Dec 212016
 
 December 21, 2016  Posted by at 9:47 am Finance Tagged with: , , , , , , , ,  1 Response »
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Laurits Andersen Ring At Breakfast 1898

Most Expensive Housing Ever: A 1% Mortgage Rate Surge Changes Everything (MH)
This Christmas Americans Will Spend An Average Of $422 Per Child (EC)
Ray Dalio Says Animal Spirits Under Donald Trump Just Getting Started (F.)
Someone Has to Tell The Fed Inflation Is Not Accelerating (CEPR)
Brace Yourself For Italy’s Bankruptcy (Gavekal)
Italy Bank Rescue Won’t Fill $54 Billion Hole in Balance Sheets (BBG)
Top French Banks Sue ECB To Reduce Capital Demands (R.)
Spanish Banks Lose EU Case on Mortgage Interest Repayments (BBG)
India’s Small Businesses Facing ‘Apocalypse’ (G.)
Let The Yuan Fall Or Not? Beijing’s Big Burning Currency Question (SCMP)
Yuan Bears Strike as Capital Outflows Override PBOC (BBG)
To Problems With China’s Financial System, Add the Bond Market (NYT)
China’s Anticorruption Drive Ensnares the Lowly and Rattles Families (WSJ)
Smog Refugees Flee Chinese Cities As ‘Airpocalypse’ Blights Half A Billion (G.)
Obama Invokes 1953 Law To Indefinitely Block Arctic, Atlantic Drilling (CNBC)

 

 

Income vs prices has never been more expensive. There’s much more in Hanson’s article.

Most Expensive Housing Ever: A 1% Mortgage Rate Surge Changes Everything (MH)

BUILDER HOUSES: The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed. For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper. Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%’s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era. Bottom line: Builder prices are up 19% from 2006 but the monthly payment is 43% greater and annual income needed to qualify for a mortgage 83% more.

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‘T is the season to be plastic.

This Christmas Americans Will Spend An Average Of $422 Per Child (EC)

For many Americans, the quality of Christmas is determined by the quality of the presents. This is especially true for our children, and some of them literally spend months anticipating their haul on Christmas morning. I know that when I was growing up Christmas was all about the presents. Yes, adults would give lip service to the other elements of Christmas, but all of the other holiday activities could have faded away and it still would have been Christmas as long as presents were under that tree on the morning of December 25th. Perhaps things are different in your family, but it is undeniable that for our society as a whole gifts are the central feature of the holiday season. And that is why so many parents feel such immense pressure to spend a tremendous amount of money on gifts for their children each year.

Of course this pressure that they feel is constantly being reinforced by television ads and big Hollywood movies that continuously hammer home what a “good Christmas” should look like. Once again in 2016, parents will spend far more money than they should because they want to make their children happy. According to a brand new survey from T. Rowe Price, parents in the United States will spend an average of 422 dollars per child this holiday season… “More than half of parents report they aim to get everything on their kids’ wish lists this year, spending an average of $422 per child, according to a new survey from T. Rowe Price.” To me, that seems like a ridiculous amount of money to spend on a single child, but this is apparently what people are doing.

But can most families really afford to be spending so wildly? Of course not. As I have detailed previously, 69% of all Americans have less than $1,000 in savings. That means that about two-thirds of the country is essentially living paycheck to paycheck. So all of this reckless spending brings with it a lot of additional financial pressure. But because we are a “buy now, pay later” society, we do it anyway. We are willing to mortgage a little bit of the future in order to have a nice Christmas now. Another new survey has found that close to half the country feels “pressure to spend more than they can afford during the holiday season”…

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Possible only -beyond short term- with Fed money. Animal spirits sounds cute, but all investors have is money based on ultra cheap rates.

Ray Dalio Says Animal Spirits Under Donald Trump Just Getting Started (F.)

During the dark days of the financial crisis Ray Dalio, head of the world’s largest hedge fund Bridgewater Associates, published papers and YouTube seminars to describe the forces that drive the economy and explain why severe cycles like the credit collapse occur. The effort was intended to guide productive responses to the implosion of Wall Street, which crippled Main Street, and avert policies that could diminish a recovery. With the Dow Jones Industrial Average nearing a record 20,000, unemployment below 5% and the U.S. economy in the seventh year of a recovery, Dalio’s tomes on ‘how the economic machine works’ aren’t as top of mind as they once were. But that’s not to say Dalio, one of Wall Street’s weightiest hedge fund investors, has lost interest in the subject.

On Tuesday morning, Dalio published a monthly update that indicates he believes the U.S. economy is poised for a sudden and dramatic shift under President-elect Donald Trump. If the economic machine is presently churning along in a steady but somewhat muted recovery from the Great Recession, Dalio believes it may kick into overdrive as Trump implements a pro-business agenda that could stimulate the animal spirits of investors and businesses across United States. “[T]he Trump administration could have a much bigger impact on the US economy than one would calculate on the basis of changes in tax and spending policies alone because it could ignite animal spirits and attract productive capital,” Dalio states in a post published to LinkedIn. He adds, “regarding igniting animal spirits, if this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge.”

Dalio believes Trump has staffed his administration with business-people who will be inclined to take quick action on perceived drags on the economy, whether that involves taxation, regulation or labor laws. What’s also clear is Dalio believes there are presently major impediments to the economy that need to be lifted. “This new administration hates weak, unproductive, socialist people and policies, and it admires strong, can-do, profit makers,” says Dalio. The Trump administration “wants to, and probably will, shift the environment from one that makes profit makers villains with limited power to one that makes them heroes with significant power,” he adds [..] “A pro-business US with its rule of law, political stability, property rights protections, and (soon to be) favorable corporate taxes offers a uniquely attractive environment for those who make money and/or have money. These policies will also have shocking negative impacts on certain sectors,” Dalio says, without describing in more detail the winners and losers.

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The ongoing confusions about what inflation is. One key rule: if spending doesn’t rise, and by a lot, there will be no inflation. There may be higher prices for some things, but that’s not the same. And where could higher spending come from when 2/3 of Americans don’t even have $1000 saved for an emergency?

Someone Has to Tell The Fed Inflation Is Not Accelerating (CEPR)

The Federal Reserve Board raised interest rates last week and seem poised to do so again in the not distant future. The rationale is that the economy is now near or at full employment and that if job growth continues at its recent pace it will lead to a harmful acceleration in the inflation rate. We have numerous pieces raising serious questions about whether the labor market is really at full employment, noting for example the sharp drop in employment rates (for all groups) from pre-recession levels and the high rate of involuntary part-time employment. But the story of accelerating inflation is also not right. This is particularly important, since John Williams, the president of the San Francisco Fed, cited accelerating inflation as a reason to support last week’s rate hike, and possibly future rate hikes, in an interview in the New York Times.

Williams has been a moderate on inflation, so there are many members of the Fed’s Open Market Committee who are more anxious to raise rates than him. A close look at the data does not provide much evidence of accelerating inflation. The core PCE deflator, the Fed’s main measure of inflation, has risen 1.7% over the last year, which is still under the 2.0% target. This target is an average, which means that the Fed should be prepared to allow the inflation rate to rise somewhat above 2.0%, with the idea that inflation will drop in the next recession. Anyhow, the 1.7% rate is slightly higher than a low of 1.3% reached in the third quarter of 2015, but it is exactly the same as the rate we saw in the third quarter of 2014. In other words, there has been zero acceleration in the rate of inflation over the last two years.

Furthermore, even this modest acceleration has been entirely due to the more rapid increase in rent over the last two years. The inflation rate in the core consumer price index, stripped of its shelter component, actually has been falling slightly over the last year. It now stands at 1.1% over the last year. It is reasonable to pull shelter out of the CPI because rents do not follow the same dynamic as most goods and services. In fact, higher interest rates, by reducing construction, are likely to increase the pace of increase in rents rather than reduce them.

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Italy’s banks are about to do the country in.

Brace Yourself For Italy’s Bankruptcy (Gavekal)

Matteo Renzi has joined a long line of Italian prime ministers who failed to “reform” their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency to Germany’s. At the time of the euro’s launch in 1999, I argued that the risk profile of Italy would change from being an economy where there was a high probability of many currency devaluations to the certain probability of eventual bankruptcy. Sadly, that moment is not so far away.

The chart below tells the story of Italy’s recent economic history in two parts, namely, (i) March 1979 to March 1999, and (ii) March 1999 to the present. Italy joined the Exchange Rate Mechanism in 1979 at 443 lira per deutschemark, yet by 1990 frequent devaluations meant that rate had slid to about 750 lira. By the early 1990s, the Bundesbank was overseeing a newly unified German monetary system and in order to fight inflation it had driven real interest rates to 7%. By September 1992 the stresses on the system caused the UK, Sweden and Italy to exit the ERM, which meant another huge currency devaluation, pushing the lira as low as 1250 against the deutschemark, but delivering a huge tourist boom to boot.

Still, from 1979 to 1998 Italian industrial production outpaced that of Germany by more than 10%, while Italian equities outperformed German equivalents by 16% (this indicates that Italian firms were earning a higher return on invested capital than those in Germany). Then came the euro. By 2003 it was clear that Italy was uncompetitive and subsequently, Italian equities have underperformed German equities by -65%, reversing the previous half century’s pattern when Italian equities outperformed on a total return basis. Similarly, since 2003 Italian factory output has lagged Germany’s by 40%.

The diagnosis is simply that Italy has become woefully uncompetitive, and as a result, is not solvent. This much is clear from the perilous state of its banking system, which is always the outcome when banks lend to firms that have been rendered uncompetitive by some reckless central banker. Short of imposing Greek-style slavery on Italy, there is not much hope of solving the problem, but I rather doubt that the Italian electorate will be as patient as its neighbours across the Ionian sea.

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Let Beppe Grillo have a go at this. What does Italy have to lose?

Italy Bank Rescue Won’t Fill $54 Billion Hole in Balance Sheets (BBG)

Italian banks need at least €52 billion ($54 billion) to clean up their balance sheets, much more than the rescue package proposed Monday by the government. The shortfall is an estimate of how much lenders would have to increase loan-loss provisions to allow for the sale of bad debt. It includes the 8 billion euros of provisions UniCredit has said it will add before selling €18 billion of its worst loans and uses that ratio as a proxy for the gap at other banks. The total also includes the 5 billion euros Banca Monte dei Paschi di Siena has been struggling to raise in recent months. The Italian government asked parliament this week to increase the public borrowing limit by as much as €20 billion to potentially backstop Monte Paschi and other lenders.

The rescue package needs to be closer to €30 billion to solve Italy’s bad-debt crisis, according to Paola Sabbione at Deutsche Bank. That conclusion assumes UniCredit and some other lenders can raise about €20 billion through capital markets, asset sales and profit retention – leaving the government to fill the rest of the €52 billion hole. “Some of the publicly traded banks can probably raise some of the funds needed for a cleanup, including Monte Paschi,” said Sabbione, who has covered Italian banks for the past decade. “So the government would have to plug in the rest. But still, at this level, it won’t do the full job.” UniCredit, the nation’s largest lender, plans to increase loan-loss provisions to 75% for nonperforming loans with the lowest chances of recovery and 40% for two other categories considered less dire.

The increased writedowns will help the Milan-based lender sell about a third of its bad loans to asset manager Fortress Investment. UniCredit is planning to raise €13 billion of new equity funding to cover the increased provisions as well as other restructuring costs and to improve its capital ratio. The company’s shares have jumped 15% since the Dec. 13 announcement, giving analysts confidence the bank will have little trouble tapping investors for the funds. Italian banks had €356 billion of bad loans at the end of June and €165 billion of provisions against them, according to the latest Bank of Italy data. To get the worst category to 75% provisioning and the rest to 40%, as UniCredit is doing, would take €52 billion.

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French banks in turn are heavily into Italian banks. Just like they were into Greek banks, but they dodged that one when their political clout made the EU shift their burden onto the Greek pople. Will Italy let them do the same?

Top French Banks Sue ECB To Reduce Capital Demands (R.)

France’s top lenders are suing the ECB to get an exemption from holding capital against deposits parked with a state-owned fund, the most high-profile challenge to supervision from Frankfurt to date. As well as providing euro zone banks with funding, the ECB has been their main regulator for the past two years, tasked with ending cozy relationships between the industry and national authorities that contributed to the financial crisis. The Frankfurt-based institution has been sued repeatedly over its bond-buying programs and by smaller banks seeking to escape its supervision. But this is the first case brought by major banks in the euro zone and is a rare confrontation between France’s financial elite and the ECB’s supervisory board, led by the former head of France’s own banking regulator, Daniele Nouy.

The lawsuits have been brought by BNP Paribas, Societe Generale, Credit Agricole, Credit Mutuel, Groupe BPCE and La Banque Postale over the past few weeks, filings with the European Court of Justice show. Sources with direct knowledge of the cases told Reuters the banks are protesting the ECB’s demand that they set aside capital against special deposits they have with state investment institution Caisse des Dépôts et Consignations (CDC). The legal action comes amid heightened tension between banks and the ECB, which is inundating the financial sector with excess cash to try to stimulate growth while charging banks for depositing it with the central bank overnight. “You are seeing banks more and more go to court to challenge the supervisor,” a senior legal source said. “Years ago that was unthinkable.”

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So, Italy, France and Spain too, all have severely troubled banks.

Spanish Banks Lose EU Case on Mortgage Interest Repayments (BBG)

Competition watchdogs won a partial victory at the EU’s top court over their attempt to force Spanish banks to pay back millions of euros in tax breaks for the acquisition of stakes in foreign firms, Bloomberg News reports. Lenders, including Banco Popular Espanol SA and Banco Bilbao Vizcaya Argentaria SA, may have to give back billions of euros to mortgage customers after a ruling by the court.

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Over 6 weeks later, “India’s Reserve Bank has issued around 1.7 billion new notes, with less than one-third the value of what was removed..”

India’s Small Businesses Facing ‘Apocalypse’ (G.)

India’s vast informal economy has been reeling since 8 November, the morning after India’s prime minister, Narendra Modi, announced the sudden voiding of the country’s two most-used bank notes. It is the largest-scale financial experiment in Indian history: gutting 14 trillion rupees – 86% of the currency in circulation – from the most cash-dependent major economy in the world. More than a month on, India’s Reserve Bank has issued around 1.7 billion new notes, with less than one-third the value of what was removed. The sixth-largest economy in the world is running on 60% less currency than before. Lines outside banks continue to stretch, and India’s small business lobby says its members are facing an “apocalypse”. But Modi insists he isn’t done.

Initially intended to flush out the “black money” said to be hoarded by elites and criminals, the government now frames demonetisation as the first step in a “cashless” revolution to shift the billions of transactions undertaken each day in India online – and onto the radar of tax authorities. This week, labour minister Bandaru Dattatreya announced it would soon be mandatory for employers to pay their staff into bank accounts, a hugely ambitious step in a country where as many as 90% of workers are paid in cash. Already struggling, businessmen such as Sharma are dreading the prospect of more enforced digital migration. “How do you think I can pay the workers with a cheque if they don’t have a bank account?” he asks, in a tiny office thick with incense smoke. “And it takes three days to clear a cheque. What will they eat during those days?”

His reasons are not just altruistic. Apart from potentially raising his tax bill – in a country where just 1% pay income tax – paying salaries electronically would mean giving staff Delhi’s mandated minimum wage, currently 9,724 rupees (£114) per month for unskilled workers. “Right now no one pays the minimum wage that the government decides,” Sharma says. “It will only make things expensive: we will charge the customer.” Outside his workers’ earshot, he adds: “If someone is doing the work of Rs.2000, why should we pay them Rs.15,000?” But workers too are wary of the big push online. Tens of millions of Indians have been given zero-deposit bank accounts in the past two years under a government scheme to boost financial inclusion. But even after demonetisation prompted a rush of new deposits, 23% of the accounts still lie empty.

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Stuck. A large depreciation would be too costly, but keeping it high would eat up foreign reserves.

Let The Yuan Fall Or Not? Beijing’s Big Burning Currency Question (SCMP)

As the Chinese yuan keeps weakening against the dollar, a question is becoming acute for Beijing: should China let the market take its course and permit a deep currency fall or should it keep burning its foreign exchange reserves to support the currency’s value? The debate over what Beijing should do about its currency is heating up as regulators’ ambiguity over the question is becoming costly and unsustainable, particularly since the Federal Reserve raised interest rates. Against Beijing’s desire for a “controllable” depreciation, the government is losing control over capital flight, depleting foreign exchange reserve stockpile at an alarming speed, and failing to convince investors that there is “no fundamental basis for the continuous depreciation”.

Yu Yongding, a renowned Chinese economist who sat on the central bank’s monetary policy committee when the yuan was revalued in July 2005, said it was time for Beijing to reconsider the matter. “The fear of the yuan’s depreciation has become a burden for us,” Yu told a forum over the weekend. Yu, who for years has called for liberalizing the yuan’s exchange rate over years, said China should give up foreign exchange interventions and safeguard its foreign exchange reserves so that China will “have sufficient ammunition” for future rainy days. While Yu’s view is not in line with Beijing’s current policy, it is winning academic support. Xu Sitao, the China chief economist at Deloitte, an auditing firm, said “the best strategy is to let the yuan fall in full, and the worst strategy is slowly depleting foreign exchange reserves”.

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“The currency is facing a triple whammy of accelerating capital outflows, faster U.S. interest-rate increases and concerns over domestic financial markets..”

Yuan Bears Strike as Capital Outflows Override PBOC (BBG)

China’s renewed efforts to curb declines in its currency are doing little to dissuade yuan bears. Traders have turned increasingly negative amid tighter liquidity, sending bets for further losses soaring. The gap between forward contracts wagering on the offshore yuan a year from now versus its current level is heading for a record monthly jump, just as the extra cost for options to sell the currency against the dollar hit a six-month high relative to prices for contracts to buy. The currency is facing a triple whammy of accelerating capital outflows, faster U.S. interest-rate increases and concerns over domestic financial markets as liquidity tightens.

Strategists say its weakening, set to be the biggest this year in more than two decades, may accelerate as the government restores the annual quota for citizens to convert yuan holdings into foreign exchange. President-elect Donald Trump has also threatened to slap 45% tariffs on China’s imports to the U.S. “Bears are adding positions because expectations for the yuan to depreciate are getting stronger and stronger,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “The pressures will likely continue and could get even worse, considering capital outflows and concerns on the reset of individuals’ conversion quota.”

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..in China, state-run banks are by far the main source of funding. Shadow banks.

To Problems With China’s Financial System, Add the Bond Market (NYT)

Chinese officials cheered on the country’s stock market when it reached heady new highs, offering hope that it could become a new source of money to fix China’s economic problems. Then, last year, the market crashed. Now another fast-growing part of China’s vast and increasingly complicated financial market is showing signs of distress: its $9 trillion bond market. Prices for government and corporate bonds have tumbled over the past week, a sell-off that continued on Tuesday. The situation has spooked investors, prompting the government to temporarily restrain some trading and to make emergency loans to struggling financial institutions. The price drops have resulted in higher borrowing costs at a time when more Chinese companies need the money to cope with slowing economic growth. Yields reached new highs again on Tuesday.

In part, China is reacting to financial shifts across the globe. With the Federal Reserve raising short-term interest rates and many expecting the presidency of Donald J. Trump to lead to heavier government spending, investors worldwide are selling bonds. But China is struggling with its own balancing act. The Chinese bond slump also stems from Beijing’s efforts to wring excess money from its financial system and to stop potential bubbles that may lurk in shadowy, hard-to-track corners of its economy. Should it continue with those efforts, bonds could fall further. “The adjustment has not yet finished,” said Miao Zuoxing, a partner at the FXM Brothers Fund. “It will continue and normalize until money is put where the government can see it.”

[..] China has particular reason to worry. As the world’s second-largest economy, after the United States, it relies on a rickety financial system that is mired in debt and susceptible to hidden stresses. Higher overseas interest rates could also prompt more Chinese investors to move their money out of the country, either to chase higher returns elsewhere or to avoid what some see as China’s growing problems. In the mature financial system of the United States, businesses have plenty of ways to get money. They can borrow from a bank, raise money selling stocks or bonds, or seek funds directly from any number of investors.

But in China, state-run banks are by far the main source of funding. That helped power the country’s economic rise, but it also led to loans going to politically connected borrowers rather than to where the economy needed it most. That is one reason the Chinese economy is now stuck with more steel, glass, cement and auto factories than it needs. Particularly in the past two years, China has taken steps to encourage the development of robust stock and bond markets as well as private lenders, needing a way to ensure the flow of money was being directed by profit-minded investors rather than politicians and their allies at state-owned banks.

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Heavy fisted. It’s all history has taught.

China’s Anticorruption Drive Ensnares the Lowly and Rattles Families (WSJ)

When Liu Chongfu returned home to his pig farm in December 2014 after months in detention, he was haunted by what he had done. Under interrogation, he later told his family, he falsely admitted to bribing government officials. Back home, released without being charged, Mr. Liu had nightmares and splitting headaches. His conscience weighed on him, his family said. So he publicly recanted in March 2015. In a written statement sent to the court, he said interrogators had deprived him of sleep and threatened his family to extract a phony confession that helped send four other men to prison. In his statement, also posted online, he said he lied “because they forced me to where there was no other way than death. I didn’t want to die.”

President Xi Jinping has called his anticorruption campaign, one of the leader’s defining initiatives, a “life or death” matter. It is among the most popular elements of his administration, given how corruption has been endemic in China and how it threatens to undermine confidence in Communist Party control. Since the campaign began in 2013, its reach has allowed Mr. Xi to root out resistance to his rule and secure party control over a society that is more prosperous and demanding. Mr. Liu’s confession and retraction suggest a dark side to Mr. Xi’s efforts. Families around China say overzealous authorities have forced confessions, tortured suspects and made improper convictions.

The farmer tried to retract his confession before, while still in detention. “I cannot violate my conscience to do this,” he told his interrogators, according to his statement, a transcript of a video he made with his lawyer. He knew it would send innocent officials to jail, he said, and that “the real tragedy is still to follow.” The four were convicted anyway.

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“I finally saw the blue sky. It was wonderful!”

Smog Refugees Flee Chinese Cities As ‘Airpocalypse’ Blights Half A Billion (G.)

Tens of thousands of “smog refugees” have reportedly fled China’s pollution-stricken north after the country was hit by its latest “airpocalyse” forcing almost half a billion people to live under a blanket of toxic fumes. Huge swaths of north and central China have been living under a pollution “red alert” since last Friday when a dangerous cocktail of pollutants transformed the skies into a yellow and charcoal-tinted haze. Greenpeace claimed the calamity had affected a population equivalent to those of the United States, Canada and Mexico combined with some 460m people having to breathe either hazardous pollution or heavy levels of smog in recent days.

Lauri Myllyvirta, a Beijing-based Greenpeace activist who has been chronicling the red alert on Twitter, said that in an attempt to shield his lungs he was avoiding going outside and using two air purifiers and an industrial grade dust mask “that makes me look like Darth Vader”. “You just try to insulate yourself from the air as much as possible,” said Myllyvirta, a coal and air pollution expert. Others have simply opted to flee. According to reports in the Chinese media, flights to some pollution-free regions have been packed as a result of the smog. Ctrip, China’s leading online travel agent, said it expected 150,000 travellers to head abroad this month in a bid to outrun the smog. Top destinations include Australia, Indonesia, Japan and the Maldives.

Jiang Aoshuang, one of Beijing’s “smog refugees”, told the state-run Global Times she had skipped town with her husband and 10-year-old son in order to spare their lungs. Jiang’s family made for Chongli, a smog-free ski resort about three hours north-west of the capital, only to find it packed with other fugitives seeking sanctuary from the pollution. “It really felt like a refugee camp,” she was quoted as saying. Yang Xinglin, who also fled to Chongli, said she had requested time off from her job at a state-owned real estate firm so she did not have to inhale the smog. “You ask me why I left Beijing? It’s because I want to live,” Yang, 27, told the Guardian.

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But why in the last few days of an 8-year term?

Obama Invokes 1953 Law To Indefinitely Block Arctic, Atlantic Drilling (CNBC)

President Barack Obama on Tuesday moved to indefinitely block drilling in vast swaths of U.S. waters. The president had been expected to take the action by invoking a provision in a 1953 law that governs offshore leases, as CNBC previously reported. The law allows a president to withdraw any currently unleased lands in the Outer Continental Shelf from future lease sales. There is no provision in the law that allows the executive’s successor to repeal the decision, so President-elect Donald Trump would not be able to easily brush aside the action. Trump has vowed to open more federal land to oil and natural gas production in a bid to boost U.S. output. Obama on Tuesday said he would designate “the bulk of our Arctic water and certain areas in the Atlantic Ocean as indefinitely off limits to future oil and gas leasing, though the prospects for drilling in the affected areas in the near future were already questionable.

The lands covered include the bulk of the Beaufort and Chukchi seas in the Arctic and 31 underwater canyons in the Atlantic. The United States and Canada also announced they will identify sustainable shipping lanes through their connected Arctic waters. Canada on Tuesday also imposed a five-year ban on all oil and gas drilling licensing in the Canadian Arctic. The moratorium will be reviewed every five years. “These actions, and Canada’s parallel actions, protect a sensitive and unique ecosystem that is unlike any other region on earth,” Obama said in a statement. “They reflect the scientific assessment that, even with the high safety standards that both our countries have put in place, the risks of an oil spill in this region are significant and our ability to clean up from a spill in the region’s harsh conditions is limited.”

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Mar 222016
 
 March 22, 2016  Posted by at 8:59 am Finance Tagged with: , , , , , , , , , ,  6 Responses »
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NPC Ford Motor Co., McReynolds & Sons garage, L Street, Washington DC 1926

US Existing Home Sales Tumble 7.1% In Warning For Housing Market (Reuters)
Companies Haven’t Fudged Their Numbers This Much Since 2009 (Yahoo)
Beware of Draghi Dropping Hints (FT)
Central Banks Creep Toward Uncomfortable Role as Central Planners (WSJ)
The ECB and The Mississippi Company Bubble (Macleod)
Germany Must Leave Eurozone To Save It: Mervyn King (CNBC)
Government Debt Could Bring China’s Credit Party To A Halt (MW)
China’s Debt Burden Is Only Going To Get Bigger (BV)
Home Is Where the Inflation Is (BBG)
Get Ready For An Australian Recession By 2017 (Steve Keen)
Regulator Warns Canadian Banks on Oil and Gas Reserves (WSJ)
Petrobras Posts Record $10 Billion Loss (Reuters)
Erdogan To Include Journalists, Politicians in ‘Terrorist’ Definition (Ind.)
The Uses of Disorder (Jim Kunstler)
Carbon Emission Release Rate ‘Unprecedented’ In Past 66 Million Years (G.)
The EU’s Deal With Turkey Is a No-Win Situation (Fortune)
Greece Appeals For EU Logistics Aid For Migrant Deal To Work (Reuters)
EU Rights Chief Demands More Protection For Refugees (AP)
Greece Sets Up Detention Camps As Refugee Deal Hits Delays (AP)

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

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

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

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

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Beware when accountants become society’s most creative people.

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

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

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

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

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

Beware of Draghi Dropping Hints (FT)

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

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

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

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“It’s capitalism with Chinese characteristics.”

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

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

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

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

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

The ECB and The Mississippi Company Bubble (Macleod)

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

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

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

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

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

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

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

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

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

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

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

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

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

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Until it no longer can.

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

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

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

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

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More or less correct.

Home Is Where the Inflation Is (BBG)

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

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

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

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

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

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

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

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

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

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

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But American banks’ exposure is much higher.

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

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

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

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

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Brazil is a game of dominoes.

Petrobras Posts Record $10 Billion Loss (Reuters)

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

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

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Who needs enemies with friends like…

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

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

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

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

The Uses of Disorder (Jim Kunstler)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Too late.

EU Rights Chief Demands More Protection For Refugees (AP)

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

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

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

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

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

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

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Sep 162015
 
 September 16, 2015  Posted by at 10:13 am Finance Tagged with: , , , , , ,  6 Responses »
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NPC Fire at S. Kanns warehouse, Washington, DC 1908

It’s highly amusing to read all the ‘expert’ theories on a Federal Reserve hike or no hike tomorrow, but it’s also obvious that nobody really has a clue, and still feel they should be heard. Don’t know if that’s so smart, but I guess in that world being consistently wrong is not that big a deal.

Thing is, US economic numbers are so ‘massaged’ and unreliable, the Fed can pick whichever way the wind blows to argue whatever decision it makes. As long as jobs numbers get presented for instance without counting the 90-odd million Americans who are not in the labor force, and a majority of new jobs are waiters, just about anything goes in that area. Numbers on wages are just as silly.

And people can make inflation a big issue, but hardly anyone even knows what inflation is. Wonder if the Fed does. It had better, because if you don’t look at spending, prices don’t tell you a thing. They surely must look at velocity of money charts from time to time?!

The biggest thing for the Fed might, and perhaps must, be the confidence factor. It’s been talking about rate hikes for so long now that if it decides to leave rates alone, it will only create more uncertainty down the road. Uncertainty about the economy (no hike would suggest a weak economy), and also about its own capabilities.

If all you have is talk, people tend to take you a lot less serious. Moreover, the abject -and grossly expensive- failure of the Chinese central bank to quiet down its domestic stock markets has raised questions about the omnipotence of all central banks.

This morning’s spectacle of a 5% rise in Shanghai in under an hour near the close no longer serves to restore confidence, it further undermines it. Beijing doesn’t seem to get that yet. But the Fed might.

No rate hike is therefore an enormous potential threat to Fed credibility. And that’s a factor it may well find much more important than a bunch of numbers it knows are mostly fake anyway. It has for years been able to fake credibility, but that is no longer all that obvious. And delaying a hike will certainly not boost that credibility.

Sure, volatility is an issue too, but volatility won’t go down on a hike delay. It’ll simply continue – and perhaps rise- until the next meeting. There’s nothing to gain there.

Besides, don’t let’s forget how crazy it is that the entire financial world is dead nervous ahead of a central bank meeting, even as everyone knows it’s all just about a decision on a very small tweak in rates.

Yellen et al are very aware of the risks of that, even if they love the limelight it brings. All that attention tells people, meeting after meeting, that the US economy is not functioning properly, no matter what the official statements say.

There are ‘experts’ talking about the dangers of emerging markets if the Fed votes Yes on a hike, but those markets are not even part of its mandate. if Yellen thinks something can be gained from pushing emerging markets and currencies down further, she’ll do just that.

Still, all this is just pussyfooting around the bush. The Fed may have noble mandates to help the real economy, but it will in the end always decide to do what’s best for Wall Street banks. And these banks could well make a huge killing off a rate hike.

They can profit from trouble and volatility in emerging markets as well as domestic markets, provided they’re well-positioned. Given that they’ve had ample time, and it’s hard to answer the question who else is in a good position, we may have an idea which wind the wind will blow.

Increasing credibility for the Fed and increasing profits for Wall Street banks. Might be a winning combination. And if Yellen is realistic about the potential for a recovery in the American economy, why would she not pick it?

Aug 312015
 
 August 31, 2015  Posted by at 10:48 am Finance Tagged with: , , , , , , ,  3 Responses »
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John Collier Trucks on highway en route to Utica, New York Oct 1941

China Stocks Extend Biggest Selloff Since 2008 on Rescue Doubts (Bloomberg)
Beijing Abandons Large-Scale Share Purchases (FT)
If the Options Market Is Right, China’s Stock Rescue Is Doomed (Bloomberg)
China Punishes 197 Over Stock Market And Tianjin ‘Rumours’ (BBC)
Families Of China’s ‘Disappeared’: Country Is Place Of ‘Fear And Panic’ (Guar.)
Two Big Winners From China’s Big Slowdown (Pesek)
Jackson Hole Questions Inflation Mastery Sought by Draghi & Co. (Bloomberg)
Looting Made Easy: the $2 Trillion Buyback Binge (Whitney)
‘Very Tough’ For Fed To Normalize: Nassim Taleb (CNBC)
Varoufakis on Schäuble (SWR-ADR)
German Business Execs Seek To Escape Prosecution In Greek Corruption Cases (AFP)
EU Ministers To Meet In Two Weeks To Find Solution To Refugee Crisis (Guardian)
Unprecedented Migrant Crisis Forces EU To Seek Answers (Reuters)
Financialy Strapped Greece Struggles With Flood Of Refugees (WSJ)
The Black Route (WaPo)
South Africa Sees Poaching Intensify as 749 Rhinos Killed (Bloomberg)

Shanghai and the PPT.

China Stocks Extend Biggest Selloff Since 2008 on Rescue Doubts (Bloomberg)

China’s stocks fell, capping the benchmark index’s biggest two-month tumble since 2008 amid growing concern that government intervention to prop up the market will fail. The Shanghai Composite Index dropped 0.8% to 3,205.99 at the close, paring a loss of as much as 3.8%. The SSE 50 Index, representing the biggest stocks in Shanghai, rallied as much as 6.7% from the intraday low. Citic Securities slid 5% after Xinhua News Agency reported that company executives were detained on suspicion of insider trading and the securities regulator was said to order the brokerage industry to boost its contribution to the nation’s market rescue.

Bearish bets in the options market climbed as traders weighed the level of state support before a World War II victory parade this week. Swings in Chinese markets this month have rattled investors worldwide as they struggle to anticipate policy actions in the world’s second-largest economy. Stocks rallied almost 10% over Thursday and Friday on speculation authorities are propping up markets before President Xi Jinping takes the stage at the parade, which the government will use to demonstrate its rising military and political might. “There is a lot of confusion about purchases of stocks by state-linked funds,” said Gerry Alfonso at Shenwan Hongyuan Group in Shanghai. “Disclosures are very limited so it is impossible to know what they are doing with certainty.”

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And then searches for a backdoor? How about Belgium?

Beijing Abandons Large-Scale Share Purchases (FT)

China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials. For two months, a “national team” of state-owned investment funds and institutions has collectively spent about $200 billion trying to prop up a market that is still down 37% since its mid-June peak. China’s leaders feel they mishandled the stock market rescue efforts by allowing too much information to become public, according to senior regulatory officials speaking at a meeting late on Thursday — an account of which has been seen by the Financial Times.

Last week’s equities collapse, which prompted a rout in global markets, was partly blamed on authorities’ apparent decision to refrain from the share purchases they had been making since early July. After standing on the sidelines for more than a week, the government resumed large-scale stock-buying in the last hour of trade on Thursday. This helped to lift the Shanghai benchmark index from a small loss to end the day up more than 5%. The market rose by almost 5% again on Friday. Traders and officials said the latest intervention was aimed at providing a “positive market environment” in preparation for a big military parade this week to celebrate the 70th anniversary of the “victory of the Chinese people’s war of resistance against Japanese aggression”.

Senior financial regulatory officials insist that this was an anomaly, and that the government will refrain from further large-scale buying of equities. Instead, authorities are planning to sharpen their focus on investigating and punishing individuals and institutions they believe have taken advantage of the state bailout to make profits or have obstructed the government’s attempts to shore up the market. Late last week, the country’s securities regulator summoned senior officials from 19 brokerages, equity exchanges, futures exchanges and government-controlled industry associations, and ordered them to step up oversight of the markets. The regulator said 22 cases of insider trading, market manipulation and “spreading market rumours” had been handed over to the police.

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It is no matter what.

If the Options Market Is Right, China’s Stock Rescue Is Doomed (Bloomberg)

Options traders have never been so pessimistic on China’s stock market, betting the government’s renewed effort to prop up share prices is doomed to fail. The cost of bearish contracts on the China 50 exchange-traded fund has surged to the highest level versus bullish ones since they started trading in Shanghai six months ago. The so-called skew also climbed to a record for a similar ETF in the U.S., even as government buying drove China’s benchmark index to a 10% rally in the final two days of last week. While policy makers are trying to bolster the market before President Xi Jinping takes the stage in a World War II victory parade this week, bears argue that valuations are too high for the rally to last.

Chinese investors have about 5 trillion yuan ($783 billion) of borrowed money riding on stocks, and many of them are looking for a chance to exit, according to Bank of America. “More and more people are not convinced about A shares,” said Tony Chu at RS Investment Management. “Ultimately, the government needs to reduce intervention and let more de-leveraging happen.” The Shanghai Composite Index dropped 2.8% to 3,140.41 at 1:01 p.m. local time, while the China 50 ETF declined 3.4%. Puts that pay out on a 10% retreat in the fund cost 8.8 points more on Monday than calls betting on a 10% gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points.

Chinese policy actions last week suggest authorities are intent on putting a floor under share prices. On Tuesday, the central bank announced its fifth interest-rate cut since November and reduced the amount of cash banks must set aside for reserves. State buying on Thursday propelled the Shanghai Composite to a rally of more than 5% in the final hour of trading, according to people familiar with the matter, an advance that extended into a 4.8% gain on Friday. China’s intervention is part of a broader effort to ensure nothing detracts from the Sept. 3 parade, an event the government will use to demonstrate its rising military and political might. Authorities have also closed thousands of factories to curb pollution and ordered some vehicles off the road.

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Pretty steep for a government that spreads fake economic numbers all the time.

China Punishes 197 Over Stock Market And Tianjin ‘Rumours’ (BBC)

Chinese authorities have punished 197 people for spreading rumours online about the recent stock market crash and fatal explosions in Tianjin, according to state news agency Xinhua. A journalist and stock market officials are among those arrested, Xinhua said. It gave no other details. Chinese shares fell by nearly 8% after a week of volatile trading that spread fear to global markets. The Tianjin explosions killed 150 people – with 23 still missing. A total of 367 people remain in hospital after the 12 August blast at a warehouse where large amounts of toxic chemicals were stored. Twenty are in critical condition, according to Xinhua. Separately, the UK’s Financial Times says Chinese leaders feel they mishandled their stock market rescue efforts.

The paper, quoting an account of a meeting of senior regulatory officials on Thursday, said the government had decided to abandon attempts to boost the stock market and instead step up efforts to punish people suspected of “destabilising the market”. Chinese authorities tightly control information online and have previously prosecuted internet users for spreading rumours. The rumours described by the latest statement include reports that a man had jumped to his death in Beijing due to the stock market slump and that as many as 1,300 people were killed in Tianjin blasts, Xinhua said. The news agency said “seditious rumours about China’s upcoming commemorations of the 70th anniversary of the end of World War II” were also among the offences.

A journalist was also arrested along with several stock market officials, according to a Xinhua report. The journalist, Wang Xiaolu, is accused of “spreading fake information” about the market slump, the report said. The state news agency said Mr Wang confessed that he “wrote fake report on Chinese stock market based on hearsay and his own subjective guesses without conducting due verifications”. In 2013 Chinese authorities introduced a possible three-year sentence for spreading rumours – the sentence was supposed to apply to anyone who posted a rumour that was reposted 500 times or viewed 5,000 times.

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Prosecute everyone, writers, investors…

Families Of China’s ‘Disappeared’: Country Is Place Of ‘Fear And Panic’ (Guar.)

Beijing’s security forces are transforming China into a place of “fear and panic”, the families of 12 attorneys and activists who disappeared during a crackdown on human rights lawyers have claimed. In an open letter to Guo Shengkun, the minister of public security, the families said they had heard nothing from their relatives since they were detained during a roundup of government critics nearly two months ago. “Words fail to express our anxiety and helplessness,” they wrote, according to a translation by China Change, a human rights website. “When a terrorist attack is perpetrated, a terrorist group will come out and claim responsibility for it. When the police system of the People’s Republic of China disappears its citizens, shouldn’t it make a statement and say something?”

On 9 July Chinese security services launched what observers describe as an unprecedented offensive against the country’s outspoken “rights defence” movement, a network of lawyers known for taking on politically sensitive cases. Scores of lawyers and their associates were detained or interrogated in what activists believe is a coordinated attempt to stamp out opposition to the Communist party. Many were subsequently released after being warned not to speak out, but more than 20 activists, lawyers and legal staff remain in detention, with some being held in undisclosed locations. Those whose whereabouts remain unknown include Wang Yu, a 44-year-old human rights lawyer who disappeared from her home in the early hours of 9 July, and Li Heping and Wang Quanzhang, two Beijing-based attorneys who vanished the following day.

“Why is Daddy still not home?” Li Heping’s five-year-old daughter has asked relatives, according to the open letter, which was released to coincide with the International Day of the Victims of Enforced Disappearances. Maya Wang, the Hong Kong-based China researcher for Human Rights Watch, said that under Chinese law police had 37 days to formally arrest those they detained before having to release them. The ongoing detention of these activists and lawyers was therefore now unlawful under both international and Chinese law. In the open letter – whose signatories include the mother of Wang Yu and the wives of Li Heping and Wang Quanzhang – relatives voice concerns over the treatment their loved ones might be receiving. “Over the years, Chinese police are known to the world for extracting confessions through torture in the investigation stage,” they write. “We have little faith that the law will protect the safety of our loved ones when the authorities would not even acknowledge their whereabouts.”

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North Korea?!

Two Big Winners From China’s Big Slowdown (Pesek)

How panicked were investors last week about China’s stock market plunge? Enough to treat the Korean peninsula, a place that was teetering on the brink of war, as a safe haven. Even as policy makers braced for renewed military confrontation between North and South Korea, the won staged a rally. That’s made South Korean assets one of the few bright spots in a dark time for emerging markets. On Aug. 24 alone, investors yanked $2.7 trillion out of developing nations, with Indonesia, Malaysia and Thailand especially hard hit. It matched the violent September 2008 selloff after Lehman Brothers collapsed. Back then, Korea was battered so hard that pundits were calling it the “next Iceland” and the “Bear Stearns economy.” Now, together with the Philippines, it’s one of Asia’s only refuges from chaos.

It’s not hard to explain why many Asian economies are suffering from China’s slowdown. Exporters of commodities, who depended on a humming Chinese market, have especially suffered. But why are there such big outliers among battered emerging markets? The answer is that investors are finally basing their decisions less on herd mentality than nuanced, case-by-case analyses. “Emerging market investors have become a lot savvier,” says economist Frederic Neumann of HSBC in Hong Kong. “Gone are the days where emerging markets were all lumped into one bucket. Today, countries with stronger fundamentals are able to resist the spread of contagion washing over global financial markets.” Along with South Korea and the Philippines, Neumann notes that even some frontier economies, like Vietnam, “have weathered global financial turmoil with apparent ease.”

The common link among the success stories is they’ve gotten the basics right since Asia’s 1997 financial meltdown: They have healthier financial systems, greater transparency, stronger banks, sober national balance sheets, and reasonable current-account deficits. Malaysia’s reckoning, by contrast, is long overdue. The ringgit is trading near 17-year lows because scandal-plagued Prime Minister Najib Razak cares more about staying in power than modernizing the country’s unproductive economy. Meanwhile, Thailand’s military junta is undoing much of the progress Bangkok made since the late 1990s in strengthening the rule of law. And for all its gripes that Indonesia is being unfairly lumped in with Asia’s laggards, President Joko Widodo’s administration is rapidly losing the trust of investors. While there’s still time to win it back, Widodo’s first 315 days in office have been a case study in timidity, drift and lost opportunities.

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More like Comedy Hour by the hour.

Jackson Hole Questions Inflation Mastery Sought by Draghi & Co. (Bloomberg)

Mario Draghi may have skipped the Federal Reserve’s Jackson Hole symposium this year, but he can’t dodge its conclusion: central banks can’t steer inflation as well as they thought. Less than six months into a stimulus program that the European Central Bank president promised would revive consumer-price growth, the euro area is facing renewed disinflationary pressure as China’s economy slows and commodity prices slump. This week, Draghi may have to admit as much, and downgrade the institution’s inflation forecasts. The newest risk to prices highlights how in the 19-nation currency bloc – as in the U.S., the U.K. and other industrialized nations – headline inflation is still far below target and falling out of sync with the recovery.

Whether that heightens calls for the ECB to step up its €1.1 trillion QE program will depend on how Draghi communicates the complex economic picture. People think “central banks don’t have a handle on inflation any more and that’s not true,” Jon Faust, professor of economics at Johns Hopkins University, said in an interview at the Kansas City Fed’s annual meeting in Jackson Hole, Wyoming. “Inflation will come back, but the specific timing of that is much more difficult in the current environment.”

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The last thing we would want is price discovery.

Looting Made Easy: the $2 Trillion Buyback Binge (Whitney)

Corporations are taking the retirement savings of elderly public employees and using them to inflate their stock prices so wealthy CEOs and their shareholders can enrich themselves at the expense of their companies. And it’s all completely legal. Under current financial regulations, corporate bosses are free to repurchase their own company’s shares, push stock prices into the stratosphere, skim off a generous bonuses for themselves in the form of executive compensation, and leave their companies drowning in red ink. Even worse, a sizable portion of the money devoted to stock buybacks is coming from “massively underfunded public pension” funds that retired workers depend on for their survival.

According to Brian Reynolds at New Albion Partners: “Pension funds have to make 7.5%,” so they are putting their money “in these levered credit funds that mimic Long-Term Capital Management in the 1990s.” Those funds, in turn, “buy enormous amounts of corporate bonds from companies which put cash onto company balance sheets…and they use it to jack their stock price up, either through buybacks or mergers and acquisitions…It’s just a daisy chain of financial engineering and it’s probably going to intensify in coming years.” So, once again, ordinary working people are caught in the crosshairs of a corporate scam that could blow up in their faces and leave them without sufficient resources to muddle through their retirement years.

The amount of money that’s being funneled into buybacks is simply staggering. According to Dave Dayen at the Intercept: “Last year, companies spent $553 billion to repurchase outstanding shares, just short of the record $589.1 billion in 2007. Large companies like Apple, General Motors, McDonald’s, Pfizer, Microsoft and more have engaged in buybacks in recent years. Returning profits to shareholders through buybacks and dividends accounted for 95% of all earnings in 2014. As a result, each additional dollar of corporate earnings now translates to under 10 cents of reinvestment, according to a study by J.W. Mason of the Roosevelt Institute.”

This explains why business investment (Capex) is at record lows. It’s because the bulk of earnings is being recycled into buybacks, over $2.3 trillion dollars since 2009 to be precise. And it’s all connected to the Fed’s zero rate policy. Zero rates have created an environment in which corporations no longer look for ways to grow their businesses, expand operations, hire more employees or improve productivity. Instead, they look for the quick fix, that is, load up on debt, buy more shares, goose the stock price, and walk away with a bundle.

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And makes a billion dollars in the process…

‘Very Tough’ For Fed To Normalize: Nassim Taleb (CNBC)

The Federal Reserve faces a “very tough” task in normalizing monetary policy, as it has limited tools at its disposal after years of near-zero interest rates, academic and writer Nassim Taleb said Friday. “The Fed is like a huge army with very sophisticated equipment and no ammunition,” he said in a CNBC “Power Lunch” interview. “They inherited that big machine without weapons. They realize that interest rates at zero is not something normal. And there’s no evidence that zero interest rates is better than 3%. But how to get to that normal level is going to be a very, very tough task for them,” the author of “The Black Swan” said.

Earlier this summer, expectations had increased that the Fed could raise interest rates in September, as its policy committee said it saw an improving U.S. economy and tightening labor market. But one of the most erratic stock market stretches in recent memory seemed to put a damper on the central bank’s plans. Concerns about China’s slowing economic growth have partially driven the rocky equity trading, which sent major U.S. averages down more than 5% earlier this week before a swift reversal. Taleb noted that he has “never seen so much excitement over nothing.” “China would not affect us directly economically. China would be maybe a diversion,” he contended, adding that slumping Chinese consumer demand would not disrupt most American companies.

Still, a hedge fund affiliated with Taleb posted a strong week amid the mayhem, according to a Wall Street Journal report. Universa Investments—which attempts to profit from extreme events—gained about 20% on Monday, sources told the newspaper. The Dow suffered a record intraday decline of nearly 1,100 points that day. The fund has accumulated more than $1 billion in profits, both realized and on paper, in the last week, the Journal wrote. Taleb declined to discuss the report in detail, but he noted that he is a scientific advisor to the fund.

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More Yanis.

Varoufakis on Schäuble (SWR-ADR)

Extract from Stephan Lamby’s SWR-ADR documentary Schäuble: Power & Powerlessness in which I discuss our government’s January-June 2015 negotiating experience and aspects of my discussions with Dr Wolfgang Schäuble.

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Berlin refuses to extradite them to a fellow EU country?!

German Business Execs Seek To Escape Prosecution In Greek Corruption Cases (AFP)

Siemens, Daimler, Rheinmetall – the cream of German industry – have been mired in cases of alleged corruption in Greece, the country that Berlin has repeatedly admonished for the parlous state of its economy. No date has been set yet for 19 former executives of German engineering group Siemens to appear in Greek court, but it is expected to be one of the biggest financial trials of the decade in Greece. More than 60 people in total are being investigated for corruption in the case that US watchdog CorpWatch has labelled “the greatest corporate scandal in Greece’s postwar history.” Siemens, whose links to Greece go back to the 19th century, is suspected of having greased the palms of various officials to clinch one of the country’s most lucrative contracts – the vast upgrade of the Greek telephone network in the late 1990s.

Overall, Siemens allegedly spent €70 million on bribes in Greece, according to Greek judicial sources. The investigation is now in its ninth year with a case brief over 2,300 pages long. Among those suspected of corruption is the group’s former point man in Greece, Michalis Christoforakos. But the 62-year-old, who holds dual Greek and German citizenship and at the height of his influence rubbed elbows with the ensemble of Greece’s political elite, is unlikely to face trial. Christoforakos fled Greece for Germany in 2009, and German justice has refused to extradite him, arguing that the statute of limitations covering his alleged activities has lapsed.

Relations between Athens and Berlin – already tested by the Greek economic crisis and Germany’s insistence on painful austerity to bail out the debt-wracked country – have not been helped by the Siemens case. Earlier this year, Greece’s combative parliament speaker Zoe Constantopoulou said the affair smacked of double standards on the part of Berlin. “This is a question of justice that shows there is doublespeak by Germany,” she told France’s Liberation newspaper in a recent interview.

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How many will die in those two weeks?

EU Ministers To Meet In Two Weeks To Find Solution To Refugee Crisis (Guardian)

EU interior and justice ministers are to meet in a fortnight in an effort to find concrete measures to cope with the escalating migration crisis. The ministers will meet on 14 September in Brussels after a statement from the home affairs ministers of Germany, France and Britain said they had “asked the Luxembourg presidency to organise a special meeting of justice and interior ministers within the next two weeks, so as to find concrete steps” to deal with the situation. The three “underlined the necessity to take immediate action to deal with the challenge from the migrant influx”.

The call came after Germany’s Thomas de Maizière, Britain’s Theresa May and France’s Bernard Cazeneuve spoke about the crisis on the sidelines of a meeting in Paris on Saturday on transport security after passengers thwarted an attack on a high-speed train from Amsterdam to Paris. In August, May visited Calais to inspect new security measures aimed at preventing migrants from reaching England via the Channel tunnel. Up to 5,000 displaced people are estimated to be in the French port, with at least nine known to have died trying to make the journey into Britain since June. Unprecedented numbers of migrants are reaching EU borders, surpassing 100,000 in July alone and reaching more than 340,000 this year so far. Italy and Greece are struggling to cope, while Macedonia has declared a state of emergency.

The Italian prime minister, Matteo Renzi, said on Sunday he believed the crisis would push the EU to adopt uniform rules for refugees in place of the current patchwork of laws and approaches. “It will take months, but we will have a single European policy on asylum, not as many policies as there are countries,” he told the Corriere della Sera. The French, British and German statement specifically called for reception centres to be set up urgently in Italy and Greece to register new arrivals, and for a common EU list of “safe countries of origin” to be established, which would theoretically allow asylum applications to be fast-tracked for specific nationalities.

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“Everything must move quickly,” says Merkel. And then calls a meeting only on September 14. That’s how full of it she is.

Unprecedented Migrant Crisis Forces EU To Seek Answers (Reuters)

European Union ministers were summoned on Sunday to meet in two weeks’ time to seek urgent solutions to a migration crisis unprecedented in the bloc’s history, as the mounting death toll on land and sea forced governments to respond. Luxembourg, which holds the rotating EU presidency, called interior ministers from all 28 member states to an extraordinary meeting on Sept. 14, saying: “The situation of migration phenomena outside and inside the European Union has recently taken unprecedented proportions.” Chancellor Angela Merkel earlier called on her EU neighbours to do more as Germany expects the number of asylum seekers it receives to quadruple to about 800,000 in 2015.

“If Europe has solidarity and we have also shown solidarity towards others, then we need to show solidarity now,” she told reporters in Berlin. “Everything must move quickly.” Luxembourg said the meeting would focus on policies on sending some migrants home and measures to prevent human trafficking. Seven people died when their boat sank off Libya’s coast on Sunday, the second such fatal accident at sea within days. The Italian coastguard said some 1,600 migrants had been rescued in the Mediterranean and brought to Italy over the weekend. At least 2,500 migrants have died since January, most of them drowning in the Mediterranean after arduous journeys fleeing war, oppression or poverty in Syria and other parts of the Middle East and Africa or beyond.

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Greeks should look at their own priorities too.

Financialy Strapped Greece Struggles With Flood Of Refugees (WSJ)

In the hot summer sun, Giorgos Tirikos-Ergas rushed by bicycle last week to a small former store where volunteers provide food and temporary shelter to some of the thousands of refugees who have landed on this island in recent months. He was responding to a call he had gotten while working at his father-in-law’s butcher shop, asking for his help in assisting a young Syrian girl who was feeling ill. The nonprofit organization that Mr. Tirikos-Ergas co-founded, called Angalia—or “hug” in Greek—is one of many volunteer initiatives helping the country cope with a massive wave of migrants, most of them refugees escaping conflict and violence in Syria and Afghanistan.

The run-up to elections set for next month has further paralyzed Greece’s response to the migration crisis as authorities are already struggling to cope with the skyrocketing number of arrivals amid the country’s debt woes and near-empty public coffers. Volunteers such as Mr. Tirikos-Ergas are often all that prevents complete chaos on the islands bearing the brunt of the migration, fueled this summer by the worsening war in Syria. The helpers warn that they have their limits. “We are not made of concrete,” the 33-year-old said. “We are under enormous pressure, especially from the people that we can’t help. At the same time, we are juggling all of our other responsibilities.”

The migrants are crossing into Greece from Turkey before heading to Northern Europe by way of the so-called Balkan corridor through Macedonia and Serbia and on into Hungary. Nearly 142,000 migrants have arrived by sea in Greece since June 1, according to the International Organization for Migration. While Kos, Chios and other Greek islands in the Aegean Sea have also received migrants, Lesbos has absorbed the bulk: More than 93,000 have arrived on the island so far in 2015, more than seven times the number in 2014.

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One of many.

The Black Route (WaPo)

They’ve made it 1,600 miles by boat, train, car and on foot. Now the light is fading as they finally reach the edge of Greece. “Let’s move,” Ahmed Jinaid beckons, his family trailing him up a hill in high grass. But then he stops. He is standing beside an abandoned watchtower near the northern border, the one after which there’s supposed to be no talking and, worse for a man with a weakness for Winstons, no smoking. The 42-year-old former deliveryman squints at his white Samsung Galaxy phone. He is looking for directions. “No, no, no,” he mutters, blinking at the glowing screen. “What happened to the GPS?” Ahmed is eight weeks out of Syria, part of a historic exodus of Arabs, Africans and Asians fleeing war and oppression. More than 102,000 migrants have risked the Mediterranean Sea to reach Europe this year.

Many land in Italy, but a surging number of migrants are coming ashore in Greece. From there, they venture north through the Balkans to the rest of the European Union — a web of perilous trails stretching hundreds of miles. Aid workers have nicknamed it the Black Route. Ahmed had meticulously plotted the trek on his phone’s GPS. On a steep hill ahead, the gaudy glow of red neon burns. That’s Macedonia and the casino town they need to avoid. Gangs armed with guns and lead pipes roam the woods, beating and robbing migrants. There are corrupt police on the route. Heat-seeking cameras. Mountains. Wolves. Ahmed is limping from days of walking. A mysterious pain is knifing through his back. The untreated goiter on his neck — the one he tries to hide with his jacket collar — is throbbing.

He taps the Samsung screen again. It’s frozen. His smartphone. It cost $275 on the black market back in Aleppo, just shy of three months’ salary. His compass. Lodestar. A lifeline for the modern migrant, who journeys to the First World by the grace of the mobile Internet. “Uncle,” whispers Marwa Jinaid, Ahmed’s shy 19-year-old niece. A kindergarten teacher with flawless copper skin who is used to afternoons coloring with kids, she lets go of the hand of her 11-year-old brother, Mohamed. He’s the family comedian, the kid who endured the past few years of war in Syria by watching “Tom & Jerry” cartoons in Arabic. But he has suddenly run out of jokes. And Marwa is hugging herself in a beige winter coat despite the warm spring night. Bandits, she knows, are capable of more than thievery.

“Uncle,” Marwa says again, on the verge of tears. “What are we going to do?” Ahmed is taking his niece and nephew to their father, Ismail, who fled Syria last year and is now living in a pastel village called Gmünd in Austria. Theirs is a journey prompted by the desperation of war. It also reflects the dysfunction of the European Union. That’s because many of the Syrians and Iraqis landing in Greece stand a good chance of qualifying for legal asylum. But there is little work and few prospects for aid in this bankrupt country. Farther north, in promised lands such as Austria, France, Germany and Sweden, asylum means shelter, a generous stipend and the prospect of a good job. The European Union, however, offers no safe passage there. Hence the Black Route.

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The most tragic species. Not rhinos.

South Africa Sees Poaching Intensify as 749 Rhinos Killed (Bloomberg)

Rhino poaching in South Africa has intensified this year after a record number of animals were killed in 2014, according to Environmental Affairs Minister Edna Molewa. In the period to Aug. 27, 749 rhinos were poached compared with 716 in the same time frame last year, Molewa told reporters on Sunday in the capital, Pretoria. Of that total, 544 were killed in the 2 million-hectare Kruger National Park, which borders Mozambique and Zimbabwe. “The problem of people attempting to poach our rhinos is intensifying,” Molewa said. “The number of arrests inside Kruger National Park was 138 for this year compared with 81 arrests for the same period last year.”

The government has yet to decide whether to sell off its rhino-horn stockpile in a bid to slow the slaughter after 1,215 rhinos were killed illegally in South Africa last year, Molewa said. While a committee of inquiry investigates the feasibility of legalizing rhino-horn trade, the country has relocated at least 100 beasts to neighboring Botswana and Zambia. Demand for rhino horns has climbed in Asian nations, including China and Vietnam, because of a belief they can cure various ailments including cancer. South Africa is working on conservation awareness programs with Cambodia, Vietnam, China and Mozambique, Molewa said. South Africa is home to most of the world’s remaining white rhinos, with a population of about 18,500 animals, according to Sam Ferreira, a large mammal ecologist at South African National Parks. The country’s 1,916 black rhinos is the highest number in the world, followed by Namibia, Molewa said.

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Aug 302015
 
 August 30, 2015  Posted by at 10:41 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle August 30 2015
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Russell Lee Hammond Ranch general store, Chicot, Arkansas Jan 1939

Why We Need To Lie To Ourselves About The State Of The Economy (Satyajit Das)
Fed, ECB, BOE Officials All Say They See Inflation Rising (Bloomberg)
Central Banks Can’t Save Markets From A Crash, And Shouldn’t Try (Guardian)
On Second Thought, China Slowdown Will Hit Global-Growth Outlook (Bloomberg)
How To Make Sense Of China (Elizabeth C. Economy)
China Falters, And The Global Economy Is Forced To Adapt (NY Times)
China Premier Li Says No Basis for Yuan’s Continued Depreciation (Bloomberg)
For China, a Plunge and a Reckoning (WSJ)
How Western Capitalism Laid China Low (Pettifor)
Market Turmoil Means Capitalism Faces Systematic Crisis (Sputnik)
We Are All Preppers Now (Mises Inst.)
IMF’s Lagarde Says Restructuring Should Suffice For Greek Debt (Reuters)
How 340.75 Drachmas Became 1 Euro (Yannis Palaiologos)
UK Property Sales Down 15%, But Prices Are Up (BBC)
The Evolution of America’s Energy Supply -1776 – 2014 (VC)
As Tragedies Shock Europe, A Bigger Refugee Crisis Looms In Middle East (WaPo)

“For most people, the effect of these problems is unemployment, reduced job security, the deskilling of many professions and stagnant incomes. Home ownership is increasingly out of reach for many. Retirement may become a luxury for all but a few..”

Why We Need To Lie To Ourselves About The State Of The Economy (Satyajit Das)

Like the characters in Samuel Beckett’s Waiting for Godot, the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation. Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US or Germany and the rest of Europe. Everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.

Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions. The 2008 global financial crisis was a warning of the unstable nature of these arrangements. But there has been no meaningful change. Since 2007, global debt has grown by US$57 trillion, or 17% of the world’s GDP. In many countries, debt has reached unsustainable levels, and it is unclear how or when it is to be reduced without defaults that would wipe out large amounts of savings. Imbalances remain. Entitlement reform has proved politically difficult. Financial institutions and activity dominate many economies. The official policy is “extend and pretend”, whereby everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.

The assumption was that government spending, lower interest rates and supplying abundant cash to the money markets would create growth. While the measures did stabilise the economy, they did not lead to a full recovery. Instead, they set off dangerous asset price bubbles in shares, bonds, real estate and even fine arts and collectibles. Economic problems are now compounded by lower population growth and ageing populations; slower increases in productivity and innovation; looming shortages of critical resources, such as water, food and energy; and man-made climate change and extreme weather conditions.

Slower growth in international trade and capital flows is another retardant. Emerging markets, such as China, that have benefited from and recently supported growth are slowing. Rising inequality affects economic activity. For most people, the effect of these problems is unemployment, reduced job security, the deskilling of many professions and stagnant incomes. Home ownership is increasingly out of reach for many. Retirement may become a luxury for all but a few, reflecting increasing difficulty in building sufficient savings. In effect, living standards will decline. Future generations will bear the bulk of the cost as they are left to tackle the unresolved problems of their forebears.

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Empty rethorical lies.

Fed, ECB, BOE Officials All Say They See Inflation Rising (Bloomberg)

Stronger growth will pull inflation higher in the U.S. and Europe, according to three top central bankers who voiced confidence that their regions will escape from headwinds that are keeping inflation too low. Fed Vice Chairman Stanley Fischer joined ECB Vice President Vitor Constancio and BoE Governor Mark Carney Saturday on a panel at the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming, dedicated to discussing inflation dynamics. Their optimism has not been shared up until now by investors, trading in inflation-protected bonds shows. “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” Fischer said in his prepared remarks.

“With inflation low, we can probably remove accommodation at a gradual pace,” Fischer said. “Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.” While Fischer has left open the option of an interest-rate increase when policy makers meet next month, he didn’t express a preference for acting that soon. “I do not plan to upset your rational expectation that I cannot tell you what decision the Fed will reach by Sept. 17,” he told the symposium Saturday. Price increases in the U.S. and Europe have been running well below levels targeted by the central banks, where officials are debating what slower Chinese growth and weaker commodity prices could mean for future inflation.

While U.S. officials are weighing the timing of their first interest-rate increase since 2006, and the Bank of England may tighten in early 2016, the ECB has heard calls to extend its quantitative easing program to provide more protection against potential deflation. “The link between inflation and real activity appears to have strengthened in the euro area recently,” the ECB’s Constancio said in a paper delivered at Jackson Hole. “Provided our policies are able to significantly reduce the output gap, we can rely on a material effect to help bring the inflation rate closer to target.” Investors may not share this optimism. 5-year, 5-year inflation swaps in the euro area – which reflect expectations for the five-year path of inflation five years from now – show that market-based inflation expectations slid to about 1.65%in August from about 1.85% at the beginning of the month. That’s almost as low as when the ECB started its quantitative easing program in March.

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But who says they’re trying? I often think they’re trying to cause crashes instead.

Central Banks Can’t Save Markets From A Crash, And Shouldn’t Try (Guardian)

The meeting of the world’s most important central bankers in Jackson Hole, Wyoming, this weekend only confirmed the need for Britain, Japan, the eurozone and the US to keep monetary policy loose. Yet the palliative offered by the Fed is akin to a parent soothing fears with another round of ice-creams despite expanding waistlines and warnings from the dentist and the doctor. According to some City analysts, the stock markets are pumped with so much cheap credit that a crash is just around the corner. And they worry that when that crash comes, the central banks are all out of moves to prevent the aftershocks from causing a broader collapse.

Since 2008 the Fed has pumped around $4.5 trillion into the financial system. The Bank of England stopped at £375bn. The Bank of Japan is still adding to its post-crash stimulus with around $700bn a year and the ECB will have matched its cousin in Tokyo by the end of the year. In each case, the central bank has adopted quantitative easing, which involves buying government debt to drive up its price. A higher price lowers the returns and encourages investors to go elsewhere in search of gains. It has meant a big shift in the portfolios of fund managers in favour of shares. Apart from a few blips due to the Greek crisis, stock markets have boomed. This summer, the FTSE 100 soared past 2008 levels to top its 1999 peak.

But China, which has borrowed heavily to keep its economy moving, is running out of steam. Beijing has said it does not want to encourage another borrowing boom. But to prevent a crash, it is doing just that. In the last two weeks it has cut interest rates and loosened borrowing limits. It has even invested directly in the market, buying the shares of smaller companies. So we face the shocking prospect of central bankers, in thrall to stock market gyrations, making the world a more unstable place with promises of yet more cheap credit.

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Disregard everything Bloomberg has published on the issue over the past two weeks?!

On Second Thought, China Slowdown Will Hit Global-Growth Outlook (Bloomberg)

China’s deepening struggles are starting to make a bigger dent in the global economic outlook. Moody’s Investors Service on Friday cut its 2016 growth forecast in Group of 20 economies to 2.8%, down 0.3 percentage point from the company’s call less than two weeks ago. China is projected to grow 6.3% in 2016, down from 6.5% previously, the credit-rating company said in a report. Citigroup Inc. last week pared its projection for world growth in 2016 to 3.1% from 3.3%, the third straight time the bank has cut the forecast. Recent Chinese data including numbers on credit expansion and fixed-asset investment suggest a sharper slowdown this quarter than Moody’s previously judged, while Citigroup said the worsening outlook was driven by “significant” downgrades for China, the euro area, Japan and several other major countries.

“We’re seeing evidence that the slowdown is broader than expected” in China, said Marie Diron, a London-based senior vice president at Moody’s and one of the report’s authors. “It’s long been clear that there’s a slowdown in the manufacturing and construction sector, but the service sector was more resilient. That’s still the case, but we’re seeing some signs of weakness in the labor market.” Efforts to boost growth by the People’s Bank of China, which eased its main policy rate this week, will only partly offset the slowdown, Moody’s said in the research report. Moody’s said it cut its global projection because of “information that has become available” since the Aug. 18 publication of its previous forecast. In addition to China, Moody’s lowered outlooks for nations including Brazil and Russia.

The depreciation of the yuan will probably be “fairly modest” in coming months, meaning the world’s second-largest economy won’t get much of a boost from a cheaper currency, Mark Schofield at Citigroup Global Markets, wrote in an Aug. 21 report. China shocked markets on Aug. 11 by devaluing the yuan and aligning its exchange-rate policy more with market forces. The currency is down 2.8% against the dollar this month, while the Shanghai Composite Index of stocks has plunged 12%. “We continue to believe that the greatest risks to our growth forecasts remain to the downside,” Schofield wrote. Actual growth is “probably even lower” because of “likely mis-measurement in China’s official data,” he wrote. Even with the weaker outlook, Moody’s dismissed the impact of China’s stock-market rout, saying it happened after a “long period of price increases” and will have limited effects on consumer spending and financial-industry profit.

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Newsweek finds this fit to print.

How To Make Sense Of China (Elizabeth C. Economy)

Over the past month, there has been a lot of “China drama.” The volatility in the Chinese stock market, the yuan devaluation and now the Tianjin warehouse explosion have all raised China chatter to a new level of anxiety. Some of the anxiety is understandable. These events have real consequences—above all for the Chinese people. At the urging of the Chinese government, tens of millions of Chinese moved to stake their fortunes not on real estate but on the stock market—the most unfortunate used their real estate as leverage to invest in the market and are now desperate for some good news. The Tianjin warehouse explosion has thus far left 121 Chinese dead, more than seven hundred injured and over fifty still missing.

Globally, the yuan devaluation has triggered a rate rethink by central bankers in Europe and the United States and the stock market slide has contributed to steep drops in Asian and U.S. markets. Events such as these in any country would garner international attention. In the case of China, however, the noise around such events is amplified by the absence of three mitigating factors:

Transparency. A lack of transparency in China compounds the challenge of understanding what is going on. What, for example, is behind China’s devaluation of the yuan? Is it part of Beijing’s bid to push forward on its economic reforms by making the currency more responsive to the market? Is it an effort to persuade the International Monetary Fund that the yuan should become part of its basket of currencies before Beijing has to wait another five years for its currency to be considered? Is it an effort to prop up China’s ever-declining export numbers? Or is it a confluence of all three?

Context. While the human toll inflicted by the Tianjin warehouse explosion was devastating, no one should be surprised by the disaster itself or the political aftermath. The pattern of Chinese behavior—including the corrupt environmental impact assessment system that allowed for the placement of the factory so close to people’s residences, the lack of knowledge of what precisely the warehouse stored, the generosity of the Chinese people trying to help those affected and the attention paid by the Chinese government to assigning blame and shutting down information transmission and popular commentary via the Internet—is one that repeats itself frequently.

Perspective. Drama surrounding China is also heightened by the tendency of outside observers to lose a bit of perspective. The media, as well as China analysts—and those who play them on TV— are rewarded for bold statements and predictions. I looked back at what people were saying about the Chinese stock market at the end of 2014 and early 2015 when the market was surging. At that time, unsurprisingly, there was a lot of triumphalism punctuated by a few dark warnings. The Economist, for example, produced a piece, “Super-bull on the rampage,” that focused 95% of its attention on all the excitement the stock market was generating, with only 5% at the end mentioning some of the potential weaknesses underpinning the rise in the market.

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Everyone was part of the Ponzi.

China Falters, And The Global Economy Is Forced To Adapt (NY Times)

The commodities giant BHP Billiton spent heavily for years, mining iron ore across Australia, digging for copper in Chile, and pumping oil off the coast of Trinidad. The company could be confident in its direction as commodities orders surged from its biggest and best customer, China. Now, BHP is pulling back, faced with a slowing Chinese economy that will no longer be the same dominant force in commodities. Profit is falling and the company is cutting its investment spending budget by more than two-thirds. China’s rapid growth over the last decade reshaped the world economy, creating a powerful driver of corporate strategies, financial markets and geopolitical decisions. China seemed to have a one-way trajectory, momentum that would provide a steady source of profit and capital.

But deepening economic fears about China, which culminated this week in a global market rout, are now forcing a broad rethinking of the conventional wisdom. Even as markets show signs of stabilizing, the resulting shock waves could be lasting, by exposing a new reality that China is no longer a sure bet. China, while still a large and pervasive presence in the global economy, is now exporting uncertainty around the world with the potential for choppier growth and volatile swings. The tectonic shift is forcing a gut check in industries that have built their strategies and plotted their profits around China’s rise. Industrial and commodity multinationals face the most pressing concerns, as they scramble to stem the profit slide from weaker consumption.

Caterpillar cut back factory production, with industry sales of construction equipment in China dropping by half in the first six months of the year. Smartphone makers, automobile manufacturers and retailers wonder about the staying power of Chinese buyers, even if it is not shaking their bottom line at this point. General Motors and Ford factories have been shipping fewer cars to Chinese dealerships this summer. It is not just companies reassessing their assumptions. Russia had been turning to China to fill the financial gap left by low oil prices and Western sanctions. Venezuela, Nigeria and Ukraine have been heavily dependent on investments and low-cost loans from China.

The pain has been particularly acute for Brazil. The country is already faltering, as weaker Chinese imports of minerals and soybeans have jolted all of Latin America. The uncertainty over China could limit the maneuvering room for officials to address the sluggish Brazilian economy at a time when resentment is festering over proposed austerity measures.

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After next Thursday’s military parade things may change.

China Premier Li Says No Basis for Yuan’s Continued Depreciation (Bloomberg)

Chinese Premier Li Keqiang said there was no basis for a continued depreciation of the yuan after the central bank allowed the currency to devalue 2.8% this month. The yuan can remain “basically” stable on a “reasonable and equilibrium level,” said Li, according to a statement posted on the State Council’s website Saturday. Li made the comments at a state council meeting on Friday. The assurances came after the central bank on Aug. 25 cut interest rates for the fifth time since November and lowered the amount of cash banks must set aside to stem the biggest stock-market rout since 1996. Deflation risks, over-capacity and a debt overhang remain a cloud over the Chinese economy, which is forecast for its slowest expansion since 1990.

China will continue to carry out proactive fiscal policy and prudent monetary policy and will use “more precise” measures to cope with downward pressure on the economy, said Li in the statement. The government will prevent regional and systematic risks, according to the statement. Policy makers want to stabilize Chinese shares before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan, two people familiar with the matter, who asked not to be identified because the intervention wasn’t publicly announced, said Thursday.

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Long good read. Still too soft though.

For China, a Plunge and a Reckoning (WSJ)

As China’s stock markets started nose-diving, the government almost immediately intervened, forbidding state-owned enterprises to sell shares, buying hundreds of billions of dollars worth of stocks and lowering interest rates to stimulate buying. It was a fatal decision: Their interventions immediately turned the markets into an institution they owned. Henceforth, the party’s reputation would rise or fall with those markets. And as the markets roil, as they undoubtedly will, the way that ordinary Chinese citizens see their leaders is likely to change significantly. The plunge was all the more unnerving because it belied the party leadership’s conceit that their superior formula of governance could safely guide the economy through just such cyclical shocks.

This pretension had not only helped create a mythology of can-do omnipotence and invincibility around party leaders but also helped silence foreign critics of the slow pace of economic reform and the complete absence of political reform. Worse, the market crash came alongside a rash of other unsettling news. Earlier this month, a key gauge of China’s nationwide manufacturing activity showed the lowest level in 77 months. Steel production and consumption are both notably off. Exports slid sharply in July. The renminbi has been devalued.

And on Aug. 12, a chemical warehouse serving the port city of Tianjin blew up in a devastating explosion that incinerated whole lots full of export vehicles, demolished thousands of apartments, killed some 140 people and spewed untold quantities of toxic chemicals into densely populated neighborhoods. The party suddenly no longer seemed infallible. For China’s leaders, the most profound problem with this string of events isn’t simply the monetary loss or the body count but the overall psychological effect. Because Mr. Xi’s China is such a brittle, tightly wound society, it is especially vulnerable to such shocks. Moreover, because the party leadership and central government purport to control so many aspects of Chinese life—from economics and financial markets to culture and politics—they get blamed first whenever anything goes awry.

Since China today already has a serious trust deficit, blame can be instant and uncompromising. And China’s leaders have been laid low by their own venture, not Western gunboats. The debacle was nothing that could be convincingly blamed on the outside world; it was made in China. The party would have been better off to have just left the stock markets alone. Party leaders could not have tangled with a more free-willed and insubordinate jousting partner. Markets answer to their own value-driven drummers. Unlike dissident Nobel Peace Prize laureates, who can always be silenced or jailed, there is no obvious way to bring a market to heel—something the party evidently remains ill-equipped to understand.

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Debt done it.

How Western Capitalism Laid China Low (Pettifor)

After two days of trouble and strife in global stock markets, the Federal Reserve’s New York President William Dudley said in remarks to reporters that a September interest rate hike seemed “less compelling” now than in recent weeks. These two words alone calmed global financial markets, and pushed up the price of oil. So everything’s going to be all right then? That is what some would have you believe. “Relax. Its just a correction” say the analysts. “The stock market always goes up and up and up. Hang on in there.” However, I do worry. Where there’s volatility and instability, the causes are ultimately fundamental. Given this week’s events what can they be? Is it all to do with China?

I doubt it. When the governors of the People’s Bank of China announced a cut in interest rates – stock markets continued to fall. When a Fed governor uttered two words off the cuff – markets rallied. So when looking for a cause we need to look west, not east. Most agree that the panic was sparked by a slowdown in China. The question then becomes: why is China slowing down? Some put it down to China’s credit binge, and the rise in debt hobbling local governments and property developers. Demographic change is another. Others believe that China’s extraordinary investment levels will now dive lower.

I don’t buy these analyses as causal. Instead I see them as consequential, and would point the finger at the following: first an overhang of global debt, largely in Anglo-American economies ($57trillion has been added since 2009). Second, the deficiency in global demand for goods and services caused by austerity, low levels of investment and wage repression. Third, the glut of unsold Chinese goods (e.g. cars and rubber tyres) caused by falling demand for these goods, and resulting in falls in prices (disinflation or deflation). The deficiency of demand and resulting disinflation or deflation originates, I would argue, in the United States, the world’s biggest consumer but also one in which private debt levels remain high, and wages remain repressed.

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“Capitalism is dead. The markets have become too big to fail..”

Market Turmoil Means Capitalism Faces Systematic Crisis (Sputnik)

The volatility sweeping world markets over the past week is a sign an impending global economic crisis and the imperfections of capitalism run amok, Trends Research Institute head Gerald Celente told Sputnik. “Capitalism is dead. The markets have become too big to fail,” Celente said on Friday. “It’s a rigged game.” Celente, who is also the publisher of Trends Journal, noted that markets behave more like a casino than a free market system. “It is like a casino that plays with two different sets of cards and in one of them it keeps putting its own new wild cards and jokers in the deck,” Celente, who is also the head of Trends Research Institute, continued. Stock market managers and major financial interests were rigging the market to protect their institutions and profits, Celente argued.

The expert said it was false to blame China for setting off the chain reaction through the volatility on the Shanghai stock exchange. He argued instead this was a symptom of the underlying problems, not their cause. “The US and Europeans are buying less products, so China has to export less and therefore its demand for raw materials from developing countries around the world falls,” he pointed out. “This is a response to global stagnation,” he argued. The US, China, Japan and other countries have tried to stave off multiple crises by printing vast sums of money through QE and other monetary policies, but they have been unable to jump-start growth, Celente observed. “This is a global crisis. It is a Ponzi scheme,” he said. He argued the global financial system and central banks tried to resolve the crash of 2008 by printing cheap money and the cracks in that policy are now revealing themselves.

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“We were close enough in 2008 and what’s coming is on 20 times that scale.”

We Are All Preppers Now (Mises Inst.)

Damian McBride is the former head of communications at the British treasury and former special adviser to Gordon Brown, erstwhile Prime Minister of the U.K. Yesterday he tweeted some surprising advice in response to the plunge in global equities markets:

Advice on the looming crash, No. 1: get hard cash in a safe place now; don’t assume banks & cashpoints will be open, or bank cards will work.

Crash advice No. 2: do you have enough bottled water, tinned goods & other essentials at home to live a month indoors? If not, get shopping.

Crash advice No. 3: agree a rally point with your loved ones in case transport and communication gets cut off; somewhere you can all head to.

Evidently, McBride interprets the wipe-out of over $3 trillion in total global market cap during the three-day rout as a prelude to a much broader and deeper financial crash that will precipitate civil unrest. According to McBride,

“We were close enough in 2008 and what’s coming is on 20 times that scale.”

Read more …

Lagarde drops the ball several times in just a few sentences. Let’s hope her minions call her on it.

IMF’s Lagarde Says Restructuring Should Suffice For Greek Debt (Reuters)

A form of debt restructuring rather than outright forgiveness should enable Greece to handle its “unviable” debt burden, the head of the IMF was quoted as telling a Swiss newspaper. The IMF has yet to make clear if it will participate in the third €86 billion international bailout that Greece signed up to in early August, having argued in favor of a partial writedown of a debt burden it considers unsustainable in its current form. Greece’s euro zone creditors, notably Germany, have ruled out a writedown but are willing to consider other forms of restructuring such as a lengthening maturities. Asked about those differences, IMF Managing Director Christine Lagarde told Le Temps: “The debate on cancelling the debt has never been open I don’t think it is necessary to open it if things go well…

“We are talking about extending maturities, reducing rates, (making) exemptions for a certain period of time. We are not speaking about cancelling debt.” The interview made no mention of whether the IMF will take part in the new bailout, which Lagarde has previously said it will make a decision on by October. Turning to China, Lagarde said she expected the country’s economic growth rate to remain close to previous estimates even if some sort of slowdown was inevitable after its rapid expansion. China devalued its yuan currency this month after exports tumbled in July, spooking global markets worried that a main driver of growth was running out of steam. “The slowdown was predictable, predicted, unavoidable,” Lagarde was quoted as saying. “We expect that China will have a growth rate of 6.8%. It may be a little less.” The IMF did not believe growth would fall to 4 or 4.5%, as some foresaw.

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Nice little history lesson.

How 340.75 Drachmas Became 1 Euro (Yannis Palaiologos)

It was Saturday, March 14, 1998, when Theodoros Pangalos traveled to Edinburgh for an informal council of European Union foreign ministers. The top item on the agenda was negotiations for the accession into the bloc of 11 new candidate states, including Cyprus. Before he entered the meeting, Greek correspondents asked Pangalos whether Athens would resist pressure to link Cyprus’s EU accession to the progress of reunification talks. Once the meeting ended and that issue was resolved, to the benefit of both Greek and Cypriot interests, Pangalos was blindsided by a barrage of questions on an issue he knew nothing about: News has leaked from Brussels of the devaluation of the drachma and its entry into the Exchange Rate Mechanism (ERM).

The fact that the Greek foreign minister had not been briefed on this development is indicative of the government’s secrecy, aimed at thwarting speculation. Five years earlier, when Greece had been on the brink of a major exchange rate crisis, the ERM accession would have seemed impossible to achieve. Greece, however, had managed to overshoot the targets of the revised Convergence Program over four consecutive years from 1994 to 1997 both in the area of growth and in its fiscal deficit, which was reduced from 13.6% of gross domestic product in 1993 to 4% of GDP in 1997. Inflation dropped from 14.1% in 1993 to 9% in 1995, down to single digits for the first time since 1972, and then to 5.6% in 1997.

Prime Minister Costas Simitis had set a goal for himself to get Greece into the Economic and Monetary Union by 2001 at the latest – two years after the other states but before the euro was introduced in physical form. The former premier tells Kathimerini he expressed “our determination for accession to the euro” in all of his first meetings with the European Union heavyweights – Germany’s Helmut Kohl, France’s Jacques Chirac, Italy’s Romano Prodi and the UK’s John Major. While they all appeared positively inclined initially, they stressed that the Greek economy needed to be adequately prepared for such an important step.

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The new logic of the marketplace.

UK Property Sales Down 15%, But Prices Are Up (BBC)

The number of homes being sold in England and Wales has fallen significantly, according to figures from the Land Registry. In May this year, there were 65,619 transactions in total, a 15% fall on the same month in 2014. However, prices in some property hotspots are still rising by up to 13% a year, due to lack of supply. The number of homes being sold for more than a million pounds dropped dramatically – down by 21%. The Land Registry figures include cash sales, as well as properties bought with mortgages. Some experts have welcomed what they see as a cooling of the market.

“Normality has returned to the market, with the panic that has driven it in the past no longer present,” said Guy Meacock, head of the London office of buying agency Prime Purchase. “It is more level and sensible, which is good news for buyers.” However, the fall in transactions appears to be putting further pressure on house prices. Earlier this month, the Royal Institution of Chartered Surveyors (Rics) reported that the number of homes for sale was at a record low. As a result it said demand was outstripping supply, and prices were likely to rise as a result. The Land Registry has already reported that house prices in England and Wales rose by 4.6% in the year to July 2015.

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Not terribly innovative, but nice graphics.

The Evolution of America’s Energy Supply -1776 – 2014 (VC)

The Energy Information Administration (EIA) recently released data on the history of America’s energy supply, sorted by the share of each energy source. We’ve taken that data to create the chart associated with today’s post. The early settlers to North America relied on organic materials on the surface of land for the vast majority of their energy needs. Wood, brush, and other biomass fuels were burned to warm homes, and eventually to power steam engines. Small amounts of coal were found in riverbeds and other such outcrops, but only local homes in the vicinity of these deposits were able to take advantage of it for household warmth. During the Industrial Revolution, it was the invention of the first coal-powered, commercially practical locomotives that turned the tide.

Although wood would still be used in the majority of locomotives until 1870, the transition to fossil fuels had begun. Coke, a product of heating certain types of coal, replaced wood charcoal as the fuel for iron blast furnaces in 1875. Thomas Edison built the first practical coal-fired electric generating station in 1882, which supplied electricity to some residents in New York City. It was just after this time in the 1910s that the United States would be the largest coal producer in the world with 750,000 miners and blasting 550 million tons of coal a year. The invention of the internal combustion engine and the development of new electrical technologies, including those developed by people like Thomas Edison and Nikola Tesla, were the first steps towards today’s modern power landscape.

Fuels such as petroleum and natural gas became very useful, and the first mass-scale hydroelectric stations were built such as Hoover Dam, which opened in 1936. The discovery and advancement of nuclear technology led to the first nuclear submarine in 1954, and the first commercial nuclear power plant in the United States in Pennsylvania in 1957. In a relatively short period of time, nuclear would have a profound effect on energy supply, and it today 99 nuclear reactors account for 20% of all electricity generated in the United States. In more recent decades, scientists found that the current energy mix is not ideal from an environmental perspective. Advancements in renewable energy solutions such as solar, wind, and geothermal were made, helping set up a potential energy revolution.

Battery technology, a key challenge for many years, has began to catch up to allow us to store larger amounts of energy when the sun isn’t shining or the wind isn’t blowing. Companies like Tesla are spending billions of dollars on battery megafactories that will have a great impact on our energy use. Today, the United States gets the majority of its energy from fossil fuels, though that percentage is slowly decreasing. While oil is still the primary fuel of choice for transportation, it now only generates 1% of the country’s electricity through power plants. Natural gas has also taken on a bigger role over time, because it is perceived as being cleaner than oil and coal. Today, in 2015, wind and solar power have generated 5% and 1% of total electricity respectively. Hydro generates 7%.

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“We are only alive because we are not dead.”

As Tragedies Shock Europe, A Bigger Refugee Crisis Looms In Middle East (WaPo)

While the world’s attention is fixed on the tens of thousands of Syrian refugees swarming into Europe, a potentially far more profound crisis is unfolding in the countries of the Middle East that have borne the brunt of the world’s failure to resolve the Syrian war. Those reaching Europe represent a small percentage of the 4 million Syrians who have fled into Lebanon, Jordan, Turkey and Iraq, making Syria the biggest single source of refugees in the world and the worst humanitarian emergency in more than four decades. As the fighting grinds into a fifth year, the realization is dawning on aid agencies, the countries hosting the refugees and the Syrians themselves that most won’t be going home anytime soon, presenting the international community with a long-term crisis that it is ill-equipped to address and that could prove deeply destabilizing, for the region and the wider world.

The failure is first and foremost one of diplomacy, said António Guterres, the U.N. High Commissioner for Refugees. The conflict has left at least 250,000 people dead in the strategic heart of the Middle East and displaced more than 11 million overall, yet there is still no peace process, no discernible solution and no end in sight. Now, the humanitarian effort is failing, too, ground down by dwindling interest, falling donations and spiraling needs. The United Nations has received less than half the amount it said was needed to care for the refugees over the past four years. Aid is being cut and programs are being suspended at the very moment when those who left Syria in haste, expecting they soon would go home, are running out of savings and wearing out the welcome they initially received.

“It is a tragedy without parallel in the recent past,” Guterres said in an interview, warning that millions could eventually end up without the help they need to stay alive. “There are many battles being won,” he added. “Unfortunately, the number of battles being lost is more.” It is a crisis whose true cost has yet to be realized. Helpless, destitute refugees are strewn around the cities, towns and farms of the Middle East, a highly visible reminder of the world’s neglect. They throng the streets of Beirut, Istanbul, Amman and towns and villages in between, selling Kleenex or roses or simply begging for change. Mothers clutching children sleep on traffic circles, under bridges, in parks and in the doorways of shops.

Families camp out on farmland in shacks made of plastic sheeting, planks of wood and salvaged billboards advertising restaurants, movies, apartments and other trappings of lives they may never lead again. “This is not a life,” said Jalimah Mahmoud, 53, who lives on handouts with her 7-year-old granddaughter in Al-Minya, a settlement of crudely constructed tents alongside the coastal highway in northern Lebanon. “We are only alive because we are not dead.”

Read more …

Dec 132014
 
 December 13, 2014  Posted by at 6:38 pm Finance Tagged with: , , , , ,  6 Responses »
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DPC “Grant’s Tomb. Rubber-neck auto on Riverside Drive, New York” 1911

Hey! Who said economics can’t be fun?! How is it not absolutely brilliant that in the face of a collapsing shale oil industry – or at least, for the moment, of its financing model -, and the worst week for the Dow since 2011, the Thomson Reuters/UofMichigan consumer sentiment index shows American consumers are more optimistic than they’ve been in 8 years, and that “more consumers volunteered good news than bad news than in any month since 1984”? 1984! How does one trump that as a contrarian signal? And that I don’t mean to sound funny: that is serious.

Of course it says something too about US media and their incessant messages about how well everything is going and how we’ve passed that corner the recovery was always just around, and what a boon the falling oil prices will be to spending over the holidays, and even if sales instead fell over Thanksgiving; surely that’s only because people were saving up their newly found extravaganza for the Christmas season. And obviously the Fed-sponsored distortions of all asset prices on the planet, homes, stocks, you name it, have a lot to do with stoking that optimism as well.

But the feat stands on its own two feet just as much. Americans are not just behind the curve, they positively confirm a top has been reached. If ever you needed a sign, here it is: “Their expectations run quite counter to recent price data.” That’s from Jason Lange for Reuters, but before he gets around to that, check out what some of the experts he cites have to say:

After Years Of Doubts, Americans Turn More Bullish On Economy

Pessimism and doubt have dominated how Americans see the economy for many years. Now, in a hopeful sign for the economic outlook, confidence is suddenly perking up. Expectations for a better job market helped power the Thomson Reuters/University of Michigan index of consumer sentiment to a near eight-year high in December, according to data released on Friday.

U.S. consumers also saw sharp drops in gasoline prices as a shot in the arm, and the survey added heft to strong November retail sales data that has showed Americans getting into the holiday shopping season with gusto. “Surging expectations signal very strong consumption over the next few months,” said Ian Shepherdson, an economist at Pantheon Macroeconomics.

While improvements in sentiment haven’t always translated into similar spending growth, consumers at the very least are feeling the warmth of several months of robust hiring, including 321,000 new jobs created in November. When asked in the survey about recent economic developments, more consumers volunteered good news than bad news than in any month since 1984, said the poll’s director, Richard Curtin.

Moreover, half of all consumers expected the economy to avoid a recession over the next five years, the most favorable reading in a decade, Curtin said. The data bolsters the view that the U.S. economy is turning a corner and that worker wages could begin to rise more quickly, laying the groundwork for the Federal Reserve to begin hiking its benchmark interest rate to keep inflation from eventually rising above the Fed’s 2% target.

Overall, the sentiment index rose to a higher-than-expected 93.8, mirroring levels seen in boom years like 1996 and 2004. Many investors see the Fed raising rates in mid-2015, and policymakers will likely debate at a meeting next week whether to keep a pledge that borrowing costs will stay at rock bottom for a “considerable time.” Consumers see faster inflation ahead. Over the next year, they expect a 2.9% increase in prices, up from 2.8% in November, according to the sentiment survey.

Their expectations run quite counter to recent price data. The Labor Department said separately its producer price index dropped 0.2% last month, brought lower by falling gasoline prices. Prices were soft even excluding the drag from gasoline. U.S. stocks briefly cut losses after the buoyant sentiment data but stayed lower on the day as investors fretted about declining oil prices and what that said about global demand.

About those recent data, the New York Times says:

Inflation has been below 2% for most of the last two years, and falling gas prices could drive it even lower. Partly because of cheaper gas, the Consumer Price Index was unchanged in October from the previous month. Compared with 12 months earlier, consumer prices were up just 1.7%.

I think maybe I should just leave it at this. The American consumer has spoken, and (s)he’s called a top. Whether that’s just the top in consumer sentiment or also one in the stock markets, let’s see, but I lean towards thinking both is a realistic option, because of the way energy credit fell to pieces in no time. It looks like a harbinger for a – much – wider segment of the economy, and it feels like something’s profoundly broken.

Oct 142014
 
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Unknown Kewpee Hotels hamburger stand 1930

Too-Big-to-Fail Banks Face Up to $870 Billion Capital Gap (Bloomberg)
Richest 1% Of People Own Nearly 50% Of Global Wealth (Guardian)
Poor Nations ‘Pushed Into New Debt Crisis’ (Guardian)
US Oil Producers Could Drill Their Way Into Oblivion (BW)
Speculators Push Oil Into Bear Market as Supply Rises (Bloomberg)
Bond Market Convinced Fed Inflation Goal Unreachable This Decade (Bloomberg)
America’s GDP Fetishism Is A Rare Luxury In An Age Of Vulnerability (Stiglitz)
Thiel: We Are In A Government Bubble Of Massive Size (CNBC)
The Great Lira Revolt Has Begun In Italy (AEP)
Beppe Grillo Demands Euro Referendum As Italy’s Depression Drags On (AEP)
ECB Dark Room Crunches Bank-Test Data Amid D-Day Nerves (Bloomberg)
German Investor Morale Falls Sharply As Contraction Looms (CNBC)
Euro Drop Seen as ECB Sends Yen Assets to US (Bloomberg)
Draghi’s ‘Whatever It Takes’ Plan Faces Trial at EU Court (Bloomberg)
UK Retail Sales Plummet To Financial Crisis Lows (CNBC)
Ireland To Close ‘Double Irish’ Tax Loophole (Guardian)
Venezuela Default Almost Certain, Harvard Economists Say (Bloomberg)
Car-Maggedon: The $4.4 Trillion Traffic Problem (CNBC)
Ebola Airport Checks: ‘A Net With Very Wide Holes’ (CNBC)
UN Medical Official Dies Of Ebola In German Hospital (Guardian)
“There Is Scientific Evidence Ebola Has The Potential To Be Airborne” (ZH)

The very definition of lowballing.

Too-Big-to-Fail Banks Face Up to $870 Billion Capital Gap (Bloomberg)

Too big to fail is likely to prove a costly epithet for the world’s biggest banks as regulators demand they increase debt securities to cover losses should they collapse. The shortfall facing lenders from JPMorgan Chase to HSBC could be as much as $870 billion, according to estimates from AllianceBernstein, or as little as $237 billion forecast by Barclays. The range is so wide because proposals from the Basel-based Financial Stability Board outline various possibilities for the amount lenders need to have available as a portion of risk-weighted assets. With those holdings in excess of $21 trillion at the lenders most directly affected, small changes to assumptions translate into big numbers.

“The direction is clear and it is clear that we are talking about huge amounts,” said Emil Petrov, who heads the capital solutions group at Nomura in London. “What is less clear is how we get there. Regulatory timelines will stretch far into the future but how quickly will the market demand full compliance?” The FSB wants to limit the damage the collapse of a major bank would inflict on the world economy by forcing them to hold debt that can be written down to help recapitalize an insolvent lender. For senior bonds to suffer losses under present rules the institution has to enter bankruptcy, a move that would inflict huge damage on the financial system worldwide if it happened to a global bank.

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And counting.

Richest 1% Of People Own Nearly 50% Of Global Wealth (Guardian)

The richest 1% of the world’s population are getting wealthier, owning more than 48% of global wealth, according to a report published on Tuesday which warned growing inequality could be a trigger for recession. According to the Credit Suisse global wealth report, a person needs just $3,650 – including the value of equity in their home – to be among the wealthiest half of world citizens. However, more than $77,000 is required to be a member of the top 10% of global wealth holders, and $798,000 to belong to the top 1%. “Taken together, the bottom half of the global population own less than 1% of total wealth. In sharp contrast, the richest decile hold 87% of the world’s wealth, and the top%ile alone account for 48.2% of global assets,” said the annual report, now in its fifth year.

The report, which calculates that total global wealth has grown to a new record – $263tn, more than twice the $117tn calculated for 2000 – found that the UK was the only country in the G7 to have recorded rising inequality in the 21st century. Its findings were seized upon by anti-poverty campaigners Oxfam which published research at the start of the year showing that the richest 85 people across the globe share a combined wealth of £1tn, as much as the poorest 3.5 billion of the world’s population. “These figures give more evidence that inequality is extreme and growing, and that economic recovery following the financial crisis has been skewed in favour of the wealthiest. In poor countries, rising inequality means the difference between children getting the chance to go to school and sick people getting life saving medicines,” said Oxfam’s head of inequality Emma Seery.

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This is how we’re making the poor our bitches. Even more than they have always been. It’s warfare.

Poor Nations ‘Pushed Into New Debt Crisis’ (Guardian)

A sharp rise in lending to the world’s poorest countries will leave them with crippling debt payments over the next decade, a few years after many had loans written off, a report has warned. The Jubilee Debt Campaign said as many as two-thirds of the 43 developing countries it analysed could suffer large increases in the share of government income spent on debt payments over the next decade. Coinciding with the World Bank’s annual meeting in Washington, the anti-poverty campaigners accuse the international lender and other public bodies of “leading the lending boom” to poor countries without checking how repaying debts will divert resources from cutting poverty. The report highlights that for 43 poor countries, half of lending is from multilateral institutions such as the International Monetary Fund, World Bank and African Development Bank. Total lending to the group of poor countries has increased by 60% from $11.4bn (£7.1bn) a year in 2009 to $18.5bn in 2013.

“There is a real risk that today’s lending boom is sowing the seeds of a new debt crisis in the developing world, threatening to reverse recent gains in the fight against poverty and inequality,” said Sarah-Jayne Clifton, director of the Jubilee Debt Campaign. “The shocking thing is that public bodies like the World Bank are leading the lending boom, not just reckless private lenders hunting for returns.” The campaigners are calling for measures to make lending more responsible and for aid-giving to be shifted away from bodies like the World Bank that give loans towards sources that give it in the form of grants. The analysis uses IMF and World Bank data on developing country debts and projects the cost of payments under the following three scenarios: predictions of continuous high economic growth are realised; estimates of one economic shock over the next decade prove correct; and economic growth is lower than the standard prediction.

Even if high growth rates are achieved, 11 of the 43 poor countries would still see the share of government income spent on debt payments increase rapidly, or by more than five percentage points of government revenue, the report says. Under the second scenario, 25 countries are at risk. That rises to 29 countries under the third. The report highlights that aside from the rise in lending, on the other side of the equation government revenues are not rising to keep pace with repayments. As such, the campaigners are urging the UK government to push for policies that support developing countries in increasing their tax revenues by clamping down on tax avoidance and evasion.

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“Back in July, Goldman Sachs estimated that U.S. shale producers needed $85 a barrel to break even. That’s about where we are right now. The futures market points to even lower prices next year, with contracts for oil next April trading at about $82 a barrel.”

US Oil Producers Could Drill Their Way Into Oblivion (BW)

Remember the fall of 2008? As the world spun out of control and the price of everything crashed, a barrel of oil lost 70% of its value over about five months. Of course, prices never should’ve been as high as $146 that summer, but they shouldn’t have crashed to $40 by the end of that year either. As the oil market has recovered, there have since been three major corrections, when prices have fallen at least 15% over a few months. We’re now in the midst of a fourth, with oil prices down more than 20% since peaking in late June at around $115 a barrel. They’re now hovering in the mid-$80 range and could certainly go lower. That’s good news for U.S. consumers, who are finally starting to reap the rewards of the shale boom through low gasoline prices. But it could spell serious trouble for a lot of oil producers, many of whom are laden with debt and exaggerating their oil reserves. In a way, oil companies in the U.S. are perpetuating the crash by continuing to drill and push up U.S. oil production to its fastest pace ever.

Rather than pulling back in hopes of slowing the amount of supply on the market to try and boost prices, drillers are instead operating at full tilt and pumping oil as fast as they can. Just look at the number of horizontal rigs in the field: Over the past five years, the amount of horizontal rigs deployed in the U.S. has almost quadrupled, from 379 in early 2009 to more than 1,300 today. This is of course purely a fracking story. Almost all the recent gains in U.S. oil production are the result of horizontal drilling techniques being used across much of the Midwest, from Texas to North Dakota. Unlike conventional vertical wells, where more wells do not always equal more oil, the strategy in a shale field appears to be to drill as many as possible to unlock oil trapped in rock formations. As the number of horizontal drill rigs has exploded, the number of vertical rigs in the U.S. has gone in the opposite direction, falling almost 70% over the past seven years.

So will U.S. oil producers frack their way into bankruptcy? That’s a real possibility now. They’ve certainly gotten more efficient at drilling, and don’t need the same price they did to remain profitable. But we’re getting pretty close. Back in July, Goldman Sachs estimated that U.S. shale producers needed $85 a barrel to break even. That’s about where we are right now. The futures market points to even lower prices next year, with contracts for oil next April trading at about $82 a barrel. Certainly, some producers need higher prices than others. Those at the bottom of the cost curve could benefit from a potential wave of bankruptcy that spreads across the oil patch; they could then scoop up some assets on the cheap.

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“Several big, smart commodity hedge funds said oil is going to zero …”

Speculators Push Oil Into Bear Market as Supply Rises (Bloomberg)

Money managers reduced bets on rising oil prices by the most in five weeks, helping push U.S.- traded futures into a bear market. Hedge funds and other large speculators lowered net-long positions in West Texas Intermediate crude by 4.8% in the seven days ended Oct. 7, U.S. Commodity Futures Trading Commission data show. Short positions climbed 8%, the most in almost a month. WTI joined Brent, the European benchmark, in falling more than 20% from its June peak, meeting a common definition of a bear market. U.S. oil inventories rose the most since April in the week ended Oct. 3 as domestic production rose to a 28-year high and refineries shut units for maintenance. Demand nationwide will slip this year to the lowest since 2012, the government predicted Oct. 7. “The extended decline is compounded mainly by supply-driven concerns,” Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy, said in an interview in New York on Oct. 10. “The U.S. is not short of crude oil.”

U.S. crude stockpiles climbed by 5.02 million barrels to 361.7 million in the seven days ended Oct. 3, according to the Energy Information Administration. Weekly production averaged 8.88 million barrels a day, the highest since March 1986. “Several big, smart commodity hedge funds said oil is going to zero,” Seth Kleinman, Citigroup’s global head of energy strategy, said Oct. 7 at the Energy Department’s Winter Energy Outlook Conference in Washington. “They are being somewhat dramatic, but they were incredibly bearish.” Output will climb to 9.5 million barrels a day next year, the most since 1970, the EIA estimated Oct 7. Production is surging as a combination of horizontal drilling and hydraulic fracturing, or fracking, unlocks supplies from shale formations. Refineries processed 15.6 million barrels a day of crude in the week ended Oct. 3, down from 16.6 million in July, according to the EIA. U.S. refiners schedule maintenance for September and October as they transition to winter from summer fuels.

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If you don’t understand what inflation is, how can you do what’s needed to influence it? What’s more, why are you trying in the first place?

Bond Market Convinced Fed Inflation Goal Unreachable This Decade (Bloomberg)

When it comes to spurring inflation in the U.S. economy, the bond market is becoming convinced that the Federal Reserve has almost no chance of achieving its 2% target before the end of the decade. Inflation expectations have plummeted in the past three months, with yields of Treasuries implying consumer prices will rise an average 1.5% annually through the third quarter of 2019. In the past decade, those predictions have come within 0.1 percentage point of the actual rate of price increases in the following five years, data compiled by Bloomberg show. Even after the Fed inundated the economy with more than $3.5 trillion since 2008, bond traders are showing little fear of inflation. That may help influence U.S. monetary policy and make it harder for Fed officials to raise interest rates from close to zero as global growth weakens and the International Monetary Fund points to disinflation as a more imminent concern.

“The longer inflation rates stay below their targets, the longer the Fed’s going to stay on hold,” Gregory Whiteley, a money manager at DoubleLine Capital, said. “The burden of proof is more on the hawks and the people arguing for a rise in rates. They’re the people who have to make the case.” As the Fed winds down the most-aggressive stimulus measures in its 100-year history, the debate has intensified over how soon the central bank needs to raise rates and whether the shift will herald the long-awaited bear market in bonds. While Dallas Fed President Richard Fisher and Philadelphia Fed’s Charles Plosser dissented at the bank’s last meeting and have both warned that keeping rates too low for too long may trigger excessive inflation, the bond market’s predictive power helps to explain why U.S. government debt remains in demand. Instead of falling, as just about every Wall Street prognosticator predicted at the start of the year, Treasuries have returned 5.1% in 2014. The gains have outstripped U.S. stocks, gold and commodities this year.

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“When economic inequality translates into political inequality – as it has in large parts of the US – governments pay little attention to the needs of those at the bottom.”

America’s GDP Fetishism Is A Rare Luxury In An Age Of Vulnerability (Stiglitz)

Two new studies show, once again, the magnitude of the inequality problem plaguing America. The first, the US Census Bureau’s annual income and poverty report, shows that, despite the economy’s supposed recovery from the recession, ordinary Americans’ incomes continue to stagnate. Median household income, adjusted for inflation, remains below its level a quarter-century ago. It used to be thought that America’s greatest strength was not its military power but an economic system that was the envy of the world. But why would others seek to emulate an economic model by which a large proportion – even a majority – of the population has seen their income stagnate while incomes at the top have soared? A second study, the United Nations development programme’s human development report 2014, corroborates these findings. Every year, the UNDP publishes a ranking of countries by their human development index (HDI), which incorporates other dimensions of wellbeing besides income, including health and education.

America ranks fifth according to HDI, below Norway, Australia, Switzerland, and the Netherlands. But when its score is adjusted for inequality, it drops 23 spots – among the largest such declines for any highly developed country. Indeed, the US falls below Greece and Slovakia, countries that people do not typically regard as role models or as competitors with the US at the top of the league tables. The report emphasises another aspect of societal performance: vulnerability. It points out that while many countries succeeded in moving people out of poverty, the lives of many are still precarious. A small event – say, an illness in the family – can push them back into destitution. Downward mobility is a real threat, while upward mobility is limited. In the US, upward mobility is more myth than reality, whereas downward mobility and vulnerability is a widely shared experience. This is partly because of the US healthcare system, which still leaves poor Americans in a precarious position, despite Barack Obama’s reforms.

Those at the bottom are only a short step away from bankruptcy with all that that entails. Illness, divorce, or the loss of a job often is enough to push them over the brink. The 2010 Patient Protection and Affordable Care Act (or “Obamacare”) was intended to ameliorate these threats – and there are strong indications that it is on its way to significantly reducing the number of uninsured Americans. But, partly owing to a supreme court decision and the obduracy of Republican governors and legislators, who in two dozen US states have refused to expand Medicaid (insurance for the poor) – even though the federal government pays almost the entire tab – 41 million Americans remain uninsured. When economic inequality translates into political inequality – as it has in large parts of the US – governments pay little attention to the needs of those at the bottom.

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No doubt there.

Thiel: We Are In A Government Bubble Of Massive Size (CNBC)

Silicon Valley venture capitalist Peter Thiel told CNBC on Monday that we are in a “government bubble of massive size,” and that the bond market is the most distorted of all the markets. In a wide-ranging interview on CNBC’s “Squawk on the Street,” Thiel also spoke about tech investing, the PayPal-eBay split, Alibaba, cybersecurity and Elon Musk. “I think the thing that is most distorted is the bond market and fixed income, and perhaps less on the equity side, but we certainly are back on a government bubble of massive size,” he said. Tech stocks are quite a different story, he added. “They’re somewhat overvalued but that’s not the core of the insanity,” he said. “Tech investors always overrate growth and always underrate durability. You can measure growth but you can’t measure durability.”

He said he thinks Airbnb is undervalued. “If I had to bet on one that would be the next hundred-billion- dollar company it would be Airbnb and the consumer space,” Thiel said. “It’s a giant market and it keeps growing very fast. Investors are very biased towards things that they understand.” He said that since investors tend to drive around in black cars and stay in five-star hotels, they are more comfortable with Uber than with a couch or house-sharing service. For that reason, he said, “Uber is overvalued, Airbnb is undervalued.” On the recently announced plan to split PayPal from eBay, Thiel said the companies have gone separate ways. “It makes sense for them to naturally spin it out again and for PayPal to focus 100% on payments,” he said.

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Two curiously overlapping pieces by Ambrose Evans-Pritchard, who’s been talking with Beppe Grillo’s right hand behind the scenes man Gianroberto Casaleggio. Interestingly, Ambrose is losing his former aggressive tone vs Grillo and the Cinque Stelle, though he still calls them Italy’s UKIP. They are not.

The Great Lira Revolt Has Begun In Italy (AEP)

The die is cast in Italy. Beppe Grillo’s Five Star movement has launched a petition to drive for Italian withdrawal from Europe’s monetary union and for the restoration of economic sovereignty. “We must leave the euro as soon as possible,” said Mr Grillo, speaking at a rally over the weekend. “Tonight we are launching a consultative referendum. We will collect half a million signatures in six months – a million signatures – and we will take our case to parliament, and this time thanks to our 150 legislators, they will have to talk to us.” Ever since the pugnacious comedian burst on the political scene, the eurozone elites have comforted themselves that the party is not really Eurosceptic at heart, and certainly does not wish bring back the lira. This illusion has been shattered. A referendum itself would not be binding, but a “law of popular initiative” certainly would be. For the first time, a process is underway in Italy that will set off a national debate on monetary union and may force a vote on EMU membership that cannot easily be controlled.

Gianroberto Casaleggio, the party’s co-founder and economic guru, told me today that the Five Star Movement – or Cinque Stelle – had set out its demands in May, calling for the creation of Eurobonds to back up EMU, as well as the abolition of the EU Fiscal Compact. “Five months have gone by and we have had no reply. They have totally ignored us,” he said. The Fiscal Compact is economic insanity. It would force Italy to run massive fiscal surpluses for decades. These would cause an even deeper depression, pushing the debt ratio even higher, and would therefore be scientifically self-defeating. Historians will issue a damning verdict on the scoundrels who foisted this atrocity on Europe. My own view is that Italy could not restore viability within EMU even if Germany agreed to the two conditions (an impossible idea). It is already too late for that. Italy has lost 40pc in unit labour cost competitiveness against Germany since the Deutsche Mark and the lira were fixed in perpetuity in the mid 1990s.

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What I also find interesting is that nobody ever mentions that Grillo is a trained accountant.

Beppe Grillo Demands Euro Referendum As Italy’s Depression Drags On (AEP)

Italy’s Five Star Movement has launched a petition drive for withdrawal from the euro to lift the country out of depression and protect Italian democracy, a dramatic turn for a country that was passionately pro-European for sixty years. “We must leave the euro as soon as possible,” said Beppe Grillo, the combative comedian-politician and founder of the protest party that swept into Italy’s parliament last year with 26pc of the vote. “We will collect half a million signatures in six months – a million signatures – and we will take our case to parliament, and this time thanks to our 150 legislators, they will have to talk to us.” Gianroberto Casaleggio, the party’s economic strategist, said the movement had set out its minimum demands in May, calling for Eurobonds and the abolition of the EU Fiscal Compact, a straitjacket that will force Italy into decades of debt-deflation. “Five months have gone by and we have had no reply. They have totally ignored us,” he said.

Any referendum would not be binding but the party may be able to push through a “law of popular initiative” if eurosceptics in other parties join forces. Italians have become bitterly disenchanted with Europe after a 9pc fall in GDP over the last five and a half years, and a 24pc fall in industrial output. Most voters think it was a mistake to join the euro but are wary of withdrawal, fearing that a return to the lira would risk a crippling crisis. Even so Datamedia Ricerche poll in March found that 59pc would view a return to the lira as a good idea. Italy’s GDP has fallen back to levels first reached fourteen years ago, a catastrophic reversal unseen in any major country in modern times, even during the 1930s. It has lost 40pc in labour competitiveness against Germany since the mid-1990s, and is now trapped inside EMU with an over-valued exchange. It cannot cut easily cut wages with an “internal devalution” because this would cause havoc for debt dynamics.

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Lip service.

ECB Dark Room Crunches Bank-Test Data Amid D-Day Nerves (Bloomberg)

Deep in the European Central Bank’s Frankfurt headquarters, there’s a room sealed off from the world. In the Dark Room, as it’s referred to internally, staffers are combing through almost 39,000 points of data on the euro area’s 130 biggest banks before the results of the ECB’s Comprehensive Assessment are released on Oct. 26. The security precautions – no Internet connection or external phone lines – being taken are part of a plan to ensure that “Disclosure Day” arrives without leaks, lawsuits or glitches. When it starts to supervise euro-zone banks on Nov. 4, the ECB will embark on its biggest new mission since the introduction of the single currency, one that also poses the biggest threat to its reputation. The challenge between now and then is to publish the results of its year-long bank audit and convince the world that it’s tougher, fairer and more credible than any test that came before.

“The ECB understands that they’ve only got one chance at getting this right, and if they don’t their reputation will be severely damaged,” said Christian Thun, a senior director at Moody’s Analytics in Frankfurt. “It has been a massive undertaking, but I think they will achieve their aim of restoring confidence in the banking system.” The Comprehensive Assessment started in October 2013 as a way to ensure that when the ECB became the euro zone’s single supervisor it would know exactly what it was dealing with. Since then, at least 25 million data points have been collected on credit files, collateral and provisioning. This knowledge of asset quality has been fed into a stress test, an innovation the ECB says makes this better than previous tests run by the European Banking Authority. Banks will be required to show that their ratio of capital to risk-weighted assets can remain above 8% under current circumstances, and above 5.5% over three years after a hypothetical recession and bond-market collapse.

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Germany’s troubles run the gamut, all the way into the political arena, and they run much deeper than anyone thought mere weeks ago.

German Investor Morale Falls Sharply As Contraction Looms (CNBC)

German investor morale fell sharply in October, new data showed on Tuesday, raising fears that the euro zone engine could contact in the third quarter of 2014. Germany’s ZEW index of economic sentiment fell into negative territory for the first time since November 2012 as pessimism mounted over the outlook for the euro zone’s largest economy. The ZEW index fell to -3.6 points versus 6.9 points in September. The euro fell to a day’s low of $1.2666 following the data. ZEW, an influential center for European economic research, said the disappointing figures concerned incoming orders, industrial production and foreign trade.

“[These] have likely contributed to the growing pessimism among financial market experts,” ZEW President Professor Clemens Fuest remarked on the data. “ZEW’s financial market experts expect the economic situation in Germany to decline further over the medium term. Geopolitical tensions and the weak economic development in some parts of the euro zone, which is falling short of previous expectations, are a source of persistent uncertainty,” he added. The ZEW Indicator of Economic Sentiment for the euro zone also decreased in October. The respective indicator has declined by 10.1 points compared to the previous month, reaching 4.1 points.

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The rising dollar will move mountains.

Euro Drop Seen as ECB Sends Yen Assets to US (Bloomberg)

The European Central Bank’s record-low interest rates are pushing Japanese investors out of the region and into the U.S., and that’s weighing down the euro, according to Mizuho Bank Ltd. The CHART OF THE DAY shows Japanese investment managers were net sellers in August of German, French and Italian bonds while they snapped up U.S. Treasuries for a sixth-straight month. The 18-nation euro has weakened about 6% against Japan’s currency this year, while the dollar reached a six-year high of 110.09 yen this month. German 10-year yields tumbled to a record 0.858% last week from 1.93% on Dec. 31. “Yields in Europe are getting crushed, reducing the allure for foreign investors,” said Daisuke Karakama, a markets economist at Mizuho Bank in Tokyo. “Europe is forced to continue easing, and carry trades funded in euros will drag the common currency lower. It’s inevitable that the U.S. will be more attractive for investors.”

Carry trades involve borrowing in low interest-rate currencies to buy higher-yielding assets elsewhere. The Federal Reserve is on course to end its bond buying this month, even as the Bank of Japan maintains record stimulus. President Mario Draghi repeated over the weekend he’s ready to expand the ECB’s balance sheet by as much as 1 trillion euros ($1.3 trillion.) Japanese money managers offloaded 4.9 trillion yen ($45.7 billion) of German bonds this year, capping eight straight months of reductions with sales of 86.8 billion yen in August, data from Japan’s ministry of finance and central bank show. The traders offloaded more than 50 billion yen each of French and Italian securities in August and bought 789.8 billion yen of Treasuries.

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“A ruling that would say the ECB’s Outright Monetary Transactions mechanism isn’t in line with the EU Treaty would be the end of the euro ..” [..] “Politically, they cannot do that.”

Draghi’s ‘Whatever It Takes’ Plan Faces Trial at EU Court (Bloomberg)

European Central Bank President Mario Draghi’s pledge to do “whatever it takes” with a bond-buying plan to save the euro-area goes on trial before the European Union’s top judges today. The Court of Justice, the bloc’s highest court, will weigh whether Draghi’s ECB overstepped its powers in 2012 with the mechanism to buy the debt of stressed countries if needed. While Germany’s own top court earlier this year expressed doubts about the plan’s legality, the EU tribunal’s 15-judge panel is unlikely to overturn it, according to legal scholars. “A ruling that would say the ECB’s Outright Monetary Transactions mechanism isn’t in line with the EU Treaty would be the end of the euro,” said Pierre-Henri Conac, a professor of financial-markets law at the University of Luxembourg.

“Politically, they cannot do that. There is no real suspense about the way the ruling will go, but there will be suspense about the actual content of the decision.” The Frankfurt-based ECB announced the details of its unprecedented bond-purchase plan in September 2012 as bets multiplied that the euro area would break apart and after Draghi’s promise to do whatever was needed to save the currency. The calming of financial markets that the still-untapped OMT program produced helped the euro area emerge from its longest-ever recession in the first half of last year. From the statements, the ECB expects wide-ranging support for its argument that it should be allowed to determine independently how to reach its goal of price stability, a spokesman for the ECB said.

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It’s the cold. No wait, it’s the heat. Summers hit sales, winters hit sales, and never is it people simply not having any money. “The prolonged Indian summer wilted retail sales in September, leaving clothing retailers hot under the collar. Selling woolly jumpers in warm weather is a tough ask…”

UK Retail Sales Plummet To Financial Crisis Lows (CNBC)

U.K. retail sales fell to the lowest levels last month since December 2008, as food sales continued to decline and clothing and footwear sales hit record lows, according to widely followed report. In a monthly joint report, the British Retail Consortium (BRC) and KPMG noted that a very warm summer had resulted in exceptionally low demand for “winter” items such as boots and coats in September. This led to the lowest monthly fashion sales since April 2012. Retail sales last month were down 2.1% on a like-for-like basis from September last year, when they increased 0.7% on 2012 levels.

“The prolonged Indian summer wilted retail sales in September, leaving clothing retailers hot under the collar. Selling woolly jumpers in warm weather is a tough ask, even for the most talented of sales staff,” David McCorquodale, head of retail at KPMG, said in the report. Grocers also had a challenging month, with many announcing further price cuts. Earlier data from the BRC showed food inflation hit an all-time low in September, as supermarkets tried to attract customers with special offers. Fresh food prices remained flat in September, for the first time since February 2010.

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Isn’t that timely?!

Ireland To Close ‘Double Irish’ Tax Loophole (Guardian)

Apple and other multinationals based in Ireland are to be given a four-year window before the phasing out of a scheme that cuts their tax bills. Amid mounting international criticism of the arrangements, which save foreign companies billions of euros, Ireland’s finance minister, Michael Noonan, is expected to announce the end of the “double Irish” scheme when he delivers his budget on Tuesday. The European commission is investigating “sweetheart” tax deals between the Irish state and Apple, and last month Brussels provisionally found that the iPhone maker’s tax arrangements in Ireland were so generous as to amount to state aid. Noonan’s move may pre-empt measures hinted at by the UK chancellor last month, when he announced a crackdown on technology firms’ tax strategies at the Conservative party conference. George Osborne said: “Some of the biggest technology companies in the world … go to extraordinary lengths to pay little or no tax here … We will put a stop to it.”

Party officials briefed that he had companies using the double Irish scheme in his sights. On the international stage, the G20 group of powerful economies has commissioned the Organisation for Economic Cooperation and Development to produce a package of tax reforms to rein in multinationals. This work is expected to be completed by summer 2015. Accompanying a pledge to remove the tax loophole, Noonan’s budget is expected to contain incentives for multinationals, such as lower tax rates for companies that centre their research and development facilities on Ireland. The so-called “patent box” will reward foreign firms that base their technological developments in the Irish state. This echoes the UK’s regime, which has attracted criticism from other countries as well as the EU’s code of conduct committee.

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The oil price drop can finish them off, those commies! Big Oil would love nothing more than to get access to the Orinoco, with arguably the biggest oil reserves on the planet.

Venezuela Default Almost Certain, Harvard Economists Say (Bloomberg)

Venezuela will probably default on its foreign debt as a shortage of dollars makes it impossible for the government to meet its citizens’ basic needs, Harvard University economists Carmen Reinhart and Kenneth Rogoff said. The economy is so badly managed that per-capita gross domestic product is 2% below 1970 levels, the professors wrote in an column published by Project Syndicate yesterday. A decade of currency controls has made dollars scarce in the country with the world’s biggest oil reserves, causing shortages of everything from deodorant to airplane tickets. “They have extensive domestic defaults and an economy that is really imploding,” Reinhart said in a telephone interview from Cambridge, Massachusetts. “What they really need to do is get their house in order. If an external default would trigger such a possibility, that’s not a bad thing.”

The suggestion that the country stop servicing its bonds comes a month after Harvard colleagues Ricardo Hausmann and Miguel Angel Santos wrote that Venezuela should consider defaulting given that it was piling up arrears to importers. Venezuela owes about $21 billion to domestic companies and airlines, according to Caracas-based consultancy Ecoanalitica. Venezuelan debt is the riskiest in the world, yielding 15.42 percentage points more than similar maturity Treasuries, according to data compiled by JPMorgan Chase & Co. The cost to insure the country’s bonds against default with credit-default swaps is also the highest for any government globally. “Given that the government is defaulting in numerous ways on its domestic residents already, the historical cross-country probability of an external default is close to” 100%, Reinhart and Rogoff wrote in their piece.

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Man’s folly in all its glory.

Car-Maggedon: The $4.4 Trillion Traffic Problem (CNBC)

Traffic congestion over the next 17 years is set to give the U.S. and the biggest economies in Europe a $4.4 trillion headache, according to a U.K.-based economic consultancy firm. France, Germany, the U.K and the U.S. will face a combined toll of $200.7 billion in 2013 across their whole economies and that figure is expected to rise to $293.1 billion by 2030, according to the Centre for Economics and Business Research (CEBR). This would mark a 46% increase in the costs imposed by congestion and is calculated from direct costs, like fuel and wasted time, as well as indirect costs like the inflated household bills passed on by idle freight traffic.”This report shows that advanced economies could be heading for ‘car-maggedon’,” said Kevin Foreman, the general manager of geoanalytics at INRIX who provided the data for the CEBR.

“The scale of the problem is enormous, and we now know that gridlock will continue to have serious consequences for national and city economies, businesses and households into the future,” he said in a press release on Tuesday. The U.K. is expected to see the biggest increase in costs due to congestion, with the U.S. in second place. Londoners faced the biggest impact – with a 71% rise – while Los Angeles is due for a 65% increase, according to the report. Road users spend, on average, 36 hours in gridlock every year in urban areas across these four economies, it added. It also noted that idle vehicles in these developed nations released 15,434 kilotons of carbon dioxide last year and forecast this to rise by 16% between 2013 and 2030.

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Always seemed a pretty useless idea to me. What they don’t say is you’re suspect when you have a fever AND you’re black.

Ebola Airport Checks: ‘A Net With Very Wide Holes’ (CNBC)

After Texas reported its second case of Ebola on Sunday, experts told CNBC that airport screening was unlikely to prevent another potential victim of the killer disease from entering the U.S. Last week, the U.S. government ordered five airports to start screening travelers for Ebola, following the first case on American soil—Thomas Eric Duncan, who died last week after arriving from Liberia in September. Texas Health Presbyterian Hospital has now announced that a female caregiver who treated Duncan has caught the disease. By instigating screening at five airports, including New York’s John F. Kennedy International Airport, the U.S.’s Centers for Disease Control and Prevention (CDC) hopes to evaluate over 94% of travelers arriving from Guinea, Liberia and Sierra Leone—the countries worst hit by the outbreak. Visitors will have their temperature taken, be observed for symptoms of Ebola and asked questions to determine their risk of the disease.

Epidemiologists have warned that there is little evidence that this screening will prevent another victim from entering the U.S., or other countries, such as the U.K., which have also adopted screening. “Airport temperature screening is ‘a net with very wide holes’,” Ran Balicer, a policy adviser and infectious diseases expert at Ben-Gurion University, Israel, told CNBC. “If your perceived aim would be to prevent most cases of imported disease, you are likely to fail.” The epidemiologist noted that the gap between sufferers contracting Ebola and developing a fever could be as long as 21 days—meaning that the likelihood of potential patients being detected as they disembark was slim. “Beyond the logistical difficulties, there is also a serious issue of false alarms, especially in the flu/RSV season (respiratory syncytial virus) when random fever may be not infrequent among travelers.”

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And so it spreads.

UN Medical Official Dies Of Ebola In German Hospital (Guardian)

A UN employee infected with Ebola has died in Germany, officials say. The 56-year-old Sudanese man had been flown from Liberia to Leipzig last Thursday, where he received treatment at a specialist unit at the St Georg clinic. On his arrival, doctors at the hospital had described his condition as “highly critical, but stable”. On Tuesday morning the clinic confirmed in a statement that their patient had died on Monday night, “in spite of intensive medical measures and the best efforts on behalf of the medical staff”. The Leipzig clinic has assured the public that there is no risk of infection for people in the area. The man had arrived in Germany on a specially adapted Gulfstream jet with an isolation chamber, and had been treated on an isolation unit by staff wearing protective gear.

According to the World Health Organisation, around 8,400 people have been infected with Ebola after the current outbreak of the disease in Africa, out of which more than 4,000 people have died. The epidemic is still out of control in the west African states of Liberia, Guinea and Sierra Leone. The Sudanese man was the third Ebola victim to receive treatment in Germany. A doctor from Uganda is being treated in an isolation unit in Frankfurt, while a Senegalese man was recently released from a Hamburg clinic after a five-week treatment. The German government claims to be well prepared for an outbreak of Ebola in Germany. Isolation units at hospitals in Frankfurt, Berlin, Düsseldorf, Leipzig, Munich, Stuttgart and Hamburg could hold a total of 50 Ebola patients, it said. There are currently no plans to increase the number of stations.

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Not a new suspicion, but good they go public with their research. Key word: Aerosols.

“There Is Scientific Evidence Ebola Has The Potential To Be Airborne” (ZH)

When CDC Director Tim Frieden first announced, just a week ago and very erroneously, that he was “confident we will stop Ebola in its tracks here in the United States”, he hardly anticipated facing the double humiliation of not only having the first person-to-person transmission of Ebola on US soil taking place within a week, but that said transmission would impact a supposedly protected healthcare worker. He certainly did not anticipate the violent public reaction that would result when, instead of taking blame for another epic CDC blunder, one which made many wonder if last night’s Walking Dead season premier was in fact non-fiction, he blamed health workers for “not following protocol.”

And yet, while once again casting scapegoating and blame, the CDC sternly refuses to acknowledge something others, and not just tingoil blog sites, are increasingly contemplating as a distinct possibility: namely that Ebola is, contrary to CDC “protocol”, in fact airborne. Or as, an article posted by CIDRAP defines it, “aerosolized.” Who is CIDRAP? “The Center for Infectious Disease Research and Policy (CIDRAP; “SID-wrap”) is a global leader in addressing public health preparedness and emerging infectious disease response. Founded in 2001, CIDRAP is part of the Academic Health Center at the University of Minnesota.” The full punchline from the CIDRAP report:

We believe there is scientific and epidemiologic evidence that Ebola virus has the potential to be transmitted via infectious aerosol particles both near and at a distance from infected patients, which means that healthcare workers should be wearing respirators, not facemasks.

In other words, airborne. And now the search for the next LAKE, i.e., a public company maker of powered air-purifying respirator (PAPR), begins.

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Sep 052014
 
 September 5, 2014  Posted by at 2:32 pm Finance Tagged with: , , , , ,  14 Responses »
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Arthur Rothstein ‘Fruit tramps’ living in tents, Yakima, Washington July 1936

Looking around us today, it would – or at least could – seem obvious that we live in a new world. Which we don’t recognize – as being new – because we don’t want that world. We instead want more of what we used to know, with icing and a cherry on top. We want to go back, not forward, though we don’t phrase or see it that way. The underlying issue is that the ‘forward’ we do want is not available, and we have no problem fooling ourselves into believing we can still achieve it.

We want a world controlled by America, with Europe as a sort of hunchbacked sibling obediently limping in its footsteps. That is familiar, and that feels safe. Like it was in days gone by, went things seemed to go well for us. We want what we had back then, we just want more of it. We want growing economies, and better lives for our kids than we had, just like our parents did. When there’s a crisis, we want it solved, so we can return to what we had, and add to it.

Because we so obviously and one-dimensionally want this and only this, it’s very easy for those who try, to make us do whatever it is they like, as long as they hold forth the promise of delivering our ideal world of more of the same and then some. There’s no-one who promises a world of less, or a world that is genuinely new, not just in name, who stands a chance of being taken serious, much less of being voted into office.

There’s not an economist who doesn’t promise a return to growth, or to prosperity, if only some model (s)he believes in is followed. More stimulus, less stimulus, the ideas and theories and models seem to run the gamut, but actually they’re all the same. They’re goal-seeked. Economics as a whole, as a field, is. There are no theories that seek not to return us to growth. As if eternal growth is a natural law or a god given right.

We are already paying a huge price for having these contorted and convoluted images presented and sold to us as real, and for us to buy into them. In Japan, Shinzo Abe is busy unleashing an economic Fukushima upon his people, just so their country can return to growth. In China, the amounts of credit with which markets are flooded just so the illusion of growth can be maintained are stupendous.

Europe can’t wait for its crisis to be finally over, so more of the same, plus a bunch of added gadgets, is there for everyone to grab onto. In the US, the media-induced consensus is that the return to growth has already been realized. Hail the centra; bankers. More of the same, in various stages of ‘development’, can be seen in many other countries across the globe. All geared towards additional growth, towards hopes and dreams.

But everywhere, save perhaps in a few very poor places, the illusion of growth can only be bought with debt. And debt, how ironic, is the opposite of growth once there is too much of it. So they just have us believe there’s no such thing as too much.

A report from two St. Louis Fed economists this week blames low inflation levels in the US on ‘consumers’ hoarding money. With 40+ million Americans on food stamps, they could think of nothing else than a local version of Ben Bernanke’s insane notion of ‘excessive savings’ in China holding back the world economy.

Without even considering the option that people simply don’t have money to hoard. That they instead are buried in debt. That the money pumped into the system only reaches the top part of it, and gets stuck there. If people don’t spend, it must be because they have tons of cash sitting in their mattresses, not that they don’t have it. A sadder picture of the state of economics could not be painted. What even more sad is that these are the kind of yokels who determine economic policy.

We don’t stand a chance. At first, I liked to see them address velocity of money in their inflation ideas, but then found they had no idea what it was or meant. US velocity of – base- money is at a record low. People are not spending. The same goes for Japan and Europe. But that’s not because people are wallowing in endless piles of cash. It’s because they’re at the end of the line.

A somewhat related piece has PIMCO bond manager Bill Gross explain how it all works according to the book he talks:

Two variables figure in the monetary straitjacket Gross describes: credit creation and credit velocity. The former must constantly expand at a high enough rate to pay interest on previously issued liabilities so as not to trigger the need for the sale of existing assets. If the current rate on outstanding debt in the U.S. is 4.5%, the Fed should target credit expansion of at least 4.5% per year.

Nevertheless, credit expansion has averaged just 2% for the past 5 years and only 3.5% in the past year. U.S. underachievement in credit creation is to blame for today’s economic stagnation, where the economy struggles to reach 2% real GDP growth.

A second variable of monetary policy is the velocity of money. Gross says no central banker knows how fast money should be changing hands in the economy and must therefore only dial the level up or down cautiously in order to avert a credit collapse.

But as a general rule, he writes, “the projected return on financial assets (relative to their risk) must be sufficiently higher than the return on today’s or forward curve levels of cash (overnight repo), otherwise holders of assets sell longer-term maturities and hold dollar bills in a mattress — lowering velocity and creating a recession/debt delevering.”

Now you know: The US doesn’t create enough additional debt. That’s why the economy is doing so poorly. Where is other times the economy was founded and built on production, on people working and producing things, it’s now debt that makes it tick.

And since people don’t have money, contrary to what the St. Louis Fed guys claim, they will need to borrow, says Gross. But they don’t. Not even at historically low rates. And if people don’t have money, and don’t borrow, they don’t spend, and you’re not going to get either growth or inflation.

By the way, why inflation at certain levels has achieved such a mantra-like status is beyond me, certainly in the way it’s supposed to be manipulated by central bankers. I always thought a central bank’s main task was to make sure just enough ‘money’ was in circulation in an economy to let it function. Not to set a goal for inflation levels. Which undoubtedly is why they predictably always fail to achieve whatever goal it is they set.

Of course, as per Bill Gross just now, central bankers must tamper in a similar way with the velocity of money (consumer spending) and ‘dial the level up or down cautiously’. As if Bernanke can make Americans spend more, or less, as and when he sees fit. How crazy do ideas get? Is that mere wishful thinking, is it goal seeking, or is it an elementary lack of intelligence?

It’ll take us forever and a day to pay down our debts and achieve some, any, kind of growth again. But that should not be the end of the world, it’s merely a transition to a new world, which has already dawned (just not on us).

We’re in a new world, one without – economic -growth, but we see it through old eyes, and it’s ruled through old politics. If we don’t recognize the dangers of that discrepancy in time, we’re going to enter an era – we may already have – of many more botched western interventions like the ones in Ukraine and Iraq. Where our leaders, who always were power hungry to begin with, turn out to be blood thirsty as well, when it comes to re-establishing the power structures of old, which belong in times gone by, and which will never come back.

The task of – central – governments, central bankers, and certainly alliances like NATO, should be to make sure as few people get hurt in this transition as possible. They should be the keepers of the peace, and the protectors of the weak as well as the natural environment in their part of the world. So far, they’re 180º off in every single respect.

As long as we insist on seeing the world through our old eyes, focused on growth and on more of whatever we feel we need even more of, we will continue to pick the leaders who promise us that. That may have been sort of fine 50 years ago, but in today’s world it can only lead to destruction, bloodshed, poverty and misery.

We’ve seen our world change, and we’ve failed to keep to up with the changes. We don’t want to be content with less, no matter how much we already have. What we possess has become our self-image, and the one we portray upon the world. But be careful: it we don’t change that, fast, it’ll lead us to places we don’t want to go.

Draghi Sees Almost $1 Trillion Stimulus as QE Fight Waits (Bloomberg)

Mario Draghi signaled at least €700 billion ($906 billion) of fresh aid for his moribund economy and left a fight with Germany over sovereign-bond purchases for another day. Pledging to “significantly steer” the European Central Bank’s balance sheet back toward the €2.7 trillion of early 2012 from 2 trillion euros now, the ECB president yesterday announced a final round of interest-rate cuts and a plan to buy privately owned securities. His mission: to revive inflation in the 18-nation euro area. Fully-fledged quantitative easing as deployed in the U.S. and Japan wasn’t enacted amid a split on the 24-member Governing Council, with Bundesbank President Jens Weidmann opposing the new stimulus and others seeking more. The latest round of measures pushed the euro below $1.30 for the first time since July 2013 and sent European bond yields negative. The steps “probably reflect that President Draghi does not have unanimity, or a large enough majority for quantitative easing,” said Andrew Bosomworth, portfolio manager at PIMCO. and a former ECB economist.

“The ECB is ready to do more if more is needed.” The ECB’s fresh monetary easing may help encourage companies and households to spend rather than save. It could also attract greater participation in a targeted lending program for banks that was unveiled in June and starts this month. Banks can borrow from the ECB for as much as four years at a small premium to the benchmark rate. The rate cuts mark the bottom line for conventional monetary policy. Declaring that the ECB can now reduce them no more, Draghi committed to buying so-called asset-backed securities and covered bonds in the hope that will funnel cash into an economy which stalled in the second quarter and where lending has been shrinking for more than two years.

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Don’t worry, someone’ll issue more.

Bond Drought Seen Challenging Draghi’s ABS Stimulus Plan (Bloomberg)

To appreciate the challenge Mario Draghi faces reviving Europe’s ailing economy by buying asset-backed securities, listen to Frank Erik Meijer. As head of ABS at Aegon Asset Management, which oversees €240 billion ($311 billion), Meijer says it takes him about three months to buy 1 billion euros of securities. “The number that’s circulating the market is €500 billion, but where is he going to get it from?” said Meijer, who is based in The Hague. “Existing bonds are unavailable so he might have to ask banks to create new ones.” The European Central Bank president’s plans are being greeted with skepticism by investors who have seen the €1.2 trillion market contract more than 40% since 2010 as regulators cracked down on the debt blamed for deepening the financial crisis. The securities are also typically bought by pension funds, insurers and banks who hold them until maturity.

Draghi said yesterday the ECB will buy a broad portfolio of “simple and transparent securities” that will include ABS and covered bonds as he seeks to free up bank balance sheets and stimulate lending. While declining to disclose the size of the program, he said it would have a “sizable” impact and details would be revealed after policy makers meet in October. “The news is clearly positive but the ECB will have to be careful not to alienate the existing investor base in ABS,” said Patrick Janssen, a fund manager at London-based M&G Investments, which oversees €21 billion of ABS. “There is a risk of us being crowded out.” The ECB is aware of the possibility of pushing investors from the market as it buys bonds. In a March paper, the bank’s researchers found that the U.S. Federal Reserve’s so-called quantitative easing program forced investors out of those sectors where the central bank had intervened.

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Crazy. And damaging. Ireland and other broke nations should not borrow for free, and then do just that at breakneck speed. It’ll break their necks.

Draghi’s Bond Rally Means Bailed-Out Ireland Can Borrow for Free (Bloomberg)

Four years ago, Ireland had to be bailed out by its European Union partners. Today investors are paying to lend it money. Ireland joined nations from Germany to Austria and Finland as its two-year note yield dropped below zero for the first time. Irish 10-year bond rates also dropped to record lows along with Italy’s after European Central Bank policy makers yesterday cut their key interest rate and signaled at least €700 billion ($906 billion) of aid to support the flagging euro-zone economy. A report today confirmed the region’s economic recovery ground to a halt in the second quarter. Negative yields reflect “ECB policy but also reflect a mounting belief in the lack of positive prospect for the European economy,” said Luca Jellinek, head of European rates strategy at Credit Agricole SA’s investment banking unit in London. “This is good news for the periphery.”

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Draghi Reaches The Dead-End Of Keynesian Central Banking (Stockman)

Europe is not growing much because most of its economies have been crushed under a mountain of debt, taxes, welfarism and statist dirigisme. Yet somehow the foolish pettifogger running the ECB thinks that driving the cost of money to the “lower bound” (i.e. zero) will help overcome these insuperable—and government made—barriers to prosperity. Yet in today’s financialized economies, zero cost money has but one use: It gifts speculators with free COGS (cost of goods sold) on their carry trades. Indeed, today’s 10 basis point cut by the ECB is in itself screaming proof that central bankers are lost in a Keynesian dead-end. You see, Mario, no Frenchman worried about his job is going to buy a new car on credit just because his loan cost drops by a trivial $2 per month, nor will a rounding error improvement in business loan rates cause Italian companies parched for customers to stock up on more inventory or machines.

In fact, at the zero bound the only place that today’s microscopic rate cut is meaningful is on the London hedge fund’s spread on German bunds yielding 97 bps—-which are now presumably fundable on repo at 10 bps less.Needless to say, when your only tool is a hammer, everything looks like a nail. And when you are a Keynesian with a hammer, it is presumed that nothing much was hammered before yesterday. That is to say, the whole mindless drive by the ECB toward the zero bound, which Draghi pointedly claimed to have achieved this morning, presumes that balance sheets—–the accumulated record of past actions—don’t matter. Instead, its all about the credit “flow” today and tomorrow. Accordingly, lower interest rates—no matter how trivial the change—are ritualistically presumed to stimulate more borrowing in the real economy, and therefore more spending, income and virtuous circle of Keynesian growth.

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It lost a lot more just in falling share prices today.

BP Found Grossly Negligent In Gulf Spill, Costs To Top $50 Billion (Bloomberg)

BP acted with gross negligence in setting off the biggest offshore oil spill in U.S. history, a federal judge ruled, handing down a long-awaited decision that may force the energy company to pay billions of dollars more for the 2010 Gulf of Mexico disaster. U.S. District Judge Carl Barbier held a trial without a jury over who was at fault for the catastrophe, which killed 11 people and spewed oil for almost three months into waters that touch the shores of five states. “BP has long maintained that it was merely negligent,” said David Uhlmann, former head of the Justice Department’s environmental crimes division. He said Barbier “soundly rejected” BP’s arguments that others were equally responsible, holding “that its employees took risks that led to the largest environmental disaster in U.S. history.” The case also included Transocean and Halliburton , though the judge didn’t find them as responsible for the spill as BP. Barbier wrote in his decision today in New Orleans federal court that BP was “reckless,” while Transocean and Halliburton were negligent.

He apportioned fault at 67% for BP, 30% for Transocean and 3% for Halliburton. U.K.-based BP, which may face fines of as much as $18 billion, closed down 5.9% to 455 pence in London trading. “The court’s findings will ensure that the company is held fully accountable for its recklessness,” U.S. Attorney General Eric Holder said. “This decision will serve as a strong deterrent to anyone tempted to sacrifice safety and the environment in the pursuit of profit.” The ruling marks a turning point in the legal morass surrounding the causes and impact of the disaster. Four years of debate and legal testimony have centered on who was at fault and how much blame each company should carry. BP is “subject to enhanced penalties under the Clean Water Act” because the discharge of oil was the result of its gross negligence and willful misconduct, Barbier held. BP said it “strongly disagrees” with the decision and will challenge it before the U.S. Court of Appeals in New Orleans.

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Yup.

BP Ruling ‘Wakeup Call’ as Risks Mount in Oil Search (Bloomberg)

A U.S. judge’s watershed ruling means the final cost to BP Plc for the 2010 Gulf oil spill may eclipse $50 billion, wiping out years of profits and highlighting the risks of drilling as the industry pushes into more dangerous areas such as deeper waters and ice-bound Arctic fields. Yesterday’s court decision that BP acted with gross negligence in the Gulf of Mexico disaster may hamstring the company financially as the industry’s search for resources becomes more expensive and dangerous. Companies including Exxon Mobil and Shell are also facing increasing pressure to show investors they can still grow as production declines. As producers scour the globe for oil and natural gas, the ruling shows they’ll be held accountable for mistakes that may be inevitable given the complexity of the work, said Edward Overton, professor emeritus at Louisiana State University’s department of environmental sciences in Baton Rouge.

While the judge has yet to rule on how much oil was spilled, a key factor in determining additional fines, millions of barrels of crude from the well harmed wildlife and fouled hundreds of miles of beaches and coastal wetlands. If $50 billion isn’t “a wakeup call to do it right, to slow down, to make sure all your i’s are dotted and t’s are crossed in terms of safety — not just for BP but also for the industry — I don’t know what is,” he said. The companies have little choice in the chase for big, new discoveries as access to resources continues to be limited. Exxon, BP, Shell, Chevron Corp. and Total SA earned more than $1 trillion in total profit during the past decade, almost all of which has been spent in the search for new pools of oil and natural gas.

Since 2004, the five companies have tripled capital spending and their combined output has fallen by 1.4 million barrels a day, according to data compiled by Bloomberg. Problems have arisen as companies drill deeper and in more perilous conditions. Shell last week submitted a plan for drilling in Alaska’s Arctic, after a vessel ran aground in 2012. The ultra-deep Davy Jones well in the Gulf, among the most expensive ever drilled, has yet to produce what operator Freeport-McMoRan Copper & Gold Inc. has said may be trillions of cubic feet of gas. The complexity of deep drilling or navigating Arctic waters means that further accidents may be inevitable, said Ed Hirs, an energy economist at the University of Houston. “People may say this will never happen again, but it probably will, although it will happen in a different way,” said Hirs, who also founded his own production company. “It happened again in space travel, which is similar in complexity and scale.”

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Not going to happen.

‘Bold Action’ Needed On Europe Unemployment (CNBC)

European employment targets are “unrealistic” and “bold action” is needed to boost job creation, according to a report published by the Ambrosetti Forum ahead of the open of its international economics conference. About 5.6 million jobs have been lost across the 28 countries that belong to the European Union (EU) since the global financial crisis of 2008, Ambrosetti’s economists say. “The economic crisis produced growing unemployment levels in the EU, which now requires bold action from policymakers to boost labor demand as well as to implement labor market structural reforms,” the economists wrote in their “Labor market scenario in Europe” report. Europe’s high unemployment, low price rises and stagnant growth is likely to be a hot topic at this year’s Ambrosetti Forum—the annual get-together of heads of states, top business people and academics at Lake Como in Italy.

The Organization of Economic Co-operation and Development warned this week that unemployment in its member countries will remain well-above pre-crisis levels until 2016 at the earliest. Unemployment averaged 10.3% across the EU in July—the same as in June. Nearly one-quarter (24.5%) of Spaniards were unemployed during the month, along with 12.6% of Italians and 11.5% of Irish citizens. With statistics like these in mind, the Ambrosetti report’s authors cast doubt on the likelihood of the EU meeting its target of creating 20 million new jobs by 2020. “This seems a particularly unrealistic target for Spain, Italy and France: they need to create 4.4 million, 2.5 million and 2 million new jobs respectively,” they wrote.

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Break it will.

Fears Resurface Over Europe Breakup (CNBC)

On Thursday morning, the European Central Bank surprised markets with a raft of stimulative measures including cuts in interest rates and the commencement of asset purchases. The news sent the euro currency much lower, but currency expert Boris Schlossberg of BK Asset Management identifies another reason why the euro could call even further: fresh concerns over a European Union breakup. ECB president Mario Draghi, in announcing the measures, mentioned that the vote was not unanimous. The strongest economy in the eurozone, Germany, is widely expected to have dissented. “It’s a very, very tenuous union in many ways, and we see the conflict come to the forefront anytime we have these issues,” Schlossberg said Thursday on CNBC’s “Futures Now.”

At this point, German unease over ECB stimulus “could become a very, very serious problem,” he said. “We’ll be watching the conflict very carefully in the fall and into the winter to see just how serious the Germans are in their opposition to this move.” Ironically, Schlossberg notes that it was the very reticence of the Germans that forced the ECB into action. The central bank is “the only institution within the eurozone that is able to act in concert. There is is simply no other way for Europeans to stimulate growth, because they have all these disparate governments with different points of view.” But while Schlossberg expects the euro/dollar to fall all the way to 1.2850, he does note that it is “extremely oversold,” and could bounce in the near-term.

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European Businesses Call For No More Sanctions (RT)

The Association of European Businesses has urged the governments of the European Union and Russia to protect foreign investors from any “further retaliatory measures.” The Moscow-based lobby group represents the interests of more than 600 European businesses in Russia, and has written a letter to all 28 heads of state and governments of the EU, as well to the Russian and Ukrainian leadership stressing that among its members “are global companies with businesses in sectors which would be directly affected by these measures.” The group has requested a meeting with European Commission President Jose Manuel Barroso in Kiev next week. “The introduction of such measures could lead to a serious decline in production and jobs, affecting not only manufacturers, but also suppliers and retailers working in these sectors,” the letter, published Thursday, reads. The lobby group says it’s politically neutral, but is interested in keeping business between the two functional.

“All this would harm not only the business of the companies concerned, but also fiscal revenues through the loss of tax and duty payments,” the letter said. Sanctions are putting a brake on business activity in Europe which is plugged into the Russian economy. Trade between Russia and the EU is $440 billion and thousands of companies do regular day-to-day business in Russia. The EU has imposed three rounds of sanctions against Russian individuals and business, most recently expanding the blacklist to include sanctions against key industries- energy, banking, and weapons. Russia retaliated with an embargo on agriculture products from the EU, which could cost $6.6 billion per year in lost exports. EU ministers will meet on Friday to discuss new sanctions against Russia for its perceived role in the Ukraine conflict.

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UK Says New Russian Sanctions Could Be Lifted If Ceasefire Holds (Reuters)

Britain’s Foreign Secretary Philip Hammond said on Friday the West would push ahead with new sanctions against Russia over the crisis in Ukraine but said these could be lifted should a proposed ceasefire take hold. NATO demanded on Thursday that Moscow withdraw its troops from Ukraine, and the European Union and the United States are preparing a new round of economic sanctions against Russia for its incursion. “There will be another step up of the pressure today when the EU meets in Brussels to decide on the next round of sanctions,” Hammond told Sky News from Wales where NATO leaders are meeting. “Our economies are fundamentally more robust and resilient than the Russian economy and if Russia ends up in an economic war with the West, Russia will lose.”

However, he said measures against Russia could be eased if a proposed ceasefire between Ukraine and pro-Russian rebels expected to be agreed later on Friday takes hold. “If there is a ceasefire, if it is signed and if it is then implemented, we can then look at lifting sanctions off but … there is a great degree of scepticism about whether this action will materialise, whether the ceasefire will be real,” Hammond told BBC TV. “We can always take the sanctions off afterwards, I don’t think we want to be distracted from our determination to impose further sanctions in response to Russia’s major military adventure into Ukraine.”

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Exactly.

‘West Should Take Responsibility for Escalating Ukrainian Crisis’ (RIA)

Western leaders meeting at this week’s NATO summit are almost wholly responsible for the ongoing crisis in Ukraine, Jan Oberg, co-founder of the Sweden-based Transnational Foundation for Peace and Future Research, told RIA Novosti on Friday. “The US, NATO and European Union carry at least 80% of the responsibility for Ukraine’s crisis due to the foreign-provoked regime change in Kiev and the EU ultimatum to Ukraine about either joining the EU or the eastern Customs Union,” Oberg said. “And over the longer term – because of NATO’s expansion from the Baltic republics to Tbilisi.

These policies lack statesmanship, are reckless in the perspective of promises given to ex-Soviet president Mikhail Gorbachev when the old Cold War ended and can be seen only as provocative in the eyes of Russia,” he added. NATO leaders gathered in Wales on Thursday, September 4, for two days of talks focused on Ukraine and the rapid rise of Islamic extremists in Iraq and Syria. They have criticized Russia, calling its influence on the conflict in eastern Ukraine “destabilizing.”

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The battle for financial control.

Russia Sees Serious Threat In FATCA (RT)

Russia’s financial system is “threatened” by America’s new tax law that demands foreign banks report on all American citizens’ banking activities, the Russian Federal Financial Monitoring Service said Thursday. The head of the financial monitoring authority Yury Chikhanchin likened the one-sided data exchange to turning Russian banks into spies for the Americans. “Essentially, our financial institutions are becoming tax informants for the American economy. As similar systems start spreading to other countries, they can bring serious risks to our financial system,” Chikhanchin said at a banking forum in Sochi. FATCA requires foreign banks to provide information on American clients, who have over $10,000 in deposits, to the US Internal Revenue Service (IRS). If a bank does not comply; it can be subject to a 30% fine. Before client information is sent to America, it will pass through the Central Bank of Russia and other local financial or government agencies, which still have the right to keep the information private.

On June 30, just before the deadline, Russia signed a law that allows Russian banks to share the tax data of American clients with US tax authorities, but participation isn’t mandatory. The law simply gives Russian banks the ability to work with FATCA, but does not deem it obligatory. In Russia, only 10% of capital in the financial system is owned by foreigners or foreign entities. Participating Russian banks had to register by May 5, 2014. The Russian financial watchdog believes the American tax law is itself a form of sanctions. The head of the authority believes that such mechanisms can exist, but should be multilateral. Originally Russia planned a bilateral information exchange with the US over FATCA after the law was passed in 2010 but the US Treasury Department suspended negotiations with Russia in March 2014 over the Ukrainian conflict.

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Yikes.

Obviously Not A Bubble (Zero Hedge)

Via John Hussman… no bubble, no consequences…

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Dallas Fed Chief Repeats Gross Portrayal Of Yellen As ‘Hindu Goddess’ (MW)

Dallas Fed President Richard Fisher knows a good phrase or two when he hears one. So at a speech in front of the U.S.-India Chamber of Commerce and Ambassador S. Jaishankar, Fisher of course trotted out this description of Federal Reserve Chairwoman Janet Yellen’s speech at Jackson Hole, Wyo. on the labor market.

Bill Gross, one of our country’s preeminent bond managers, made a rather pungent comment about our efforts. He noted that President Harry Truman “wanted a one-armed economist, not the usual sort that analyzes every problem with ‘on the one hand, this, and on the other, that.’” Gross claimed that Fed Chair (Janet) Yellen, in her speech given recently at the Fed’s Jackson Hole, Wyo., conference, introduced so many qualifications about the status of the labor market that “instead of the proverbial two-handed economist, she more resembled a Hindu goddess with a half-dozen or more appendages.”

In keeping with the theme of the night, Fisher also pointed out — in calling Texas a job-creating juggernaut — that the term juggernaut is derived from the word Jaganmatha, a title of Krishna. Fisher repeated his concern about the central bank’s policy, saying “we have overshot the mark” on interest rates.

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NZ should focus on feeding itself, not the Chinese.

New Zealand Greens See Road to Ruin in Rivers of Milk (Bloomberg)

New Zealand Prime Minister John Key sees milk and oil driving economic growth for years to come. The Green Party says he’s running a “pollution economy” that’s destroying the country’s clean-green brand. The debate about the future shape of New Zealand’s economy is at the heart of the campaign for the Sept. 20 election, in which the Greens could prove pivotal in denying Key a third term in office. The ruling National Party’s growth plan relies on increasing export earnings from the dairy and fossil-fuel industries, which generate more than NZ$18 billion ($15 billion) a year and employ 60,000 people. Oil prospectors scouring marine sanctuaries and cow urine polluting rivers are at odds with New Zealand’s “100% Pure” tourism pitch and the pristine scenery depicted in the Lord of the Rings and Hobbit movies. “We’re doing exactly the wrong thing,” Greens co-leader Russel Norman said in an interview. “People want food that is clean, green and safe. New Zealand has a great opportunity to provide that. Instead, we’re pursuing a pollution economy.”

New Zealand’s 180,000 kilometers (112,000 miles) of rivers are a vital source of water for the dairy industry, which has expanded from pastures in the North Island’s Waikato region into the rolling hills and patchwork plains of the South Island. The number of cows has almost doubled in the past 20 years to 4.8 million. Effluent from the animals has discolored waterways, while the nitrogen from their urine is soaking through the soil to contaminate groundwater, spoil rivers and choke lakes with algal bloom, a parliamentary report said last year: “The large-scale conversion of more land to dairy farming will generally result in more degraded fresh water”. “New Zealand does face a classic economy versus environment dilemma.” Norman, 47, says dairy farming focused on volume is destroying New Zealand’s environmental credentials and hurting the industry itself. “It’s very shortsighted to maximize production of milk powder,” he said. “We need to accept we’re never going to feed the world and focus on selling to people who want high-value products. The long-term future of dairying is dependent on protecting the brand.”

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I know I say this a lot, but: Not surprised.

Secret Network Connects Harvard Money to Payday Loans (Bloomberg)

Alex Slusky was under pressure to put the money in his private-equity fund to work. The San Francisco technology financier had raised $1.2 billion in 2007 to buy and turn around struggling software companies. By 2012, investors including Harvard University were upset that about half the money hadn’t been used, according to three people with direct knowledge of the situation. Three Americans on the Caribbean island of St. Croix presented a solution. They had built a network of payday-lending websites, using corporations set up in Belize and the Virgin Islands that obscured their involvement and circumvented U.S. usury laws, according to four former employees of their company, Cane Bay Partners VI LLLP. The sites Cane Bay runs make millions of dollars a month in small loans to desperate people, charging more than 600 percent interest a year, said the ex-employees, who asked not to be identified for fear of retaliation.

Slusky’s fund, Vector Capital IV LP, bought into Cane Bay a year and a half ago, according to three people who used to work at Vector and the former Cane Bay employees. One ex-Vector employee said the private-equity firm didn’t tell investors the company is in the payday-lending business, where borrowers repay loans out of their next paychecks. Vector’s investment in Cane Bay shows the continuing allure of the payday-loan business, even after most states from California to New York restricted or banned it to protect consumers. The crackdown has driven borrowers online. Internet payday lending in the U.S. has doubled since 2008 to $16 billion a year, with half made by lenders based offshore or affiliated with American Indian tribes who say state laws don’t apply to them, according to John Hecht, an analyst at Jefferies Group LLC in San Francisco.

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