Jun 092018
 
 June 9, 2018  Posted by at 12:37 pm Finance Tagged with: , , , , , , , , , ,  


Dorothea Lange Children and home of cotton workers at migratory camp in southern San Joaquin Valley, CA 1936

 

My long time pal Jesse Colombo, now at Real Investment Advice, recently linked on Twitter to a Zero Hedge article, which quoted CoreLogic as saying more than half of American homes are overvalued. CoreLogic calls itself “a leading provider of consumer, financial and property data, analytics and services to business and government.”

Well, CoreLogic is way off. All American homes are overvalued. How can we tell? It’s easy. It’s so easy it’s perhaps no wonder that people overlook the reasons why. But we all know them: The Fed has pushed some $20 trillion down the throats of the financial system. It has also lowered interest rates to near zero Kelvin. Then the government added a “relaxation” of lending standards and an upward tweak of credit scores. And Bob’s your uncle.

These measures haven’t influenced just half of US homes, they’ve hit every single one of them. Some more than others, not every bubble is as big as San Francisco’s, but the suggestion that nearly half of homes are not overvalued is simply misleading. It falsely suggests that if you buy a home in the ‘right’ place, you’ll be fine. You won’t be. The Washington-induced bubble will and must pop, and precious few homes will be ‘worth’ what they are ‘worth’ today.

Here’s what Jesse tweeted along with his link to the Zero Hedge article:

“Almost half of the US housing market is overvalued” – this is why U.S. household wealth is also overvalued/in an unsustainable bubble.

He followed up with:

U.S. household wealth is in a bubble thanks to Fed-inflated asset prices. This is creating a “wealth effect” that is helping to drive our spurious economic recovery. This economy is nothing but a sham. It’s smoke and mirrors. Wake the F up, everyone!!!

My reaction to this:

Sorry, my friend Jesse, but every single US home is overvalued. It just depends on the vantage point you look from. All prices have been distorted by the Fed’s policies, not just half of them. Arguably some more than others, but can that be the core argument here?

Jesse’s reply:

Yes, that’s a good point.

Another long time pal, Dave Collum, chimed in with a good observation:

I think even us bunker monkeys start recalibrating, no matter how hard we try to maintain what we believe to be perspective.

Yes, we’ve been at this for a while. Even if Jesse was still a student when he started out. We’ve been doing it so long that he recently wrote an article named: Why It’s Right To Warn About A Bubble For 10 Years. And he’s right on that too.

Let’s get to the article the conversation started with:

 

More Than Half Of American Homes Are Overvalued, CoreLogic Warns

CoreLogic reports that residential real estate prices nationwide increased 6.9% year over year from April 2017 to April 2018. The firm’s Home Price Index (HPI) also shows a 1.2% rise on the month-over-month basis from March to April 2018. This has certainly sparked the debate of housing affordability across the nation with many millennials struggling to achieve the American dream.

CoreLogic Market Condition Indicators showed that 40% of the 100 largest metropolitan areas were overvalued in April, compared to 28% undervalued, and 32% in line with valuations. The report uncovers a shocking discovery that of the nation’s top 50 largest residential real estate markets, 52% were overvalued in April.

CoreLogic’s methodology behind overvalued housing markets “as one in which home prices are at least 10% higher than the long-term, sustainable level, while an undervalued housing market is one in which home prices are at least 10% below the sustainable level.”

The CoreLogic people probably mean well, but they also probably don’t want to rattle the cage. It’s not really important. As soon as someone starts talking about a ‘sustainable level’ for home prices, you can tune out. Because no such thing exists. Unless you first take those $20 trillion out of the ‘market’, free up interest rates, tighten lending standards and lower credit scores. Only then MAY you find a ‘sustainable level’ for prices.

Historically a house in the US cost around 3 to 4 times the median annual income. During the housing bubble of 2007 the ratio surpassed 5 – in other words, the median price for a single-family home in the United States cost more than 5 times the US median annual household income. According to Mike Maloney, this ratio is heavily influenced by interest rates. When interest rates go down the affordability of a house goes up, so people spend more money on a house. Interest rates have now been falling since 1981 when they peaked at 15.32% (for a 10-year US treasury bond).

Mike Maloney, another longtime friend of the Automatic Earth, is dead on. Price to income is a useless point unless you include interest rates in the calculation. And then you can get large differences. Since interest rates have been falling for 37 years, count on them to rise. And see what that does to your model.

“The best antidote for rising home prices is additional supply,” said Dr. Frank Nothaft, chief economist for CoreLogic. “New construction has failed to keep up with and meet new housing growth or replace existing inventory. More construction of for-sale and rental housing will alleviate housing cost pressures,” Nothaft added.

Right, yeah. Now we know the CoreLogic mindset. The more you build, the better home prices will be. Just one of many problems with that is that if you really expect prices to fall once you build, people will build fewer houses, because profit margins fall too. The whole idea that we can save housing markets by simply building ever more has never rung very true. But that’s for another day.

In a recent op-ed piece via The Wall Street Journal, Paul Kupiec and Edward Pinto place the blame on the government for creating another real estate bubble through “loose mortgage terms pushing home prices up.” They claim that mortgage underwriters need to tighten standards.

“Home prices are booming. So far, 2018 has posted the strongest growth since 2005. “About 60% of all U.S. metros saw an acceleration in the rate of price increases through February this year,” according to Housing Wire. Since mid-2012, real home prices have increased 28%, according to data from the American Enterprise Institute. Entry-level home prices are up about double that rate. In contrast, over the same period household income has barely kept pace with inflation. The current pace of home-price inflation is increasing the risk of another housing bubble.

The Fed is raising rates -finally- and home prices grow at the fastest rate in 13 years. Over the past 6 years prices are up 28%. Entry level homes are up more than 50% in that time frame. That is just profoundly scary. It’s like Dante’s descent into hell. And no, it’s not true that “The current pace of home-price inflation is increasing the risk of another housing bubble”. We’re already caught up head first in a new housing bubble.

“The root of the problem is declining underwriting standards. In April Freddie Mac announced an expansion of its 3% down-payment mortgage, the better to compete with the Federal Housing Administration and Fannie Mae . Such moves propel home prices upward. Because government agencies guarantee about 80% of all home-purchase mortgages, their underwriting standards guide the market.

Making lending even more dangerous, CNBC recently reported that “credit scores may go up” because new regulatory guidance allows delinquent taxes to be excluded when calculating credit scores. These are only some of the measures that “expand the credit box” and qualify ever-shakier borrowers for mortgages.”

As I said before: if you lower lending -and underwriting- standards and artificially raise credit scores, then yes, you can keep the bubble going for a while longer. But it overvalues properties. You’re just moving goalposts.

“During the last crisis, easy credit led home prices to rise at an unsustainable pace, leading marginally qualified borrowers to stretch themselves thin. Millions of Americans’ dreams became nightmares when the housing market turned. The lax underwriting terms that helped borrowers qualify for a mortgage haunted many households for the next decade.”

No, it’s not just homes. Stocks and bonds as just as overvalued. Because of a behemoth attempt at making the economy look good, even though it’s entirely fake. No price discovery, no market, just central banks and tweaking standards and surveys. C’mon, we all know where this must go. We just don’t want to know. So this Marketwatch piece gets a wry smile at best:

 

America Is House-Rich But Cash-Poor

The housing market has not only recovered from the Great Recession, it’s heated up. According to an analysis from Attom Data, nearly 14 million Americans are now “equity rich” – meaning they have at least 50% equity in their homes. It bears repeating that many owners and communities are not so lucky: over a million Americans are underwater, and some cities and towns are still reeling under the weight of abandoned and vacant homes and stagnant micro-economies. But for most of the country, rapidly rising home prices and a dearth of anything else to buy means people are staying in their homes longer, allowing them to accrue more and more equity: $15 trillion worth, to be exact.

 

 

Oct 302014
 
 October 30, 2014  Posted by at 12:18 am Finance Tagged with: , , , ,  


John Collier Street Corner, Monday after Pearl Harbor, San Francisco Dec 8 1941

Janet Yellen today solemnly stated that the Fed has killed QE because the jobs outlook has improved. These are the guys and gals who have more and better access to more and better data than any of us have. And we all know that the sole reason the BLS unemployment rate has fallen is that 90-odd million working age Americans are no longer counted as part of the work force, and a huge part of those who are still employed moved to worse-paying jobs and/or had their pay and/or benefits cut.

To claim that QE improved the jobs picture is either very stupid, and I’ve never thought that gang is stupid, just perverted, or it means they don’t have the proper data, but we already saw that they do. So that jobs thing is bollocks.

And I haven’t seen anyone come up with a satisfactory answer as to why the Fed really quit QE the moment they’re doing it. Here I’m thinking that’s an interesting question, and all the pundits and experts leave that question alone. Then again, I have of course tried to answer it, a number of times, with the help of some other people’s observations, and noted that Wall Street banks saw their profits slip because everyone was on the same side of the wagers as they were. They were still getting the free money, but they couldn’t make it work for them anymore the way it once did. And something had to change.

Does anyone outside the Fed want to claim that QE had a positive influence on the American economy, other than through boosting prices of stocks and homes that could only happen because people started seeing things that weren’t really there? I guess there’s plenty of you out there who think the jobs picture actually has improved, and that those $4 trillion or so actually had something to do with that, but that only leads us right back to the beginning:

Why does the Fed cut QE now, when in reality nothing has improved in the American economy if you wipe the smoke from the mirrors, and they know it, even if they say the opposite? And if their view remains as distorted as it is today, why wouldn’t they raise rates much sooner than everyone seems to presume? QE never had anything to do with the real economy (even Greenspan said as much in the WSJ), so there’s no point in keeping rates low to save that real economy. QE has created a perception only, and no substance. And if they take away the perception, there still won’t be any substance, so why not do it?.

When you see Greenspan being paraded in public like he was in the WSJ this morning, you know everything must be scripted. That’s no coincidence. You know, just in case you hadn’t figured that out yet. The Oracle is pushed onto the stage to confuse the ranks a bit more, just so as much money as possible stays invested in the very things Wall Street wants them to be invested in. Greenspan’s job is to say the things Yellen cannot. His words are published the morning of the day she’s set to announce the death of QE.

He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy. “Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”

Too many questions there to mention. Asset prices are high but there’s no demand, to sum it up. Which raises that one question again: if “effective demand is dead in the water”, why kill QE? Or: if QE boosted asset prices, what will its demise result in?

Asked whether he regrets not doing more with Fed policy to stop the financial-market bubbles that preceded the crisis, Mr. Greenspan said “no.” He observed that history shows central banks can only prick bubbles at great economic cost. “It’s only by bringing the economy down can you burst the bubble,” and that was a step he wasn’t willing to take while helming the Fed …

Greenspan effectively admits he created a bubble in those words, plus he doesn’t regret it. And he realizes the only way to burst the bubble, which, he also admits, has grown to behemoth proportions through QE, is by bringing the economy down.

There’s tons of people claiming QE4 is just around the corner. I’m certainly not one of them. I think the Fed is going to do what Greenspan said there: bring the economy down. And justify that by saying that it’s the only way to burst the bubble and make it healthy again. Raise interest rates and declare that they’ve been too low for too long. Pump up the dollar and claim it’s been undervalued too long because of the global impact of QE’s flood of cheap credit.

Low interest rates don’t work to improve the real economy. Neither does free credit for Wall Street. So now that more people are finally figuring that one out, they’re going to let go of these manipulations that pose as policies, while supporting their member banks in making the biggest possible profits off of the impending changes.

And don’t think that every move they’ve made over the past years has not been as scripted as the Greenspan interview. The Fed doesn’t react to – changing – circumstances, it scripts them. And it’s not about Greenspan or Yellen or Bullard or even Jamie Dimon, they’re hand-puppets; it’s about the wizards behind the curtain. Pretty clear cut. You just have to pay attention. Or you’ll lose your shirt and then some.

Oct 142014
 
 October 14, 2014  Posted by at 8:39 pm Finance Tagged with: , , , ,  


Dorothea Lange Drought-stricken farmer and family near Muskogee, OK Aug 1939

With the US mid-term elections just 3 weeks away, of course there won’t be any sudden interest rate hikes or other major moves directly traceable to, or even remotely suspected to be from, the Federal Reserve and its Wall Street and/or global central bank chums. But I’ll explain once more why I think those hikes are coming – just not before November 4 – on the back of a Bloomberg piece today.

Mark October 26 as well, by the way: ECB stress test results and Ukraine elections without east Ukraine. And if you’re interested, you can read back what I said before about those rate hikes in This Is Why The Fed Will Raise Interest Rates (Aug 29) and Why The Fed WILL Raise Rates (Sep 30).

Actually, there’s two Bloomberg pieces today that are relevant to my point. Here’s the first:

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

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 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 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 at Nomura in London. “Regulatory timelines will stretch far into the future but how quickly will the market demand full compliance?”

A hard question to answer given that the Fed et al have been the market for a long time now. Them and the HFT robots. Webster’s should really redefine the term markets. But then, I understand there’s been some pick-up from ultra-low volumes recently as the VIX rises with human nerves.

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. That’s what happened when Lehman collapsed in 2008.

The FSB, which consists of regulators and central bankers from around the world, will present its draft rules to a G-20 summit in Brisbane, Australia, next month. Its proposals call for 27 of the world’s largest banks to hold loss-absorbing debt and equity equivalent to 16% to 20% of their risk-weighted assets to take losses in a failure …

Under the plans, these lenders will also have to meet buffer rules set by the Basel Committee on Banking Supervision, another group of global regulators. These can amount to a further 5% of risk-weighted assets, taking banks’ requirements to as much as 25% of holdings.

All the numbers and percentages don’t matter much, because they could all just as well have been invented on the spot. What makes this piece, and those ECB stress test results, relevant, is that they point out the how big banks are still far from healthy, no matter the profits and bonuses they report and dole out. No surprise there if you’ve been paying attention the past decade. No amount of free money will ever nurse them back to health. But it can keep them slugging along, replete with lots of green goo, empty sockets and tombstones.

It gets more interesting in the next bit, where you need to read between the lines a little. I took the liberty of bolding the juiciest bites:

No Stock Salvation Seen in Bank Results as VIX Surges

Options traders are skeptical this week’s bank earnings will deliver calming news to a stock market enduring its worst losses in two years. U.S. stocks have fallen for the past three days on concerns about global growth, the future of interest rates and the spread of Ebola. With companies from JPMorgan to Goldman Sachs and Bank of America scheduled to report this week, demand for bearish options on the largest U.S. financial firms has increased to the highest since May 2013.

Even though banks have escaped the worst losses in the recent selloff, the companies will struggle to boost profits if the Federal Reserve keeps interest rates near zero. Analyst projections tracked by Bloomberg show financial companies in the S&P 500 Index increased earnings 3.1% in the third quarter and 1.6% in the fourth. “There’s an anticipation that a significant percentage of earnings are going to lower forward guidance relatively significantly, including some of the big banks,” Jeff Sica at Sica Wealth Management said by phone.

“That’s going to have a very negative impact on the stock market.” JPMorgan, Citigroup and Wells Fargo are scheduled to provide quarterly results this morning. Bank of America, Goldman Sachs and Morgan Stanley report later in the week. Low interest rates have crimped lending profits for banks, which benefit from higher loan yields. Net interest margins, the difference between what a firm pays in deposits and charges for loans, were a record-low 3.1% in the second quarter…

Fed Vice Chairman Stanley Fischer said during the weekend that U.S. rate increases could be delayed by slowing growth elsewhere. The central bank should be “exceptionally patient” in adjusting monetary policy, Chicago Fed President Charles Evans said yesterday.

Wait, that’s not what Fisher implied, at least not as MarketWatch reported it:

Fed’s Fischer Says Rate Hike Won’t Damage Global Economy

The Federal Reserve’s eventual rate increase, the first since 2006, will not damage the global economy, Federal Reserve Vice Chairman Stanley Fischer said on Saturday. While there could be “further bouts of volatility” in international markets when the Fed first hikes, “the normalization of our policy should prove manageable for the emerging market economies,” Fischer said in a speech at the IMF’s annual meeting.

[..] Since last year, Fischer said, the Fed has “done everything we can, within limits of forecast uncertainty, to prepare market participants for what lies ahead.” The Fed has been as clear as it can be about the future course of its policy course, and markets understand, Fischer said. “We think, looking at market interest rates, that their understanding of what we intend to do is roughly correct … ”

There’s a veiled message in there that’s very different from Chuck Evans’ “The central bank should be “exceptionally patient” in adjusting monetary policy.” Fisher says it won’t make any difference, because everybody already knows what will come. Which is a load of male bovine, because many of the emerging nations that are neck deep in dollar denominated debt have nowhere to turn. And besides, the Fed doesn’t serve market participants, or the real economy, or Americans, and certainly not enmerging markets, The Fed serves banks. Still, for now the confusing messages work miracles (we return to that 2nd Bloomberg piece):

Federal fund futures show the likelihood of a September 2015 rate increase fell to 46%, from 56% on Oct. 10, and 67% two months ago, according to data compiled by Bloomberg.

Wow, that’s a lot of behinds risking a severe burn. You better hope your pension fund manager is just a tad less complacent.

“If you get rates rising, you can price that into loans,” Peter Sorrentino at Huntington Asset Advisors, said. “We haven’t seen much shift in the yield curve, even though people thought this would be the year for it because of the Fed easing on QE. There’s a disappointment that we haven’t seen better margin growth this year.”

That’s all you need to know. Wall Street banks are still ‘down on their luck’ (I know I’m funny), they’re no longer making real money with interest rates scraping zero, and the answers to their ‘sorrows’ are right there in the hands of the people they own: the Fed. There have been a few years of free cash and zero rates which were profitable, but that has put all market parties in the same boat, so the real money, nay, the only money, is now in being on the other side of that boat, that bet, that trade. The trade, and the emotion, has shifted singnificantly. 90º, 180º, take your pick.

Increased volatility will boost trading revenues for the financials, according to Arjun Mehra of JPMorgan. [..] “For the first time in over a year, the largest U.S. banks are expected to get a boost from their trading business, which stands in stark contrast to press reports heading into the second quarter that called for the death of trading,” Mehra wrote. The VIX, a gauge of S&P 500 derivatives prices, jumped 41% last quarter for its biggest increase in three years. Bank of America Merrill Lynch’s MOVE Index, which measures implied volatility on U.S. Treasuries, climbed 22%.

Everyone’s gotten complacent, everyone follows Yellen’s lips, everyone thinks the same. There’s no money in that, and Wall Street needs money, badly. The money is now in volatility, not the lack thereof. So we will have volatility, it’s already rising.

“There are two things banks need to work: higher rates and credit expansion,” Mark Freeman at Westwood Holdings said. “Just as the outlook for growth is getting called into question, the outlook for higher rates is being called into question, and that’s been a headwind for the group as of late.”

The higher rates will be there, and not as late as September 2015. No profit in that. Credit expansion comes to an end, in a sense, with the tapering of QE. But guess what? A significantly higher dollar works the exact same way. It expands ‘credit’ in all – or most – other currencies, and in commodities.

Understand the make-up of the system, the role of the Fed and other central banks, and their relationship with the major commercial/investment banks, and it becomes obvious what their next moves will – must – be. The beast must be Fed.

Oct 012014
 
 October 1, 2014  Posted by at 9:40 pm Finance Tagged with: , , , , , , ,  


David Myers Theatre on 9th Street, Washington, DC July 1939

For me, the quote of the day is this one: “If there’s a periphery of the eurozone’s periphery, that’s Naples.”. The city of Napoli hosts ECB boss Mario Draghi and the heads of Europe’s central banks this week in some very posh former Bourbon family royal palace, and the contradictions involved couldn’t be more striking.

Napoli is home to an immense amount of poverty and misery, and the advent of the EU and the euro has done absolutely nothing to make life in the city any better. Quite the contrary. And there’s not a single thing in sight that holds any promise of alleviating the deepening Italian downfall. Therefore things can, and will, only get worse from here.

And that’s not just true for Italy, or Napoli. It’s true for all of Europe. That is not because Mario Draghi hasn’t spent enough money, or too much of it, or that he’s spent it in the wrong places. It’s because Napels is not Berlin or Frankfurt, or even Milan in the much richer north of Italy. And because Italy is not Germany, and Greece is not Finland, and trying to force all of them into one and the same economic mold can only possibly end in the poor getting poorer.

Unless there would be a massive wealth transfer from rich to poor, from north to south, but that’s never been in the cards. The intention was always to make the EU a tide to lift all boats, or even, in the wildest dreams, a boat to lift all tides. That intention has failed in dramatic fashion. But not one single one of the architects and present day leaders is ready to fess up to their failures.

Almost 15 years after the euro was introduced, the battlefields are littered with dead and wounded bodies. And the only answer that comes from Brussels is to strengthen the – financial and political – army. The only answer that comes from Brussels is that Europe, including Italy, Greece, Spain, needs more Brussels, more centralized control.

And Napoli is not the only place that can lay claim to the title “periphery of the eurozone’s periphery”. Spain and Greece have unemployment numbers just like Napoli, only for them it’s in their entire countries. All have had youth unemployment at well over 50% for years now, a sort of real life version of throwing your babies away with the bathwater. And all have regions and cities where things are much worse still.

Oh well, at least Bloomberg has a poetic headline for once:

Draghi Takes ECB to Land of Gomorrah as Naples Prays

As Europe’s central bankers gather in Naples to discuss the state of the region’s economy, the city stands as a stark warning of just how bad things can get. “If there’s a periphery of the eurozone’s periphery, that’s Naples,” said economist Riccardo Realfonzo, a former councilman of the Southern Italian city. “The gap between the debate at the Royal Palace in Capodimonte and everyday life can’t be filled with just monetary policy.”

In Naples “there is a hunger for bread and justice, hope and future, work, legality and planning,” local Catholic Archbishop Crescenzio Sepe on Sept. 19 told the faithful gathered in the city’s medieval cathedral for the ritual of the so-called miracle of San Gennaro, the patron saint.

Last year, Naples scored the highest among Italy’s main cities on the misery index, a gauge which combines unemployment and deflation. With a reading of 26.7% it stood above Greece. Much like Greece, Naples, hard hit by Italy’s longest recession on record, risked default this year after a court rejected plans to cut municipal debt of about €1 billion ($1.3 billion). [..] Naples’ 2013 gross domestic product per capita was one-third less than Italy’s average and its unemployment was more than double the national average at 25.8%.

The outlook for the future is far from rosy after Italy entered a new recession in the second quarter and the government was forced to cut the country’s growth forecast. Finance Minister Pier Carlo Padoan said yesterday 2014 GDP is seen shrinking 0.3%, compared with an April forecast of a 0.8% expansion. The government also sees GDP growing just 0.6% next year, compared with a previous estimate of 1.3%.

In that setting, or rather overseeing it from a heavily guarded and inaccessible palace, enjoying the best food and wine freshly printed money can buy, Europe’s central bank bosses are planning their next moves.

And still the only answer is more Brussels. Where Mario Draghi now wants to start buying up Greek and Cypriot junk loans, simply because that’s all they have left to sell. That’s where we stand today. We’re back to toilet paper as the only thing that represents any value.

And, you know, if a country like Spain, with 25% unemployment, can get investors to nevertheless buy its bonds with real yields below zero, maybe there is some – although doomed – logic somewhere in Draghi’s ideas. If you distort and pervert values enough so nobody knows what anything is worth anymore, and you still have all these big funds needing to roll over their ‘investments’, you have them trapped, or at least temporarily.

The question is, for how long?

European Bond Yields Go Negative

Record-low interest rates in Europe have flipped bond investing on its head. Some bond buyers, typically paid for lending out their money, have begun paying borrowers to look after their cash. In September, yields on two-year Irish government debt dipped below zero for the first time, just four years after the country needed a €67.5 billion ($85.6 billion) bailout to avert a banking-system collapse. At the height of the eurozone’s debt crisis, Ireland’s two-year bonds were yielding more than 14%.

Now, they are yielding about minus 0.01%. Yields move inversely to prices. The sharp drop in Ireland’s borrowing costs marks a rapid return of investor confidence, but the recovery is also part of a wider theme in Europe: central-bank policy pushing interest rates ever lower, and in some cases, turning bond yields negative.

[..] “We think negative yields will spread, because the impact of the ECB’s rate cut is ongoing,” said Mr. Bayliss. Yields will continue their decline as short-term debt matures and cash is reinvested, he added. “You’re going to see more countries and longer maturities in the negative-rate camp,” he said. Given that backdrop, one way investors can boost returns is by buying longer-dated bonds. Spanish government debt maturing in July 2017, for instance, yields roughly 0.5%, according to Tradeweb.

By instead lending to Spain for 10 years, yields jump to about 2%. Another way to snag higher yields is to buy riskier bonds with lower credit ratings. Ben Bennett, a credit strategist at Legal & General Investment Management, says that with investment-grade corporate bonds yielding so little the only way to get a reasonable return in Europe is by lending to junk-rated companies or by buying junior bonds that are first to take a hit if a company defaults on its debt. “This should work out fine if the ECB’s policies kick-start the European economy, but they don’t have a very successful track record in recent years,” Mr. Bennett said.

They sure don’t. And that’s not even Draghi’s fault, he’s just a clown. The entire structure of the EU is to blame. Draghi won’t be able to buy any toilet paper unless Merkel gives in. But the EU economy has now started to drag down Germany as well, so she will have to choose to protect her own people first. Which is precisely where the EU fails, that that is still possible.

In the US California can’t say screw Kansas. In the EU, that is an option. The richer nations only signed up to the project to get richer off it. The same as the poorer. Nobody ever gave any thought to what should be done is everybody got poorer, and if they did, it certainly wasn’t put into written words. So Germany CAN elect to put itself first, and try to boost its economy at the expense of Spain. And that’s what it’ll do, especially after the recent rise of anti-euro sentiments.

Sentiments that will crop up and grow in ever more places in ever stronger ways. Because there is no way to save the pan-European ideals within the settings laid out inside the EU. You can’t turn Spain into Germany overnight, for the same reason that you can’t demand the Spanish turn to beer and bratwurst from one day to the next.

There is not one reason why Europe couldn’t be a looser organization of nation states, each with their own currency if that works better for them, but still with many ties defined by those things that do indeed bind them. The thing is, France has close ties to Spain, they share the same border, and France has similar ties to Germany, but Germany and Spain don’t have those ties.

It’s much easier to resolve regional differences within a country the size of France or Spain that it is within a 28-member EU. The differences have become too overwhelming. People from Finland vote on issues in Greece, but they have no idea about those issues. While the Greeks sink into desolation:

60% Of Greeks Live At Or Below Poverty Line

Three in every five Greeks, or some 6.3 million people, were living in poverty or under the threat of poverty in 2013 due to material deprivation and unemployment, a report by Parliament’s State Budget Office showed on Thursday. Using data on household incomes and living conditions, the report – titled “Minimum Income Policies in the European Union and Greece: A Comparative Analysis” – found that “some 2.5 million people are below the threshold of relative poverty, which is set at 60% of the average household income.” It added that “3.8 million people are facing the threat of poverty due to material deprivation and unemployment,” resulting in a total of 6.3 million people.

In the medium term, Europe will fall to bits. It’s inevitable. The crumbling of the walls could only be prevented by overall increasing wealth, but the very structure of the Union doesn’t allow for that to happen. And neither does the global economy.

As for the cheap loans and the yields on peripheral sovereign bonds, the money that investors have out there will flee in a massive move to the global financial center, the US, as soon as interest rates there are raised. Which is another major reason why they indeed will be raised. Come to daddy.

And the EU will go from the lofty ideal of a peacemaker to the reality of being a cause for unrest and then war. It has already made that switch, but nobody notices yet.

Draghi Takes ECB to Land of Gomorrah as Naples Prays (Bloomberg)

As Europe’s central bankers gather in Naples to discuss the state of the region’s economy, the city stands as a stark warning of just how bad things can get. “If there’s a periphery of the eurozone’s periphery, that’s Naples,” said economist Riccardo Realfonzo, a former councilman of the Southern Italian city. “The gap between the debate at the Royal Palace in Capodimonte and everyday life can’t be filled with just monetary policy.” In Naples “there is a hunger for bread and justice, hope and future, work, legality and planning,” local Catholic Archbishop Crescenzio Sepe on Sept. 19 told the faithful gathered in the city’s medieval cathedral for the ritual of the so-called miracle of San Gennaro, the patron saint.

Last year, Naples scored the highest among Italy’s main cities on the misery index, a gauge which combines unemployment and deflation. With a reading of 26.7% it stood above Greece, according to Bloomberg calculations. Much like Greece, Naples, hard hit by Italy’s longest recession on record, risked default this year after a court rejected plans to cut municipal debt of about €1 billion ($1.3 billion). Nor do its troubles end there. Located in one of Italy’s poorest and most crime-ridden areas, Naples’ 2013 gross domestic product per capita was one-third less than Italy’s average and its unemployment was more than double the national average at 25.8%. The city is also prey to periodic garbage crises caused by overflowing landfills and saw its transport system come to a halt last year amid strikes and fuel shortages.

European Bond Yields Go Negative (WSJ)

Record-low interest rates in Europe have flipped bond investing on its head. Some bond buyers, typically paid for lending out their money, have begun paying borrowers to look after their cash. In September, yields on two-year Irish government debt dipped below zero for the first time, just four years after the country needed a €67.5 billion ($85.6 billion) bailout to avert a banking-system collapse. At the height of the eurozone’s debt crisis, Ireland’s two-year bonds were yielding more than 14%. Now, they are yielding about minus 0.01%. Yields move inversely to prices. The sharp drop in Ireland’s borrowing costs marks a rapid return of investor confidence, but the recovery is also part of a wider theme in Europe: central-bank policy pushing interest rates ever lower, and in some cases, turning bond yields negative.

Germany, the Netherlands, Austria, Finland, Belgium and France had already seen their two-year borrowing costs drop below zero amid a move by the European Central Bank to start charging eurozone banks for keeping deposits at the ECB. That policy shift is encouraging lenders to look for cheaper ways to park their surplus cash. If “you buy short-dated Irish or French paper and pay less [than depositing at the ECB], you’re improving your net income, even if the yields are still negative,” said Jonathan Bayliss, a managing director for global government bonds at Goldman Sachs Asset Management in London. Ireland’s drop into negative territory came after the ECB on Sept. 4 cut benchmark interest rates by 0.1 percentage point to 0.05% and overnight deposit rates by the same amount to minus 0.2%, in a fresh bid to revive the region’s stalling economy. The ECB said it intends also to buy bonds backed by loans such as residential mortgages in an attempt to boost lending, potentially further weighing on yields.

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Nice image.

Trading The Euro: A Seat On The Titanic? (CNBC)

With the European Central Bank set to meet on Thursday, currency strategists are weighing up whether to join a crowded trade and short the euro or whether to go long and get comfortable with what has been described as a “seat on the Titanic.” The common currency – shared by the 18 nations in the region – has been a one-way trip south this year with the ECB expanding its balance sheet while central banks in the U.S. and the U.K. have been looking to reverse their ultra-easy policies. The currency has depreciated 8.22% year-to-date against a greenback that has recently hit a four-year high against a basket of currencies. The euro is on course for its worst yearly drop since 2005 and September marked its biggest monthly fall since February 2013.

Ranko Berich, the head of market analysis at Monex Europe, a U.K.-based foreign exchange company, believes that the euro could be set for a major collapse. “A long position on the euro might as well be a seat on the Titanic,” he said in a note on Tuesday. Meanwhile, John Higgins, the chief markets economist at Capital Economics, has given a forecast of $1.15 for the euro by the end of 2016. “We suspect (the euro) will drop further as the monetary policies of the (Federal Reserve) and the ECB continue to diverge by more than widely envisaged,” he said in a research note late Tuesday.

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Mario Draghi Pushes For ECB To Accept Greek And Cypriot ‘Junk’ Loans (FT)

Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with “junk” ratings, in a move that is set to exacerbate tensions between Germany and the bank. Mr Draghi, ECB president, will this week unveil details of a plan to buy hundreds of billions of euros’ worth of private-sector assets – the central bank’s latest attempt to save the euro zone from economic stagnation. The ECB’s executive board will propose that existing requirements on the quality of assets accepted by the bank are relaxed to allow the euro zone’s monetary guardian to buy the safer slices of Greek and Cypriot asset backed securities, or ABS, say people familiar with the matter. Mr Draghi’s proposal is designed to make the program of buying ABS, which are bundles of loans sliced and diced into packages, as inclusive as possible.

If it is backed by the majority of members of the ECB’s governing council, the central bank would be able to buy instruments from banks of all 18 euro zone member states. However, the idea is likely to face staunch opposition in Germany, straining already tense relations between the ECB and officials in the euro zone’s largest economy. Bundesbank president Jens Weidmann, who also sits on the ECB’s policy-making governing council, has already objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks. Wolfgang Schäuble, Germany’s finance minister, has also voiced his opposition, saying purchases would heighten concerns about potential conflicts of interest between the ECB’s role as monetary policymaker and bank supervisor.

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Inevitable.

Factories Slashing Prices Toughens Draghi’s Deflation Battle (Bloomberg)

Euro-area manufacturing expanded at the slowest pace in 14 months, according to today’s report. The gauge stood at 50.3 in September, just above the 50 mark that divides expansion from contraction, and below a preliminary estimate of 50.5. Euro-area factories cut prices in September by the most in more than a year and German manufacturing shrank, underlining the mounting challenge facing Mario Draghi. The European Central Bank president is on a mission to avert deflation as the euro region’s economic landscape deteriorates. Purchasing Managers’ Indexes from Markit Economics showed manufacturing activity also contracted in France, Austria and Greece, with a gauge for the 18-nation region pointing to almost stagnant output. As the euro area’s economic weakness spreads to countries in the region’s core, the ECB will face increased scrutiny tomorrow when it unveils details of an asset-purchase plan.

The fresh round of stimulus comes against a backdrop of weak inflation and stuttering growth, with geopolitical uncertainty and high unemployment weighing on confidence and demand. “ It is very hard to put any positive spin” on the data, said Howard Archer, chief European economist at IHS Global Insight in London. “Clutching at straws, the best that can be said is that it indicates that the manufacturing sector is still growing.” Euro-area manufacturing expanded at the slowest pace in 14 months, according to today’s report. The gauge stood at 50.3 in September, just above the 50 mark that divides expansion from contraction, and below a preliminary estimate of 50.5. The euro slid after the German report and extended its decline after euro-area data were published. Today’s PMI data make for a “gloomy reading,” said Chris Williamson, chief economist at Markit in London. “The weakening manufacturing sector will intensify pressure on the ECB to do more to revive the economy and no doubt strengthen calls for full-scale quantitative easing.”

A manufacturing gauge for Germany, once Europe’s export-led powerhouse economy, slid to 49.9 last month, the lowest level in 15 months, with new orders falling at the fastest pace since 2012. By contrast, factory activity in Italy returned to growth, with expansions also registered in Spain, the Netherlands and Ireland. In the euro area, new orders fell for the first time since June 2013 due to weak domestic demand and waning exports, Markit said, casting doubt on forecasts that the industry will pick up toward the end of the year. There’s “negative momentum in manufacturing activity, especially in Germany where the pace of slowdown is rather pronounced,” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “The data flags clear downside risks to the ECB staff’s growth forecast.”

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Germany A Fresh Source Of Weakness As Eurozone PMI Falls (MarketWatch)

Activity in the eurozone’s manufacturing sector slowed more sharply than first estimated in September, with Germany joining France in contraction, while Italy staged a surprise revival. Fresh signs that the currency area’s economy remains mired in stagnation, with manufacturers cutting prices for the first time since April, will likely add to pressure on the European Central Bank to take more dramatic stimulus measures to boost demand and inflation. The headline measure from data firm Markit’s monthly survey of purchasing managers at more than 3,000 manufacturers fell to 50.3 from 50.7 in August, an indication that activity barely increased. A reading above 50.0 for the Purchasing Managers Index indicates an expansion in activity, while a reading below that level signals a contraction. The final measure was slightly below the preliminary estimate of 50.5 released in September, and the lowest in 14 months.

In a setback for the currency area’s recovery hopes, Germany’s manufacturing sector was a fresh source of weakness, with its PMI falling to a 15-month low and indicating that activity declined — albeit very marginally. “In a sign of spreading economic malaise, Germany, Austria and Greece all joined France in reporting manufacturing downturns in September,” said Chris Williamson, Markit’s chief economist. Williamson said the surveys suggest the currency area’s “northern industrial heartland has succumbed to the various headwinds of weak demand within the euro area, falling business and consumer confidence, (and) waning exports due to the Ukraine crisis and Russian sanctions.” The surveys suggest that manufacturing activity won’t soon revive, with new orders declining for the first time in 15 months, and export orders rising at the slowest pace since July 2013.

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Germany Fights On Two Fronts To Preserve The Eurozone (MarketWatch)

The European Court of Justice announced Sept. 22 that hearings in the case against the European Central Bank’s (ECB) bond-buying program known as Outright Monetary Transactions (OMT) will begin Oct. 14. Though the process is likely to be lengthy, with a judgment not due until mid-2015, the ruling will have serious implications for Germany’s relationship with the rest of the eurozone. The timing could hardly be worse, coming as an anti-euro party has recently been making strides in the German political scene, steadily undermining the government’s room for maneuver. The roots of the case go back to late 2011, when Italian and Spanish sovereign bond yields were following their Greek counterparts to sky-high levels as the markets showed that they had lost confidence in the eurozone’s most troubled economies’ ability to turn themselves around. By summer 2012 the situation in Europe was desperate.

Bailouts had been undertaken in Greece, Ireland and Portugal, while Italy was getting dangerously close to needing one. But Italy’s economy, and particularly its gargantuan levels of government debt, meant that it would be too big to receive similar treatment. In any event, the previous bailouts were not calming financial markets. As Spain and Italy’s bond yields lurched around the 7% mark, considered the point where default becomes inevitable, the new president of the European Central Bank, Mario Draghi, said the ECB was willing to do whatever it took to save the euro. In concert with the heads of the European governments, the ECB developed a mechanism that enables it to buy unlimited numbers of sovereign bonds to stabilize a member country, a weapon large enough to cow bond traders.

Draghi never actually had to step in because the promise of intervention in bond markets convinced investors that eurozone countries would not be allowed to default. But Draghi’s solution was not to everyone’s taste. Notable opponents included Jens Weidmann, president of the German Bundesbank. Along with many Germans, Weidmann felt the ECB was overstepping its jurisdictional boundaries, since EU treaties bar the bank from financing member states. Worse, were OMT ever actually used, it essentially would be spending German money to bail out what many Germans considered profligate Southern Europeans.

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No.

China’s Latest Property Rescue Package: Will It Work? (CNBC)

The latest steps to rescue China’s sagging property sector are among the most high-profile yet, but don’t expect a market turnaround, economists say. Late Tuesday, the People’s Bank of China and China Banking Regulatory Commission announced measures to support housing sales and increase lending to cash-strapped property developers. “These measures are substantial enough to improve sentiment and sales on the property market,” Louis Kuijs, chief China economist at RBS wrote in a note. “[But] we do not expect this package to lead to a rapid recovery of the real estate sector… given the inventories of unsold housing and additional large volumes of housing in construction but not finished hanging over the market,” he said. New measures include granting second-home buyers that have paid off their first mortgage access to lower mortgage rates and lower down-payment requirements.

Now they’re eligible for a 30% discount on mortgage rates, an offer previously limited to first-home buyers. Down payment levels were also cut to 30% from 60-70%. In addition, banks were asked to support the funding needs of “quality” developers, increase their access to the bond market and introduce pilot programs for REITs. An acceleration in China’s property market downturn in recent months intensified concerns about slowing economic growth. New home prices fell for the fourth straight month in August, down 1.1% from the month before, after dipping 0.9% in July, according to Reuters’ calculations of figures released by the National Bureau of Statistics. Many analysts have cited the cooling property sector as a major risk for the economy. The sector accounts for about 15% of gross domestic product and is linked to some 40 industries from furniture to steel.

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And surging.

Dollar-Yen Breaches 110 For First Time Since 2008 (CNBC)

The dollar hit a new high six-year high against the yen on Wednesday, breaching 110 for the first time since August 2008. The currency pair reached 110.08 in early Asian trading, prompting a Japanese government spokesperson to say that authorities will monitor the yen’s movement carefully. The greenback has strengthened more than 8% against the yen since early August, driven by the Federal Reserve’s tightening monetary policy and recent weakness in the Japanese economy. Japanese policymakers welcome a weaker yen, which boosts exports, but the rapid move is worrying. Japan is stuck with a chronic trade deficit; a major yen depreciation raises the cost of buying materials abroad, squeezing corporate earnings. The dollar-yen could rise slightly further, but will stabilize soon, according to Eisuke Sakakibara, former vice finance minister of Japan.

“Although Japanese economy is currently somewhat weaker than anticipated, it’s still doing fairly well,” said Sakakibara, also known as Mr Yen for his influence on Japan’s currency when he was in office from 1997 to 1999. “Continued weakness of the yen is unlikely; this is clearly the strength of the U.S. dollar. The market has already incorporated the strength of the U.S. dollar so I wouldn’t think dollar-yen will go beyond 112 or 113 – It will be in range trading between 107 and 112 in my view,” he added. There have been increasing calls for policymakers to take further action to prop up the Japanese economy, which has been hit hard by a sales tax hike introduced in April. Fresh data on Tuesday showed a mixed reading – retail sales rose 1.2% on year in August, while household spending fell an annual 4.7%. The Bank of Japan (BOJ) is due to meet next week and many analysts have penciled in a move from the central bank to ease monetary policy further. But Sakakibara believes BOJ governor Haruhiko Kuroda will reserve his ammunition for now.

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Oops.

Japan Stunned After Massive $617 Billion “Fat Finger” Trading Error (ZH)

A few days ago, Bloomberg had a fascinating profile of the person, pardon degenerate Pachinko gambler, who goes under the name CIS, and who is the “mystery man who moves the Japanese market.” In a nutshell, CIS, a momentum day trader and living proof of survivorship bias in finance (because for every CIS who has, allegedly, made it some 999,999 have failed) has amassed a fortune that he says now exceeds 16 billion yen after having traded 1.7 trillion yen in his career, generating an after tax profit of 6 billion yen in 2013 alone. Of course, the numbers are likely wildly fabricated for pageview purposes becuase as Bloomberg itself admits, “CIS didn’t offer a complete accounting of his investing returns and his wealth for this story, and some of his claims can’t be verified.”

That said, it is indeed the case that Japan has increasingly become a cartoon market in which while days can go by without a single trade taking place in its rigged bond market, where the BOJ has soaked up all the liquidity, when it comes to equities, it has become a free for all for “Mr. Watanabes” who have never taken finance, accounting or economics, but who know all about heatmaps and chasing momentum, and as a result, in a rising market/tide environment, have all grown ridiculously rich. The problem, of course, is that what some may call a market is anything but, and has become a fragile playground for a few technicians who move massive sums of money from Point A to Point B, hoping to outsmart the few remaining others, while in the process earning the rents that the BOJ is eagerly handing out by injecting liquidity at a pace that dwarfs what the Fed did for the past 2 years.

The other problem is that it is a merely of time before everything crashes into a pile of smoldering rubble thanks to the unprecedented fragility that is now embedded in every market, although most likely in Japan first. Which leads us to what just happened in Japan when as Bloomberg reports, stock orders amounting to a whopping $617 billion (yes Bilion with a B) or more than the size of Sweden’s economy, were canceled in Japan earlier today, for reasons unknown although the early culprit is that this was one of the biggest trading errors of all time. Of course, since this trade was noted, and DKed, one can assume that a major whale was on the losing end of the trade: recall that this is precisely what happened to Goldman time and again, when some errant algo caused the firm to lose millions on several occasions in 2012 and 2013. There is one tiny difference: this time it was not Goldman, and the total amount was not a few paltry million but over half a trillion dollars!

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Creative accounting shouldn’t be this transparent.

Fall In UK Living Standards Deeper Than Thought (Guardian)

The UK’s fall in living standards has been worse than previously thought, the TUC claimed, after new figures showed a bigger squeeze on households’ disposable incomes. The Office for National Statistics published sweeping updates to its previous estimates on the economy on Tuesday that suggested Britain recovered from the recession three-quarters sooner than initial estimates. Its move to new ways of measuring GDP put the size of the economy at 2.7% above its pre-crisis peak in 2008, compared with the previous estimate of 0.2%. But the TUC said the figures also revealed that the toll taken by years of falling real wages was greater than previously thought, as estimates of household disposable income were revised to show it further off its previous peak.

For 2013, real household disposable income per capita, described by the TUC as “the most comprehensive measure of living standards”, was 2.6% below its peak according to the latest data. It was £16,881 in 2013 down from a peak of £17,324 in 2007. On the previous figures, the measure had been 1.8% off the peak, standing at £15,764 in 2013 down from a peak of £16,060 hit in 2009.The TUC general secretary, Frances O’Grady, said: “While the size of the economy has been revised up, household incomes have been revised down. It turns out the UK’s living standards crisis is even worse than we thought.” “This is set to be the first full parliament since the second world war when the government leaves office with people’s pay packets worth less than when they came into power. There is something deeply wrong when the economy is growing, but the people who do all the work face ever shrinking pay and falling living standards.”

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Love it!

Drugs, Hookers, New GDP Measuring Make UK Economy Look Better (Guardian)

Britain’s economy was bigger and grew faster than previously thought over the second quarter, according to official figures that measure GDP in a new way. The economy also recovered sooner than previously thought from the recession. The Office for National Statistics (ONS) said the economy expanded 0.9% over April to June as both the dominant services sector and construction enjoyed strong growth. That beat economists’ forecasts for GDP growth to hold at a previous estimate of 0.8%. But at the same time the ONS revised down the first quarter figure to 0.7% from 0.8%, leaving the estimate of year-on-year growth at 3.2%. The size of the economy was also upgraded as the ONS moved to a new European-wide way of measuring GDP and incorporated other changes.

Under the new method, illegal activities such as drug dealing and prostitution are included and other activities are accounted for differently, including research & development and military spending. Explaining the figures, the ONS said: “The new data are based on the most far-reaching set of improvements to the national accounts in the last 15 years or so.” The ONS left full-year GDP growth in 2013 unrevised at 1.7%. But it said the changes meant that UK GDP recouped lost ground from the downturn sooner than previously thought. “The new data show that during the recent downturn the economy shrank by 6.0%, rather than the 7.2% previously estimated. GDP was also estimated to have exceeded its pre-financial crisis levels in Q3 2013, three quarters sooner than previously estimated. However, overall, the average absolute quarter-on-quarter revision between 1997 and 2014 Q2 was 0.16%age points,” statisticians wrote alongside the data.

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They, too, are Wall Street banks.

Fed Rate Policies Aid Foreign Banks (WSJ)

Banks based outside the U.S. have been unlikely beneficiaries of the Federal Reserve’s interest-rate policies, and they are likely to keep profiting as the Fed changes the way it controls borrowing costs. Foreign firms have received nearly half of the $9.8 billion in interest the Fed has paid banks since the beginning of last year for the money, called reserves, they deposit at the U.S. central bankaccording to an analysis of Fed data by The Wall Street Journal. Those lenders control only about 17% of all bank assets in the U.S. Moreover, the Fed’s plans for raising interest rates make it likely banks will see those payments grow in coming years. Though small in relation to their overall revenues, interest payments from the Fed have been a source of virtually risk-free returns for foreign banks. Large holders of Fed reserves include Deutsche Bank, UBS, Bank of China and Bank of Tokyo-Mitsubishi, according to bank regulatory filings. U.S. banks including JP Morgan, Wells Fargo and Bank of America are also big recipients of Fed interest payments, according to the filings.

“It is a small transfer from U.S. taxpayers to foreign taxpayers,” said Joseph Gagnon, a former Fed economist at the Peterson Institute for International Economics. The transfer, he added, was a side effect of Fed policy, not a goal. Behind the payments is a complex interplay between new government regulatory policies and new methods the Fed has developed to control short-term interest rates. The Fed has pumped nearly $3 trillion into the banking system since the 2008 financial crisis, increasing banks’ reserves, in efforts to stabilize markets and boost economic growth. Since 2008, it has paid banks interest of 0.25% on those reserves. The Fed affirmed this month that the rate it pays on reserves will be the primary tool it uses to raise short-term borrowing costs from near zero when the time comes, likely next year. In part because regulatory requirements discourage domestic banks from holding more cash reserves than they need, many of the reserves created by the Fed are held by foreign banks.

In the past, the Fed influenced interest rates by increasing or reducing money in the banking system through small amounts of short-term bond trades with banks. This caused the Fed’s benchmark federal funds rate to rise or fall, influencing other borrowing costs across the economy, such as those on mortgages, credit cards and business loans. Because there is so much money in the financial system now, that old method won’t work and the Fed plans to rely primarily on adjusting the interest rate on reserves to change the fed funds rate and other borrowing costs. The interest payments totaled $4.7 billion so far this year and $5.1 billion last year, and will increase over time as the Fed raises rates. The Fed remits most of its profits to the U.S. Treasury, and the rising cost of the interest payments could put downward pressure on the amount the central bank sends to taxpayers each year, the Fed has said.

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The U.S. government is borrowing about $8 trillion a year.

If Something Rattles This Ponzi, Life In America Will Change Overnight (MS)

I know that headline sounds completely outrageous. But it is actually true. The U.S. government is borrowing about $8 trillion a year, and you are about to see the hard numbers that prove this. When discussing the national debt, most people tend to only focus on the amount that it increases each 12 months. And as I wrote about recently, the U.S. national debt has increased by more than a trillion dollars in fiscal year 2014. But that does not count the huge amounts of U.S. Treasury securities that the federal government must redeem each year. When these debt instruments hit their maturity date, the U.S. government must pay them off. This is done by borrowing more money to pay off the previous debts. In fiscal year 2013, redemptions of U.S. Treasury securities totaled $7,546,726,000,000 and new debt totaling $8,323,949,000,000 was issued. The final numbers for fiscal year 2014 are likely to be significantly higher than that. So why does so much government debt come due each year?

Well, in recent years government officials figured out that they could save a lot of money on interest payments by borrowing over shorter time frames. For example, it costs the government far more to borrow money for 10 years than it does for 1 year. So a strategy was hatched to borrow money for very short periods of time and to keep “rolling it over” again and again and again. This strategy has indeed saved the federal government hundreds of billions of dollars in interest payments, but it has also created a situation where the federal government must borrow about $8 trillion a year just to keep up with the game. So what happens when the rest of the world decides that it does not want to loan us 8 trillion dollars a year at ultra-low interest rates? Well, the game will be over and we will be in a massive amount of trouble.

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French Policy Stupor Sends Bearish Equity Bets Soaring (Bloomberg)

French stocks have beaten euro-area stocks for six years. Options traders are betting 2014 will be different. With a budget deficit poised to rise and economic growth running at half the region’s rate, investor sentiment on the CAC 40 Index is deteriorating. Options protecting against swings in the equity gauge cost the most since April 2013 relative to the Euro Stoxx 50 Index, data compiled by Bloomberg show. French stocks slid in the last three months, completing their first quarterly loss in more than two years. International investors are losing patience because policy measures in Europe’s second-largest economy have failed to keep up with those in Spain, Portugal or Ireland, said Yves Maillot, head of European equities for Natixis Asset Management in Paris.

“Being bearish on French stocks is definitely a sentiment story,” Maillot said by phone. “Reforms have only just begun in France and there is still so much to do.” A Bank of America Corp.’s European fund-manager survey conducted last month showed a net 38% of respondents see France as the country they most want to be underweight in the coming year, meaning they plan to own less of the shares than are represented in equity benchmarks. That’s the most in Europe. About 18% are overweight euro-area stocks, an improvement from a month earlier, the survey showed.

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60% Of Greeks Live At Or Below Poverty Line (Ekathimerini)

Three in every five Greeks, or some 6.3 million people, were living in poverty or under the threat of poverty in 2013 due to material deprivation and unemployment, a report by Parliament’s State Budget Office showed on Thursday. Using data on household incomes and living conditions, the report – titled “Minimum Income Policies in the European Union and Greece: A Comparative Analysis” – found that “some 2.5 million people are below the threshold of relative poverty, which is set at 60% of the average household income.” It added that “3.8 million people are facing the threat of poverty due to material deprivation and unemployment,” resulting in a total of 6.3 million people.

The State Budget Office’s economists who drafted the report argued that in contrast with other European countries “which implement programs to handle social inequalities, Greece, which faces huge phenomena of extreme poverty and social exclusion, is acting slowly.” They added that there is high demand for social assistance, while its supply by the state is “fragmented and full of administrative malfunctions.” In that context “the social safety net is inefficient, while there is no prospect for the recovery of income losses resulting from the economic recession in the near future,” the report noted, reminding readers that the measure of the minimum guaranteed income “arrived in Greece belatedly.”

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Maybe This Is Why Carmen Segarra Drove the Fed Nuts (Bloomberg)

We’ve lost something in our human nature since – we’re guessing – the conclusion of the Second World War. Certainly since Vietnam. It’s the willingness to be firm, to say things no one wants to hear, in person. We lost the muscle that allows us to say “no” to something because it might risk upsetting someone, even if it’s the right thing to do, because people are petty and insecure, and no matter the substance of the message that goes along with “no,” it will be how you say “no” that overshadows why you say “no.” “No” means anything negative: I disagree. You are wrong. You didn’t do what you said you would. You’re late and wasted my time. This is central to why Carmen Segarra was fired from the New York Federal Reserve, the dirty laundry from it all now scattered about Wall Street’s front yard for all the neighbors to see. Beyond the other elements to the conflict that resulted in the termination of a woman who did the job she was hired to do, but didn’t do it the way Jennifer Aniston would have done it, lies human nature.

It’s now human nature to play nice. Above all, be nice. It will be referred to as being “professional” or being “collegial.” We’d always thought that risking screwing something up because of a preoccupation with hurting someone’s feelings was being unprofessional. There are those other elements that might explain why Segarra was fired besides the nice quotient, but it’s almost impossible to believe her termination had anything to do with job performance. Like most except Goldman Sachs, we hate to disagree with the New York Fed, but what Ivy League- and Sorbonne-educated international lawyer secretly records herself doing a crappy job for 46 hours? After reading the Pro Publica story and listening to the parallel radio version produced by “This American Life,” we came away asking why, exactly, someone at the New York Fed or any regulator would be afraid of, or intimidated by, the bank or industry they regulate so much that they’d sacrifice Segarra or anyone else in her position. We had to know to help us understand.

Michael Lewis knows his way around Wall Street a little, so we asked him. His column on all this hit the same day as the news. He came up with some of the other, more practical elements. “The simple answer is that it’s become standard practice for Fed employees to go to work for Wall Street firms, so the last thing they want to do is to alienate those firms and come across as people who don’t ‘get it,’” Lewis wrote to us in an e-mail. “When you ask a person making $150,000 a year to control a person making $1.5 million a year, you are asking for trouble,” he wrote. “To that, add the problem that the typical Fed regulator is in the awkward position of having to be educated about whatever the Wall Street firm has dreamed up.”

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The Rational Complacency Of Financial Markets (Roubini)

There appear to be good reasons why global markets so far have reacted benignly to today’s geopolitical risks. What could change that? Several scenarios come to mind. First, the Middle East turmoil could affect global markets if one or more terrorist attacks were to occur in Europe or the US – a plausible development, given that several hundred Islamic State jihadis are reported to have European or US passports. Markets tend to disregard the risks of events whose probability is hard to assess, but that have a major impact on confidence when they do occur. Thus, a surprise terrorist attack could unnerve global markets. Second, markets could be incorrect in their assessment that conflicts such as that between Russia and Ukraine, or Syria’s civil war, will not escalate or spread. The Russian president Vladimir Putin’s foreign policy may become more aggressive in response to challenges to his power at home, while Syria’s ongoing meltdown is destabilising Jordan, Lebanon and Turkey.

Third, geopolitical and political tensions are more likely to trigger global contagion when a systemic factor shaping the global economy comes into play. For example, the mini-perfect storm that roiled emerging markets earlier this year – even spilling over for a while to advanced economies – occurred when political turbulence in Turkey, Thailand, and Argentina met bad news about Chinese growth. China, with its systemic importance, was the match that ignited a tinderbox of regional and local uncertainty. Today – or soon – the situation in Hong Kong, together with the news of further weakening in the Chinese economy, could trigger global financial havoc. Or the Federal Reserve could spark financial contagion by exiting zero rates sooner and faster than markets expect. Or the eurozone could relapse into recession and crisis, reviving the risk of redenomination in the event that the monetary union breaks up.

The interaction of any of these global factors with a variety of regional and local sources of geopolitical tension could be dangerously combustible. So, while global markets arguably have been rationally complacent, financial contagion cannot be ruled out. A century ago, financial markets priced in a very low probability that a major conflict would occur, blissfully ignoring the risks that led to the first world war until late in the summer of 1914. Back then, markets were poor at correctly pricing low-probability, high-impact tail risks. They still are.

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He was initially sent home with antibiotics?! WTF?

First Ebola Case Is Diagnosed in the US (Bloomberg)

The first case of deadly Ebola diagnosed in the U.S. has been confirmed in Dallas, in a man who traveled from Liberia and arrived in the U.S. on Sept. 20, the Centers for Disease Control and Prevention said. The man is being kept in isolation in an intensive care unit. He had no symptoms when he left Liberia, then began to show signs of the disease on Sept. 24, the CDC said yesterday. He sought medical care on Sept. 26, was hospitalized two days later at Texas Health Presbyterian and is critically ill, said Thomas Frieden, director of the CDC. Frieden said the agency is working to identify anybody who had contact with the man and track them down. “There is no doubt in my mind that we will stop it here,” he said at a press conference in Atlanta.

The CDC has a team of epidemiologists on the way to Texas, he said. The team will follow anyone who has had contact with the man for 21 days. If they develop any symptoms, they’ll immediately be isolated, and public health officials will trace their contacts. The diagnosis was first confirmed by a Texas lab based on samples of the man’s blood and confirmed by the CDC. The man was traveling to the U.S. to visit family here and was staying with them. He was exposed to only a “handful” of people during the time when he had symptoms, including family members and possibly some community members, according to Frieden, who said there was little risk to anyone on a flight with the man.

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Good article.

In Less Than 2 Human Generations, 50% Of World Wildlife Is Gone (Bloomberg)

If animals were stocks, the market would be crashing. The chart below shows the performance of an index that tracks global animal populations over time, much like the S&P 500 tracks shares of the biggest U.S. companies. The Global Living Planet Index, updated today by the World Wildlife Foundation, tracks representative populations of 3,038 species of reptiles, birds, mammals, amphibians and fish. To say the index of animals is underperforming humans is an understatement. More than half of the world’s vertebrates have disappeared between 1970 and 2010. (In the same period, the human population nearly doubled.) The chart starts at 1, which represents the planet’s level of vertebrate life as of 1970.

It makes sense that the WWF is framing of biodiversity loss as an index that may look more familiar to financial analysts than environmentalists. The research group’s message is as much economic as environmental: Not only do animal populations represent valuable natural systems that economies rely on, in many cases they are actual tradable goods, like stocks of wild fish. “In less than two human generations, population sizes of vertebrate species have dropped by half,” writes WWF Director General Marco Lambertini. “We ignore their decline at our own peril.” Humans are currently drawing more from natural resources than the Earth is able to provide. It would take about 1.5 planet Earths to meet the present-day demands that humanity currently makes on nature, according to the WWF. If all the people of the world had the same lifestyle as the typical American, 3.9 planet Earths would be needed to keep up with demand.

The report reads like one of the “alarm bells” U.S. President Barack Obama referenced in his climate change speech last week. Unfortunately, according to the WWF, the effects of climate change are only starting to be felt; most of the degradation of the past four decades has other causes. The biggest drivers are exploitation (think overfishing) responsible for 37% of animal population decline, habitat degradation at 31%, and habitat loss at 13%. Global warming is responsible for 7.1% of the current declines in animal populations, primarily among climate-sensitive species such as tropical amphibians. Latin American biodiversity dropped 83%, the most of any region. But the toll from climate change is on the rise, the WWF says, and the other threats to animal populations aren’t relenting. For social and economic development to continue, humans need to take better account of our resources. Because right now, life on Earth is not a bull market.

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Sep 302014
 
 September 30, 2014  Posted by at 9:49 pm Finance Tagged with: , , , ,  


Herbert Mayer Honi soit qui mal y pense: Aug 1939

This is not the first time I’ve written on this topic, but I want to do it again, because rate hikes, when they come, will have a tremendous effect on everybody’s loves and economies, wherever you live. And because I think there’s still far too much complacency out there, far too much ‘conviction’ that higher rates will come only after a comfortable period of time, and even then only gradually.

There are three steps in the Fed’s ‘policies’. There’s QE, which will end in October. There’s ultra low interest rates, which have so far been maintained. And then there’s the dollar, whose rate many people still think is determined by the ‘markets’, even if the Fed is in effect the ‘markets’. When the Fed buys, or makes third parties buy, bonds and stocks (and we know it has), it’s not going to let the dollar roam free. That makes no sense.

Which means the rising dollar (about 10% vs the euro in mere weeks) is due to Fed actions. The Fed manipulates what it can. It’s the motivation behind its actions that catches people on the wrong foot. Most continue to have this idea that Janet Yellen, and Ben Bernanke before her, seek and sought their alleged dual mandate of full employment and price stability. Ironically, those are two things they have zero control over.

What they do instead, what motivates their actions, is seek to maximize Wall Street bank profits, and, in the same vein and same breath, hide these banks’ losses. Once you realize and acknowledge that, policies over the past 8 years – and before, cue Greenspan – make a lot more sense then when you try to see them through that alleged dual mandate view.

QE is all but done. This alone already has started a capital flight move away from emerging markets. Many of whom will soon look a whole lot less emerging because of it. The capital will continue to flow back to the global financial center from the periphery, leaving dozens of countries and companies scrambling to find dollars to pay off the loans that looked so cheap.

The rising dollar will only make that worse. And moreover, it will catch many other countries, for instance southern European ones, in the same dragnet the emerging economies were already in. If and when your currency loses 10%+ against the currency more commodities and debts are denominated in, and you have such debts and need such commodities, you stand to lose, in all likelihood, a lot.

That leaves interest rates. Given the recent Fed actions on QE and the dollar, why would it NOT raise rates? The dual mandate? To affect price stability in the US? With the dollar moving the way it has, that’s gone anyway. To help Americans get jobs? The only reason US jobless numbers are not much higher is A) millions left the job market altogether and B) millions who were once account managers are now burger flippers, WalMart greeters and self-employed.

The definitions were changed as we went along, that’s why, at least officially, unemployment is not at 15% or 20%. And that is al part of the same opaque truth, that nothing the Fed did since 2008 has mattered one bit when it comes to jobs for Americans. All it has effectively achieved is that trillions of dollars in Main Street money and future obligations were shifted to Wall Street.

The objectives of the Fed’s dual mandate have turned out to be a total joke when the chips came down. Not surprising, because they were always a joke to begin with. A central bank should not be involved in job creation, and it should not hand trillions of dollars to the banks that are its owners, to ostensibly keep prices stable in the real economy, where none of those trillions end up. It’s all just a joke, albeit a very costly one.

QE was never meant to benefit Main Street. Neither was the suppression of the dollar. Why then would the Federal Reserve NOT hike rates only to protect the real American economy? Nothing it has done so far has been aimed at that goal, so why start now? There’s no logic there.

The Fed will continue to do what it’s done all these years: enact those policies that promise to bring the greatest profits to the banks that own it. And right now, those profits are not in more bond buying, and not in artificially low rates, and not in an artificially low dollar. Simply because that’s what everybody else is betting on, and the money when that happens is on the opposite side of the bet.

I cited this piece by Philip Van Doorn at MarketWatch 5 weeks ago, and it’s as relevant now as it was then:

Big US Banks Prepare To Make Even More Money

[..] … the debate at the Federal Reserve has now shifted to the timing of interest rate increases. Most economists expect the federal funds rate to begin climbing in the second half of 2015, but it could well happen sooner than that. For most banks, the extended period of low interest rates has become quite a drag on earnings. Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago

Once you you’ve metastasized that, and the truth about the dual mandate thing, and you’ve read the ‘Secret Goldman Tapes’ stories earlier this week, which showed in a blinding fashion how Goldman Sachs controls the Fed, not the other way around, then maybe your idea about those ‘soft slow’ rate hikes are due for a review as well.

Just look at what Dallas Fed head Richard Fisher had to say over the weekend:

Fisher Says Fed Must Weigh Wage Pressures in Setting Rate Policy

“I don’t want to fall behind the curve here,” Fisher said in a Fox News interview. “I think we could suddenly get a patch of high growth, see some wage-price inflation, and that is when you start to worry.” Fisher dissented on Sept. 17 at the last meeting of the Federal Open Market Committee, when the Fed retained a pledge to keep rates near zero for a “considerable time” after its asset purchases halt at the end of next month.

He called U.S. second-quarter growth “uber strong,” referring to the upward revision last week to an annualized rate of 4.6% from 4.2% previously estimated, and said history had shown that wage pressures could accelerate when unemployment got below current levels of 6.1%. In addition, Fisher said surveys of wage-price pressures in the Dallas Fed’s district, which includes Texas, northern Louisiana and southern New Mexico, were the highest since before the recession, and other indictors were also buoyant. “We’re going to be releasing some data on Monday and Tuesday, our new surveys, that I think will just knock your socks off,” he said.

I’d say Fisher is uber happy, and those data did come in as he predicted – though I think everyone wearing socks still has them on. Fisher wants that rate hike now, not next summer or fall. And he has a voice, even if he himself and fellow hawk Philly Fed head Charles Plosser are poised to step down some 6 months from now. I’m reading ‘experts’ who claim that will relieve the pressure on Yellen and her doves, but it’s the other way around: they’re going to make sure their – departing – voices will be heard one last time.

But of course down the line that’s all theater. The rate hike is a foregone conclusion. As is the mayhem it will give birth to. Prepare yourselves accordingly. And from now on always keep in the back of your mind what the Fed really is. It is not your friend. Unless you too own a piece.

Why A Strong Dollar Is Scarier Than Taper Tantrum (CNBC)

Expectations that the Federal Reserve is on course to start tightening policy has spurred fears of a return of last year’s emerging market turmoil, but Societe Generale tips a strong dollar as a bigger risk. “A strong dollar tantrum could be a more worrying scenario than a Fed tightening tantrum,” Michala Marcussen, global head of economics at Societe Generale, said in a note dated Sunday. The U.S. dollar index has climbed around 7% this year, with the Fed now nearly completing the tapering of its asset purchases, with markets widely expecting interest rate increases to begin sometime next year. Some analysts are concerned this will spur a repeat of the “taper tantrum,” when concerns about the Fed’s move to begin tapering caused a brutal selloff in emerging market assets earlier this year and last year.

“Hope today is that a strong dollar will cap U.S. inflation, delay Fed tightening and boost exports to the U.S.,” Marcussen noted, but she believes for that to happen, the U.S. dollar would need to strengthen so much that it would signal much weaker growth in the rest of the world. To delay Fed rate hikes, the euro would need to fall to $1.10, while the U.S. dollar would need to fetch around 120 yen and 6.50 yuan, she said. Early Tuesday, the euro was around $1.2690 and the dollar was fetching 109.40 yen and 6.1495 yuan. “In such a scenario, [a strong] dollar would equate to further capital outflows, placing further pressure on already vulnerable economies,” she said. “A ‘dollar tantrum’ scenario could well prove more painful than a ‘Fed tightening tantrum,’ assuming the latter comes with better growth in the rest of the world.” To be sure, she doesn’t believe the dollar’s move yet qualifies the currency as “strong,” with it still trading just below its long term average, although Societe Generale expects the trade-weighted dollar will rise further into 2015.

Others expect some emerging market assets will react negatively to the dollar’s recent advance. “The upcoming Fed exit will continue to lead front-end rates higher in the quarters ahead,” Goldman Sachs said in a note last week. “In a market environment where China growth expectations decline, front-end U.S. rates gradually push higher and emerging market front-end yields remain anchored around current levels, there is room for emerging market currencies (particularly high-yielding ones) to weaken further.” But Goldman is looking to Europe for cues on whether any emerging market selloff will be confined to the currencies or if it will spill over to other assets. “Heightened Euro area growth concerns can weigh on risky assets, including parts of emerging market credit and equities,” it said.

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Nah.

Strong Dollar Bolsters Fed Patience on Rates Amid Growth Impact (Bloomberg)

The dollar’s strongest year since 2008 is a source of growing concern among some Federal Reserve policy makers, who say further gains have the potential to curb economic growth and keep inflation too low. Atlanta Fed President Dennis Lockhart, New York’s William C. Dudley and Chicago’s Charles Evans have all said in the past week they are watching the dollar as officials debate the timing of the first interest-rate increase since 2006. A strong dollar tends to restrain exports by making them more expensive, holding back growth, while reducing the cost of imported goods. “We’re going to take that into account, the way it’s affecting the economy in terms of net exports and GDP growth and what it means for our inflationary developments,” Evans told reporters yesterday after a speech in Chicago. Evans and Dudley are among policy makers who argue that the Fed can afford to be patient on raising interest rates, and that tightening prematurely poses a greater risk to the world’s largest economy than waiting too long.

“They are worried about the durability of the labor-market recovery and inflation still running below their target, and the dollar feeds into that,” said Guy Berger, U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “If you have a stronger dollar you’re going to have less inflation, and that’s the reason they’re focusing on it,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York and a former New York Fed economist, who said the dollar’s gains so far are unlikely to affect monetary policy. “If the dollar keeps going up obviously it may have implications for the timing of tightening,” he said. On the other side of the debate are officials such as Dallas Fed President Richard Fisher, who favors an interest-rate increase at the end of the first quarter of next year. In a Bloomberg Radio interview yesterday, Fisher called the strength of the dollar “a vote of confidence” in the U.S. economy. “Everybody is finding the things that are favorable to their side of the argument,” Berger said. “In the case of the doves, the dollar is one of them.”

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Could=Will.

Record World Debt Could Trigger New Financial Crisis (Guardian)

Global debts have reached a record high despite efforts by governments to reduce public and private borrowing, according to a report that warns the “poisonous combination” of spiralling debts and low growth could trigger another crisis. Modest falls in household debt in the UK and the rest of Europe have been offset by a credit binge in Asia that has pushed global private and public debt to a new high in the past year, according to the 16th annual Geneva report. The total burden of world debt, excluding the financial sector, has risen from 180% of global output in 2008 to 212% last year, according to the report. The study by a panel of senior academic and finance industry economists accuses policymakers in many countries of failing to spur sustainable growth by capitalising on historically low interest rates while deterring exuberant lending.

It called for Brussels to write off the debts of the eurozone’s worst-hit countries and urgently embark on a “sizeable” programme of electronic money creation or quantitative easing to push down long-term interest rates. It said unless policymakers kept a lid on risks in the financial system, especially overvalued property and stock markets, a trend for investing in assets with borrowed money could run out of control. The Geneva report, which is commissioned by the International Centre for Monetary and Banking Studies, follows a study earlier this year by the Bank of International Settlements (BIS), which diagnosed the same problem, but said risky borrowing could only be discouraged by higher interest rates. The Geneva report instead argued a concerted effort to tackle the after-effects of the crisis was needed to mitigate a “poisonous combination of high and rising global debt and slowing nominal GDP [gross domestic product], driven by both slowing real growth and falling inflation”.

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Deflation is all that’s left. Until debts are restructured.

Japan’s Industrial Production, Household Spending and Real Wages Fall (WSJ)

A raft of economic data released Tuesday continues to paint a picture of sluggish growth for the third quarter in Japan, despite a tight labor market and rising wages. Industrial production fell a surprising 1.5% on month in August. Retail sales grew 1.9% on month, but separate data adjusted for inflation and expenditure on services showed household spending fell 4.7% on year. At the same time, the unemployment rate fell to 3.5%, a 17-year low. The tightening labor market has contributed to a run of year-on-year wage increases not seen in six years. But those wage gains are outpaced by inflation, meaning real wages are still down 2.6% on year. The government and the Bank of Japan believe wage growth will eventually filter through the economy and start a virtuous cycle of higher private spending and increased production and investment. But some private economists are skeptical about this rosy scenario. Others say that even if such a virtual cycle eventually materializes, the economy will likely lack a robust growth engine for some time.

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Repeat: Deflation is all that’s left. Until debts are restructured.

Eurozone Inflation Drops To Fresh 5 Year Low, Euro Tumbles (Zero Hedge)

Anyone confused why futures are doing their best to surge in the overnight session, the answer is simple: first it was Japan reporting the latest batch of atrocious economic data, which an hour ago was followed by Europe own abysmal econofreakshow, where Eurostat just reported that in September Eurozone inflation rose a meager 0.3% from a year ago, the lowest annual increase since October 2009.This marks the 12th straight month that Euro inflation has been below 1%, and far below the ECB’s goal of 2% inflation.

More importantly, it also shows that some 3 months of a sliding Euro have not only had zero impact on European export competitiveness, as the entire continent is careening into a triple dip recession, but that the ECB is completely powerless to create an inflationary spark, as not only is the bulk of the Eurozone flirting with disinflation but more and more European countries are in outright deflation. Also of note, while headline inflation was in line with expectations, it was core CPI that missed expectations of a 0.9% increase, and rose by only 0.7%, confirming that the most recent bout of deflation in Europe is about far more than just sliding energy prices. In fact for the culprit, perhaps look at Japan which is now exporting deflation hand over fist.

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Tick tick tick.

Europe Ticking All the Wrong Boxes Starts Mirroring Japan (Bloomberg)

Similarities between the euro region and Japan are intensifying, heaping pressure on Mario Draghi while offering good news for bond holders. Sluggish credit growth? Check. Slowing economy? Check. Falling market expectations for inflation? Check. Aging population? Yes, it has that too, placing Europe in a similar situation to what was encountered by the world’s third-largest economy after the bubble burst on its postwar Economic Miracle. That’s a concern for DZ Bank AG, the most bullish forecaster of German bunds in data compiled by Bloomberg. It estimates the 10-year yields will fall to a euro-era record of 0.5% by the first quarter, leaving them below the 0.65% percent median estimate for their Japanese peers.

With the official interest rate near zero, European Central Bank President Draghi may need to do more to steer the region away from the deflation and debt traps that condemned Japan to two decades of stagnation. “Renewed ECB activism offers hope that the euro area will not follow the path Japan embarked on in the 1990s,” said Nikolaos Panigirtzoglou, London-based global market strategist at JPMorgan Chase. “Low growth leads to low income growth. Combine that with persistently high unemployment and you’ve got a lack of confidence.” Europe should be on a roll. It’s never been cheaper for euro-area governments or individuals to borrow money and the ECB is seeking to put cash into the economy through cheap loans to banks and a pledge to buy asset-backed securities.

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A lot.

A Look At Just How Much China’s Housing Downturn Could Hurt GDP (WSJ)

Just how much will a downturn in China’s property market hurt the economy? A new analysis by analysts at Japanese bank Nomura sheds some light. China’s property market won’t recover any time soon, say the analysts, who figure the downturn will shave the country’s GDP growth by 1.4 percentage points in 2014 and 0.6 percentage points in 2015 if there are no drastic changes to policy. In the worst-case scenario , GDP growth could plunge by 4 percentage points. There is no easy way out: the property market correction will be long-lasting if orderly, or very painful if sudden, Nomura analysts Changchun Hua, Wendy Chen and Rob Subbaraman say in a report. The analysts came up with three scenarios. If government policy continues at its current pace—piecemeal targeted easing—GDP growth will drop by 1.4 percentage points this year because property takes a big bite out of industries like steel, construction, chemicals and transport.

If the government eases monetary policy by lifting credit curbs, cutting banks’ reserve requirement ratios and interest rates, and rolling out large stimulus packages, the impact on GDP would be smaller this year and next, shaving growth by 1.1 percentage points in 2014 and 0.3 percentage points in 2015. But in the longer term, it could be worse than continuing current policy because debt levels would be pushed higher and the oversupply situation would worsen, the analysts say. “This is a risky strategy as it could eventually lead to an even sharper correction in the sector, and indeed in the wider economy, ahead.” The third scenario is if the government does nothing and a housing crash ensues. In that case, GDP growth could fall 4 percentage points, the investment firm said. In any case, the downturn could last between two to four years.

“This is not a minor correction,” they said. “This property market downturn is different to those China has experienced in the past. Previous downturns were largely driven by tighter policies while this one appears more naturally driven by market forces.” The last two property market corrections in China occurred in 2007-08 and in 2011-12. (China, where the private housing market only started in 1998, has a shorter property cycle than more mature markets such as the U.S. and Japan.) Those downturns were triggered by policy tightening aimed at reining in property investment, but the market turned around quickly because policymakers changed their minds and loosened the curbs to counter effects of the global financial crisis in 2009 and slowing domestic growth in 2012. This time, the market isn’t likely to behave like a yo-yo. The country is currently plagued by an oversupply problem, especially in so-called third- and fourth-tier cities, and barring a significant crash, the correction will likely be long-lasting, the Nomura analysts said.

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Pimco May Suffer Over $250 Billion In Outflows: Deutsche (CNBC)

Estimates of how much investors are likely to pull from Pimco following the departure of star manager Bill Gross are swirling, with Deutsche Bank now expecting around $266 billion in outflows or a fall in assets equivalent to 20% over the next two years.
The firm has named Daniel Ivascyn as chief investment officer and Gross’s successor while Scott Mather, Mark Kiesel and Mihir Worah will take on Gross’s flagship $221 billion Total Return fund after his shock exit on Friday. Chief executive of Pimco Doug Hodge has said Gross’s former fund “does not define Pimco,” but analyst estimates of outflows are racking up. Deutsche Bank research argued that each €100 billion in outflows is equivalent to around 9% of third party assets under management (AUM), which reduces Pimco’s parent company Allianz’s earnings by around 2%.

The bank also cut its price target on the insurer to €135 from €140, but maintained a hold position on the stock. Bernstein Research expects asset outflows between 10 and 30% and sees a “good deal” of Pimco clients switching to Janus Capital Group – where Gross has taken up a post managing a recently launched unconstrained bond fund and similar strategies. “We estimate that a drop in AUM of 10% would have a minor impact on Allianz fair value of 2%, while a 30% drop in AUM would hit the stock by around 13% according to our fundamental valuation mode,” analysts led by Thomas Seidl said.

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Hong Kong Protesters Stockpile Supplies, Prepare For Long Haul (Reuters)

Tens of thousands of pro-democracy protesters extended a blockade of Hong Kong streets on Tuesday, stockpiling supplies and erecting makeshift barricades ahead of what some fear may be a push by police to clear the roads before Chinese National Day. Riot police shot pepper spray and tear gas at protesters at the weekend but withdrew on Monday to ease tension as the ranks of demonstrators swelled. Protesters spent the night sleeping or holding vigil unharassed on normally busy roads in the global financial hub. Rumors have rippled through crowds of protesters that police could be preparing to move in again on the eve of Wednesday’s anniversary of the Communist Party’s foundation of the People’s Republic of China in 1949. “Many powerful people from the mainland will come to Hong Kong. The Hong Kong government won’t want them to see this, so the police must do something,” Sui-ying Cheng, 18, a freshman at Hong Kong University’s School of Professional and Continuing Education, said of the National Day holiday.

“We are not scared. We will stay here tonight. Tonight is the most important,” she said. The protesters, mostly students, are demanding full democracy and have called on the city’s leader, Leung Chun-ying, to step down after Beijing ruled a month ago it would vet candidates wishing to run for Hong Kong’s leadership in 2017. While Leung has said Beijing would not back down in the face of protests it has branded illegal, he also said Hong Kong police would be able to maintain security without help from People’s Liberation Army (PLA) troops from the mainland. “When a problem arises in Hong Kong, our police force should be able to solve it. We don’t need to ask to deploy the PLA,” Leung told reporters at a briefing on Tuesday. There was a growing sense that the protests could come to a head later on Tuesday before the National Day celebrations.

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No.

Will Hong Kong Spark An Asian Spring? (CNBC)

Thousands of protesters campaigned for full democracy in Hong Kong over the weekend, raising the question: Could unrest spread to mainland China. “Today is a very important moment for Beijing and for the Hong Kong government because if they don’t control the streets of Hong Kong today they could see this thing start to mushroom,” Gordon Chang, author of ‘The Coming Collapse of China’ told CNBC on Monday. “Beijing has a lot at stake here as this is something that could spread…political scientists call it the ‘demonstration effect,'” he said. “We’re starting to see that now in China.” Netizens across China shared images from the protests and expressed their views via social media, but authorities quickly deleted posts and shut down websites, in line with China’s history of censorship.

Popular photo sharing website Instagram was blocked after photos and videos from the Hong Kong protests were posted, according to numerous reports. Meanwhile, the phrase “Occupy Central” was blocked on Weibo – the hugely popular micro-blogging site in China – on Sunday. Ripples of discontent have begun to show in Taiwan and Macau. In Taiwan, a state that is essentially autonomous, student leaders occupied the lobby of Hong Kong’s representative office on Monday in a show of support for democracy protesters, according to local media. Meanwhile, in Macau – another “special administrative region” like Hong Kong, a referendum conducted last month during the official election of its chief executive, showed a striking disparity between the election result and public opinion.

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Obama step in?!

US Judge Holds Argentina in Contempt of Court in Bond Payment Case (NY Times)


For more than a year, Judge Thomas P. Griesa of Federal District Court in Manhattan has warned that Argentina would suffer repercussions if it defied his orders regarding payments to bondholders. On Monday, the judge put some teeth behind those warnings, ruling the nation in contempt of court. He stopped short of issuing sanctions, however, saying he would make a decision on them in the future. Speaking firmly, Judge Griesa indicated that the Republic of Argentina had gone a step too far in seeking to sidestep his injunction that forbids the government from paying only the bondholders it chooses. “What has happened is the Republic, in various ways, has sought to avoid, to not attend to, almost to ignore this basic part of its financial obligations,” Judge Griesa said on Monday. The ruling was another dramatic turn in a legal battle that has pitted President Cristina Fernández de Kirchner of Argentina against a group of hedge funds that are seeking more than $1.5 billion in payments on bonds that defaulted in 2001.

In a separate move that could increase the tension, the Argentine government sent a letter to Secretary of State John F. Kerry on Monday morning before the hearing, seeking to enlist his support and calling the actions by Judge Griesa “excessive judicial harassment,” according to the embassy in Washington. “A declaration of contempt would result in an unprecedented escalation in the conflict,” the letter, signed by the Argentine ambassador to the United States, said. “We are in uncharted waters,” said Arturo C. Porzecanski, economist in residence at American University’s School of International Service. “This makes official the fact that Argentina has been a rogue debtor for many many years and has been in contempt of many many judgments.”

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And they’re right.

Argentina Says US Judge Contempt Order ‘Violates International Law’ (BAH)

The Foreign Ministry has asserted that New York district judge Thomas Griesa’s contempt ruling against Argentina is in clear breach of international law, adding that the decision had no practical ramifications against the nation and only served to aid the vulture fund campaign. The government department, headed by Foreign minister Héctor Timerman, stated this evening that Griesa’s ruling “is in violation of international law, the United Nations Charter and the Organisation of American States charter,” in a press statement.
“All of these instruments establish that the United States of America as a state is the only entity responsible for the actions of any of its organisms, such as the recent decision from its judicial branch,” the missive fired, hours after the judge’s ruling was made public.

“Judge Griesa’s decision has no practical effect, expect for providing new elements for the vulture funds to use in their slanderous political and media campaign against Argentina.” The Ministry strongly criticised the magistrate, who despite finding Argentina in contempt declined to immediately impose financial penalties of up to 50,000 dollars a day, as requested by plaintiffs NML Capital in the ongoing sovereign debt conflict in New York. “Griesa boasts the sad record of being the first judge to hold a sovereign state in contempt for paying a debt, after failing in his efforts to obstruct Argentina’s foreign debt restructuring,” the statement said. “The Argentina government reaffirms its decision to keep exercising its defence of national sovereignty, and requesting that the United States accepts the International Court of Justice’s juridisction in order to solve this controversy between the two countries.”

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Word.

Europe’s Real Crisis Will Be Political With Spain as Ground Zero (Phoenix)

Spain’s Mariano Rajoy is back with yet another display of why he should never have been allowed to take office in the first place. For those who need a quick primer, here’s a quick highlight reel of Rajoy’s more notable accomplishments:

1) Helped facilitate biggest housing bubble in Spanish history, a bubble so large that the US’s looks like a molehill in comparison

2) Took bribes and kickbacks from developers in helping to create said bubble (more on this later).

3) Claimed Spain would never need a bailout, then demanded a €100 billion bailout one weekend before flying off to watch a soccer match.

4) Raided Spain’s social security fund, investing 90% of its assets in Spanish bonds… which were on the verge of default a mere six months before.

5) Got caught with dirty money he received from property developers and stated the following, “…everything that has been said about me and my colleagues in the party is untrue, except for some things that have been published by some media outlets,”

Now Rajoy is dealing with the problem of Catalonia (a region in Spain) wanting independence. Catalonians are proposing putting the matter to a vote, much as Scotland recently did regarding its own move to potentially break away from the UK. Rajoy, never one to miss the opportunity to embarrass himself, has called the decision to vote for independence “profoundly anti-democratic.” Bear in mind, this is the same “leader” who likes to proclaim that Spain is in a recovery… while Spain’s unemployment is roughly 24% and youth unemployment is above 50%. At some point, the markets will call BS on Spain’s dreams of recovery and the bond markets will rebel. When this happens the whole fraud will come unraveled. However it might take a full-scale political crisis before this happens. And by the look of things we’re not far from one. We’re back in trouble whenever Spain takes out the long-term trendline for its 10-year bond yields.

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Democracy?

Spain Court Blocks Catalonia Vote as Standoff Escalates (Bloomberg)

Spain’s Constitutional Court temporarily blocked Catalan government plans to hold a vote on independence, raising the stakes in the central government’s standoff with the regional administration in Barcelona. Catalan president Artur Mas signed a decree on Sept. 27 calling for a Nov. 9 ballot as a non-binding consultation on independence for the region of about 7.5 million people in northeastern Spain. Spanish Prime Minister Mariano Rajoy denounced the vote as unconstitutional and said yesterday that his government had filed a lawsuit to block it. The suit was admitted for consideration, effectively blocking the Catalan decree and vote until the court makes a further ruling on the government’s legal action, a Madrid-based official at the court said last night by phone.

“It’s false that the right to vote can be assigned unilaterally to one region about a matter that affects all Spaniards,” Rajoy told reporters at the government palace in Madrid. “It’s profoundly anti-democratic.” Less than two weeks after Scotland voted against independence from the U.K. after 307 years of union, Mas and Rajoy are at loggerheads over whether the Spanish region can stick with its plan to vote on independence following the court’s blocking of the vote. Unlike in Scotland, polls suggest a majority of Catalans would support independence. “The Constitutional Court met at supersonic speed,” Mas said yesterday during a televised presentation of the steps to be taken on the proposed transition of Catalonia. “We hope the members of the Constitutional Court keep in mind that they should be a referee for everyone, not for one side only.”

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Mass graves uncovered. No mention in the west.

Russia Investigates ‘Kiev Sponsored Genocide’ In East Ukraine (Reuters)

Russia opened a criminal case Monday into what it called Kiev’s genocide of Russian-speaking residents in eastern Ukraine in a move that could increase tensions during a strained ceasefire in the region. An official statement said Russian-speaking citizens were targeted by Kiev forces using heavy weapons to kill over 2,500 people in the “Luhansk and Donetsk people’s republics,” the breakaway regions in the east. The investigation could ratchet up tensions between the post-Soviet neighbors weeks after Kiev and pro-Russian rebels agreed on a ceasefire earlier this month that has been marred by daily skirmishes and artillery shelling. “The Investigative Committee opened has opened a criminal case into the genocide of the Russian-speaking population of Ukraine’s southeast,” said the statement by the Investigative Committee of the Russian Federation, a law enforcement body that answers only to President Vladimir Putin.

“Unidentified representatives of Ukraine’s senior political and military leadership, National Guard and the Right Sector [nationalist organization] gave orders aimed at the intentional annihilation of the Russian-speaking citizens,” the statement said. The statement cited violations of the 1948 U.N. convention on genocide and other “international legal acts” to describe the reported violence, including the destruction of 500 houses and public infrastructure buildings since fighting erupted in April. Russia has long blamed Kiev for violence against civilians in the east, as the West has accused Moscow of sending weapons and troops to help pro-Russian rebels fighting Kiev’s forces. A recent U.N. report put the death toll at 2,593 people on both sides and accused pro-Russian separatists of a wide array of human rights abuses, including murder, abductions and torture.

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“Carter said 200-300 girls are sold into sexual slavery every month in his home state Georgia.”

Happy birthday, Mr. President.

Jimmy Carter, Turning 90, Says Slavery Is Worse Now Than In 1700s (CNBC)

Human slavery is not just a major issue in developing countries, but is a serious problem in the U.S. and is more prolific now than during the 18th and 19th century, former President Jimmy Carter has told Tania Bryer, host of “CNBC Meets.” Carter said 200-300 girls are sold into sexual slavery every month in his home state Georgia, and many living in advanced economies are completely unaware of the abuse happening to young women close to home. Referring to facts in his most recent book, “A Call to Action, Women, Religion, Violence and Power,” Carter describes the abuse of women around the world as “the worst, unaddressed issue that the world faces today.” “And those of us in the more advanced countries don’t know much about horrible abuse of girls whose genitals are mutilated when they’re very young, children who are killed because a girl is raped by strangers and her family kills her to protect their own nation’s honor.

These kinds of things go on in the more remote parts of the world as far as we’re concerned,” the Democratic former president said. “But even in the United States, human slavery now is greater than it ever was during the 18th or 19th century. In Atlanta, Georgia, we have between 200-300 girls sold into sexual slavery every month,” he added. Before moving into politics, Carter was in the Navy and worked on the family’s farm. He served as the 39th president from 1977 to 1981 and was awarded the Nobel Peace Prize in 2002 for his efforts in finding peaceful solutions to international conflicts and his work in human rights. Carter, who is turning 90 on Wednesday, and wife Rosalynn still travel the world doing work for The Carter Center, his human rights and health care charity, which he set up after leaving the White House.

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Export land model.

Saudi Arabia Poised To Tip Into Deficit (CNBC)

Saudi Arabia risks falling into a budget deficit next year and may have to tap its reserves, the International Monetary Fund (IMF) has warned. One sign that Saudi Arabia is in danger of dipping into deficit is its “break-even oil price” – the price oil would need to be for the country to balance its budget. The IMF, in its annual consultation paper released Wednesday, notes that Saudi Arabia’s break-even price has risen to $89 a barrel in 2013 from $78 a barrel in 2012. It would be the first time since 2010 that the Middle East’s largest economy records a deficit for its government finances. Apart from domestic expenditures such as ambitious infrastructure outlays, pressure on government finances is also coming from substantial aid pledges to countries across the Arab World.

“This expenditure path and lower oil revenues lead to an overall fiscal deficit in 2015, which is expected to deteriorate further to almost 7.5% of (gross domestic product) GDP by 2019,” the fund said in the 54-page dossier. But while Saudi officials have shrugged off suggestions spending needed to be reined in, experts diverge on projections. “According to our model, we will see a fiscal deficit in 2016 as government maintains high spending while a gradual decline in oil prices will push revenues downward,” Fahad Alturki, Head of Research at Riyadh-based Jadwa Investment, told CNBC. “We also factor in lower oil production as many of the oil outages that we see today are expected to resume production”.

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Something tells me taxpayers will chip in.

North Sea Oil Costs Threaten $1.6 Trillion Investment Needed (Bloomberg)

North Sea oil operators’ surging costs risk scaring away the more than 1 trillion pounds ($1.6 trillion) of investment needed to meet their production goals, according to industry lobby Oil & Gas U.K. The country needs that investment if it hopes to recover the equivalent of more than 20 billion barrels of oil, the group said today in a statement. Unit operating costs are about 60% higher than as recently as 2011, it said. “The U.K. has to compete for each and every pound of that investment,” Malcolm Webb, chief executive officer of the industry group, said today in the statement. “If the current trend of rising cost continues, the U.K. Continental Shelf will cease to provide a healthy return on investment.”

Energy resources were central to the debate over Scottish independence, with those supporting a split claiming almost all the oil as the nation’s own. Oil companies were among those who said before the Sept. 18 referendum that keeping Britain’s 307-year-old union was good for the industry because of the stability and certainty it provided. A review by Ian Wood, former head of engineering company John Wood Group Plc (WG/), this year estimated there were 12 billion to 24 billion barrels yet to be extracted from the North Sea. Production has dropped 40% in the past three years as fields mature, according to the February report. “We need a lighter tax burden, a simpler and more predictable system of field allowances and fiscal support for exploration,” said Michael Tholen, director of economics at Oil and Gas U.K. The government is expected to announce the results of its fiscal review in December.

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How low are we going to take this?

Earth Lost 50% Of Its Wildlife In The Past 40 Years (Guardian)

The number of wild animals on Earth has halved in the past 40 years, according to a new analysis. Creatures across land, rivers and the seas are being decimated as humans kill them for food in unsustainable numbers, while polluting or destroying their habitats, the research by scientists at WWF and the Zoological Society of London found. “If half the animals died in London zoo next week it would be front page news,” said Professor Ken Norris, ZSL’s director of science. “But that is happening in the great outdoors. This damage is not inevitable but a consequence of the way we choose to live.” He said nature, which provides food and clean water and air, was essential for human wellbeing. “We have lost one half of the animal population and knowing this is driven by human consumption, this is clearly a call to arms and we must act now,” said Mike Barratt, director of science and policy at WWF. He said more of the Earth must be protected from development and deforestation, while food and energy had to be produced sustainably.

The steep decline of animal, fish and bird numbers was calculated by analysing 10,000 different populations, covering 3,000 species in total. This data was then, for the first time, used to create a representative “Living Planet Index” (LPI), reflecting the state of all 45,000 known vertebrates. “We have all heard of the FTSE 100 index, but we have missed the ultimate indicator, the falling trend of species and ecosystems in the world,” said Professor Jonathan Baillie, ZSL’s director of conservation. “If we get [our response] right, we will have a safe and sustainable way of life for the future,” he said. If not, he added, the overuse of resources would ultimately lead to conflicts. He said the LPI was an extremely robust indicator and had been adopted by UN’s internationally-agreed Convention on Biological Diversity as key insight into biodiversity.

A second index in the new Living Planet report calculates humanity’s “ecological footprint”, ie the scale at which it is using up natural resources. Currently, the global population is cutting down trees faster than they regrow, catching fish faster than the oceans can restock, pumping water from rivers and aquifers faster than rainfall can replenish them and emitting more climate-warming carbon dioxide than oceans and forests can absorb. The report concludes that today’s average global rate of consumption would need 1.5 planet Earths to sustain it. But four planets would be required to sustain US levels of consumption, or 2.5 Earths to match UK consumption levels.

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Useless stats.

Affordable Global Housing Will Cost $11 Trillion (Bloomberg)

Replacing the world’s substandard housing and building affordable alternatives to meet future global demand would cost as much as $11 trillion, according to initial findings in a McKinsey & Co. report. The shortage of decent accommodation means as many as 1.6 billion people from London to Shanghai may be forced to choose between shelter or necessities such as health care, food and education, data disclosed at the 2014 CityLab Conference in Los Angeles show. McKinsey will release the full report in October. The global consulting company says governments should release parcels of land at below-market prices, put housing developments near transportation and unlock idle property hoarded by speculators and investors. The report noted that China fines owners 20% of the land price if property is undeveloped after a year and has the right to subsequently confiscate it.

“Cities struggle with the dual challenges of housing their poorest citizens and providing housing at a reasonable cost,” said the paper, whose lead author, Jonathan Woetzel, is a Shanghai-based director of McKinsey Global Institute, the company’s research unit. About 330 million households — about 1.2 billion people — now struggle with substandard housing, a number that may increase to 440 million in 11 years, McKinsey forecasts. Acceptable housing is within an hour’s commute of work and has basic services including flush toilets and running water, the report says. What the authors call the affordable-housing gap now stands at about $650 billion a year, or 1% of global gross domestic product. The baseline for their calculation is housing payments that exceed 30% of household income in 2,400 cities around the globe.

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Sep 222014
 
 September 22, 2014  Posted by at 9:52 pm Finance Tagged with: , , ,  


DPC Herald Square, New York 1903

Emerging markets are about to get hit by a whopper of a double whammy. And if I were you, I wouldn’t be too surprised if it takes on epic proportions.

The exposure that emerging markets, countries in the less wealthy parts of the globe, Asia, Eastern Europe, Africa, Latin America, have to the west has grown at a very rapid clip since, let’s say, Lehman. These countries were hit hard by the western crisis, but found what looked like a sugar mountain afterward when western interest rates plunged to zero and beyond, which provided them with both of the seemingly beneficial sides of what will now become their double whammy.

First, western money flowed, make that flooded, into their economies at unparalleled levels, driven by a chase for yield instigated by the difference between ultra low interest rates in the west and much higher rates beyond. For emerging countries, this has been a boon beyond belief. No matter how corrupt or poorly organized they may have been or still are, most showed nice growth numbers for a few years. It wasn’t really a carry trade in the literal sense of the word, but it was close. And it’s now coming to an end.

Second, and likely to work out even much worse, the ’emerging governments’ borrowed those cheap US dollars using anything not bolted down, including their national treasures, as collateral, and they now face a doubling, tripling, quadrupling etc. of the interest rates they have to pay on those loans. Which looks about like this (and something tells me this could well underestimate reality by a considerable margin):

Janet Yellen is about to announce rising rates, and whether it’s tomorrow or in 6 months is not that relevant in all this, it’s expectations that rule the day. Emerging markets will first be hit by outflows of western investment – or rather casino – capital, just because of the fear in the markets of what Yellen will do, and then get the second whammy when rates move from 0.25% to 1.25% and then some.

We see the initial jitters today. Or rather, they’re not the initial ones, just the first ones to come from people other than western investors.

What sticks out that the western press has very little attention for the ‘other side’s’ point of view. Still, here’s the Indonesian FM with a pretty clear message for someone who sees his country being suspended by its balls:

Asia May Need to Sacrifice Growth to Cope With Fed Rate Hike

Asia’s developing nations may have to sacrifice some growth next year and focus on keeping their economies stable amid potential fallout from higher U.S. interest rates, Indonesian Finance Minister Chatib Basri said. Capital outflows are a threat facing emerging markets as the prospect of the Federal Reserve lifting rates lures funds, Basri said [..] In Indonesia, where the benchmark rate is already at its highest since 2009, policy makers may have to tighten further to preserve the nation’s relative appeal to investors, he said. “In the short term, some emerging markets may have to choose stabilization over growth,” Basri said. “You cannot promote economic growth when dealing with this issue. It will exacerbate the situation.”

The U.S. dollar has appreciated as the Fed edges closer to its first rate increase since 2006, while Indonesia’s rupiah has dropped for five straight weeks amid global funds pulling money from local stocks in anticipation of higher U.S. borrowing costs. As some of the world’s fastest-growing economies adapt to changing policy at the Fed, their contribution to global expansion might weaken, Basri said. [..] The prospect of higher rates in the U.S. is the single biggest challenge facing Indonesia’s new government, Basri said.

Basri has called for the incoming government to focus on narrowing the budget deficit, raising fuel prices and luring foreign investment. In Indonesia, where the key rate is at 7.5%, policy makers may have to hold firm to prevent funds from flowing out of the country, Basri said.

“Maybe the tightening cycle will continue, from both the fiscal and the monetary side,” he said. Such a step “is not really conducive to promoting economic growth,” he said. Indonesia also needs to diversify its base of investors, the finance minister said. Relying more on domestic bond buyers would help, he said. “If global liquidity becomes tighter because of this tightening policy at the Fed, it will be more difficult for a country like Indonesia to get foreign financing,” Basri said.

Not that all investors will leave. If only because the emerging market countries need to raise their base rates even higher.

Investors Bet on Asia Despite U.S. Rate Threat

A consensus is emerging among investors that some Asian markets can do well even with the prospect of higher U.S. interest rates on the horizon. Fund managers see stepped up corporate and economic overhauls by leadership in China and India this year, combined with relatively strong growth in Asian economies compared with the rest of the world, as reasons to be bullish. Investors choosing Asia have been rewarded in the past three months. The MSCI Asia ex-Japan index is up 2.4%, topping the 0.4% gain in emerging markets globally and comparable to the 2.6% increase in the S&P 500.

The Fed said Wednesday that it remains on track to end its bond-buying stimulus program in October. It is widely expected to raise interest rates next year. Higher interest rates in the U.S. can hurt Asian assets by drawing investment money into U.S. assets and away from Asia’s markets. Despite the concerns over U.S. interest rates, investors say they are selectively investing in Asian markets that they see as cheap and where economic fundamentals have improved or where they believe reforms are on the way. Investors continued putting money into Asian emerging markets last month, according to the latest data on money flows from the Institute of International Finance.

Still, the world’s smaller economies are plenty afraid.

Wary of Another ‘Tantrum,’ Emerging Economies Prep for Fed Rate Hike

As the Federal Reserve debates the timing of a potential interest rate increase, some policymakers in the developing world aren’t taking any chances. Officials from Indonesia to Hungary say they’re trying to curb their reliance on foreign investors in case an eventual Fed rate increase sparks another broad retreat from emerging markets. “Everyone is getting prepared” for a U.S. rate increase, Mauricio Cardenas, Colombia’s finance minister, said in an interview on Tuesday.

Mr. Cardenas said his government has worked to shift its borrowing from foreign to domestic buyers, on the view that locals are less likely to sell en masse based on shifts in global monetary policy. “I don’t think it fully insulates us from an increase in interest rates in the U.S., but it certainly protects us,” Mr. Cardenas said.

Years of low rates and stimulus from the Fed, deployed in an effort to jumpstart growth in the U.S., had the side effect of sending investors piling into developing world assets. The rock-bottom interest rates available in the U.S. essentially made the higher returns promised by bonds and stocks in countries such as Brazil and Turkey more attractive.

But what happens when that flow reverses? Global markets got a taste last year during a so-called “taper tantrum,” as investors fled emerging markets in anticipation of a reduction in the Fed’s stimulus efforts.

One more then, because you enjoy it so much:

Fed Dims Emerging Markets’ Allure

Fears of higher U.S. interest rates are prompting fund managers to cut back on investments in emerging markets. For now, investors still are moving into developing markets, though the pace has moderated. Emerging-market stocks and bonds received $9 billion from investors in August, compared with an average $38 billion a month between May and July, according to the latest data from the Institute of International Finance. But after months of heavy buying in such places as Brazil and India, lured by the prospect of higher returns than in the Western world, investors are taking a more cautious stance. Chief among these money managers’ concerns: that the recent rally in emerging-market stocks, bonds and currencies could be derailed as the U.S. Federal Reserve gets closer to raising interest rates.

The Fed, by raising its rates and relinquishing its downward pressure on the US dollar, is about to kill off most of the emerging markets. That’s a whole lot of misery in one pen stroke. That’s a whole lot of millions of people who will see their dreams of better lives shattered, just as they were beginning to think they had a chance.

It’s how the game is played. The weak must be sacrificed so the strong be stronger. It’s like a law of nature. From some point of view, at least. For me, it looks more like ‘we’ have found another way, and another victim, to keep ‘our’ game going a bit longer. There is no way this just happens, in some accidental kind of way. There is a reason the Fed raises both interest rates and the US dollar inside the same timeframe.

Short emerging markets. Play it well and their misery can make you a fortune. Isn’t that what life is all about?

Bond Losses Wiped Out for Treasuries With Dollar Conquering All (Bloomberg)

The prospect of higher U.S. interest rates is proving to be a boon for the biggest owners of Treasuries outside of the Federal Reserve. While the government bonds have fallen this month as the Fed boosted its forecast for how much rates will rise next year, the dollar climbed to its highest level since 2010 against a broad range of currencies. That’s transformed losses into gains for most foreign holders, who own $6 trillion of Treasuries. The U.S. currency has appreciated so much that Treasuries are the developed world’s best-performing sovereign debt this quarter for investors based in euros, pounds and yen. Sustaining demand from America’s biggest foreign creditors, such as the Chinese government and Japan’s Kokusai Asset Management Co., is crucial in containing funding costs as the Fed winds down its own extraordinary bond buying and prepares to lift rates for the first time since 2006.

With Treasuries offering the highest yields in seven years relative to sovereign bonds worldwide, the dollar’s strength may now help prevent an exodus of overseas investors from upending the $12.2 trillion market for U.S. government debt. “You’re getting a relatively higher yield by owning Treasuries as well as benefiting from a rising dollar, so the U.S. is going to suck in capital,” Philip Moffitt, the Sydney-based head of fixed income for Asia-Pacific at Goldman Sachs Asset Management, which oversees $935 billion globally, said in an e-mail response to questions on Sept. 19.

With the amount of U.S. public debt almost doubling since the financial crisis erupted in 2008, the stakes have never been higher for Fed Chair Janet Yellen. As she tries to extricate the central bank from six years of near-zero benchmark rates and trillions of dollars of debt purchases, any slack in demand for Treasuries may trigger a jump in borrowing costs for the government, companies and consumers. That threatens to upend the U.S. economy, which is still growing slower on average than before the credit crisis. After advancing 4.45% in the first eight months of the year, Treasuries have lost 1.1% in September, the most this year, index data compiled by Bloomberg show.

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Will, not could.

Stronger Dollar Could Put Squeeze On Earnings (MarketWatch)

Financial results from Nike this week could offer a preview of how the rallying U.S. dollar may wind up squeezing corporate profits and outlooks this earnings season. Stocks finished slightly higher this past week near all-time highs with the Dow Jones Industrial Average DJIA rising 1.7%, the S&P 500 finishing up 1.3%, and the Nasdaq up 0.3%, after the Federal Reserve indicated rate hikes were not just around the corner and Scotland voted to remain part of the United Kingdom. Nike, the first of the Dow 30 Industrials components to report earnings this season, reports earnings on Thursday. The athletic apparel and gear giant could be a litmus test for earnings season as it has considerable exposure to foreign markets and represents what’s expected to be one of the weakest sectors this season: consumer discretionary.

While some analysts are concerned about weak revenue growth over the next few quarters, Mark Luschini, chief investment strategist at Janney Montgomery Scott, said the stronger dollar will likely be a more significant problem. “I’m more concerned about currency,” said Luschini. “Multinationals seeing that strength in the dollar could be a headwind for earnings growth.” Since June 30, the U.S. Dollar Index, which tracks the dollar against six major currencies, has gained more than 6% after moving in a relatively narrow range in the 12 months prior. Even back in March, when the dollar index was more than 5% lower than its current level, Nike was warning a stronger dollar would be a significant drag on earnings.

In a recent note, Susquehanna Financial Group analyst Christopher Svezia lowered his full-year earnings estimate by 2 cents to $3.31 a share solely based on the stronger dollar. “Headwinds are strongest in [Nike’s fiscal second quarter] and don’t appear to be baked into estimates,” Svezia noted. The higher dollar will likely hit all multinationals, especially in the consumer discretionary sector. As the dollar has gathered strength, consumer discretionary earnings estimates have dropped significantly over the course of the quarter. Back on June 30, the sector was expected to see an earnings decline of 0.4%. Now, earnings are expected to decline by 5.4%, according to John Butters, senior earnings analyst at FactSet.

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Yes but.

The Fallacy Of US Dollar “Strength” (Macleod)

You’d think that the US dollar has suddenly become strong, and the chart below of the other three major currencies appears to confirm it.

The US dollar is the risk-free currency for international accounting, because it is the currency on which all the others are based. And it is clear that three months ago dollar exchange rates against the three currencies shown began to strengthen notably. However, each of the currencies in the chart has its own specific problems driving it weaker. The yen is the embodiment of financial kamikaze, with the Abe government destroying it through debasement as a cover-up for a budget deficit that is beyond its control. The pound had been poleaxed by the Scotish independence campaign, plus an ongoing deferral of interest rate expectations. And the euro sports negative deposit rates in the belief they will cure the Eurozone’s gathering slump, which if it develops unchecked will threaten the stability of Europe’s banks. So far this has been mainly a race to the bottom, with the dollar on the side-lines. The US economy, which is officially due to recover (as it has been expected to every year from 2008) looks like it’s still going nowhere.

Indeed, if you apply a more realistic deflator than the one that is officially calculated, there is a strong argument that the US has never recovered since the Lehman crisis. This is the context in which we must judge what currencies are doing. And there is an interpretation which is very worrying: we may be seeing the beginnings of a major flight out of other currencies into the dollar. This is a risk because the global currency complex is based on a floating dollar standard and has been since President Nixon ended the Bretton Woods agreement in 1971. It has led to a growing accumulation of currency and credit everywhere that ultimately could become unstable.

The gearing of total world money and credit on today’s monetary base is forty times, but this is after a rapid expansion of the Fed’s balance sheet in recent years. Compared with the Fed’s monetary base before the Lehman crisis, world money is now nearly 180 times geared, which leaves very little room for continuing stability. It may be too early to say this inverse pyramid is toppling over, because it is not yet fully confirmed by money flows between bond markets. However in the last few days Eurozone government bond yields have started rising. So far it can be argued that they have been over-valued and a correction is overdue. But if this new trend is fuelled by international banks liquidating non-US bond positions we will certainly have a problem.

We can be sure that central bankers are following the situation closely. Nearly all economic and monetary theorists since the 1930s have been preoccupied with preventing self-feeding monetary contractions, which in current times will be signalled by a flight into the dollar. The cure when this happens is obvious to them: just issue more dollars. This can be easily done by extending currency swaps between central banks and by coordinating currency intervention, rather than new rounds of plain old QE. So far market traders appear to have been assuming the dollar is strong for less defined reasons, marking down key commodities and gold as a result. However, the relationship between the dollar, currencies and bond yields needs watching as they may be beginning to signal something more serious is afoot.

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Flaky.

Change Of Tone By Fed Dove Dudley May Lift Dollar (CNBC)

The U.S. dollar may push higher this week if an influential policymaker from the U.S. Federal Reserve drops his dovish tone and suggests the world’s largest economy is ready for an interest hike earlier than the mid-2015 consensus, currency strategists told CNBC. New York Federal Reserve President William Dudley – also vice-chairman of the central bank’s rate-setting panel, a permanent voting member and widely regarded as a policy dove – is scheduled to speak tonight in New York. Dudley’s remarks this week – the highlight for currency markets – will be followed by speeches from fellow policymakers including Jerome H. Powell, Narayana Kocherlakota and Loretta J. Mester – all voting members of the Federal Open Market Committee (FOMC) in 2014. “I want to hear Dudley,” said Robert Rennie, Westpac’s global head of FX strategy in Sydney. “That will be big.” Dudley said in late June that the Fed can reasonably wait to raise interest rates until mid-2015 without risking an undesirable rise in inflation.

Any indication by Dudley that he favors an earlier rate hike may send the dollar higher, said Khoon Goh, senior FX strategist at ANZ. The Australian bank expects the first Fed rate hike to occur in March. “Any pronunciation from him on the dovish side shouldn’t come as a surprise,” Goh told CNBC Monday. “The big risk is if he does come out less dovish than what the market is expecting, then we could see a further boost to the USD.” Fed policymakers last week indicated they expect faster rate hikes next year and the year after. The central bank pushed up its expected path of interest rate increases – the so-called Fed ‘dots’ forecast – boosting yields on U.S. treasuries, and the dollar. As a policy dove, Dudley may “downplay the dots from last week’s FOMC,” ANZ’s Goh said. Still, given Fed Chair Janet Yellen’s insistence that the rate outlook is data-dependent, upside surprises in this week’s economic indicators – which include existing home sales, durable goods orders and consumer sentiment – may shift the balance in favor of the dollar bulls.

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Everything’s down vs the dollar is all.

Global Stocks Drop With Commodities on Slowing China Growth (Bloomberg)

Shares fell around the world and commodities tumbled to a five-year low amid speculation China will accept slower growth. Bonds rose after officials from the world’s biggest economies warned of rising financial risks. The MSCI All-Country World Index slid 0.2% at 10 a.m. in London. The Stoxx Europe 600 Index fell 0.3% and Standard & Poor’s 500 Index futures lost 0.5%. A gauge of Chinese stocks in Hong Kong dropped to a two-month low. French and Belgian government bonds gained the most in Europe and the rand led currencies of commodity-producing nations lower. Silver retreated to the lowest level since July 2010.

China’s Finance Minister Lou Jiwei said growth in Asia’s largest economy faces downward pressure and reiterated that there won’t be major changes in policy in response to individual economic indicators. Group of 20 finance chiefs and central bankers said low interest rates could lead to a potential increase in financial-market risk, as major economies rely on monetary stimulus to bolster uneven growth. U.S. housing data is scheduled for today. Lou “gave a real hint that the recent policy easing may actually be quite limited,” Stuart Beavis, head of institutional equity derivatives at Vantage Capital Markets in Hong Kong, said by phone. “We’re not just going to see this wall of money thrown at the Chinese slowdown.”

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Asia May Need to Sacrifice Growth to Cope With Fed Rate Hike (Bloomberg)

Asia’s developing nations may have to sacrifice some growth next year and focus on keeping their economies stable amid potential fallout from higher U.S. interest rates, Indonesian Finance Minister Chatib Basri said. Capital outflows are a threat facing emerging markets as the prospect of the Federal Reserve lifting rates lures funds, Basri said in an interview yesterday in Cairns, Australia, where Group of 20 finance chiefs met. In Indonesia, where the benchmark rate is already at its highest since 2009, policy makers may have to tighten further to preserve the nation’s relative appeal to investors, he said. “In the short term, some emerging markets may have to choose stabilization over growth,” Basri said. “You cannot promote economic growth when dealing with this issue. It will exacerbate the situation.”

The U.S. dollar has appreciated as the Fed edges closer to its first rate increase since 2006, while Indonesia’s rupiah has dropped for five straight weeks amid global funds pulling money from local stocks in anticipation of higher U.S. borrowing costs. As some of the world’s fastest-growing economies adapt to changing policy at the Fed, their contribution to global expansion might weaken, Basri said. Basri’s concern highlights the task facing G-20 finance chiefs as they attempt to lift collective economic growth by an additional 2% or more over five years. Officials agreed monetary policy should continue to support the recovery and particularly address deflationary pressures where evident, Australian Treasurer Joe Hockey said yesterday in Cairns. The prospect of higher rates in the U.S. is the single biggest challenge facing Indonesia’s new government, Basri said.

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Malaise ….

Metals Malaise Weighs On Equity Markets (CNBC)

The prices of a range of commodities continued their slide on Monday with the effect spilling over into stock markets with investors fearing more pain ahead for the asset class. Spot silver was the standout laggard, slouching to a low of $17.34 an ounce on Monday, reaching a four-year low. Data on Friday from the Commodity Futures Trading Commission confirmed that money managers had turned negative on the commodity. Spot gold also dipped, to $1,208.70 per ounce, and effectively wiped out all of its gains this year as the precious metal traded at levels not seen since early January. Other metals were also lower with platinum extending losses and hitting new nine-month lows and palladium also slipping to levels not seen since mid-May. A London benchmark for copper hit a 3-month trough and Reuters reported that Chinese steel and iron ore futures slid to record lows on Monday.

Soft commodities like wheat, corn and soybean are all lower for the trading year and prices eased again on Monday morning. Oil benchmarks and natural gas also saw weakness as the trading week began. “The liquidation is universal,” Dennis Gartman, a commodities trader and editor and publisher of the Gartman letter, told CNBC via email. “Today may be quite ugly around the world as deflation, rather than inflation, is the order of the day.” The malaise in the metal markets was felt across the broader equities indexes. Shanghai shares widened losses on Monday to close down 1.7%. In Sydney, shares saw hefty losses in mining majors which helped drag Australia’s benchmark S&P ASX 200 lower on the first day of the trading week. Fortescue Metals and Rio Tinto lead declines with losses of 4.8 and 2.5% each as iron ore prices slumped.

In Europe, the basic resources sector lost around 2.5% in early deals and stocks like Anglo American, Rio Tinto and Glencore suffered heavy losses. The latter’s fall was accentuated by an announcement that it was in a contract dispute with another mining firm. A slew of reasons were given for the weak sentiment. In the fields, economic reports have reinforced an expectation that there are massive harvests ahead. There’s also the stellar rally for the U.S. dollar. The greenback has climbed to trade at two-year highs, with anticipation of an interest rate hike in the U.S., and commodities have had to duly readjust with this currency strength. And then there’s also China. The Asian powerhouse, renowned for its large consumption of commodities, has seen some weak data points recently. The People’s Bank of China has had to add more stimulus to the world’s second largest economy and investors are cautious ahead of Tuesday’s preliminary reading on the country’s manufacturing sector, which could provide more evidence of a slowdown.

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Hussman’s got it.

The Broken Backbone of the Ponzi Economy (Hussman)

When the most persistent, most aggressive, and most sizeable actions of policymakers are those that discourage saving, promote debt-financed consumption, and encourage the diversion of scarce savings to yield-seeking financial speculation rather than productive investment, the backbone that supports a rising standard of living is broken. [..]

Meanwhile, financial repression by the Federal Reserve has held interest rates at zero, discouraging savings while encouraging and enabling households to go more deeply into debt. Various forms of deficit-financed government assistance and unemployment compensation have also been used to make up the shortfall, allowing consumption, and by extension, corporate revenues and profits, to be sustained. As long-term economic prospects have deteriorated, the illusion of prosperity has been maintained through soaring indebtedness, coupled with yield-seeking speculation in risky assets that has repeatedly (albeit not always immediately) been followed by crashes throughout history.

The U.S. Ponzi Economy is one where domestic workers are underemployed and consume beyond their means; household and government debt make up the shortfall; corporate profits expand to a record share of GDP as revenues are sustained by household and government deficits; local employment is replaced by outsourced goods and labor; companies refrain from productive investment, accumulate the debt of other companies and issue new debt of their own, primarily to repurchase their own shares at escalating valuations; our trading partners (particularly China and Japan) become our largest creditors and accumulate trillions of dollars of claims that can effectively be traded for U.S. property and future output; Fed policy encourages the yield-seeking diversion of scarce savings toward speculation in risky securities; and as with every Ponzi scheme, everyone is happy as long as nobody seeks to be repaid.

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Europe Will Never Be The Same After Scot Vote, Nor Will Euroscepticism (AEP)

Each of Europe’s aggrieved clans sent witnesses to Scotland for the vote. Some were nationalities seeking statehood, some more explosively seeking Anschluss with a mother country broken by victors’ cartography after the First World War. The flaming red and yellow Senyera of the Catalans flew over Edinburgh. The German-speakers of the Sud-Tirol sent a delegation, careful not to violate Italian law by speaking too loudly of reunion with Austria. The Corsicans turned up. Flemings who could not make it lit candles on the Scottish Saltire in Brussels. The Bosnian Serbs invoked the precedent, and so did Okinawan separatists in Japan as the chain reaction reached Asia. If the Okinawans get anywhere, their island will become a strategic hot potato, pitting China and Japan against each other on the world’s most dangerous fault line. Chinese nationalists are already combing through archives to bolster claims to the land dating back to the early Ming Dynasty in the 14th century.

Those descending on Scotland were not so much aiming to celebrate a Yes – though all wanted a Salmond triumph to make their point crushingly emphatic – but rather hoping to bottle the intoxicating air of democratic secession and take it home to countries were no such vote is allowed. What matters to them is the precedent set by this extraordinary episode. Scotland’s right to self-determination was recognised. The British state allowed events to run their course, vowing to accept the outcome. “It is a great lesson for democracy for the whole world. What we have seen in Scotland is the only way to settle conflicts,” said Artur Mas, the Catalan leader.

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Germans Would Shoot Down A ‘Helicopter Mario’ (CNBC)

The former Fed Governor Ben Bernanke’s speech on November 21, 2002 (“Deflation: Making Sure “It” Doesn’t Happen Here”) earned him the affectionate sobriquet “Helicopter Ben.” Building on the concepts of Milton Friedman, the Nobel Prize winning economist, that price inflation and price deflation were monetary phenomena, Bernanke espoused Friedman’s view that price deflation (the “It”) can be prevented and overcome by an aggressively expansionary monetary policy. Friedman metaphorically described the extreme form of such a policy as money being dropped on people from a helicopter. Bernanke came pretty close to the “helicopter money” with his virtually zero interest rate policies since late 2008, augmented by monthly purchases (better known as “quantitative easing”) of debt instruments issued by government-sponsored enterprises and including, later on, the U.S. Treasury securities.

Following that example, massive asset purchases are now being advised to Mario Draghi, President of the European Central Bank (ECB), on the view that the near-zero interest rates over the last three years have not prevented the euro area economy from a recessionary relapse and a steady deceleration of consumer prices to 0.3% in August from 1.3% in the same month of 2013. Before following asset purchase policies practiced by the Fed, I believe the ECB might wish to address the reasons why the transmission mechanism of the cheap and abundant loanable funds it keeps supplying to the banking system fail to find their way into strong business and consumer lending to support the euro area recovery.

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I agree, but not for the same reasons.

The Solution To Italy’s Woes Is Quite Simple – Leave The Euro (Telegraph)

No country epitomises the European economic malaise better than Italy. People often say that Italy cannot get into trouble because it is so rich. It is. Rich in natural beauty and historical treasures, with wonderful cities and beautiful countryside, lovely people, marvellous food and wine and an attractive way of life. But as a country it doesn’t really work. Some aspects of the problem have been there for ages; some are comparatively new. Before the war, much of Italy was poor. During the 1950s and 1960s, although Italian politics were chaotic and government was dysfunctional, as it industrialised the economy grew very fast and it climbed up the GDP leagues. In 1979, in respect of measured GDP, Italy even overtook the UK, an event that the Italians rejoiced in, calling it Il Sorpasso. The underlying problems were disguised. Although there was a tendency for inflation to be high, relief was always close at hand in the shape of a weaker lira. And the economy kept growing. But then it all started to go wrong.

The UK overtook Italy again in 1995 and the gap between the two economies has been widening ever since. To get the problem in perspective, all G7 countries except Italy and Japan have now exceeded the level of GDP they enjoyed before the Great Recession. Canada is 9pc above the 2008 level, while Italian GDP is still 9pc below. What’s more, the economy is contracting. This is not a bolt from the blue. Since the euro was formed in 1999 the annual average growth rate of the Italian economy has been only 0.3pc – in other words, next to nothing. Mind you, not all of this is due to the euro. There is a desperate need for reform yet the political system seems incapable of delivering what is needed. And Italy has been one of the prime sufferers from the rise of the emerging markets. Whereas Germany produces high-spec, large consumer durables and machinery, Italy has been specialised in precisely the low-to mid-spec consumer goods which China and others have come to produce more cheaply.

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Didn’t he put them there?

Sarkozy Says ‘Despair’ in France Reason for Return to Politics (Bloomberg)

Former President Nicolas Sarkozy said he couldn’t stay out of politics, noting that he has never seen such “despair” in France. “I have never seen such anger in this country, such a lack of perspective,” Sarkozy said on France2 television last night in his first interview since announcing on Sept. 19 that he’s in the running to lead his political party. “Being just a spectator would have been an act of abandonment.” The decision, which may be a stepping stone to the 2017 presidential race nomination, reversed his pledge in May 2012 that he was leaving politics after his defeat by Francois Hollande. His return comes as his UMP party has been riven by succession battles, and as Hollande finds himself France’s most unpopular president in more than half a century. Sarkozy said yesterday that he never lied to the French during his five years in office, saying, however, that Hollande has left behind him “a long list of lies.”

Sarkozy said “the French model has to be re-thought” to stop young people leaving the country to look for work. “When capital moves freely, if you raise taxes how can you expect to keep companies?” he said. “If companies’ margins go down, how can they hire? There are solutions, France is not condemned.” Sarkozy’s return to politics may pose a further hurdle to Hollande, 60, whose popularity rating stands at 13%, according to a recent poll. Opinion surveys show voters don’t want Hollande to run for re-election and he would stand little chance if he did. The French economy has barely grown during his two years in office, and the number of jobless has risen to a record 3.4 million from 2.9 million when he assumed office.

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All EU sinking.

EU Periphery Currencies Left at Draghi’s Mercy After Losses (Bloomberg)

Strategists divided on the outlook for eastern Europe’s currencies agree on one thing: Mario Draghi holds the key to their performance in the months ahead. Societe Generale SA and Commerzbank AG are bullish on Poland’s zloty and Hungary’s forint amid bets some of the 1 trillion euros ($1.3 trillion) of extra stimulus the European Central Bank has pledged to pump into the euro-region economy will head eastward in search of higher yields. Danske Bank A/S says ECB President Draghi will need to make more funds available for the currencies to strengthen.

An influx of ECB cash would support the zloty and forint at a time when the nations’ economies are being hurt by the prospect of deflation, the conflict in Ukraine and a stagnating euro region. Six of the eight worst-performing emerging-market currencies versus the dollar and euro this quarter are in eastern Europe. “For the currencies to show sustainable gains, the ECB would need to start aggressive, Federal Reserve-style quantitative easing, but that’s not what we expect,” Stanislava Pravdova, an emerging-markets analyst at Danske Bank in Copenhagen, said by phone on Sept. 18. “The current ECB stimulus won’t be enough.”

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ECB Member and Bundesbank Chief Weidmann Criticizes ECB Stimulus Plan (RTT)

Bundesbank President Jens Weidmann has criticized the European Central Bank’s latest measures to boost the euro area economy, such as the planned purchases of covered bonds and asset-backed securities and covered bonds, as well as the interest rate reduction this month. The latest decisions suggest a fundamental shift in strategy and a drastic change for the ECB’s monetary policy, Weidmann reportedly said in an interview to the German magazine Der Spiegel, published on Sunday. The majority of the Governing Council has signaled that monetary policy is ready to go very far and to enter new territory, he added. Last week, banks took up less-than-expected amount of funds at the ECB’s first targeted longer term refinancing operation, or TLTRO, damping the hopes of the success of the measure that was aimed to boost liquidity to help revive lending to small businesses and households.

Results of its first TLTRO showed that 255 banks were allotted EUR 82.60 billion, which was below the EUR 100 – EUR 150 billion predicted by analysts. With the poor take-up of TLTRO funds, the question remains whether the ECB’s proposed measure of purchasing covered bonds and ABS will help it to achieve its goal of expanding the central bank’s balance sheet to EUR 1 trillion. Buba’s chief warned that depending on the exact design of the ABS purchase-plan, banks could be exempt from risks at cost of taxpayers. Hence, it was important that the ECB should not take on no significant risks of individual banks or countries, he added. Further, Weidmann, who is also a Governing Council member, said the ECB should only buy low-risk securities, but he expressed concern regarding the adequate availability of such assets in the market to meet the central bank’s plan targets.

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Funny.

Short Sellers Target China From The Shadows (Reuters)

Short-sellers who profit from stock price declines have resumed targeting Chinese companies after a three-year lull, but many of the researchers who instigate the strategy are now cloaked in anonymity, shielding themselves from angry companies and Beijing’s counter-investigations. Three reports published this month separately accused three Chinese companies – Tianhe Chemicals, 21Vianet and Shenguan Holdings – of business or accounting fraud. All three companies said the allegations were baseless but their shares were hit by a wave of short-selling by clients of the research firms and then by other investors as the reports were made public. The reports were written by research firms that did not publicly disclose names of research analysts or even a phone number. In the last wave of short-selling that peaked in 2011 and wiped more than $21 billion off the market value of Chinese companies listed in the United States, the researchers advocating short-selling were mostly public.

Carson Block of Muddy Waters, one of the most prominent short sellers, openly accused several Chinese companies of accounting fraud. Block said in 2012, according to several media reports, that he moved to California from Hong Kong because he had received death threats. “If you have researchers who are based in China, it makes sense to operate anonymously because some of the mainland Chinese companies have a history now of retaliating against people who do negative research,” said short-seller Jon Carnes in an interview with Reuters. Carnes’s research firm Alfred Little has the best track record among short sellers, according to data compiled by Activists Shorts Research that shows the share performances of companies it targeted. Carnes has said he was threatened by representatives of one of the companies he reported on in 2011. His researcher Kun Huang was jailed in China for two years and then deported.

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Yes we do.

We Are Living In A State Of Keynesian “Bliss” (Rebooting Capitalism)

John Maynard Keynes is the grandfather of all modern mainstream economic thought. Richard Nixon was famously attributed as saying, “We are all Keynesians now” whilst slamming shut the gold window and launching the era of global fiat money. (Nixon didn’t really say this, it was actually Milton Friedman) The phrase came back in vogue in the aftermath of the Global Financial Crisis when neo-Keynesians like Paul Krugman called for, and got, massive government and Central Bank intervention into the global economy in order to “save it”. Back in 1930, Keynes looked out into the future and saw that with the proper management of the economy, monetary policy and the like, the world could attain a type of utopian stasis:

Keynes, working in 1930, expected growth to come to an end within two to three generations, and the economy to plateau. He referred to this imaginary state of equilibrium as “bliss”.
– Nick Gogerty, “The Nature of Value”

In his essay “The Economic Possibilities of Our Grandchildren” Keyne’s imagined the big challenges of our days in the 21st century would be what to do with all that extra leisure time and how to achieve fulfillment since by now the quest for wealth and material gain would become more or less unfashionable or even obsolete. “Thus for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.”

Granted, Keynes did say this would happen if mankind avoided any calamitous wars and if there was no appreciable increase in population. Two more flawed base assumptions there could not have been. But this hasn’t stopped the world’s conventional economists, not to mention the political and policy-making class (a.k.a The Overlords) from embracing the uniquely Keynesian notion that if you just know which macro-economic levers to pull, and how much and for how long, and when to do it; then you can get just the right amounts of: money quantity, money velocity, interest rates, nominal inflation, savings rates, capital expenditures, unemployment levels and consumer spending to make Everything Just Right All The Time without ever having so much as a downtick or a speed-wobble, ever again.

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Big cheat.

Merkel’s Taste for Coal to Upset $130 Billion German Green Drive (Bloomberg)

When Germany kicked off its journey toward a system harnessing energy from wind and sun back in 2000, the goal was to protect the environment and build out climate-friendly power generation. More than a decade later, Europe’s biggest economy is on course to miss its 2020 climate targets and greenhouse-gas emissions from power plants are virtually unchanged. Germany used coal, the dirtiest fuel, to generate 45% of its power last year, the highest level since 2007, as Chancellor Angela Merkel is phasing out nuclear in the wake of the Fukushima atomic accident in Japan three years ago. The transition, dubbed the Energiewende, has so far added more than €100 billion ($134 billion) to the power bills of households, shop owners and small factories as renewable energy met a record 25% of demand last year. RWE AG, the nation’s biggest power producer, last year reported its first loss since 1949 as utility margins are getting squeezed because laws give green power priority to the grids.

“Despite the massive expansion of renewable energies, achieving key targets for the energy transition and climate protection by 2020 is no longer realistic,” said Thomas Vahlenkamp, a director at McKinsey, and an adviser to the industry for 21 years. “The government needs to improve the Energiewende so that the current disappointment doesn’t lead to permanent failure.” While new supplies sent wholesale power prices to their lowest level in nine years, consumer rates are soaring to fund the new plants. Germany’s 40 million households now pay more for electricity than any other country in Europe except Denmark, according to Eurostat in Brussels. A decade ago, Belgium, the Netherlands and Italy all had higher bills than Germany. “Politicians are often trying to kid us,” Claudia Fabinger, a 65-year-old self-employed marketing manager, said in between shopping for groceries on Leipziger Strasse in Frankfurt. “Our power bills keep rising and rising to fund clean energies; on the other hand, we are still polluting the air with old coal plants.”

[..] … the burning of coal rose 68% from 2010 to provide a steady supply of electricity. Fossil-based power plants, including those fired by hard coal and lignite, are “indispensable for the foreseeable future,” reads the agreement between Merkel’s conservatives and the Social Democratic Party that helped form her current government. “The ‘black gold’ is still an important factor in the energy generation mix,” the government says on its website. “The share of renewable energy is rising and is at nearly 30% now, but the remaining 70% is getting dirtier and dirtier,” Carsten Thomsen-Bendixen, a spokesman at EON, Germany’s biggest utility, said. “That’s an obvious flaw in the system that needs to be put to an end.” “Yes, we are burning more coal; on the other hand it is also true that Germany still plays a leading role when it comes to emission reductions in Europe,” Beate Braams, a spokeswoman for the German Economics and Energy Ministry, said.

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No.2!

China Beats Europe in Per-Capita Emissions for First Time (Bloomberg)

China surpassed the European Union in pollution levels per capita for the first time last year, propelling to a record the worldwide greenhouse gas emissions that are blamed for climate change. The findings led by scientists at two British universities show the scale of the challenge of reining in the emissions damaging the climate. They estimate that humans already have spewed into the atmosphere two-thirds of the fossil fuel emissions allowable under scenarios that avoid irreversible changes to the planet. If pollution continues at the current rate, the limit for carbon will be reached in 30 years, the scientists concluded in a report issued on the eve of a major United Nations summit designed to step up the fight against climate change.

“We are nowhere near the commitments needed to stay below 2 degrees Celsius of climate change, a level that will be hard to reach for any country, including rich nations,” said Corinne Le Quere, co-author of the report and a director of the Tyndall Center for Climate Change Research at the University of East Anglia, England. “CO2 growth now is much faster than it was in the 1990s, and we’re not delivering the improvements in carbon intensity we anticipated 10 years ago.” Each person in China produced 7.2 tons of carbon dioxide on average compared with 6.8 tons in Europe and 1.9 tons in India in 2013, according to the study by the Tyndall Center and the University of Exeter’s College of Mathematics and Physical Sciences.

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Sep 212014
 
 September 21, 2014  Posted by at 8:10 pm Finance Tagged with: , , ,  


Russell Lee Hamburger stand in Harlingen, Texas Feb 1939

On this relatively quiet Sunday, why not delve into a topic that’s as timely as it is controversial topic: the US greenback. I see it moving a lot lately, and I see a lot of opinions being expressed on those moves. But for most of those opinions, I got to say: I’m sorry, but I don’t think so.

There’s such a huge amount of entrenched and ingrained ideas in the financial world about the dollar and inflation and gold, and an awful lot of it is in desperate need of, for lack of a better term, mental flexibility.

You can claim that the dollar will perish, and that’s true enough, but it will be – near – the last of all fiat currencies to do so. You can claim inflation is on the way, but that can’t happen without increased spending. And consumers who get poorer all the time cannot increase their spending.

You can claim the golden days of gold are nigh again, and that prices have been manipulated (not that I doubt that), but as long as the dollar’s alive, why should we assume that at least the American dollar generated part of the manipulation will stop? Gold will rise to the top once more alright, it always has, but it’s what to do in the meantime that’s more interesting for all but the 1%.

The Automatic Earth has always said that the US dollar would come out the winner among currencies. Simply because there is no other way. Eventually, the greenback will go the way of all fiat money, but that’s not going to happen tomorrow morning, and we need to find something to do with ourselves until it does.

The fact that the dollar is the world reserve currency is important, but it’s not no.1. Today’s world is drowning in debt, and a huge majority of it is denominated in US dollar. Yank up interest rates and dollar demand will soar like a BUK rocket. No matter what Russia and China and India invent in non-dollar trade. Too little too late.

The US Fed has prevented the dollar surge from happening over the past 7-8 years, and the entire globe has hidden and/or financed its deficits courtesy of that, but the Fed, for one reason or another, has decided to stop playing that game. Not only will there be fewer dollars made available (QE tapering), but the Fed funds rate will also be raised.

Present numbers from Fed sources being chewed on in the press are well above 1% in a year or so, from 0.25% now. Count your blessings, emerging markets. The question is: why would they do that at this point? I think a large part of the explanation is to be found in what I talked about in The Fed Has A Big Surprise Waiting For You.

That is, Wall Street sees its profit sources drying up because everybody and their pet hamster is on the same side of the trade. Which means if you can get them to stay there, and change the rules of the game behind their back in the meantime, potential profits are stupendous.

In The Fed Has A Big Surprise Waiting For You, I focused on interest rates (only). But I think what’s true for rates there, is also valid for the dollar: the Fed is changing its views and policies. And no, it does not have everybody’s back, not investors and, but that does hardly need repeating, Main Street.

Most people will still see the recent rise of the dollar in FX markets as just that, something that happens due to market mechanisms. Really, what market? It would be naive to think the Fed, which has controlled asset markets up to the point of being a direct buyer of stocks, and propped up the US housing market for years, would let the dollar either slide or rise as much as we’ve seen lately, and not act. Therefore, if you follow my point, it must have acted.

For the same reason that you shouldn’t assume too easily that the economy is recovering, you shouldn’t too easily assume the Fed is not aware of what happens to the USD, or doesn’t have a handle on it. Just as it would be silly, for that matter, to disregard off-hand the connection between economic depression and increasing cries for war, but that’s perhaps for another day.

Let’s turn to what others have to say about the dollar vs other currencies. First, a few quotes from the Australian rainforest, where the world’s finance ministers were gathered. I’m not sure whether to think the setting is too much for them, or that it fits just right. They sure produced some whoppers.

Currencies Back on Agenda as G-20 Monetary Policies Split

The dollar has climbed over the past three months against all 16 major peers tracked by Bloomberg, touching a six-year high versus the yen and a 14-month peak against the European currency.

• U.S. Treasury Secretary Jacob J. Lew renewed a call for member nations to avoid currency intervention in a bid to gain a competitive edge.

• South Korean Finance Minister Choi Kyung Hwan said divergent monetary policies “have the risk of increasing uncertainties in global financial markets,” while volatile foreign capital flows “could also have an impact on the foreign exchange rates.”

“It’s important for foreign-exchange rates to move in a stable manner by reflecting economic fundamentals,” Bank of Japan Governor Haruhiko Kuroda said. Kuroda said this month he would do what’s needed to achieve the BOJ’s inflation target as he continues unprecedented easing.

• The ECB has cut interest rates to record lows and committed to boost its balance sheet to the levels it had at the height of the sovereign debt crisis in 2012. German Finance Minister Wolfgang Schaeuble told the G-20 meeting today that expansive fiscal and monetary policies could risk creating a bubble in equity and property markets, according to a German delegation official. ECB Governing Council member Jens Weidmann told Bloomberg that monetary policy should not be expansionary for longer than necessary to ensure price stability.

• [..] After finance ministers and central bank chiefs met in Moscow in July 2013, they pledged: “We will refrain from competitive devaluation and will not target our exchange rates for competitive purposes.” Lew yesterday revisited language from that communique. Lew told South Korea’s Choi that countries must meet “commitments to move toward market-determined exchange rates.”

• Choi said the South Korean government is “not at all” intervening in the foreign-exchange market to determine the won’s level. Lew’s comments were “reiterating the importance” of the issue, rather than singling out South Korea, Choi said. While Choi said he lets the market determine the strength of the won, it’s different when moves are extreme. “If there is a very sudden tilting toward one direction in a very short period of time in the foreign exchange market, then there would be some smoothing operations.”

Note to Self: If and when Jack Lew says that “countries must meet “commitments to move toward market-determined exchange rates”, he’s actually saying that at present there are no market-determined exchange rates. Not a minor thingy.

What’s happening with the US dollar is exceptional, it’s not some sort of fluke:

Dollar Has Longest Winning Streak Since 1967 on Divergence

The dollar had its longest stretch of weekly gains since Lyndon Johnson was in the White House after the Federal Reserve signaled an end to unprecedented monetary stimulus measures next year. The U.S. Dollar Index advanced for a 10th straight week, the longest since at least March 1967, when Johnson was in the fourth year of his presidency.

“The dollar is the No. 1 trend across all asset classes going into the end of the year,” Neil Azous, founder of Stamford, Connecticut-based research firm Rareview Macro LLC, said in a phone interview. “It’s back to trading interest-rate fundamentals.”

[..] “ … the dollar has been so depressed over the last few years, and now that depression is unwinding, like a coiled spring,” Douglas Borthwick, head of foreign exchange at Chapdelaine & Co., said. “The Dollar Index will continue to stay bid as long as the Japanese continue to make motions of quantitative easing while Europe makes more noise about expanding their balance sheets.”

[..] The U.S. Dollar Index has rallied 5.9% this year, set for the biggest annual gain since 2008, when the Fed began the first of three rounds of bond purchases under the quantitative-easing stimulus strategy. The gauge lost 4.2% in 2009.

[..] The dollar has risen 3.2% in the past month in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has lost 3.3%, the biggest decline, and the euro has fallen 1.1%. Sterling has gained 0.9%.

Mr Borthwick is right, but I’m not sure he understands why he is. He’s dead on remarking that “the dollar has been so depressed over the last few years”, but he should note that it’s the Fed that has been depressing the dollar, not the markets. The recent surge doesn’t even have to be due to active support, the simple lifting of whatever measures kept it down is sufficient.

Keep your cool and shrink the amount of available dollars. That’s all it takes. The, from a market point of view, insanely high prints for the Euro against the USD, which lasted for years at $1.30 to $1.40, are let go. Big move. Not in the least for US businesses.

Dollar’s Rally Bad News For Oil, Multinationals

The asset with the greatest prowess of late has been the U.S. dollar, and if its rally continues, it threatens to eat into the earnings of multinational companies. The greenback’s recent gains have lifted the dollar index – a measure of the dollar’s value relative to six currencies – for 10 consecutive weeks.

That marks the dollar’s longest rally since the index was created in 1973 – and could pose significant headwinds to dollar-sensitive sectors of the market, particularly companies that respond to commodity prices affected by the greenback, and multinationals that do much of their business overseas.

“For the past few years, the U.S. dollar has been trading in a relatively quiet trading range. This summer, something changed. We are now seeing a new uptrend develop,” said Adam Sarhan, founder and CEO of Sarhan Capital in New York. Analysts have already pointed fingers at the dollar for the decline in prices of commodities like precious metals, corn and oil in recent weeks. U.S. multinationals with large streams of revenue from overseas also stand to lose.

[..] Much of the calculus of whether the dollar’s rise will become a net negative for U.S. stocks depends on domestic inflation rates, as well as the speed and scale of the currency’s gains, market watchers said. “The euro zone is fragile … the British pound is also weak, and geopolitical or economic woes remain a threat. As long as it is a healthy and normal advance, they should be able to adjust and prepare for it,” Sarhan said. “But if the move is very large, fast or erratic, those consequences [could] be immeasurable.”

Yes, something changed alright. Fed priorities did. Jim Rickards gives his view:

Jim Rickards: ‘World In Indefinite Depression’ (RT)

RT: The Chinese Central bank is now offering stimulus. Is this a part of a new round of “currency wars”?

Jim Rickards: Yes, that is right. I think this is one long “currency war”. We are now getting into more of a battle, more of a confrontation. The US dollar is the only strong currency that cannot last: the US cannot have a strong currency, because we are desperate for inflation. We have done all the quantitative easing, we have raised the zero, we have issued further guidance, we have done a twist, and we have done three versions of QE. We have done everything possible. The only thing left is to try to cheapen the currency and in fact the dollar is getting stronger.

The Fed might not have minded a stronger dollar: six months ago it did look like the economy was getting stronger. We saw strong second quarter GDP. So it was a little bit of a good day. And Europe was desperate for the help: they were stepping into recession. Japan`s economy collapsed in the second quarter. So you could see the feds saying “ok…we will have a stronger dollar and give Europe and Japan a break”. But that is over. Now the US is becoming a loser and we are the ones who need to take a break. The only way to get it is a cheaper dollar. I would look for that in the months ahead.

Jim, it’s not six months ago, it’s more recent than that. Look:

And the biggest drop was even over just the past month or so:

I know, this is the EUR/USD situation only, but that IS the most important data. What happens vs the yen is much less relevant, because Shinzo Abe is a desperate man willing do anything to beggar his currency. And China is too opaque to draw any conclusions from. Besides, the Euro is by far the biggest reserve currency behind the USD.

And after that, Jim, you’re just absolutely missing the mark. The rise of the dollar just got started. The Fed is not looking for a cheap dollar. Not anymore. You may argue that we’re watching a headfake, but it’s not that “the Fed might not have minded a stronger dollar”: they actively want a stronger dollar. For the same reason they want higher interest rates: the profits of Wall Street banks.

There are tens of trillions – mostly in US dollars – outstanding in interest rate derivatives. The mood in that camp has become as complacent, ‘Fed has my back’, as it has in stock markets. That means there are no profits there anymore. That’s what Minsky meant when he said that stable markets MUST lead to instability: it’s about profits. Stability will always only remain an illusion.

If and when the Fed takes its hands off the US dollar rate, da greenback will rise like crazy vs the Euro, go to par and probably beyond. And that would still only be normal, there’s no reason why they wouldn’t be at par. But it’s also a 30% move. And that sounds like the promise of real profits.

The Fed never sought to ‘protect’ Main Street or main investors, other than as something collateral, some sort of piggybacking. The big money going forward is in a higher dollar and higher interest rates. So that’s what we’ll have. There won’t be too many parties, big or small, gearing or hedging up for that, even if they have that flexibility, so it’s OK to give away a little of the game plan.

I’m not saying that I know all the details and ins and outs here, but I do think a lot of questions never get asked on this topic, and I do think the role the Fed plays is very poorly understood. The Fed has long given up on the US economy.

Global Finance Chiefs Said to Warn of Growing Economic Risks (Bloomberg)

Group of 20 finance chiefs will warn that risks to the global economy have increased in recent months, an official said, citing the latest draft of a communique due to be released today. Finance ministers and central bank governors meeting in Cairns, Australia, will acknowledge in the statement that the outlook is uneven among countries, the official from a G-20 nation said yesterday, asking not to be identified because the document hasn’t been made public. G-20 economies today will also commit to taking growth-boosting measures to spur recovery. “Ambitious goals to increase sustainable growth rates are certainly welcome against the background of sluggish growth and sticky unemployment in some countries,” European Central Bank Governing Council member Jens Weidmann said in an interview yesterday. The global economic recovery has faltered since a February G-20 meeting in Sydney, as signs that Europe risks slipping into deflation offset more bouyant economies in the U.S. and U.K. and the wealth effects of stock-market gains.

In Asia, Japan’s revival is being blunted by a sales tax increase and concerns are mounting that China’s 7.5% growth target for 2014 is becoming harder to attain. G-20 economies have submitted individual plans to boost gross domestic product by an additional 2% over five years, a goal the group committed to in February. The group will say in their statement that measures proposed so far will boost GDP by 1.8%. Members will commit to additional action to meet their target ahead of a summit of G-20 leaders in Brisbane, Australia, in November, the official said. Even as the group discusses longer-term measures to lift economic output, officials in the U.S. and Canada are pressing for more immediate steps to boost demand. Some European countries should consider additional fiscal measures to bolster growth, even if they temporarily delay efforts to shrink their budget deficits, Canadian Finance Minister Joe Oliver said in an interview. U.S. Treasury Secretary Jacob J. Lew said the global economy continues to underperform, particularly Europe and Japan.

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Currencies Back on Agenda as G-20 Monetary Policies Split (Bloomberg)

Currencies are back on the G-20 agenda as diverging monetary policies from the U.S. to Japan threaten to increase exchange-rate volatility. Foreign-exchange “coordination” will be reflected in tomorrow’s communique in Cairns, Australia, echoing a pledge by Group-of-20 economies in July 2013 in Moscow, South Korean Finance Minister Choi Kyung Hwan said in an interview today. The U.S. dollar has climbed as the Federal Reserve edges closer to its first interest-rate increase since 2006, while easing by the European Central Bank and the Bank of Japan are weighing on the yen and euro. In Cairns yesterday, U.S. Treasury Secretary Jacob J. Lew renewed a call for member nations to avoid currency intervention in a bid to gain a competitive edge.

Divergent monetary policies “have the risk of increasing uncertainties in global financial markets,” Choi said. Volatile foreign capital flows “could also have an impact on the foreign exchange rates.” The dollar has climbed over the past three months against all 16 major peers tracked by Bloomberg, touching a six-year high versus the yen and a 14-month peak against the European currency. “It’s important for foreign-exchange rates to move in a stable manner by reflecting economic fundamentals,” Bank of Japan Governor Haruhiko Kuroda, who is also in Cairns, said yesterday. “It’s natural for it to move in accordance with changes in economic fundamentals.”

Kuroda said this month he would do what’s needed to achieve the BOJ’s inflation target as he continues unprecedented easing. The ECB has cut interest rates to record lows and committed to boost its balance sheet to the levels it had at the height of the sovereign debt crisis in 2012. German Finance Minister Wolfgang Schaeuble told the G-20 meeting today that expansive fiscal and monetary policies could risk creating a bubble in equity and property markets, according to a German delegation official, who briefed reporters on condition of anonymity in line with policy. ECB Governing Council member Jens Weidmann told Bloomberg News in Cairns that monetary policy should not be expansionary for longer than necessary to ensure price stability.

[..] After finance ministers and central bank chiefs met in Moscow in July 2013, they pledged: “We will refrain from competitive devaluation and will not target our exchange rates for competitive purposes.” Lew yesterday revisited language from that communique. According to a statement from the U.S. Treasury Department, [U.S. Treasury Secretary Jack Lew] told South Korea’s Choi that countries must meet “commitments to move toward market-determined exchange rates.”

[..] In a statement in April this year in Washington, G-20 finance chiefs said they were committed to “exchange rate flexibility” among other steps to help meet their goal of boosting gross domestic product by an additional 2% over five years. Choi said the South Korean government is “not at all” intervening in the foreign-exchange market to determine the won’s level. Lew’s comments were “reiterating the importance” of the issue, rather than singling out South Korea, Choi said. While Choi said he lets the market determine the strength of the won, it’s different when moves are extreme. “If there is a very sudden tilting toward one direction in a very short period of time in the foreign exchange market, then there would be some smoothing operations,” he said. “But that is something that is done not only in Korea but in all other countries.” He described “smoothing” as the minimum level of effort made by the currency authority in times of such extreme fluctuations.

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OK, I Get It. Things Are Coming Unglued (WolfStreet)

As long as major stock indices around the world keep soaring (forget for a moment the carnage in smaller stocks), and as long as bonds trade at near all-time highs, and as long as the yield of dubious government debt is close to zero or below zero so that borrowing has become a profit center for governments and a loss center for investors, as long as we live in this wondrous world, who cares about the global economy? This is a resounding theme. Super-ugly data about Japan’s economy piles up, and people say, “Yeah but look, the Nikkei surges.” And this discussion is over. It doesn’t matter that the Nikkei surges as the Bank of Japan is buying every JGB that isn’t nailed down. It’s buying them from banks, pension funds, and individual investors to pile them up on its balance sheet where they can be selectively defaulted on without sparking social chaos. Everyone seems to have accepted the alternative to social chaos, namely a gradual loss of “wealth.”

So banks, pension funds, and other investors are selling their JGBs to the Bank of Japan and are looking at stocks as a place to stash their proceeds. This buying is unrelated to what companies in the Nikkei are doing. It’s an effort to get rid of increasingly toxic JGBs. And hedge funds anticipate that pension funds and other investors are shifting into stocks, and they front-run them, and the Nikkei surges…. But off to the side, in Cairns, Australia, the finance honchos of the G-20 are meeting this weekend. And they’re already jabbering. They’re lamenting just how badly the global economy is faltering. But it was overshadowed by the iPhone 6 razzmatazz and the IPO hoopla of Alibaba, whose shares give investors ownership in a mailbox company in the Cayman Islands that has a contract with some Chinese outfit, and nothing more. But hey, the purpose of owning a stake in a mailbox company is to make a buck and get out. An equation that might work for a while in this era of endless liquidity.

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Jim Rickards: ‘World In Indefinite Depression’ (RT)

We are in global depression which started in 2007 and is going to continue indefinitely, Jim Rickards, economist and author of “Currency Wars: The Making of the Next Global Crisis,” told RT. China’s central bank is injecting a combined 500 billion Yuan into the country’s top banks – a move signaling the deep concerns of an economic slowdown in China. A downturn in China`s economy, as investment is scaled back in Chinese real estate, has prompted economists to forecast further financial defaults and slowing economic growth in the second half of the year. Will this monetary easing fix China’s short-term problem and put it back on the path to prosperity in the long-term? Erin from “Boom Bust” asked economist, Jim Rickards, in her show.

RT: The Chinese Central bank is now offering stimulus. Is this a part of a new round of “currency wars”?

Jim Rickards: Yes, that is right. I think this is one long “currency war”. We are now getting into more of a battle, more of a confrontation. The US dollar is the only strong currency that cannot last: the US cannot have a strong currency, because we are desperate for inflation. We have done all the quantitative easing, we have raised the zero, we have issued further guidance, we have done a twist, and we have done tree versions of QE. We have done everything possible. The only thing left is to try to cheapen the currency and in fact the dollar is getting stronger. The Fed might not have minded a stronger dollar. Six months ago it did look like the economy was getting stronger. We saw strong second quarter GDP. So it was a little bit of a good day. And Europe was desperate for the help: they were stepping into recession. Japan`s economy collapsed in the second quarter. So you could see the feds saying “ok…we will have a stronger dollar and give Europe and Japan a break”. But that is over. Now the US is becoming a loser and we are the ones who need to take a break. The only way to get it is a cheaper dollar. I would look for that in the months ahead.

RT: PIMCO says that Chinese growth will slow to 6.5% over the next year and this is despite the official 7.5% target now in place. Do you think PIMCO is right?

JR: Yes, it is about to go down further. I have been going for Chinese growth to get to 3 or 4%. I would say that China`s growth is already at 4%. I know they print 7.5%. But about half of the GDP they produce is wasted. So if I build a $5 billion train station in a small town that is $5 billion of GDP- this money is completely wasted because 10 people getting on the train are not going to pay for a $5 billion station. So you go around China with these ghost cities we have talked about before… So it is generating GDP, but it is completely wasted. If you adjusted the published GDP figures for the amount of waste, their actual growth is probably already roughly 4%. That is going to go lower.

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!!!

Families Of German MH17 Victims To Sue Ukraine (Reuters)

Survivors of German victims of Malaysian Airlines flight MH17 downed over Ukraine plan to sue the country and its president for manslaughter by negligence in 298 cases, the lawyer representing them said on Sunday. Professor of aviation law Elmar Giemulla, who is representing three families of German victims, said that under international law Ukraine should have closed its air space if it could not guarantee the safety of flights. “Each state is responsible for the security of its air space,” Giemulla said in a statement emailed to Reuters. “If it is not able to do so temporarily, it must close its air space. As that did not happen, Ukraine is liable for the damage.” Bild am Sonntag Sunday mass newspaper quoted Giemulla as saying that by not closing its airspace, Ukraine had accepted that the lives of hundreds of innocent people would be “annihilated” and this was a violation of human rights.

The jetliner crashed in Ukraine in pro-Russian rebel-held territory on July 17, killing 298 people, two-thirds of them from the Netherlands. Four Germans died in the crash. Ukraine and Western countries have accused the rebels of shooting the plane down with an advanced, Russian-made missile. Russia has rejected accusations that it supplied the rebels with SA-11 Buk anti-aircraft missile systems. Giemulla planned to hand his case to the European Court of Human Rights in about two weeks, accusing Ukraine and its President Petro Poroshenko of manslaughter by negligence in 298 cases. He would also push for compensation of up to one million euros ($1.3 million) per victim, Bild am Sonntag reported.

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Idiots.

Ukraine Defense Minister ‘Claims’ Russia Used Nukes (RT)

A reported claim by Ukraine’s Defense minister that Russia used tactical nuclear weapons against his troops sparked sarcastic comments from Moscow and criticism from the rival Ukrainian Interior Ministry. The allegations, by Col. Gen. Valery Geletey, were first reported by Roman Bochkala, one of the Ukrainian journalists accompanying the minister in his recent trip to Poland. “So Russia did use tactical nuclear weapons against Ukrainian troops,” the journalist wrote on his Facebook page, citing Geletey’s words. The nuclear weapons in question are rounds for 2S4 Tyulpan self-propelled mortars. The journalist reported the minister as saying that Russia supplied some of those to rebel forces and used at least two 3-kiloton nuclear rounds in the battle for Lugansk airport. “If it were not for the Tyulpans, we could have been holding the airport for months and nobody would have ousted us from it,” the general was cited as saying.

The allegations understandably provoked a small media storm in Ukraine and even comments from the Russian Defense Ministry, which expressed doubt that a general could actually have said it. If the minister did say all that, the Russians joked, then “the Ukrainian security service should investigate what the Polish friends slipped into Geletey’s glass.” “Speaking seriously, Geletey’s habit of justifying the failures of the punitive operation in southeastern Ukraine with the alleged actions of the Russian armed forces start to resemble paranoia,” the Russian ministry added. And ever-sarcastic Deputy Prime Minister Dmitry Rogozin, who supervises Russian defense and security, tweeted a picture of Geletey with his hands stretched out saying: “they nuked us with a bomb this big.”

The Ukrainian general himself later denied the nuclear allegations, saying that the journalist had misinterpreted his words. “Everyone knows that Russia is de facto using Ukrainian territory as a testing range for its new weapons,” Geletey wrote on his Facebook page. “What else than for testing did the Russians send 2S4s into our territory?” “I stress that only competent specialists armed with special equipment may test whether or not a nuclear or any other weapon that we don’t know of was used. In particular they need to take radiation samples on the ground. Unfortunately, we cannot do that because Lugansk airport is currently under control of the terrorists and the Russian military,” he added.

If anything, the defense minister and the journalist, who misreported his words, have given ammo to critics of Ukraine, said Anton Gerashchenko, an aide to Interior Minister Arsen Avakov. “Why would anyone make such statements that can be easily checked and proven false?” he wrote on his Facebook page. “In the end Russia and the entire world will now ridicule us. Too bad, it’s nothing new for us.” The two Ukrainian ministries involved in the military campaign against rebel forces in the east have been trading accusations lately. The latest round of bickering this week came after Geletey said in an interview that “there were no real heroes” among the commanders of the Interior Ministry’s National Guard, who are now seeking seats in parliament. Avakov responded with a demand for an apology from his fellow minister.

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Too late.

Russia to Consider Diversifying Away From Western Debt Securities (WSJ)

Russia is considering diversifying its debt portfolio away from countries that have imposed sanctions on Moscow and into the papers of its Brics partners, Finance Minister Anton Siluanov said Saturday. Australia, Canada, the European Union, Japan, the U.K. and the U.S. have imposed sanctions against Russia in recent months to punish it for the annexation of the Ukrainian region of Crimea and for supporting anti-Kiev rebels in eastern Ukraine. The sanctions have pressured Russia’s finances, prompting the Kremlin to seek tighter ties with the emerging world. Speaking on the sidelines of an annual investment forum in the Black Sea town of Sochi, Mr. Siluanov said the Finance Ministry wants to diversify its investment basket, and is looking for higher yields without too much risks.

He said the ministry will consider buying papers issued by Brazil, India, China and South Africa, which along with Russia are known collectively as the Brics countries. “[We would like to] walk away from investing in papers of the countries that impose sanctions against us,” Mr. Siluanov said, adding that the reshuffle would be carried out gradually. He didn’t elaborate on when the first purchases of Brics debt may take place. Mr. Siluanov said such a move wouldn’t be aimed at punishing the West because Russia’s share in their papers is so small they wouldn’t feel the effect. When asked whether the diversification would mean Russia was preparing for financial isolation in the long term, Mr. Siluanov said he hopes Western sanctions would be lifted soon but said that his ministry should be ready for other scenarios.

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Russia Pledges State Funds to Business as Sanctions Limit Growth (Bloomberg)

Russia will remain committed to developing its market economy as the state offers billions of dollars of aid to help the country’s biggest companies weather sanctions imposed by the U.S. and Europe. Prime Minister Dmitry Medvedev met with business leaders to discuss state aid to cope with the strain as Russia’s economic slowdown is exacerbated by the sanctions, Economy Minister Alexei Ulyukayev said today at an investment forum in the Black Sea city of Sochi, site of the Winter Olympics. The government is trying to revive its $2 trillion economy, growing at its slowest since a contraction in 2009 as U.S. and European Union sanctions compound cooling consumption and falling oil prices.

Concerns that the arrest of billionaire Vladimir Evtushenkov, the richest Russian to face criminal charges since Mikhail Khodorkovsky a decade ago, signal an attack on private business have intensified outflows. The ruble weakened to a record against the dollar and the 50-stock Micex index fell to six-week low as Russia’s political and business elite mingled in Sochi. The sanctions are a “pointless and ugly decision toward Russia but we’ll manage without” foreign financing, Medvedev said in an interview with TV channel Rossiya 24. The government is holding off discussing another round of tit-for-tat measures, he said, after Russia last month banned some food imports from the U.S., the EU, Norway, Canada and Australia.

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‘Europe To Lose Its Share Of Russian Market Due To Foolish Sanctions’ (RT)

Europe will not regain its share of the Russian market after the sanctions war is over, as it will already be occupied by other local and foreign businesses, Russian Prime Minister Dmitry Medvedev has warned. Russia and the West will eventually “come to agreements sooner or later, as sanctions don’t last forever,” Medvedev said in an interview with Vesti 24 TV channel. “These foolish sanctions will pass, but international relations will continue. And currency markets will open up,” he added. The prime minister stressed that “the niches in our [Russian] economy, which will by then be occupied by local produces or other foreign producers…our European counterparts wouldn’t be able to come back.” According to Medvedev, “this is the price Europe will have to pay” for trying to put Russia under economic pressure. He assured that Asian and Latin American companies – which will replace the Europeans on the Russian market – will maintain their positions after relations between Moscow and the EU return to normal.

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Word.

‘Whatever Is Offered To Scotland Has To Be Available To Wales Too’ (RT)

The Scottish referendum is a real victory for people power, although the UK establishment was against it. Now Wales needs to ensure that its needs and demands are heard as well, leader of the Party of Wales (Plaid Cymru), Leanne Wood, told RT.

RT: Scotland walked a very long road to get this referendum. Have they blown their chance?

Leanne Wood: What has happened in Scotland has been remarkable. It has been a David and Goliath battle really, with the “yes” campaign almost achieving what they set out to achieve from a very low base. The entire corporate media was against social media, the entire British establishment was against ordinary Scots coming together in town halls. So even though they haven’t created a new state as the result of the referendum yesterday, they have achieved a great amount for democracy. And I want to whole heartedly congratulate the Scots for the way in which they conducted this debate.

RT: The Scottish breakaway campaign was very strong, and yet it failed. What kind of example does this give to your movement which is aimed at independent Wales?

LW: I would say it didn’t fail actually. The fact that so many people were engaged, so many people were talking about this and that there was very little apathy in the run-up to this campaign, it tells me that this is a real victory for people power.

RT: Before the referendum, the pro-union parties promised more powers for Scotland if they chose to stay. When can we expect this process to start?

LW: Today, it has to happen straight away. I have to say that the promises that have been made to people of Scotland, I am skeptical about them being delivered. But what I would say is that at the very basic minimum whatever is offered to Scotland has to be available to Wales too. There is a very real risk that we will have second or even third-class devolution here in Wales, while first-class devolution is being offered to Scotland. And that situation is simply not acceptable – we must have first-class devolution here in Wales too.

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They know how to do it.

French Farmers Torch Tax Office In Brittany Protest (BBC)

French vegetable farmers protesting against falling living standards have set fire to tax and insurance offices in town of Morlaix, in Brittany. The farmers used tractors and trailers to dump artichokes, cauliflowers and manure in the streets and also smashed windows, police said. Prime Minister Manuel Valls condemned protesters for preventing firefighters from dealing with the blaze. The farmers say they cannot cope with falling prices for their products. A Russian embargo on some Western goods – imposed over the Ukraine crisis – has blocked off one of their main export markets.

About 100 farmers first launched an overnight attack on an insurance office outside Morlaix, which they set light to and completely destroyed, officials said. They then drove their tractors to the main tax office in the town where they dumped unsold artichokes and cauliflowers, smashed windows and then set the building on fire. French media said the farmers then blocked a busy main road in Morlaix in both directions. In a statement, Mr Valls “vigorously” condemned the “looting and destruction by fire” of the buildings. He said violence was not justified and the perpetrators would be prosecuted.

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Word.

You Can’t Feed a Family With GDP (NY Times)

The most important thing to know about the state of the United States economy was revealed in a report Tuesday morning that Wall Street barely noticed. Every year, the Census Bureau delivers a sweeping set of numbers that give the richest annual picture of how much Americans are making, how many are living in poverty, and how many have access to health insurance. The numbers are backward-looking, covering conditions from a year ago. But the new numbers, released Tuesday, in many ways tell us more about how well the economy is serving — or failing — the mass of Americans than data that create hyperventilation in the financial markets. The census numbers on what American families made last year are as mediocre as they are predictable.

We now know that if your household brought in $51,939 in income last year, you were right at the 50th percentile, with half of households doing better and half doing worse. In inflation-adjusted terms, that is up a mere 0.3 percent from 2012. If you’re counting, that’s an extra $180 in annual real income for a middle-income American family. Don’t spend your extra $3.46 a week all in one place.

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8 Ways The Obama Administration Is Blocking Information (AP)

The fight for access to public information has never been harder, Associated Press Washington Bureau Chief Sally Buzbee said recently at a joint meeting of the American Society of News Editors, the Associated Press Media Editors and the Associated Press Photo Managers. The problem extends across the entire federal government and is now trickling down to state and local governments. Here is Buzbee’s list of eight ways the Obama administration is making it hard for journalists to find information and cover the news:

1) As the United States ramps up its fight against Islamic militants, the public can’t see any of it. News organizations can’t shoot photos or video of bombers as they take off — there are no embeds. In fact, the administration won’t even say what country the S. bombers fly from.

2) The White House once fought to get cameramen, photographers and reporters into meetings the president had with foreign leaders overseas. That access has become much rarer. Think about the message that sends other nations about how the world’s leading democracy deals with the media: Keep them out and let them use handout photos.

3) Guantanamo: The big important 9/11 trial is finally coming up. But we aren’t allowed to see most court filings in real time — even of nonclassified material. So at hearings, we can’t follow what’s happening. We don’t know what prosecutors are asking for, or what defense attorneys are arguing.

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Far too many people missing.

Missing Men in U.S. Workforce Risk Permanent Separation (Bloomberg)

Too few men like Kaminski are returning to work in a decades-long puzzle about prime working-age males ages 25 to 54 falling away from the U.S. labor force. Their participation rate slid to 88.4% in August in a steady decline from 97.9% in 1954. Over the last 10 years, the slump was the steepest for those ages 25 to 34. About 7 million male Americans waste their best years of wealth formation not employed or even trying to find work. The pattern will persist, economists say, putting some men – particularly those without a college degree – at risk of permanent isolation from the job market. The pace of decline was among the fastest during the last two contractions and the drop has continued in the current expansion, according to data compiled by Bloomberg from Labor Department reports. This shows the labor-market recovery isn’t strong enough for some men to find jobs or even continue looking.

A key reason is the change in labor demand: the gradual disappearance of construction and manufacturing positions, especially those demanding relatively few skills, such as furniture, shoe or leather-goods making, said David Autor, professor of economics at Massachusetts Institute of Technology in Cambridge. “The trend will remain downward,” Autor said in a phone interview. “I don’t see any recovery for low-skilled labor demand coming. There’s never going to be a great time in America again to be a high-school dropout.” A fall in inflation-adjusted earnings for less-educated men, more stay-at-home dads and a surge in the number of veterans with military-service disability benefits also contribute to the decline, according to Bureau of Labor Statistics economist Steve Hipple. The number of veterans receiving such assistance rose 42% to 3.7 million in 2013 from 2.6 million in 2005, U.S. Department of Veterans Affairs data show. About 40% were 54 years old or younger, and about 89% were men.

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China Will Not Alter Policy Based On One Economic Indicator (Reuters)

China will not dramatically alter its economic policy because of any one economic indicator, Finance Minister Lou Jiwei said on Sunday, in remarks that came days after many economists lowered growth forecasts having seen the latest set of weak data. Lou made the comments at a meeting of finance ministers and central bank governors from the G-20 countries in Australia, according to a statement from the People’s Bank of China, China’s central bank. “China will not make major policy adjustments due to a change in any one economic indicator,” he said. Economists dialed back their growth forecasts last week after data showed factory output grew at its weakest pace in nearly six years in August.

China’s total social financing aggregate, a broad measure of lending in the economy, was the weakest in nearly six years, data showed earlier this month, indicating credit levels were far below average. China cannot rely on government spending to increase infrastructure investment, Lou added. The economic stimulus measures adopted by China to confront the international financial crisis had boosted economic growth, but they also brought excess capacity, environmental pollution, and the growth of local government debt along with other problems, Lou said. As a result, China cannot completely rely on public financial resources to make large-scale investments in infrastructure.

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US Court Tosses Argentina, Citigroup Appeal In Bond Case (Reuters)

A U.S. appeals court on Friday dismissed an appeal by Citigroup Inc and Argentina of a judge’s order blocking the bank from processing payments on $8.4 billion in bonds issued under the country’s local laws following its 2002 default. The 2nd U.S. Circuit Court of Appeals in New York in a brief order declined to find it had jurisdiction, because the order Citigroup and Argentina appealed over was a “clarification, not a modification” of a prior decision by U.S. District Judge Thomas Griesa. The appellate court, though, said nothing in its decision was intended to prevent Citigroup from seeking further relief from Griesa. Citigroup faces regulatory and criminal sanctions by Argentina, which defaulted again in July, if it cannot process the $5 million payment by Sept. 30, Karen Wagner, Citigroup’s lawyer, said during arguments Thursday.

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America can’t make a decent car anymore.

GM Recalls Another 221,000 Cars Over Braking Problem (MarketWatch)

General Motors announced a recall of 221,000 new cars worldwide over a fault with braking that could cause excessive heat and poor performance. The new recall covers 2013-2015 Cadillac XTS and 2014-2015 Chevrolet Impala cars and was prompted by an investigation by the National Highway Traffic Safety Administration opened in April. 205,000 of the recalled cars were sold in the U.S. GM said it was not aware of any crashes, injuries or fatalities as a result of this condition. The automaker recalled more than 29 million cars in 2014, with issues ranging from faulty ignition switches to wiring flaws.

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Chrysler Recalls 230,000 Cars Over Fuel-Pump Defects (MarketWatch)

Chrysler, a subsidiary of Fiat SpA, announced on Saturday it is recalling more than 230,000 SUVs over a problem with fuel pump relay that may cause the cars to stall. About 189,000 of those were sold in the U.S.
The recall affects 2011 Jeep Grand Cherokee and Dodge Durangos, which will need to get a new relay circuit to improve the fuel-pump relay durability. Chrysler decided to recall cars after reviewing a pattern of repairs and complaints. There have been no accidents or injuries because of the problem, the company said. Customers with recalled cars can take them to dealers for free replacement of the fuel-pump relay starting Oct. 24, according to Chrysler. In June 2014 Chrysler recalled 696,000 minivans from 2008-2010 models for the ignition switch problems. Faulty ignition switch problems were much more prevalent in cars made by General Motors. GM has recalled more than 29 million cars through North America since the start of the year.

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Climate Change Changes Everything (Amy Goodman)

The climate crisis is worsening faster than predicted, by every scientific measure, and is paralleled by another crisis: the failure of the U.N. climate negotiation process. “You have been negotiating all my life,” student activist Anjali Appadurai said as she addressed the formal climate negotiations in Durban, South Africa, back in 2011. The climate negotiations have been in a virtual gridlock, with nations, most notably the United States under President Obama, blocking progress and protecting their national interests while the planet heats up, potentially irreversibly. Appadurai, the designated youth speaker, said. “You’ve given us a seat in this hall, but our interests are not on the table. What does it take to get a stake in this game? Lobbyists? Corporate influence? Money?” Three years later, the United Nations is now holding a special climate summit in New York City on Tuesday, with more than 100 world leaders expected.

Unlike the formal U.N. climate negotiations, the goal of this nonbinding summit, the UN says, is “to raise political will and mobilize action, thereby generating momentum toward a successful outcome of the negotiations.” After 20 years, U.N. officials have apparently realized that, if left to the usual suspects of government and industry participants, the efforts to achieve a legally binding climate accord, slated for Paris in December 2015, will fail. Grass-roots action is now seen as a critical component for success. Environmental activists protested in outrage at the climate summit in Copenhagen in 2009, when President Obama showed up and derailed the U.N. negotiations by holding closed-door meetings with the world’s largest polluting nations. Back then, the United Nations responded by ejecting the activists.

The U.N. climate negotiations are held around the world, but always in tightly secured convention facilities, far from people most directly impacted by climate change, and far from the sight and sound of climate activists who converge at the summits, hoping to pressure the negotiators to reach a deal before it is too late. Just days before Ban Ki-moon’s invite-only summit next week, a broad coalition will hold the People’s Climate March, expected to be the largest march addressing climate change in history. People from all walks of life will gather on Central Park’s west side on Sunday. Organizers expect over 100,000 people.

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Hmmm.

How the People’s Climate March Became a Corporate PR Campaign (Arun Gupta)

I’ve never been to a protest march that advertised in the New York City subway. That spent $220,000 on posters inviting Wall Street bankers to join a march to save the planet, according to one source. That claims you can change world history in an afternoon after walking the dog and eating brunch. Welcome to the “People’s Climate March” set for Sunday, Sept. 21 in New York City. It’s timed to take place before world leaders hold a Climate Summit at the United Nations two days later. Organizers are billing it as the “biggest climate change demonstration ever” with similar marches around the world. The Nation describes the pre-organizing as following “a participatory, open-source model that recalls the Occupy Wall Street protests.” A leader of 350.org, one of the main organizing groups, explained, “Anyone can contribute, and many of our online organizing ‘hubs’ are led by volunteers who are often coordinating hundreds of other volunteers.”

I will join the march, as well as the Climate Convergence starting Friday, and most important the “Flood Wall Street” direct action on Monday, Sept. 22. I’ve had conversations with more than a dozen organizers including senior staff at the organizing groups. Many people are genuinely excited about the Sunday demonstration. The movement is radicalizing thousands of youth. Endorsers include some labor unions and many people-of-color community organizations that normally sit out environmental activism because the mainstream green movement has often done a poor job of talking about the impact on or solutions for workers and the Global South. Nonetheless, to quote Han Solo, “I’ve got a bad feeling about this.”

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Sep 072014
 
 September 7, 2014  Posted by at 7:07 pm Finance Tagged with: , , , ,  


Esther Bubley Greyhound garage, Pittsburgh, PA Sep 1943

There’s not a single day that we’re not treated to more smart treats about stimulus measures. Are they necessary, are they good, are they bad, who profits from them. It gets really long in the tooth. Today, former ECB head Trichet says unlimited stimulus ‘risks’ blowing bubbles. “Supplying unlimited amounts of liquidity at interest rates close to zero has “unintended counterproductive consequences.”

No shit, assclown. Does Jean-Claude really mean to claim he just figured that one out now? Why else did he never say it before? There are 1001 other wise guys like Trichet who’ve only recently seen a sliver of light, and see fit to make the great unwashed party to their new found wisdom. And they’re the vanguard, all the rest still sit on their asses.

The simple truth about ultra low interest rates is so simple it’s embarrassing, at least for those who claim they benefit society. That is, ultra low rates make borrowing accessible to the wrong people, and to the right people for the wrong reasons. The former are people who shouldn’t be able to borrow a dime, because they have no credit credibility, the latter borrow only for unproductive or counter-productive reasons.

Like companies setting up mergers and acquisitions not because a merger or stock buy-back is a good idea in itself, but because at 0% it’s too easy a risk not to take when you know it’ll lift your share price, and you can fire thousands of people to boot and label that ‘efficiency’.

In that same vein, but on an individual scale, mortgages will once again be made tempting for people who shouldn’t ever have a mortgage, at least not until they have their finances in order, through plans like the Access to Affordable Mortgages Act the US Congress is planning to launch upon the country. That is to say, if a 4% rate is too high for the poor, let’s make it less.

But if you can’t afford 4%, you shouldn’t have a mortgage, period, and your government certainly shouldn’t entice you into getting one. No matter how left or how right you lean politically, that is simply not something a pot a government should be stirring in or tampering with. That Congress prepares to do so anyway is a solid sign of how desperate Washington is about the US economy. That’s not even open to discussion.

Ultra low rates in a situation of already existing excessive debt levels is like feeding terminal patients strychnine, and telling them they’re sure to feel much better in the morning. Or maybe just something along the lines of: how much worse could it get?

US banks complain that they can’t lend out more because the potential penalties, in case the loan turns bad, are too severe. So Washington will lower those penalties (want to bet?). If not, home prices will fall, and we can’t have that, can we?

We live in a virtual economy, whereas we desperately need a real one. We need it because if we don’t get one soon, the virtual one will eat huge parts of every hard-working American’s (and European’s) fast shrinking wealth.

There are no western stock markets anymore, other than a bunch of idle numbers we see in the media. Trade volume is at levels as ultra low as interest rates, AND central banks are buying shares, AND a huge chunk of the market is high-frequency trade. What all that means is the Dow and S&P no longer reflect anything even remotely related to the American economy. That link is broken, gone. Not a minor detail.

Handing trillions to essentially broke banks, and on top of that enabling them to borrow – virtually – unlimited amounts of funds, is in essence the worst thing that could happen to the US economy. It is, though, the only way to save those same banks. And that’s why we have QE. It kills the real economy to save Wall Street. The latter has more political say than the former, i.e. it purchases more votes. It is simple indeed.

There are plenty historical average charts and stats for business loans and mortgage loans, and there’s no reason we should be at that average today.

Other than that, we are at a historically unique, never before seen, point at which we can only keep appearances if we give money away for free to those who already have the highest levels of debt. And that will only work short term. After that, all that remains is ‘Le deluge’, i.e. the wash-out flood, i.e. the debt tsunami.

That’s the only simple truth there is as far as QE is concerned. It’s nothing but yet another way to transfer money from you to the bankrupt yet privileged world of finance. Designed to allow the banks to postpone their inevitable moment of reckoning, and let everyone else pay for that delay.

How simple would you like it? The financial hole you’re in gets deeper every single day courtesy of your own government and central bank. That’s what QE means to you. Told you it was simple.

War.

Ukraine To Get Arms From Five NATO Allies: Poroshenko Aide (Reuters)

A senior aide to Ukraine’s President Petro Poroshenko said on Sunday Kiev had reached agreement during the NATO summit in Wales on the provision of weapons and military advisers from five member states of the alliance. “At the NATO summit agreements were reached on the provision of military advisers and supplies of modern armaments from the United States, France, Italy, Poland and Norway,” the aide, Yuri Lytsenko, said on his Facebook page.

He gave no further details and it was not immediately possible to confirm his statement. Poroshenko, whose armed forces are battling pro-Russian separatists in eastern Ukraine, attended the two-day summit in Wales that ended on Friday. NATO officials have said the alliance will not send weapons to Ukraine, which is not a member state, but they have also said individual allies may choose to do so. Russia is fiercely opposed to closer ties between Ukraine and the NATO alliance.

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Unlimited Liquidity Risks Asset Bubbles: Ex-ECB Head Trichet (CNBC)

Supplying unlimited amounts of liquidity at interest rates close to zero has “unintended counterproductive consequences,” former European Central Bank President Jean-Claude Trichet warned on Saturday. “It’s true that new bubbles are necessarily created when you deliver unlimited supply of liquidity at zero rates,” Trichet told CNBC in an interview at the Ambrosetti Forum in Italy. The European Central Bank (ECB) surprised investors and markets on Thursday by cutting interest rates to record lows and announcing a bond-buying program. The rate on the main refinancing operations was cut to a new low of 0.05%. The rate on the marginal lending facility was lowered to 0.30% and the rate on the deposit facility was cut still further into negative territory, to -0.20%. ECB President Mario Draghi also announced the ECB would purchase asset-backed securities (ABS) and covered bonds to boost the economy and boost inflation.

Trichet said he trusted the move to purchase ABS and said it was “very very important”. Under such a program, euro zone banks sell the ECB their loans and other types of credit that have been packaged together. Draghi said the ECB would only purchase less risky senior tranches of securitized debt and loans, as well as mezzanine tranches with guarantees. “So I trust really,that as far as purchases of credible securities are concerned, the ECB is right to concentrate on where you have a problem, namely, the private tradable securities,” Trichet said. “On top of that, of course you have the monetary policy decision, and historically very very low rates, which confirms that the is ECB taking very seriously this very low inflation which characterizes the euro area. Concerns about growth-sapping low inflation had already seen the ECB unveil a host of measures designed to give the euro zone’s recovery a boost in June.

Former European Central Bank executive board member Jörg Asmussen, now a minister in the German government, said the ECB was right to do whatever it could within its mandate. He said the bank should not “change the rules”, echoing comments by other German policymakers who have challenged the legality of the ECB’s as yet untested sovereign bond buying program. Newswires, citing sources, reported that Bundesbank President Jens Weidmann had opposed the ECB’s latest policy measures. Asmussen warned that the euro zone debt crisis was not over but “dormant”. “And the risk for catastrophic events have clearly diminished. But this is why I try to say on the fiscal policy side, it’s extremely important – especially for countries with high public debt levels – to stick with the agreed framework.”

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Fed’s Plosser Warns Again On Risks Of Waiting To Hike Rates (Reuters)

Charles Plosser, president of the Philadelphia Federal Reserve Bank and the loan dissenter at the Fed’s July policy meeting, on Saturday continued his push for the U.S. central bank to change its language on interest rate policy to reflect an improving economy and pave the way for a faster-than expected-interest rate hike. Plosser, who is known for his longstanding warnings about potential inflation, said the Fed’s steady, accommodative language had fallen out of step with a strengthening economy. “We must acknowledge and thus prepare the markets for the fact that interest rates may begin to increase sooner than previously anticipated,” Plosser said in remarks prepared for delivery to a group of Pennsylvania community bankers gathered for their annual convention at this seaside resort.

“I am not suggesting that rates should necessarily be increased now,” said Plosser, who currently is a voter on the Fed’s main policy-setting committee. But “our first task is to change the language in a way that allows for liftoff sooner than many now anticipate and sooner than suggested by our current guidance.” The Fed’s policy committee meets later this month in a session that may see Plosser get his wish. In a recent speech at the Fed’s annual economic conference in Wyoming, Fed Chair Janet Yellen acknowledged the arguments of those, like Plosser, who feel the economy – and labor markets in particular – may be stronger than they appear by some indicators.

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Th Fed is the only party left.

How Central Bank Liquidity Levitates The Financial Markets (Lee Adler)

Dow Jones’s Marketwatch, inexplicably, does a better job of being “fair and balanced” in reporting financial news than its sister in crime, the Wall Street Journal, or their evil stepmom, Fox Business. The great humanitarian seeker of truth and paragon of journalistic virtue, Rupert Murdoch, controls all of them. So it’s surprising to find occasional points of light in that evil empire. Marketwatch’s Washington Bureau Chief Steve Goldstein is one of them, and one of a few financial journos who at least makes an effort to seek and report the facts, rather than hewing strictly to Wall Street’s company line. I had a conversation with Goldstein on Twitter on Tuesday. Goldstein had tweeted, “How much good data is needed for Treasury bulls to capitulate? (Lots, probably, but 10-yr up 7 bps today).”

I inferred that he was referring to the idea that good economic data should push Treasury yields higher. It’s a broadly accepted misconception that there’s a cause/effect relationship between economic data and bond yields. I sent him a Tweet alluding to the real drivers of Treasury prices, supply and demand. “Maybe, but there’s a temporary shortage of cash now as Treasury issues $87B in new paper 8/28-9/4, including $32B today.” He responded, “That’s surely not issue (no pun intended) at the long end.” Me in a series of tweets: “Sure it is. Absolutely positively. The cash must be raised to pay the bill. This is enormous supply in one week”. But it’s a short term effect. Couple days at most. Then the market snaps back to whatever trend it’s on. Treasury supply is one of THE most important, and widely ignored, short term market drivers for both bonds and stocks. It directly impacts the Primary Dealers in their market making functions, and other buyers, across the spectrum of markets.

Goldstein was open enough and curious enough to ask me if I had data. So I sent him my latest Treasury and Fed reports, along with the emailed comments reproduced below, which briefly illustrate a couple of key points in how I view markets. The Fed and US Treasury are the major players in driving price trends in the markets along with two other mammoth central banks. Goldstein then asked “What’s the correlation between S&P 500 and Treasury issuance, and how does that compare to QE?” This question really gets to the heart of what drives the markets, and what’s wrong with them. Below is my quickly penned, somewhat disjointed response.

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Even In The Richest 3%, There’s A Growing Wealth Gap (CNBC)

America’s millionaire population hasn’t grown significantly in 10 years, according to new government data, suggesting that not everyone at the top is benefiting from the recovery. The latest Surveys of Consumer Finance from the Federal Reserve paints the familiar picture of widening income inequality in America. The wealthiest 3% of households control 54.4% of the nation’s wealth, up from 51.8% in 2009. But the gains are highly concentrated at the top of the top 3%. And as a whole, American millionaire households—those with a total net worth of $1 million or more—have not fared as well, either in the recession or the recovery.

According to the new Federal Reserve data, there were 11.53 million millionaire households in the U.S. in 2013, down from 11.98 million in 2010 and below the 11.65 million millionaire households in 2004. (The numbers are inflation adjusted). In other words, it’s been a lost decade for America’s millionaire population. Even in percentage terms, the millionaire population is the lowest in a decade. Only 9.4% of American households had $1 million or more in assets in 2013, down from a peak of 10.4% in 2004 and even below the levels in 2001. Compared with the rest of the country, of course, millionaires are doing fine. But the declining population of millionaires through the recession shows just how devastating the downturn was even among the affluent. It is only the truly wealthy—the top 1% and, more importantly, the top 0.01%—that have benefited most from rising stocks and asset prices.

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‘Affordable Mortgages Act’: How Congress Will Create The Next Crisis (Black)

Say hello to the next financial crisis, brought to you courtesy of the dumbest new bill of the week: H.R. 5148: Access to Affordable Mortgages Act. Ordinarily whenever an individual wants to borrow money for a mortgage, the bank conducts due diligence… both on the borrower as well as the property. It’s in the banks’ interest (as well as the banks’ depositors) to ensure that the property is at least worth as much as the amount being borrowed. Duh. Congress doesn’t agree. Apparently when banks conduct property appraisals, that seems to unfairly discriminate against some segment of the population trying to buy crap properties. And we certainly can’t have that going on in the Land of the Free.

So with HR 5148, Congress aims to exempt certain ‘higher-risk mortgages’ from property appraisal requirements. Curiously, this legislation reverses several provisions in the 1968 ‘Truth in Lending Act’. It’s as if Congress is now anti- ‘Truth in Lending’ and pro- ‘whatever the hell gets the money on the street’. And of course, all of this comes at a time when mortgage rates are still near their all-time lows. You can borrow money to buy a home today at just 4%. That’s less than half the long-term average of 8.5%, and a fraction of the 16%+ people were stuck paying 30 years ago. Isn’t paying 4% affordable enough? Nope. Not according to Congress.

So now they’re trying to engineer yet another financial crisis by encouraging banks and other lenders to exercise minimal due diligence on their mortgage portfolio. This comes at a pivotal time. US banks are only now just barely starting to recapitalize after the early days of the financial crisis. They’ve unloaded their toxic assets to the US government and Federal Reserve. They’ve borrowed money at essentially 0% from the Fed and loaned it to the Treasury Department at interest (the mother of all scams). After six years of these freebies and taxpayer-funded bailouts, bank balance sheets are only now starting to clear up. So what does Congress do? They propose a new law to screw up bank balance sheets all over again. It’s idiocy on an epic scale… and it makes one wonder what team of monkeys is coming up with these ideas.

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‘Mortgage Crisis’ Is Coming This Winter: Dick Bove

A toxic brew is bubbling in the housing market that will lead to a mortgage crisis by winter, banking analyst Dick Bove said. Now that the Federal Reserve is nearly done with its monthly bond-buying program, which includes mortgage-backed securities, and Washington continues on its quest to unwind Fannie Mae and Freddie Mac, conditions could get dicey in the home loan market. Bove envisions a scenario in which long-term financing, like the ubiquitous 30-year mortgage, that has come with fixed interest rates is endangered as mortgage buyers dry up. “This means there will be less money available to fund housing, and the terms of the available funds will be considerably more onerous than what was available under 30-year, fixed-rate loans,” Bove said in a report he sent to clients Tuesday. “This means higher monthly payments and lower housing prices. It means a crisis in the mortgage markets—and the economy.”

As part of its quantitative easing program, the Fed had been buying as much as $40 billion a month of mortgage-backed securities—known as MBS and essentially mortgages bundled into products for investors. However, that buying has been reduced to $10 billion a month as part of a process often referred to as “tapering.” At the same time, Congress is on a path to unwind Fannie Mae and Freddie Mac, the two government-sponsored enterprises that were bailed out during the financial crisis. Bove credited the MBS program—which was coupled with purchases in Treasurys—with rescuing the housing market from its moribund state prior to the start-up of the third QE phase in 2012. He similarly pointed out that Fannie and Freddie control about 61 percent of mortgages as a buyer of loans on the secondary market.

Under the current congressional plan, the Fannie and Freddie GSE system would be replaced by one in which a Federal Mortgage Insurance Corporation would replace the two entities. Part of the plan would see private capital take the first 10 percent of losses in case of default, a provision that has drawn critics who say the level is too high and will discourage investors. While banks have stepped up their mortgage buying this year, Bove noted anecdotally that those institutions are unwilling to take on the risk of 30-year, fixed-rate mortgages. “While these banks are not willing to make public statements similar to those of the industry’s leaders, they all agree that the risk in making loans to low-income households is too high,” he said. “The fines, lawsuits and put-backs associated with those loans make them unprofitable.” Unless someone fills that vacuum, the prospects for housing remain troublesome.

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Yawn.

Ukraine Ceasefire Breached In Donetsk And Mariupol (Observer)

Ukraine’s ceasefire was breached repeatedly on Sunday as shelling was audible in the port city of Mariupol, and loud booms were also heard in the regional centre Donetsk. The ceasefire, agreed on Friday, held for much of Saturday, but shelling started overnight. The official Twitter account of the Donetsk rebels said in the early hours of Sunday that its forces were “taking Mariupol”, but later accused Ukraine of breaking the ceasefire. Fighters from the Azov battalion, who are defending the town, said their positions had come under Grad rocket fire. Earlier on Saturday the truce had appeared to be holding, with only minor violations reported, as hopes mounted that the deal struck in Minsk on Friday could bring an end to the violence that has left more than 2,000 dead in recent months.

Both sides accused the other of violating the ceasefire, but there did not appear to be any serious exchanges of fire and no casualties were reported. Nevertheless, the rhetoric coming from Kiev and Donetsk, capital of the Russia-backed rebel movement, showed that a political solution was still some way away. The atmosphere between the two frontlines on Saturday was tense but calm, as both sides took stock of what appear to have been heavy losses in the final fighting that led up to the ceasefire. The fiercest fighting on Friday came in the villages between Novoazovsk and Mariupol, the strategic port city that Ukrainians feared would be attacked by separatists over the past week. Rebel forces seized the town of Novoazovsk, across the border with Russia, 10 days ago. Kiev says the rebels were aided by soldiers and armour of the regular Russian army, which helped turn the tide against Ukraine’s forces and push Kiev towards accepting a ceasefire.

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No chance.

Ceasefire Plan: Ukraine Decentralized, Special Status Lugansk, Donetsk (RT)

The OSCE has revealed the 12-point roadmap behind the September 5 truce signed in Minsk. It says that Ukraine must adopt a new law, allowing for a special status for Lugansk and Donetsk regions, and hold early elections there. The document, titled ‘Protocol on the results of consultations of the Trilateral Contact Group’ and signed in Minsk on September 5, outlines what needs to be done for the ceasefire to stay in place. “To decentralize power, including through the adoption by Ukraine of a law ‘on provisional procedure for local government in parts of Donetsk and Lugansk regions (law on special status),’” states one of the provisions in the document. Another point emphasizes that “early local elections” are to be held in light of the special status of both regions. The early elections must be held in accordance with the same proposed law, it says. Kiev must then continue an “inclusive nationwide dialogue,” the document stresses.

The roadmap also implies an amnesty for anti-government forces in Donbass: “To adopt a law, prohibiting prosecution or punishment of people in relation to the events that took place in individual areas of Donetsk and Lugansk regions of Ukraine.” At the same time, it notes that all “illegal military formations, military equipment, as well as militants and mercenaries” have to be withdrawn from Ukraine. The Organization for Security and Co-operation in Europe (OSCE) published a copy of the protocol early on Sunday, with only a PDF document in Russian available so far. During the meeting on September 5, Kiev officials and representatives of the two self-proclaimed republics in southeastern Ukraine have agreed to a ceasefire. Some of the other provisions of the truce include monitoring of the ceasefire inside Ukraine and on the Russia-Ukraine border by international OSCE observers, the freeing of all prisoners of war, and the opening of humanitarian corridors.

A “safety zone” is to be created with the participation of the OSCE on the Russia-Ukraine border, the document says. It also calls for measures to improve the dire humanitarian situation in eastern Ukraine, and urges in a separate point that a program for Donbass’ economic development is to be adopted. Since the conflict significantly deteriorated in mid-April, 2,593 people have died in fighting in the east of the country, according to the UN’s latest data. More than 6,033 others have been wounded in the turmoil. The number of internally displaced Ukrainians has reached 260,000, with another 814,000 finding refuge in Russia.

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Don’t like an inch of her. But she’s right.

Crisis In Ukraine Is ‘All EU’s Fault’ – France’s Marine Le Pen (RT)

Marine Le Pen, the leader of France’s far-right National Front party, says the EU is to blame for the crisis in Ukraine as it forced the situation where Kiev had to choose between East and West. Now that France is joining sanctions against Russia over the alleged direct interference in the political crisis in Ukraine and Paris is considering suspending the €1.2 billion deal of two Mistral helicopter carrier ships ordered by Russia, the leader of the biggest parliamentary faction of the French parliament has her own opinion on Ukraine’s turmoil. “The crisis in Ukraine is all the European Union’s fault. Its leaders negotiated a trade deal with Ukraine, which essentially blackmailed the country to choose between Europe and Russia,” Le Pen told Le Monde daily in an interview. Le Pen has been a long-standing critic of Europe’s foreign policy and does not see how Ukraine could join the bloc. “The European Union’s diplomacy is a catastrophe,” Le Pen told RT’s Sophie Shevardnadze in an exclusive interview in June.

“The EU speaks out on foreign affairs either to create problems, or to make them worse.”“Ukraine’s entry into the European Union; no need to tell fairy tales: Ukraine absolutely does not have the economic level to join the EU,” Le Pen told RT. In her fresh interview with Le Monde, the National Front leader had a positive attitude towards Russian President Vladimir Putin and the economic model he builds. “I have a certain admiration for the man [Putin]. He proposes a patriotic economic model, radically different than what the Americans are imposing on us,” said Marine Le Pen. As for France’s decision to suspend the delivery of the first of two Mistral helicopter carrier ships to Russia, it only shows Paris’ obedience of American diplomacy, Marine Le Pen said earlier. This decision (not to deliver Mistral ships) is very serious, firstly because it runs contrary to the interests of the country and shows our obedience of American diplomacy,” Le Pen told France’s RTL radio.

France’s National Front and its leader Marine Le Pen, a party renowned for its anti-immigrant and anti-EU rhetoric, achieved unprecedented results at the latest EU elections, claiming nearly 25 percent of the votes and winning the election. “Our people demand one type of politics: they want politics by the French, for the French, with the French. They don’t want to be led anymore from outside, to submit to laws.” These were the National Front’s slogans that garnered a quarter of French voters earlier this year. President Francois Hollande’s popularity in France has hit a record low – just over 13 percent, according to estimates from the TNS-Sofres pollster, reported Reuters on Thursday. Full of confidence, the National Front leader Marine Le Pen has no doubt she can head the national government today. “I’m ready to be prime minister and implement the policies that the French are waiting for,” she said.“Hollande would be the president for representation and inauguration ceremonies, but that’s it. The government decides the policies and the political path to follow. He would have to submit to it, or he would have to go,” Le Pen told Le Monde.

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Dementia at work.

West Must Arm Ukraine To Fight ‘Invasion’: McCain (CNBC)

U.S. Senator John McCain on Saturday decried the “shameful” refusal of the West to provide Ukraine with intelligence and defensive weapons in its fight against Russian separatists in the east of the country. A cease-fire struck between Ukrainian forces and pro-Russian separatists was largely holding on Saturday, but McCain doubted the calm would last. Russian President Vladimir Putin had already achieved “de facto control over eastern Ukraine,” McCain, an influential member of the U.S. Senate Foreign Relations Committee told CNBC in an interview at the Ambrosetti Forum in Italy. “He calculates from day to day,” McCain said of Putin’s moves, “what is the reaction to the things he does”. He added that he believed Putin’s ultimate goal was to “re-establish the old Russian empire”. “That includes Ukraine, that includes Moldova, that includes the Baltics. And that is his ambition to achieve that goal… And if we don’t show strength, as we did during the Cold War. Then he will take advantage of what he perceives as weakness. And it could lead to very serious crises,” he said.

The lawmaker has traveled to Ukraine repeatedly to voice his support for the country. In December, he addressed pro-EU protestors who wanted former Ukrainian President Yanukovych booted out of office. McCain suggested the only reason the fragile cease-fire would hold was because Ukraine’s military had “no real capability”. “That of course, makes it more difficult for them to force the removal of Russians from eastern Ukraine. And the Russians are there,” the Arizona Republican Senator said. “We need tougher sanctions, we need to give the Ukrainians military equipment, intelligence, we need to set up training program. We need a group of American military advisors over there.” He is also concerned that Europe’s dependence on Russian energy could restrict the bloc’s willingness to act. “I’m afraid that as long as Europeans are dependent on Russian energy, that we’re not going to see vigorous response. We’ve heard a whole lot of talk, and very little action.”

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Word. See Ron Paul.

NATO – An Idea Whose Time Has Gone (Antiwar.com)

In the past dozen years, the armed forces of NATO countries, whether operating under the NATO banner or in related ad-hoc coalitions, have killed many hundreds of thousands of people. Of those hundreds of thousands of people, only a few hundred at most ever had any connection to any attack on a NATO country. Whatever modern NATO has become, a defensive alliance it is not; that fact is beyond rational dispute. It is also the case that the situation in countries where NATO has been most active in killing people, including Iraq, Libya, Afghanistan and Pakistan, has deteriorated. It has deteriorated politically, economically, militarily and socially. The notion that NATO member states could bomb the world into good was only ever believed by crazed and fanatical people like Tony Blair and Jim Murphy of the Henry Jackson Society. It really should not have needed empirical investigation to prove it was wrong, but it has been tried, and has been proved wrong.

The NATO states as a group have also embarked on remarkably similar reductions in the civil liberties of their own populations during this period. NATO to me is symbolized by the fact that its Secretary General, Anders Fogh Rasmussen, as Danish Prime Minister blatantly lied to the Danish parliament about Iraqi Weapons of Mass Destruction. When Major Frank Grevil released material that proved Rasmussen was lying, it was Grevil who was jailed for three years. In the United States, no CIA operative has been prosecuted for their widespread campaign of torture, but John Kiriakou is in jail for revealing it. NATO’s attempt to be global arbiter and enforcer has been disastrous at all levels. Its plan to redeem itself by bombing the Caliphate in Iraq and Syria is a further sign of madness. Except of course that it will guarantee some blowback against Western targets, and that will “justify” further bombings, and yet more profit for the arms manufacturers. On that level, it is very clever and cynical. NATO provides power to the elite and money to the wealthy.

But what of Putin’s Russia, I hear you say? I am no fan of Putin – I think he is a nasty, dangerous little dictator. But little is the operative word. Russia is not a great power. Its GDP is 10% of the GDP of the EU. Its economy is the same size as Italy’s. The capabilities of Russia’s armed forces are massively exaggerated by the security industry, including the security services, and by arms manufacturers. The entire area of Eastern Ukraine which Russia is disputing has a GDP smaller than the city of Dundee. Russia is only any kind of “military threat” because of its nuclear arsenal. The way forward to peace is active international nuclear disarmament – and the existence of NATO is the greatest obstacle to that. The idea that almost the entire developed world needs to encircle and contain Russia with massive military threat, is as sensible as the idea that it needs to encircle the UK or France – both of which have substantially larger and more diversified economies than Russia and much larger and more technologically advanced arms industries.

NATO is by far the largest danger to world peace. It should be dissolved as a matter of urgency.

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More corrupt than Washington or Kiev?

Dozens Of Brazil Politicians Linked To Petrobras Kickback Scandal (BBC)

An ex-director of Brazil’s state-run oil company Petrobras has accused more than 40 politicians of involvement in a kickback scheme over the past decade. Paulo Roberto Costa – who is in jail and being investigated for involvement in the alleged scheme – named a minister, governors and congressmen. They were members of the governing Workers party and two other groups that back President Dilma Rousseff. She is seeking re-election in a poll due on 5 October. Many of the names were published in Veja, one of Brazil’s leading magazines. Several politicians mentioned have denied involvement. Mr Costa claimed that politicians received 3% commissions on the values of contracts signed with Petrobras when he was working there from 2004 to 2012. He alleged that the scheme was used to buy support for the government in congressional votes.

Mr Costa was arrested in 2013. He is now in jail and struck a plea-bargain deal with prosecutors before giving the names. Ahead of the election, Ms Rousseff’s approval ratings have been slipping in opinion polls in favour of her rival, former Environment Minister Marina Silva. The BBC’s Wyre Davies in Rio de Janeiro says the latest allegations could hurt the incumbent further, as during her presidency Petrobras has dramatically underperformed and its costs have risen sharply. It has become one of the world’s most indebted oil companies and lost half of its market value in three years.

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Too early?

Scottish Independence Poll Puts Separatists Ahead at 51% (Bloomberg)

Scotland’s nationalists overtook opponents of independence in an opinion poll for the first time this year, less than two weeks before the country votes on whether to break up the 307-year-old U.K. A YouGov Plc survey for the Sunday Times showed Yes voters increased to 51%, while the No side dropped to 49% when undecided respondents were excluded. The shift to an outright lead for supporters of independence may further roil financial markets after the pound weakened last week when the pro-U.K side’s support narrowed to six percentage points.

The Sept. 18 ballot on Scottish independence is dominating the U.K. after door-to-door campaigning on both sides intensified last week and as traders and investors no longer rule out a dramatic victory for nationalist leader Alex Salmond. “For a positive message to catch up so much in a month is totally unprecedented,” said Matt Qvortrup, a senior researcher at Cranfield University in England and author of “Referendums and Ethnic Conflict.” “This is pretty revolutionary stuff in referendum terms. We’re ringside to history.” The pound may trade lower as markets absorb the poll and start to price in a higher probability of a Yes win, said Sebastien Galy, a senior currency strategist at Societe Generale SA in New York. “The market has been very relaxed regarding this risk and may now take a sharper interest,” he said.

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Too late?!

UK Promises Scots More Powers If They Reject Independence (Reuters)

The British government is scrambling to respond to a lurch in the opinion polls towards a vote for Scottish independence this month by promising a range of new powers for Scotland if it chooses to stay within the United Kingdom. British finance minister George Osborne said on Sunday that plans would be set out in the coming days to give Scotland more autonomy on tax, spending and welfare if Scots vote against independence in a historic referendum on Sept. 18. Osborne’s comments came after a YouGov poll for the Sunday Times showed supporters of independence had taken their first opinion poll lead since the referendum campaign began. With less than two weeks to go before the vote, the poll put the “Yes” to independence campaign on 51 percent and the “No” camp on 49 percent, overturning a 22-point lead for the unionist position in just a month.

“You will see in the next few days a plan of action to give more powers to Scotland … Then Scotland will have the best of both worlds. They will both avoid the risks of separation but have more control over their own destiny, which is where I think many Scots want to be,” Osborne told the BBC. “More tax-raising powers, much greater fiscal autonomy … more control over public expenditure, more control over welfare rates and a host of other changes,” he said, adding that the measures were being agreed by all three major parties in the British parliament. Osborne said the changes would be put into effect the moment there was a ‘no’ vote in the referendum. Nicola Sturgeon, deputy leader of the pro-independence Scottish National Party, welcomed the poll as a “very significant moment” in the campaign and rejected the talk of more devolved powers for Scotland. “I don’t think people are going to take this seriously. If the other parties had been serious about more powers, then something concrete would have been put forward before now,” she told Sky news.

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Get out!

The West Without Water (Tavares)

Dr. B. Lynn Ingram is a professor in the Department of Earth and Planetary Science at UC Berkeley, California. The primary goal of her research is to assess how climates and environments have changed over the past several thousand years based on the geochemical and sedimentologic analysis of aquatic sediments and archaeological deposits, with a particular focus on the US West. She is the co-author of “The West without Water: What Past Floods, Droughts, and Other Climatic Clues Tell Us about Tomorrow” together with Dr. Frances Malamud-Roam, which received great reviews. In this interview, Dr. Ingram shares her thoughts on the current drought in the US Southwest within the larger climate record and potential implications for the future.

E. Tavares: Thank you for sharing your thoughts with us today. Your research focuses on long-range geoclimatic trends using a broad sample of historical records. In this sense, “The West without Water”, which we vividly recommend reading, provides a very grounded perspective on the weather outlook for the US Southwest going forward. So let’s start there. What prompted you to write this book?

L. Ingram: My co-author and I decided to write this book because our findings, and those of our colleagues, were all showing that over the past several thousand years, California and the West have experienced extremes in climate that we have not seen in modern history – the past 150 years or so. Floods and droughts far more catastrophic than we can even imagine. We felt it was important to bring these findings to the attention of the broader public, as these events tend to repeat themselves. So we need to prepare, just as we prepare for large earthquakes in California.

ET: When you say “West”, which regions are you referring to?

LI: In the book we focus on the climate history of California and the Southwest, but also bring in examples and comparisons with other western states as appropriate (such as Oregon and Washington, Nevada, Utah, etc.), as the entire region experiences similar storms and is controlled by similar climate that originates in the Pacific Ocean.

ET: What type of evidence have you used in reaching your conclusions? How accurate are these records?

LI: In the book we bring together many lines of evidence, ranging from tree-ring records to sediment cored from beneath lakes, estuaries, and the ocean. Paleoclimatologists – those that study past climate change using geologic evidence – study various aspects of these cores, including the fossils in them, the chemistry of the fossils and the sediments, and pollen and charcoal remains. The charcoal provides evidence about past wildfires. The archaeological record also contains important clues about past climate and environments and how they impacted human populations.

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Retirees Turn To Farming As Encore Career (Chris Farrell)

A critical confusion at the core of the “unretirement,” work longer, encore career movement — pick your favorite euphemism — is choice versus necessity. Is the encore trend little more than marketing talk masking the ugly reality that most aging boomers can’t afford to retire and need to eke out a living well past 60? Or is the rethinking of life’s last stage a welcome shift in expectations, built on embracing engagement, meaning, giving back and, yes, earning an income? Truth is, for most boomers, the exploration is a mix of the desire for meaningful work and the need to pocket a paycheck. One of the oldest occupations (not that one) nicely shows the dialectical tension and illustrates an optimistic cocktail of motives behind the Unretirement movement: Farming.

Not having enough of a cushion for retirement is a daunting fear but there are strategies to help eke out some more dollars when it counts. If you know any farmers, you know that, for them, retirement is an elusive concept. Nearly 29% of the nation’s farmers (principal operators) are 55 to 64; a third are 65 and older. But there’s another reason for the high average age of farmers: The retire-to-farm movement (or, as my editor quipped, digging in for retirement). It’s an eclectic group that includes part-time farmers; second-career farmers; semiretired farmers; hobby farmers with a few acres; encore-career farmers with several hundred acres; immigrants carving out a new life for themselves and their families and others. Many retire-to-farm migrants rely on savings and pensions earned in a different occupation, although not all.

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Aug 292014
 
 August 29, 2014  Posted by at 4:37 pm Finance Tagged with: , , ,  


Esther Bubley Greyhound bus driver off duty, Columbus, Ohio Sep 1943

Given recent developments in Ukraine, and the accompanying PR, spin and accusations, the whole by now familiar shebang, I’m sure you would expect me to address the Kiyv vs Moscow vs the land of the brave issue today. Unfortunately, there are more important issues to talk about today.

Suffice it for me to say that the west is losing, and can therefore be expected to grab onto ever more desperate handles as we progress. Nothing new here: nothing proven, but plenty insinuated. We really should stop relying on our own news channels, for Ukraine, and for the economy, but those of you who’ve visited the Automatic Earth before, know that. And know why.

One prediction as per Ukraine: Angela Merkel will make sure Ukraine won’t be a member of NATO. Or she’s going to regret it something awful. My bet is she’s too smart to let things meander that far and too long.

What I do think should stand out from all of what we’ve seen recently is that there’s not a single news source in the Anglo Saxon world, or in what I read in the German, French and Dutch press, that’s even remotely trustworthy. And that’s still, no matter how long this has been going on, a pretty scary conclusion to draw.

The more important issues of the day for us are those that bubble under the surface. And maybe that’s not a coincidence. Maybe, just maybe, the whole warmongering thing serves to take your eyes of the failing economies in Europe and the US. And Japan.

I’m sure many people wonder why the Fed would cut QE and raise interest rates at the very moment Tokyo and Brussels are either preparing to or thinking about launch(ing) more stimulus, not less. You might think that US unemployment numbers, and GDP data, are behind the decisions, but then those are merely fabrications dutifully repeated by the news/politics system.

The US economy is in just as poor a shape as all other formerly rich economies are. And raising rates now risks blowing up very large segments of the global economy. Such as emerging economies, western mortgage holders, and all the millions in Europe and the US who’ve had to switch from well-paid jobs to a burger flipping standard of living. They may make stats look sort of OK (Mary’s got a job!), but both the people and the stats will topple over en masse when interest rates rise.

Why then should Janet Yellen raise those rates regardless? It’s very simple, and I don’t see why or how everybody has missed out on this, and how the vast majority still are.

Because anything and everything the Fed has done since Wall Street caused the crisis, and well before (ask Alan Greenspan), has been about protecting Wall Street. And protecting Wall Street, or rather enhancing Wall Street’s profits, is exactly why Janet Yellen is about to raise US interest rates.

Not that I think it’s necessarily a bad move, ultra low rates have been a scourge on our economies for far too long – and they have been around only because Wall Street could profit from them -, but because the act of raising them is once more being executed solely to benefit the TBTF banks. Certainly not to benefit the American people, millions more of whom will be forced out of their homes when the Fed funds rate moves to 3% or 4%, or bend over backwards just to stay put.

Don’t count on Yellen, or the rest of the Fed crew, to take that into account, though. That’s not what they do. That’s not their MO. They’re not there for you. The whole storyline about the central bank looking out for the American people, for full employment and price stability, is just that: a storyline. No different from the one about how America is busy saving Kiev from Putin: a convenient storyboard that lures in enough people to stand on its own.

Reality resides in for instance this Philip Van Doorn article for MarketWatch:

Big US Banks Prepare To Make Even More Money

An expected rise in interest rates over the next year will help the largest U.S. banks earn billions of dollars in additional net interest income, setting up their cheap stocks for what could be a stellar run. [..]

The Federal Reserve has kept the short-term federal funds rate locked in a range of zero to 0.25% since late 2008, in an effort to increase loan demand and jump-start the economy. This policy and the “QE3” bond purchases that will end this year seem to have worked, with the U.S. economy expanding at a 4% annual rate during the second quarter and continuing to add over 200,000 jobs a month. But the debate at the Federal Reserve has now shifted to the timing of interest rate increases. Most economists expect the federal funds rate to begin climbing in the second half of 2015, but it could well happen sooner than that.

For most banks, the extended period of low interest rates has become quite a drag on earnings.

Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago, while their assets continue to reprice downward.

A 1% rise (from zero) in interest rates will grow BoA profits by 8.4%. That’s all you need to know, right there. What else do you need? How about a 3% rise? Low rates have brought down bank earnings for a couple years, and they’ve all bled that cashcow dry by now. The next big thing for Wall Street will by higher rates. Which they can pass on to you, Joe and Jill Main Street. Make sure you have your checkbooks ready.

When rates are low, banks can borrow on the cheap. But they can’t charge you high rates either. They’ve now borrowed all they want, and can, at zero percent (there’s a limit to profits even there). And the banks want to move to 3-4-5+%, so they can squeeze their customers for the difference.

The Fed is only too happy to comply. And it will use the argument of an improving US economy to do so. Because (some of) the – handpicked – stats say there’s improvement. Yellen is still dutifully hesitating, because they all know there really is no great US economy that would justify a rate hike, but all the pieces are in place.

And that’s why US interest rates will go up. And create chaos in global markets. And push millions of Americans and Europeans into servitude. It’s because the banks want it. Because they stand to profit greatly from the ensuing mayhem.

Eurozone Inflation Hits 5-Year-Low of 0.3% (CNBC)

Eurozone inflation continued to fall in August, boosting expectations that the ECB will try bolster the region’s economy by announcing further stimulus measures – perhaps as early as next week. Consumer prices rose by just 0.3% year-on-year in August, according to official figures released by Eurostat Friday, meeting expectations but marking a fresh five-year low. This is down from 0.4% in July, and is significantly below the central bank’s target of just below 2%. Separate data revealed that the rate of unemployment in the eurozone remained stubbornly high in July, at 11.5%, unchanged from June. The inflation data come at a key time for the ECB, just days ahead of its next policy meeting on Thursday. ECB President Mario Draghi hinted at further stimulus measures in a speech in Jackson Hole last week, as economic data for the euro zone continue to surprise on the downside. The closely-watched composite Purchasing Managers’ Index – which measures business activity in the euro zone – slipped in August, coming in below forecasts.

In addition, official figures revealed that economic growth in the region was stagnant in the second quarter, with GDP flat, below analysts’ expectations. Concerns about the region’s economic strength led the ECB unveil a host of measures at its June meeting designed to give the euro zone’s recovery a boost. Now, a growing number of economists expect the ECB to announce further easing on Thursday, with some arguing that a bond-buying – QE – program will be announced in the coming months. Riccardo Barbieri, chief European economist at Mizuho International, said August’s inflation print “isn’t a game changer” because the ECB will have expected this figure. “I don’t think it puts them under huge pressure to announce something stunning immediately, but they’re obviously under pressure to do more,” he told CNBC after the data were released. “Ultimately, they have to move to QE, and this may well happen before the end of the year.” He added that he expects the central bank to announce a program to buy asset-backed securities on Thursday.

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Germnay says no QE.

Schaeuble Sees Draghi’s Instruments for Growth Exhausted (Bloomberg)

The European Central Bank has run out of ways to help the euro area, putting the burden on governments to spur growth without running excessive deficits, German Finance Minister Wolfgang Schaeuble said. In an interview with Bloomberg Television at the Medef business leaders’ conference near Paris, Schaeuble said he agrees “100%” with ECB President Mario Draghi’s appeals for governments in the 18-country currency union to complement monetary policy with “structural reforms” to boost competitiveness and overcome the legacy of Europe’s debt crisis. “Monetary policy can only buy time,” Schaeuble said in the interview yesterday. “Liquidity in markets is not too low, it’s even too high. Therefore I think monetary policy has come to the end of its instruments and therefore what we urgently need is investments, regaining confidence by investors, by markets, by consumers.”

Schaeuble’s comments reflect the mainstream view in Chancellor Angela Merkel’s coalition and Europe’s biggest economy as policy makers debate how to boost growth and Draghi signals the euro area may need more monetary stimulus. French Prime Minister Manuel Valls urged the ECB on Aug. 27 to use all means at its disposal to lift inflation to its target level. Euro-area economic confidence fell more than forecast, Spanish consumer prices dropped the most in five years and German unemployment unexpectedly rose yesterday, giving Draghi possible arguments to deliver quantitative easing. “I don’t think ECB monetary policy has the instruments to fight deflation, to be quite frank,” Schaeuble said. Domestic demand is driving German growth “because we have high confidence of consumers, investors.”

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I just love that line.

Wall Street Has Become A Self-Licking Ice Cream Cone (WolfStreet)

With all this enthusiasm for stocks, you’d think there’d be some volume, some serious buying, to back it up. But yesterday, the day when the S&P 500 snuggled up to 2000, it was the lightest non-holiday volume day since, gosh – someone did the math – October 2006. I asked a Street technician about the low volume advance and the pattern in recent years for the market to rise on low volume and fall on high volume. The first rule I learned about this biz in 1978 was VID: volume indicates direction. But no longer. High volume has become a “contrarian indicator,” the street technician explained. It’s a “sign of stress or a crisis.” It’s the New Normal, one of many anomalies. But we have remarkably little interest in analysis to learn why this is so. Something has changed, but we don’t yet see what or how. Low volume has another name: lack of liquidity. When a few buyers emerge, stocks rise because there aren’t many sellers.

That’s what lack of liquidity does on the way up. But when investors click the sell-button one too many times, there might be a shortage of buyers. Selling into an illiquid market is something even the Fed is fretting about. And it’s not like the world is swimming in peace dividends, or anything. Wars, civil wars, and potential wars are brewing around the world. China’s economy, which is desperately dependent on housing and infrastructure construction, is facing local mini-rebellions, as the prices of unsold homes get whacked by 25% or more, thus wiping out the investment of those hapless souls who’d bought a few days or weeks earlier. The sector is taking down steelmakers and other industries. The Eurozone seems to be reentering a recession. The second quarter in Germany was terrible, Italy’s entire “recovery” was a sham, and other Eurozone countries are teetering as well.

In the US, construction and sales of new homes, a big contributor to GDP, are getting bogged down in prices that have moved out of reach. Automakers have to resort to heavy discounting to bring down their inventories and move the iron, and it’s cutting into transaction prices and revenues. Big tech companies, the high-growth darlings of yesteryear, are laying off tens of thousands of people…. Economists would have plenty to talk about, but no one wants to hear it. The fundamentals – whatever they may be – no longer matter. The Fed has surgically removed them from the markets, and thus from consideration. What everyone wants to hear is the reassurance that stocks will continue to soar, regardless. And without interruption.

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Japan keeps on sinking, and will for a long time.

Abegeddon: Japan Spending Plunges, Unemployment At 9-Month High (Zero Hedge)

Just when you thought it couldn’t get any worse… In a veritable deluge of data from Japan tonight, there is – simply put – no silver lining. First, Japan’s jobless rate unexpectedly jumped to 3.8% – its highest since Nov 2013 (despite the highest job-to-applicant ratio in 22 years). Then, household spending re-collapsed 5.9% for the 4th month in a row (showingh no sign of post-tax-hike-recovery). Industrial Production was up next and dramatically missed expectations with a mere 0.2% rebound after last month’s plunge (-0.9% YoY – worst in 13 months), quickly followed by a 0.5% drop in Japanes retail trade MoM (missing hope for a 0.3% gain). That’s good news, right? Means moar QQE, right? Wrong! Japanese CPI came hot at 3.4% YoY with energy costs and electronic goods ‘hyperinflating’ at 8.8% and 9.1% respectively. As Goldman’s chief Japan economist warns, “the BOJ doesn’t have another bazooka,” adding that “The window for reform may already have been half closed.” We’re gonna need another arrow, Abe!

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Boomers have all refinanced when the going was good.

Boomer Wealth Depressed by Mortgages Poses US Spending Risk (Bloomberg)

Mortgage-burning parties in the U.S. may be going the way of home milk deliveries and polyester leisure suits. A growing number of homeowners are reaching retirement age still owing money on their houses. The share of Americans 65 and older with mortgage debt rose to 30% in 2011 from 22% in 2001, according to a May analysis by the Consumer Financial Protection Bureau based on the latest available figures. Loan balances also increased, with the median amount owed climbing to $79,000 from $43,400 after adjusting for inflation, the data showed. “There were old-fashioned beliefs probably 30 years ago” that included “you should pay off your house before you retire,” said Olivia Mitchell, executive director of the Pension Research Council at the University of Pennsylvania’s Wharton School in Philadelphia. “This is no longer the case.”

The increase in mortgage debt may influence labor-force dynamics as some older Americans find they’re unable to completely retire, needing extra cash to keep up monthly payments. It also diminishes home equity and wealth, making these households more susceptible to swings in the economy and curbing spending on things such as vacations and visits to grandchildren. “When they are hit with a financial downturn or an unexpected cost, they often are in a position where they don’t have the ability to recoup whatever losses they may have suffered,” said Stacy Canan, the deputy assistant director of the CFPB’s Office for Older Americans in Washington. Because a larger portion of income has to go to paying a mortgage, “there has to really be a dialing back of almost all other expenses.”

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Until you hear a big bang.

Bond Yields: Even Lower for Even Longer (WSJ)

It has been a one-way street in global bond markets this year: Yields just keep on falling. There seems to be little in the cards to reverse this trend. But investors should still think carefully before embracing it. German 10-year yields stand at just 0.88% and have fallen more than a%age point this year; two-year yields are negative. That is at least understandable: Euro-zone growth and inflation are at worryingly low levels. But elsewhere, falling yields are questioning some of the market’s basic assumptions about the relationship between economic data and bond prices. In the U.S., where second-quarter growth ran at a 4.2% annualized pace and the Federal Reserve has steadily cut back its bond purchases, the 10-year Treasury yield has fallen to 2.32%, down about 0.7%age point this year. And in the U.K., where growth has boomed and two of the Bank of England’s monetary-policy makers have started voting for an increase, 10-year gilts yield 2.36%, down from just over 3%.

There are several factors at work. Investors might normally expect the vast and liquid U.S. Treasury market to set the tone for global yields. But Europe appears to be in the driver’s seat for two reasons. The first is speculation that the European Central Bank will be forced into adopting quantitative easing, providing a further flood of liquidity. The second is that investors appear focused on relative rather than absolute value. Thus a decline in German yields makes U.S. bonds look cheap; U.S. yields get dragged lower. This could go further: Royal Bank of Scotland thinks 10-year German bund yields could hit 0.65%. Meanwhile, geopolitical risk is running high. The Middle East is in turmoil. The crisis in Ukraine has deepened rather than receded. That leads to both a flight into haven bonds as well as concerns about spillover effects on Europe in the case of Ukraine.

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But Kiev just wants to fight.

Russia Urges Ukraine To Store More Gas For Winter, Offers Discount (Reuters)

Russia’s energy minister Alexander Novak said on Friday that Ukraine should pump as much as 10 billion cubic metres into its gas storage facilities or else it faces shortages. He said this should be done by Oct.15 when the winter season starts, and that Ukraine has stockpiled up to 16 bcm of gas already. Novak also said that Moscow is ready to apply retroactively a $100 discount per 1,000 cubic metres of Russian gas to Ukraine.

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Russia To Restart Gas Supplies, If Ukraine Repays $2 Billion Debt (FG)

Russia is ready to resume natural gas supplies to Ukraine, if Kiev repays its $2 billion debt, Russian Energy Minister Alexander Novak said on Friday. Novak made this statement after talks with EU Energy Commissioner Guenther Oettinger who had arrived in Moscow on Friday to try to find a solution to the Russia-Ukraine gas price dispute. The Russian energy minister said this figure included Ukraine’s $1.4 billion debt for Russian natural gas deliveries to the ex-Soviet republic in 2013 and partial repayment of the gas debt accumulated from April. The Russian energy minister also said Russia was prepared to offer Ukraine a gas price discount of $100 per 1,000 cubic meters, which would not breach the country’s contractual obligations and would not contradict Russia’s position in an international arbitration tribunal as this offer was not a corporate discount. “We are prepared to offer this discount not only for the winter period but even for a year or for a year and a half,” Novak said.

Russia raised the gas price for Ukraine from $268.5 to $485.5 per 1,000 cubic meters from April 2014. Ukraine has said it will not pay for Russian natural gas supplies at such a high price. After Russia and Ukraine failed to reach a compromise on the gas issue, Naftogaz and Gazprom filed mutual claims to the Stockholm Arbitration Tribunal. The gas price for Ukraine has increased, in particular, by $100 per 1,000 cubic meters since April 1, 2014 after Russia denounced the 2010 Kharkov accords on extending the lease of the Russian Black Sea Fleet’s base in Crimea in exchange for a gas price discount. The accords were denounced after the Black Sea peninsula joined Russia in the spring of 2014. Russia also offered Kiev the second discount as part of an anti-crisis aid package for Ukraine in November 2013 but scrapped it from April 1, 2014 over Ukraine’s failure to repay its debts for Russian natural gas supplies.

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Crucial: Merkel get what Merkal wants.

From Minsk To Wales, Germany Is The Key (Pepe Escobar)

The road to the Minsk summit this past Tuesday began to be paved when German Chancellor Angela Merkel talked to ARD public TV after her brief visit to Kiev on Saturday. Merkel emphasized, “A solution must be found to the Ukraine crisis that does not hurt Russia.” She added that “There must be dialogue. There can only be a political solution. There won’t be a military solution to this conflict.” Merkel talked about “decentralization” of Ukraine, a definitive deal on gas prices, Ukraine-Russia trade, and even hinted Ukraine is free to join the Russia-promoted Eurasian Union (the EU would never make a “huge conflict” out of it). Exit sanctions; enter sound proposals. She could not have been more explicit; “We [Germany] want to have good trade relations with Russia as well. We want reasonable relations with Russia. We are depending on one another and there are so many other conflicts in the world where we should work together, so I hope we can make progress”.

The short translation for all this is there won’t be a Nulandistan (after neo-con Victoria ‘F**k the EU’ Nuland), remote-controlled by Washington, and fully financed by the EU. In the real world, what Germany says, the EU follows. Geopolitically, this also means a huge setback for Washington’s obsessive containment and encirclement of Russia, proceeding in parallel to the ‘pivot to Asia’ (containment and encirclement of China). Ukraine’s economy – now under disaster capitalism intervention – is… well, a disaster. It’s way beyond recession, now in deep depression. Any forthcoming IMF funds serve to pay outstanding bills and feed the (losing) creaking military machine; Kiev is fighting no less than Ukraine’s industrial heartland. Not to mention that the conditions attached to the IMF’s ‘structural adjustment’ are bleeding Ukrainians dry.

Taxes – and budget cuts – are up. The currency, the hryvnya, has plunged 40% since early 2014. The banking system is a joke. The notion that the EU will pay Ukraine’s humongous bills is a myth. Germany (which runs the EU) wants a deal. Fast. The reason is very simple. Germany is growing only 1.5% in 2014. Why? Because the Washington-propelled sanction hysteria is hurting German business. Merkel finally got the message. Or at least seems to have. The first stage towards a lasting deal is energy. This Friday, there’s a key meeting between Russian and EU energy officials in Moscow. And then, later next week, it will be Russian, EU and Ukrainian officials. The EU’s energy commissioner, Gunther Oettinger, who was in Minsk, wants an interim deal to make sure Russian gas flows through Ukraine to Europe in winter. General Winter, once again, wins any war. Here, essentially, we have the EU – not Russia – telling Ukrainian President Petro Poroshenko to stuff his (losing) ‘strategy’ of slow-motion ethnic cleansing of eastern Ukraine.

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Orlov does the explaining for me.

Propaganda And The Lack Thereof (Dmitry Orlov)

With regard to the goings-on in Ukraine, I have heard quite a few European and American voices piping in, saying that, yes, Washington and Kiev are fabricating an entirely fictional version of events for propaganda purposes, but then so are the Russians. They appear to assume that if their corporate media is infested with mendacious, incompetent buffoons who are only too happy to repeat the party line, then the Russians must be same or worse. The reality is quite different. While there is a virtual news blackout with regard to Ukraine in the West, with little being shown beyond pictures of talking heads in Washington and Kiev, the media coverage in Russia is relentless, with daily bulletins describing troop movements, up-to-date maps of the conflict zones, and lots of eye-witness testimony, commentary and analysis.

There is also a lively rumor mill on Russian and international social networks, which I tend to disregard because it’s mostly just that: rumor. In this environment, those who would attempt to fabricate a fictional narrative, as the officials in Washington and Kiev attempt to do, do not survive very long. There is a great deal to say on the subject, but here I want to limit myself to rectifying some really, really basic misconceptions that Washington has attempted to impose on you via its various corporate media mouthpieces.

1. They would like you to think that there is a Russian invasion in the East of Ukraine. What’s actually happening is a civil war between the government of Western Ukraine (which no longer rules the east in any definable way) and the Russian population of Eastern Ukraine. Ukraine has been falling apart for decades—ever since independence. The eventual break-up was inevitable, but the catalyst for it was the military overthrow of Ukraine’s legitimate government and its replacement with cadres hand-picked in Washington.

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Kiev Protesters Demand Ouster Of Ukrainian President, Officials (RT)

Hundreds of people have gathered in front of the Ukrainian Defense Ministry in Kiev, demanding resignation of President Petro Poroshenko and the defense minister over the poor handling of the military operation in the southeast. The demonstrators, many of whom were mothers and wives of the soldiers involved in the fighting in the Donetsk and Lugansk Regions, have blocked traffic at one of the capital’s arterial roads, the Vozdukhoflotsky Boulevard. They called on the army to urgently send reinforcements, including tanks and other heavy military vehicles, to the city of Ilovaysk in the Donetsk Region. This strategic town was retaken by the self-defense forces after several days of fighting on Wednesday, which led to the encirclement of a large group of Kiev’s troops. The protesters also insisted on the resignation of defense minister Valery Geletey and all other top commanders of Kiev’s so-called “anti-terrorist operation” in southeast Ukraine.

After several hours outside the Defense Ministry, the demonstrators moved toward the presidential administration building. The protesters said that they would remain on the streets until their demands were met by the authorities. Several hours later, the traffic on the Ukrainian capital’s main street, Khreshchatyk, was also paralyzed by demonstrators chanting: “Kiev, rise up!” According to the Itar-Tass news agency, they urged all Kiev residents to join their protest, including recently elected mayor and former boxing world champion Vitaly Klitschko. The demands at Khreshchatyk were similar – to impeach President Poroshenko and calling for the resignation of the country’s top military officials.

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OSCE: ‘No Russian troops in Ukraine’ (RT)

The OSCE was told there was no Russian presence spotted across the Ukraine border, refuting Thursday’s claims that a full-scale invasion was underway. Both the Ukrainian monitoring team head and Russia’s representative have given a firm ‘no.’ The chorus of allegations about Russia’s military invasion of Ukraine had President Poroshenko calling for an emergency meeting of the country’s security and defense council, while Prime Minister Yatsenyuk on Thursday called for a Russian asset freeze. No actual evidence has been given either by either foreign governments or the media, apart from claims that photographs exist that someone had “seen.”

“I have made a decision to cancel my working visit to the Republic of Turkey due to sharp aggravation of the situation in Donetsk region, particularly in Amvrosiivka and Starobeshevo, as Russian troops were brought into Ukraine,” Petro Poroshenko said in a statement on his website. The Russian representative to the OSCE Andrey Kelin, meanwhile, has given a firm response to the allegations, saying that “we have said that no Russian involvement has been spotted, there are no soldiers or equipment present. “Accusations relating to convoys of armored personnel carriers have been heard during the past week and the week before that,” he said. “All of them were proven false back then, and are being proven false again now.”

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Putin Urges Ukraine Militants to open Humanitarian Corridor (IANS)

Russian President Vladimir Putin Friday urged militants in southeastern Ukraine to open a humanitarian corridor for Ukrainian soldiers to allow them to get out of the combat areas. “I am calling on forces to open a humanitarian corridor for Ukrainian soldiers in order to avoid senseless casualties, enable them to get out of the combat areas, reunite with their families and to provide urgent medical aid,” the presidential address released by the Kremlin press service said. The militants have succeeded in cutting short Kiev’s military operation, “which has already resulted in tremendous casualties among civilians”, Putin said.

“Russia is ready and will continue to provide humanitarian aid for the Ukrainian people suffering from a humanitarian disaster,” he added. He urged the Kiev authorities “to immediately abandon combat actions, cease fire, and sit down at the negotiating table together with representatives of Ukraine’s eastern regions in order to settle, exclusively in a peaceful way, all the problems that have piled up.” The conflict between government troops and pro-Russian militants has killed more than 2,000 people in eastern and southeastern Ukraine, with thousands of others displaced.

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Separatists Say Will Allow ‘Trapped’ Ukrainian Forces To Withdraw (Reuters)

Pro-Moscow rebels fighting in Ukraine said on Friday they would comply with a request from the Kremlin and open up a ‘humanitarian corridor’ to allow the withdrawal of Ukrainian troops they have encircled. It was not clear how the government in Kiev would react to the offer, suggested first by Russian President Vladimir Putin, but the first word from the Ukrainian military was negative. It said in a statement that Putin’s call showed only that “these people (the separatists) are led and controlled directly from the Kremlin”. Kiev has accused Russian troops of illegally entering eastern Ukraine and, backed by its U.S. and European allies, has said it will fight to defend its soil. Russia stands accused of pushing troops and weapons into the former Soviet republic to shore up a separatist rebellion that a week ago appeared to be on its last legs. That development has sharply escalated the five-month conflict over eastern Ukraine.

In his late-night statement, released by the Kremlin, Putin adopted a softer tone, though without acknowledging that Russia’s military is involved in the conflict. “It is clear that the rebellion has achieved some serious successes in stopping the armed operation by Kiev,” Putin was quoted as saying in the statement. “I call on the militia forces to open a humanitarian corridor for encircled Ukraine servicemen in order to avoid pointless victims, to allow them to leave the fighting area without impediment, join their families … to provide urgent medical aid to those wounded as a result of the military operation.” Hours later, Alexander Zakharchenko, leader of the main rebel entity in eastern Ukraine, told a Russian television station his forces were ready to let the encircled Ukrainian troops pull out. He said though they would have to leave behind their heavy armoured vehicles and ammunition.

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Let’s see it.

Russia Urges US To Explain Advisors, Mercenaries In Ukraine (RT)

A statement calling for a ceasefire in eastern Ukraine was blocked at the UN Security Council under a completely frivolous pretext, Russia’s envoy to the UN Vitaly Churkin said, after a heated debate with Kiev again accusing Russia of full-scale invasion. “The Russian delegation’s proposal on declaration of a ceasefire was blocked under a frivolous pretext,” Churkin said after the emergency session of the UNSC meeting, Itar-Tass quotes. “The Security Council as a result of destructive efforts of a number of its members was unable to play its role in resolving the Ukrainian crisis.” During the meeting, the UN Security Council’s permanent representative of Lithuania Raymond Murmokayte stated that the draft document prepared by Russia does not highlight “some serious issues,” namely that anti-Kiev forces “hamper the provision of humanitarian aid on the part of Ukraine’s government.”

The Russian proposed text to the UN Security Council all expressed serious concerns about the deteriorating situation in south-eastern Ukraine, and called for “immediate and unconditional ceasefire” as well as the beginning of a dialogue “based on the Geneva Declaration of 17 April 2014 and the Joint Berlin Declaration of July 2, 2014.” The text also noted the need to “multiply efforts to provide humanitarian assistance to the population of the Donetsk and Lugansk regions of Ukraine.” While Kiev continues to blame Russia for violating its sovereignty and escalating violence in the south east of the country, Churkin during the emergency session insisted that the current escalation is a “direct consequence of a wreckers policy of Kiev which is conducting a war against its own people.”

US Permanent Representative to the United Nations Samantha Power also attacked Russia accusing it of repeated lies and insisting that it is a fact that Russia has moved troops, tanks and other armored vehicles into Ukraine. “One of the separatist leaders that Russia has armed and backed said openly that three or four thousand Russian soldiers have joined their cause. He was quick to clarify that these soldiers were on vacation. But a Russian soldier who chooses to fight in Ukraine on his summer break is still a Russian soldier. And the armored Russian military vehicle he drives there is not his personal car,” Power said, presenting her own case the Security Council members. The leader of Donetsk People’s Republic, indeed said that Russians are fighting along the people of Donbas – but they are all volunteers with a “heightened feeling of sorrow and human misfortune” who prefer spending their holidays among their brothers fighting for a good cause.”

Vitaly Churkin fired back at Power saying that nobody ever tried to hide the presence of Russian volunteers, urging Washington instead to explain what dozens of US advisers are doing in Kiev or tell how many mercenaries from private military companies are waging war in Ukraine. Russia’s permanent representative also called on Washington to “curb their geopolitical ambitions” and stop interfering in the affairs of sovereign states. “Then not only Russia’s neighbors, but also many other countries around the world will breathe a sigh of relief,” he said. Russia also demanded an end to “speculations around the Malaysian downed aircraft,” the investigation of which was also brought up during the emergency session that became the 24th meeting of the UN Security Council over Ukrainian crisis.

“So far, only Russia transparently and significantly contributed to the investigation of this tragedy. From the other side we hear only half-hints and no information,” said the diplomat, as Churkin once again urged Kiev to publish the recording of Ukrainian air traffic controllers that guided MH17 flight that went down in July. The Russian envoy stressed that Ukrainian authorities pushing forward with their military solution to the crisis under the support and the influence of a number of “well-known states.” “With support from and under the influence of a number of well-known states the Kiev authorities have torpedoed all political agreements on settling the crisis in Ukraine,” including the Geneva statement of April 17 and the Berlin declaration of July 2, Churkin said.

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Lavrov: No Proof Given For Allegations About Russian Troops In Ukraine (RT)

Russia’s only reaction to NATO accusations of interfering militarily in Ukraine will be a consistent position of putting an end to bloodshed and establish dialogue between warring parties in Ukraine, Russia’s FM said. No facts about Russian military being present on the territory of Ukraine have ever been presented, Sergey Lavrov pointed out, while speculation on the issue has been voiced repeatedly, he stressed. “It’s not the first time we’ve heard wild guesses, though facts have never been presented so far,” Lavrov said at a press conference in Moscow. “There have been reports about satellite imagery exposing Russian troop movements. They turned out to be images from videogames. The latest accusations happen to be much the same quality,” he said.

“We’ll react by remaining persistent in our policies to stay bloodshed and give a start to the nationwide dialogue and negotiations about the future of Ukraine, with participation of all Ukrainian regions and political forces, something that was agreed upon in Geneva back in April and in Berlin [in August], yet what is being so deliberately evaded by our Western partners now,” Lavrov said. Sergey Lavrov pointed out that the only means to decrease the number of casualties among the civilian population in Donetsk and Lugansk Regions is by self-defense militia pushing Ukrainian troops and National Guards out.

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Sure, but in the 21st century?

The Multi-Billion-Dollar Fall Of The House Of Espirito Santo (Reuters)

On June 9, with his 150-year-old Portuguese corporate dynasty close to collapse, patriarch Ricardo Espirito Santo Salgado made a desperate attempt to save it. Salgado signed two letters to Venezuela’s state oil company, which had bought $365 million in bonds from his family’s holding company. The holding company was in financial trouble. But the letters, according to copies seen by Reuters, assured the Venezuelans that their investment was safe. The “cartas-conforto” – letters of comfort – were written on the letterhead of Banco Espirito Santo, a large lender controlled by the family. They were co-signed by Salgado, who was both the bank’s chief executive and head of the family holding company. “Banco Espirito Santo guarantees … it will provide the necessary funds to allow reimbursement at maturity,” said the letters. There were problems, though: By promising that the bank stood behind the holding company’s debt, the letters ignored a directive from Portugal’s central bank that Salgado stop mixing the lender’s affairs with the family business.

The guarantees were also not recorded in the bank’s accounts at the time, which is required by Portuguese law. The following week, after intense pressure from regulators, Salgado resigned. Within a month, the holding company, Espirito Santo International, filed for bankruptcy, crumbling under €6.4 billion ($8.4 billion) in debt. In August, Banco Espirito Santo was rescued by the Portuguese state, after reporting €3.6 billion in losses. The two letters, whose existence was made public last month but whose details are revealed here for the first time, are a key part of an investigation into the spectacular fall of one of Europe’s most prominent family businesses. Portuguese regulators and prosecutors are examining them along with the bank’s accounts and other evidence to determine whether there was unlawful activity behind the fall of the Espirito Santo empire. So far, shareholders and investors in the family companies and Banco Espirito Santo have lost more than €10 billion, making this one of Europe’s biggest corporate collapses ever.

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My main man Rubino.

A World Without Fractional Reserve Banks and Central Planning (John Rubino)

Excerpted From The Money Bubble: What To Do Before It Pops by James Turk and John Rubino:

In a very real sense, it is fractional reserve banking and not money itself that is the root of so many of today’s evils. Whenever fractional reserves are permitted, the banking system – including the one that exists today throughout the world – comes to resemble a classic Ponzi scheme which can only function as long as most people don’t try to get at their money. Now, is this critique of the current monetary system just impotent ideological whining over something that, like the weather, can’t be changed? Or could fractional reserve banking and the resulting need for economic central planning actually be replaced by something better? Specifically, how could a banking system without fractional reserve lending accommodate depositors’ demand that their money be there when they want it and borrowers’ desire for 30-year mortgages which would tie up those deposits for decades? And could this market operate without the need for government oversight and management?

The answer to that last question is yes. A better financial system is possible, and here’s how it would work: First, today’s commercial banks would split into two types. “Banks of commerce” would take deposits and keep them safe for a fee, like the goldsmiths of old. “Banks of credit” would pay interest on deposits and lend out depositor money, but would have to match the duration of deposits with the duration of loans. Deposits that can be withdrawn anytime (a checking account for instance) could only be used to fund a loan which the bank can “call” on demand, while longer-term deposits (say a 5-year CD) would be matched to longer-term loans like a business term loan or 5-year mortgage. Really long-term loans like 30-year mortgages would be funded with deposits for which the bank would have to pay up in order to convince a depositor to part with his or her money for such a long time.

The resulting mortgage would carry a high enough rate to provide the bank with a small profit, which would make 30-year mortgages both expensive and hard to get. But the case can be made that they should be hard to get. Buying a house – or anything else that requires capital for extremely long periods – should require a hefty down payment, other liquid assets as collateral and a solid income stream. This coverage would give the bank the ability to foreclose and realize more than the value of the loan, which would protect its ability to repay its depositors, thus making depositors more willing to tie up their money for long periods. Such a society would be a lot less prone to excessive debt accumulation and inflation, bank runs would be far less frequent and government deposit insurance would be much less necessary. It would, in short, be a saner world in which individuals managed their own finances, saved with confidence and borrowed only for highly-productive uses, while two sharply-differentiated types of banks facilitated wealth protection and real wealth creation rather than paper trading.

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But why should we care?

Syrian Refugees Top 3 Million, Half Of All Syrians Displaced (Reuters)

Three million Syrian refugees will have registered in neighboring countries as of Friday, an exodus that began in March 2011 and shows no sign of abating, the United Nations said. The record figure is one million refugees more than a year ago, while a further 6.5 million are displaced within Syria, meaning that “almost half of all Syrians have now been forced to abandon their homes and flee for their lives”, it said. “The Syrian crisis has become the biggest humanitarian emergency of our era, yet the world is failing to meet the needs of refugees and the countries hosting them,” Antonio Guterres, U.N. High Commissioner for Refugees, said in a statement. The vast majority remain in neighboring countries, with the highest concentrations in Lebanon (1.14 million), Turkey (815,000) and Jordan (608,000), the UNHCR said. Some 215,000 refugees are in Iraq with the rest in Egypt and other countries.

In addition, the host governments estimate that hundreds of thousands more Syrians have sought sanctuary in their countries without formally registering, the agency said. Increasing numbers of families arrive in a shocking state, exhausted, scared and with their savings depleted, it said. “Most have been on the run for a year or more, fleeing from village to village before taking the final decision to leave.” “There are worrying signs too that the journey out of Syria is becoming tougher, with many people forced to pay bribes at armed checkpoints proliferating along the borders. Refugees crossing the desert into eastern Jordan are being forced to pay smugglers hefty sums (ranging from $100 per person or more) to take them to safety,” it added.

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Years of smoke?

Iceland Eruption Near Volcano Triggers Red Alert (BBC)

The Icelandic Met Office has raised its aviation warning level near the Bardarbunga volcano to red after an eruption began overnight. Scientists said a fissure eruption 1km (0.6 miles) long started in a lava field north of the Vatnajokull glacier. Civil protection officials said Icelandic Air Traffic Control had closed the airspace above the eruption up to a height of 5,000ft (1,500m). The volcano has been hit by several recent tremors. The fissure eruption took place between Dyngjujokull Glacier and the Askja caldera, a statement from the Department of Civil Protection said. The area is part of the Bardabunga system. “Scientists who have been at work close to the eruption monitor the event at a safe distance,” the statement added. “The Icelandic Met Office has raised the aviation colour code over the eruption site to red.” It added that no volcanic ash had so far been detected but a coast guard aircraft was due to take off later to survey the site.

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Aug 192014
 
 August 19, 2014  Posted by at 7:39 pm Finance Tagged with: , , ,  


Harris&Ewing Safest driver of Washington DC, 32 Years Without Crash 1936

It’s Jackson Hole week, and we’re going to hear a lot of fairy tales and otherwise invented-from-scratch material. Since it may not always be easy to distinguish between pure mud and actual information, let’s destroy a few fantasy piñatas right here and now. So when Yellen and Draghi speak on Friday, you’ll be able to tell a few things apart. It’ll be hard enough, the speech writers and spin doctors won’t get much sleep this week.

But in the end, it’s all terribly simple. Central bank governors, finance ministers, government leaders and media have built up an image of ‘mere’ economic cycles and recovery and promises, boosted stock markets to new records, and gotten everybody’s hopes up. And now they won’t be able to deliver on those promises. Still, they can play along for a while longer. And they will.

There’s not a major central banker who can raise interest rates without risking severe damage to their economies. Simply because those economies wouldn’t look half as promising as they do today without the highly manipulative actions of ultra low rates and ultra loose credit. Without that pair, it’s going to be the crumbling walls of Jericho. In every single formerly rich nation.

There is no escape velocity – and there won’t be -, there are only stories and fantasies. Where do you think housing would be where you live if mortgage rates were 2-3 times higher – as in normal – than they are now?

At the same time, the enormous distortion of the economies caused by ultra low rates and ultra loose credit cannot last forever. Because fixed income, pensions, will be bled so dry grandmas will start thirsting for blood before they keel over because of a lack of care. And because markets need the mechanism of price discovery, lest the only companies left to invest in will be the weaker ones (since every single one will be weak).

They have to, but they can’t. They must, but they don’t dare. So much for forward guidance, it doesn’t mean a thing when central bankers are stuck in a trap of their own BS spin.

Don’t Hike Alone Is Jackson Hole Bear Warning for Central Banks

The message from [Yellen] and fellow central banking superstars is loose monetary policy still has a while to run. Yellen continues to caution that labor markets are slack enough to merit low interest rates, while European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda may even deploy more stimulus before the end of the year to battle low inflation. Yellen and Draghi will both address the Federal Reserve Bank of Kansas City’s conference in Jackson Hole on August 22.

Their behavior makes it tougher for others to take the initiative. A case in point: Bank of England Governor Mark Carney. After warning in June that investors may not appreciate the risk of higher rates, he said last week the U.K. won’t rush to act amid overseas threats of expansion and the weakness of wages. When the pack picks up the speed away from stimulus will therefore depend on Yellen, Draghi and Kuroda. If economic growth or inflation accelerates more than anticipated they may even push ahead faster …

Both the Fed and the Bank of England, if the forward guidance they so abundantly advertize would have actual meaning, would, given the targets they set in the past, have to raise rates. But they can’t, and this ‘having to do it in concert’ idea is a welcome distraction. There are others.

To justify not raising rates despite earlier guidance targets, Yellen uses the overloaded on part-time US jobs market, and the ‘broken record’ wages that just won’t move up no matter how great the economy is supposedly doing. Carney uses wages and an opaque story about disappointing exports. And then, obviously, they use each other as lightning rods.

They can also quite safely hide behind the ECB and the Bank of Japan, both of which oversee economies that are by most standards doing so poorly that a rate hike by either would be seen as suicidal.

Not that they’re in the same boat: the ECB, a.k.a. Berlin, hasn’t loosened credit enough over the past 7 years to achieve the short term upticks the US and UK have shown (and which both claim are not short term). Japan, on the other hand, has stimulated so much it has reached the end of the road in ‘stimuland’. Japan’s PM Shinzo Abenomics can look forward only to frightening statistics, and BOJ boss Kuroda will soon either move to Paraguay or be humbly requested to commit harakiri.

Carney’s case is a tad peculiar. Only this weekend he declared his willingness to risk a complete collapse of Britain’s economy just to show his never tried and certainly never proven theories are right:

Interest Rates Will Rise Before Real Pay Stops Falling, Says Carney

The governor of the Bank of England has warned interest rates might start to rise before workers see a sustained real-terms pick up in their pay. Signalling further pain for households, Mark Carney said it was possible that borrowing costs – on hold at 0.5% for more than five years – would increase before wage growth catches up with inflation. “We have to have the confidence that real wages are going to be growing sustainably [before rates go up]. We don’t have to wait for the fact of that turn to do so,” Carney said.

That’s at least sort of funny, because it’s exactly what Abe said about Abenomics before it started to fall apart entirely: that if only the Japanese had faith and confidence that it would work, it magically would. Looking at his mindset, you can expect him to repeat until his dying day that if only they had believed!

But that still doesn’t make Carney’s line any less crazy, of course. What he proposes is to make everyone in Britain pay more for everything, mortgages, services, you name it, without getting paid more so they can afford it. “We have to have the confidence”.

Inflation has outpaced wage growth for the vast majority of the period since 2008, bringing a prolonged period of falling real pay and living standards for UK workers. Last week the Bank’s rate-setting Monetary Policy Committee slashed its forecast for pay growth by half to 1.25% by the end of 2014, as wage rises have failed to materialise despite rapidly rising employment. With inflation expected to be just below the 2% target by the end of 2014, average real pay is expected to fall for the rest of the year, with rises not expected until 2015. Markets are forecasting a first rate rise in early 2015, and the pound has strengthened in recent weeks as investors bet that Threadneedle Street will be the first major central bank to raise rates.

Carney said he would be “comfortable” being the first to move. “We will do what we need to do.” Hinting at the growing division among MPC members over the appropriate timing of the first hike, Carney said: “In terms of our broader message, and where the committee is united and has the same view, is that as the expansion continues, rates are going to go up,” he said. “People might have different views on the exact timing, but it will happen and people should plan accordingly. Second, our best judgment of the path is that it will be limited and gradual, a new normal if you will.”

Carney, no matter what he says, isn’t “comfortable being the first to move”. He just finds himself with a big sweaty – but undoubtedly well pedicured – foot in his mouth. He’s looking for a way out, and covering his donkey with lines like “as the expansion continues, rates are going to go up”, so if there’s no expansion, he’s off the hook.

But that contradicts his earlier “forward guidance”, and it head-on collides with the insane loose credit-induced housing boom he himself created and now realizes he must stop, lest three quarters of the nation end up underwater.

As for that so-called “inflation”, British CPI was announced to be 1.6% today. Way below anyone’s target. Should that make him more, or less, likely to raise rates? One could argue either way, but he could certainly make a case for not raising them on account of it, and so he will. But it’s all hot air.

Because inflation cannot be measured – just – by looking at rising prices. Inflation is the money/credit supply – which recent policies have raised to stupendous levels – multiplied by the velocity of money, better known as consumer spending. Given the rise in credit, one can only surmise, looking at low CPI numbers, that spending is dropping rapidly. Despite all that credit pumping. But then, with stagnant wages, and a nation already swamped in debt, who would expect anything else?

British MPs are on to Carney’s behind-wiggling too, but they’re seeking a political reason behind it.

Bank Of England’s Mark Carney Accused Of Delaying Rate Hike Ahead Of General Election

A second MP has attacked Bank of England Governor Mark Carney, claiming the Canadian is “clearly” attempting to delay rate rises until after the next general election. Treasury Select Committee member John Mann’s intervention comes in the wake of accusations from Conservative MP Mark Field of a “clear bargain” between Carney and Chancellor George Osborne to keep rates low until the country goes to the polls next May. A dovish inflation report from the Bank last week meanwhile dampened prospects for an interest rate rise this year. Mann said: “It is abundantly clear that Mark Carney is attempting to delay interest rate increases until after the election when they rise immediately.”

Mann previously clashed in public with Carney in November last year when he accused him of being “in danger of being too close to the Chancellor and acting as a politician rather than a Governor”. Carney responded that he was “more than mildly offended” by the thrust of Mann’s comments. The Bank of England – operationally independent since 1997 – and the Treasury deny any kind of backroom deals between Osborne and Carney, following Field’s claims. The Bank said there “was no agreement between the Governor and the Chancellor over Bank rate and never has been”. One insider added: “The idea is absolutely mad. The monetary policy committee guards its independence fiercely.”

Right. Independence. Only a fool would believe in that, and regardless, Carney still doesn’t need pressure from politicians to make up his mind. He has nowhere to turn, whatever he does is going to work out terribly wrong. All he’s got is the ‘official’ 3.2% GDP growth for the UK. That looks good. For now. So he might as well go for the rate hike in an ‘after me the flood’ move.

But then, there’s Jackson Hole. And all those other hugely important people who want a say.

For Interest Rates, Low Is the New Status Quo

It’s time to get used to near-zero savings-account interest rates and 10-year bond yields that don’t get much higher than 3%. Yes, the Federal Reserve is preparing to raise rates as soon as next spring. But even that won’t produce the interest-rate “normalization” that many assume to be on the way.

That overdue reversion to the mean of recent decades—pined for by retirees and other risk-averse savers, feared by holders of higher-yielding bonds—isn’t coming. Blame it on the persistent sources of fragility in the global economy: banks that remain reluctant to lend to Main Street, a looming debt crisis in China, and the alarming prospect that deflation will come to Europe’s shores and return to Japan’s. All that will keep inflation reined in and make the Fed extremely hesitant to do follow-up rate hikes after its first one breaks an almost decadelong drought.

In other words, whatever or whoever may be wrong, it’s not the central bankers. It’s global fragility , China, Europe, Japan. If not for that all that reality, theories would look just great, thank you.

Scott Mather, deputy CIO at bond fund manager Pacific Investment, says the eventual resting point for rates will be much lower and “the Fed will take a lot longer to get there than in previous cycles. And a chief reason for that is all the overhangs that we have.” The initial move, certain to be a mere quarter of a percentage point, will have only the slightest impact on money-market rates, since banks will still be borrowing short-term money at not much more than 0%.

Yet because of underlying economic weakness, even this modest credit tightening could temper growth and reflexively give the Fed pause. It isn’t hard to imagine that first increase being followed by a six-month or even yearlong hiatus. That’s a far cry from past periods of policy normalization, when signs of economic recovery would send the Fed off on a multiyear campaign of repeated interest-rate increases.

The bond market seems to know this. Even as forecasts for Fed rate increases have come forward in response to better U.S. employment data, the 10-year Treasury yield is at a 14-month low beneath 2.4%. Pimco’s Mr. Mather thinks the 10-year yield won’t get much higher than 3%. But it is very difficult for economists to abandon their old normalization models.

Translation: Bond markets don’t believe there will be a recovery, or at least not one that looks anything like what we’ve been told for 7 years is just around the corner.

Even though there is intellectual appreciation that liftoff will be slower than in the past and implicit acknowledgment of former Treasury Secretary Lawrence Summers’s “secular stagnation” thesis, routine policy normalization is baked into base-case projections.

The Federal Open Market Committee’s own “blue dot” projections for the federal funds rate capture this. In June, its 16 members’ median forecast stood at 1.13% for the end of 2015, then sloped up to 2.5% at end-2016 and to 3.75% in the “long run” beyond that.

While that long-run forecast marked a modest reduction from March’s 4% median, it is far higher than the 2% or less that believers in the secular-stagnation thesis are now citing. This group, which includes Pimco, says the long-run “neutral fed funds” rate—a theoretical equilibrium for an economy running at full capacity—is now much lower because the economy’s ingrained growth capacity is weaker.

That last bit is just absolutely hogwash. Actually, it all is. There is no “fragility” in the global economy, there is nothing left that could lift it out of its misery. To call that fragility is like calling a boulder that’s about to land on your head a ‘nuisance’. Economists are completely useless when it comes to understanding the economy. All they have is theories and models and graphs and ideas of how things ‘should’ go.

Today’s leading – Keynesian – ideas in economics claim that loose credit and low interest rate ‘should’ lift any economy out of any hole it’s dug itself into. It doesn’t get sillier than that. And it certainly doesn’t work, other than in in tales fabricated by media and spin doctors.

As for “the Fed will take a lot longer to get there than in previous cycles”, all I got is: Cycles? Author Mike Casey himself states that “it is very difficult for economists to abandon their old normalization models.” Well, the first thing they should get rid of is the notion of cycles – well other than 70-year Kondratieff, perhaps -.

Cycles imply a move upward at some point. There’ll be no such thing in our formerly rich economies for a long time to come.

We might have arrived at an upward turn in the cycle if debt had been allowed, and forced, to be properly restructured. As things stand, however, the debt is still all or mostly there, and it has continued to bloat, swell and fester for 7 long years as well. And that could only be achieved by increasing debts at governments and central banks.

Altogether, we’re in a much worse situation than we were 7 years ago. We’re just getting better as we go along at hiding how bad it is.

Me, personally, I can’t wait for the first central banker to raise rates. Because it will be the best opportunity we will have for price discovery, for finding out what things really look like, and are worth, behind the veil of abundant credit that fogs our mirrors.

It’ll be very ugly when those rates go up, because there is nothing to catch our fall. But the only alternative is for our children to fall even deeper than they already must because of our illusionary media-induced visions of recovery and escape velocity and American Dreams.

One thing’s for sure already: for our kids, the American Dream will be nothing but a Hollywood driven illusion or video game. They will hardly understand that once their ancestors really believed it to be true, and for a short few decades seemed to achieve that dream.

A few last words on Ferguson. Everyone so far has done everything wrong over there that they could. Why the first black US president 10 days after it started still hasn’t shown his face is beyond me. Obama’s sending Eric Holder, and only tomorrow. As if people either know who Holder is, or care one damn bit.

Obama needs to watch out by now. because more people will be drawn towards Ferguson, police already said they arrested people from California and New York. And protests will spread as long as Ferguson is not handled in a proper and respectful way; the first ones were in St. Louis, New York, Seattle and Oakland last night.

This can get out of hand in a way that nobody, not even the most war party minded Americans, should look forward to. And it’s really easy: send Obama, make sure he can deliver a sure-fire way to assure an independent investigation, and deliver the guilty parties to justice. There are too many Fergusons in the US not to.

The by far best summary of the situation comes from John Oliver, a British comedian: “let’s totally demilitarize the police; and if and only if they can get through a month without killing a young black man can they get their toys back.”.

Oliver was a Daily Show correspondent for Jon Stewart until recently, the show that was elected the most trustworthy news program not long ago by Americans. So that Oliver should provide the best coverage of this topic, fits a pattern.

But come on, how sad is that?


Finally, the saddest thing I’ve seen in ages must be this:

Americans Eat Most Of Their Meals Alone

Americans eat most of their meals alone, new research finds, with families finding it more difficult to find time to eat together and a dramatic increase in the number of single-person households. The majority of meals (57%) are eaten by solo diners.

That depicts a nation in despair, and demise.

Americans Eat Most Of Their Meals Alone (MarketWatch)

It may have taken more than half a century, but Miss Lonelyhearts from Alfred Hitchcock’s “Rear Window” finally has some company. Americans eat most of their meals alone, new research finds, with families finding it more difficult to find time to eat together and a dramatic increase in the number of single-person households. The majority of meals (57%) are eaten by solo diners, market researcher NPD Group found. Snacks have the highest percentage of lone diners (72%) followed by breakfast (61%) and lunch (55%). (Solo lunches include workers eating at their desk.) Although 34% of Americans spent dinner time alone, half of American families still choose to eat dinner with each other five times a week. Would this make Ward Cleaver proud — or not? “A generation ago, the ‘Leave it to Beaver’ television family ate dinner together,” says Warren Solochek, vice-president of client development for NPD’s food service practice. “Today, that traditional eating arrangement is much harder to achieve.”

Although this was the first time NPD carried out the survey, experts say the trend of a person cooking for just themselves or requesting tables for one will continue. Single-person households jumped from 17% in 2008 to 27% in 2012, according to the U.S. Census Bureau. “People are marrying later in life and starting families later in life,” says Andy Brennan, a lead analyst at research firm IBISWorld. “A lot of restaurants are accommodating single diners with more bar space. There isn’t the stigma there once was to dining alone.” Restaurants – still struggling after the Great Recession – are happy to cater to the new wave of single diners. Breakfast menus are the only growth area on fast-food and casual dining menus, studies show. “Breakfast sales rose over 5% to $27.4 billion last year at quick-service and fast-casual restaurants, according to analysis of BLS data by research firm Mintel. What’s more, fast-casual restaurants were the only segment to see traffic growth in the restaurant industry last year — increasing 7% in 2013 and 9% in 2012.

With the popularity of on-demand entertainment via DVRs and mobile devices, it’s no longer easy to blame the fall-off in family dinner time on TV, says Jonathan Wai, a psychologist at the Duke University Talent Identification Program. He sees it as part of a broader unravelling of the “social fabric” and cites the high number of hours worked by Americans and the fact that commutes are getting longer every year. The 40-hour work week in the U.S. is longer than the work week in many European countries. And around 2.2 million U.S. workers have a daily commute of at least an hour to and from work, according to the U.S. Census.

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Preserving Disorder in Ferguson (Bloomberg)

The rioting that erupted in Ferguson, Missouri, over the weekend calls to mind Chicago Mayor Richard Daley’s 1968 gaffe: “The policeman is not here to create disorder. The policeman is here to preserve disorder.” In Ferguson, the police are doing an outstanding job of that. That’s partly why Missouri Governor Jay Nixon was right to call in the National Guard today. Yet he must know that the move will not quell the anger among protesters, who are motivated not only by a sense of injustice over an unarmed teenager’s death but also out of frustration with a truculent police force. Only when political leaders do a better job of holding police accountable — an urgent necessity in Ferguson right now, and a priority nationwide — will tensions truly begin to ease. Last week, police in Ferguson seemed to take every opportunity to ratchet up tensions over the shooting death of 18-year-old Michael Brown.

They mishandled the release of information about the case, attempted to intimidate residents with displays of military power, and were unable to provide basic answers about chain-of-command decisions. When Nixon on Thursday finally appointed State Highway Police Captain Ron Johnson to lead the police response, an evening of calm ensued. Johnson not only pulled back the heavily artillery, but he also walked among the protesters. Unfortunately, this goodwill evaporated on Friday when the local Keystone Cops released a video — before releasing Brown’s initial autopsy report or a photo of the officer who shot him — of what appears to be Brown lifting some cigars from a local convenience store minutes before he was killed. The officer who shot Brown did not stop him in connection with the robbery, a fact the police failed to disclose until questioned about it later in the day.

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John Oliver: Ferguson, MO and Police Militarization (HBO)

In the wake of the shooting of Michael Brown in Ferguson, MO, John Oliver explores the racial inequality in treatment by police as well as the increasing militarization of America’s local police forces.

“let’s totally demilitarize the police; and if and only if they can get through a month without killing a young black man can get their toys back.”

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For Interest Rates, Low Is the New Status Quo (WSJ)

It’s time to get used to near-zero savings-account interest rates and 10-year bond yields that don’t get much higher than 3%. Yes, the Federal Reserve is preparing to raise rates as soon as next spring. But even that won’t produce the interest-rate “normalization” that many assume to be on the way. That overdue reversion to the mean of recent decades—pined for by retirees and other risk-averse savers, feared by holders of higher-yielding bonds—isn’t coming. Blame it on the persistent sources of fragility in the global economy: banks that remain reluctant to lend to Main Street, a looming debt crisis in China, and the alarming prospect that deflation will come to Europe’s shores and return to Japan’s. All that will keep inflation reined in and make the Fed extremely hesitant to do follow-up rate hikes after its first one breaks an almost decadelong drought.

Scott Mather, deputy chief investment officer at bond fund manager Pacific Investment, which has $2 trillion in assets under management, says the eventual resting point for rates will be much lower and “the Fed will take a lot longer to get there than in previous cycles. And a chief reason for that is all the overhangs that we have.” The initial move, certain to be a mere quarter of a percentage point, will have only the slightest impact on money-market rates, since banks will still be borrowing short-term money at not much more than 0%. Yet because of underlying economic weakness, even this modest credit tightening could temper growth and reflexively give the Fed pause. It isn’t hard to imagine that first increase being followed by a six-month or even yearlong hiatus. That’s a far cry from past periods of policy normalization, when signs of economic recovery would send the Fed off on a multiyear campaign of repeated interest-rate increases.

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Don’t Hike Alone Is Jackson Hole Bear Warning for Central Banks (Bloomberg)

“Hiking alone is not recommended” goes the warning to walkers in Wyoming’s Grand Teton National Park. Central bankers should perhaps heed the same advice when it comes to interest rates as they fly this week to the Tetons and their annual symposium on monetary policy in Jackson Hole. Currency bulls rather than grizzly bears are the reason there is safety in numbers for them. The point is highlighted in recent research by Joachim Fels and Manoj Pradhan, economists at Morgan Stanley in London, who use a cycling rather than walking analogy to make it. Reviving a 2009 analysis, they note cyclists prefer not to ride solo because of wind drag and to instead stick to a group – or peloton – to reduce headwinds by as much as 40%. For those who try to go it alone in monetary policy, the work can be harder too. Raising rates before counterparts or signaling plans to do so often trigger higher exchange rates, which sap demand in their economies and often force them back into the pack.

“In cycling, the peloton is usually led and controlled by the strongest and largest teams,” Fels said in a report yesterday, citing a longer study he and Pradhan released on July 30. “It’s the same with the global monetary peloton where the easy policy stance of the Group of Three central banks sets the pace for the entire group.” For Tour de France winner Vincenzo Nibali, read Federal Reserve Chair Janet Yellen. The message from her and fellow central banking superstars is loose monetary policy still has a while to run. Yellen continues to caution that labor markets are slack enough to merit low interest rates, while European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda may even deploy more stimulus before the end of the year to battle low inflation. Yellen and Draghi will both address the Federal Reserve Bank of Kansas City’s conference in Jackson Hole on August 22.

Their behavior makes it tougher for others to take the initiative. A case in point: Bank of England Governor Mark Carney. After warning in June that investors may not appreciate the risk of higher rates, he said last week the U.K. won’t rush to act amid overseas threats of expansion and the weakness of wages. Economists at Citigroup and Berenberg Bank were among those to revise their forecasts to show the U.K. central bank raising rates in the first quarter of 2015 rather than the last few months of this year. The pound responded by falling for a sixth week against the dollar, its longest run in four years. Carney isn’t alone. New Zealand also has tightened policy more slowly than its domestic economy would suggest, according to Morgan Stanley. The central banks of Sweden, South Korea, Mexico and Israel have all cut their benchmarks lately, while Canada and Australia have turned more dovish. Most noted currency strength or global economic conditions in explaining their decisions.

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Not one inch.

How Independent Is The Independent Bank Of England? (Telegraph)

A CPI reading of 1.6% is below the City’s expectations, and makes it – for now, anyway – at little bit less likely that the Bank of England will raise interest rates this year or early in 2015. Cue relief and even a bit of jubilation in the Government; Danny Alexander has gone so far as to say that “subdued inflation is now becoming the norm as the economy recovers”. Ministers, it is clear, do not want rates to rise any time soon. Higher rates mean it’s more costly to borrow, and in an election season that will focus heavily on talk of the cost of living, no one seeking re-election wants anything that eats into household disposable income. (Yes, higher rates mean better returns for savers, but for unfortunate reasons best explored on another day, politicians tend to care more about borrowers than savers.) The decision on rates, of course, rests with the Bank of England. Since 1997, the Bank has had operational independence over monetary policy.

Central bank independence is a relatively novel feature of British political life that has become part of the orthodoxy, accepted by just about everybody as a Good Thing. It means no more political interference, no more ministers keeping rates artificially low before elections and generally skewing the economy for political purposes. But just how independent is the independent Bank of England? Some people have their doubts about the Bank under its current governor, Mark Carney. Mark Field, the Conservative MP for the City and Westminster, makes a habit of saying in public things that other politicians only mutter privately. Today, he’s suggested that Mr Carney is setting rates for reasons that are not wholly economic. The Governor is under a “political imperative” to delay an increase until after the election, Mr Field suggests: “From the moment Mark Carney became governor in July 2013, it was pretty clear forward guidance was an indication rates would not rise this side of the election – for all the talk of Bank of England independence, there was a clear bargain between him and George Osborne.”

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For Markets, Any Re-Escalation Is Simply Pent Up De-Escalation (Zero Hedge)

A quick reminder of how geopolitics governs markets: on Friday, the market plunged 0.005% over fears Ukraine and Russia may be about to go at it all out after a fake report Ukraine shelled a Russian military convoy. On Monday, the same “market” soared just under 1% as the news that had caused the “crash” was refuted. That has been the dominant rinse, repeat theme for the past month and will continue to be well after Yellen’s Friday speech at Jackson Hole (although one does wonder why she is not speaking on Wednesday when the symposium begins). Not surprisingly, with only modest re-escalation news overnight (that Russia is preparing further retaliatory sanctions against the West), which is simply “pent up de-escalation” in the eyes of Keynesian algos, futures are again up a solid 0.2% and rising, and the way the rampy USDJPY is being manipulated before its pre-market blast off, we may well see the S&P hit 1980, if not a new all time high before 9:30am, let alone during today’s cash session.

In any event, whatever you do, don’t you dare suggest that algos should care one bit about Ferguson and its implications for US society. Taking a closer look at the geopolitical stories, as DB summarizes, no bad news is certainly viewed as good news for now. Following the four-way diplomatic talks in Berlin on Sunday, Russian Foreign Minister Sergei Lavrov yesterday told the press that the talks have failed to produce positive results in establishing a ceasefire and (starting) a political process. According to Reuters, Lavrov accused Ukraine for changing their demands over what it would take to establish a truce between government troops and pro-Russian insurgents. The good news though is that some progress was made on allowing the delivery of Russian humanitarian aid to eastern Ukraine. Lavrov said that “all questions” regarding the humanitarian convoy had been removed and agreement had been reached with Ukraine and the International Committee of the Red Cross (ICRC).

Bloomberg news overnight said that the ICRC expects to work out the details of a safe-passage plan for the convoy into Ukraine “soon”. The four-way talk is expected to resume again sometime this week but we don’t have specific timing on that yet. Despite the ongoing volatility, it is interesting to see the strong performance in Russian equities over the past week. The MICEX index has rallied every single day for the past 7 trading sessions and is currently about 7% off its early August lows. One wonders which Russian oligarchs are selling into the latest liftathon.

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Robert Shiller Wonders Why Stocks Are ‘Very Expensive’ (MarketWatch)

“The United States stock market looks very expensive right now.” And with that, Yale professor Robert Shiller is at it again, telling us to worry. He’s got plenty of company these days among those who fear this bull market can’t possibly keep going. Shiller’s particularly uncomfortable about the CAPE ratio (cyclically adjusted price-earnings), a stock-price measure that he helped create. He said something similar in June. (Just Google Robert Shiller bubble for more instances of his bubble theories.) Otherwise known as the Shiller P/E, the ratio basically takes average inflation-adjusted earnings for the S&P 500 over the previous 10 years. In Shiller’s New York Times article from Saturday, he notes that when he touched on this topic over a year ago, that ratio stood around 23, far above its 20th-century average of 15.21. It now stands at 25, a level that since 1881 has only been surpassed in three other periods — the years surrounding 1929, 1999 and 2007. And we all know what came next after the market peaks in those years.

Shiller says the CAPE was never intended to indicate timing on when to buy and sell, and that the market could remain at these valuations for years. But given that this is an “unusual period,” investors should be asking questions, he says. His question: Given that the ratio shows valuations have been elevated for years, are there legitimate factors that could keep stock prices high for decades longer? He points that his own questionnaire surveys show investors are getting more worried. Other than that, unfortunately there is no “slam-dunk” explanation for these high valuations, says Shiller. “I suspect the real answers lie largely in the realm of sociology and social psychology — in phenomena like irrational exuberance, which, eventually, has always faded before,” says the Nobel-Prize winner. “If the mood changes again, stock market investments may disappoint us.”

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Keep your eye on him. He’s not kidding.

George Soros Is Not The Only Big Investor Playing Defense (MarketWatch)

George Soros isn’t the only big-shot investor who seems to be suffering from a bit of a backache. The question is whether it’s just a twinge or something more serious. Soros, whose astounding long-term success as a trader has reportedly been shaped at least in small part by his reactions to physical discomfort, raised eyebrows when a regulatory filing on Thursday showed he had significanty upped his holdings of puts on the SPDR S&P 500 ETF. As you may recall, Soros reported that he held nearly 11.3 million puts on the ETF as of June 30, a position with a market value of more than $2.2 billion. That was a 605% rise from the end of the first quarter and made the stake his largest single position, constituting nearly 17% of his total portfolio. That is the biggest such put position Soros has had since 2008, noted Raul Moreno, chief executive of iBillionaire, an index that tracks investment choices by big investors, including the likes of Soros, Warren Buffett and Carl Icahn.

So in a portfolio that’s around 80% long equities, the position appears clearly to be a hedge rather than an outright bet on a market fall, Moreno said. Still, the size of the position would seem to indicate Soros had grown more worried about the potential for a pullback, Moreno said in a phone interview. Maz Jadallah, founder of AlphaClone, a research firm that collects, aggregates and clones data from 13F filings, emphasized that while the shift indicates Soros believes the risk of a pullback has increased, it shouldn’t be read to indicate he is betting on one. In fact, the data shows Soros’s long exposure increased by 9% over the second quarter, a time when the S&P 500 rose 5%. Michael Vachon, the spokesman for Soros Fund Management, said the increase in put holdings was “not a story.”

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Run, Forrest, run!

Fed Says SEC Money-Market Rule Could Spark, Not Reduce, Runs (MarketWatch)

A new Securities and Exchange Commission rule designed to reduce runs in the money-market mutual-fund industry could instead spark them, the New York Federal Reserve said Monday. At issue is part of the new SEC rule giving funds the ability to limit outflows — through gates or restrictions to redemptions — when liquidity runs short. New York Fed economists, in a blog post, said that a study of academic literature concludes these gates may ultimately just make investors run sooner.

“The possibility of a fee or any other measure that is costly enough to counter investors’ strong incentives to run amid a crisis will give investors a strong incentive to run preemptively to avoid such measures.”

A spokeswoman for the SEC. said the agency had no comment on the blog post. One SEC. commissioner, who ultimately voted against the rule, raised concerns about a rush to redemption in the debate. Fed officials do like other parts of the SEC rule, especially the fluctuation in net asset values of shares for some of the funds instead of a fixed value of $1 a share. Boston Fed President Eric Rosengren last week called that part of the new rule a “meaningful improvement.”

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Yes, it is.

Is Rising Unrest In China A Threat To The Economy? (CNBC)

Incidents of unrest in China are increasing, and analysts told CNBC the country’s one-party government may be getting more concerned about the broader impact on social and economic stability. Protests are illegal in China, an authoritarian state where freedom of speech is limited. “[The government] places arbitrary curbs on expression, association, assembly and religion; prohibits independent labor unions and human rights organizations; and maintains Party control over all jurisdictions,” according to Human Right Watch’s 2014 World Report. Yet, according to official police statistics, the number of annual protests rose to 87,000 in 2005 from approximately 8,700 in 1993. Currently, there are 300-500 protests in China each day, with anywhere from ten to tens of thousands of participants, the 2014 World Report said.

Protests ranged from farmers contesting land grabs to environmental protests organized by the middle classes and deadly ethnic minority riots. “Most of these protests have involved farmers pushed off their land and sometimes poorer people in urban areas kicked out of their houses to make way for development,” said James Miles, China editor at The Economist. “Often these protests have involved the weakest, poorest, most marginalized sectors of Chinese society. They are poorly organized and their grievances are localized – so a protest might flare up in one particular location, but not spread like wildfire across the country,” he added. But more recent large-scale environmental protests by the middle class, long viewed as a crucial government support, have caused for alarm among authorities, he said. “The way in which these demonstrations have rapidly formed using social media has clearly unnerved authorities and made them wonder about how quickly middle class unrest could spread,” Miles told CNBC.

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Just the start.

Abandoned Homes Swell Bad Debt in China’s Wenzhou (Bloomberg)

Falling property prices in China’s eastern city of Wenzhou triggered 6.4 billion yuan ($1 billion) of bad loans as buyers abandoned homes and stopped making mortgage payments, the Economy & Nation Weekly reported. Purchasers of 1,107 properties halted payments as prices dropped for 34 straight months, the Xinhua News Agency-affiliated magazine said yesterday on its website, citing data from the local banking regulator. A press officer at the Wenzhou branch of the China Banking Regulatory Commission declined today to confirm the data. China’s slumping property market is a drag on the world’s second-biggest economy and banks’ profits, with lenders’ soured loans increasing for almost three years. New-home prices fell last month in 64 of 70 cities tracked by the government.

In Wenzhou, about 56% of the homes were abandoned due to falling values and most were high-end apartments, according to the report. Homes were also abandoned by borrowers left with liabilities after making guarantees for companies in financial trouble, the report said. Real-estate lending accounts for 26% of outstanding bank loans in Wenzhou, 8%age points higher than the national level, according to the report, which didn’t specify a time period for the data. The city’s economy expanded 6.8% in the first half, according to the local government, compared with a 7.4% expansion nationwide. China’s economy is forecast to expand 7.4% for the full year, the slowest pace since 1990.

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China to Cut ‘Overly High’ Income of State-Owned Firm Executives (Bloomberg)

Chinese President Xi Jinping plans to regulate income distribution in state-owned companies, cutting the top salaries, as part of the nation’s anti-extravagance and anti-corruption campaigns. “Unreasonably high income will be adjusted,” and top managers can’t have excessive spending beyond what’s stipulated by government regulations or companies’ financial policies, according to a statement posted on the central government’s website, citing Xi. Leaders of central-government-controlled enterprises should actively support the changes, Xi was cited as saying in a meeting of the Communist Party’s reform group yesterday.

Xi started a broad campaign to cut corruption and excessive spending by government officials after he took over as head of the ruling Communist Party in November 2012. In the wake of the campaign, growth in retail sales dropped to a three-year low in April. Yesterday’s meeting also discussed plans to build a few influential media groups, and changes to the national examination and enrollment systems. In another meeting yesterday, Xi urged innovation to promote development, according to a statement posted on the central government’s website.

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Subprime China.

China Banks On First-Time Buyers To Prop Up Housing (CNBC)

Jiang Lu is the proud owner of a 450 square foot apartment in the Chinese capital of Beijing. The 28-year-old web editor invested her entire life savings and took advantage of easier mortgages in China to buy her new 250,000 dollar home. “It is very easy to get a mortgage. Any bank will give one to you,” she said. “Without one, I wouldn’t even think about buying.” Jiang is one of the first time buyers Chinese authorities hope will help prop up China’s flagging property market. In Beijing and many other cities across China, the housing market is starting to weaken. New home prices dropped in July for the third month in a row with 64 out of 70 cities surveyed showing month-on-month declines. Based on data from the National Bureau of Statistics on Monday, the average price of new homes slid 0.9% from June, slipping faster than June’s 0.5% drop. “The acceleration in home price declines is probably due to more projects offering discounts and slower sales in July,” Bank of America Merrill Lynch analysts said in a research note.

Housing sales in China have dropped this year in total value by 10.5% compared to last year, according to official data. China’s home prices have been skyrocketing for years, with the government encouraging development and offering few other ways for regular citizens to invest their cash. Concerned that prices were becoming out of reach for average citizens, policymakers began to put in restrictions in 2010 to stop speculators. After several false starts, the market appears to be cooling finally but there are now fears the market could fall too fast and trigger a hard landing. With property so important to China’s growth, accounting for an estimated 20-percent of GDP, some economists worry about the impact a housing downturn could have on China’s economy and the rest of the world. The country’s real estate market drives global growth with construction fueling prices in commodities.

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The lunatics take over. And no-one sees the difference.

Tycoon Palmer: China Wants to Take Over Australia Resources (Bloomberg)

Australian mining magnate Clive Palmer, whose political party effectively holds the balance of power in the Senate, accused China of trying to take over the nation’s resources — earning a rebuke from Prime Minister Tony Abbott’s government. “They want to take over our ports and get our resources for free,” Palmer said on Australian Broadcasting Corp. television late yesterday. Palmer also labeled a unit of China’s state-owned Citic Pacific Ltd., his partner in the world’s biggest magnetite iron ore mine in Western Australia, as “mongrels”. Abbott’s government attacked Palmer’s comments as “hugely damaging”, and stressed the importance of Australia’s relationship with its biggest trading partner. The Australian Industry Group condemned Palmer’s comments as “ill-considered and inappropriate.”

Palmer is embroiled in legal battles with Citic Pacific, which has alleged he used funds from a joint account to help finance his political campaign. His nascent Palmer United Party has three senators in Parliament’s upper house, making it an influential force that Abbott’s government must win over to pass legislation should it be opposed by Labor and the Greens. On the ABC’s Q&A show last night, Palmer denied Citic’s allegations, calling them “Chinese mongrels.” “I’m saying that because they are communists, they shoot their own people, they haven’t got a justice system and they want to take over this country,” Palmer said.

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Next goal for US.

Bulgaria Halts South Stream Gas Pipeline Project For Second Time (RT)

All operations on Russia’s Gazprom-led project South Stream have been suspended, as they do not meet the requirements of the European Commission, Bulgaria’s Ministry of Economy and Energy said on its website. “Minister of Economy and Energy Vasil Shtonov has ordered Bulgaria’s Energy Holding to halt any actions in regards of the project,” the ministry said. This specifically means entering into new contracts. There has been mounting pressure from the EU to put the project on hold, and now the European Commission will be consulted each step of the way to make sure it complies with EU law. European ‘anti-monopoly’ laws prohibits the same company to both own and operate the pipeline. However, Gazprom and Bulgaria had previously struck a bilateral agreement regarding that aspect of the project.

This is the second time Bulgaria has called for a suspension of the South Stream project. In early June, the country’s Prime Minister Plamen Oresharski ordered the initial halt. Bulgaria is the first country traversed by the pipeline on land, after a section that runs beneath the Black Sea from Russia. The branch that begins in Bulgaria is planned to continue through Serbia, Hungary, Slovenia and Austria. Other participating countries have confirmed their commitment to the South Stream’s construction. Gazprom’s $45 billion South Stream project, slated to open in 2018 and deliver 64 billion cubic meters of natural gas to Europe, is a strategy by Russia meant to bypass politically unstable Ukraine as a transit country, and help ensure the reliability of gas supplies to Europe.

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And Russia’s aid will never be delivered?!

East Ukraine Under Massive Artillery Fire (Itar-Tass)

The Ukrainian army’s artillery delivered massive artillery strikes on large populated areas and industrial enterprises in the Donetsk and Luhansk Regions in east Ukraine on Tuesday. The Ukrainian military’s howitzers and multiple launch rocket systems shelled residential quarters in Donetsk, Horlivka, Yenakiyevo and Makeyevka The Donetsk city council said that artillery shells had exploded in a residential neighborhood near the airport and destroyed a local school while local residents were hiding in basements and bomb shelters The shelling started on Monday evening and continued until Tuesday morning. Water supply has been disrupted in the area. Donetsk People’s Republic PM Alexander Zakharchenko earlier said that the Ukrainian army’s shelling had destroyed electricity transmission lines supplying power to water filtration stations.

“Teams have been dispatched to restore water supply to populated areas and there are plans to use reserve water reservoirs,” Zakharchenko said, adding that “facilities were located on the territory occupied by the Ukrainian army,” which complicated restoration efforts. The situation in the Donetsk Region is close to critical due to incessant shelling. In addition to the absence of water, local residents are experiencing food shortages. Food stocks in stores are running out while supplies have almost stopped. The prices of available food products have jumped almost 50%.

Local residents have to stand in line to get bread, milk and drinking water, eye-witnesses said. The Samsonovskaya-Zapadnaya coalmine in the Luhansk Region has halted work over artillery shelling, the press office of the Metinvest company reported on Tuesday. “The mine’s work has been suspended. Specialists are restoring power supply to switch to a regime of maintaining the mine’s vital systems. The operations headquarters and the special commission are assessing the scope of damage,” the press office said. The Ukrainian army’s shelling has also halted production at the Yenakiyevo metallurgical plant, the Yenakiyevo coke and chemical enterprise and the Khartsyz pipe factory.

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“As long as they’re betting on a military solution, and as long as the authorities in Kiev are using military victories over their own people to shore up their position in Kiev, I don’t think there’s any point to what we’re trying to do now,” Lavrov said.

Red Cross Makes Progress on Russian Aid Convoy to Ukraine (BW)

The Red Cross is making progress on details of a safe-passage plan for a Russian aid convoy intended for southeast Ukraine, after four-way talks on a halt to the fighting reached an impasse in Berlin. The crisis, in which Ukrainian troops have been battling pro-Russian separatists for months, can only be stemmed once the government in Kiev calls off its army as part of an unconditional cease-fire, Russian Foreign Minister Sergei Lavrov said yesterday in the German capital. Ukraine says it will declare a truce if the pro-Russian rebels lay down their arms and Russia stops supplying them with weapons. Galina Balzamova, a spokeswoman for the International Committee of the Red Cross, said today she expects agreement “in the very near future” on security guarantees for the Geneva-based agency to accompany the Russian aid trucks, though she said she couldn’t give a specific time. The ICRC says it’s “extremely concerned” about the humanitarian crisis in eastern Ukraine.

In Kiev, military spokesman Andriy Lysenko said yesterday that separatists shelled a column of civilian vehicles in the Luhansk region, killing “dozens of people.” There was no independent confirmation. Government troops have been shelled 10 times since yesterday, the Defense Ministry said on its Facebook page. Government forces are fighting rebels in Yasynuvata in the Donetsk region in eastern Ukraine and blockading Ilovaysk to the east of Donetsk, the ministry said. Meanwhile, paratroopers and infantry are battling to keep control of the villages of Novosvitlivka and Khryashchuvate in the neighboring Luhansk region.

Ukraine’s central bank raised its overnight refinancing rate to 17.5% today from 15% as it seeks to support the hryvnia. The Ukrainian currency fell 0.9% to 13.15 per dollar today, taking its decline for the month to 6.7%. Russia’s benchmark Micex stock index gained for an eighth day today, rising 0.8% at 12:47 p.m. in Moscow. “As long as they’re betting on a military solution, and as long as the authorities in Kiev are using military victories over their own people to shore up their position in Kiev, I don’t think there’s any point to what we’re trying to do now,” Lavrov said. He said no resolution was reached in the talks with his Ukrainian, German and French counterparts. No date has been set for a resumption.

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Must read.

Occupation Forces (International Man)

When I was growing up in Berlin, after the war (World War II), we lived in the American sector and the American soldiers were everywhere—on the streets, in the cafes. No one wanted them there, but whenever we made disparaging remarks, our own authorities tell us we must not do this. They tell us the Americans can do what they like and we just have to accept it. So, we stop using the words, “Yankee” and “American.” They are the occupying forces, just like the Romans were at one time, so, amongst ourselves, we refer to them as “the Romans.” So, we talk freely in the cafes about the “Romans” and the American soldiers don’t know that we mean them.

The snippet above was from taken from a conversation I had recently in a café with Klaus, a German who is now in his late sixties. He had a long career as a pilot for the German air force and had been stationed in many countries. In spite of his own career as an “occupier,” he never got over the resentment he had for the occupation of his homeland by American troops. (Berlin was occupied from 1945 to 1994.) The US is unique in the world with regard to occupation. It has been estimated that the US has over 325,000 military personnel in over 1,000 overseas military bases in more than 150 countries, but statistics are widely conflicting. Generally, the American troops arrive to deal with some sort of conflict (either invited or uninvited), but unlike most other armies, they tend to remain for a long time beyond the stated “need.”

There are those who praise this policy, stating that the US “keeps the world safe for democracy;” however, the US is known (at least to us outsiders) as a country that typically routs elected governments, installs corrupt and ineffectual puppet leaders, and seeks to control the occupied country as a satellite state. There are three major downsides to this policy:

1. Occupation Forces Are Always Resented Most Americans, during the Cold War, perceived the Russian forces in Berlin to be hated by the Berliners, but assumed that Berliners were grateful to have American occupiers to “keep them safe.” The truth, as Klaus states, was that all occupiers were hated, not just the Russians. Long after the war was over and it was time for Berlin to return to normal, the Russians and Americans maintained a standoff in Berlin that did not end for another forty-nine years. Only in 1994 did Germans “get their city back.” Not surprisingly, many Germans, even today, feel that neither the Russians nor the Americans can be trusted, as they are seen as “empire builders” who play out their ambitions in foreign lands. Although today, there is a fair bit of cooperation between the governments of the US and Germany, the German people themselves have, even recently, expressed their distrust by asking that the Bundesbank demand the return of their $141 billion in gold from the US Federal Reserve, and have additionally railed against NSA spies in Germany.

2. Occupation Is Extremely Costly Two thousand years ago, the Romans created an empire by training its own people as troops, then invading other countries, stripping them of their wealth. They then left troops behind in each country as occupiers to maintain Roman control. Unfortunately, after the initial pillaging, there was little ongoing wealth to be taken, and the occupations became expensive liabilities. Eventually, the once-wealthy Rome sank into debt and relied more and more on mercenary troops—troops that had no real loyalties to Rome and would eventually turn on Rome, when the money ran out. The US is now in a similar state. There is no more military draft in the US, and the majority of soldiers occupying the 150 countries are mercenaries (or, in today’s nomenclature, “defense contractors”). As the US is technically bankrupt, it is only a question of time before the cheques stop coming. As in Rome, it can be expected that the mercenaries will drop their “loyalty” with little or no warning at some point.

3. A Government that Believes in Occupation as a Policy is a Danger to its Citizens The US Government clearly believes in the concept of occupation, as it is actually increasing the number of countries where it has troops in occupation. In addition, in the last decade, the US has been dramatically ramping up its preparedness for war at home. Not since World War II has the US spent so much money building tanks, buying bullets, and training troops to get ready for a major conflict. However, this time, it is not for a war overseas, but at home. The armaments are being deployed to localised law enforcement departments and the Department of Homeland Security (DHS), which is charged solely with domestic enforcement. Similarly, the training of police officers and other authorities has changed dramatically from the traditional “Protect and Serve” policy to one of riot control and combatting “domestic terrorism.” Of the three downsides to occupation, this is the one that should concern American citizens most greatly, as, for the first time since 1865, the American continent itself is planned to be the occupied territory.

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Remember how many flights were cancelled a few years ago?

Iceland Tells Airlines Volcano Under Glacier May Erupt (Bloomberg)

Iceland warned airlines that there may be an eruption at one of the island’s largest volcanoes located underneath Vatnajokull, Europe’s biggest glacier. The alert level at Bardarbunga was raised to “orange,” indicating “heightened or escalating unrest with increased potential of eruption,” the Reykjavik-based Met Office said in a statement on its website. Over 250 tremors have been measured in the area since midnight. The agency said there are still no visible indications of an eruption. The volcano is 25 kilometers (15.5 miles) wide and rises about 1,900 meters above sea level. Bardarbunga, which last erupted in 1996, can spew both ash and molten lava. Ash from Iceland’s Grimsvotn volcano forced flight cancellations in Scotland, northern England and Germany in May 2011. An eruption of the Eyjafjallajokull volcano in April 2010 caused the cancellation of more than 100,000 flights on concern glass-like particles formed from lava might melt in aircraft engines and clog turbines.

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