2016 brought a lot of changes, or rather, brought them to light. In reality, the world has been changing for many years, but many prominent actors benefitted from the changes remaining hidden. Simply because their wealth and power and worldviews are better served that way.
It’s entirely unclear whether we will ever get a chance to see to what extent the efforts to hide developments have been successful, or even been perpetrated at all, because we don’t know to what extent truth and reality will be accessible in the future.
What we can say at this point in time is that the changes 2016 delivered were urgently needed. There are many people out there who just want to turn back the clock, and change everything back to how it was, but they can’t, and that’s a good thing, because the way things were was hurting too many people.
2016 will go down in history as the year when a big divide between groups of people in the western world became visible, a divide that had until then been papered over by real or imaginary wealth, as well as by ignorance and denial.
When politics and media conspire to paint for the public a picture of their choosing, they can be very successful, especially if that picture is what people very much wish to see, true or not. But as we’ve seen recently, our traditional media have become completely useless when it comes to reporting news; the vast majority have switched to reporting their own opinions and pretending that is news.
On the one hand, there is a segment of society that either has noticed no changes, or is so desperate to hold on to what they have left, that they resist seeing them. On the other hand, there are those who feel left behind by that first group, and by the idea that the world that is still functioning and even doing well.
The first group has been captivated by, and believed in, the incessantly promoted message of recovery from an economic, financial and gradually also political crisis. The second see in their lives and that of their friends and neighbors that this recovery is an illusion.
It’s like the old saying goes: you can’t fool all of the people all of the time. And that’s why you have Brexit and Trump and why you’re going to have much more of that, certainly across Europe. Things are not going well, and there is no recovery, for a large enough percentage of people that their votes and voices now swing the debates and elections.
It’s not even complicated. This week there was a report from Elevate’s Center for the New Middle Class that concluded that half of Americans, 160 million people, can’t afford to have a broken arm treated (at $1,400). And sure, you can say that perhaps that number is a bit too high, but there have been many such reports, that for instance say the majority of Americans have less than $1000 in savings, and can’t even afford a car repair.
In Britain numbers are not much different. Over the past decade, the country has been very busy creating an entire new underclass. If your economy is not doing well, and your answer to that is budget cuts and austerity, it’s inevitable that this happens, that you create some kind of two-tier or three-tier society. And then come election time, you run the risk of losing.
Both Britain and the US boast low unemployment numbers, but as soon as you lift the veil, what you see is low participation rates, low wages and huge numbers of part-time jobs stripped of all the benefits a job used to guarantee. It allows those who still sit pretty to continue doing that, but it’ll come right back to haunt you if you don’t turn it around, and fast enough.
For many people, Obama, Merkel, Cameron and the EU cabal have been disasters. For too many, as we now know. That doesn’t mean that Trump will fix the economic problems, but that’s not the issue. People have voted for anything but more of the same. Which in Britain they’re not even getting either, so expect more mayhem there.
In most places, some variety of right wing alternative is the only option available that is far enough removed from ‘more of the same’. Moreover, many if not most incumbent parties are in a deep identity crisis. Trump did away with the Republicans AND the Democrats, and they had better understand why that is, or they’ll be wholly irrelevant soon.
In Britain, the most important votes in many decades was lost by the Tories, who subsequently performed a musical chairs act and stayed in power. You lost! Losers are not supposed to stay in power! But the other guys are all too busy infighting to notice.
That identity crisis, by the way, is not a new thing. If you look across the western political spectrum, there are all these left wing and right wing parties happily working together, either in coalition governments or through other ‘productive’ forms of cooperation. So who are people going to vote for when they’re unhappy with what they’ve got? Where is that ‘change’ that they want? Not on the traditional left or right.
So you get Podemos and M5S and Trump and UKIP and Le Pen. It’s not their fault, or the voters’ fault, it’s the political establishment that has tricked itself into believing in the same illusion it’s been promoting to voters.
And yes, they have now proven that it’s possible to stave off, for a number of years, a deeper crisis, depression, by borrowing and printing ‘money’. Especially if you can at the same time hit the poorest in your society with impunity.
But in the end no amount of fake or false news on the economic front will allow you to continue the facade for too long, because people know when they can’t afford things anymore. The evidence here is somewhat more direct than with regards to political fake news, though they may well both follow the same pattern of ‘discovery’.
Our societies are still run as if there is no real crisis, as if it’s all just a temporary glitch, as if the incumbent models function just fine, and as if recovery is just around the corner. And we can make it look as if that is true, but only for an ever smaller amount of time, and for an ever smaller amount of people.
The basic issue here is not a political one. It’s economic. Our economic systems have failed, and they can’t be repaired. We should always have realized that no growth is forever, but at least we now know. Or could know, it’ll take a while to sink in.
Next up is a redo and revamp of those economic systems, but that is not going to be easy, and may not get done at all. The resistance may be too strong, warfare -economic or physical- may seem like a way out, there are many unknowns. We could, ironically, get quite far in that redo if we simply cut all the waste for our economic processes, but then again, that would have us find out that much of the system runs entirely on wasting stuff, and wasting less kills the system.
However that may be, and however it may turn out, this is where we find ourselves. Protesting Trump and Brexit is inevitable, but it doesn’t address any core issues. From a purely economic point of view, Obama failed spectacularly, as did David Cameron, as does Angela Merkel. And as do, we will find out in 2017, many other incumbent ‘leaders’.
Their successors, whatever political colors they may come from, will all come to power promising, and subsequently attempting, to restart growth. Which is no longer feasible across an entire country, or even if it were, it would mean squeezing other countries. With corresponding risks.
Trump and Brexit are necessary, perhaps even long overdue, in order to break the illusion that things could go on as they were. But they are not solutions. America needs a big wake-up. Trump looks likely to deliver one. That is needed for the rest of the country to wake from its slumber. Ask yourself: are you going to get weaker from dealing with a Trump presidency? Maybe not the best question, or at least not before having asked: do you know how weak you are right now?
For Britain to leave the EU is a great first step. As I’ve said many times, centralization is not an option without growth. And Brussels has shown us quite a few of the worst consequences of centralization. Nobody should want to be a part of that.
Summarized: for most people, 2017 will be the year of the inability to understand where their favorite worldview flew off the rails. Change can be a bitch. But change is needed to keep life alive.
Last month, the world mourned the death of beloved actor Leonard Nimoy. Mr. Nimoy, of course, was renowned for his portrayal of the iconic character Mr. Spock on the 1960s television series Star Trek. One of the most memorable Star Trek inventions was the transporter that allowed human beings to be beamed through space and time like light and energy. Investors expecting central bankers to solve the world’s economic problems might as well believe that Janet Yellen is capable of beaming them straight into the Marriner S. Eccles Building in Washington, D.C. Their failure to acknowledge that the Fed is failing to generate sustainable economic growth while contributing to income inequality and crushing debt burdens is inexplicable.
Central banks that purport to be promoting financial stability are actually undermining it – with the able assistance of regulators who have drained liquidity from the world’s most important markets. Negative interest rates on $3 trillion of European debt are an obvious sign of policy failure, yet the policy elite stands mute. Actually that’s not correct – the cognoscenti is cheering on Mario Draghi as he destroys the European bond markets just as they celebrated Janet Yellen’s demolition of the Treasury market. Negative interest rates are not some curiosity; they represent a symptom of policy failure and a violation of the very tenets of capitalist economics. The same is true of persistent near-zero interest rates in the United States and Japan.
Zero gravity renders it impossible for fiduciaries to generate positive returns for their clients, insurance companies to issue policies, and savers to entrust their money to banks. They are a byproduct of failed economic policies, not some clever device to defeat deflation and stimulate economic growth. They are mathematically doomed to fail regardless of what economists, who are merely failed monetary philosophers practicing a soft social science, purport to tell us. The fact that European and American central banks are following the path of Japan with virtually no objection represents one of the most profound intellectual failures in the history of economic policy history.[..]
Christopher Whalen, one of the best bank analysts on Wall Street, argued that global banks face trillions of bad off-balance sheet debts that must eventually be resolved (i.e. written off) and are dragging on economic growth. These debts include everything from loans by German banks to Greece to home equity loans in the U.S. for homes that are underwater on their first mortgage. Banks and governments refuse to restructure (i.e. write off) these bad debts because doing so would trigger capital losses for banks and governments. As Mr. Whalen explains, “the Fed and ECB have decided to address the issue of debt by slowly confiscating value from investors via negative rates, this because the fiscal authorities in the respective industrial nations cannot or will not address the problem directly.”
But in addition to avoiding the bad debt problem, these policies are causing further economic damage by depressing growth and starving savers. Per Mr. Whalen: “ZIRP and QE as practiced by the Fed and ECB are not boosting, but instead depressing, private sector economic activity. By using bank reserves to acquire government and agency securities, the FOMC has actually been retarding private economic growth, even while pushing up the prices of financial assets around the world.”
President Obama and Fed Chair Janet Yellen have been crowing about improving economic conditions in the US. Unemployment is down to 5.5% and growth in 2014 hit 2.2%. Journalists and economists point to this improvement as proof that quantitative easing was effective. Unfortunately, this latest boom is artificial and has been built by adding debt on top of debt. Total household debt increased 2.5% in 2014 — the highest level since 2010. Mortgage loans increased 1.5%, student loans 6.6% while auto loans increased a hefty 9.6%. The improving auto sales are built mostly on a bubble of sub-prime borrowers. Auto sales have been brisk because of a surge in loans to individuals with credit scores below 620. Since 2010, such loans have increased over 100% and have gone from 20% of originations in 2009 to 27% in 2013.
Yet, auto loans to individuals with strong credit scores, above 760, have barely budged over the last year. Subprime consumer borrowing climbed $189 billion in the first eleven months of 2014. Excluding home mortgages, this accounted for 41% of total consumer lending. This is exactly the kind of lending that got us into trouble less than a decade ago, and for many consumers, this will only end in tears. But we need to ask ourselves: is the current boom built on sound foundations? In other words, do we have sharp increases in productivity or real wage growth? Productivity increased less than 1% on average in the last three years and real wages have flat lined or declined for decades. From mid-2007 to mid-2014, real wages declined 4.9% for workers with a high school degree, dropped 2.5% for workers with a college degree and rose just 0.2% for workers with an advanced degree.
Is the boom being built on broad base investment in plant and equipment? The current average age of working plants and equipment in the US is one of the oldest on record. Meanwhile, it is now clear that the shale boom was an illusion of prosperity. Oil prices have dipped below $50 with some analysts calling for $20 oil by the end of the year. This is a drop from over $100 from last year. Many shale outfits need oil above $65 just to break even. Massive layoffs in the energy sector are now a certainty. Few realize that most of the gains in employment in the US since 2008 have been in shale states. Yet the carnage is not over. Induced by low interest, investment banks loaned over $1 trillion to the energy industry. The impact on the financial sector is still to be felt.
In a candid conversation with Frank Rich last fall, Chris Rock said, “Oh, people don’t even know. If poor people knew how rich rich people are, there would be riots in the streets.” The findings of three studies, published over the last several years in Perspectives on Psychological Science, suggest that Rock is right. We have no idea how unequal our society has become. In their 2011 paper, Michael Norton and Dan Ariely analyzed beliefs about wealth inequality. They asked more than 5,000 Americans to guess the%age of wealth (i.e., savings, property, stocks, etc., minus debts) owned by each fifth of the population. Next, they asked people to construct their ideal distributions. Imagine a pizza of all the wealth in the United States. What%age of that pizza belongs to the top 20% of Americans?
How big of a slice does the bottom 40% have? In an ideal world, how much should they have? The average American believes that the richest fifth own 59% of the wealth and that the bottom 40% own 9%. The reality is strikingly different. The top 20% of US households own more than 84% of the wealth, and the bottom 40% combine for a paltry 0.3%. The Walton family, for example, has more wealth than 42% of American families combined. We don’t want to live like this. In our ideal distribution, the top quintile owns 32% and the bottom two quintiles own 25%. As the journalist Chrystia Freeland put it, “Americans actually live in Russia, although they think they live in Sweden. And they would like to live on a kibbutz.” Norton and Ariely found a surprising level of consensus: everyone — even Republicans and the wealthy—wants a more equal distribution of wealth than the status quo.
This all might ring a bell. An infographic video of the study went viral and has been watched more than 16 million times. In a study published last year, Norton and Sorapop Kiatpongsan used a similar approach to assess perceptions of income inequality. They asked about 55,000 people from 40 countries to estimate how much corporate CEOs and unskilled workers earned. Then they asked people how much CEOs and workers should earn. The median American estimated that the CEO-to-worker pay-ratio was 30-to-1, and that ideally, it’d be 7-to-1. The reality? 354-to-1. Fifty years ago, it was 20-to-1. Again, the patterns were the same for all subgroups, regardless of age, education, political affiliation, or opinion on inequality and pay. “In sum,” the researchers concluded, “respondents underestimate actual pay gaps, and their ideal pay gaps are even further from reality than those underestimates.”
I’m sure when Talking Heads wrote “Burning Down The House” that they didn’t exactly have financial collapse and environmental degradation in mind. Although with a verse like “Hold tight wait till the party’s over. Hold tight we’re in for nasty weather. There has got to be a way. Burning down the house” it’s hard not to see that song as strangely prophetic. What we are now doing to the planet and to human society is exactly that – burning down the house while we are still living in it. Everyone needs fuel, especially during a bitter winter, but only a mad man starts deconstructing the house in order to burn bits of it in the stove or fireplace. Almost as mad as that is stealing bits of other people’s houses to burn, but that at least is not soiling your own doorstep – well not at first.
In a world of limited resources and limited space we’ve now reached the point where raiding our neighbours’ houses is the same thing as raiding our own house, because the net effect is the same – disaster on an unprecedented level. Of course it’s easier to live in denial and keep on cannibalising the world’s vital resources at an ever-increasing rate and pretend that it’s business as usual, but in reality it is anything but that. The alarm bells from commentators from all sectors: science, economics, religion etc. are getting louder and more frequent, better argued and with the raw data to back it up, but we are still not listening. Of course, the alarm bell was being rung fifty or more years ago by people such as Admiral Hyman Rickover in 1957, the now retiring Lester Brown and the late Rachel Carson (author of Silent Spring).
Nobody really listened that well back then, although governments paid lip-service to these troublesome do-gooders. Now we know that what they said was entirely true, that we are headed for disaster and yet will still only get the tired old lip-service, as before or Koch Brother inspired denial. The evidence is clearly there that we are depleting all of our resources far too quickly, especially the land we use to produce food and draw raw materials from. In part a consequence of this, the fresh water supplies that are even more vital are also being depleted way too fast. Devastation of the land, especially deforestation exacerbates water loss and soil erosion. Couple this with increased damming of rivers, pollutant run-off into rivers, fracking and mining and you’ve a recipe for a water crisis, which will, in turn, lead to a food crisis.
Let us be quite definite about this. Any Democratic politician who thinks this is a bad situation – or, worse, will not stand by a Democratic colleague in this situation – is not worth the hankie to blow Joe Lieberman’s nose.
Representatives from Citigroup, JPMorgan, Goldman Sachs and Bank of America, have met to discuss ways to urge Democrats, including Warren and Ohio Senator Sherrod Brown, to soften their party’s tone toward Wall Street, sources familiar with the discussions said this week. Bank officials said the idea of withholding donations was not discussed at a meeting of the four banks in Washington but it has been raised in one-on-one conversations between representatives of some of them. However, there was no agreement on coordinating any action, and each bank is making its own decision, they said.
My god, what a prodigious bluff. Also, my god, what towering arrogance? These guys own half the world and have enough money to buy the other half, and they’re threatening the party still most likely to control the White House because they don’t like the Senator Professor’s tone? Her tone? Sherrod Brown’s tone? These are guys who should be worried about the tone of the guard who’s calling them down to breakfast at Danbury and they’re concerned about the tenderness of their Savile Row’d fee-fees? Honkies, please.
The tensions are a sign that the aftermath of the 2008 financial crisis – the bank bailouts and the fights over financial reforms to rein in Wall Street – are still a factor in the 2016 elections. Citigroup has decided to withhold donations for now to the Democratic Senatorial Campaign Committee over concerns that Senate Democrats could give Warren and lawmakers who share her views more power, sources inside the bank told Reuters.
Tensions? These are the guys who should have spent the last six years going door to door apologizing to every American for blowing up the world economy and then buying up the splinters. That is, they should have been going door-to-door to apologize to all those Americans who still have doors they can call their own. Call this. Do it now. Tell them their money is no good here any more. Give these brigands the 86 the way any respectable saloonkeeper gives the heave to a chronic deadbeat who’s run up an unpayable tab. Show the country in simple (and not necessarily civil) words what these people really are.
Demonstrate, speech by speech, that they have no loyalty to the political entity that is the United States of America, that they are stateless gombeen bastards who would sell this country’s democracy off like a subprime mortgage to put another ten bucks into their pockets. They are threatening the people whom they still should be thanking for saving them from themselves. And Senator Professor Warren is only their most conspicuous target. Don’t kid yourselves, this is a message they’re sending to every politician, up and down the line, national and local. Don’t cross us. We own you. There is only one response for a democratic people to make to this ongoing gross obscenity. Bring it, motherfkers. Bring your lunch. And your lawyers.
It should come as no surprise that Q1 was a banner quarter for corporate debt issuance as struggling oil producers tapped HY markets to stay afloat, companies scrambled to max out the stock-buyback-via-balance-sheet re-leveraging play before a certain “diminutive” superwoman in the Eccles Building decides to do the unthinkable and actually hike rates, and there was M&A. As we discussed last week, rising stock prices have tipped investors’ asset allocation towards equities even as money continues to flow into bonds, meaning that yet more money must be funneled into fixed income for rebalancing purposes, which ironically drives demand for the very same debt that US corporates are using to fund the very same buy backs that are driving equity outperformance in the first place. Put more simply: the bubble machine is in hyperdrive. Not only did Q1 mark a record quarter for issuance, March supply also hit a record at $143 billion, tying the total put up in May of 2008. Here’s more from BofAML:
1Q set records for both supply and trading volumes in high grade, as new issue supply volumes reached $348bn, up from the previous record of $310bn in 1Q- 2014, whereas trading volumes averaged 15.6bn per day, up from the previous record of $14.3bn during the same quarter last year… Issuance in March totaled $143bn and it tied with May 2008 and September of 2013 for the highest monthly supply on record going back to at least 1998. September of 2013 was the month when the record $49bn VZ deal was priced… Supply in March was supported by low interest rates (encouraging opportunistic issuance on the supply side and supporting investor demand by diminishing interest rate risk concerns) and a busy M&A-related calendar. Some of these trends will continue in April, although investors are becoming more concerned about the Fed hiking cycle…
Shanghai traders now have more than 1 trillion yuan ($161 billion) of borrowed cash riding on the world’s highest-flying stock market. The outstanding balance of margin debt on the Shanghai Stock Exchange surpassed the trillion-yuan mark for the first time on Wednesday, a nearly fourfold jump from just 12 months ago. The city’s benchmark index has surged 86% during that time, more than any of the world’s major stock gauges. While the extra buying power that comes from leverage has fueled the Shanghai Composite Index’s rally, it’s also sending equity volatility to five-year highs and may accelerate losses if a market reversal forces traders to sell.
Margin debt has increased even after regulators suspended three of the nation’s biggest brokers from adding new accounts in January and said securities firms shouldn’t lend to investors with less than 500,000 yuan. “It’s like a two-edged sword,” said Wu Kan, a money manager at Dragon Life Insurance Co. in Shanghai, which oversees about $3.3 billion. “When the market starts a correction or falls, it will increase the magnitude of declines.” In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.
Chinese investors have been piling into the stock market after the central bank cut interest rates twice since November and authorities from the China Securities Regulatory Commission to central bank Governor Zhou Xiaochuan endorsed the flow of funds into equities. Traders have opened 2.8 million new stock accounts in just the past two weeks, almost on par with Chicago’s entire population. The outstanding balance of the margin debt on China’s smaller exchange in Shenzhen was 493.8 billion yuan on March 31. That puts the combined figure for China’s two main bourses at the equivalent of about $241 billion. In the U.S., which has a stock market almost four times the size of China’s, margin debt on the New York Stock Exchange was about $465 billion at the end of February.
Strong effort by Ambrose. He manages to look behind the obvious veil: “When Warren Buffett suggests that Europe might emerge stronger after a salutary purge of its weak link in Greece, he confirms his own rule that you should never dabble in matters beyond your ken.”
Two months of EU bluster and reproof have failed to cow Greece. It is becoming clear that Europe’s creditor powers have misjudged the nature of the Greek crisis and can no longer avoid facing the Morton’s Fork in front of them. Any deal that goes far enough to assuage Greece’s justly-aggrieved people must automatically blow apart the austerity settlement already fraying in the rest of southern Europe. The necessary concessions would embolden populist defiance in Spain, Portugal and Italy, and bring German euroscepticism to the boil. Emotional consent for monetary union is ebbing dangerously in Bavaria and most of eastern Germany, even if formulaic surveys do not fully catch the strength of the undercurrents. This week’s resignation of Bavarian MP Peter Gauweiler over Greece’s bail-out extension can, of course, be over-played. He has long been a foe of EMU.
But his protest is unquestionably a warning shot for Angela Merkel’s political family. Mr Gauweiler was made vice-chairman of Bavaria’s Social Christians (CSU) in 2013 for the express purpose of shoring up the party’s eurosceptic wing and heading off threats from the anti-euro Alternative fur Deutschland (AfD). Yet if the EMU powers persist mechanically with their stale demands – even reverting to terms that the previous pro-EMU government in Athens rejected in December – they risk setting off a political chain-reaction that can only eviscerate the EU Project as a motivating ideology in Europe. Jean-Claude Juncker, the European Commission’s chief, understands the risk perfectly, warning anybody who will listen that Grexit would lead to an “irreparable loss of global prestige for the whole EU” and crystallize Europe’s final fall from grace.
When Warren Buffett suggests that Europe might emerge stronger after a salutary purge of its weak link in Greece, he confirms his own rule that you should never dabble in matters beyond your ken. Alexis Tsipras leads the first radical-Leftist government elected in Europe since the Second World War. His Syriza movement is, in a sense, totemic for the European Left, even if sympathisers despair over its chaotic twists and turns. As such, it is a litmus test of whether progressives can pursue anything resembling an autonomous economic policy within EMU. There are faint echoes of what happened to the elected government of Jacobo Arbenz in Guatemala, a litmus test for the Latin American Left in its day. His experiment in land reform was famously snuffed out by a CIA coup in 1954, with lasting consequences. It was the moment of epiphany for Che Guevara, then working as a volunteer doctor in the country.
The Greek government has threatened to default on its loans to the International Monetary Fund, as Athens continued its battle to convince creditors for a fresh injection of bail-out cash. Greece’s interior minister told Germany’s Spiegel magazine, his country would not respect a looming €450m loan repayment to the fund on April 9, without a release of much-needed bail-out funds. “If no money is flowing on April 9, we will first determine the salaries and pensions paid here in Greece and then ask our partners abroad to achieve consensus that we will not pay €450 million to the IMF on time,” said Nikos Voutzis. The cash-strapped government has struggled to keep up with its wage and pensions obligations having agreed a bail-out extension on February 20.
Athens insists it has enough money to last it until the middle of April, but a final agreement on any deal is unlikely to be secured before the end of the month. A Greek government spokesperson later denied the reports of a deliberate default, saying the country still hoped for a “positive outcome” to its debt negotiations. The comments came as the eurozone’s working group discussed a new 26-page plan of reforms from Athens on Wednesday. Aiming to generate an estimated €6bn in 2015, Athens has pledged a range of revenue-raising measures including cracking down on tax evasion, carrying out an audit on overseas bank transfers, and introducing a “luxury tax”. The document also warned brinkmanship on the part of the eurozone meant the “viability” of the currency union was now “in question.”
“It is necessary now, without further delay to turn a corner on the mistakes of the past and to forge a new relationship between member states, a relationship based on solidarity, resolve, mutual respect,” said the proposal. The Leftist government has continually fallen short of creditor demands, who hold the purse strings on €7.2bn in bail-out cash the government requires over the next three months. However, the latest blueprint is unlikely to satisfy lenders as it lacks details on labour market liberalisation or pensions reforms. Previous privatisations of the country’s assets were also described as a “spectacular” failure, generating far less in revenues for the state than first envisaged..
China’s biggest oil refiner is signaling the nation is headed to its peak in diesel and gasoline consumption far sooner than most Western energy companies and analysts are forecasting. If correct, the projections by China Petroleum & Chemical, or Sinopec, a state-controlled enterprise with public shareholders in Hong Kong, pose a big challenge to the world’s largest oil companies. They’re counting on demand from China and other developing countries to keep their businesses growing as energy consumption falls in more advanced economies. “Plenty of people are talking about the peak in Chinese coal, but not many are talking about the peak in Chinese diesel demand, or Chinese oil generally,” said Mark C. Lewis at Kepler Cheuvreux. “It is shocking.”
Sinopec has offered a view of the country that should serve as a reality check to any oil bull. For diesel, the fuel that most closely tracks economic growth, the peak in China’s demand is just two years away, in 2017, according to Sinopec Chairman Fu Chengyu, who gave his outlook on a little reported March 23 conference call. The high point in gasoline sales is likely to come in about a decade, he said, and the company is already preparing for the day when selling fuel is what he called a “non-core” activity. That forecast, from a company whose 30,000 gas stations and 23,000 convenience stores arguably give it a better view on the market than anyone else, runs counter to the narrative heard regularly from oil drillers from the U.S. and Europe that Chinese demand for their product will increase for decades to come.
“From 2010 to 2040, transportation energy needs in OECD32 countries are projected to fall about 10% while in the rest of the world these needs are expected to double,” Exxon Mobil said in a December report on its view of the future. “China and India will together account for about half of the global increase.” Exxon expects most of that growth to be driven by commercial transportation for heavy-duty vehicles, specifically ships, trucks, planes and trains that run on diesel and similar fuels. BP’s latest public projection for China, released in February, sounds a similar note. “Energy consumed in transport grows by 98%. Oil remains the dominant fuel but loses market share, dropping from 90% to 83% in 2035.”
Ships carrying oil from Mexico docked in South Korea this year for the first time in more than two decades as the global fight for market share intensifies. Latin American producers are providing increasing amounts of heavy crude to bargain-hungry Asian refiners in a challenge to Saudi Arabia, the world’s largest exporter and the region’s dominant supplier. “By diversifying, more Asian refiners will be able to reduce the clout that Saudi Arabia has on the market,” said Suresh Sivanandam, a refining and chemical analyst with Wood Mackenzie Ltd. in Singapore. “They will be getting more bargaining power for sure.”
The U.S., enjoying a surge of light oil from shale formations, has raised imports of heavy grades from Canada, displacing crude from nations such as Mexico and Venezuela. That’s boosting South American deliveries to Asia even after Saudi Arabia cut prices for March oil sales to the region, its largest market, to the lowest in at least 14 years. The shale boom also has transformed the flow of oil to Asia. South Korea received its first shipment of Alaskan crude in at least eight years as output from Texas and North Dakota displaces oil that fed U.S. refineries for years. The country was one of the first to receive a cargo of the ultralight U.S. crude known as condensate after export rules were eased.
Petrobras and partner operators are also shipping to Asia and were scheduled to load nine tankers bound for the region in March, according to Energy Aspects, as Latin American oil’s discount to Middle East benchmark Dubai widens to almost double the average of the past year. Asian-Pacific refiners are forecast to add 5.4 million barrels a day of capacity in the next five years, according to Gaffney, Cline & Associates, a petroleum consultant.
“April is a crucial month for the industry because it’s when lenders are due to recalculate the value of properties that energy companies staked as loan collateral.” Calculations until now are stil based on $90 oil.
Lenders are preparing to cut the credit lines to a group of junk-rated shale oil companies by as much as 30% in the coming days, dealing another blow as they struggle with a slump in crude prices, according to people familiar with the matter.
Sabine Oil & Gas became one of the first companies to warn investors that it faces a cash shortage from a reduced credit line, saying Tuesday that it raises “substantial doubt” about the company’s ability to continue as a going concern. About 10 firms are having trouble finding backup financing, said the people familiar with the matter, who asked not to be named because the information hasn’t been announced. April is a crucial month for the industry because it’s when lenders are due to recalculate the value of properties that energy companies staked as loan collateral.
With those assets in decline along with oil prices, banks are preparing to cut the amount they’re willing to lend. And that will only squeeze companies’ ability to produce more oil. “If they can’t drill, they can’t make money,” said Kristen Campana at Bracewell & Giuliani LLP’s finance and financial restructuring groups. “It’s a downward spiral.” Sabine, the Houston-based exploration and production company that merged with Forest Oil Corp. last year, told investors Tuesday that it’s at risk of defaulting on $2 billion of loans and other debt if its banks don’t grant a waiver. Publicly traded firms are required to disclose such news to investors within four business days, under U.S. Securities and Exchange Commission rules.
Some of the companies facing liquidity shortfalls will also disclose that they have fully drawn down their revolving credit lines like Sabine, according to one of the people. The credit discussions are ongoing and a number of banks may opt to be more lenient, giving companies more time to prepare for bigger cuts later in the year, the people said. Credit lines for some of the companies may be reduced by as little as 10%, they said. The companies are among speculative-grade energy producers that were able to load up on cheap debt as crude prices climbed above $100 a barrel. The borrowing limits are tied to reserves, the amount of oil and gas a company has in the ground that can profitably be extracted based on its land holdings. With oil prices plunging below $50 from last year’s peak of $107 in June, some are now fighting to survive.
Douglas Blackburn has been crawling in and out of the coal mines of Central Appalachia since he was a boy accompanying his father and grandfather some 50 years ago. The only time that Blackburn, now a coal industry consultant, remembers things being this bad was in the 1990s. Back then, he estimates, almost 40% of the region’s mines went bankrupt. “It’s a similar situation,” said Blackburn, who owns Blackacre, a Richmond, Va consulting firm. Now, like then, the principal problem is sinking coal prices. They’ve dropped 33% over the past four years to levels that have made most mining companies across the Appalachia mountain region unprofitable. To make matters worse, there’s little chance of a quick rebound in prices. That’s because idling a mine to cut output and stem losses isn’t an option for many companies.
The cost of doing so – even on a temporary basis – has become so prohibitive that it can put a miner out of business fast, Blackburn and other industry analysts say. So companies keep pulling coal out of the ground, opting to take a small, steady loss rather than one big writedown, in the hope that prices will bounce back. That, of course, is only adding to the supply glut in the U.S., the world’s second-biggest producer, and driving prices down further. It’s become, in essence, a trap for miners. “You have this really perverse situation where they keep producing,” James Stevenson at IHS said in a telephone interview. “You’re just shoveling coal into this market that’s oversupplied.” Companies will dig up at least 17 million tons more coal than power plants need this year, Morgan Stanley estimates. Coal is burned at the plants to generate electricity. That’s creating the latest fossil fuel glut in the U.S., joining oil and natural gas.
I was just sent this. Don’t know enough about it, I must admit. The article suggests that prices are still 11% higher than 3 months ago. That would seem to mean they rose 20% or so in 2015. It doesn’t make much sense to me right now.
International dairy prices continued to reverse gains made early this year at this morning’s GlobalDairyTrade (GDT) auction, putting downward pressure on Fonterra’s $4.70 a kg farmgate milk price forecast and raising concerns about next season’s likely payout. The GDT price index fell by 10.8% compared with the last sale a fortnight ago, when prices dropped by 8.8%. Big falls were recorded for the key products of wholemilk powder – down 13.3% to US$2,538 a tonne, skim milk powder – down 9.9% to US$2,467/tonne. Wholemilk prices are now just 11% higher than than they were by the end of 2014. ANZ rural economist Con Williams said that with milk powder making up the bulk of New Zealand’s product mix, the GDT result suggested a payout of $4.50-4.70 a kg this year.
The largest price falls at the auction were generally seen in the longer-dated contracts, up to 6 months out – into the new season. “While these prices remain higher than those for the end of this season, the curve has flattened, suggesting less price recovery is now anticipated – not boding well for next year’s payout,” Williams said. The fall comes as the New Zealand season enters its final phase, with about 80% of production now out of the way. Most of the price weakness was put down to better-than-expected supply, with the effects of this year’s drought being offset by rain in many parts of the country.
The Commodity Futures Trading Commission on Wednesday charged Kraft Foods and Mondelez Global with manipulating wheat futures and cash wheat prices. The CFTC says that, in response to high cash wheat prices in summer 2011, the two companies developed and executed in early December 2011 a strategy to buy $90 million of wheat futures they didn’t intend on receiving. The companies expected the market would react to their “enormous” long position in futures by lowering cash prices, the CFTC said. They later earned more than $5.4 million in profits, according to the CFTC’s complaint. The agency says litigation is continuing against the companies and it is seeking disgorgement and civil monetary penalties.
Brazil’s richest man Jorge Paulo Lemann may add more than $5 billion to his personal fortune after ketchup maker H.J. Heinz merges with Kraft Foods. Heinz, controlled by Lemann’s 3G Capital and Warren Buffett’s Berkshire Hathaway, agreed last week to buy the macaroni-and-cheese maker Kraft in a cash-and-stock deal. Heinz’s 51% of the combined company will be worth about $45 billion, valuing Lemann’s stake at about $9.6 billion, said Kevin Dreyer, a portfolio manager at Gabelli Equity. Lemann has invested about $4 billion through 3G Capital, according to data compiled by Bloomberg.
“A combination of synergies from the deal and the sprinkling of the magic 3G dust is giving Kraft a higher valuation than it would otherwise have,” Dreyer said in a phone interview from New York. “3G has a track record of drastically expanding margins. There’s an expectation they’ll achieve the number they put in and then some.” 3G, co-founded by Lemann, eliminated more than 7,000 Heinz jobs in 20 months after taking the company over with Berkshire Hathaway. Buffett defended the job reductions his partners at 3G have taken when they buy businesses during a March 31 interview on CNBC.
The share price of Kraft, which surged 36% the day of the deal, can be used to estimate the future value of closely held Heinz, Dreyer said. His calculation takes into account the ketchup maker’s special dividend payment and assumes a market capitalization of about $87 billion for the new company. 3G owns 48% of Heinz, co-founder Alex Behring told reporters March 25. The buyout firm contributed $4.25 billion to Heinz in 2013 and another $4.8 billion in the Kraft deal. Lemann hasn’t disclosed his personal stake in Heinz. His investments in publicly traded companies show he tends to have a larger stake than Brazilian 3G partners Marcel Telles and Carlos Alberto Sicupira..
The currency crisis starts about 75 feet into Cuba. I land in the late afternoon and, after clearing customs, step into the busy arrivals hall of Havana’s airport looking for help. I ask a woman in a gray, military-like uniform where I can change money. Follow me, she says. But she doesn’t turn left, toward the airport’s exchange kiosk. Called cadecas, these government-run currency shops are the only legal way, along with banks, to swap your foreign money for Cuba s tourist tender, the CUC. Instead, my guide turns right and only comes clean when we reach a quiet area at the top of an escalator. The official rate is 87 for a hundred, she whispers, meaning CUCs to dollars. I’m giving you 90. So it’s a good deal for you.
I want to convert $500, and she doesn’t blink an eye. Go in the men’s room and count your money out, she instructs. I’ll do the same in the ladies room. The bathroom is crowded, with not one but two staff and the usual traffic of an airport in the evening. There s no toilet paper. In an unlit stall I try counting to 25 while laying $20 bills on my knees. There’s an urgent knock, and under the door I see high heels. I’m still counting, I say. She’s back two minutes later and pushes her way into my stall. We trade stacks, count, and the tryst is over. For my $500, I get 450 CUCs, the currency that’s been required for the purchase of almost anything important in Cuba since 1994. CUCs aren’t paid to Cubans; islanders receive their wages in a different currency, the grubby national peso that features Che Guevara’s face, among others, but is worth just 1/25th as much as a CUC.
Issued in shades of citrus and berry, the CUC dollarized, tourist-friendly money has for 21 years been the key to a better life in Cuba, as well as a stinging reminder of the difference between the haves and the have-nots. But that’s about to change: Cuba is going to kill the CUC. Described as a matter of fairness by President Raul Castro, the end of the two-currency system is also the key to overhauling the uniquely incompetent and centrally planned chaos machine that is the Cuban economy.
Even in Cuba there are markets, and the effects of Castro’s October announcement of a five-step plan for phasing out the CUC are already rippling out to every wallet in the country. The government has issued notifications and price conversion charts, and introduced new, larger bills to supplement the low-value national peso. Over the next year, the CUC will be invalidated what Cuban economists call Day Zero and then, in steps four and five, the regular Cuban peso will become exchangeable and be floated against a basket of five currencies: the yuan, the euro, the U.S. dollar, and two others to be named later.
California Gov. Jerry Brown ordered unprecedented mandatory water cuts across the Golden State after the latest measurements show the state’s mountain snowpack – which accounts for roughly a third of California’s water supply – has shrunk to a record low of 5% of normal for this time of year. The Democratic governor took the action on Wednesday after accompanying state surveyors into the Sierra Nevada mountains to manually verify electronic readings that show an average snow water equivalent of 1.4 inches, the lowest ever recorded on April 1. “Today we are standing on dry grass where there should be five feet of snow,” the governor said. “This historic drought demands unprecedented action.”
Gov. Brown directed the State Water Resources Control Board to implement mandatory water reductions of 25%. Details on how the cuts would be implemented weren’t immediately released, although the governor said in his order that reductions would fall hardest in water districts that haven’t adequately followed his voluntary calls for conservation last year. According to monthly surveys of water use, conservation levels have varied widely around the state. In general, reductions have been lower in Southern California than the rest of the state, in part because of the region’s concentration of estate-sized lots homes and golf courses. A spokesman for the state water control board, which has already ordered limits in outdoor lawn watering, said the governor’s action won’t mean mandatory rationing for households.
As voters were coming out of the polls on Tuesday, pesky reporters were asking why they voted the way they did — and what was going through their heads The most popular response — from 45% of the voters — was the economy. Only 28% said their families were doing better financially. The economy is always the major issue in an election during times like these. So no one should have been shocked that voters took their anger out on the party that controls the White House, even though Republicans are just as much to blame for our economy’s failures. John Harwood, a political reporter for CNBC, asked a very good question before the votes were counted: Why? As in, “Why did people appear so angry and unhappy when the stock market was at record levels, the unemployment rate is down sharply, inflation is subdued and the number of jobs is increasing?”
Harwood’s explanation was that the benefits of this economic growth weren’t being evenly distributed and were being felt only by the blessed in the American economy — the upper 1%, if you will. Harwood is only a little right. Yes, the economy is blessing the few and leaving the rest of us in limbo. What Harwood and the rest of the folks who rely solely on Washington’s mainstream thinkers and Wall Street boosters for their information don’t realize is this: The economy isn’t really doing what the statistics say it is doing. Our nation’s economic statistics are nipped and tucked, massaged, managed, fabricated and dolled up. In short, our statistics are wrong and Main Street folks know it. Here’s what a Wall Street hedge fund mogul, Paul Singer, head of Elliott Management Corp., told his clients the other day: “Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth,” Singer wrote.
“When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.” I’m glad someone is reading my column. But it’s not like Singer — whom I don’t know — was willing to say that out loud so that everyone could understand. He wrote that in his newsletter to his clients. So, shhhhh! It’s a secret. Don’t tell Americans that the economy isn’t doing so well. (Oh, that’s right, they’ve already caught on.) I won’t get into the year-long investigation I have been conducting into the Census Bureau’s faulty economic data. Now that the Republicans control both houses of Congress, I’m sure what is going on at Census will be looked at very carefully. But fabrication of data isn’t the only problem. Put enough academics and statisticians in a room and they can turn any statistic into something it isn’t.
The Fed has formally “ended” QE, but it hasn’t really. The Fed will continue reinvesting interest on its portfolio in more bonds and it will rollover maturities. We saw what happens to the stock market a few weeks ago when Fed official James Bullard asserted that the Fed needs to start raising rates: the S&P 500 quickly dropped 8%. Right at the bottom of the drop, the very same Bullard issued a statement suggesting that QE should be extended. This triggered an insanely abrupt “V” move back up to a new record high for the S&P 500. Bullard either did this intentionally or is a complete idiot. The stock market can’t function without Federal Reserve intervention. The stock market lost 8% quickly on just the thought that the Fed might start raising rates. Imagine what would happen if the Fed decided to “experiment” by shutting down its market intervention operations – both verbal and physical – for a month…
As for QE, if the Fed has achieved its objective of stimulating the economy, why doesn’t it start removing the $2.6 trillion of liquidity that it has injected into its member banks? This was money that was supposed to be directed at the economy. How come it’s sitting on bank balance sheets earning .25% interest? That’s $6.5 billion in free interest the Fed continues to inject into the Too Big To Fail banks. But why? What would happen if the Fed decided to “experiment” by removing this massive dead-pool of money from the banks? The money isn’t really “dead,” it’s keeping the banks from collapsing. I’m interested to watch the Government Treasury bond auctions now that the Fed is not there to soak up anywhere from 50-100% of each issue. I wonder if the banks will be moving their $2.6 trillion in Excess Reserves into new Treasury issuance. Obama is going around broadcasting the lie that the Government’s spending deficit in FY 2014 was something like $600 billion.
Yet, the amount of new Treasury bonds issued increased by $1 trillion over the same period. Either Obama is lying or the accountants at the Treasury committed a big typo. Either the Fed has found a way to continue opaquely monetizing new Government debt issuance, or the market is soon going to force U.S. interest rates up much higher.
Spoiler alert: it’s not the Fed, even though the portfolio rebalancing channel courtesy of a $4.5 trillion Fed balance sheet certainly assured that the artificially inflated bubble in stocks, as a result of the Fed’s own purchases of bonds, is unlike anything seen before (and to all those debating whether the bubble is in bonds or stocks, here is the answer: it is in both). The answer, according to Goldman’s David Kostin is the following: “From a strategic perspective, buybacks have been the largest source of overall US equity demand in recent years.”
In other words, not only has the Fed made a mockery of fundamentals, the resulting ZIRP tsunami means that corporations can issue nearly-unlimited debt to yield chasing “advisors” managing other people’s money, and use it to buyback vast amounts of stock, which brings us to the latest aberation of the New Abnormal: the “Pull the S&P up by the Bootstaps” market, in which the only relevant question is which company can buyback the most of its own stock. Some further observations on the only thing that matters for equity demand in a world in which the Fed is, for the time being, sidelined:
Since the start of 4Q, a sector-neutral basket of 50 stocks with the highest buyback yields has outpaced the S&P 500.
And sure enough, with the market once again rewarding stock buybacks… companies will focus exclusively on stock repurchases in lieu of actual growth-promoting capital allocation such as CapEx (as predicted in April 2012):
We forecast S&P 500 cash spent on repurchases will rise by 18% in 2015 following a 26% jump in 2014.
So where is the impasse I point to? Well, as stated above, I am not quite so sanguine as Mr. Stockman is regarding the reasons behind our apparent self induced economic undoing. It is my contention that there exists ample motive behind the apparent policy insanity we are indeed witnessing and actually navigating through. What is being done is quite simply too plainly preposterous to be so innocently and readily dismissed. One has to consider what else may be driving the continuous and relentless stoking of a glaring, oncoming, head on collision train wreck dead ahead. No locomotive engineer can simply be assumed to be this brain dead, so completely out to lunch, it just doesn’t add up. Something else is at the heart of this mainlined monetary mayhem.
Call me a jaded cynic or even worse, a crackpot conspiracist, but when I see a country as majestic and powerful as the United States which has always stood for liberty and the pursuit of free enterprise, knowingly, willfully and conspicuously being undermined, as if being herded over a cliff like baffled buffaloe on the great plains, I smell a dubious dirty rat. Let us bear in mind, that the IMF Multinational Central Bankers are waiting in the wings to pick up the pieces of the train wreckage, with their deliberate SDR regime preparations. They are qualifying themselves to take on the existing immense capital account imbalances between the debtor and creditor nations. That will be a critical aspect of the developing picture.
As a new global monetary order begins to emerge and impose itself, the SDR composite will be expanded so as to address these utterly unsustainable trade imbalance. The envisaged multilateral SDR monetary instrument will be positioned to buy out the existing unserviceable sovereign debt loads, whereby the massively indebted nations of the developed world will cede a measure of influence to the creditor nations of the emerging world.
The following two charts cut right through the headline propaganda and show all there is to know about the state of the global economy. The first is a chart of Global Cyclical stocks (Goldman ticker GSSBGCYC). The second shows Global Defensives (Goldman ticker GSSBGDEF). The resulting picture is worth 1000 Op-Eds welcoming you to yet another “global recovery.”
China’s factory-gate prices fell for a record 32nd month in October and consumer prices remained subdued, raising pressure on policymakers to bolster the world’s second-largest economy as disinflation spreads. The producer-price index dropped 2.2% from a year earlier, the National Bureau of Statistics said in Beijing today, compared with the median projection of a 2% decline in a survey of analysts by Bloomberg News. Consumer prices rose 1.6% and the rate was unchanged from the prior month and matched economists’ estimates. China’s economy, burdened by overcapacity and weak domestic demand, is headed for the slowest full-year growth in more than two decades. Lower oil and metals prices are cutting costs at the factory gate, allowing China’s exporters to reduce prices and adding to deflationary pressures globally.
“China’s domestic demand remained soft and dis-inflationary risks are on the rise on the back of falling global commodity prices,” said Chang Jian, chief China economist at Barclays. “Subdued inflation offers room for more PBOC easing, but broad-based monetary easing will more likely to be triggered by disappointing growth numbers, which we will likely see in the coming months.” Chang said she expects the PPI drop will continue to 2015. Purchasing prices of fuels fell 3.8% in October from a year earlier, while ferrous metals costs dropped 6.9%, the NBS data showed. Prices of all nine components dropped. Oil prices have slumped into a bear market amid speculation of a global glut, slowing drilling at U.S. shale formations. Producers in OPEC countries are responding by cutting prices, resisting calls to reduce supply as they compete with the highest U.S. output in three decades.
“The extended drop in the PPI is affected by the prolonged decline of global oil prices and overcapacity in some domestic industries,” Yu Qiumei, a senior statistician at the NBS, said in a statement today. Eighteen of China’s 31 provinces and municipalities reported a nominal growth rate lower than the price-adjusted level for the first nine months of this year, signaling deflation. China’s imports moderated to a 4.6% increase in October from September’s 7% gain, according to data released by General Administration of Customs over the weekend.
President Xi Jinping sought to counter U.S. efforts aimed at boosting influence in Asia by flexing China’s economic muscle days before a Beijing summit with his counterpart Barack Obama. Speaking to executives at a CEO gathering in Beijing, Xi outlined how much the world stands to gain from a rising China. He said outbound investment will total $1.25 trillion over the next 10 years, 500 million Chinese tourists will go abroad, and the government will spend $40 billion to revive the ancient Silk Road trade route between Asia and Europe. “China’s development will generate huge opportunities and benefits and hold lasting and infinite promise,” Xi said. “As China’s overall national strength grows, China will be both capable and willing to provide more public goods for the Asia Pacific and the world.”
China has used the Asia-Pacific Economic Cooperation forum summit under way in Beijing to put forward its own trade and economic proposals to strengthen its sway in Asia. Those incentives complement a greater assertiveness in territorial disputes and moves to upgrade its military after decades of U.S. dominance in the region. China is rolling out counteroffers for each promise made by President Barack Obama, whom he’ll meet this week in Beijing as part of the summit. Xi is pushing the Free Trade Area of the Asia-Pacific in response to the U.S.-backed Trans-Pacific Partnership, which excludes China. An Asia Infrastructure Investment Bank mostly financed with money from Beijing is seen as an answer to the Asian Development Bank and other multinational lenders where the U.S. and Japan have the most influence.
“Any time they have the chance to shape international economic rules or norms they are going to do that,” said Andrew Polk, resident economist at the Conference Board China Center for Economics and Business in Beijing. “It’s a bifurcated kind of response – there’s a reactive response to the developed world but trying to take a leadership role among other emerging economies.” While spelling out his message, Xi also made clear China is ready to accept a lower rate of growth, assuring executives that the economy is more resilient than ever and his government can safely guide the country through any slowdown. China’s economy is targeted to grow at about 7.5% this year, the slowest since 1990, and Xi said a growth rate around 7% would still make the country a top performer.
When MarketWatch covers Chinese stocks, we usually focus on those listed in Hong Kong. The reason for this is that few outside of China – mainly just institutional investors with approved quotas – are able to buy what’s sold in Shanghai, Shenzhen and the other mainland Chinese bourses, while any investor in the world can buy Hong Kong-listed names. But this is all about to change in a big way next Monday, when China launches its game-changing “Shanghai-Hong Kong Stock Connect” program. For the first time ever, retail investors around the world will be able to invest in mainland Chinese equities.
In some high-profile cases, the same companies have stock listing in both Shanghai (known as “A-shares” when denominated in yuan) and Hong Kong (“H-shares”), though here too, opportunities exist in the form of arbitrage, as a given company’s A-shares and H-shares rarely trade at the same level. “Many international investors are completely excited,” Charles Li, the chief executive of bourse operator Hong Kong Exchanges & Clearing (HKEx) told MarketWatch at a recent media availability. “This is probably the last frontier market that has yet to open,” Li said, “and they [global investors] probably have never seen a rebalancing possibility like this scale anytime in past history.”
The race is on to give U.S. exchange-traded fund investors access to $9 trillion of stocks and bonds in mainland China. Money managers including BlackRock and CSOP have now registered almost 40 ETFs tracking the country’s domestic shares and debt with U.S. regulators, six times the number of existing funds. The products allow anyone with a U.S. brokerage account to gain exposure to Chinese securities that were previously off limits to all but a few qualified institutions. Equities in the biggest emerging market are heading for the best annual gain since 2009, outpacing shares of mainland companies listed overseas amid speculation government plans to ease capital controls will narrow the valuation discount on domestic securities. As programs including a planned bourse link between Hong Kong and Shanghai help open up China’s markets, fund providers are rushing to stake claims to the fees they hope will come from new investors.
“There is so much potential, you just can’t ignore China,” Patricia Oey, a senior analyst at investment data provider Morningstar Inc. in Chicago, said in a telephone interview. Fund companies “want to have a foot into a very big market. China is opening up and they want to be there.” BlackRock, the world’s largest money manager, is seeking to introduce its first U.S. exchange-traded fund that would invest directly in equities traded in Shanghai and Shenzhen, according to a Sept. 15 regulatory filing. CSOP, which runs a $6 billion ETF of China’s yuan-denominated A shares out of Hong Kong, filed to create a U.S. version three days later. While only a fraction of Chinese companies are listed or sell debt offshore, U.S. investors have piled almost $10 billion into ETFs that exclusively buy securities trading abroad, until recently one of the only ways for individuals to gain exposure to businesses from the world’s second-largest economy.
China has secured almost a fifth of the natural gas supplies it will need by the end of the decade after striking a second major deal with Russia. Russian President Vladimir Putin and Chinese President Xi Jinping signed the gas-supply agreement in Beijing the day before U.S. President Barack Obama arrived in the Chinese capital for the Asia-Pacific Economic Cooperation summit. The deal is slightly smaller than the $400 billion accord reached earlier this year, shortly after Russia’s annexation of Crimea. Russia’s Gazprom is negotiating the supply of as much as 30 billion cubic meters of gas annually from West Siberia to China over 30 years, it said yesterday. Another Russian company is discussing the sale of a 10% stake in a Siberian unit to state-owned China National Petroleum Corp.
Russia has turned to China to diversify its market and spur its economy as relations soured with the U.S. and Europe over the Ukraine crisis. The initial accord “will make Russia rely more on China both economically and politically,” Lin Boqiang, director of the Energy Economics Research Center at Xiamen University, said by phone. “China is probably the only country in the world that has both the financial ability and the market capacity to consume Russia’s huge energy exports on a sustainable basis over a long period of time,” said Lin. It gives Putin an opportunity to show Europe and the U.S. that his country won’t be isolated over Ukraine, he said. The two deals could account for almost 17% of China’s gas consumption by 2020, Gordon Kwan at Nomura wrote.
Russia may start selling gas to China within four to six years as part of the agreement with CNPC, Gazprom Chief Executive Officer Alexey Miller told reporters in Beijing. When the new supply deal begins, China will surpass Germany to become Russia’s biggest natural gas customer, according to CNPC’s website. “Together we have carefully taken care of the tree of Russian-Chinese relations,” Chinese President Xi Jinping said yesterday at a meeting with Putin at the economic forum. “Now fall has set in, it’s harvest time, it’s time to gather fruit.”
The ruble firmed broadly on Monday after President Vladimir Putin said there were no reasons for the slide in the Russian currency. After a dramatic fall in previous week and volatile swings of 6% in its rate on Friday, the rouble traded 1.9% higher at 45.77 to the dollar at 0735 GMT. The Russian currency was 1.7% stronger at 57.07 against the euro. The Russian central bank said on Monday that it expects zero economic growth in 2015 and only 0.1% growth in 2016, in a three-year monetary policy strategy that anticipates Western sanctions against Russia will remain until the end of 2017. The central bank said that it was also calculating its base forecasts on the Urals oil price recovering to an average of $95 in 2015 but falling to $90 by the end of 2017, a long-term downward trend which it said would constrain economic growth.
Putin, wooing Asian investors on Monday at the Asia-Pacific Economic Cooperation summit in Beijing, said he was hopeful that speculation against the rouble would stop soon and that there was no fundamental economic reason for the currency’s slide. The rouble has slumped nearly 30% against the dollar this year as plunging oil prices and Western sanctions over the Ukraine crisis shrivelled Russia’s exports and investment inflows. Russia’s central bank, which limited its support for the rouble last week by cutting the size of its interventions to $350 million a day, said on Friday it would still intervene to support the rouble it sees threats to financial stability. Putin also said Russia and China intend to increase the amount of trade that is settled in yuan, as he ruled out capital controls for Russia.
The world’s largest banks will have to build up their loss-absorbing liability buffers to see them through a crisis, as regulators tackle too-big-to-fail lenders six years after the collapse of Lehman Brothers Holdings Inc. The Financial Stability Board, led by Bank of England Governor Mark Carney, said today that the biggest banks may be required to have total loss absorbing capacity equivalent to as much as a quarter of their assets weighted for risk, with national regulators able to impose still tougher standards. The FSB is seeking comment on the rule, known as TLAC, which would apply at the earliest in 2019. Carney said the plans are a “watershed” in regulators’ mission to end the threat posed by banks whose size and systemic importance mean their failure would be catastrophic for the global economy.
“Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system,” he said. The rules are the latest step by the FSB in a five-year quest to boost banks’ resilience in the face of financial shocks. Agreement has already been reached on measures including tougher capital requirements and enhanced scrutiny by supervisors. The TLAC rules would apply to the FSB’s register of global systemically important banks. The latest list, published last week, contains 30 banks, with HSBC and JPMorgan identified as the most significant. The draft requirements announced by the FSB would measure banks’ ability to absorb losses in a crisis, shielding taxpayers from bailouts.
Jean-Claude Juncker, the new president of the European Commission, was always a bad choice for the job, foisted on the bloc’s 28 national governments by a European Parliament eager to expand its powers. It’s becoming clear now just how poor a decision that appointment was. Juncker was the prime minister of Luxembourg, a tiny nation with a population 1/17th the size of London’s, for almost two decades. In that time, he oversaw the growth of a financial industry that became a tax center for at least 340 major global companies, not to mention investment funds with almost €3 trillion ($3.7 trillion) in net assets – second only to the U.S. Partly as a result of the Swiss-style bank secrecy rules and government-blessed tax avoidance schemes that helped draw so much capital, the people of Luxembourg have become the world’s richest after Qatar.
The tax arrangements, described in leaked documents provided by the International Consortium of Investigative Journalists, allegedly enabled multinationals, from Apple to Deutsche Bank, to reduce their tax liabilities on profits earned in other countries: The effective Luxembourg tax rates that resulted were as little as 0.25%. The countries where the money was made received nothing. It’s telling that these arrangements have long been shrouded in secrecy. (Only last month did Luxembourg’s government drop its opposition to new EU rules on banking transparency.) Juncker, you could say, made his country rich by picking the pockets of other countries, including those of the European Union he is now mandated to serve.
The commission was already conducting an investigation of Luxembourg’s tax arrangements. Juncker says he won’t interfere – but he won’t recuse himself, either. Indeed, his spokesman says he is “serene” in the face of the revelations. He shouldn’t be. At this point, he could best serve the European project by resigning. Juncker’s position as the head of the body investigating the tax practices he oversaw as prime minister is a clear conflict of interest. It’s possible the commission will find nothing improper about Luxembourg’s tax-avoidance paradise: The EU allows member governments wide latitude in taxing companies, so long as they don’t favor some over others. But with Juncker in charge of the commission, any such exoneration will fail to command public confidence.
Mario Draghi is seeking economists who understand banks, and he’s not afraid to look outside Frankfurt to find them. As the European Central Bank assumes the mantle of euro-area financial supervisor, its president has just staffed two key monetary-policy posts with non-ECB experts on how lenders function in the economy. The appointments mark a trend of turning to outsiders as the 16-year-old institution struggles to meet its changing responsibilities with existing staff. “People like Draghi have much more interest in how markets and supervision affect monetary policy than the old school,” said Anatoli Annenkov, senior European economist at Societe Generale SA in London. “It’s a reflection of the problems that the ECB is facing.” Sergio Nicoletti Altimari, a Bank of Italy financial-markets official who worked closely with Draghi during the latter’s time as governor there, will become director general for macroprudential policy and financial stability from Jan. 1.
Luc Laeven, a Belgian economist at the International Monetary Fund with a track record of analyzing financial crises, will become director general for research by March. Draghi is seeking people who can handle the new powers the ECB gained when it became the euro-area banking supervisor on Nov. 4. About 900 new staff have been hired so far who will be dedicated to oversight, and the role also brings the authority to promote financial stability throughout the economy with measures such as higher capital buffers or increased risk-weightings on lenders’ assets. This macroprudential policy was born out of the gradual recognition that the financial system isn’t always rational, and so someone needs to be watching for the emergence of risks that could escalate and broaden.
An overwhelming majority of Catalans has supported the region’s independence, vice president of the autonomy’s government Joana Ortega said early Monday. There have been two question in the ballots: “Would you like Catalonia to become a state?” and “If yes, would you like Catalonia to become an independent state?” With 88.44% of the ballots counted, 80.72% of voters answered yes to both questions in the ballot, and 10.11% answered yes only to the first questions, according to Ortega. As few as 4% of the voters said no to both questions.
More than 2.25 million people out of 5.4 million eligible voters in the wealthy breakaway region of Catalonia in northeastern Spain voted on Sunday in the unofficial independence poll. Results of the vote are expected to come on Monday morning. Spanish government sees the voting as illegal and tried to block it by filing complaints to the Constitutional Court. However Catalan President Artur Mas has stated that Catalonia would carry out the consultation despite the central government’s protests. Earlier on Sunday the central government dismissed the vote as “useless” and unconstitutional.
A top-level threat to cut emergency European funding to Ireland days before the humiliating international bailout will shock people, Public Expenditure Minister Brendan Howlin has said. Letters released today by the European Central Bank (ECB) confirm the Government was warned crisis funds propping up collapsed banks in 2010 would be withdrawn unless they asked for an €85bn rescue package. The missive from then-ECB president Jean Claude Trichet to the late former Finance Minister Brian Lenihan also demanded a written commitment to punishing austerity measures, spending cutbacks and an overhaul of the financial industry. Irish high-street banks were surviving on emergency funding – known as emergency liquidity assistance (ELA) – at the time and if stopped, it could have effectively shut down the property crash-ravaged lenders.
Mr Trichet urged a speedy response to his proposals, which have been interpreted by some as the Frankfurt central bank pushing Ireland into a bailout. “It is the position of the (ECB) Governing Council that it is only if we receive in writing a commitment from the Irish government vis-a-vis the Eurosystem on the four following points that we can authorise further provisions of ELA (Emergency Liquidity Assistance) to Irish financial institutions,” Mr Trichet wrote. The four points included Ireland seeking a bailout, agreeing to austerity, reforming banks and guaranteeing to repay emergency funds. Two days after the letter was sent on November 19 Ireland officially requested a rescue package from the ECB, the International Monetary Fund and the European Commission. Minister Howlin said the letters – published after a years-long campaign for their release – would “come as a shock to many people”.
General Motors ordered a half-million replacement ignition switches to fix Chevrolet Cobalts and other small cars almost two months before it alerted federal safety regulators to the problem, according to emails viewed by The Wall Street Journal. The parts order, not publicly disclosed by GM, and its timing are sure to give fodder to lawyers suing GM and looking to poke holes in a timetable the auto maker gave for its recall of 2.5 million vehicles. The recall concerns a switch issue that is now linked to 30 deaths and has led to heavy criticism of the auto giant’s culture and the launch of a Justice Department investigation.
The email exchanges took place in mid-December 2013 between a GM contract worker and the auto maker’s ignition-switch supplier, Delphi Automotive. The emails indicate GM placed a Dec. 18 “urgent” order for 500,000 replacement switches one day after a meeting of senior executives. GM and an outside report it commissioned have said the executives discussed the Cobalt at the Dec. 17 meeting but didn’t decide on a recall. The emails show Delphi was asked to draw up an aggressive plan of action to produce and ship the parts at the time. In the months that followed, the size of the recall announced Feb. 7 would balloon and spark an auto-safety crisis, casting a shadow over the industry and leading to widespread calls for faster action by auto makers addressing safety concerns.
A massive intelligence-gathering network of RCMP video cameras, radar, ground sensors, thermal radiation detectors and more will be erected along the U.S.-Canada border in Ontario and Quebec by 2018, the Mounties said Tuesday. The $92-million surveillance web, formally known as the Border Integrity Technology Enhancement Project, will be concentrated in more than 100 “high-risk” cross-border crime zones spanning 700 kilometres of eastern Canada, said Assistant Commissioner Joe Oliver, the RCMP’s head of technical operations. Airport search not racial profiling when based on customs officers’ on-the-job experience: court Customs officers are not guilty of racial profiling when they use on-the-job experience to decide who to stop and search at Canada’s airports, the Federal Court of Appeal has ruled.
“Officers on the front line, such as the officer herein, cannot be expected to leave their experience — acquired usually after many years of observing people from different countries entering Canada — at home,” Justice Marc Nadon said, writing on behalf of a three-person appeal panel. Justice Nadon made the comment in overturning a tribunal decision that quashed an $800 fine imposed against an Ottawa woman, Ting Ting Tam, who failed to declare some pork rolls in her luggage. “The concept involves employing unattended ground sensors, cameras, radar, licence plate readers, both covert and overt, to detect suspicious activity in high-risk areas along the border,” Assistant Commissioner Oliver told security industry executives attending the SecureTech conference and trade show at Ottawa’s Shaw Centre. “What we’re hoping to achieve is a reduction in cross-border criminality and enhancement of our national security.”
The network of electronic eyes is to run along the Quebec-Maine border to Morrisburg, Ont., then along the St. Lawrence Seaway, across Lake Ontario, and ending just west of Toronto in Oakville. The project was announced under the 2014 federal budget, but framed solely as a measure to improve the RCMP’s ability to combat contraband cigarette smuggling. The network will be linked to a state-of-the-art “geospatial intelligence and automated dispatch centre” that will, among other things, integrate the surveillance data, issue alerts for high-probability targets, issue “instant imagery” to officers on patrol and produce predictive analysis reports.
Investment into renewable energy projects in Australia has dropped by 70% in the last year, according to a new report by a climate change body. The Climate Council says foreign investors are going to other countries because Australia’s government has no clear renewable energy policy. Australia has gone from “leader to laggard” in energy projects, it added. Another new report says Australia will need to raise its carbon emission reduction target to 40% by 2025. The damning report on the state of renewable energy, entitled Lagging Behind: Australia and the Global Response to Climate Change, said the country was losing out on valuable business. Investment that could be coming to Australia was going overseas “to countries that are moving to a renewables energy future”, said Tim Flannery, one of the report’s authors. He said most countries around the world had accelerated action on climate change in the last five years because the consequences had become more and more clear.
The report found China had retired 77 gigawatts of coal power stations between 2006 and 2010 and aimed to retire a further 20GW by next year. It also said the US was “rapidly exploiting the global shift to renewable energy” by introducing a range of incentives and initiatives to investors. The future of Australia’s renewable energy industry remains highly uncertain, the report concluded, because of a lack of clear federal government renewable energy policy. “Consequently investment in renewable energy in 2014 has dropped by 70% compared with the previous year,” it said. The second new report, by the Climate Institute, calls on Australia’s government to announce an “independent, transparent” process for setting the post 2020 carbon emission reduction targets. Erwin Jackson, deputy chief executive of the climate body, said too much of the political debate had “ignored growing scientific, investment and international realities”.
Australia’s most important trading partners and allies, such as China, the US and the European Union are strengthening their responses to climate change. Australia will be left in the wake of these big economies (and big emitters), according to the latest Climate Council report Lagging Behind: Australia and the Global Response to Climate Change. Australia’s retreat from being a global leader at tackling climate change is as impressive as our recent performances at the cricket. Looking on the bright side, even countries not known for their sunshine like Germany are going solar in a big way. Global momentum is building as more and more countries invest in renewable energy and put a price on carbon. 39 countries are putting a price on carbon. The EU and China (now with seven pilot schemes up and running) are home to the two largest carbon markets in the world, together covering over 3,000m tonnes (MtCO2) of carbon dioxide emissions.
There’s also plenty of action in the US: 10 states with a combined population of 79 million are now using carbon pricing to drive down emissions, including California, the world’s ninth largest economy. Yet, here in Australia, we now hold the dubious distinction of being the first country to repeal an operating and effective carbon price. Like carbon pricing, support for renewables is also advancing worldwide. In the last year, more renewable energy capacity was added than fossil fuels. Globally renewables attracted greater investment with US$192bn spent on new renewable power compared to US$102bn in fossil fuel plants. China is leading the charge on expanding renewable capacity. At the end of last year, China had installed a whopping 378GW of renewable energy capacity – about a quarter of renewables capacity installed worldwide, and over seven times Australia’s entire grid-connected power capacity.
The new U.S. plan to spend $6 billion fighting Ebola has a hidden agenda that aid workers approve of: not only stamping out the epidemic in West Africa, but starting to build a health infrastructure that can prevent this kind of thing from happening again. President Barack Obama’s $6.18 billion request is an enormous amount of money – six times what the U.S. has already committed and far more even than what the World Health Organization says is needed. Most is going for full frontal assault on Ebola – one that hasn’t really gotten off the ground yet, months into an epidemic that has been out of control despite an outcry from international groups and governments alike. But billions are also being quietly allocated to building a health care system in the countries suffering the most – a less sexy approach that could prevent another epidemic in the future. Most aid groups are focused on eradicating the virus, which has infected at least 13,000 people, probably more, and killed at least 5,000 of them.
That’s where the public support is; donors and taxpayers alike prefer to focus on a specific goal, and an emergency always gets attention. “Had we had those things in place, we would have detected this a lot earlier.” “We are not really a developmental organization,” said Dr. Armand Sprecher of Médecins Sans Frontières (Doctors Without Borders), one of the main groups fighting Ebola in West Africa. MSF focuses on providing targeted medical care. And while that has to be the first priority, it’s important to keep an eye on the long game, says Dr. Raj Panjabi, a founder and CEO of Last Mile Health, an aid group focused on helping people in the most remote corners of the world. “The goal has to be to not just contain Ebola,” Panjabi told NBC News. Ebola spread silently in villages and remote communities where there were no health care workers to diagnose Ebola and no way for them to report it even if they did catch it. “Had we had those things in place, we would have detected this a lot earlier,” said Panjabi.
And once again the markets are happily and excitedly awaiting more free zombie capital from a major central bank, this time the ECB. Of course this is capital the markets, judging from where stock exchanges find themselves, absolutely don’t need, but, you know, gift horses have foul breath and all that.
It’s some 15 years ago since the dotcom bubble started to burst, and half that long since the US (and Spanish, and Irish) housing bubble began to show what it was truly made of. So we’re due, and what do we find ourselves with today? Bubbles as far as the eye can see that everyone denies are bubbles. S&P, London housing, tech, biotech … No, Tesla and Netflix and Twitter are solid proof that it’s different this time, and companies don’t need to make an actual product, or even money, to be valued through the rooftops. Right? Oh, sweet Jesus…
I never see anyone talk about this, but the biggest reason why all banks should be fully restructured, all assets and liabilities, is not even, though it’s certainly true, that they are too big, that they have too much debt, or that they prey upon society, but it’s that restructuring bank debt will chase zombie money away all across the financial markets. That is long overdue.
All those QEs lead to humongous and growing distortions of the economy you and I have to live in. And since we have no access to the funny money, but it does get used to buy real assets, like land, food, water, at insanely bloated prices, it is hugely destructive to the world we need to survive in, to our future ability to survive. Whoever bought into these basic human needs at highly inflated “values” will be looking for a “healthy” return long after you and I will no longer be able to afford them. This will lead to severe human suffering, and only because we, as a society, refuse to be honest.
It’s not just some vaguely defined elite, it’s you too. You too are hoping for recovery, now, with your wealth intact. And it’s the Chinese who’ve managed to get hold of part of the $7 trillion or so Beijing stimulus, and that’s before it was leveraged (a scary thought indeed!), and use it to buy US land. It’s all zombies all the way down. And there’s no way that’s not going to crash.
As long as banks don’t have to fess up to their losses, lots of other parties don’t have to either. That’s why there are so many people and institutions who label themselves “investors”, and often even borrow to buy stocks, who are just as much zombies as the banks are. Their “capital” would be wiped out faster than an HFT flash if we would start being honest about what things are worth. But our governments and central banks have decided that we’re going to lie to ourselves up to some undetermined point in the future, when our economies are supposed to reach escape velocity, when, to put it in other words, our lies will become the truth.
The past 6+ years of attempts not to come clean are tremendously damaging to society at large because they for instance keep the hopes alive for recovery and growth, notwithstanding the fact that the whole charade facade is based on the refusal to let actual and honest markets determine what assets are worth. And how much more obvious does it have to get that you can and will never ever restore faith and confidence in markets as long as you keep distorting them with these neverending interventions aimed at, well, distorting them even more?
We lie to ourselves, as a society and as individuals, on a constant basis because we (have been led to) believe that we have no choice but to forever chase an illusive entity named economic growth that we don’t even need at all. We’re rich enough. More than rich enough.
The growth illusion is more destructive than anything in the history of the planet. And we know it, we – can – see it every day in the world around us. And we know, too, that we don’t need any more growth. What do any of us lack in a material sense? We also know that nothing can grow forever, and the cancerous tumor metaphor is as obvious as it is well-known. But if you can find one single politician or analyst where ever you live who doesn’t want more growth, please let me know.
A smart species? Us? I don’t see how, if we were, we could find ourselves where we do. We destroy the only reality we have, this planet, to chase illusions we don’t even have a real use for. I think I’ve said this before: the only thing that makes us different from amoeba, when provided a surplus of energy, is that we can watch ourselves use it to destroy the very things need to live. And be aware of it. So much for awareness. And for being smart.
If we really were smart, we’d stop this madness, starting with the bank bailouts and the voting for whoever promises the rosiest gardens and the biggest profits. There must be a better reason for us to have been put on this earth than to chase profits and eternal growth and faster cars and bigger TV screens and one mile high buildings and even deadlier weapons to kill one another with. Because if there’s not, or even just if we can’t find that reason, we should say goodbye and leave this humble abode for the incredible beauty around us to survive in.
The much-awaited Non-Farms Payroll Report didn’t produce any positive result for bulls. The report on Friday showed 192,000 jobs vs. 206,000 expected and the prior report was revised higher to 197,000 from 175,000. The unemployment rate remained at 6.7% vs 6.6% expected. Inside the numbers though conditions weren’t that rosy. In fact, looking at Janet Yellen’s “dashboard,” many data points weren’t positive including: declines in wages from 0.4% to 0.0%; only 1,000 new manufacturing jobs created; temporary Help came in at 29,000; retail was just 21,000 and leisure and travel was a mere 29,000 — not to mention that in combo these jobs are dominated by low-wage paying part-time work.
Plus, underemployment, the labor participation rate and the long-term unemployed numbers are still bothersome. Overall the report is dovish for the Fed, as these data points were so weak the Fed is less likely to raise interest rates any time soon. So, why the market decline? Bulls are too complacent and too many sectors were overstretched. Social Media and Biotech are two sectors exemplifying this condition. These sub-sectors in turn spilled losses over to larger parts of the market, notably the NASDAQ 100 (down 2.33%) and other major markets like small-caps. However, overseas markets for the most part were able to avoid much of the selling.
For much of the past year, Tesla Motors seemingly could do no wrong in investors’ eyes. An early unbroken string of quarterly losses, ambitions to build a huge battery factory: no matter. Shareholders kept pushing the company’s stock up, by about 50% this year. But on Friday, the market had second thoughts about its onetime darling, as Tesla shares tumbled nearly 6%. That sudden turnaround played out again and again in the once-high flying technology and biotechnology stocks that propelled the markets for over a year. The Icarian Tumble of beloved names, like NXP Semiconductor and the biopharmaceutical company Alexion, signals a potential shift in investors’ belief in chasing eye-popping growth.
What remains to be seen is whether the damage has been contained, or even if these stocks have finally hit earth. All that is apparent now is that many “momentum” stocks, those that had drawn buyers because of their ascending trajectories, ran out of steam on Friday. While the three major market indexes were down that day, the Nasdaq composite index fell by more than double the descent of the Standard & Poor’s 500-stock index or the Dow Jones industrial average. The Nasdaq began to wobble a little before 11 a.m., and then commenced a full-on tumble, ending the day down 2.6% at 4,127.73.
Behind the index’s plunge was its very nature as the home of many of the highest highfliers, whose valuations have soared to spectacular levels. Over all, the Nasdaq trades at 31 times the reported earnings of its constituent companies, or nearly twice the ratio seen with the S.&P. 500. “There is concern that we could be at a near-term market peak,” said Dane Leone, the head of United States market strategy for Macquarie. If that is true, he added, investors rightly worried about holding onto stocks that were correlated so closely with overall market performance.
When Mario Draghi flies to the U.S. this week, he will leave a 1 trillion-euro ($1.4 trillion) question mark hanging over Europe. While the European Central Bank president can show his new quantitative-easing plan to officials at the International Monetary Fund meetings in Washington, he has yet to reveal his full hand to investors on its design. That suspense risks setting them up for disappointment, according to economists at UniCredit SpA and Deutsche Bank AG.
With the revelation last week that the ECB has simulated an anti-deflation QE program deploying as much 1 trillion euros in bond purchases, Draghi and his colleagues can expect intensifying scrutiny of the measure he divulged on April 3. Executive Board members Vitor Constancio and Yves Mersch and Governing Council members Jens Weidmann and Ewald Nowotny are all due to make public appearances today. “All this talk about QE has gotten markets rather excited,” Erik Nielsen of UniCredit wrote in a note yesterday. “I am sure the ECB – like most of us – is happy about this, but action is not imminent. What happens when markets realize that this was all just a semi-public discussion of the toolbox – – and not what will happen, unless we get an emergency?”
The global economy seemed to be on the mend when the International Monetary Fund met for its spring meeting in Washington 10 years ago. Alan Greenspan had cut official interest rates in the US to 1% after the collapse of the dotcom boom and the world’s biggest economy had responded to the treatment. Gordon Brown was chancellor of the exchequer and the UK was in its 12th year of uninterrupted growth. Companies in the west were flocking to China now that it was part of the World Trade Organisation. The talk was of offshoring, just-in-time global supply chains and integrated capital markets.
The expectation was that the good times would last for ever. No serious thought was given to the notion that total system failure was just around the corner. Faith in the self-correcting properties of open markets was absolute. When the crash duly came, a self-flagellating IMF confessed that it had been guilty of groupthink. It had either ignored the signs of trouble or played down their significance when it did spot them. The fund has learned some hard lessons from this experience. Downside risks to the forecasts in its half-yearly World Economic Outlook (WEO) are now exhaustively catalogued.
The world of 2014 is not dissimilar to that of 2004. The boost provided by cheap money has got the global economy moving. Inflation as measured by the cost of goods and services is low but asset prices are starting to hum. Financial markets have got their mojo back. Deals are being done, big bonuses paid. The received wisdom is that the worst is over and that the prospects for the global economy will strengthen as the remaining problems are ironed out.
In the twelve months to January, the lending of U.S. banks to households increased about 3% while, over that period, their loanable funds (excess reserves) soared by an incredible 59.4%. Clearly, massive monthly asset purchases by the U.S. Federal Reserve (Fed) were of no great help. The banks’ near retreat from their core business (consumer financing), along with sluggish income growth and a large slack in labor markets, weakened all the key pillars of private consumption.
Is it any wonder, then, that the inflation adjusted consumer spending – 70% of the U.S. economy – was growing at a rate of 2.2% in the first two months of this year, after a lackluster 1.9% growth during 2013? The void left by the weak bank lending to consumers has been filled by nonbank financial institutions (finance companies, credit unions, etc.). Lending to households by these companies rose a whopping 9% in the year to January, and was 47% higher than the amount of consumer loans booked by commercial banks.
Hence an interesting question of monetary policy: Why do banks prefer to keep their huge excess reserves ($2.5 trillion at the last count) at the Fed at an interest rate of 0.25% instead of making car loans at 4.4% or two-year personal loans at 10.2%? I can take a guess at some answers, but that is irrelevant. The important public policy issue here is what the Fed makes of all this, and how it intends to solve this well-known problem plaguing the U.S. economy over the last few years.
Monthly asset purchases – on top of a virtually zero% interest rate – have been a relatively easy part of a sweeping crisis management. The verdict on that policy is given by America’s demand, output and employment. It is perhaps time to adjust policy instruments and intermediation techniques to address some apparently structural issues whose solution does not seem to be in the wall of money thrown at the U.S. economy. I have no doubt that the Fed’s highly capable technical staff is fully aware of these problems, and that – given a chance – they could probably come up with specific remedies instead of continuing with an excessive monetary creation.
One of the first investors in Pimco’s $232 billion Total Return fund has begun looking for an alternative fixed income manager as concerns over the world’s biggest bond house escalate. The Orange County Employees Retirement System, situated just 12 miles from Pimco’s headquarters in California, has instructed an investment consultant to search for an “additional” domestic fixed income portfolio manager. The $11.5 billion pension scheme has invested in Pimco chief executive Bill Gross’s Total Return strategy since 1982, but it has put the fund on watch due to “organisational and personnel issues” at the company.
The setback follows the resignation of chief executive Mohamed El-Erian in January, which triggered widespread criticism from investors and analysts about Pimco’s recent investment performance and Mr Gross’s management style. The Californian pension fund has $1.3 billion invested in Pimco and $582 million in the Total Return fund, which has suffered $52 billion of outflows in the past 11 months. Pimco declined to comment on Ocer’s decision but a spokesperson said the bond house has seen “considerable interest from institutional and retail investors in fixed income strategies” beyond its core bond funds.
Concerns are growing, however. Investment group Columbia Management last month replaced Pimco with rival US fund company TCW for a $1.3 billion bond fund mandate. The $28.6 billion Indiana Public Retirement System also recently dropped two Pimco mandates worth $50 million and placed the remaining investments with the group on watch. Several pension funds, including the California-based City of Fresno retirement board and the $8.5 billion North Dakota state board of investments, have placed Pimco on watch since Mr El-Erian quit the Newport Beach-based company. Calpers, the world’s biggest pension fund, has not placed Pimco on a formal watch list, but a spokesperson said: “We are paying close attention to developments. Calpers staff has tremendous respect for the staff at Pimco and we are monitoring the issue and will keep our board aware of the changes.”
Since 2008, the number of people who call themselves middle class has fallen by nearly a fifth, according to a survey in January by the Pew Research Center, from 53% to 44%. Some 40% now identify as either lower-middle or lower class, compared with just 25% in February 2008. According to Gallup, the percentage of Americans who say they’re middle or upper-middle class fell eight points between 2008 and 2012, to 55%. And the most recent National Opinion Research Center’s General Social Survey found that the vast proportion of Americans who call themselves middle or working class, though still high at 88%, is the lowest in the survey’s 40-year history. It’s fallen four percentage points since the recession began in 2007.
The trend reflects a widening gap between the richest Americans and everyone else, one that’s emerged gradually over decades and accelerated with the Great Recession. The difference between the income earned by the wealthiest 5% of Americans and by a median-income household has risen 24% in 30 years, according to the Census Bureau. Whether or not people see themselves as middle class, there’s no agreed-upon definition of the term. In part, it’s a state of mind. Incomes or lifestyles that feel middle class in Kansas can feel far different in Connecticut. People with substantial incomes often identify as middle class if they live in urban centers with costly food, housing and transportation.
Former U.S. Treasury Secretary Larry Summers has urged global leaders to form a global growth strategy to combat economic stagnation and has called upon the U.S. government to ramp up investment expenditure. Writing in the the Financial Times on Monday, Summers took the opportunity to openly address central bankers and finance ministers who are gathering in Washington this week for the biannual International Monetary Fund meetings. “In the U.S. the case for substantial investment promotion is overwhelming. Increased infrastructure spending would reduce burdens on future generations, not just by spurring growth but also by expanding the economy’s capacity and reducing deferred maintenance obligations,” he said.
“Government could do much at no cost to promote private investment including authorizing oil and natural gas exports, bringing clarity to the future of corporate taxes, and moving forward on trade agreements that open up foreign markets.” Since the global financial crisis of 2008, loose monetary policies from central banks across the globe have resulted in record low interest rates in the hope of stimulating borrowing and spending. This has been accompanied by asset purchases by the U.S. Federal Reserve and others. Summers believes that while this may be better than the strategies put in place during the Great Depression of the 1930s, it doesn’t necessarily have a big impact on spending decisions.
Any spending this loose monetary policy induces tends to represent a pulling forward rather than an increase of demand, he said, adding that no-one can confidently predict the ultimate impact on markets of the unwinding of central bank balance sheets. “Creative consideration should also be given to ways of mobilizing the trillions of dollars in public assets held by central banks and sovereign wealth funds largely in the form of safe liquid assets to promote growth,” he said. “In a globalized economy, the impact of these steps taken together is likely to be substantially greater than the sum of their individual impacts. And the consequences of national policy failures are likely to cascade.”
The catchall response to worries about China’s credit-bloated economy is don’t worry, the government controls the money, and with it, the ability to fix or patch-up any problems. That means talk of a Lehman-style financial crisis, a Minsky moment or a property implosion are all rather far-fetched, as Beijing simply won’t allow it. Indeed, last week it was very much business as usual as a mini-stimulus was announced to shore up flagging growth. This will see more affordable housing being built, more railways, as well as a tax cut for small businesses.
At the same time, guidance from China’s central bank was unequivocally reassuring. The People’s Bank of China (PBOC) released a brief statement after its quarterly policy meeting saying economic conditions are in a “reasonable range,” though the economy faced complicated situations. It also reaffirmed a commitment to keep the exchange rate at an “appropriate level,” while adding that domestic price levels are basically steady. This sanguine outlook is a contrast to red flags at various agencies, from the IMF to the Bank of International settlements, about China’s dangerous build-up of credit, now estimated at over 200% of GDP. Such warnings are nothing new perhaps, but the difference this time is that the PBOC no longer controls all the money.
It has become increasingly clear just how much foreign capital China has borrowed, despite its closed capital account. And this foreign capital is getting edgy as the yuan weakens and markets brace for further Fed tapering. According to one estimate by the Bank of International Settlements (BIS), foreign credit to China has more than tripled over four years, rising from $270 billion to $880 billion in March 2013. Much of that lending has come through Hong Kong and Singapore. Brokerage Jefferies estimates that Hong Kong’s financial system has become linked to an “invisible carry trade” with a parabolic surge in lending to mainland China. Since 2009 Hong Kong banks have lent almost $400 billion.
China’s development has been driven by investment, which represents around 50% of Gross Domestic Product. About half of this investment is in property. Infrastructure investment is also high, far greater annually than the U.S. and Europe, but also than other emerging markets — double that of India and around four times that of Latin America. China’s total investment levels are also 10%-15% of GDP higher than comparable countries, such as Japan and South Korea, at the equivalent stage of development. China’s central government wants to enhance domestic demand and consumption, but the task is made even more difficult by the influence that state-owned enterprises command over the national economy.
China has about 150,000 SOEs, which control around 50% of industrial assets and employ around 20% of the nation’s workforce. These SOEs receive plenty of government support — except they aren’t as profitable as their private sector peers. SOEs have become a drag on China’s economic potential and are need reform. How, and how much, that will happen is questionable. That said, China’s consumption has not been static, growing strongly at around 8% annually over the past decade. However, the growth in consumer spending has been slower than that of the overall economy and the increase in gross fixed investment, at an average annual growth of over 13% annually, has dropped private consumption to about 35% of GDP.
If China’s economy grows at 8% annually , consumption needs to grow by around 11% just to increase the share of consumption one percentage point, 36% of GDP, in a year. Assuming a growth rate of 8% and consumption increases of 11%, it would take around five years to increase consumption to 40% of GDP. If growth slows, then the difficulty increases.
As China frets about meeting its target of about 7.5% growth in 2014, it’s time for more stimulus. The State Council, China’s cabinet, announced plans this week to further expand railways across the country, renovate dilapidated urban housing, and provide new tax breaks for small businesses. Many analysts are expecting a return to looser credit policies this year as well. But what China considers unacceptable levels of gross domestic product growth would be the envy of most other countries. So why do China’s leaders demand such rapid rates of economic expansion?
A clue to that is found in Premier Li Keqiang’s recent work report, China’s version of a state of the union speech. Creating enough jobs – mentioned 11 times in the document released on March 5 – is what drives Chinese officials’ obsession with fast-rising GDP. China needs high levels of growth – at least 7%, says Li – to ensure enough jobs for 7.2 million college grads and 10 million people flooding cities from the countryside every year. China’s leaders have set a target of producing at least 10 million jobs this year, and a record-high 13.1 million urban jobs were added last year. “Employment is the basis of people’s well-being,” Li said in the work report. “We will steadfastly implement the strategy of giving top priority to employment.” The trouble is, new stimulus mainly means more investment-driven expansion, which already accounts for about half of the economy. That’s problematic given industrial overcapacity and soaring debt levels held by local governments and companies.
Short-seller Jim Chanos says China is “panicking” in the face of a stalling economy. As the fast-growing economy now deals with a lending bubble, Chanos told CNBC’s “Squawk Box” on Thursday his long-running bearish outlook is now coming to fruition. On Wednesday, the Chinese government vowed to cut taxes on small firms and said it would boost railway construction. Chanos said China has rolled out such “mini-stimulus” programs for years. “One has to keep in mind, if you’re a Western investor in stocks and bonds in China, you are investing in a scheme, not a market,” Chanos said. “This is important. You are basically providing capital to them and you might not see any profits or dividends from them.”
The country still houses massive stretches of unoccupied residential complexes, with three to six years of unsold supply left over outside of Beijing and Shanghai, Chanos said. Chinese growth figures don’t account for sales, so the country’s enviable growth rate includes construction projects left empty, Chanos said. China fueled its construction boom largely on credit. “Anybody who thinks that can’t collapse because of too much lending has not looked at economic history,” Chanos said.
For the first time since 2007, investors are willing to lend five-year money to Spain at a lower interest rate than they charge the U.S. government. Yes, that’s not a typo. Spain, where more than a quarter of the nation is unemployed is paying less than the world’s biggest economy, which also happens to own the global reserve currency of choice and the deepest and most liquid bond market anywhere. Today, Spain’s five-year bond yield dropped to as low as 1.71%, compared with about 1.72% for the comparable Treasury yield.
Provided we believe that “in price, is knowledge” — an increasingly bankrupt tenet in these days of central bank intervention and manipulation – what does this tell us? For one thing, it reinforces the view that credit ratings on sovereign borrowers are pretty meaningless. Uncle Sam still enjoys the top Aaa grade from Moody’s and AA+ from Standard & Poor’s, while Spain languishes among the alphabet spaghetti of Baa2 (Moody’s) and BBB- (S&P).
So, Spain would have to be upgraded by no fewer than eight levels at Moody’s to get the same credit score as the U.S. Just as telling, Spain would only have to be downgraded by two levels to be classified as junk. The main implication, though, is that investors are increasingly convinced that Mario Draghi and the European Central Bank are about to lace up their bond-buying boots, just as Janet Yellen and the Federal Reserve are scaling back on their yield-suppressing debt purchases. The bond market is telling us that it thinks quantitative easing is coming to the euro region.
When Eisenhower signed the 1956 Bank Holding Company Act banning interstate banking, he left a large loophole as a conciliatory gambit: a gray area as to what big banks could consider “financially-related business,” which fell under their jurisdiction. In practice, that meant that they could find ways to expand their breadth of services while they figured out ways to grow their domestic grab for depositors. On May 26, 1970, the “Big Three” bankers— Wriston and Rockefeller, along with Alden “Tom” Clausen, chairman of Bank America Corporation—appeared before the Senate Banking and Currency Committee to press their case for widening the loophole.
During the proceedings, Wriston led the charge on behalf of his brethren in the crusade. Tall, slim, elegantly dressed, and the most articulate of the three, he dramatically called on Congress to “throw off some of the shackles on banking which inhibit competition in the financial markets.” The global financial landscape was evolving. Ever since World War II, US bankers hadn’t worried too much about their supremacy being challenged by other international banks, which were still playing catch-up in terms of deposits, loans, and global customers.
But by now the international banks had moved beyond postwar reconstructive pain and gained significant ground by trading with Cold War enemies of the United States. They were, in short, cutting into the global market that the US bankers had dominated by extending themselves into areas in which the US bankers were absent for US policy reasons. There was no such thing as “enough” of a market share in this game. As a result, US bankers had to take a longer, harder look at the “shackles” hampering their growth. To remain globally competitive, among other things, bankers sought to shatter post-Depression legislative barriers like Glass-Steagall.
They wielded fear coated in shades of nationalism as a weapon: if US bankers became less competitive, then by extension the United States would become less powerful. The competition argument would remain dominant on Wall Street and in Washington for nearly three decades, until the separation of speculative and commercial banking that had been invoked by the Glass-Steagall Act would be no more.
Hundreds of pro-Kremlin demonstrators seized official buildings in Ukraine’s eastern regions, where separatist unrest turned deadly last month, urging referendums on joining Russia. Buildings in the cities of Donetsk, Kharkiv and Luhansk were occupied yesterday by protesters with Russian flags who also called for a boycott of May 25 presidential elections. Amid the unrest, acting President Oleksandr Turchynov canceled a trip to Lithuania and convened a special meeting of law enforcement officials, according to the website of the Ukrainian parliament.
Ukraine’s government, which came to power after Kremlin-backed President Viktor Yanukovych fled the country last month, has accused Russia of stoking tensions in the country’s eastern regions following the annexation of Crimea. The U.S. and NATO have urged Russian President Vladimir Putin to pull back thousands of troops massed on his neighbor’s eastern border in the worst standoff since the Cold War.
The idea of reverse gas flow from Europe to Ukraine raises lots of questions, says Gazprom CEO Aleksey Miller, as the physical reverse flow is hardly possible and a virtual one questions the legality of the reverse flow itself. “We very much doubt whether reverse flow from Slovakia to, say, Donetsk, Kharkov or Kiev is physically possible,” Gazprom CEO Aleksey Miller said in an interview with Russian NTV channel. According to Miller, the pipe “can’t have gas flowing in both directions at the same time,” that’s why it cannot be a physical reverse flow but a virtual one on paper, “which questions those who gave Ukraine the right to control Gazprom gas in the Ukrainian pipe.”
“Our terminals are in Europe. We will certainly look very carefully into that to see if this scheme is legal. I think this issue requires careful study and consideration. For example, I think that the European companies that plan to supply gas to Ukraine through such reverse flow should think twice whether such transactions are legal,” said Miller. The issue of the reverse gas deliveries was raised by Ukraine’s coup-appointed PM Arseniy Yatsenyuk who said on Wednesday that Ukraine is looking forward to a political decision by the EU to start reverse gas supplies from Slovakia. Yatsenyuk also added on Saturday that Ukraine may get up to 20 billion cubic meters of reverse gas from Slovakia, Poland and Hungary.
Supermarkets have been forced to defend their efforts to tackle the UK’s food waste crisis, after being accused by MPs of contributing to the “morally repugnant” mountain of produce thrown away each year by shoppers. A report published today by the House of Lords EU Committee, Counting the Cost of Food Waste, urged supermarkets to end “Buy One, Get One Free” promotions to help cut the 15 million of tonnes of food wasted in the UK each year, at a cost of £5bn.
According to the report, the supermarkets are able to pass on food waste “from the store to the household” by the use of special offers. Baroness Scott of Needham Market, the chair of the committee, said: “We are urging the supermarkets to look again at offers such as ‘buy one get one free’, which can encourage the excess consumption that leads to food waste. “We also think supermarkets must work much more closely with their suppliers so as not to cancel pre-ordered food which has been grown, is perfectly edible and is then ploughed straight back into the field.”
But the British Retail Consortium, the industry body that represents the supermarket chains, said the Lords committee should focus on “evidence-based policy, rather than being distracted by perception”.
A spokesman said: “The report is useful in highlighting the need for everyone, including retailers, government and consumers, to make cutting food waste a priority. However, it appears to have not appreciated what is already happening.
The media has been overwhelmed by talk of Crimea joining Russia, but all are ignoring the fact that the ‘Five Eyes’ intelligence alliance, principally the US, has annexed the whole world through their spying, said WikiLeaks founder Julian Assange. Speaking at the WHD.global conference on Wednesday, Assange – who has been living under asylum in Ecuador’s embassy in London since 2012 – pointed out that there is a need for independent internet infrastructure for countries to maintain sovereignty to resist US control over the majority of communications. The annual conference is dedicated to global surveillance and privacy matters.
“To a degree this is a matter of national sovereignty. The news is all flush with talk about how Russia has annexed the Crimea, but the reality is, the Five Eyes intelligence alliance, principally the United States, have annexed the whole world as a result of annexing the computer systems and communications technology that is used to run the modern world,” Assange said. “So it’s a matter of national sovereignty. If there is not at least some national network that can be maintained in a moment of economic or political conflict with the United States, then there is simply too much leverage on nation states to be able to effectively defend the interests of their peoples.”
Assange noted that the revelations leaked by Edward Snowden on NSA and GCHQ spying have caused a new wave of resistance against US control, shifting the geopolitical forces in Europe. “These revelations about the United States and GCHQ annexing our new world of the internet has produced market forces to do something about it. But they’re also playing into, within Europe, a very interesting geopolitical phenomenon, which is Germany’s new leadership of Europe, and it demonstrating its new leadership of Europe.” “One of the ways to demonstrate its leadership is to demonstrate how someone else does not control you. Here we have an example of Angela Merkel and German society as a whole striving slowly to demonstrate some kind of independence in relation to the United States,” he said.
BP is expected to come under pressure at its annual meeting this week to explain how its decision to take a 20% stake in Russia’s biggest oil company, Rosneft, will be affected by the country’s standoff with the west over Crimea. BP’s annual meeting, held at the ExCel centre in London’s docklands on Thursday, could see questions from shareholders about Rosneft, continuing legal threats in the US and executive pay and environmental issues. The British oil group has already been drawn into the row over Russia’s annexation of Crimea with calls for Rosneft’s delisting from the London Stock Exchange.
There is a risk that the Russian president, Vladimir Putin, could expropriate assets from western companies, including BP, said independent analyst Louise Cooper. BP’s Rosneft stake accounts for a third of its production volume and gives it a stake in Arctic exploration. In addition, BP still operates under the cloud of the Deepwater Horizon disaster. It has already paid out billions in compensation to victims but could face further penalties of up to $20bn (£12bn), on top of the existing $40bn bill, if it is found guilty of gross negligence by the US department of justice.
HSBC oil analysts Gordon Gray and Peter Hitchens wrote of the 2010 disaster in the Gulf of Mexico : “In the case of gross negligence 1) BP’s balance sheet looks strong enough to weather it in our estimates, and 2) we would expect a multi-year appeal process to mean the near-term financial impact would be limited.” They also thought BP’s strategy presentation in early March “did a good job of shifting the strategic emphasis from the post-Macondo [Gulf of Mexico] recovery to its longer-term growth potential”. BP can point to a recent deal with US environmental protection authorities that will enable the oil company to bid for drilling rights in the Gulf of Mexico.
As advances in horizontal drilling and hydraulic fracturing have boosted U.S. crude oil and natural gas production to multidecade highs, midstream companies have struggled to keep up with the surge in output. In remote resources plays like North Dakota’s Bakken shale, where pipeline capacity is limited, many companies are shipping the majority of their production by rail. Midstream companies recognize these challenges and are investing heavily in the necessary infrastructure to transport, store, and process the oil, gas, and natural gas liquids being pumped out of U.S. shale plays. But to keep up with the expected growth in domestic hydrocarbon production, they will have to spend a whole lot more over the next several years. Let’s take a closer look at exactly how much, as well as one stock to play the trend.
Energy companies will need to invest a whopping $641 billion on U.S. and Canadian midstream oil, gas, and natural gas liquids infrastructure over the next two decades, according to a recent study by consultancy ICF International on behalf of the Interstate Natural Gas Association of America. That equates to annual spending of roughly $29.1 billion through 2035, almost triple the $10 billion companies have shelled out each year over the past decade.
So, where exactly will that money go? According to the study, roughly half, or about $14.2 billion per year, will need to be spent on midstream infrastructure to accommodate the continued growth in U.S. natural gas production. Companies will need to build some 35,000 miles of new transmission pipelines and 303,000 miles of gas gathering lines, says the report, titled “North American Midstream Infrastructure Through 2035: Capitalizing on Our Energy Abundance.”
In addition to heavy spending on gas infrastructure, the study estimates that some $12.4 billion per year will have to be directed toward infrastructure designed to handle crude oil, including pipelines, gathering lines, and storage tanks. Lastly, another $2.5 billion in annual spending will be required for infrastructure associated with natural gas liquids such as ethane, butane, and propane, including NGL pipelines, fractionation, and export facilities.
A gigantic resort proposed for far north Queensland does not need federal environmental assessment, its backers have argued, even though it includes two casinos, eight accommodation towers, a golf course and a 33-hectare lake filled via a 2.2km pipeline from the Great Barrier Reef. The $8 billion Aquis project, slated for Yorkeys Knob, north of Cairns, is described as “Australia’s only genuine, world-class, integrated resort”. The resort, which would cover 340 hectares, is backed by the Hong Kong investor Tony Fung, who last year bought the Reef Casino Trust, which operates the Cairns casino.
An initial advice statement from July last year describes the casino as the “man-made wonder of the world” that north Queensland is missing. The development would include accommodation for up to 12,000 guests, an 18-hole golf course, tennis courts and the artificial lake. The resort would be built on the Barron river floodplains, which drains into the Great Barrier Reef lagoon, on land used mostly as sugar cane plantations. The proposal has divided the small community of Yorkeys Knob.
In a submission to the federal Department of the Environment last week, Aquis maintained it did not require a commonwealth environmental assessment process, as any impacts on the surrounding environment – including the reef – were not significant enough to warrant it. Should the proposal be considered for a “controlled action” under environmental legislation, a report appended to the submission is good enough. “A draft EIS [environmental impact statement] has been completed but not submitted to the co-ordinator-general, pending finalisation of a related issuing of a casino licence that is critical to the project viability,” the company said.
Australian household debt has hit a record 177% of annual disposable income while housing valuations are “flashing red”, according to Barclay’s chief economist, Kieran Davies. “House prices now equate to 4.3 times annual income and 28 times annual rent, both within a fraction of their historic highs,” Mr Davies said. The respected former treasury economist believes the RBA is “worried about the strength of the housing market, where the evolution from recovery to boom has brought jawboning by the governor into play.”
“We’re paying more attention to house prices and credit than the currency to see if the RBA changes its mind on macro-prudential tools [which limit lending growth] to gauge if housing strength could trigger a rate rise this year.” In March RBA governor Glenn Stevens warned “we need to be alert to the possibility that the past year of strong rises in dwelling prices leads people to assume that this is the norm”.
“Were such an assumption to lead to increasing speculative activity, accompanied by a renewed increase in household leverage with all the associated risks to the housing market … that would be unwelcome,” Mr Stevens said. Australian house prices leapt almost 11% over the 12 months to 31 March to record levels in absolute terms, with capital gains of 15 % experienced in the nation’s largest city, Sydney. Using ABS data on total Australian household liabilities and incomes, including small business debts that are excluded from similar RBA metrics, Barclays found that the ratio of household debt to disposable incomes has hit a record of 177%.
“This is up from a recent low of 173% and exceeds the previous high of 175% reached in 2010,” Mr Davies noted. In striking contrast to consumers in the US and UK, Australian families have boosted debt relative to incomes since the 2008 crisis. The RBA put the household debt to income ratio at 149% in December, just a touch off its 153% peak in 2006.
Wind power in the U.S. is on a respirator. The $14 billion industry, the world’s second-largest buyer of wind turbines, is reeling from a double blow — cheap natural gas unleashed by the hydraulic fracturing revolution and the death last year of federal subsidies that made wind the most competitive of all renewable energy sources in the U.S. Without restoration of subsidies, worth $23 per megawatt hour to turbine owners, the industry may not recover, and the U.S. may lose ground in its race to reduce dependence on the fossil fuels driving global warming, say wind-power advocates.
They place the subsidy argument in the context of fairness, pointing out that wind’s chief fossil-fuel rival, the gas industry, is aided by the ability to form master limited partnerships that allow pipeline operators to avoid paying income tax. This helps drive down the cost of natural gas. “If gas prices weren’t so cheap, then wind might be able to compete on its own,” said South Dakota’s Republican Governor Dennis Daugaard. Consider that gas averaged $8.90 a million British thermal units in 2008 and plunged to $3.73 last year, making the fuel a cheaper source of electricity for utilities. Congress allowed the wind Production Tax Credit to expire last year, and wind farm construction plunged 92%.
Towering flames atop oil wells break the inky darkness in the badlands on North Dakota’s Fort Berthold Indian Reservation. The flares of natural gas set grass fires on the prairie where Theodora Bird Bear’s ancestors hunted buffalo and create a driving hazard on rural roads. “At nighttime, clouds of gravel dust from semis are lit up with flaring lights,” said Bird Bear, 62, who can see flames shooting from a well behind land where she grows red beans, corn and squash. “It’s a hellish scene.” Twice as much natural gas is wasted through flaring than in 2012 amid an energy boom that’s propelled North Dakota’s torrid economic growth.
The state’s employment expansion has been the fastest in the U.S. for four years. In the rush to exploit the Bakken shale formation, which holds the nation’s second-largest oil supply, companies from Statoil to Whiting Petroleum are stepping in to try to capture more of what’s lost. Natural gas burned in flaring is a byproduct of crude oil. Without enough pipelines to transport the gas, or the refinery capacity to process it, about a third of what’s released each day, worth $1.4 million, goes up in smoke. Tribal members say as much as 70% of gas from wells on the reservation is flared. “We’re confessing that we are flaring a tremendous amount of gas right now,” Governor Jack Dalrymple, a Republican, said at a Bloomberg Link Conference, Energy 2020, in Washington on Feb. 24.
“Everybody feels it’s a huge waste, to say nothing of the environmental impact.” Drillers flared 340 million cubic feet, or 30%, of the 1 billion cubic feet of natural gas produced per day in January, about twice as much as the 184 million cubic feet burned per day two years ago, said Marcus Stewart, an analyst at Denver-based Bentek Energy. The lost revenue adds up to $1.4 million each day, he added. Energy executives say economic realities force them to start producing oil from wells before infrastructure is in place to haul away less-valuable natural gas. Bakken oil fetched $98.14 on April 4, while natural gas for May delivery fell to $4.439 per million British thermal units on the New York Mercantile Exchange the same day.