involvement in the Syrian Civil War (refering to political, military and operational support to parties involved in the ongoing conflict in Syria, as well as active foreign involvement). Since then the nation has collapsed into chaos with an endless array of superlatives possible to describe the economic and civilian carnage that has ensued. However, while a picture can paint a thousand words, these four shocking images describe a canvas of US foreign policy “success” that few in the mainstream media would be willing to expose… Mission un-accomplished?

I’m getting a bit antsy seeing people presenting arguments as new that I’ve made umpteen times in the past. We move far too slow.

• The Economics Of The Refugee Crisis Lay Bare Our Moral Bankruptcy (Guardian)

The Germans want to introduce a pan-European tax to pay for the refugee crisis. The Danish want to pass a law to seize any jewellery worth more than £1,000 as refugees arrive – apart from wedding rings. That’s what marks you out as a civilised people, apparently, that you can see the romance in a stranger’s life and set that aside before you bag them up as a profit or a loss. In Turkey people smugglers are charging a thousand dollars for a place in a dinghy, $2,500 in a wooden boat, with more than 350,000 refugees passing through one Greek island – Lesbos – alone in 2015. The profit runs into hundreds and millions of dollars, and the best EU response so far has been to offer the Turkish government more money to either hold refugees in their own country or – against the letter and the spirit of every pledge modern society has made on refugees – send them back whence they came.

Turkey is a country of 75 million that has already taken a million refugees, accepting impossible and cruel demands from a continent of more than 500 million people that, apparently, can’t really help because of the threat to its “social cohesion”. Our own government has pledged to take 20,000 refugees but only the respectable ones, from faraway camps: the subtext being that the act of fleeing to Europe puts refugees outside the purview of human sympathy, being itinerant, a vagrant, on the take. Institutions and governments represent an ever narrower strain of harsh opinion. The thousands of volunteers in Greece, the Guardian readers who gave more at Christmas to refugee charities than to any appeal before, the grassroots organisations springing up everywhere to try and show some human warmth on this savage journey to imagined safety – none of these are represented, politically, in a discourse that takes as its starting point the need to make the swarms disappear, to trick them into going somewhere else.

It’s those neutral-sounding, just-good-economics ideas that give the game away: if a million people in any given European nation suffered a natural disaster, nobody would be talking about how to raise a tax so that help could be sent. We would help first and worry about the money second. When the EU wants to rescue a government, or the banks of a member state (granted, at swingeing cost for the rescued), it doesn’t first float a “rescue tax”. The suggestion that the current crisis needs its own special tax may well be an attempt to force individual governments to confront the reality of their current strategy, which is to have no strategy. Yet it sullies the underlying principle of the refugee convention: that anyone fleeing in fear for their life be taken in on that basis, not pending a whip-round.

To repudiate that is essentially to say that human rights are no longer our core business. But without that as an organising principle, the ties that bind one nation to another begin to fray: alliances must at the very least be founded on ideas you’re not ashamed to say out loud.

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